By Jim Shrine

VaxGen Inc., a Genentech Inc. spinoff with ongoing Phase III trials of an HIV vaccine, intends to raise $40 million to $53 million through an initial public offering (IPO).

VaxGen, of Brisbane, Calif., was formed in November 1995 to complete development of and commercialize AIDSVAX in collaboration with South San Francisco-based Genentech. Two large, three-year Phase III trials ¿ one in North America and one in Thailand ¿ already are under way.

VaxGen filed to sell 3.1 million shares of common stock at $13 to $15 per share. Prudential Securities Inc., of New York, is the lead underwriter. Punk, Ziegel & Co., of New York, is co-managing underwriter. They have an overallotment option on another 465,000 shares.

The offering, at $13, would raise $40.3 million; at $15, it would raise $46.5 million. Assuming underwriters exercise their overallotment option, the offering would bring in $49.3 million to $53.5 million at the assumed prices, respectively. There would be about 10.8 million shares outstanding after the offering. The proposed Nasdaq symbol is VXGN.

The vaccine is designed to prevent HIV infection, not to treat the disease. AIDSVAX uses recombinant versions of glycoprotein 120 (gp120) from two different strains of HIV. Gp120 is a major envelope protein from HIV that takes the virus into immune cells. The theory is that the vaccine will produce antibodies that bind to the virus and stop it from infecting cells.

In Phase II trials, the company said, vaccinated volunteers developed neutralizing antibodies to HIV. Vaccinated chimpanzees injected with the virus were protected against infection.

According to VaxGen¿s filing with the Securities and Exchange Commission, Genentech spent more than $50 million over 10 years in developing the vaccine candidate. Genentech has exclusive options to manufacture and market the product.

¿We believe we have a strong competitive lead in the development of an HIV vaccine,¿ VaxGen said in its filing. ¿We are the only company worldwide with Phase III clinical trials of an HIV vaccine under way. In addition to having the advantage of lead time, we also have an exclusive license from Genentech to a portfolio of U.S. and foreign patents on AIDSVAX and associated technology.¿

Genentech¿s 19.8 percent ownership position in VaxGen would be reduced to 14.1 percent upon completion of the offering. William Young, chief operating officer at Genentech and a director at VaxGen, also currently owns 19.8 percent of the spinoff company.

VaxGen president Donald Francis is the third largest shareholder, at 8.2 percent. Francis worked for 20 years at the Centers for Disease Control and Prevention, and also was the lead clinician for a Phase III trial of a hepatitis B vaccine. The other significant shareholder is Robert Nowinski, VaxGen¿s chairman and CEO, who now owns 4 percent of the company.

VaxGen reported having $20.6 million in cash and equivalents on March 31.

The North American Phase III trial of AIDSVAX started in June 1998 and is designed for 5,400 volunteers, primarily gay males and individuals with HIV-positive partners. Fifty-eight sites already are running and the trial is expected to reach 60 sites, including one clinic each in Canada, Puerto Rico and the Netherlands.

The trial in Thailand is designed for 2,500 volunteers to be treated at 17 clinical sites in Bangkok.

VaxGen said the level of HIV infections must be reduced 30 percent to support regulatory approval, based on its discussions with the FDA. An interim analysis will be conducted midway through each trial. If the 30 percent threshold has been reached at that time, the independent monitoring committee will stop the trial, and the company will seek regulatory approval. If the target is not met at the interim analysis, the trial will be completed to see if the result is reached then.

The vaccine used in North America contains versions of gp120 common to the strains found in Western countries. The Thai vaccine was developed with strains predominant in Southeast Asia.

VaxGen said about 16,000 people become infected with HIV every day, and more than 47 million people have become infected in the past two decades. Because of the magnitude and severity of the epidemic, the company said, ¿an HIV vaccine would have one of the largest population-based markets in the history of modern medicine.¿ n