West Coast Editor

Having settled a legal spat with former Fortigel partner PDI Inc., Cellegy Pharmaceuticals Inc. is looking for a new collaborator to help with the testosterone gel product for hypogonadism, Fortigel, which the FDA won't approve without another Phase III trial.

"I've been on the phone a lot today," said Richard Williams, chairman and interim CEO of Brisbane, Calif.-based Cellegy, who said he started contacting would-be partners as soon as he signed the settlement with PDI.

"They took us into mediation about a year ago, so it was obvious they didn't want [Fortigel]," Williams said, adding that he "tried like the devil" to reach an agreement, but was unsuccessful.

He said the claims by PDI had no merit, "but even if you prevail, Fortigel just was not of strategic interest to them anymore."

Cellegy's stock (NASDAQ:CLGY) closed Tuesday at $1.33, down 2 cents.

The company could continue on its own with Fortigel, but "whether we do a co-marketing [deal] or do it ourselves, I've got an asset that has value. The prior group had given that away," he said.

Under the terms of the settlement with PDI, of Upper Saddle River, N.J., Cellegy paid $2 million and issued a $3 million promissory note payable in 18 months, with earlier payments against that note to the extent of 50 percent of funds gained by Cellegy in the form of royalties or milestones from licensees of Tostrex (Fortigel's brand name outside the U.S.) and Rectogesic (nitroglycerin ointment) outside of North America, 50 percent of up-front license fees or milestones from Fortigel licensees in North American markets, and 10 percent of proceeds in excess of $5 million from financings.

The various payments will be made until the $3 million note is satisfied.

Cellegy also issued to PDI a $3.5 million principal amount senior convertible debenture, due in three years. Cellegy may call the debenture at any time during the first 18 months. After 18 months, PDI could convert the note into Cellegy common stock at a price of $1.65 per share.

If Cellegy does not call the note within the first 18 months, then Cellegy will file a registration statement for the resale of the shares.

Under the North American license deal with PDI, the latter was responsible for marketing Fortigel and got a $15 million payment upon signing, with a milestone to come upon FDA approval. In the summer of 2003, the FDA issued a not-approvable letter, citing potential safety problems due to high supraphysiological testosterone levels. (See BioWorld Today, July 8, 2003.)

In December of the same year, after notices from PDI and the mediation proceedings, Cellegy and PDI both started legal action against each other. PDI claimed Cellegy breached several provisions of the deal and failed to disclose relevant facts, asking for damages that included return of the $15 million license fee. Cellegy insisted it had fully complied with the licensing terms.

That deal is kaput, and Cellegy has a special protocol assessment for another Phase III trial with Fortigel.

Meanwhile, Cellegy has the fast-track vaginal gel Savvy in Phase III trials in the U.S. and Africa. That product came by way of the $13.8 million buyout last year of privately held Biosyn Inc., of Huntingdon Valley, Pa. (See BioWorld Today, Oct. 11, 2004.)

More than 1,500 patients are enrolled in the African trials, which are testing Savvy for contraception and HIV transmission, with "200-plus" patients involved in the U.S. studies for contraception only, Williams said.

Late last year, Cellegy lost 45 percent of its value, to close at $2.70, when the FDA sent a not-approvable letter for the company's anal fissure product, Cellegesic.

"We're still working with the FDA right now," Williams said. "I haven't given up on that. I wouldn't call it a flagship, per se, but it's nearer term."

Rectogesic, the brand name for Cellegesic outside the U.S., is approved in the UK for pain associated with chronic anal fissures. Launch in the UK by partner ProStrakan Group Ltd., of Romainville, France, is expected in the first half of this year. A similar formulation is being sold in Australia, New Zealand, Singapore and South Korea.

Tostrex was approved by the Medical Products Agency in Sweden late last year, and ProStrakan will distribute Tostrex in Sweden and the European Union. Cellegy and ProStrakan are pursuing approvals of Rectogesic and Tostrex by the other member states of the EU through the mutual recognition procedure.

The firm also is developing Tostrelle testosterone gel, nearing Phase III for sexual dysfunction in postmenopausal women.