Sepracor Inc. Reports Second Quarter 2008 Results

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Jul 29 2008, 7:00 AM EST Sepracor Inc. Reports Second Quarter 2008 Results
News source: Business Wire
Sepracor Inc. ( Nasdaq: SEPR ) today announced its consolidated financial results for the secondquarter and first half of 2008.

For the three months ended June 30, 2008, total revenues increased6.3% to approximately $294.1 million compared to revenues of $276.8million during the same quarter in 2007. Excluding an income taxbenefit as a result of the release of a valuation allowance on ourdeferred tax assets, an after-tax in-process research anddevelopment charge, and certain other items detailed in theattached reconciliation of GAAP to non-GAAP measures, non-GAAP netincome for the second quarter 2008 was $6.7 million, or $0.06 perdiluted share. These results compare with non-GAAP net income of$4.8 million, or $0.04 per diluted share, in the second quarter of2007. GAAP net income for the three months ended June 30, 2008 wasapproximately $395.1 million, or $3.41 per diluted share, comparedto $4.8 million, or $0.04 per diluted share, for the same quarterin 2007.

For the six months ended June 30, 2008, total revenues increased1.7% to approximately $614.9 million compared to total revenues of$604.5 million during the same period in 2007. Excluding an incometax benefit as a result of the release of a valuation allowance onour deferred tax assets, after-tax in-process research anddevelopment charges, an after-tax milestone payment, and certainother items detailed in the attached reconciliation of GAAP tonon-GAAP measures, non-GAAP net income for the first half of 2008was $68.1 million, or $0.59 per diluted share compared to netincome of $56.5 million, or $0.48 per diluted share, for the firsthalf of 2007, an increase of 22.9%. Included in the results for thesix months ended June 30, 2007 is an after-tax charge related to alitigation settlement. GAAP net income for the six months endedJune 30, 2008 was approximately $407.3 million, or $3.52 perdiluted share, compared to $23.6 million, or $0.20 per dilutedshare, for the same period in 2007.

Sepracor's 2008 full-year total revenue guidance is changed from$1,350-$1,450 million to $1,275-$1,375 million (midpoint of newrevenue guidance is an increase of 8.1% over 2007). GAAP EPSguidance has changed to $4.20-$4.60 per diluted share, whichincludes the impact of special items and recurring non-GAAPadjustments.

"We have made progress during the first half of this year towardour goals of driving enhanced sales force productivity andbroadening and deepening our research and development pipeline - apipeline that we believe is among the best in our sector," saidAdrian Adams, President and Chief Executive Officer of Sepracor."We are also pleased to have successfully obtained rights to twoFDA-approved products from Nycomed, OMNARIS Nasal Spray, which waslaunched in mid-April, and ALVESCO(R) HFA Inhalation Aerosol, whichis on track to be launched in the fall of this year. Theseinitiatives, together with the planned deployment of a contractsales force, reinforce our determination to deliver strongerperformance and enhanced shareholder value over time."

LUNESTA(R) brand eszopiclone, for the treatment of insomnia,generated revenues of $148.1 million in the second quarter of 2008compared to $142.9 million for the same quarter in 2007.

XOPENEX(R) brand levalbuterol HCl Inhalation Solution, ashort-acting beta-agonist indicated for the treatment or preventionof bronchospasm in patients with asthma and chronic obstructivepulmonary disease (COPD), accounted for $85.4 million of revenuesfor the second quarter 2008 compared to $103.5 million for thesecond quarter 2007. The reduction of XOPENEX Inhalation Solutionrevenues for the second quarter 2008 compared to the second quarter2007, was attributable in part to both reduced volume and thedecision made by the Centers for Medicare and Medicaid Services(CMS) during the second quarter 2007 to institute a new bundledpayment amount for XOPENEX Inhalation Solution and genericalbuterol inhalation solution products.

