Finding itself with a less-than-desirable cash position, ViroLogic Inc. on Friday said it would raise $10 million through new investments and conserve funds on hand through a 20 percent staff reduction.
In its third-quarter report released the same day, the South San Francisco-based firm said that as of Sept. 30 it had $6.2 million in cash, restricted cash and short-term investments. Based on a historical burn rate of about $6 million per quarter, the company was not finding much wiggle room as the calendar year drew to a close, though ViroLogic said it expected an additional $1 million from a lease payment.
But its most significant cash infusion is coming from external investment on multiple fronts. ViroLogic reported both a private placement of preferred stock and a deal with Pfizer Inc. that includes an investment from the pharmaceutical giant.
When asked if the company felt a sense of urgency to locate funding to continue operations, ViroLogic Chief Financial Officer Karen Wilson told BioWorld Today, "Certainly. We had projected money through the end of the year, but needed some additional funding."
But raising such funds comes at the cost of diluting ViroLogic's stock, of which 24.7 million shares were outstanding prior to the private placement.
Its private financing agreement is expected to raise $7 million through the sale of newly issued shares of 8 percent convertible preferred stock to a group of unnamed investors. The preferred stock will be convertible into common stock at a premium to the current market price - its shares (NASDAQ:VLGC) on Friday climbed 11 cents to close at $1.328. The purchasers also will receive warrants to purchase a total of 4.4 million shares of common stock at a price based on a five-day trading average.
Wilson declined to disclose the premium rate, though she said such information would be available in a forthcoming Form 8-K filing. In connection with the private placement closing, the viral disease treatment developer said it plans to exchange its Series B preferred stock for short-term convertible debt, which would automatically convert into the new preferred stock.
ViroLogic said it plans to use proceeds from the private financing, expected to close by Tuesday, to support ongoing commercial activities and for general administrative expenses, capital expenditures and working capital.
The private placement proceeds are in addition to a 5 percent equity investment in ViroLogic made by Pfizer, of New York. Pfizer's ownership percentage is calculated on an as-converted-to-common-stock basis, assuming conversion of all the outstanding preferred stock.
In the Pfizer agreement, ViroLogic becomes Pfizer's preferred supplier for HIV resistance testing technology and services to support Pfizer's HIV drug discovery and development programs. ViroLogic's technologies assess drug resistance among a number of antiretroviral therapies in both preclinical and clinical studies, including PhenoSense HIV, GeneSeq, PhenoSenseGT, PhenoSense HIV Entry and PhenoScreen.
"This validation of our technology by the world's largest pharmaceutical company reflects the value ViroLogic offers to our customers," ViroLogic Chairman and CEO Bill Young said in a conference call.
Pfizer will guarantee undisclosed service minimums for three years. In addition, Pfizer will make an equity investment resulting in its ownership of about 5 percent of ViroLogic's common stock.
"The deal was based on a premium to a 20-day average," Wilson said.
In part, the need to both raise funds and conserve cash stems from problems arising from unnamed partners that use ViroLogic's services for drug development.
"We're still the company to do all the testing for them and we remain confident these trials will proceed as planned," Young said. "The timing of these projects is not under our control."
Specifically, a delay in pushing the beginning of two large clinical trials from this year's third quarter into next year is resulting in a lowered revenue forecast for the end of the year.
"Our customers send us samples, but if they're delayed in their timing, then we don't have the revenue until we run the samples," Wilson said, adding that ViroLogic expects the delays to lift next year.
The company dropped revenue expectations to the $24 million to $26 million range from $28 million to $32 million.
Enter the termination of about 40 employees, as well as lowered salaries and consolidated functions among remaining employees, resulting in a fourth-quarter charge of about $400,000. ViroLogic is looking to reduce its burn rate to about $4.5 million in the first quarter of next year, and it expects that figure to decrease as revenue grows in subsequent quarters.
Aside from all financial moves going forward, the third quarter saw higher revenues and lower losses for ViroLogic. The company reported $5.9 million in revenue, up 35 percent from $4.4 million in the corresponding year-earlier quarter. At the same time, the net loss fell to $5.6 million, or 23 cents per share, better than last year's third-quarter loss of $6.6 million.
But going forward, the company remains upbeat.
"These resources, combined with the cost-cutting measures we've implemented, put ViroLogic in a strong position to grow our business and become cash-flow positive," Young said.