By Jim Shrine

CollaGenex entered into a $20 million financing agreement that will help the company commercialize its approved periodontal product, and that is expected to take it to profitability.

OCM Principal Opportunities Fund LP committed to purchase $20 million of Series D convertible preferred stock that can be converted at any time into common shares at $11 per share. Over the first three years, OCB can receive dividends in common stock at 8.4 percent per year and after that, 8 percent cash dividends per year.

OCM is an investment partnership whose general partner is Los Angeles-based Oaktree Capital Management LLC.

CollaGenex got approval on its lead product, Periostat, in September, launched it in November and brought in $3.1 million in sales for the fourth quarter. In January the company formally trained and launched its 130-person sales force, which targets the dental pharmaceutical market.

¿We ended the year with $10 million in cash after getting approval of our lead product,¿ said Nancy Broadbent, chief financial officer at CollaGenex. ¿Our expectation was that we would access the public markets with such good news. But the public markets fell apart last fall and still haven¿t come back for the biotech sector.¿

The $11 conversion rate with Oaktree is a premium of about 11 percent to the recent closing price of the stock (NASDAQ:CGPI). The deal allows CollaGenex to force conversion when the stock trades at $22 or more for 40 consecutive days, Broadbent said. CollaGenex closed Friday at $9.25, down $1.25.

The financing is expected to go through after a May 11 meeting of shareholders. Until then, Oaktree provided $10 million to CollaGenex, which will be repaid when the financing is secured.

Kevin Tang, an analyst at BT Alex. Brown Inc. in New York, estimated 1999 sales of Periostat at $12 million. He anticipated the company would turn profitable in the second half of next year.

¿The important thing,¿ Tang said, ¿is this is enough money to get them through to profitability, we think. And it¿s with a quality investor.¿

Tang said the financing eliminates overhang that may have been pressuring the stock and also represents a nice endorsement of the product¿s commercial potential, in light of the long-term investment orientation of Oaktree and the favorable terms under which the financing deal was completed.

As of March 5, Tang said, 4.8 million Periostat prescriptions had been filled, translating to an annual run rate of $8.5 million.

¿That¿s three-quarters of the way there for the full year and it¿s only the first week of March,¿ he said. ¿We think this is an underappreciated story.¿

Broadbent said CollaGenex formed its own sales force since no others were in place to address pharmaceutical sales to the dental market. CollaGenex plans to leverage that sales force, she said, and already is co-marketing London-based SmithKline Beecham¿s cold-sore medication called Denavir. n

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