(Reuters) - Transcept Pharmaceuticals Inc said U.S. health regulators granted a shorter review period of two months for its experimental sleep drug, reviving hopes for the treatment and sending company shares up as much as 34 percent.

The treatment Intermezzo had been considered virtually dead by Wall Street after receiving two rejections from the U.S. Food and Drug Administration due to concerns about residual effects in the daytime. On Tuesday, the FDA set an action date of Nov. 27.

Transcept's chief executive had earlier told Reuters that its proposal to increase the recommended dosing time by an hour, to a total of five hours, might help gain a much shorter review period and eventual approval.

"We have widened the margin of safety even further. This is the part that seems to make the FDA (shorter review) a bit more possible," Chief Executive Glenn Oclassen said in an interview last week.

Intermezzo aims to treat patients who wake up in the middle of the night and find it hard to go back to sleep. Currently, these patients have limited or preventive treatment options, such as taking, before bedtime, a sleep aid that will last all night long.

Intermezzo is a low-dose formulation of zolpidem (Ambien), which is most commonly prescribed in the United States for the treatment of insomnia but has some serious side effects.

Transcept's Intermezzo contains about one-third of the active ingredient. The company says that its delivery mechanism, which involved placing the pill under the tongue, allows the low dose to be effective.

"This is a truly tiny dose. It is still effective because of the delivery system that we use, which gets high levels of drug into systemic circulation very rapidly," said Oclassen.

METABOLIC DIFFERENCES

The FDA in its most recent rejection letter had also raised concerns about a small number of patients who showed unusually high levels of the drug in their blood levels.

Transcept responded by proposing to reduce the dose for women to 1.75 mg from 3.5 mg.

"We found that there was a difference between the way men and the way women metabolize this drug," Oclassen said.

Doctors see demand for a drug that can be taken as needed -- when a patient really cannot fall back asleep -- rather than automatically taking a sleep aid daily in anticipation of a bad night.

"Middle of the night awakening is a huge problem and it is very difficult to treat," said Dr. Sarah Stolz, medical director of Sleep Medicine Associates at Swedish medical center in Seattle. "It (Intermezzo) will be a useful tool to have in the toolbox."

If approved, Purdue Pharma will sell the drug in the United States under an exclusive commercialization agreement.