By Lisa Seachrist

Washington Editor

June ordinarily rings in the dog days of summer for the biotechnology markets, but several financings completed last month may indicate that, instead, the summer is just beginning to heat up.

The capital markets, which have been extremely tight for the past year, appear to be looking more favorably on the biotech industry based on a few interesting offerings: Human Genome Sciences Inc. (HGS) completed a convertible note financing worth $100 million, Alliance Pharmaceuticals Inc. returned from the brink with a $23 million follow-on offering, and VaxGen Inc. completed its initial public offering (IPO) and saw its stock climb 26 percent on its first day of trading.

¿The window may be opening for the biotech companies,¿ said Mike King, senior analyst with BancBoston Robertson Stephens in New York. ¿I think it¿s a selective group, but we do seem to be getting a bit of a summer-months surge.¿

That¿s not to say that the majority of the financings completed in June weren¿t small, with private placements of stock averaging around $10 million raised by small or microcap biotech companies, such as cancer vaccine specialist Therion Biologics Corp., cell device company VitaGen Inc., and Calydon Inc., which is developing a virus to attack prostate cancer.

¿[Many such deals involve] little companies, short on cash, doing a private placement,¿ said Rachel Leheny, an analyst at Warburg Dillon Read in New York. ¿Often, they involve either current investors or a limited number of investors. It¿s a sign that the market still isn¿t great for microcap stocks.¿

But, outside the microcaps, HGS took a bold step forward raising $100 million in a private placement of 5.5 percent convertible subordinated notes with Credit Suisse First Boston. While other biotechnology companies have used converts to quickly raise money, most notably Idec Pharmaceuticals Inc. in February, that type of financing usually is only available for companies soon to have a product on the market. HGS, on the other hand, has intentions of beginning Phase III clinical studies, but has products currently in Phase II and I/II studies only.

¿Converts were really hot last year,¿ Leheny said. ¿But there have been a lot of ups and downs with them lately. Because the bank is taking a lot of risk, they are usually reserved for companies that will have product on the market soon. So, this was a very interesting move for HGS.¿

Leheny noted that converts can be an extremely attractive way for a company to raise money because they shield its stock from the vagaries of the market by eliminating the need for companies to conduct a road show for a public offering. In fact, the offering was completed in one day. In addition, because the stock is sold at a premium, it significantly reduces dilution.

HGS said it intended to use the proceeds to fund clinical development of three product candidates: myeloid progenitor inhibitory factor-1 (MPIF-1), a chemoprotectant; keratinocyte growth factor-2 (KGF-2), a wound-healing factor; and vascular endothelial growth factor-2 (VEGF-2), a protein that encourages blood vessel formation. The company jumped at the opportunity to complete the convert despite ending the first quarter of 1999 with $176 million in cash and cash equivalents.

Steve Mayer, senior vice president and chief financial officer at HGS, said the company continually was evaluating funding opportunities and decided that the convert was the most attractive option.

Leheny noted that HGS has a significant burn rate and is expected to go through $40 million to $50 million this year alone.

¿They need to consider building up a big cash position because some of these trials could get quite expensive,¿ Leheny said.

Buyers of the notes typically look to hedge out the position and short the stock in order to guarantee a return on their investment. For that reason, they typically look to companies that soon will have product on the market.

HGS may be quite far from having a product, but it may be much closer to being able to further leverage its genetic sequence data. A 1994 agreement gives SmithKline Beecham the first right to develop and market drugs, vaccines and diagnostic products and services based on human gene sequence data discovered by HGS. That agreement will run out in 2001, giving HGS an opportunity to offer its technology more broadly to the pharmaceutical industry.

VaxGen, a 1995 spin-off of Genentech Inc., completed what has become an extremely rare IPO in the sector garnering $40.3 million through the sale of 13.1 million shares of common stock. The company has granted the underwriters, Prudential Securities, which served as lead manager, and Punk, Ziegel & Co., both of New York, an overallotment of 465,000 shares. Should that amount be exercised it would add $6 million to the IPO.

VaxGen, which is focused on developing preventative vaccines against HIV, anticipated the IPO range at between $13 and $15 a share. It completed the offering at the low end of the range, but saw its first day of trading take it to $16.375 a share.

¿Their success is a little surprising,¿ said Jay Silverman, senior analyst with BancBoston Robertson Stephens. ¿There haven¿t been many companies to get through an IPO favorably. There really just hasn¿t been a window of opportunity in a while.¿

VaxGen will use the proceeds for continued research and development and general corporate purposes. The company is conducting two Phase III clinical trials of its AIDSVAX vaccine ¿ one principally in North America and the other in Thailand.

Alliance Pharmaceuticals Inc. raised $23.3 million in a follow-on offering to see it through expensive periods while it conducts two pivotal Phase III clinical trials and readies a new drug application for a third.

The offering priced at $2.45 a share and included both established and new investors. The company needed the money after Hoechst Marion Roussel, of Frankfurt, Germany, pulled out of an agreement to develop LiquiVent, a liquid ventilation agent, in December 1997. Just six months earlier, Johnson & Johnson returned development rights for Oxygent, a blood substitute, to Alliance, but did not sever the relationship, retaining the right of first offer for worldwide marketing.

¿They have a product in late-stage development, which may have made this offering more attractive,¿ Leheny said.

While the rumblings are beginning to point to the markets opening for the biotech sector, the floodgates are far from open. However, the recent trend toward big pharmaceutical firms buying promising biotechnology firms may further spark market interest in the sector. Last month, Pharmacia & Upjohn agreed to purchase cancer drug developer Sugen Inc. in a $650 million stock deal.

That deal was largely based on Sugen¿s promising pipeline of small-molecule drugs aimed at inhibiting tumor growth. Sugen¿s lead angiogenesis inhibitor, SU5416, will be the first drug aimed at stanching a tumor¿s blood supply to enter Phase III clinical trials when patients with lung or colorectal cancer begin enrolling in the study later this year. The company also has second-generation angiogenesis inhibitors and an inhibitor of platelet-derived growth factor in clinical development.

¿The lesson the Sugen deal taught us is that pipelines matter,¿ King said. ¿All you need is one more company like Sugen to go [to big pharma] and we could see an upswing in the market.¿

King pointed out that should another merger occur, the market may realize it has undervalued the biotech sector because the informed buyers ¿ pharmaceutical companies ¿ are paying big money to acquire them.

¿One of the triggers for the rally in 1995 was exactly this type of activity,¿ King said.