By Jim Shrine

Sugen Inc. completed a $28 million private placement of 12 percent senior convertible notes due in 2002, through a financing that gives the company needed cash without the stock dilution that would have come with a public offering.

Investors also will be issued warrants entitling them to purchase another $21 million in notes on the same terms over the next two years. And, finally, the balance of $5.6 million from a September 1997 floating convertible financing was retired, as holders will receive either common stock or the new 12 percent convertible notes.

Sugen, a South San Francisco company developing cancer products, has the option to pay the interest with common stock or cash. The notes are convertible in Sugen stock at a fixed price of $20.50 ¿ a premium of about 20 percent to recent prices.

¿We are very concerned about dilution,¿ said James Knighton, Sugen¿s senior vice president and chief financial officer. ¿This was a much more desirable way to sell stock at a premium, and at the same time get the cash we needed, as well as getting rid of that floating convert.¿

¿This did a lot for us, and within two years we have the possibility of getting another $21 million,¿ he added. ¿In two years, we¿ll need $21 million for completely different reasons. We¿ll be growing a commercial organization.¿

Company Undecided About Partners

Until then, Sugen has a series of clinical trials running and planned for three lead products. As many as five trials designed to support product registrations could be going by the end of the year, Knighton said, and Sugen still holds all U.S. rights to them. He said the company is deciding on whether or not to bring on partners.

The private placement is expected to close Wednesday. Diaz & Altschul Capital LLC, of New York, was the placement agent. Delta Opportunities Fund Ltd. was the lead investor.

Sugen¿s stock (NASDAQ:SUGN) fell $1.625 Monday to close at $15.062. The company has about 16.5 million shares outstanding, and posted a net loss of $39.6 million in 1998 on revenues of $14.9 million.

Knighton said the company was pleased to get the conversion at $20.50 ¿ a price the stock hasn¿t reached in about 18 months ¿ because of the significant premium, and because it reflects confidence from the investor.

¿They¿re not going to do a deal like this for a 12 percent coupon,¿ Knighton said. ¿A lot of their return is in the ability to convert into common stock. They need to capture value in the equity side as well as the debt side.¿

Sugen¿s lead products are SU101, a small-molecule inhibitor of platelet-derived growth factor receptor, and SU5416, an Flk-1/KDR angiogenesis inhibitor. The third compound is SU6668, a inhibitor of angiogenesis and tumor growth.

Interim data from a pivotal study of SU101 in glioblastoma are expected later this year. If further survival data are needed, the trial is expected to be completed next year. The drug is expected to go into a pivotal study this year to treat pain associated with hormone-refractory prostate cancer. It is also in Phase II trials in ovarian and non-small-cell lung cancers.

Knighton said the company has accelerated development of SU5416 by planning to move it into registrational studies for non-small-cell lung and colorectal cancers. Phase III data from a study in Kaposi¿s sarcoma should be in by the end of the year or early next year, he said.

SU6668 is in Phase I trials for solid tumors.