Managing Editor

Sunesis Pharmaceuticals Inc., which jumped on the restructuring bandwagon last summer by laying off 60 percent of its staff, is on the verge of a fresh infusion of $43.5 million through a private placement.

The restructuring was undertaken to conserve cash to support voreloxin through midstage studies in acute myeloid leukemia (AML) and ovarian cancer, and the private placement has the potential to carry those trials through late-stage development and a new drug application filing, company officials said.

The South San Francisco-based company has not yet filed an annual report, but said the new funds would allow that to happen, and it said the report will contain a "going concern" qualification. However, it added that the new funding should keep Sunesis afloat through this year.

Sunesis is conducting Phase II trials of voreloxin as a single agent for the treatment of platinum-resistant ovarian cancer and previously untreated AML, as well as a Phase Ib trial of voreloxin in combination with cytarabine in relapsed/refractory AML.

Data collected to date showed voreloxin has demonstrated objective responses in both solid and hematologic tumors and has been well tolerated.

The REVEAL-1 trial is enrolling newly diagnosed elderly AML patients unlikely to benefit from standard induction chemotherapy. Two arms, one for 72 mg/m2 of voreloxin weekly for three weeks and one for 72 mg/m2 of voreloxin weekly for two weeks, are fully enrolled, the company said. Patients now are being enrolled on another arm involving 72 mg/m2 of voreloxin on days one and four.

In the first arm, 12 of 29 patients achieved complete remission (CR) or complete remission without full platelet recovery (CRp) with a 30-day all-cause mortality of 17 percent. An update of the interim data suggested that the second arm is better tolerated by patients than the first, the company said, while maintaining anti-leukemic activity. Ten of 35 patients on the second arm have achieved CR or CRp.

In addition to improved tolerability, the 30-day all-cause mortality has been reduced to 9 percent.

Phase II data in ovarian cancer reported last year showed that 48 percent of platinum-resistant ovarian cancer patients treated at a dose of 48 mg/m2 once every 21 days achieved disease control, defined as stable disease for 90 days or more or a complete or partial response.

Voreloxin is structurally related to the antibiotic quinolones, a class of compounds that has not been used previously for the treatment of cancer. But voreloxin does not have any antibacterial activity.

The complicated placement involves 10 investors, some of whom gain seats on the company's board, and guarantees of a 3X return on their investment in case the company is sold or signs a significant partnership.

The private placement involves the sale of up to $15 million of units consisting of convertible preferred stock and warrants to purchase common stock in two closings. A total of $10 million of units would be sold in the initial closing, expected soon, and an additional $5 million of units may be sold in a second closing. That can occur at the company's election or at the election of the investors, subject to approval by Sunesis stockholders.

If the company elects to draw down the funds, it will also be subject to achieving a specific milestone relating to voreloxin's progress, and on the condition that the company's stock trades above a specified floor price.

The remaining tranche of up to $28.5 million is tied to Sunesis' future cash balance.

In the initial closing for $10 million of units, Sunesis Pharmaceuticals would issue approximately 2.9 million shares of convertible preferred stock, convertible into about 29 million shares of common stock, and warrants to purchase approximately 29 million shares.

In the second closing for an additional $5 million of units, Sunesis would issue approximately 1.45 million shares of convertible preferred stock, which would be convertible into approximately 14.5 million shares of common stock, and warrants to purchase approximately 14.5 million shares.

The per unit purchase price for a share of convertible preferred stock and a warrant to purchase 10 shares of common stock would be $3.45 for both the first and second closings.

When the initial closing occurs, some of the investors would have the right to name three of eight members of the Sunesis board. Following a second closing, the investors would have the right to designate five of nine members of the board.

The investors also will have rights to approve any sale of the company, any issuance of debt or preferred stock and any issuance of common stock, other than the second closing.

And if the company is sold or enters a partnering deal, holders of the convertible preferred stock would receive three times the purchase price.

Funds taking part in the transaction include those managed by Bay City Capital, New Enterprise Associates, Alta Partners, Caxton Advantage Life Sciences Fund, Merlin Nexus, Nextech Venture, OpusPoint Partners, Venrock Associates and Vision Capital Advisors.

Despite the availability of extra cash, Sunesis announced its cutbacks are continuing, affecting six positions, including the senior vice president and general counsel, as well as the vice president of business and corporate development. Also, the company announced that Jim Young is retiring as executive chairman and will continue on the board as nonexecutive chairman.

In other financing news:

• Anadys Pharmaceuticals Inc., of San Diego, filed an $80 million shelf registration with the Securities and Exchange Commission. The company is developing ANA598, a small-molecule, non-nucleoside inhibitor of the NS5B polymerase for the treatment of hepatitis C and ANA773, an oral, small-molecule inducer of endogenous interferons that acts via the Toll-like receptor 7 (TLR7) pathway for the treatment of hepatitis C and cancer.

• Mesoblast Ltd., of Melbourne, Australia, closed a private placement to existing and new investors, raising A$10.81 million (US$7.3 million). The funds will be used to expand the company's clinical trial programs focusing on bone and cartilage regenerative products for spinal vertebral disc disease.