Sepracor Looking Past Lunesta

We see little that can be done to reaccelerate sales of Sepracor, Inc.’s (SEPR) sleeping pill Lunesta in the U.S. Thankfully, we are pleased to see management looking to move beyond Lunesta and expanding its respiratory franchise with the recent additions or two new products and several technology licensing deals. Additionally, the mid-stage pipeline is progressing nicely and the stock is very attractively valued.

Business fundamentals have been mixed over the past several quarters. Lunesta growth has been a disappointment and with several new sleep medications coming to the market in the next few years we fail to see whatever drives market share gains above 15 percent. As such, we find it hard to believe Sepracor’s stock will outperform while Lunesta treads water.

Management is working to improve the policy regarding asthma drug Xopenex. New draft legislation should help improve trends in the second half of the year. And, the recent patent litigation settlement with Breath Limited was a big positive in our view.

We are excited to see Sepracor starting to put its cash to work. Management still has roughly $900 million in cash on hand to seek more deals in 2008. Beside these small positive steps forward, Sepracor is very attractively valued at only 13.5x our 2008 EPS forecast of $1.49. This should help support the stock at the current level. Our near-term target predicts some recovery back to the $24 level.

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