By Lisa Seachrist

Washington Editor

WASHINGTON — In an effort to reduce its burn rate and steer its lead product toward Phase III clinical trials, Celtrix Pharmaceuticals Inc. has discontinued its manufacturing operation and plans to lay off up to 90 percent of its staff by the end of the year.

The Santa Clara, Calif.-based company has produced enough of lead drug SomatoKine, an insulin-like growth factor-1 coupled to its natural binding protein, to carry Celtrix through up to two years of clinical trials in severe osteoporosis, diabetes and severe burns. As a result, the company decided to stop manufacturing of the drug.

"It's really a little bit of a natural move," said Andreas Sommer, CEO of Celtrix. "Our annual burn rate will go from $13 million to $2 million. Most of our employees were involved in the manufacturing end of the business so we will be letting a large number go."

Sommer said that Celtrix let 49 employees go on Friday and will lay off 19 more by the end of the year as the company shifts focus to completing clinical trials of SomatoKine. The company has "a little more than $2 million" cash on hand and a $2 million commitment from investors to fund the drug's clinical development.

SomatoKine is a recombinant complex of insulin-like growth factor-1 and its binding protein, BP3. Studies of the drug to date have shown that it has potential as a hormone replacement therapy, stimulating the production of bone and muscle mass. In effect, Sommer said, the drug is an anabolic agent that prevents tissue breakdown.

The drug has shown benefit in treating severe osteoporosis in patients who have broken a hip. Sommer said that Phase II results in osteoporosis will be announced by the end of the year. In addition, the drug is being tested as way to increase insulin sensitivity in diabetic patients, and Phase II results are also expected by year's end. In May, the company announced positive preliminary Phase II results in helping patients with severe burns heal faster.

Partner Or Money Needed To Launch Phase III In '99

Sommer said that the company plans to have the drug in Phase III studies in osteoporosis in 1999. That goal, however, won't be met unless the company raises additional funds or finds a corporate partner.

"With the money that we now have, we would not embark on this trial," Sommer said. "The data continue to look very encouraging in all the indications. I think we will be able to have the financing in less than a year."

Sommer admitted a 90 percent staff reduction sounds like a dire situation, but maintained the company is in a good position to move SomatoKine forward.

"We think this is a pretty good situation from a business point of view," Sommer said. "We now have a low burn rate with very encouraging clinical data. This should be a pretty promising outlook for the future here."

Celtrix's stock (NASDAQ:CTRX) closed at $1.188, down $0.188. *