West Coast Editor

Still mulling the next steps with the Phase III lupus drug Prestara, Genelabs Technologies Inc. raised $23.7 million through the sale of stock and warrants to boost its preclinical hepatitis C virus efforts, which include three in-house programs, as well as two HCV deals with collaborators.

The small molecule drug discovery company "probably has as many people working on basic, research-level HCV as a lot of your big pharma" firms, said Kevin DeGeeter, analyst with Oppenheimer & Co. in New York.

"From the investor side, the bet here is that one or both of those [already] partnered programs will move into the clinic eventually," he told BioWorld Today. "The best guess now is sometime in 2008."

Genelabs sold about 12.9 million shares of common stock plus warrants to buy about 2.6 million more. Each unit consisted of one share and one warrant to buy 0.2 share of stock, and the units priced each unit at $1.84, with a $2.08 exercise price on the warrants, which will be exercisable at any time before the fifth anniversary of Oct 1, 2007.

The company's shares (NASDAQ:GNLB) closed Tuesday at $2.05, up 5 cents. Deutsche Bank Securities Inc. acted as placement agent in the transaction.

Last summer, Genelabs' technology platform yielded an HCV-focused deal that provided $12.5 million up front with $7.5 million more coming in the next two years from Basel, Switzerland-based Novartis AG, which could provide as much as $175 million in milestone payments. (See BioWorld Today, June 6, 2006.)

In that arrangement, Genelabs is responsible for drug discovery of non-nucleoside HCV polymerase inhibitors, and Novartis will handle development and commercialization, with an option to extend research funding for a third year. Genelabs already had another HCV deal with Foster City, Calif.-based Gilead Sciences Inc., centered on developing early-stage nucleoside inhibitors of HCV polymerase, and could be worth as much as $46 million if a compound reaches the market. (See BioWorld Today, Oct. 1, 2004.)

DeGeeter acknowledged recent setbacks in HCV, but pointed out that Genelabs is involved with varied targets. "The space is risky, but you've got a somewhat diversified profile," he said. "And it's cheap. If they get anything into the clinic, this is a $3 or $4 stock."

Earlier stumbles in HCV had to do with pharmacokinetics, noted James Smith, president and CEO of Redwood City, Calif.-based Genelabs. "People rushed into the clinic with compounds that weren't ready," he said. "The most recent failures have not been [for] lack of efficacy, but safety."

Genelabs, he said, is "extraordinarily rigorous" in its preclinical testing, with an eye to avoiding trouble later. "It's not that the disease is intractable," he said, but that groundwork has not been properly laid before starting clinical trials.

In house, the firm has three preclinical HCV programs, targeting the nonstructural 5a (NS5a) protein, NS4b and the HCV replicase, "an assembly of the overall replication complex," Smith said.

"I would say the most advanced of those is the replicase program, where an optimized lead has met all the a priori criteria for moving forward," though a couple of experiments are yet to be completed, he told BioWorld Today.

Others are working with NS5a and NS4b, including Presidio Pharmaceuticals Inc., of San Francisco, which earlier this year licensed worldwide rights to HCV technology from Stanford University. This month, Valley Cottage, N.Y.-based XTL Biopharmaceuticals Ltd., presented encouraging replicon-assay data on small-molecule inhibitors of NS5A targets.

Genelabs also has a hepatitis E virus program, licensed to London-based GlaxoSmithKline plc. HEV is transmitted through contaminated water or food with an overall mortality rate of 1 percent to 2 percent among adults in the developing world, and it's especially problematic for pregnant women infected in their third trimester, where the maternal mortality rate can be as high as 20 percent. There is neither specific treatments nor an available vaccine to prevent the disease, and the GSK vaccine has reached Phase II trials.

The compound came out of cloning and sequencing first done at Genelabs, which holds a strong patent portfolio, Smith said. HEV, although symptomatically similar to hepatitis A and usually self-resolving, can lead to hospitalization for very sick patients, followed by six weeks to two months of convalescence.

"We worked with GSK through preclinical studies and then effectively handed it over entirely to them," Smith said. Earlier this year, GSK's study showed the vaccine was 96 percent effective in preventing disease, with safety similar to placebo, except for injection-site reactions. "I don't believe full value has been attributed to us yet for that program," which carries a significant potential royalty stream, he said.

