Aerogen Inc. completed the first closing of its planned $32.7 million private financing, resulting in the sale and issuance of 499,981 shares of Series A-1 convertible preferred stock and warrants to purchase about 5 million shares of the company's common stock at a strike price of $3.25 per share, in exchange for gross proceeds of about $15 million.

If the second closing of the financing is approved at Aerogen's annual meeting of stockholders scheduled for early May, Aerogen, of Mountain View, Calif., said it would issue an additional 589,881 shares of Series A-1 convertible preferred stock and warrants to purchase about 5.9 million shares of common stock, for anticipated gross proceeds of about $17.7 million.

The Xmark Funds is lead investor for the financing, which also includes investments by HealthCap, Orbimed Advisors, Perceptive Life Sciences Fund Ltd., SF Capital Partners and other investors. CIBC World Markets Corp. is placement agent.

In connection with the financing, the secured convertible debentures previously issued to SF Capital and the Carpenter Family Trust have been amended to permit the financing, to extend the maturity of SF Capital and the Carpenter Family Trust's March 1 debentures to June 1, and to permit the debt to convert into either common stock or Series A-1 preferred stock within 55 days after the first closing.

SF Capital also will receive warrants to acquire common stock in connection with its debt conversion into Series A-1 preferred stock. Also, SF Capital will provide a $300,000 secured bridge loan due at the earlier of the first closing or April 9 to support the company's operations through the first closing, and is expected to be repaid with the proceeds of the equity financing.

The company currently has an estimated 4.4 million shares outstanding.

Robert Breuil, chief financial officer and vice president of corporate development at Aerogen, said the investment will be used to support the development of the company's drug products, including their lead product, an aerosolized amikacin sulfate, an antibiotic designed to treat ventilator-associated pneumonia. The company is refining a method to deliver the drug via its Aeroneb nebulizer.

The current treatment for ventilator-assisted pneumonia, he said, is intravenous use of amikacin, but as an aminoglycoside, which means patients suffer from "a very low partition [less than 10 percent] of the drug from the bloodstream to the lungs."

He said that while those aminoglycosides in IV form do get into the lungs, it's in such a small dose that it tends to be less effective, and one cannot increase the IV dosage because the compounds are toxic in the kidneys and ears.

"Unfortunately," he noted, "you need high blood levels to get enough killing levels inside the lung."

He said the aerosolized formula presents an obvious opportunity for the company "where we can bypass the systemic circulation." He said with the aerosol form of amikacin, the company can "put the drug where it needs to be and keep it away from where it shouldn't be."

The company's initial focus was on developing a form of inhaled insulin for diabetics, but safety issues raised by the FDA with San Carlos, Calif.-based Nektar Therapeutics' version of the drug - called Exubera - caused Aerogen to halt its program just prior to doing large-scale clinical trials, Breuil said.

"It's kind of on the shelf," he said.

Aside from respiratory disorders in the acute-care setting, Aerogen, which was founded in 1991 and went public in 2000, also is developing pulmonary drug delivery products in collaboration with partners for respiratory therapy and systemic drug input.

The company also has two nebulizer products on the market: the Aeroneb Portable Nebulizer System and the Aeroneb Professional Nebulizer System.