After a major shareholder of Northstar Neuroscience (Seattle) recommended that the company should sell or split its cash among shareholders, Northstar said last week that it has decided to change its focus, move away from stroke rehabilitation therapy and instead emphasize its cortical stimulation therapy for depression, putting all other clinical programs on hold.

Besides dropping its clinical work on stroke, Northstar also will cut costs by laying off 20 more employees and subleasing about 40% of its office space. These moves should give the company enough cash to operate until 2012, John Bowers, Northstar's president/CEO, told analysts during a conference call last week.

"We have conducted a thorough evaluation of our clinical opportunities," Bowers said. "Based on our findings, we determined that increasing our focus on our existing depression program and putting our other clinical programs on hold is the best course to achieving a viable therapy for the millions of patients suffering from treatment resistant depression, while also conserving our financial assets and striving to enhance overall shareholder value."

Last month Northstar turned down an unsolicited take-over bid from Tang Capital Partners (San Francisco) that valued the company at $58 million (Medical Device Daily, July 7, 2008). Tang had offered to buy Northstar for $2.25 a share in cash, but the company's board judged the proposal "not in the best interests of all shareholders" (MDD, July 9, 2008).

Then, RA Capital Biotech Fund (Boston), in a letter, asked Northstar either to find a buyer or make a cash distribution (MDD, July 16, 2008).

"We value the input of all our shareholders and take their points of view and suggestions seriously," Bowers said. "We remain committed to exploring all options to enhance long-term shareholder value for all shareholders of Northstar."

"Clearly, we're not happy with where our share price is," Bowers admitted, saying that the company is evaluating other strategic alternatives to enhance shareholder value.

"Among others, these alternatives could include a strategic partnership, a sale of the company, or a licensing transaction," he said, though declining to comment on the specifics of that process.

Northstar's value plummeted after its lead therapy — which sought to stimulate the brain to improve motion in stroke survivors — failed in a clinical trial in January. Tang's offer was a roughly 47% premium to Northstar's average trading price since Jan. 22 when the company reported its disappointing EVEREST clinical trial results (MDD, Jan. 23, 2008). The company had $73 million cash as of March 31.

Northstar said it expects to incur about $1.1 million in costs, including non-cash share-based compensation of $190,000, associated with employee termination benefits and sublease losses. The majority of these costs will be incurred in the third quarter.

Bowers said, "During the quarter, we announced long-term data from our PROSPECT study showing that patient depression symptoms continue to improve over time. Additionally, we recently submitted an IDE supplement to the FDA for our PROSPECT II study to further evaluate cortical stimulation for depression in a larger number of subjects. Under our revised strategic plan, we are focused on moving this program forward in a way that preserves cash resources and financial flexibility.

He said that company management continues to explore other alternatives as well.

The company released results of its PROSPECT feasibility study during the American Society for Stereotactic and Functional Neurosurgery (Manhassett, New York) meeting in Vancouver, British Columbia, in June (MDD, June 10, 2008).

Cortical stimulation therapy is a method for precisely delivering low levels of electricity to the outer layer of the brain via an implanted stimulator system. To do this, the company uses the Renova, a device in which electronic leads are implanted along the outer surface of the brain — the cerebral cortex.

In the PROSPECT trial for depression, the patients received 16 weeks of active stimulation. Hamilton Depression Rating Scale scores improved by an average of 27% from baseline and the Montgomery-Asberg Depression Rating Scale scores improved by 31% from baseline.

According to PROSPECT data, out of the 12 patients who underwent cortical stimulation for depression in the trial, four had improvement greater than 50% and one had improvement right at 49%.

"We made the difficult decision to put our stroke program on hold," Bowers said. "We continue to be encouraged by the subset analysis of the EVEREST data and believe that our cortical stimulation therapy retains promise to provide meaningful improvements for stroke patients with hand and arm impairment. We also believe that there is a path to confirm that clinically with a refined treatment protocol."

"Despite this, we believe that our most prudent strategic course is to focus solely on depression in the near term. We are considering alternative means to progress our stroke motor recovery and our other clinical indications while we focus on depression."

Northstar also said last week that investments in its existing clinical programs resulted in a net loss of $4.1 million, or 16 cents a share, for 2Q08, compared to a net loss for 2Q07 of $7 million, or 27 cents a share. Northstar also reported cash and investments of $74 million as of June 30.

"Our balance sheet remains strong and debt free," said company CFO Ray Calvert. "The cost reductions implemented in February 2008, along with the current actions, will significantly reduce cash use during 2009 as we advance our cortical stimulation program for depression. We expect to end 2009 with approximately $53 million in cash and investments."

Calvert told analysts during the call that Northstar has reduced its workforce by about 60% since the results of the EVEREST trial were disclosed, resulting in estimated ongoing annual personnel cost reductions of $5 million to $6 million. The company now has 38 employees, he said.

With an employee base in the 30s, Bowers said Northstar is "sized" appropriately as a small-focused organization, even smaller than it was as a private company pursuing early-stage studies.

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