By Debbie Strickland

Somatogen Inc. Tuesday announced it would pare its workforce by more than one-third, with 67 of 190 full- and part-time employees slated to receive severance packages. The restructuring comes one month after Eli Lilly and Co. terminated an agreement to jointly test and market Somatogen's experimental blood substitute, rHb1.1, dubbed Optro.

Several companies have expressed interest in taking Lilly's place as a partner in the development of recombinant hemoglobin products, said Andre de Bruin, president, chairman and CEO of the Boulder, Colo.-based company. As yet, though, no deal has come to fruition. Somatogen has yet to bring a product to the market.

The company will take a fourth-quarter charge in an amount undisclosed as a result of the downsizing.

Third-quarter earnings of $1.6 million, or 7 cents a share, were announced Friday. The net gain was attributed to Lilly's contract-termination payment of $6 million. Excluding the Lilly infusion, Somatogen lost $4.4 million, 18 percent less than the comparable quarter last year.

At the close of trading Wednesday, the company's stock (NASDAQ:SMTG) was down $0.437, to $5.187 a share.

The restructuring allows the company to "meet critical milestones without having to raise more cash," de Bruin added.

De Bruin said he expects the company's burn rate to drop below the current level of about $1.5 million per month.

"I think we'll keep it at that as maximum and more than likely do better," he said.

Somatogen has more than $50 million in cash, including an $8 million long-term loan and $6 million in cash * both from Lilly, of Indianapolis, as a condition of contract termination.

Despite the cost-cutting move, analyst David Crossen hasn't changed his "hold" recommendation on Somatogen, which he downgraded from "buy" in the wake of the Eli Lilly pullout.

"We tend not to recommend companies just because they lose less money," said Crossen, of Montgomery Securities, of San Francisco, "but it was a smart move on the company's part to save money, because they've got to conserve cash.

"The issue is whether Optro can find a place for itself either in cardiopulmonary bypass or hematopoiesis. In the former case there's already competition and this is an unproven product, and in the latter case there are also other competitors."

The job cuts, de Bruin said, are "across the board" and include positions in manufacturing and quality control.

"We have made all of the clinical materials for our clinical programs," de Bruin said. "We're structured now so that we can focus on our immediate priorities, [which are] to expeditiously complete our current Optro clinical studies and develop our next-generation recombinant hemoglobin technology."

The Phase II study of Optro use in cardiopulmonary bypass is going forward as planned, but a 400-patient, late Phase II intraoperative study, which Lilly was to have managed, has been dropped.

"We believe that the cardiopulmonary-bypass indication is a faster path to FDA approval of the compound," de Bruin wrote in an April 2 letter to shareholders.

So far, clinical results show no "unacceptable toxicities," according to the company. Patients have received doses of up to 100 grams, the equivalent of four units of transfused blood, and, the company said, the largest dose of recombinant protein ever administered to humans.

Somatogen also is conducting animal research on a second generation of recombinant hemoglobin compounds, and de Bruin said the company expects to file an investigational new drug application with the FDA in the next six to nine months. *