Washington Editor

VaxGen Inc., which has had a tumultuous year since losing an $877.5 million government contract last December for its anthrax vaccine, is merging with Raven Biotechnologies Inc. in a stock deal, the two South San Francisco-based firms said.

In a tax-free transaction, Raven Series D preferred stockholders are receiving about 32 million shares of VaxGen common stock. After closing the deal, VaxGen stockholders will own 50.9 percent of the combined company and Raven Series D preferred stockholders will own the remaining 49.1 percent, VaxGen CEO James P. Panek said Tuesday during a conference call.

Under the deal, VaxGen will assume Raven's debt and equipment lease obligations of about $1.8 million as of Dec. 1. To fund ongoing operations at Raven, "and just as importantly, to enable the advancement" of the firm's product portfolio, Panek said, VaxGen will extend a $6 million bridge loan to Raven, which will begin on Dec. 1 and will be funded monthly based on an agreed-upon budget.

Raven Series D preferred stockholders also will contribute a $3.8 million bridge loan of their own to cover operational and transaction-related expenses, he said.

The agreement calls for Raven Series D preferred stock warrants to be converted into about 332,000 VaxGen common stock warrants, Panek explained, adding that all other Raven options and warrants will be canceled. Completion of the deal is conditioned on VaxGen being relisted on a national stock exchange.

"We've already filed a proxy, which, among other things, asks our stockholders to approve a reverse stock split so that VaxGen will qualify for listing on the Nasdaq capital market," Panek said, adding that the listing process is "well under way." If all goes as planned, he said, the firms expect to complete the merger in the first half of 2008.

One of the strategic considerations that the firms are still working through is the future of VaxGen's manufacturing facility. "We see tremendous potential to use it for manufacturing clinical supplies of Raven's compounds," Panek said. However, for the near term, the facility "will be underutilized if employed solely for that purpose."

The companies, he added, are exploring a variety of opportunities for the facility, including contract manufacturing partnering, leasing or an outright sale of the site.

"Our manufacturing facility is a valuable asset, and we are confident in our ability to drive value from it that will serve our development objectives and benefit our shareholders," said Panek, who will assume the position of president and chief operating officer for the newly combined company.

Raven CEO George F. Schreiner will lead the new firm as the CEO. "We believe that, in George, we have a CEO with the experience, vision and drive to make a fresh start for the combined companies," Panek said. "We believe that our stockholders will be well served by this transaction."

After reviewing about 140 companies and engaging in discussions with dozens of firms, including large pharmaceutical makers, public and private biotechnology companies, contract manufacturers and financial entities, VaxGen chose Raven for the merger because of the breadth of the firm's product pipeline, Panek said. The power of Raven's discovery platforms and technology, he added, were "quite attractive."

"We liked that they addressed one of the most promising areas of cancer therapy, and we believe that our capability, manufacturing and late-stage product development complements their strengths in product discovery," Panek said.

Schreiner called the transaction an "exciting new beginning for both companies."

"In many respects we are creating an entirely new company, a fresh start, if you will, and an opportunity to do things differently," he said.

Raven, which is engaged in developing monoclonal antibody therapeutics for cancer, has developed "multiple cancer stem cell lines representing 12 solid tumor types," Schreiner said. "We have also developed antibodies that recognize new targets on tumor cell surfaces that have been conditioned by prior chemotherapy or radiation therapy."

The firm's lead drug product, RAV12, currently is in a Phase I/IIa dose-ranging monotherapy study in 51 patients with gastrointestinal-related cancer, Schreiner said. The company expects to complete that trial in early 2008. The firm also anticipates initiating a Phase II study in patients with pancreatic cancer in the first quarter of 2008 and in colon cancer later that year.

Phase I results showed that RAV12 was well tolerated in patients and provided radiographic or biochemical evidence suggesting activity against gastrointestinal-related cancer in several patients, Schreiner said.

Raven's product pipeline also includes four preclinical product candidates for oncology indications, which are being readied for clinical testing. Schreiner said that the combined company anticipates filing at least one investigational new drug application in 2009 and another one in 2010.

The merger concludes a "particularly difficult" year for VaxGen and its stockholders, Panek said, triggered by the loss of its multimillion-dollar contract for the anthrax vaccine due to stability concerns of the product. That setback was followed by at least three restructurings of the firm. (See BioWorld Today, Dec. 21, 2006, and Sept. 17, 2007.)

"There is no question that we have a lot of hard work and challenges ahead of us," he said. By combining VaxGen's and Raven's complementary capabilities and resources, Panek affirmed, "we believe that we have the renewed ability to create the world-class oncology company that provides growth to our investors and critically important therapies to cancer patients."

Shares of VaxGen (Pink Sheets:VXGN) dropped 46 cents Tuesday, or 41.4 percent, to close at 65 cents.