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Justin Manger

SEPR AT A GLANCE

P/E ► 13.5 AVG EV/EBITDA ► 10.0 AVG ROA ► 11.8% AVG ROE ► 26.2% AVG Debt to Equity ► 0.966 AVG Current Ratio ► 1.39 LOW Interest Coverage Ratio ► 13.0 HIGH

 

 

 

 

 

 

Sepracor Inc. (NASDAQ: SEPR) makes branded drugs. Two drugs accounted for 92.4% of Sepracor's total sales and 89% of its $1.22 Billion revenue during fiscal 2007: Lunesta (51% of Sales, 49% of Revenue) and Xopenex Inhalation Solution (41.4% of Sales, 40% of Revenue).^[1][2]

Lunesta faces branded as well as generic competition resulting from competitor Ambien's April 2007 patent expiration.^[3] The last of Xopenex's patents is set to expire in August of 2013, while sales of the drug continue to be adversely affected by its lower-than-market-rate reimbursement through Medicare Part B.^[4]

Sepracor's developmental pipeline is light: its most-developed drug is in Phase III FDA clinical trials (the final testing phase before FDA approval), and is the only drug in their pipeline so far along the approval process.^[5] In order to supplement their pipe as well as increase revenue from sales, Sepracor entered into contract with Nycomed in January 2008 as a means of obtaining exclusive U.S. rights to Omnaris AQ nasal spray (launched on April 17, 2008)^[6] and Alvesco HFA Inhalation Aerosol (launched on September 8, 2008).^[7]

Company Overview

Sepracor revenues are made primarily from sales of their branded products Lunesta and Xopenex, and are supplemented by the sale of their other branded drugs and royalties obtained through third-party out-licensing.^[1]

Business & Financial Metrics

Sepracor Revenue and Net Income Over Fiscal Years 2005, 2006, and 2007 with Profit Margin Outlined in yellow. (Click to Enlarge)

Business Segments

Sales (96.1% of Total Revenue)

The vast majority of Sepracor's revenue comes from sales of its pharmaceutical products. In 2007, sales accounted for 96.1% of total company revenue, down from 97.1% in 2006.^[1][2] This decrease in revenue share resulted directly from increased royalty and licensing fees received by the company, as Sepracor's total sales increased 2.4% between fiscal 2006 and 2007.^[2] In fiscal 2007, those sales broke down as follows:

• LUNESTA (51% of Sales, 49% of Total Revenue): Lunesta (eszopiclone), a sedative used to treat insomnia, was approved by the FDA in 2004.^[1] Lunesta has a lower risk of tolerance, dependence, abuse, and residual effects (such as hallucination) as compared to its predecessors (benzodiazepines and barbiturates),^[8] a fact that drives its sales. In fiscal 2007, sales of Lunesta accounted for $600.9 million, or 49% of total company revenue. The drug was responsible for 49.2% and 43.6% of total Sepracor sales in 2006 and 2005, respectively.^[1][2] In September 2007, SEPR entered into an agreement with GlaxoSmithKline (GSK) which gives GSK rights to sell Lunesta as Lunivia in all world markets excluding the U.S., Mexico, Canada and Japan.^[1]
• XOPENEX Inhalation Solution (41.4% of Sales, 40% of Total Revenue): Xopenex (levalbuterol HCl) Inhalation Solution loosens constricted airways in chronic obstructive pulmonary disorder (COPD) and reversible obstructive airway disease patients 6 years and older. The 5 patents protecting the approved therapeutic use of Xopenex Inhalation Solution are set to expire between January 2010 and August 2013.^[1] In fiscal 2007, sales of Xopenex Inhalation Solution accounted for $487.2 million, or 40% of total company revenue.^[1][2] The drug accounted for 47.2% and 54.8% of Sepracor sales in 2006 and 2005, respectively.^[1][2]
• XOPENEX HFA Metered-Dose Inhaler (6.4% of Sales, 6% of Total Revenue): Xopenex HFA (levalbuterol tartrate) Inhalation Aerosol is used for the treatment and prevention of bronchospasm in reversible obstructive airway disease patients four years and older.
• BROVANA Inhalation Solution (1.2% of Sales, 1% of Total Revenue): Brovana (arformoterol tartrate) Inhalation Solution is a long-acting, twice-daily maintenance treatment of bronchoconstriction in patients with COPD, and is approved for use with a nebulizer.^[1]

Revenue by Source and Breakdown of Sales for Sepracor in Fiscal 2007. (Click to Enlarge)

Royalties (3.9% of Total Revenue)

As a result of out-licensing agreements with the Schering-Plough Corporation (for Clarinex), Sanofi-Aventis (for Allegra) and UCB Farchim S.A. and UCB S.A. (collectively UCB) (for XYZAL/XUSAL), Sepracor earned royalties of $47.7 million (3.9% of total revenue), $33.8 million (2.8% of total revenue) and $51.2 million (6.4% of total revenue) in 2007, 2006 and 2005, respectively.^[1][2]

Pipeline

Zebinix (Eslicarbazepine) is a sodium channel blocker being developed by Sepracor and Eisai Co. Ltd. (ESALY) as an antiepileptic. Phase III trials have been completed, and results indicate that Zebinix results in a sustained decrease in seizure frequency over the long-term.^[9]

Key Trends and Forces

Sales of Xopenex Inhalation Solution Have Been Negatively Impacted by the Change in the Medicare Part B Reimbursement Rate

