Sepracor's drug development program focuses on the treatment of respiratory and central nervous system (CNS) disorders. Sepracor's commercialization efforts are carried out by its U.S.-based sales force, as well as through out-licensing partnerships.

Sepracor currently commercializes three proprietary products: Lunesta (eszopiclone) for the treatment of insomnia as well as Xopenex HFA metered-dose inhaler (MDI) and Xopenex Inhalation Solution for the treatment or Asthma and Chronic Obstructive Pulmonary Disease (COPD).

Sepracor's out-licensing program includes agreements with: Schering-Plough for Clarinex, Sanofi-Aventis for Allegra, and UCB Pharma for Xyzal/Xusal.

While Sepracor currently markets Lunesta and Xopenex, it will need to be successful developing or acquiring new products since both Xopenex and Lunesta have patents expiring in the next ten years.

Lunesta
In 2005, Lunesta experienced a strong launch, with $329 million in revenue for the year. The market leader, Ambien (Sanofi-SNY), held steady in terms of total prescriptions, though its share was diluted by market growth. With the launch of Ambien CR, Sanofi stepped up its sales details, and Lunesta’s growth was curtailed. Sepracor was set for a tough marketing battle with Pfizer after the approval of Indiplon, however, Indiplon received an ‘approvable’ response for Indiplon 5 mg and 10 mg capsules (short-acting, IR) and a ‘not-approvable’ one for the 15 mg XR tablets.

Sepracor holds two U.S. patents covering the therapeutic use of Lunesta and another patent covering the compound eszopiclone. While these patents expire in 2012, we are currently modeling Lunesta to receive a patent-term extension under the Hatch-Waxman Act (which Sepracor has already applied for).

Please see our Insomnia Indication Report Update and post Indiplon FDA decision event for more information on Lunesta.

Xopenex in COPD
Xopenex is a novel short-acting beta-agonist: the R enantiomer of albuterol (albuterol is a mix of two enantiomers: molecules that have the same chemical makeup but are mirror images of each other). An HFA formulation was approved in March 2005 for “reversible bronchospasm,” but due to manufacturing issues the drug only became available in December 2005.

Sepracor’s nebulized Xopenex has shown mixed results in COPD: it has not shown significant improvements in pulmonary function over standard treatment, but in one study, it led to fewer withdrawals due to exacerbations than regular albuterol. A retrospective study showed the nebulized version used in a hospital led to a shorter length of stay, fewer rescue medications, and fewer readmissions than regular albuterol.

Without more data showing an outcomes benefit, we do not think there will be a compelling clinical argument in favor of Xopenex HFA for COPD, though its theoretical advantage and the benefit seen with the nebulized form is likely to help it.

Please see our COPD Indication Report for more information on Xopenex in COPD.

Xopenex in Asthma
Xopenex is a special albuterol formulation, available as a nebulizer solution since 1999 and an HFA MDI since December 2005. The rationale for Xopenex is that the R enantiomer is the more active form, and there are some concerns that the S enantiomer may increase airway reactivity, though that has not been convincingly documented.

While Xopenex appears to be at least as good as racemic albuterol, due to the conflicting evidence one major question has been whether the results are definite enough to justify the greater cost. As a result, while Xopenex has seen solid market uptake in the nebulized medication segment, achieving 27% of prescriptions and 33% of hospital units sold, it has not supplanted generic nebulized albuterol in the majority of patients.

For the recently introduced HFA formulation, pulmonary function tests have been similar to equivalent doses of albuterol HFA. Without more data showing an outcomes benefit, we do not think there will be a compelling clinical argument in favor of Xopenex HFA, though its theoretical advantage and the possible benefit seen with the nebulized form are likely to help it do better than branded albuterol.

Please see our Asthma Indication Report for more information on Xopenex in Asthma.

Arformoterol
Arformoterol is a single isomer form of the beta(2)-adrenoceptor agonist formoterol. It is being developed as a nebulized, once-daily preparation for the long-term maintenance treatment of COPD. Sepracor submitted an NDA for Arformoterol in December of 2005 and has an October 12, 2006 PDUFA date. Early Stage Programs

(S)-Amlodipine for Hypertension
In 2005, Sepracor continued its clinical evaluation of (S)-amlodipine as a treatment for hypertension. Phase I & II clinical studies of (S)-amlodipine have been conducted. Amlodipine, marketed by Pfizer as Norvasc, is the leading calcium channel antagonist approved for use for the treatment of hypertension and angina. Sepracor is currently considering the compound as a potential out-licensing candidate.