XOPENEX HFA(R) brand levalbuterol tartrate Inhalation Aerosol, ahydrofluoroalkane (HFA) metered-dose inhaler (MDI) formulation oflevalbuterol, accounted for $14.1 million of revenues during thesecond quarter 2008 compared to $12.4 million for the same periodin 2007.

BROVANA(R) brand arformoterol tartrate Inhalation Solution, along-acting, twice-daily maintenance treatment ofbronchoconstriction in patients with COPD, was commerciallyintroduced in April 2007. For the second quarter of 2008, BROVANArevenues were $13.3 million compared to $5.5 million for the sameperiod in 2007.

Sepracor commercially introduced OMNARIS Nasal Spray in April 2008,and the product had revenues of $7.4 million for the quarter.OMNARIS Nasal Spray is indicated for the treatment of nasalsymptoms associated with seasonal allergic rhinitis in adults andchildren 6 years of age and older, and with perennial allergicrhinitis in adults and adolescents 12 years of age and older.

Sepracor continues to earn royalty revenues on sales ofout-licensed antihistamine products, which includeSchering-Plough's CLARINEX(R) brand desloratadine, sanofi-aventis'ALLEGRA(R) brand fexofenadine HCl and UCB's XYZAL(R)/XUSAL(TM)brand levocetirizine. These products accounted for combined royaltyrevenues of $21.8 million in the second quarter of 2008 compared to$12.5 million for the same quarter in 2007.

Sepracor announced in May that it signed a global license anddevelopment agreement with Arrow International Limited (Arrow), aEuropean company, for the development, commercialization,marketing, sale and distribution of a levalbuterol(XOPENEX)/ipratropium inhalation solution product, which iscurrently ready to enter Phase III clinical development. Inaddition, Sepracor announced it signed a global technology licenseand development agreement with Arrow for know-how and intellectualproperty rights related to stable sterile steroid suspensionformulations as well as other applicable nebule technology for theuse in developing ciclesonide, a corticosteroid, in an inhalationsolution. This agreement is facilitating enhanced development ofSepracor's ciclesonide stand-alone product for the treatment ofasthma as well as a planned ciclesonide/long-acting beta-agonist(BROVANA) inhalation solution combination product for the treatmentof COPD. The agreement also includes Arrow's "U-Bend" packagingtechnology, which is designed to allow increased accuracy in dosingthrough a novel U-Bend ampule design.

"During the quarter, we were pleased to announce severaltransactions that we believe independently have the potential toadd shareholder value over time," said Mr. Adams. "We acquired OryxPharmaceuticals, giving us an opportunity to expand our reach intothe Canadian marketplace, and we signed agreements with Arrow thatcould add significant value to our research and developmentpipeline and our franchise management enhancement strategies forour XOPENEX, BROVANA and ciclesonide products. We also are pleasedto have announced the settlement of our patent litigation withBreath Limited regarding XOPENEX Inhalation Solution, which reducedlitigation expenses and risk. These initiatives are furtherreflections of our evolving growth plans and strategy forSepracor."

Sepracor's pipeline portfolio continues to progress. SEP-225289, anovel triple reuptake inhibitor for the treatment of depression, iswell-advanced in a Phase II proof-of-concept study with clinicalresults anticipated in the first half of 2009. Similarly,SEP-225441, a compound for the treatment of generalized anxietydisorder, is in the middle of a large Phase II study with clinicalresults anticipated during the first quarter 2009. In the secondhalf of 2008, we plan to participate in an end-of-Phase II meetingwith the U.S. Food and Drug Administration (FDA) for SEP-227162 forthe treatment of depression, and we are currently targeting theinitiation of Phase III in 2009. During the second quarter of 2008,SEP-228432 and SEP-228425, both triple reuptake inhibitors for thetreatment of depression, began Phase I clinical studies. In June,Sepracor submitted an IND for SEP-227900, a D-amino acid oxidaseinhibitor for neuropathic pain, a first-in-class compound with anovel mechanism of action.

