After moving insomnia drug Intermezzo (zolpidem tartrate) through the approval process, Transcept Pharmaceuticals Inc. is seeking to raise $40.5 million in an underwritten public offering of 4.5 million shares of common stock as the company turns its attention to TO-2061, a low-dose formulation of ondansetron as adjunctive treatment for obsessive compulsive disorder (OCD).

Point Richmond, Calif.-based Transcept priced the offering at $9 per share, an 18 percent discount to the stock's (NASDAQ:TSPT) closing price of $11 on April 25. Shares slumped in response, closing Thursday at $9.28, a loss of 15.6 percent on the day.

Transcept expects to net approximately $37.6 million from the offering. The company granted the underwriters an option to purchase up to an additional 675,000 shares to cover overallotments, potentially generating another $6.1 million.

Transcept's SEC filing indicated the company expects to have 18.5 million shares outstanding when the offer closes on or about May 1. Leerink Swann LLC and Lazard Capital Markets LLC are acting as joint book-running managers, with Cowen and Co. LLC and JMP Securities LLC acting as co-managers.

Transcept has been trading at the higher end of its 52-week range, and Glenn Oclassen, the company's president and CEO, told BioWorld Today he would have preferred the pricing to come in at $10 per share, "but we're only one side of setting the price," he acknowledged. "The other side is the buyer. At $9 we had three times as many orders as we had shares available. At higher prices, it was a narrower window."

The company decided "to get the deal done promptly," and with high-quality investors "who are interested in the long term," Oclassen added.

Because Transcept came into the world through a reverse merger rather than an initial public offering "we didn't have exposure to some of the bigger players that we would have had otherwise, and this was an opportunity to make a deal with them," he said.

In 2008, Transcept pulled in a sizeable chunk of cash through a reverse merger with Novacea Inc., a South San Francisco-based firm that had been looking for its own strategic move in the wake of a halted Phase III trial of its lead compound, Asentar, in androgen-independent prostate cancer. Novacea contributed roughly $84 million to the combined firm's bank account in the all-stock deal. (See BioWorld Today, Sept. 3, 2008.)

Transcept, founded in 2002, had previously raised $72 million in venture funds.

The public offering is expected to give Transcept more bandwidth to accomplish three near-term priorities. The first is the opportunity to co-promote Intermezzo to psychiatrists in the U.S. In December 2011, Purdue Pharmaceutical Products LP, of Stamford, Conn., exercised its option to commercialize the insomnia drug in the U.S., launching the drug this quarter.

Transcept won FDA approval for Intermezzo, a sublingual version of zolpidem intended specifically for middle-of-the-night waking followed by difficulty returning to sleep, in November 2011. (See BioWorld Today, Nov. 28, 2011.)

Under the 2009 licensing deal between the companies, Transcept can exercise its co-promotion option as early as the first anniversary of the commercial launch. The biotech also is eligible to receive up to an additional $80 million in sales- and intellectual property-related milestones and will earn a tiered base royalty on net sales of Intermezzo ranging from the mid-teens to mid-20s. Transcept retains rights to Intermezzo in the rest of the world. (See BioWorld Today, Aug. 4, 2009.)

Purdue has publicly committed to invest about $100 million to support sales and marketing during the first year of commercialization, and "we're obviously going to be watching progress with Purdue's launch very, very carefully," Oclassen said.

The product began shipping April 4.

"We're just starting to get prescription data, and we're monitoring that on a continuous basis," he said.

Second, Transcept is seeking to put "some additional assets in the bag" with products that could be promoted to psychiatrists alongside Intermezzo, making for a more efficient and profitable marketing program.

Transcept isn't looking to go back into early stage development with a new compound, however.

"The priority for us is products very close to approval or already in the marketplace," Oclassen said. "We're looking at some interesting opportunities in the psychiatry space, but we haven't drafted any term sheets yet."

Whether the company adds products or pulls the trigger on the Intermezzo co-promote on its own, Transcept will need to hire and train a sales staff, facing nearly a year of expenses before any payback.

"Having the funds to move on that is an important part of the [co-promotion] criteria," Oclassen said.

Finally, the company is working to complete its double-blind Phase II trial of TO-2061 in OCD. Enrollment is expected to be completed in early fall, and Transcept expects to see data early next year.

"Assuming that we succeed, of course, at that point we plan to sit down with the FDA to determine what they're going to want in the balance of the clinical program," Oclassen said.

The path forward for TO-2061 is somewhat uncertain, since the OCD indication represents the first use of low-dose ondansetron in a chronic condition, he added. The Transcept formulation uses micro-doses of the same drug used in GlaxoSmithKline plc's Zofran for chemotherapy-induced nausea and vomiting.

"We're employing it because it's a very efficient dopamine down-regulator," Oclassen explained. "We got good results in open-label studies, and those gave us the courage to move forward with this trial."

Transcept expects to need additional cash once the program moves into Phase III.

"Only after we meet with FDA will we have a complete understanding of what's going to be required," Oclassen said.

In other financings news:

• Galenea Corp., of Cambridge, Mass., got a $6 million equity investment from the Stanley Medical Research Institute. The money will support development of a drug for schizophrenia and other psychiatric disorders and is expected to last through submission of an investigational new drug application.

• Innovacell Biotechnologie AG, of Innsbruck, Austria, is raising €8.3 million (US$11 million) in two tranches. The main shareholders are financial investors Buschier, Fides, HYBAG and private equity firm uni venture. Proceeds are expected to help support ongoing development of the firm's cell therapy for stress-urinary incontinence, which has started testing in a 370-patient European trial, with results expected in the fourth quarter.