VaxGen Inc. is raising $27 million through the sale of 3.5 million shares to support ongoing development of its anthrax vaccine.

The company also agreed to issue to investors five-year warrants initially exercisable for 700,000 shares at a price of $9.24 per share. With net proceeds, not counting funds from the potential exercise of warrants, VaxGen estimated that its cash, cash equivalents and investments totaled about $35 million after the transaction closed Friday.

"We could have raised more, but we chose to limit the dilution," said Lance Ignon, vice president of corporate affairs for the Brisbane, Calif.-based company, noting that, in addition to providing clinical funding, the money is "a bridge financing to what we hope will be a completely non-dilutive transaction that leverages our investment in our offshore joint venture manufacturing facility."

He’s referring to Celltrion Inc., a South Korean operation established in 2002 by VaxGen and three South Korean partners - Nexol Corp., KT&G Corp. and J. Stephen & Co. Ventures Ltd. - to manufacture monoclonal antibodies and recombinant proteins. VaxGen owns about 21 percent of Celltrion.

"We’d been looking at a lot of financing vehicles for some time," Ignon told BioWorld Today, "and we became increasingly confident that we could monetize our investment in our manufacturing facility."

The private placement is intended to help build up VaxGen’s balance sheet and "put us in a better position" to possibly sell the company’s interest in Celltrion, Ignon said. "The sale of an asset takes some time, and hopefully, [the financing] will buy us that time that we need."

The funds also help bolster the company’s work on rPA102, a recombinant protein vaccine in Phase II development for anthrax. That product was the subject of an $878 million BioShield contract with the U.S. government signed in November 2004. In that deal, the government ordered a total of 25 million doses of the vaccine for 2006 and 50 million doses for 2007. VaxGen gets paid on delivery of those doses. (See BioWorld Today, Nov. 8, 2004.)

"We plan to start shipping toward the end of this year, assuming there are no delays or changes in the contract," Ignon said.

VaxGen also continues work on its attenuated smallpox vaccine, LC16m8, which is in late-stage development. That product is partnered with the Chemo-Sero-Therapeutic Research Institute, of Kumamoto, Japan, and has been licensed for inclusion in Japan’s smallpox vaccine stockpile.

LC16m8, a second-generation vaccine produced in a cell culture from a modified vaccinia virus, is designed to provoke an immune response without causing serious side effects.

VaxGen’s third product, a meningitis B vaccine, is in proof-of-concept development. The company entered a collaboration in May 2005 to use technology developed by EndoBiologics International Corp., of Missoula, Mont., to develop a vaccine against Neisseria meningitides serogroup B. VaxGen agreed to fund proof-of-concept studies of the vaccine, and continue product development if the studies yield promising results.

Punk, Ziegel & Co., of New York, acted as placement agent for the financing.

VaxGen trades on the Pink Sheets (Pink Sheets:VXGN), and its stock lost 30 cents Friday to close at $9.20.