By Randall Osborne

West Coast Editor

Finishing up a restructuring effort that cut personnel by 20 percent and aiming to transform the company from a vendor of chips and arrays to ¿a gene-to-drug story,¿ Hyseq Inc. raised $21.3 million in a private placement of 3.04 million shares of stock at $7 per share, said Peter Garcia, senior vice president and chief financial officer.

¿The money will be used to continue operations,¿ said Garcia, adding that the staff reduction ¿will be completed by the end of the quarter. It was difficult to do, but really the right thing to do. If there are positions not devoted to developing pharmaceuticals, we¿re going to let those people go.¿

Garcia said the financing gives Hyseq $27.7 million in cash, and about 19 million shares outstanding.

Hyseq also issued warrants to the investors for about 1.52 million shares of common stock at $10.50 per share, a 50 percent premium to the per-unit purchase price on the closing date, which may be adjusted to $7.95 per share based upon certain future issuances.

Investors in the private placement included Narragansett Asset Management, of New York; Vulcan Ventures, of Seattle; and senior Hyseq management and board members led by George Rathmann, chairman. Rathmann, co-founder of thriving Amgen Inc., of Thousand Oaks, Calif., also in July made available a $20 million line of credit, but the company needed to prove itself further as it made changes.

¿[The credit] gave us a little breathing room on financing, but we had to show we could bring in some investors ¿ well-known, long-term biotech investors,¿ said Garcia. He joined Hyseq in May, having worked at Amgen with Rathmann, who is an impetus behind Hyseq¿s new plan.

While intending to turn the chip business into a self-funded entity and in-license some drug candidates, Hyseq will be focused mainly on making drugs from its understanding of genes.

¿The deal with Aurora gets us part of the way there, and the deal with Kirin gets us there,¿ Garcia said.

A three-year research and development collaboration entered earlier this month with the pharmaceutical division of Kirin Brewery Co. Ltd., of Tokyo, is directed toward drugs for diseases that include hematopoietic and inflammatory conditions. The two-year pact with Aurora Biosciences Corp., of San Diego, signed in July, is for Aurora to screen Hyseq¿s orphan secreted protein collection. (See BioWorld Today, Aug. 17, 2001, and July 12, 2001.)

¿I¿m not sure if we have reinvented ourselves, but [Rathmann] felt there was a lot of potential in the over 8,000 genes we¿ve filed patents on,¿ Garcia told BioWorld Today.

¿We¿re just building on the George Rathmann model,¿ Garcia added, noting that the Hyseq chairman also founded ICOS Corp., of Bothell, Wash., which earlier this month made news by signing deals with Seattle Genetics, also of Bothell, and Array BioPharma Inc., of Boulder, Colo.

¿Look at ICOS,¿ Garcia said. ¿It was a three-dollar stock, five years ago.¿ ICOS (NASDAQ:ICOS) closed Thursday at $59.21, down $3.15.

Hyseq was finding the chip and array markets ¿kind of crowded,¿ he said. ¿There are ongoing patent issues among various companies, us included.¿

The trend toward takeovers makes the switch by Hyseq smart, too. Garcia pointed to Cambridge, Mass.-based Vertex Pharmaceuticals Inc.¿s $592 million stock swap buyout of Aurora, and Whitehouse Station, N.J.-based Merck & Co. Inc.¿s $620 million stock buyout of Rosetta Inpharmatics Inc., of Kirkland, Wash. (See BioWorld Today, May 1, 2001, and May 14, 2001.)

Turning Hyseq around strategically, Garcia added, will take time. ¿It¿s not going to be a six-month story,¿ he said.

The company¿s stock (NASDAQ:HYSQ) closed Thursday at $7.40, up 2 cents.