By Mary Welch

Privately held Insmed Pharmaceuticals Inc. received a commitment for $34.5 million in equity financing to fund two compounds, INS-1 for the treatment of Type 2 diabetes and polycystic ovary syndrome (PCOS), and SomatoKine, a novel IGF-BP3 complex, for the treatment of a broad range of metabolic disorders, through Phase II trials and into Phase III.

Insmed, of Richmond, Va., is selling 5.632 million shares of its common stock to a group of investors led by Cooper Hill Partners LLC, of New York. Other investors included funds managed by OrbiMed Advisors and Quantum Partners, both of New York, and Vector Fund Management, of Deerfield, Ill. The investors will receive warrants, exercisable for five years, to buy the equivalent of 1.971 million additional shares. BancBoston Robertson Stephens Inc., of New York, served as an adviser to Insmed.

"We had targeted about $25 million but we ended up oversubscribed," said Michael Baer, Insmed's chief financial officer. "We weren't willing to go above $35 million. This will provide us with enough cash to put our two primary products through Phase II and into Phase III. At some point we may partner one of the drugs or we may not."

The financing is scheduled to close immediately prior to the closing of the merger between Insmed and Celtrix Pharmaceuticals Inc., of San Jose, Calif. Last month Insmed entered into an agreement to acquire Celtrix, forming a company the market valued at around $178 million. (See BioWorld Today, Dec. 2, 1999, p. 1.)

Insmed had about 16 million shares outstanding prior to the financing. Celtrix currently has about 27 million shares of common stock outstanding. The new company, which will retain the name Insmed, will have about 98 million shares outstanding after the merger.

"We announced the merger in December and we are filing the first set of documents with the SEC next week," Baer said. "They review it, send it back to us and we revise and refile them. Then we send the documents to the shareholders who have 30 days to review and then there are stockholder meetings. We're putting our best bet that the merger will be approved in about 75 days, or around April 15," he said.

INS-1 is a carboyhdrate-based small molecule that appears to improve insulin sensitivity by boosting formation of an "insulin mediator" molecule. Both Type II diabetes and PCOS, a leading cause of infertility in women, are insulin-resistant disorders.

The company completed a Phase II trial in PCOS last year and started a Phase IIb trial last month. It expects to finish the second arm by the third quarter.

In a double-blind, placebo-controlled trial of 22 obese women with PCOS, INS-1 significantly improved ovulation rates while decreasing total testosterone. In addition, it reduced triglycerides and blood pressure, which lowers the risk of coronary artery disease.

The company finished a Phase II trial in Type II diabetes last March. The results showed the drug treatment resulted in an improvement in parameters for glycemic control and lipid profile but did not induce significant body weight gain. A larger Phase II trial also started in December and should also finish in the third quarter.

"Both trials are pretty much running in parallel," Baer said.

SomatoKine is the recombinant equivalent of insulin-like growth factor-1 (IGF-1) and its major binding protein, BP-3. Studies have shown the drug has potential as a hormone replacement therapy, stimulating the production of bone and muscle mass. In effect, it is an anabolic agent that prevents tissue breakdown.

Last April, Celtrix and Dublin, Ireland-based Elan Corp. plc entered into a joint venture to develop SomatoKine for osteoporosis. Elan agreed to purchase up to $12.8 million in preferred Celtrix stock at a significant premium. (See BioWorld Today, April 14, 1999, p. 1.)

The two companies are in the early stages of a Phase IIb trial, with enrollment starting in the first half of the year in patients with severe osteoporosis who had hip fractures. The trial should be completed in a year and a half, said Donald Huffman, Celtrix's chief financial officer.

"This funding allows for the Phase IIb trial in Type I diabetes," he said. "Prior to the merger, we didn't have adequate cash for a trial on our own. With the merger - that's step one - and now the financing, there's money to do a Phase IIb in Type I diabetes."

The Phase IIa was completed in February 1999.

Celtrix had also completed a Phase II trial with SomatoKine for burns and could be ready to enter Phase III trials, if the merged company decides to pursue that indication.

In the Phase II trial, six severely burned children who received an intravenous infusion of SomatoKine for five days showed a 16 percent improvement in cardiac output and a 15 percent increased in stroke volume, as compared to saline-treated controls. (See BioWorld Today, Nov. 20, 1998, p. 1.)

"SomatoKine already has orphan drug status for burns," Huffman said. "It is possible that it could be the first indication to go into Phase III after the merger. It's a bit more advanced than the others."

Celtrix also has a licensing agreement with Genzyme Corp., of Cambridge, Mass., for the rights to transforming growth factor beta-2, which finished Phase II trials for dermal ulcers.

"We are not involved in the development end of it," Huffman said. "We only receive milestones and royalties - and there's nothing wrong with that."

Celtrix's stock (NASDAQ:CTRX) closed Thursday at $4.375, up 12.5 cents.