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).
Lunesta faces branded as well as generic competition resulting from competitor Ambien's April 2007 patent expiration. 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.
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. 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) and Alvesco HFA Inhalation Aerosol (launched on September 8, 2008).
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.
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. 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. In fiscal 2007, those sales broke down as follows:
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.
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.
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. 
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. 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). While much of this decrease resulted from higher research & development costs (which increased $100 Million between 2006 and 2007), 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.
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. Some of Sepracor's competitors include:
|Company||Total Revenues (most recent annual filing)||R&D Expenditures (most recent annual filing)||Net Income (most recent annual filing)|
|Sepracor (SEPR)||$1.22 B||$264 MM||$58.33 MM|
|Sanofi-Aventis SA (SNY)||$36.43 B||$6.68 B||$8.37 B|
|Teva Pharmaceutical Industries (TEVA)||$9.41 B||$581 MM||$1.95 B|
|GlaxoSmithKline (GSK)||$35.56 B||$5.06 B||$8.3 B|