Sepracor's ( SEPR) third-quarter loss narrowed dramatically from a year ago, and the company's results easily beat Wall Street's estimates.

The maker of the insomnia drug Lunesta lost $2.2 million, or 2 cents a share, on revenue of $205.7 million for the three months ended Sept. 30. For the same period last year, the Marlborough, Mass., company lost $130.4 million, or $1.40 a share, on revenue of $80.8 million.

The latest quarter was aided by a gain of 17 cents a share from selling $18.3 million in Vicuron Pharmaceuticals stock after that drug developer was acquired by Pfizer ( PFE).

Analysts polled by Thomson First Call had been expecting a loss of 60 cents a share on revenue of $165.7 million.

"This was a great quarter with very strong top-line growth," says Marc Goodman of Morgan Stanley in a Tuesday research note. He has an overweight rating on the stock. He doesn't own shares, but his firm has had a recent investment banking relationship.

The news drove Sepracor's stock up $2.13, or 3.9%, to $56.55, and volume was much heavier than normal.

During the third quarter Lunesta, which was launched in April, produced sales of $100.9 million, followed by the asthma drug Xopenex with $92.5 million. Last month, another company asked the Food and Drug Administration to approve an application for generic Xopenex. Sepracor is suing the company, Breath Ltd., for patent infringement.

Sepracor also said that later this year it expects to begin marketing Xopenex in a device that doesn't require chlorofluorocarbon propellants. The FDA has given the makers of asthma inhalers such as Xopenex until 2008 to remove ozone-depleting CFCs from their products.

Although investors are cheering now, a big challenge is looming as Sepracor battles not only the insomnia market leader, Ambien from Sanofi-Aventis ( SNY), but other competitors as well.

One is Ambien CR, an extended-release version of Ambien. Whereas Ambien CR, like Lunesta, isn't restricted to short-term use, Ambien's label says the drug should be used for seven to 10 days.

Another offering is Rozerem from Japan's Takeda Pharmaceuticals. Approved by the FDA in late July, Rozerem reached the market in late September. The drug doesn't have a time-usage restriction, but unlike the other products, Rozerem isn't deemed a controlled substance by the Drug Enforcement Administration.

Despite its adversaries, Sepracor still has many fans on Wall Street, and its performance has even resurrected takeover talk. When Sepracor was developing Lunesta, analysts worried about the costs the company would face marketing the drug by itself.

What Sepracor needed, they said, was reaching a marketing pact with another firm or being bought out by a drug giant.

The rumor mill was stoked in early February when Bloomberg said Sepracor said had hired a financial adviser to review its options. Sepracor declined to comment, but that didn't stop analysts from speculating the company could be had for $75 to $80 a share.

"We continue to view an acquisition of Sepracor as a logical means for unlocking value," says Andrew Swanson of Citigroup Global Markets in Tuesday research note. Reaffirming his buy rating, Swanson says $75 would be the top price for a takeover. He doesn't own shares of Sepracor.

If Sepracor isn't acquired, there are downside risks, he says, such as the impact of competing sleep products and generic competition for Xopenex. Thanks to intense insomnia market competition, Sepracor will continue to incur "substantial operating expenses," Swanson adds.

Sepracor has nearly tripled its sales force to 1,250 and expects to add another 175 people. This expense, plus direct-to-consumer marketing, could be better absorbed by a big company, Swanson says.

More from Stocks

PayPal Just Revealed a Clever New Deal With Google

PayPal Just Revealed a Clever New Deal With Google

Dow Tumbles as Trump Calls Off North Korea Summit

Dow Tumbles as Trump Calls Off North Korea Summit

Jim Cramer: Why I am So Bullish on Apple's Services Revenue

Jim Cramer: Why I am So Bullish on Apple's Services Revenue

Jim Cramer: Does Saudi Arabia Think Oil Prices Are Too High?

Jim Cramer: Does Saudi Arabia Think Oil Prices Are Too High?

Video: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Video: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation