Small medical-device maker Northstar Neuroscience Inc. (NSTR), which is dealing with disgruntled shareholders following a major study failure earlier this year, is cutting more spending and tightening its focus on developing a treatment for severely depressed patients.

The company said Thursday that it now believes its cash will last until 2012, rather than 2011, as it funds study of its brain-stimulation technology. It is slashing its work force by an additional 20 workers -- after 19 were let go in February -- leaving just 38.

Northstar management did not offer any new details on the review of strategic options, which could include a sale, during a brief conference call.

The company suffered a major blow in late January when it announced the surprising failure of a study aimed at proving its technology could help stroke survivors. The news triggered a steep drop in the company's shares, which have generally stayed below $2 since then.

The company debuted at $15 in an initial public offering in May 2006. Shares slipped 2 cents to close at $1.79 on Thursday.

Northstar responded to the failed stroke-treatment trial by cutting costs and turning its focus to depressed patients who don't respond to drugs. That is a potentially large and competitive market that much bigger medical-device companies are also chasing, and is likely several years away from materializing.

Top investors have been pushing for other, more dramatic changes. Tang Capital Partners -- which holds nearly 20% of outstanding Northstar shares -- proposed on July 2 that it acquire the rest for $2.25 a share. But the company said that deal wasn't in the best interest of shareholders.

On July 14, shareholder RA Capital Biotech Fund urged Northstar to reconsider, and said it was concerned that an "alarming" cash burn rate would further hurt shares. RA Capital said Northstar should engage in a buyout that pays stockholders at least the net cash value per share -- which is about $2.84 -- and suggested it consider a liquidation if no buyers can be found.

John Bowers, Northstar's president and chief executive, repeated late Thursday that management and the board of directors "continue to evaluate other strategic alternatives to enhance shareholder value," along with pushing the depression- treatment program forward. Leerink Swann is helping with the review.

Northstar makes a device that delivers stimulation to the outer surface of the brain and could potentially be used to treat different neurological problems. The company is limiting its focus on severe depression for now, though, to save money and pursue a market where it has some data indicating potential.

To move research forward, the company expects to enroll patients in its next depression-study trial by the end of this year and to have data by the end of next year, at which time the company expects to have about $53 million in cash and investments. The company, which does not have any debt, ended the second quarter with $74 million cash.

It could take several years before Northstar has a product on the market and begins producing revenue, provided its research goes well. The company is also aiming for a market that Medtronic Inc. (MDT) and St. Jude Medical Inc. (STJ) are also pursuing with brain-stimulation technology, although Northstar believes its system will benefit from being less invasive.

Cyberonics Inc. (CYBX) has a Food and Drug Administration-approved nerve- stimulation device for depression, but it has not been able to attain crucial insurance reimbursement coverage. Cyberonics has retrenched and turned its focus back to its core market for treating severe epilepsy.

Northstar expects to incur costs of about $1.1 million, mostly in the third quarter, associated with cutting more costs and workers.

In the second quarter it posted a net loss of $4.1 million, or 16 cents per share, compared with a loss of about $7 million, or 27 cents a share, a year ago.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// www.djnewsplus.com/al?rnd=%2B%2B0A4EKn7ZlAi6szOQUadw%3D%3D. You can use this link on the day this article is published and the following day.

  (END) Dow Jones Newswires
  07-31-08 1825ET
  Copyright (c) 2008 Dow Jones & Company, Inc.