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Sepracor (3-07) - No Sleep for Sepracor

>>> By Robert Steyer
TheStreet.com Staff Reporter
3/9/2007 11:27 AM EST

URL: http://www.thestreet.com/newsanalysis/pharmaceuticals/10342931.html

Though Sepracor (SEPR) recently achieved a full-year operating profit for the first time since its 1984 founding, there's hardly time to celebrate, because the next challenge is just around the corner.

Next month, its insomnia drug Lunesta will have to compete not only with brand-name foes but also with generic options, because market leader Ambien from Sanofi-Aventis (SNY) is about to lose its U.S. patent protection.

Already, there are signs that Lunesta's U.S. prescription growth has decelerated, raising questions about whether Sepracor's prediction for a 21% sales increase this year is achievable. Lunesta produced 47% of Sepracor's $1.2 billion in revenue in 2006.

Brand-name pressure continues from Ambien CR, the successor to Ambien. Controled-release Ambien CR, approved in September 2005, has surpassed Lunesta in U.S. market share.

"It could be a tough year for Lunesta with both of those converging forces," says Julie Stralow of the independent financial research firm Morningstar.

Several analysts, pointing to lower-than-expected fourth-quarter Lunesta sales, fret about generic Ambien despite Sepracor's recent announcement that it was increasing its marketing for Lunesta.

Sepracor's 2007 guidance "does not adequately reflect the potential sales disruption to Lunesta" when generic Ambien arrives, says David Amsellem of Friedman Billings Ramsey.

He told clients last month that Sepracor's $685 million sales forecast for this year "appears aggressive." Amsellem has a market-perform rating on the stock. His firm seeks to do business with companies covered in research reports.

Although Lunesta's price was raised in November, that isn't enough to convince S.G. Cowen & Co. that the drug's growth can hit Sepracor's targets this year.

Generic Ambien "will provide a stiff competitive headwind," says analyst Ian Sanderson, who in January cut his rating to underperform from neutral. Sanderson's firm seeks to do business with companies covered in research reports.

However, most investment bankers remain bullish on Sepracor. The number of buy recommendations is still nearly double the combined total of hold and sell ratings.

Some analysts say generic Ambien may not do as much damage as others fear, partly because Sepracor plans to start selling Lunesta overseas. It will seek European Union approval later this year, targeting a 2008 launch. Selling Lunesta in Japan is at least three years away.

Unlike its go-it-alone U.S. marketing strategy, Sepracor will look for partners in foreign markets.

The rest of the bullish scenario around Sepracor involves continued growth of the asthma drug Xopenex, which produced 50% of corporate revenue last year. The other key to growth is Brovana, a treatment for lung diseases such as emphysema and chronic bronchitis, which goes on sale in the U.S. in the second quarter.

Still, it's hard to ignore Lunesta's numbers among prescription drugs for insomnia. A recent analysis by A.G. Edwards shows that Lunesta's total U.S. prescriptions -- new orders and refills -- took off after the drug was launched in April 2005. But market-share percentage has been relatively stable, in the low teens, since late that same year.

Using data from the medical-data research firm IMS Health, A.G. Edwards notes that Ambien CR overtook Lunesta in June 2006. By early February, Lunesta had a 13.5% market share, vs. Ambien CR's 18.4% and original Ambien's 44.6%.

Sonata from King Pharmaceuticals (KG) and Rozerem from Japan's Takeda remain minor players. Total prescriptions for the entire drug class rose 9% for the 12 months ending in early February.

Aaron Reames of A.G. Edwards says that one crucial factor for Lunesta's future success has nothing to do with the merits of competing insomnia drugs. He believes Lunesta's sales will improve once Sanofi-Aventis secures Food and Drug Administration approval for the weight-loss drug Acomplia. The FDA is now expected to act in late July on the drug.

Reames postulates that the FDA's approval of Acomplia will prompt Sanofi-Aventis to divert many sales representatives from marketing Ambien CR, giving Lunesta's marketers less brand-name competition.

"There's a finite number" of sales representatives, Reames says. "Sanofi-Aventis has got to switch as many patients as possible to Ambien CR" before April 21 when original Ambien goes off patent.

Reames, who has a buy rating on Sepracor, also thinks insurers' behavior could help Lunesta even when Ambien goes generic. Managed care firms usually have three tiers of drug coverage, with Tier I representing the lowest, out-of-pocket cost for consumers and Tier III representing the highest.

Generic drugs are usually Tier I drugs. Preferred brand-name drugs are in Tier II, and nonpreferred drugs are in Tier III in insurers' formularies.

Conventional wisdom says Lunesta will be hurt when insurers move Ambien to Tier I as a generic. But Reames says many managed care firms have had brand-name Ambien in Tier I "for a long time," trying to condition consumers to stick with generic Ambien. To Reames, that means Lunesta's sales won't get such a jolt when Ambien goes off patent.

Meanwhile, Sepracor continues to fight for the best placement in managed-care formularies, leading some analysts to say that weaker-than-expected fourth-quarter Lunesta sales were due to dealmaking with insurers.

Sepracor "has aggressively contracted with managed care [firms] to keep or move Lunesta into the Tier II position ahead of Ambien CR and, importantly, have lower co-pays for patients," says Marc Goodman of Credit Suisse in a recent report to clients. The firm has a banking relationship with Sepracor.

Goodman, who has an outperform rating, says Sepracor has raised Lunesta's Tier II coverage to 37%, from 10% in late 2005, and cut its Tier III designations to 43%, from 74%. <<<