Disappointing Quarter for Sepracor

Sales and profits are below estimates.
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Sepracor

(SEPR)

issued a first-quarter financial report Tuesday that fell below Wall Street's expectations for both revenue and profit, as sales from the sleep aid Lunesta were weaker than some analysts had forecast.

Shares of the Marlborough, Mass., company lost $2.17, or 4.5%, to $45.80 by midmorning. The stock fell as low as $43.68. In the first hour of trading, volume was nearly triple the daily average for the past three months.

The company earned $10.3 million, or 9 cents a share, on revenue of $285.7 million for the three months ended March 31. Sepracor also took a charge of $9.8 million, or 9 cents a share, to account for stock-option expensing.

Analysts polled by Thomson First Call predicted earnings of 29 cents a share, excluding one-time items, on revenue of $299.1 million. For the same period last year, Sepracor lost $22.6 million, or 22 cents a share, on revenue of $119 million. These results didn't include charges for stock options.

Sepracor's revenue comes from essentially two products, Lunesta for insomnia and Xopenex for asthma. Sales of the asthma drug grew 31% to $139.4 million. Lunesta's first-quarter revenue was $138.1 million, which was slightly below some analysts' predictions. The drug was launched in April 2005.

In the increasingly competitive insomnia-drug market, Sepracor is trying to boost Lunesta's revenue by adding 450 sales representatives by May 1, bringing the total to 1,350. The new representatives will focus on primary-care physicians.

Sepracor is fighting the market leader

Sanofi-Aventis

(SNY) - Get Report

, which makes Ambien and Ambien CR,

Takeda Pharmaceuticals

and, to a lesser extent,

King Pharmaceuticals

(KG)

.

On the horizon is Indiplon, now under review by the Food and Drug Administration. Indiplon was developed by

Neurocrine Biosciences

(NBIX) - Get Report

, whose marketing partner is

Pfizer

(PFE) - Get Report

. The FDA is scheduled to act on Indiplon in mid-May.

A major risk to Sepracor would be the deceleration of Lunesta's sales growth and the need for significantly higher marketing expenses to see that the drug remains competitive, says Michael Tong of Wachovia Securities. His comments were included in a research note issued Tuesday. Tong has a market-perform rating on Sepracor. He doesn't own shares.

"With

Lunesta prescriptions slowing down, we see more likelihood of the stock price declining than an acquirer making a move, especially in front of a Pfizer competitive launch," David Woodburn of Prudential Equity Group wrote in his own research report.

"We think Lunesta expectations already assume the company is able to maintain current market share," says Woodburn, who has an underweight rating on the stock. That means "there's more room for downside than upside" from the emergence of competing drugs. He doesn't own shares, and his firm doesn't have an investment-banking relationship.