By Lisa Seachrist

Washington Editor

Poised to submit data for its first product to the FDA next year, DNA diagnostics specialist Visible Genetics Inc. will raise $30 million in the sale of preferred convertible stock to the equity investment firm E.M. Warburg, Pincus & Co. LLC.

Warburg signed a letter of intent to purchase the preferred stock, which is convertible at $11.00 per share, and will receive 1.1 million warrants that may be exercised at $12.60 per share. The stock purchase will give Warburg approximately 30 percent ownership of Toronto-based Visible Genetics Inc. (VGI), as well as a seat on the company's board of directors.

VGI's stock (NASDAQ:VGIN) surged 20 percent on the news Friday, closing at $12.50 per share, up $2.062.

"We've now got the core building blocks in place and are ready to grow very rapidly," said Richard Daly, CEO of VGI. "Our technology is proven, our instrumentation is proven, we have the management team in place, and Warburg has added the capital. We've got a very strong future."

In addition to getting the additional funds, the company will be retiring all the debt on its balance sheet. Hilal Capital Management LLC, which provided the company with $7 million in a debt financing, will receive $4.1 million from the proceeds of the Warburg investment. In addition, $3.9 million of its existing loan will convert into preferred convertible stock under the same terms as the Warburg investment.

"We wanted to clean up the balance sheet of all debt," Daly said. "We wanted to guarantee that we would have enough capital on board to build the business."

The preferred stock will accrue dividends at 9 percent per year during the first three years and at 4 percent per year thereafter. For the first three years the dividends will be payable in kind as stock. Once the 4 percent rate kicks in the dividends will be available as cash. One-third of the preferred stock must be redeemed in each of 2006, 2007 and 2008 at a price equal to the amount invested plus accrued dividends.

If the company fails to redeem the shares as required, the shareholders may appoint a majority of the VGI's board and will have the right to participate on a pro rata basis in future company financings.

After the investment satisfies Securities and Exchange Commission registration requirements and the purchase is completed, the company anticipates it will have $27 million in cash and no debt.

That money will be used to advance the company's diagnostics business. VGI manufactures and markets high-performance automated DNA sequencing systems and complete kits for the analysis of genes linked to disease. It's OpenGene system employs stratified DNA testing and single-tube, single-step sequencing methods to significantly reduce the time and cost involved in identifying clinically relevant genetic information.

VGI's OpenGene HIV Genotyping System is in multisite validation and proficiency studies as a means of helping physicians quickly establish the resistance profile of the particular virus they are treating. The company also is developing hepatitis B and C, and tuberculosis versions of the GeneKit products.

"The market in gene-based diagnostics is very strong and likely to grow," Daly said. "The HIV diagnostic is on the market in Europe and we expect to submit data on it to FDA sometime next year. The other products are early stage."