Sepracor, Inc. (SEPR)

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Sepracor Pharma Range-Bound
Thursday July 31, 3:28 pm ET
By Jason Napodano, CFA

Sales of Sepracor Inc.'s (NasdaqGS: SEPR - News) insomnia drug Lunesta remain weak after growth of only 4% in the second quarter. With several new sleep medications coming to the market in the next few years, we see little that can be done to reaccelerate trends in the U.S. and drive market share back above 15%. As such, we find it hard to believe Sepracor's stock will outperform while Lunesta treads water.

Thankfully, we are pleased to see the management looking to move beyond Lunesta and expanding its respiratory franchise with the recent additions of two new products and several technology licensing deals. Additionally, the mid-stage pipeline is progressing nicely and the stock is very attractively valued.

Sales of asthma drug Xopenex also disappointed in the most recent quarter, but we chalk that up to more seasonality than fundamentals. The management is working to improve the policy regarding Xopenex. New draft legislation should help improve trends in the second half of the year. The best opportunity to re-accelerate the topline could come with the approval of eslicarbazepine acetate in early 2010.

The management should exit 2008 with roughly $900 million in cash on hand. This is a significant amount and affords management the ability to seek more deals in the coming quarters. Sepracor is very attractively valued at only 13.2x our 2008 EPS forecast of $1.37. This should help support the stock at the current level. Our near-term target predicts some recovery back to the $22 level.