The maker of the most popular insomnia drug in the U.S. suffered a setback Monday when the Food and Drug Administration asked for more information about a proposed extended-release version.

But the bad news for France's

Sanofi-Aventis

(SNY) - Get Report

and its extended-release Ambien CR was good news for

Sepracor

(SEPR)

of Marlborough, Mass., which just started marketing a competing insomnia pill, Lunesta.

Sanofi-Aventis makes the market-leading Ambien. It had hoped to secure approval of Ambien CR to offset the upcoming patent expiration of its legacy drug, and it had hoped that Ambien CR would have fewer label restrictions than the original drug.

But in a brief announcement Monday, Sanofi-Aventis said it had received an "approvable letter" from the Food and Drug Administration, meaning the agency won't support the application until the company fulfills certain conditions. Sanofi-Aventis didn't discuss the conditions or a timetable for approval.

The company says it is "already working closely with the FDA to address the questions outlined in the letter." It adds that the FDA's questions relate specifically to the proposed new drug "and are not related to the safety and efficacy of Ambien."

Shares of Sanofi-Aventis slipped 23 cents in early trading to $43.22, while shares of Sepracor gained $1.68, or 2.9%, to $59.49. Investors already had traded 3.2 million Sepracor shares -- more than 1.1 million shares above the average daily trade for the last three months.

The delay in Ambien CR helped Sepracor gain back some of the advantage it lost when Lunesta's launch was delayed early this year. The company had to wait for paperwork to clear the Drug Enforcement Agency because Lunesta is considered a controlled substance.

The FDA approved Lunesta on Dec. 15, and the company originally predicted the drug would reach the market in January. But getting DEA approval

delayed Lunesta's launch until earlier this month.

Lunesta is off to a good start. The drug "has far exceeded our expectations for its first week of launch," says Corey Davis, of J.P. Morgan, in a research note that was published Monday just before the Sanofi-Aventis announcement. Davis had expected 500 Lunesta prescriptions for the first week; the total number was 11,697.

Davis says he didn't expect so many prescriptions until the seventh week, but added that he'll need to see more data to ascertain if prescription figures reflect a hot new drug or just pent-up demand. He has an outperform rating on Sepracor. He doesn't own shares; his firm is a market maker and has had a non-investment banking relationship.

The

contest between Sepracor and Sanofi-Aventis focuses on what the FDA says the companies can put on their drugs labels. Sepracor has gained an apparent advantage over Ambien. Most notably, Lunesta's label doesn't carry the recommendation that the drug's use be limited to seven to 10 days. Ambien's label contains such a warning, and Wall Street was waiting to see if the Ambien CR label would be broader than the Ambien label.

Ambien has about 70% of the U.S. market for FDA-approved insomnia drugs, but it could lose its U.S. patent protection in October 2006.