Meanwhile, the lupus drug Prestara (prasterone), a synthetic form of the human hormone dehydroepiandrosterone - which in 2004 yielded disappointing results from an intended confirmatory study - is held up. The FDA has designated as approvable the compound's new drug application, and Genelabs has a special protocol assessment deal with the agency for another Phase III trial, but that trial would cost about $25 million.

As of June 30, Genelabs had about $23.8 million in cash and cash equivalents. The firm is "exploring more creative, project-specific ways to raise the [Phase III trial] funding that would not be dilutive or would be minimally dilutive to our shareholders," Smith said. Such a deal "could involve a partner or an off-balance sheet financing," similar to the financings others have done with the likes of Symphony Capital LLC. (See BioWorld Today, May 21, 2007.)

Analyst DeGeeter noted that lupus is "not an easy indication either, from a regulatory perspective. There hasn't been a drug approved in 30 years." Not only are patients highly variable in how they manifest the disease, but also their response to therapy differs strongly.

"With a lot of the lupus studies, all the signs are that you've got an active drug, but your statistical power comes up short," he said - a reference to San Diego-based La Jolla Pharmaceuticals Inc.'s struggles with Riquent (abetimus sodium), which got an "approvable" letter about three years ago from the FDA, but the agency insisted on another study. The company's stock suffered a 60 percent hit that day. Riquent is undergoing a new study, though analysts argue regarding its likely outcome. (See BioWorld Today, Oct. 18, 2004, and June 18, 2007.)

At the start of this year, Rockville, Md.-based Human Genome Sciences Inc. and partner GSK started the first of two pivotal Phase III trials with LymphoStat-B (belimumab) for lupus. The second started in late May.

Earlier this month, Aspreva Pharmaceuticals Corp., of Victoria, British Columbia, and partner F. Hoffmann-La Roche Ltd., of Basel, Switzerland, decided not to proceed with a regulatory submission for CellCept (oral mycophenolate mofetil) as an induction therapy for lupus nephritis, after the induction part of a Phase III trial missed its primary endpoint.

The rheumatoid arthritis Rituxan (rituximab, Genentech Inc. and Biogen Idec Inc.), also is in Phase III trials for lupus, as is Orencia (abatacept), the RA drug from Bristol-Myers Squibb Co. Like Rituxan, Orencia already is used off-label for lupus.

"I know [the Phase III trial with Prestara] is a priority, but let's say it's more of a priority with management than with investors," said DeGeeter. In a research report published this week, he characterized Prestara as a "distraction" from the HCV effort, and wrote that there is "little reason to expect a different outcome from a third study. Even under the best-case scenario - an outside party funds 100 percent of the Prestara study - we view the program as adding unnecessary complexity to the investment story, with little near-term upside for investors."

In other financing news:

• Applied NeuroSolutions Inc., of Vernon Hills, Ill., completed a $2.9 million private placement of its common stock and warrants. The firm sold about 20.7 million shares of unregistered common stock at 14 cents per share to SF Capital Partners Ltd. and issued about 6.2 million five-year warrants to purchase more shares at an exercise price of 19 cents per share. The company did not incur any banking fees associated with the transaction.

• Chelsea Therapeutics International Inc., of Charlotte, N.C., filed a shelf registration to periodically sell up to $60 million in common and preferred stock, warrants, debt securities and units. Proceeds will be used for general corporate purposes.

• Duska Therapeutics Inc., of Bala Cynwyd, Pa., completed a $5.75 million financing from three institutional investors. The financing is in the form of two-year 10 percent notes, convertible into about 14.3 million shares of Duska common stock subject to adjustment as provided in the notes, about 14.3 million one-year warrants convertible into Duska common stock and about the same amount of five-year warrants, also convertible into Duska common stock. Proceeds will be used to "develop several of our drugs to an inflection point in valuation," said James Kuo, Duska's chairman.

• Medicure Inc., of Winnipeg, Manitoba, raised gross proceeds of $16 million through a private placement, $1 million more than planned. A total of 13.91 million common shares were issued at a price of $1.15, together with warrants to purchase 4.17 million more shares. The warrants have a five-year term and an exercise price of $1.50. Proceeds will be used to fund MC-1, a cardioprotective molecule designed for patients undergoing coronary artery bypass graft surgery, and in the sales and marketing of Aggrastat, (tirofiban), used in combination with heparin for the treatment of acute coronary syndrome. Leerink Swann, A.G. Edwards & Sons, Inc., Merriman Curhan Ford & Co., RBC Capital Markets Inc, and Noble Financial Group served as financial advisors.

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