Tightening its focus on developing its already discovered cells, StemCells Inc. said it would lay off a quarter of its work force to reduce costs by the same percentage as it slows discovery research activities.

The Palo Alto, Calif.-based firm said dropping its roster to about 30 employees would save about $3 million per year.

"Equity-based financing is the way that biotech companies typically fund their operations," President and CEO Martin McGlynn said. "In these conditions, one has to take that into consideration in terms of speed of forward progress and the scope of your endeavors."

The company said the decision to scale back would be implemented by the end of the year.

StemCells said it would channel remaining resources - the company reported about $7 million in cash, with a burn rate of $1 million per month - to accelerate preclinical development of its cells for the treatment of neural and liver diseases. Its technology isolates, purifies and expands stem or progenitor cells that are found in human tissue and are committed to become the mature cells of an organ from which they were derived, with a goal of using such cells to repair or repopulate tissue that has been damaged or lost due to disease or injury.

StemCells said success in its human neural stem cell program, as well as the identification of a number of candidate cells in the liver, makes those programs most attractive to move forward. The company has discovered and patented the human neural stem cell and has a number of patents pending in the liver and pancreas fields. But StemCells said it would delay further pancreatic cell work until it secures funding from a partner.

In its neural stem cell program, McGlynn said the company routinely fills the gap in what it lacks in in-house testing by working with external academic collaborators who possess knowledge specific to particular animal disease models. Following that structure, its neural stem cells are being evaluated in a range of animal models of central nervous system disease, including Parkinson's, stroke, multiple sclerosis and lysosomal storage diseases, as well as spinal cord injury.

"We're in a very broad evaluation endeavor," McGlynn said, "and all of this is going on in parallel."

StemCells also has begun preclinical testing with candidate human liver engrafting cells in a program targeting treatment of liver cancer and chronic liver failure. McGlynn said the majority of liver cell research is being undertaken in-house, though he added that StemCells does seek external guidance in that initiative.

"The whole challenge here is to ensure that you're working in animal models that are reasonably close or predictive of the human clinical setting," McGlynn said. "The double challenge is to put the right cell into the right animal disease model, which would be as close as you could get it to a clinical condition."

The company's downsizing decision coincided with a bill signed Sunday by California Gov. Gray Davis, authorizing research into stem cells of any source, including embryonic, for therapeutic use.

Embryonic stem cell research has become a volatile issue for church and anti-abortion groups, along with some in Congress. President Bush last year restricted federal government funding for work in embryonic stem cells.

California's bill allows for state funds to be used to further stem cell research efforts.

"Indirectly, I think [the bill impacts us] from the point of view of overall perception of government policy as it relates to the research and development of stem cell technology," McGlynn said. "StemCells Inc. does not engage in the research and development of embryonic stem cell technology. This particular initiative would directly read on those who are engaged in embryonic stem cell technology and would have a direct and obvious benefit there. StemCells Inc. focuses on the use of adult stem cells derived from human tissue, not embryonic. But nonetheless, being in the stem cell space, we would clearly see this as a very positive move in the right direction."

Investors apparently liked the bill and its impact on stem cell technology firms, as the company's stock (NASDAQ:STEM) on Monday climbed 20 cents, or 30.8 percent, to close at 85 cents.