During the first quarter of 2008, in addition to the exclusive U.S.distribution rights to OMNARIS Nasal Spray and ALVESCO HFAInhalation Aerosol, Sepracor obtained development rights to severalciclesonide line extensions through its agreement with NycomedGmbH, which have the potential to broaden the ciclesonide andcurrent Sepracor respiratory franchises. These programs includeOMNARIS HFA MDI, a candidate that is expected to enter Phase IIIduring the second half of 2008; ALVESCO inhalation solution, apreclinical candidate; and ciclesonide in combination with along-acting beta-agonist (BROVANA). If developed successfully,OMNARIS HFA MDI could be the first HFA nasal formulation to beavailable for patients in the U.S.

In addition to Sepracor's organic pipeline portfolio, during thefourth quarter of 2007, the company established a licensingarrangement with Bial-Portela & C(a), S.A for development andcommercialization of eslicarbazepine acetate, a new chemical entityPhase III anti-epileptic compound, in the U.S. and Canada.Following a successful pre-New Drug Application (NDA) meeting withthe FDA for eslicarbazepine acetate in January, Sepracoranticipates submitting an NDA to the FDA in late 2008 or early 2009with a potential product launch in late 2009 or early 2010, subjectto FDA approval. In June, Phase III combined clinical results foreslicarbazepine acetate for the treatment of epilepsy werepresented at the Ninth Eilat Conference on New Anti-Epileptic Drugsin Spain. Results of the studies demonstrated a significantreduction in the frequency of partial seizures in patients who wereadministered eslicarbazepine acetate in combination with otherexisting anti-epileptic drugs.

About Sepracor

Sepracor Inc. is a research-based pharmaceutical company dedicatedto treating and preventing human disease by discovering, developingand commercializing innovative pharmaceutical products that aredirected toward large and growing markets and unmet medical needs.Sepracor's drug development program has yielded a portfolio ofpharmaceutical products and candidates with a focus on respiratoryand central nervous system disorders. Sepracor's corporateheadquarters are located in Marlborough, Massachusetts.

Use of non-GAAP Financial Measures

In addition to providing financial measurements based on generallyaccepted accounting principles in the United States of America(GAAP), Sepracor is providing additional financial metrics that arenot prepared in accordance with GAAP (non-GAAP). Recent legislativeand regulatory changes discourage the use of and emphasis onnon-GAAP financial metrics and require companies to explain whynon-GAAP financial metrics are relevant to management andinvestors. We believe that the inclusion of these non-GAAPfinancial measures in this press release helps investors to gain ameaningful understanding of our past performance and futureprospects, consistent with how management measures and forecastsour performance, especially when comparing such results to previousperiods or forecasts. Specifically with respect to the exclusion ofamortization of intangible assets from GAAP net income, purchasedintangible assets relate primarily to core and developed technologyof acquired businesses. We consider these charges non-cash innature and unrelated to our core operating performance, and use ofthis non-GAAP measure allows comparisons of operating results thatare consistent over time for both the company's newly acquired andlong-held businesses and with both acquisitive and non-acquisitivepeer companies. Our management uses all of these non-GAAP measures,in addition to GAAP financial measures, as the basis for measuringour core operating performance and comparing such performance tothat of prior periods. These measures are also used by managementin its financial and operational decision-making. There arelimitations associated with reliance on these non-GAAP financialmetrics because they are specific to our operations and financialperformance, which makes comparisons with other companies'financial results more challenging. By providing both GAAP andnon-GAAP financial measures, we believe that investors are able tocompare our GAAP results to those of other companies while alsogaining a better understanding of our operating performance asevaluated by management.

