Sepracor

( SEPR) posted a narrower first-quarter loss Monday as Wall Street continues to lose sleep over the company's just-launched insomnia drug.

The Marlborough, Mass.-based biotechnology company lost $22.6 million, or 22 cents a share, on revenue of $119 million. The consensus analyst estimate recorded by Thomson First Call was for a loss of $59.6 million, or 60 cents a share, on revenue of $111 million.

For the same period last year, Sepracor lost $50.4 million, or 59 cents a share, on revenue of $99.5 million.

The results for the quarter ended March 31 don't reflect the sales impact of Lunesta, which the company began selling April 4. Lunesta is the foundation for Sepracor's future, and analysts are tracking not only how the drug performs against the market leader Ambien, from

Sanofi-Aventis

(SNY) - Get Report

, but also how the marketing costs are mounting.

The "most likely reason" that Sepracor beat Wall Street estimates is that the Lunesta launch costs are "being pushed out to the second quarter," says Tim Anderson, of Prudential Equity Group, in a brief research note before the telephone conference was held. "We're far more interested in the uptake of Lunesta than first-quarter results." Anderson has a neutral rating on the stock, adding that the "expectations are too high for Lunesta and too low for expenses in 2006 and beyond." He doesn't own shares; his firm is a market maker in the stock.

Sepracor's stock was up 13 cents to $60.41. The stock is up about 20% since Dec. 15, the day before the Food and Drug Administration approved Lunesta.

Sepracor, with a market capitalization of $6.3 billion, is fighting Sanofi-Aventis and its $123.5 billion market cap. In a few years, the insomnia medication market could be filled with other drugs from small companies, such as

Neurocrine Biosciences

(NBIX) - Get Report

and Denmark's

H. Lundbeck

, which have signed marketing deals respectively with

Pfizer

(PFE) - Get Report

and

Merck

(MRK) - Get Report

.

In a telephone conference call Monday with analysts, Sepracor executives reiterated their desire to market Lunesta by itself, adding in response to one question that the company won't rule out the option of collaboration.

Michael Tong, of Wachovia Capital Markets, says Sepracor's current share price "appears to have reflected fully" the company's near-term prospects for Lunesta and for Xopenex, an asthma medication, which accounted for $106.6 million in first-quarter sales.

Sepracor's big risks include a slowdown in growth of Xopenex's prescriptions and a slower-than-expected market embrace of Lunesta, he says in a Monday report to clients. He doesn't own shares; his firm is a market maker.

Lunesta prescriptions are off to a good start, Marc Goodman of Morgan Stanley says in a research report issued before the conference call. Citing figures from IMS Health, which tracks prescriptions, Goodman says "the launch is meeting the already high expectations for the drug." He has an overweight rating on the stock. He doesn't own shares; his firm has an investment banking relationship.

Sepracor's strategy for Lunesta is not only to challenge Ambien but also to seek other approved uses for the drug.

Lunesta has a marketing advantage over Ambien because it has a more liberal label. Unlike Ambien, Lunesta isn't restricted by a label that says use of the drug should be limited to seven to 10 days.

Sanofi-Aventis also must worry about Ambien losing patent protection in October 2006. It is working on

a new version of the drug called Ambien CR, which it hopes will have a broader label. Earlier this month, the company received conditional approval for Ambien CR; but it wouldn't disclose the conditions or the timetable for answering the questions the FDA needs to grant final approval.

Sepracor said Monday that it plans to talk to the FDA about the prospects of Lunesta being prescribed for patients with insomnia and major depressive disorder. In January, it announced preliminary results of a study that showed depressed patients demonstrated statistically significant gains in patients' ability to fall asleep and stay asleep. The 10-week study, involving 545 people, compared patients who received Lunesta plus the antidepressant Prozac vs. patients who received Prozac plus placebo.

More details will be presented at medical conferences in May and June. The company says it will "further analyze the data and present the findings to the FDA to discuss how the data may impact the future development" of the drug.

Sepracor also expects to file during the second half of 2005 an application with the FDA for Arformoterol, a maintenance treatment for lung diseases such as asthma and emphysema. The drug would complement Xopenex, which recently received FDA approval for use in a new container called a metered-dose inhaler. Sepracor expects this new version to be available by year-end. This inhaler doesn't use chlorofluorocarbons, or CFCs, as a propellant. Because CFCs are considered ozone-depleting chemicals, they are being phased out of many products. The FDA says all CFC-propelled asthma inhalers must be off the market by the end of 2008.