SEP-225289 for Unipolar Depression
SEP-225289 is a serotonin, norepinephrine and dopamine reuptake inhibitor, or SNDRI, for the treatment of major depressive disorder, or MDD. In October 2005, a Phase I, single- blind, randomized, placebo-controlled safety, tolerability and pharmacokinetic clinical study for SEP-225289 was initiated. SEP-225289 has been shown in preclinical studies to be a potent and balanced reuptake inhibitor of serotonin, norepinephrine and dopamine, which are three neurotransmitters associated with depression. Contingent on successful completion of the Phase I studies of SEP-225289, Sepracor will initiate a Phase II study of SEP-225289 in 2006 for the treatment of depression.

Partnership and Licensing Agreements

Allegra
In July 1993, Sepracor licensed to Hoechst Marion Roussel (now Sanofi-Aventis) U.S. patent rights covering Allegra (fexofenadine HCl). In 1996, Aventis commercially introduced Allegra and since March 1, 1999, Sepracor has been entitled to royalties on Allegra sales in countries where it has patents related to the drug. In February 2001, Sepracor began earning royalties on fexofenadine sales in the U.S. However, since the introduction of a generic version of Allegra in the U.S. during the third quarter of 2005, the company has ceased to earn royalties on U.S. sales. Sepracor is currently receiving royalties from for sales of Allegra in Japan, Canada and Australia and in certain E.U. member states.

Clarinex
In December 1997, Sepracor licensed to Schering-Plough worldwide rights to Claritin (desloratadine). Under the terms of the license agreement with Schering, Sepracor currently receives royalties on sales of Clarinex in countries in which it holds patents.

Xyzal/Xusal
On February 23, 2006, Sepracor entered into a licensing agreement with UCB, relating to the Xyzal/Xusal (antihistamine levocetirizine). Under the agreement, Sepracor exclusively licensed to UCB all patents and patent applications in the U.S. regarding levocetirizine and Sepracor currently receives royalties on sales of levocetirizine products.

In 2005, Allegra royalties were $36.94 million, Clarinex royalties were $9.36 million and Xusal/Xyzal royalties were $4.99 million. U.S. Allegra royalties ended in late 2005 and as a result Sepracor expects a drop in royalty revenue of $15-20 million in 2006.

Revenue Potential

Lunesta
Sepracor’s primary growth driver is Lunesta. While we increased our Lunesta projections after the FDA response to Indiplon (removing Indiplon MR from the competitive landscape), we still believe Lunesta will be hard pressed to surpass Ambien/Ambien CR. Furthermore, overall market growth is likely to be lower without a strong Pfizer marketing effort. We are projecting 2006 and 2007 US Lunesta revenue of $708.8 million and $824.1 million and project peak US Lunesta revenue of $2.31 billion.

Xopenex HFA in Asthma and COPD
The clinical benefit for Xopenex HFA has not been clearly shown, though the theoretical benefit and that seen with the nebulized form is likely to carry some weight. However, we do not think Xopenex will gain significant share until the CFC ban at the end of 2008. Subsequently, we think it will succumb to competition from generic HFA drugs once they enter the market in 2013.

For Xopenex HFA in Asthma we currently project peak U.S. revenues of $429.1 million.

For Xopenex HFA in COPD, we currently project peak U.S. revenues of $113.2 million.

Xopenex is not currently being developed outside of the US.

Xopenex Inhalation Solution (IH)
While the nebulized formulation of Xopenex has seen good growth, particularly in the hospital and institutional setting, we believe it is now beginning to level off. Though Xopenex has shown some advantages, trial results are mixed and there are questions about whether it is worth the additional cost. In addition, patents on the compound expire between 2010 and 2013 (there is a formulation patent until 2021). Our model presumes generic competitors entering towards the end of 2013.

For Xopenex IH in asthma we currently project peak U.S. revenues of $555.2 million.