We expect to continue to incur for the foreseeable futuresignificant expenses similar to the non-GAAP adjustment foramortization of intangible assets described in the attachedreconciliation of GAAP to non-GAAP measures, as well as imputedinterest expense related to discounted future payments underlicense agreements which are also excluded from GAAP net income asdescribed above, and exclusion of these items from our non-GAAPfinancial measures should not be construed as an inference thatthese costs are unusual, infrequent or non-recurring. Some of thematerial limitations in relying on this non-GAAP financial measureare that while amortization of intangible assets does not directlyaffect our current cash position, such expenses represent thedeclining value of technology and other intangible assets we haveacquired over their respective expected economic lives. The expenseassociated with this decline in value is excluded from non-GAAPfinancial measures, and therefore the non-GAAP financial measuresdo not reflect the costs of acquired intangible assets. Inaddition, while the imputed interest expense that is excludedrelates to a non-cash interest charge and does not directly affectour current cash position, such expense will eventually be paid byus under the relevant license agreements and is a necessary elementof our costs and ability to generate profits. Therefore any measurethat excludes imputed interest expense has material limitations. Wecompensate for these limitations by using the non-GAAP measuresthat exclude associated amortization of intangible assets andimputed interest expense from discounted future payments underlicense agreements as only one of several comparative tools,together with GAAP measurements, to assist in the evaluation of ourprofitability and operating results.

Forward-Looking Statement

This news release contains forward-looking statements that involverisks and uncertainties, including statements with respect to thesuccessful development and commercialization of Sepracor'spharmaceutical products and product candidates; the safety,efficacy, potential benefits, possible uses and commercial successof Sepracor's products and product candidates; Sepracor being ontrack for the launch of ALVESCO HFA Inhalation Aerosol in the Fallof 2008; the planned deployment of a contract sales force;Sepracor's ability to expand its reach into the Canadianmarketplace; Sepracor's recently announced transactionsindependently having the potential to add shareholder value; theagreements with Arrow potentially adding significant value toSepracor's research and development pipeline as franchisemanagement enhancement strategies for the XOPENEX, BROVANA andciclesonide products; clinical results for SEP-225289 andSEP-225441 being available in the first half of 2009 and the firstquarter of 2009, respectively; Sepracor's expectation toparticipate in an end-of-Phase II meeting with the FDA forSEP-227162 in the second half of 2008 and its target for theinitiation of Phase III in 2009; the anticipated submission of anNDA for eslicarbazepine in late 2008 or early 2009 with a potentialproduct launch in late 2009 or early 2010; the potential of theciclesonide development rights to broaden Sepracor's respiratoryfranchises; OMNARIS HFA MDI potentially being the first HFA nasalformulation available for patients in the U.S; and Sepracor'sexpected future growth, profitability and 2008 revenue and EPSguidance. Among the factors that could cause actual results todiffer materially from those indicated by such forward-lookingstatements are: Sepracor's ability to fund, and the results of,further clinical trials with respect to products under development;the timing of the results of Sepracor's clinical trials; the timingand success of submission, acceptance, and approval of regulatoryfilings, including with respect to eslicarbazepine acetate andOMNARIS HFA MDI; the scope of Sepracor's trademarks, patents andthe patents of others and the success of challenges by others ofSepracor's patents; the clinical benefits and commercial success ofSepracor's products; changes in the use and/or label of Sepracor'sproducts; the outcome of litigation and regulatory decisionsrelating to Sepracor's patents, products and product candidates;Sepracor's ability to realize the benefits of its recent salesforce realignment and to expand its sales force capacity toaccommodate the launch of OMNARIS Nasal Spray and ALVESCO HFAInhalation Aerosol; private insurers such as managed careorganizations adopting their own coverage restrictions or demandingprice concessions in response to state, Federal or administrativeaction; the ability of the company to attract and retain qualifiedpersonnel; the ability of the company to successfully collaboratewith third parties; the performance of Sepracor's licensees andother collaboration partners and its ability to enter into newlicenses and collaborations; the ability of Sepracor to develop andsuccessfully launch its newly acquired products and productcandidates; the continued ability of Sepracor to meet its debtobligations when due; and certain other factors that may affectfuture operating results, which are detailed in the company'sQuarterly Report on Form 10-Q for the quarter ended March 31, 2008filed with the Securities and Exchange Commission and other reportsfiled with the SEC.

