Assistant Managing Editor

The latest firm to take advantage of a flexible financing vehicle in a tough fundraising environment, ZymoGenetics Inc. signed a deal with health care investment company and existing stockholder Deerfield Management to draw down as much $100 million over the next 18 months.

Under the terms, funds can be drawn down in $25 million tranches at ZymoGenetics' discretion and should extend "our cash runway significantly," Jim Johnson, chief financial officer of the Seattle-based firm, told investors during a conference call.

In fact, if its recently approved Recothrom, a topical hemostat product for controlling minor bleeding during surgery, is well received by the market and the firm makes good on other business initiatives, the Deerfield capital might even see ZymoGenetics all the way to profitability, though Johnson cautioned that "it's difficult to make that prediction definitively."

As of March 30, ZymoGenetics, which posted a net loss of $40.9 million, or 60 cents per share for the first quarter, had cash, equivalents and short-term investments totaling $155.1 million. Johnson said the company "probably" will draw down one $25 million tranche between now and the end of this year. Beyond that, he said, any drawdowns will depend on other business activities.

ZymoGenetics is under no obligation to draw down the full $100 million, and "we have complete freedom over when we draw the funds based on our capital needs," Johnson said. The only financial commitment, he said, was a $1 million transaction fee to Deerfield and the issuance of 1.5 million warrants, to be exercisable at a price of $10.34 each at the time of the first draw.

The company would issue an additional 1 million in warrants for each of the other three tranches.

In exchange for each tranche, ZymoGenetics agreed to pay Deerfield a 2 percent royalty on net Recothrom sales in the U.S. - a maximum 8 percent in royalties if the full $100 million is accessed. But that deal includes caps on the royalty payments, so that the maximum royalties for a single tranche drawdown would not exceed $18.75 million, or $45 million for the full drawdown.

ZymoGenetics, which can repay borrowed amounts at any time, will cease to pay further royalties once the Deerfield loan has been repaid in full. So "when we repay this, the royalty goes away," Johnson said.

In a tough financing environment, many companies are turning to alternative funding deals and moving away from the traditional public offerings, which drastically dilute the stock, and staying wary of partnerships in which they have to give up significant rights to their products. Similar to the ZymoGenetics' deal, Mountain View, Calif.-based Vivus Inc. signed a deal with Deerfield in April for up to $30 million to help fund pivotal studies of its erectile dysfunction product avanafil. That agreement included a royalty and funding deal involving royalties of Muse (alprostadil), the firm's marketed ED product.

Array Biopharma Inc. and Exelixis Inc. also have entered deals with Deerfield. Boulder, Colo.-based Array gained access to $80 million, to be drawn down in two $40 million tranches this year, and South San Francisco-based Exelixis secured up to $150 million in an 18-month flexible credit facility.

For ZymoGenetics, the deal provides a significant shot in the arm, with a cost of capital that's favorable to attempting a public offering, "especially given where our stock price is today and the state of the financial markets in general," Johnson said.

The company's shares (NASDAQ:ZGEN) closed at $8.42 Monday, down 7 cents.

Analyst Han Li, of Stanford Group Co., called ZymoGenetics' deal with Deerfield "creative and minimally dilutive to current shareholders. He wrote in a research note that it also provides flexibility to the company until "Recothrom sales ramp up."

Li projected 2008 sales of Recothrom to reach about $24 million, with sales to increase to $83 million in 2009 and $145 million in 2010. By 2012, he estimated that the product will gain a dominant market share.

But analyst Jonathan Aschoff, of Brean Murray Carret & Co., viewed the deal as more of a positive for Deerfield rather than ZymoGenetics, "given the $1 million transaction fee" and potential future dilution with about 4.5 million warrants and Recothrom royalties, he wrote in a research note. He added that "we do not project profitability anytime in the foreseeable future" and see "debt repayment as far more onerous than dilution" from the equity issue.

