Washington Editor

VaxGen Inc. expects to fund its operations through the end of next year by selling its stake in an overseas contract manufacturing firm.

Investors warmed quickly to the news, driving up shares in the Brisbane, Calif.-based company by 30 percent Thursday. The stock (Pink Sheets:VXGN) gained $1.10 to close at $4.65.

"Clearly, the company was strapped for cash and not in a good position to do a financing," explained Sharon Seiler, an analyst with Punk Ziegel & Co. in New York. "So the fact that they were able to realize non-dilutive proceeds from this transaction is clearly positive."

The company is getting $79 million in gross proceeds through the sale of a portion of its common shares in Celltrion Inc., and expects to receive another $50.3 million for its remaining stock by the end of the year. That $129.3 million clearly would boost VaxGen's "rather low" existing cash balance, Chief Financial Officer Matthew Pfeffer said in a conference call.

Its current capitalization was expected to sustain activities through September, though precise figures remain somewhat unclear because it has not filed financial statements for several years due to ongoing auditing efforts to reconcile past accounting matters.

"Frankly, I'm really pleased to see that they seem to have gotten full value for it," Seiler told BioWorld Today, noting that the Celltrion holdings were valued at $130 million earlier this year. "The purchasers certainly could have held their feet to the fire and given them much lower terms."

Prior to the sale, VaxGen was Celltrion's second largest stockholder, with a 21 percent ownership stake. It sold about 62 percent of those shares to three related entities - Nexol Co. Ltd., Nexol Biotech Co. Ltd. and Nexol Venture Capital Co. Ltd. - which together represent Celltrion's largest shareholder. The purchasers have an exclusive option to acquire VaxGen's remaining shares by Dec. 31, and VaxGen President and CEO Lance Gordon said in the conference call that he expects that to be exercised.

He added that the transaction "does more than simply stabilize our existing operations," noting that "it gives us the financial staying power to renew our effort to broaden the company's portfolio." Gordon pointed to a growing need for new and improved vaccines against a range of conditions - meningitis B, respiratory syncytial virus, influenza and a host of sexually transmitted diseases.

"Our goal," he added, "is to be one of the leading developers of products to prevent these and other human infectious diseases."

Gordon conceded that projections on making the new money last could vary depending on VaxGen's existing and potential future product development initiatives, and the date by which it begins to deliver its anthrax vaccine candidate to the U.S. government to generate product revenue.

That latter matter has been beset by question marks of late. The Department of Health and Human Services last month amended the $877.5 million contract to require additional milestones before beginning to purchase the still-investigational vaccine, but Gordon said the government "recently agreed to enter two-way negotiations with VaxGen to address our concerns." Company watchers continue to await the next clinical trials on the product, which will include a slightly different adjuvant preparation than the one originally tested, Seiler said. (See BioWorld Today, May 11, 2006.)

Gordon declined to provide guidance on VaxGen's timing for filing its financial statements, though he said the submission of a 10-K for 2003 would be its "next major event."

Celltrion, of Incheon, South Korea, was established four years ago to provide biopharmaceutical manufacturing services for the global drug industry. In conjunction with the transaction, James Panek will no longer serve as Celltrion's co-CEO. Already VaxGen's head of manufacturing, he was concurrently promoted to executive vice president of the company, which relinquished two seats on Celltrion's board in the process.

Lazard acted as the exclusive financial adviser to VaxGen in this transaction.