In addition, the statements in this press release representSepracor's expectations and beliefs as of the date of this pressrelease. Sepracor anticipates that subsequent events anddevelopments may cause these expectations and beliefs to change.However, while Sepracor may elect to update these forward-lookingstatements at some point in the future, it specifically disclaimsany obligation to do so. These forward-looking statements shouldnot be relied upon as representing Sepracor's expectations orbeliefs as of any date subsequent to the date of this pressrelease.

Lunesta, Xopenex, Xopenex HFA and Brovana are registered trademarksof Sepracor Inc. Omnaris is a trademark and Alvesco is a registeredtrademark of Nycomed GmbH. Clarinex is a registered trademark ofSchering Corporation. Allegra is a registered trademark of MerrellPharmaceuticals. Xusal is a trademark and Xyzal is a registeredtrademark of UCB, Societe Anonyme.

In conjunction with this Second Quarter 2008 Financial Resultspress release, Sepracor will host a conference call and livewebcast beginning at 8:30 a.m. ET on July 29, 2008. To participatevia telephone, dial 612-332-0335, referring to access code 954156.Please call ten minutes prior to the scheduled conference calltime. For live webcasting, go to the Sepracor web site atwww.sepracor.com and access the For Investors section. Click oneither the live webcast link or microphone icon to listen. Pleasego to the web site at least 15 minutes prior to the call in orderto register, download, and install any necessary software. A PDF ofthe slides will be available in the For Investors section of theweb site as well as in the left-hand navigation menu of the webcastviewer just prior to the start of the call. A replay of the callwill be accessible by telephone after 12:00 p.m. ET and will beavailable for one week. To replay the call, dial 320-365-3844,access code 954156. A replay of the web cast will be archived onthe Sepracor web site in the For Investors section. Condensed,consolidated statements of operations and consolidated balancesheets follow.

Sepracor Inc. Condensed Consolidated Statements of Operations(Unaudited) (In thousands, except per share amounts) Three monthsended Six months ended June 30, June 30, 2008 2007 2008 2007---------- --------- ---------- --------- Revenues: Product sales $269,946 $264,326 $ 575,490 $581,889 Royalties and license fees24,199 12,466 39,434 22,603 ---------- --------- ------------------- Total revenues 294,145 276,792 614,924 604,492 Cost ofrevenue 27,881 25,530 57,705 57,148 ---------- --------- ------------------- Gross margin 266,264 251,262 557,219 547,344 Operatingexpenses: Research and development 58,299 45,457 124,528 86,159Research and development - in process upon acquisition 50,758 -89,995 - Selling, general and administrative 207,769 210,779386,595 421,738 Amortization of intangible assets 1,918 34 4,183 85Litigation settlement, net - - - 34,000 Restructuring expense (266)- (566) - ---------- --------- ---------- --------- Total operatingexpenses 318,478 256,270 604,735 541,982 ---------- ------------------- --------- (Loss) income from operations (52,214) (5,008)(47,516) 5,362 Other income (expense): Interest income 5,865 11,10714,598 23,709 Interest expense (2,115) (113) (2,170) (2,870) Otherexpense, net (9,354) (558) (9,432) (286) ---------- ------------------- --------- Total other (expense) income (5,604) 10,4362,996 20,553 Equity in investee losses (272) (132) (475) (404)---------- --------- ---------- --------- (Loss) income beforeincome taxes (58,090) 5,296 (44,995) 25,511 (Benefit from)provision for income taxes (453,170) 485 (452,267) 1,885 ------------------- ---------- --------- Net income $ 395,080 $ 4,811 $407,272 $ 23,626 ========== ========= ========== ========= Netincome per common share - basic $ 3.66 $ 0.05 $ 3.78 $ 0.22========== ========= ========== ========= Net income per commonshare - diluted $ 3.41 $ 0.04 $ 3.52 $ 0.20 ========== =================== ========= Weighted average shares outstanding - basic107,834 106,567 107,797 106,275 Weighted average shares outstanding- diluted 115,764 116,635 115,747 116,839