For Xopenex IH in COPD we currently project peak U.S. revenues of $141.8 million.

Arformoterol in COPD
We estimate that Arformoterol will take some share from long-acting beta agonist metered dose inhalers, but also from short-acting nebulizers, including Xopenex IH, albuterol, and anticholinergics (though there will be less switching from the latter due to their different mechanism of action and benefits above beta-agonists for a number of patients with COPD).

We currently project peak U.S. revenue of $200.2 million.

Valuation & Catalysts
Sepracor’s gross margin (91.2% in 2005, 91.4% projected for 2006) and relatively low degree of R&D (17.6% of sales in 2005, 14.3% of sales projected for 2006) allows the company to spend the necessary amount to market its drugs (76.2% of sales in 2005, 58.4% of sales projected for 2006).

We currently value Sepracor’s 5 and 10-year pipeline at $74.92/share and $42.00/share. While we feel the 5 year value is more appropriate for a biotech company with marketed products, the lower 10-year value does reflect the intellectual property challenge Sepracor faces.

Prior to Indiplon’s PDUFA, we had expected the MR version to do better than Lunesta. If in fact MR is able to come to market, we would be forced to lower our Lunesta sales estimates. Using our pre-Indiplon PDUFA estimate for Lunesta, we would still find Sepracor’s 5 and 10-year pipeline to be Undervalued at approximately $64/share and $27/share. Since our current Lunesta sales projections assume no Indiplon MR competition, there is likely a disparity between our valuation and the market value and Sepracor’s stock will most likely benefit from additional negative news regarding Indiplon.

Arformoterol’s PDUFA date is October 12, 2006. While having another marketed drug is important for Sepracor, our current LOA (86%) does not leave a lot of room for improvement. If Arformoterol is approved, we would increase Sepracor’s 5 and 10-year pipeline value by $0.75/share and $0.35/share. If the drug were to receive an ‘Approvable’ letter and our LOA to move down to an average Phase III drug, we would reduce Sepracor’s 5 and 10-year value by $0.70/share and $0.45/share.

Early Stage Programs

(S)-Amlodipine for Hypertension
In 2005, Sepracor continued its clinical evaluation of (S)-amlodipine as a treatment for hypertension. Phase I & II clinical studies of (S)-amlodipine have been conducted. Amlodipine, marketed by Pfizer as Norvasc, is the leading calcium channel antagonist approved for use for the treatment of hypertension and angina. Sepracor is currently considering the compound as a potential out-licensing candidate.

SEP-225289 for Unipolar Depression
SEP-225289 is a serotonin, norepinephrine and dopamine reuptake inhibitor, or SNDRI, for the treatment of major depressive disorder, or MDD. In October 2005, a Phase I, single- blind, randomized, placebo-controlled safety, tolerability and pharmacokinetic clinical study for SEP-225289 was initiated. SEP-225289 has been shown in preclinical studies to be a potent and balanced reuptake inhibitor of serotonin, norepinephrine and dopamine, which are three neurotransmitters associated with depression. Contingent on successful completion of the Phase I studies of SEP-225289, Sepracor will initiate a Phase II study of SEP-225289 in 2006 for the treatment of depression.

Partnership and Licensing Agreements

Allegra
In July 1993, Sepracor licensed to Hoechst Marion Roussel (now Sanofi-Aventis) U.S. patent rights covering Allegra (fexofenadine HCl). In 1996, Aventis commercially introduced Allegra and since March 1, 1999, Sepracor has been entitled to royalties on Allegra sales in countries where it has patents related to the drug. In February 2001, Sepracor began earning royalties on fexofenadine sales in the U.S. However, since the introduction of a generic version of Allegra in the U.S. during the third quarter of 2005, the company has ceased to earn royalties on U.S. sales. Sepracor is currently receiving royalties from for sales of Allegra in Japan, Canada and Australia and in certain E.U. member states.

Clarinex
In December 1997, Sepracor licensed to Schering-Plough worldwide rights to Claritin (desloratadine). Under the terms of the license agreement with Schering, Sepracor currently receives royalties on sales of Clarinex in countries in which it holds patents.

