Shares of

Sepracor

( SEPR) jumped Thursday, a day after the Food and Drug Administration approved the company's new drug for treating insomnia.

The drug was known as Estorra during development, but the name was changed to Lunesta and will be available in pharmacies in mid-January.

Analysts had been predicting Lunesta's approval, and the apparent drama was how broad a usage label the FDA would endorse. Labels are important marketing tools, because they allow companies and their sales representatives to distinguish their products from others.

In Lunesta's case, the FDA-approved label gives it a powerful selling opportunity, especially against the market leader Ambien, made by

Sanofi-Aventis

(SNY) - Get Report

.

As a result, Sepracor's stock climbed $6.30, or 12.5%, to $56.75 on Thursday. The FDA approval came Wednesday night, long after markets had closed.

"We believe that Lunesta, with its differentiated product label, will provide physicians with a unique treatment option for their insomnia patients, particularly those with sleep maintenance difficulties and those who suffer chronically," said W. James O'Shea, president and chief operating officer at Sepracor.

Lunesta becomes the first of what analysts expect to be several new compounds that could transform the insomnia market, much like Ambien has done. Ambien, Lunesta and the various experimental drugs have superior side-effects profiles than older medications, which can create drug dependence, cause a hangover effect, create withdrawal symptoms or impair memory.

The big reason for Sepracor's rising shares and analysts' applause was the fact that Lunesta's label doesn't carry the recommendation that the drug's use be limited to seven to 10 days. Ambien's label contains that language.

"While current sleeping aids are generally limited to seven to 10 days of use, Lunesta is the first and only prescription sleep aid not limited to short-term use," says the newly-created Lunesta Web site. (It is standard industry practice to create a site for prescription drugs to serve patients and health professionals.) "Physicians can prescribe Lunesta for as long as they determine their patients may need it."

Of course, doctors may prescribe Ambien and other sleep aids for longer periods of time. In addition, many doctors prescribe an assortment of other drugs -- including antihistamines and tranquilizers -- even though the FDA hasn't specifically approved them for insomnia. Such off-label prescribing is legal, because once the FDA approves a drug for a single condition or disease, doctors may prescribe it for other ailments.

Wall Street Wake-Up Call

The Lunesta label "exceeded even our most bullish expectations," said Corey Davis of J.P. Morgan, in a Thursday report to clients. The label "will differentiate the drug by several orders of magnitude" above Ambien.

In addition to excluding the seven-to-10-day use recommendation, the label also excludes the restriction for a 30-day prescription that is mentioned in Ambien's label, said Davis. Reiterating his overweight recommendation on the stock, Davis said his original price target of $60 by March appears conservative. (He doesn't own shares; his firm is a market maker for the stock, and Sepracor has been a non-investment-banking client.)

Even Andrew Swanson, a Citigroup Smith Barney analyst who is keeping his sell rating on Sepracor, said the Lunesta label provides "a key differentiating factor versus Ambien."

Swanson told clients Thursday that "long-term use will be the key element" of Sepracor's marketing efforts to patients and doctors. "It's a very clean label overall," said Swanson, noting that a potential negative was a test result showing that 17% to 34% of patients experienced an unpleasant taste. (Other side effects include headache and cold-like symptoms. Sepracor adds that until patients gauge their reactions to the drug, they should not drive vehicles or operate heavy machinery. They shouldn't take the drug with alcohol.)

Swanson is keeping his sell rating because he believes the high cost of competing in the insomnia market -- Sepracor doesn't have a marketing partner -- "will be a drag on profitability." Sepracor will market the drug with its own sales force of 1,250 people. The company says it will spend $60 million in direct-to-consumer marketing, a figure that Swanson believes is "conservative." (He doesn't own shares; his firm is a market maker, and Sepracor has been a non-investment-banking client.)

No Sleepy Market

According to Sepracor, research shows an estimated 100 million U.S. adults have chronic or occasional insomnia. The company says the U.S. market for FDA-approved prescription sleep products, excluding off-label prescriptions of unapproved drugs, was approximately $2.1 billion between November 2003 and October 2004, according to data from the medical research firm IMS Health. Those sales represent a 20% increase from the same period for the previous year.

Ambien accounts for most of those sales. The medical research firm Datamonitor says Ambien's U.S. sales were about $1.5 billion. Sonata, made by

King Pharmaceuticals,

( KG) was a very distant second place.

Lunesta is a cousin of zopiclone, which is sold by Sanofi-Aventis in many countries but is not available in the U.S. Sepracor received conditional approval for Estorra from the FDA in February, but the FDA asked for additional information.

Datamonitor notes that the up-and-coming experimental drugs have different mechanisms of action, providing a potential opportunity to distinguish themselves from other insomnia drugs.

Datamonitor estimates that the next drug for FDA approval should be Indiplon, which was developed by

Neurocrine Biosciences

(NBIX) - Get Report

. The company, which has filed its application with the FDA, has signed a marketing deal with

Pfizer

(PFE) - Get Report

.

Datamonitor predicts the FDA could approve Indiplon in 12 months, but some analysts speculate a best-case scenario approval by August.

Other products in late-stage clinical testing are TAK-375, from Japan's Takeda, and Gaboxadol, developed by Denmark's H. Lundbeck, which earlier this year signed a marketing and development agreement with

Merck

(MRK) - Get Report

. Datamonitor says TAK-375 could reach the U.S. market in 2006; Gaboxadol could be available in 2008.

Meanwhile, Sanofi-Aventis is working on a new version of Ambien called Ambien MR, which is aimed at sleep maintenance. Analysts predict the drug could be approved in the second half of 2005. The original Ambien could lose patent protection in October 2006.