Aschoff also predicted "sluggish" Recothrom sales, in light of competing, and cheaper products, such as Thrombin JMI, from Bristol, Tenn.-based King Pharmaceuticals Inc., and Evithrom, from New York-based Omrix Biopharmaceuticals Inc.

Recothrom gained FDA approval in January as the first and only recombinant, plasma-free thrombin for use a topical hemostat indicated for use during surgery to control minor bleeding from capillaries and small venules when standard surgical techniques for stopping blood loss are ineffective or impractical. The product is partnered with Bayer Healthcare Pharmaceuticals, a division of Bayer AG, of Leverkusen, Germany, which is supporting the drug's U.S. launch for three years. (See BioWorld Today, Jan. 18, 2008.)

ZymoGenetics' development pipeline includes candidates targeting cancer, autoimmune and viral diseases. Most recently, the firm's partner, Merck Serono International SA, of Geneva, started a Phase II/III trial of atacicept, a recombinant fusion protein, in patients with systemic lupus erythematosus. That study is being conducted under a special protocol assessment agreement with the FDA and, in addition to a separate ongoing Phase II/III study in lupus nephritis, is expected to form a potential registration package for marketing approval.

In other financings news:

• Alseres Pharmaceuticals Inc., of Hopkinton, Mass., entered a convertible promissory note for a purchase agreement to borrow up to $5 million. The company develops therapeutic and diagnostic products aimed at central nervous system disorders. Shares (NASDAQ:ALSE) closed at $2.34, up 4 cents.

• Cardium Therapeutics Inc., of San Diego, completed a registered direct offering of $3.25 million, in which an institutional investor agreed to purchase shares and warrants. Cardium's lead product, Generx (alferminogene tadenovec, Ad5FGF4) is a DNA-based growth factor in development for potential use by interventional cardiologists as a one-time treatment to promote and stimulate the growth of collateral circulation in patients with ischemic conditions such as angina. Cardium also operates subsidiaries InnerCool Therapies Inc. and the Tissue Repair Co. Empire Asset Management Co. acted as financial advisor and the sole placement agent. Shares of Cardium (AMEX:CXM) closed at $2.29 Monday, unchanged.

• Depomed Inc., of Menlo Park, Calif., is adding $15 million in a senior secured loan agreement with Oxford Finance Corp. and GE Healthcare Financial Services, which will be funded in three tranches through Sept. 30. Under the agreement, Depomed has borrowed $3.8 million and may borrow up to an additional $11.2 million on or before that date. The deal was structured to nondilutive funding for its hot flash program, Gabapentin GR, which is set to enter Phase III testing. Shares of Depomed (NASDAQ:DEPO) closed at $3.21 Monday, up 5 cents.

• Luminex Corp., of Austin, Texas, closed its public offering of 4 million shares, including 525,000 shares issued in connection with the underwriters' overallotment option, priced at $19.91 each. Net proceeds totaled about $74.3 million, which will be used for general corporate purposes, including research and development, potential acquisitions and capital expenditures. Luminex develops biological testing technologies. JP Morgan Securities Inc. and UBS Investment Bank acted as joint book-running managers, while Avondale Partners LLC, Canaccord Adams Inc. and Leerink Swann LLC served as co-managers. The company's shares (NASDAQ:LMNX) closed at $20.55 Monday, down 24 cents.

• Pharminox Ltd., of Nottingham, UK, said it completed a round of equity funding, raising slightly more than £2 million (US$4 million) from new and existing investors. Proceeds will be used to advance the company's portfolio of small-molecule cancer therapeutics. Pharminox also said Alan Miller, former chief investment officer of New Star Asset Management, joined its board.

• Raptor Pharmaceuticals Corp., of Novato, Calif., raised $10 million in a private placement of 20 million units - each unit comprised of one share of common stock and one warrant to purchase one-half share - priced at 50 cents each. Net proceeds totaled about $9.3 million, which will be used to fund programs for its drug candidates and to execute its corporate strategy. Limetree Capital acted as lead placement agent. Shares of Raptor (OTC BB:RPTP) gained 2 cents Monday to close at 57 cents.