Xyzal/Xusal
On February 23, 2006, Sepracor entered into a licensing agreement with UCB, relating to the Xyzal/Xusal (antihistamine levocetirizine). Under the agreement, Sepracor exclusively licensed to UCB all patents and patent applications in the U.S. regarding levocetirizine and Sepracor currently receives royalties on sales of levocetirizine products.

In 2005, Allegra royalties were $36.94 million, Clarinex royalties were $9.36 million and Xusal/Xyzal royalties were $4.99 million. U.S. Allegra royalties ended in late 2005 and as a result Sepracor expects a drop in royalty revenue of $15-20 million in 2006.

Revenue Potential

Lunesta
Sepracor’s primary growth driver is Lunesta. While we increased our Lunesta projections after the FDA response to Indiplon (removing Indiplon MR from the competitive landscape), we still believe Lunesta will be hard pressed to surpass Ambien/Ambien CR. Furthermore, overall market growth is likely to be lower without a strong Pfizer marketing effort. We are projecting 2006 and 2007 US Lunesta revenue of $708.8 million and $824.1 million and project peak US Lunesta revenue of $2.31 billion.

Xopenex HFA in Asthma and COPD
The clinical benefit for Xopenex HFA has not been clearly shown, though the theoretical benefit and that seen with the nebulized form is likely to carry some weight. However, we do not think Xopenex will gain significant share until the CFC ban at the end of 2008. Subsequently, we think it will succumb to competition from generic HFA drugs once they enter the market in 2013.

For Xopenex HFA in Asthma we currently project peak U.S. revenues of $429.1 million.

For Xopenex HFA in COPD, we currently project peak U.S. revenues of $113.2 million.

Xopenex is not currently being developed outside of the US.

Xopenex Inhalation Solution (IH)
While the nebulized formulation of Xopenex has seen good growth, particularly in the hospital and institutional setting, we believe it is now beginning to level off. Though Xopenex has shown some advantages, trial results are mixed and there are questions about whether it is worth the additional cost. In addition, patents on the compound expire between 2010 and 2013 (there is a formulation patent until 2021). Our model presumes generic competitors entering towards the end of 2013.

For Xopenex IH in asthma we currently project peak U.S. revenues of $555.2 million.

For Xopenex IH in COPD we currently project peak U.S. revenues of $141.8 million.

Arformoterol in COPD
We estimate that Arformoterol will take some share from long-acting beta agonist metered dose inhalers, but also from short-acting nebulizers, including Xopenex IH, albuterol, and anticholinergics (though there will be less switching from the latter due to their different mechanism of action and benefits above beta-agonists for a number of patients with COPD).

We currently project peak U.S. revenue of $200.2 million.

Valuation & Catalysts
Sepracor’s gross margin (91.2% in 2005, 91.4% projected for 2006) and relatively low degree of R&D (17.6% of sales in 2005, 14.3% of sales projected for 2006) allows the company to spend the necessary amount to market its drugs (76.2% of sales in 2005, 58.4% of sales projected for 2006).

We currently value Sepracor’s 5 and 10-year pipeline at $74.92/share and $42.00/share. While we feel the 5 year value is more appropriate for a biotech company with marketed products, the lower 10-year value does reflect the intellectual property challenge Sepracor faces.

Prior to Indiplon’s PDUFA, we had expected the MR version to do better than Lunesta. If in fact MR is able to come to market, we would be forced to lower our Lunesta sales estimates. Using our pre-Indiplon PDUFA estimate for Lunesta, we would still find Sepracor’s 5 and 10-year pipeline to be Undervalued at approximately $64/share and $27/share. Since our current Lunesta sales projections assume no Indiplon MR competition, there is likely a disparity between our valuation and the market value and Sepracor’s stock will most likely benefit from additional negative news regarding Indiplon.

Arformoterol’s PDUFA date is October 12, 2006. While having another marketed drug is important for Sepracor, our current LOA (86%) does not leave a lot of room for improvement. If Arformoterol is approved, we would increase Sepracor’s 5 and 10-year pipeline value by $0.75/share and $0.35/share. If the drug were to receive an ‘Approvable’ letter and our LOA to move down to an average Phase III drug, we would reduce Sepracor’s 5 and 10-year value by $0.70/share and $0.45/share.