Shares in Cellegy Pharmaceuticals Inc. slid 38.1 percent Monday after the company said it recently received a non-approvable letter in its mailbox.

The stock (NASDAQ:CLGY) closed at $3.23, down $1.99, after the FDA found deficient the South San Francisco-based firm's new drug application for Fortigel (testosterone gel) 2 percent. Cellegy, which said it believes its package was sufficient to support approval of its transdermal testosterone gel for hypogonadism, expects to meet with the agency within about a month to explore its options.

"Up until the time we received the letter of non-approval, we believed the product would be approved," Cellegy Chairman and CEO K. Michael Forrest said during a conference call. "We believe that our data are very good, so we need to meet with the FDA as soon as possible to make sure they have a full understanding of the information we submitted, and a full appreciation of the information we submitted."

The company said the FDA questioned safety related to above-normal daily Cmax serum testosterone levels found in a significant portion of participants in the study supporting the application. The letter also said the application, which Cellegy submitted in June 2002, does not demonstrate that doses can be adjusted to consistently preclude such high supraphysiological testosterone levels.

"They believe that the high serum levels that were achieved on a daily basis could produce some side effects over a longer period of time under chronic administration," Forrest said, adding that the FDA did not specify the side effects that could result. But he countered that other transdermal testosterone replacement products produce daily, transient, above-normal blood levels in some patients. Forrest called the effect "characteristic of all transdermal products, and all the injectable products as well."

Cellegy said clinical trial results demonstrated that such supraphysiologic levels are not associated with side effects any more frequently with Fortigel than with the published incidence of side effects related to other marketed testosterone products. Some of the side effects appear to occur less frequently with Fortigel, the company said. A 204-patient trial showed that the drug, developed to treat male hypogonadism, restored normal blood levels in 90 percent of patients.

"The side effects that are produced by testosterone products are well known and are generated independent of the mechanism of delivery of the products and are considered to be a class effect of testosterone replacement therapy," Forrest said. "Our trial and the data submitted as part of the Fortigel NDA did have some side effects associated with testosterone, as do all the other products. But none of these side effects were associated with high blood levels and were no more frequent than side effects seen with marketed testosterone products."

The product previously was called Tostrex Gel until the FDA requested a name change in order to avoid potential confusion related to currently marketed products.

Cellegy's commercialization partner is PDI Inc., of Upper Saddle River, N.J. The marketing deal was worth at least $25 million, including $15 million up front followed by a $10 million milestone payment upon approval, as well as royalty payments ranging from 20 percent to 30 percent on net sales. (See BioWorld Today, Jan. 3, 2003.)

Forrest said the FDA letter would not affect the agreement beyond putting marketing plans on hold. In the meantime, he said Cellegy would seek an overseas partner for the product. The market already includes another gel as well as products delivered by patch and injection.

Cellegy finished its most recent quarter with about $20 million in cash, which Forrest said would sustain operations for up to about two years. He added that should the FDA require further clinical investigation of Fortigel, the 22-person company would remain sound in terms of its finances.

Elsewhere in its pipeline, Cellegy is studying Tostrelle, a transdermal testosterone gel to treat female sexual dysfunction due to testosterone deficiency, in Phase II/III testing. Through four months of treatment, results on a subset of patients showed that 71 percent responded favorably to Tostrelle treatment in terms of increased sexual satisfaction.

Cellegy also continues late-stage studies of Cellegesic, a drug for which the company voluntarily withdrew its NDA more than a year ago. A confirmatory, pivotal Phase III trial is scheduled to begin for the nitroglycerin ointment, designed to treat pain caused by chronic anal fissures. The FDA raised concerns related to headaches experienced by prior trial participants - about 50 percent developed headaches, though only 5 percent dropped out of the trial. (See BioWorld Today, April 29, 2002, and Sept. 10, 2002.)

The company also expects to begin a Phase I/II study of Cellegesic for dyspareunia by the end of this year. The product is marketed in the Pacific Rim region for anal fissure pain.