Judging by the trading pattern, Sepracor’s/NASDAQ: SEPR share price reflects various opinions of investors. Despite its schizophrenic trading pattern, we still like the name. The company had a good fourth quarter, with solid Lunesta sales. In addition, management provided 2006 financial guidance that is positive. However, investors remain concerned that management will increase spending significantly in 2006 and the market share of Lunesta will roll over when Pfizer enters the market with Indiplon. We think Lunesta’s market share gains may stall with the Indiplon launch, but we fully expect the market to expand faster than expected with a new player in the market. And, at a minimum, Lunesta only needs to gain about 2-3% market share per year to reach $1 billion in Lunesta sales by 2010. We don’t think this is a stretch at all. Then there is the continued speculation that Sepracor is an acquisition candidate, a possibility since Sepracor’s stock price has pulled back from a high of $66 in February 2005 and the launch of Lunesta has been successful. Thus, we will change our hold rating to a buy on the dips.
Also, Sepracor’s Xopenex MDI is ramping up nicely so far, and we would expect the company to eventually settle the patent challenge lawsuits with generics to keep this product growing into the next decade.
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