On July 1, 2007, the Centers for Medicare & Medicaid Services (CMS) dictated that Medicare Part B reimbursement for Xopenex Inhalation Solution would be based on the average selling price (ASP) of Xopenex and its cheaper generic counterpart albuterol. This meant that Medicare beneficiaries received reimbursement for Xopenex that was substantially less than its published selling price in wholesaler distribution channels, forcing patients to either (1) pay more out-of-pocket for Xopenex or to (2) use albuterol-based substitutes. Simultaneously, the legal change also created reimbursement for albuterol that was much higher than its published selling price, in effect creating a double-disincentive for Xopenex purchases. On April 1, 2008 the law changed to remove albuterol's higher-than-market rate recompense, instead forcing it to be reimbursed according to its stand-alone weighted ASP. Although this recent change lessens the ongoing damage done to Xopenex revenue, the original July 1, 2007 rate change continues to influence Xopenex sales. ^[4]

Litigation Expenses tied to Xopenex's Patent Protection are Negatively Impacting SEPR's Net Income

In 2007 Breath, Dey, L.P., Barr and Watson each began FDA proceedings to seek approval to market their own generic versions of Xopenex Inhalation Solution.^[1] As a result, Sepracor spent $34 Million on litigation expenses during fiscal 2007, reporting a net income 65.9% lower than it did in 2006 ($58.3 Million in 2007 versus $171 Million in 2006).^[2] While much of this decrease resulted from higher research & development costs (which increased $100 Million between 2006 and 2007),^[2] the combination of Sepracor's small revenue stream and its tight operating margins means that litigation expense(s) SEPR incurs will ultimately have a significant impact on the company's net income.

Lunesta Competitor Ambien lost Patent Protection in 2007, allowing Generics to Enter the Market

In April 2007 Sanofi-Aventis-owned Ambien lost its patent protection. As a result cheaper generics are being released, increasing competition in the sleep aid market.^[3]

Competition

Sepracor's comparatively small annual revenue within the pharmaceutical industry makes it particularly vulnerable to competition. As it lacks the resources to develop and sell a wide array of products, Sepracor relies on the success of a few staple drugs.^[1] Some of Sepracor's competitors include:

• Sanofi-Aventis SA (SNY): The fourth-largest pharmaceutical company in the world and Europe's biggest, Sanofi-Aventis' 2006 revenues of $37 Billion were roughly 30 times those of Sepracor's.^[10][1] As of 2007, SNY's insomia treatment Ambien was the highest revenue earner in the insomnia treatment market: Ambien CR alone netted 2007 U.S. sales of over $751 Million, while Sepracor's combined 2007 Lunesta sales were $600.9 Million.^[11][1] Additionally, SNY's Nasacort is a competitor of Sepracor's recently-released Omnaris AQ allergic rhinitis treatment.^[12]
• Teva Pharmaceutical Industries (TEVA): The world's largest producer of generic drugs,^[13] Teva sells generic versions of the branded drugs that Sepracor makes, including a generic sleep aid released in April 2007 that competes against Lunesta.^[14] Teva will very likely be among the companies that attempt to capitalize on the upcoming loss of Xopenex's patent protection, which will have completely dissolved by August 2013.^[1]
• GlaxoSmithKline (GSK): The second-largest pharmaceutical company in the world by revenue, their drug Veramyst is a competitor of Sepracor's Omnaris for the allergic rhinitis-treatment marketspace.^[15] (NOTE: GSK's figures in the chart below use figures from their 2007 20-F filing, then converted to American dollars with the CURRENT pound-to-dollar exchange rate).

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16} "Sepracor Form 10-K For Fiscal Year 2007; Part I, Item 1 - Business"
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10} "Selected Financial Data From Sepracor Form 10-K For Fiscal Year 2007; Part 2, Item 6"
3. ↑ ^{3.0 3.1} "Impact of Ambien Patent Exclusivity Loss On Sleep Disorder Drug Class Formulary Access."
4. ↑ ^{4.0 4.1} "Sepracor Form 10-K For Fiscal Year 2007; Part I, Item 1A - Risk Factors"
5. ↑ "Sepracor - Press and Media: Product Pipeline."
6. ↑ "Omnaris Nasal Spray Now Available by Prescription for Patients with Seasonal and Perennial Allergies."
7. ↑ "Alvesco Inhalation Aerosol Now Available by Prescription for Patients with Seasonal and Perennial Allergies."
8. ↑ "Update on the safety considerations in the management of insomnia with hypnotics: incorporating modified-release formulations into primary care."
9. ↑ Zebinix Shows Long-Term Reduction In Seizure Frequency
10. ↑ Sanofi-Aventis Raises Zentiva Bid to Clinch Takeover.
11. ↑ "Sanofi-Aventis Form 20-F For Fiscal Year 2007; Item 5 - Business and Financial Review and Prospects, Page 83"
12. ↑ "Sanofi-Aventis Form 20-F For Fiscal Year 2007; Item 4B - Business Overview, Page 18"
13. ↑ "BioJerusalem entry on Teva Pharmaceutical Industries."
14. ↑ "Teva Pharmaceutical Industries Ltd Form 20-F For Fiscal Year 2008; Item 4 - Information on the Company, Page 14"
15. ↑ "GlaxoSmithKline Form 20-F For Fiscal Year 2007; Five questions, five answers, Page 7"