Updated from 10:33 a.m. EST

Staff members of the Food and Drug Administration on Wednesday issued a report raising several questions about an experimental drug from

Procter & Gamble

(PG) - Get Report

designed to improve sexual desire in menopausal women whose ovaries have been surgically removed.

The report, which asks questions about P&G's data as well as potential safety issues, comes one day before an FDA advisory committee meets to review the drug called Intrinsa. It's a transdermal patch that transmits the hormone testosterone. The FDA staff routinely issues a report a day before advisory committees meet, asking the panels to examine a range of safety, efficacy and testing issues based on the companies' applications.

Sometimes the staff recommends approval of a product; sometimes it recommends rejection. For Intrinsa, the staff made no recommendation on a drug that many analysts say could become a female equivalent of Viagra, the erectile dysfunction drug made by

Pfizer

(PFE) - Get Report

.

The FDA isn't bound by its advisory committees' opinions, but the agency usually follows their recommendations. Intrinsa would be the first FDA-approved drug to treat hypoactive sexual desire disorder, and its approval could clear the path for a host of other female sexual disorder

products now being tested as patches, pills, gels, creams and nasal sprays.

Although P&G is seeking Intrinsa's approval for surgically menopausal women, analysts say a much bigger market would be naturally menopausal women. P&G is conducting late-stage clinical trials for this larger group. But if the FDA approves the drug for the smaller group, analysts expect some "off-label" use by other women. Once the agency approves a drug for one disease or condition, doctors can prescribe it for other uses.

Analysts caution, however, that the drug could face some political as well as medical hurdles. Another big issue is how many insurers will pay for its use.

Asking Questions

The FDA staff report asked the advisory panel to look at several key issues with the drug that P&G licenses from

Watson Pharmaceuticals

(WPI)

.

Even though P&G's clinical trials showed statistically significant comparisons between women using Intrinsa and women receiving a placebo, the staff questioned whether the results are "clinically meaningful" because the tests gauged such indicators as "satisfying sexual events."

More importantly, the staff asked the panel to assess "both demonstrated and potential risks" associated with women taking both testosterone and estrogen. Pointing to the "unexpected findings" from a previous study on women's hormone use, the staff said the research indicated that short-term studies "may not provide the adequate estimates of the risks of hormonal therapy." The previous research, known as the Women's Health Initiative, found that women taking estrogen after undergoing hysterectomies had a greater risk of strokes.

This research is important for the panel to consider, the FDA staff said, "because the women for whom this product will be indicated will also be taking estrogen." The staff report noted that the Women's Health Initiative, whose findings were issued in 2002, also found that women taking estrogen and another hormone, progesterone, increased the risk of breast cancer and cardiovascular problems.

"It is unknown whether the addition of a different hormone, testosterone, might have similar and unanticipated effects that have not been demonstrated in the applicant's safety database, which includes only a very small number of subjects who have been treated beyond one year," the staff report said.

Current estrogen and estrogen-progesterone drugs prescribed for menopausal women contain "black box" warnings -- the strongest warning from the FDA. These warnings say the products "should be prescribed at the lowest effective doses and for the shortest duration consistent with treatment goals and risks for the individual woman," the FDA staff report said.

The report added that the American College of Obstetrics and Gynecology recommends that women review their use of hormonal products with their doctors each year. "However, Intrinsa is a product that will potentially be used on a chronic, long-term basis, and thus might induce women to continue use of estrogen well beyond the duration that would be recommended for management of menopausal symptoms," the report said.

The FDA staff report didn't affect P&G's stock, which gained $1.02, or 1.9%, to $54.50, or Watson's stock, which rose 27 cents, or 1%, to $29.32. However, several small companies working on female sexual disorder treatment suffered declines in their stocks.

BioSante Pharmaceuticals

(BPA)

lost 91 cents, or 9%, to $9.16, after having fallen as low as $8.70.

Vivus

(VVUS) - Get Report

lost 10 cents, or 1.7%, to $5.77.

Possible Roadblocks

Although analysts believe Intrinsa will eventually be approved, some say the FDA might attach some conditions due to questions about the long-term effect of testosterone on blood pressure and cholesterol. Talking to medical consultants, K. Noelle Tune of Leerink Swann & Co. said the patch is likely to be approved "with a worst-case scenario including restrictive labeling for patients at risk for cardiovascular disease."

Tune's comments came in a Dec. 1 research report on BioSante Pharmaceuticals, for which she has an outperform rating. (She doesn't cover P&G. She doesn't own shares; her firm as an investment banking relationship with BioSante.) She worried that the advisory panel vote might be affected by "the conservative nature" of some members and their possible reluctance to approve a so-called lifestyle drug.

Despite those concerns, the consultants "view the likelihood of approval as very high" and they believe the Intrinsa test data are "statistically significant and clinically meaningful," she said.

Analysts also wonder how insurers will affect sales of Intrinsa and other female sexual disorder drugs. "It is currently unclear how managed care is going to view the product for reimbursement," said Ann Gillin-Lefever, who follows P&G for Lehman Brothers, in a Dec. 1 report to clients.

"However, our best guess is that Intrinsa, like Viagra, will be slotted as 'lifestyle' drug" and be subject to the highest level out-of-pocket costs among drugs covered by managed care organizations, she said. For example, if an average prescription costs $60, a patient would likely pay about $40, she said. (P&G hasn't set a price yet.)

Gillin-Lefever, who has an outperform rating on P&G, said the advisory panel probably will focus on several key areas -- the impact of testosterone on blood pressure and cholesterol; the question of whether longer-term studies are needed (P&G's clinical trials ran six months); and prospects of "off-label" use. "The committee is also likely to be keenly interested in whether Intrinsa will work over the long term," she added. "To date, there is very little supporting data for longer-term efficacy." (She doesn't own shares; her firm has an investment banking relationship with Watson Pharmaceuticals.)