Washington Editor

Corautus Genetics Inc. is adding $23 million through a few different transactions, two private stock sales and a loan.

A group of private investors and Corautus' largest stockholder, Boston Scientific Corp., agreed to buy about 4.7 million common shares in two deals for proceeds of about $18 million. At the same time, Boston Scientific amended a loan agreement with Corautus to immediately make available a $5 million loan.

"The markets are very tough, and for biotech companies of our size to raise money, they have to give tremendous discounts to market and significant warrant coverage," said Jack Callicutt, Corautus' vice president of finance and administration. "But we weren't interested in doing that."

Instead, the Atlanta-based company approached Boston Scientific and then additional investors, mostly existing stockholders but also some new faces, to buy into the financing. In the end, Corautus "really did it ourselves," Callicutt told BioWorld Today, adding that the placements include no fees for outside bankers.

The transaction with the private investors has closed, generating about $10 million through the sale of about 2.6 million shares at $3.80 apiece. The stock transaction with Boston Scientific has closed in escrow, subject only to Corautus stockholder approval, after which the Natick, Mass.-based company will purchase 2.1 million shares at the same price for $8 million in additional proceeds. The per-share price was the stock's closing price on the day the companies agreed to the deal in principle, though at present it represents a discount. On Tuesday, Corautus' shares (NASDAQ:VEGF) fell 65 cents, or 13 percent, to close at $4.35.

In total, funds from those transactions and the loan will provide Corautus sufficient cash to float operations through next year. And when the dust settles, Boston Scientific will have provided $33 million in cash to Corautus over the past two years, in addition to supporting the development of Corautus' lead product.

That backing includes support for the ongoing GENASIS Phase IIb trial, which is testing the delivery of VEGF-2 as a gene product candidate in Class III or IV angina patients. Boston Scientific is providing its Stiletto catheters to deliver the regenerative medicine therapy, as well as physician training and other clinical support. That same support also will continue in Phase III.

The added financing will be used to further fund the double-blinded, placebo-controlled GENASIS trial, which will enroll 404 patients by the first quarter, as well as manufacturing costs for VEGF-2 for Phase III and the initial costs related to conducting that pivotal development. The company, which had about $20.7 million in cash, cash equivalents and short-term investments through March 31, is working with Boehringer Ingelheim GmbH, of Ingelheim, Germany, to manufacture VEGF-2 for Phase III and commercialization.

"We were going to have to [raise funds] at some point this year, because we only had cash to get us through this year and maybe into a little bit of '06," Callicutt said. "We're looking at smaller milestones throughout this year, but really major milestones late next year, so we wanted to go ahead and get enough money to get us through to that next milestone - getting results from our Phase IIb trial."

Corautus incurred a net loss of about $4.3 million during the quarterly period ended March 31, at which time it had about 14.7 million shares outstanding.

Its therapy is designed to treat the underlying causes of severe coronary artery disease through direct injection of VEGF-2 into ischemic cardiac muscle. Based on Phase I and IIa data, the company expects the later-stage trials to show that introducing the therapy into ischemic cardiac muscle will stimulate the growth of new blood vessels, improve cardiac function and reduce pain associated with severe angina. VEGF-2 is delivered via a non-viral vector system in which the naked DNA plasmid is injected directly into the tissue, where the gene transfer occurs.

After considering the additional new private investment, Boston Scientific's voting ownership in Corautus will be about 17 percent, making it Corautus' largest voting shareholder. Prior to the additional private investment and upon the release of the escrowed proceeds, Boston Scientific would have owned 19 percent of Corautus' outstanding voting stock.

In the loan transaction, Boston Scientific modified the terms of a convertible debt facility established two years ago such that the final $5 million became available immediately. That relationship had provided a $15 million loan, payable in three installments, all of which now have been drawn down by Corautus. There are no interest or principal payments due for five years, Callicutt added, noting that Boston Scientific also simultaneously paid about $9 million for a 10 percent equity stake in Corautus.

An existing distribution agreement between the companies also was modified as a part of the latest transaction, whereby Boston Scientific will be the exclusive distributor of Corautus' VEGF-2 when it receives FDA approval. That modification will slightly reduce the percentage of commercial sales revenues received by Corautus, but Corautus will continue to receive at least one-third of the sales price of its product after all royalties and transfer prices. Under the agreement, Boston Scientific is providing all sales, marketing and distribution functions.

For Corautus, the VEGF-2 therapy for angina represents its sole clinical-stage program in development, though other indications are being considered.

Callicutt said the company expects to eventually file an investigational new drug application to begin human trials of the same therapy in patients with Buerger's disease, a smoking-related circulatory problem for which VEGF-2 has orphan drug status. Corautus also is in discussions with collaborators at St. Elizabeth's Hospital in Boston to test the therapy for diabetic neuropathy.

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