Only a few weeks after winning an $878 million government contract for its anthrax vaccine, VaxGen Inc. conducted a direct offering of common stock to raise $40 million.

The Brisbane, Calif.-based company agreed to sell about 3 million shares of its stock at $13.25 per share to a group of institutional investors. New York-based Punk, Ziegel & Co. and Trout Capital LLC acted as placement agents.

Earlier this month, VaxGen received a contract under the Project BioShield Act of 2004 to supply anthrax vaccine for 25 million Americans in a three-dose regimen.

"That's raised the visibility of our company among investors who haven't previously known about VaxGen," said Kesinee Yip, VaxGen's associate director of corporate communications.

Yip declined to say how far the $40 million would take VaxGen, but she confirmed that the company needed to do the financing partly due to an increase of expenditures as a result of the recent government contract.

In a filing with the SEC, VaxGen reported $6.7 million of cash, cash equivalents and investment securities as of the end of October. That amount, plus income from existing government contracts and grants, and investment income, provided the company with enough money to take it through the beginning of 2005. But that government contract meant more spending.

"Even with the net proceeds we expect to receive through this financing," the filing states, "we will need to raise additional capital in order to complete our obligations under the [anthrax vaccine] contract."

The company said it might attempt to raise the funds through equity or debt financings, collaborations with corporate partners or from other sources. But the $40 million raised Monday is a good start.

The company's recombinant Protective Antigen anthrax vaccine (rPA102) will be delivered to the Strategic National Stockpile (SNS) beginning in early 2006. VaxGen will maintain manufacturing operations and provide stockpile-related services throughout the five-year contract. (See BioWorld Today, Nov. 8, 2004.)

While the government will purchase the vaccine before it is FDA approved, VaxGen will continue to develop rPA102 with the goal of filing a new drug application. The vaccine has fast-track status.

The contract is expected to take VaxGen to profitability in 2006, with the first payment being made upon the government's acceptance of the company's vaccine.

The vaccine is composed of an aluminum salt and recombinant protective antigen, which induces antibodies that are known to neutralize anthrax toxins. RPA102 does not cause anthrax infection and can provide immunity with three doses, as opposed to the six doses needed with the currently approved anthrax vaccine.

Aside from the anthrax vaccine, VaxGen is focusing on another clinical candidate, LC16m8.

"We have an attenuated smallpox vaccine candidate that is in Phase I/II clinical trials, and that involves four medical centers throughout the U.S.," Yip told BioWorld Today. "That started in October."

The trial includes about 150 volunteers that are being randomized to test the safety and immune response of LC16m8. VaxGen hopes the vaccine will fulfill the government's desire for an emergency stockpile of attenuated smallpox vaccine.

As it works to develop its vaccines, VaxGen also intends to regain its Nasdaq National Market listing sometime in January. Earlier this year, the company announced it would reaudit and restate its financial statements for the fiscal years closed at the end of 2001, 2002 and 2003. As a result, the company was delisted from Nasdaq until it files the financial statements that incorporate a new revenue-recognition policy. All of the company's revenue is derived from government contracts and grants.

The stock (OTC BB:VXGN) rose 16 cents on Monday, to close at $15.71.