By Debbie Strickland

With results from a Phase II clinical trial likely to be released this fall, Sugen Inc. has raised $17.5 million through an unusually structured private placement of senior convertible notes.

Diaz & Altschul Capital L.L.C., of New York, is serving as the placement agent in the transaction, whose lead investor is Delta Opportunity Fund Ltd., an offshore, open-ended investment company located in the British Virgin Islands and advised by Diaz & Altschul Advisors L.L.C.

Sugen will use the proceeds for general corporate purposes.

The company is developing new classes of small molecule drugs that interact with members of the tyrosine kinase, serine-threonine kinase and tyrosine phosphatase families of signal transduction molecules and their signaling pathways. These pathways are involved in a number of human diseases, including cancer and diabetes, as well as immune and neurological disorders.

Sugen has three independent programs in clinical development, including the lead product SU101, a platelet-derived growth factor (PDGF) receptor inhibitor, in Phase II for the treatment of malignant gliomas and other cancers. SU5271, an epidermal growth factor (EGF) receptor inhibitor is in Phase I studies for psoriasis, and Sugen recently filed an investigational new drug application for an Flk-1 angiogenesis inhibitor.

In addition, the company has corporate collaborations at the preclinical level with Zeneca Group P.L.C., of London; with Astra Medica, of Frankfurt, Germany; and Allergan, of Irvine, Calif.

Sugen is "very confident we're going to conclude additional corporate partnering arrangements this year," said Stephen Evans-Freke, chairman and CEO. That the discussions concern the company's more advanced-stage products is a "sound deduction," he said.

The busy Redwood City, Calif., company broke ground Wednesday on a new 100,000 square foot facility in South San Francisco, slated for occupancy in 1998. The facility is being financed by a real estate investment partner.

Sugen's cash level at mid-year was $43 million, with a burn rate of $6 million to $7 million a quarter.

"There's an awful lot going on in the company and I didn't want to see our cash position fall below $40 million," Evans-Freke told BioWorld Today.

The private offering of convertible shares offered a "rather convenient and elegant way" for Sugen to raise money without doing a time-consuming and expensive public offering, a process that takes weeks of management time and tends to drive down the stock price. "Anybody who's been through the process of secondary offerings in the biotech sector in recent times would empathize with the statement that alternatives are needed," said Evans-Freke.

The financing takes the form of notes that will be convertible to common stock beginning 90 days after the closing date, which is expected to be Sept. 12. The notes may be converted for 100 percent of an average of specified trading prices during the 20 trading days prior to conversion.

The notes carry a 5 percent annual interest rate and will mature in September 2000. Interest may be paid in Sugen common stock or cash at the company's option.

"The absence of a discount-to-market in the pricing is crucial in aligning the interest of the noteholder with the company," Evans-Freke added.

Beginning Jan. 19, 1998, a cap kicks in. After that date, the conversion price may not exceed 115 percent of the average closing bid price of the company's common shares for the 20 trading days immediately preceding Jan. 19.

Warrants Included In Deal

The investors also will be issued three-year warrants to acquire 262,500 shares of common stock at an exercise price of $16.75 per share. If the notes are not converted, upon maturity in September 2000, they will be exchanged for 13.75 percent five-year debentures, due 2005.

The deal's architects were Diaz & Altschul co-founders Arthur Altschul, who is also Sugen's former senior director of corporate affairs, and Reinaldo Diaz, who, with Evans-Freke, led PaineWebber Development Corp., a source of non-traditional biotechnology financings in the 1980s.

Founded in May 1996, Diaz & Altschul specializes in convertible placements for high-technology companies and has done just under $70 million worth of transactions this year in four separate deals.

Advantages to biotechnology firms include the option of custom design and access to non-traditional biotechnology investors.

"The buyers of convertible instruments such as these are not fundamental investors — they don't buy a stock in 1990 and hold it until the year 2000 and look for a 10-to-1 return," said Altschul. "They're looking for just-above-average fixed income return."

Sugen's stock (NASDAQ:SUGN) closed Wednesday at $14.375, up $0.375. *