Sepracor Inc. Non-GAAP Condensed Consolidated Statements ofOperations (Unaudited) (In thousands, except per share amounts)Three months ended Six months ended June 30, June 30, 2008 20072008 2007 --------- --------- --------- --------- Revenues: Productsales $269,946 $264,326 $575,490 $581,889 Royalties and licensefees 24,199 12,466 39,434 22,603 --------- --------- ------------------ Total revenues 294,145 276,792 614,924 604,492 Cost ofrevenue(a) 26,884 25,530 56,708 57,148 --------- ------------------ --------- Gross margin 267,261 251,262 558,216 547,344Operating expenses(a): Research and development 58,299 45,457114,528 86,159 Selling, general and administrative 207,769 210,779386,595 421,738 Amortization of intangible assets 33 34 67 85Restructuring expense (266) - (566) - --------- --------- ------------------ Total operating expenses 265,835 256,270 500,624 507,982--------- --------- --------- --------- Income (loss) fromoperations 1,426 (5,008) 57,592 39,362 Other income (expense)(a):Interest income 5,865 11,107 14,598 23,709 Interest expense (49)(113) (104) (2,870) Other expense, net (248) (558) (326) (286)--------- --------- --------- --------- Total other income 5,56810,436 14,168 20,553 Equity in investee losses (272) (132) (475)(404) --------- --------- --------- --------- Income before incometaxes 6,722 5,296 71,285 59,511 Income taxes 67 485 3,153 3,038--------- --------- --------- --------- Net income $ 6,655 $ 4,811$ 68,132 $ 56,473 ========= ========= ========= ========= Netincome per common share - basic $ 0.06 $ 0.05 $ 0.63 $ 0.53========= ========= ========= ========= Net income per common share- diluted $ 0.06 $ 0.04 $ 0.59 $ 0.48 ========= ========= ================== Weighted average shares outstanding - basic 107,834106,567 107,797 106,275 Weighted average shares outstanding -diluted 115,764 116,635 115,747 116,839 (a) Attached is areconciliation of GAAP to non-GAAP calculations.

Sepracor Inc. Reconciliation of Non-GAAP Measures (Unaudited) (Inthousands, except per share amounts) Three months ended Six monthsended June 30, 2008 June 30, 2008 EPS EPS ------- ------- Non-GAAPnet income $ 6,655 $ 68,132 Non-GAAP diluted income per commonshare $ 0.06 $ 0.59 Special Items: Valuation allowance releaserelated to taxes 451,997 3.90 451,997 3.91 Research and developmentmilestone payment - - (10,000) (0.08) Research and development - inprocess upon acquisition (50,758) (0.43) (89,995) (0.78) Impairmentloss on investment (9,106) (0.08) (9,106) (0.08) Recurring non-GAAPadjustment: Cost of goods sold - amortization of intangible assets(997) (0.01) (997) (0.01) Amortization of intangible assets (1,885)(0.02) (4,116) (0.04) Imputed interest on acquired intangibleassets (2,066) (0.02) (2,066) (0.02) ---------- ------- ---------------- Total special items and recurring non-GAAP adjustmentbefore income taxes 387,185 3.34 335,717 2.90 Income tax benefit1,240 0.01 3,423 0.03 ---------- --------- Net income, as reportedunder GAAP $395,080 $407,272 ========== ------- ========= -------Diluted income per common share, as reported under GAAP $ 3.41 $3.52 ======= ======= Three months ended Six months ended June 30,2007 June 30, 2007 EPS EPS ------- ------- Non-GAAP net income $4,811 $ 56,473 Non-GAAP diluted income per common share $ 0.04 $0.48 Special Items: Litigation settlement, net - - (34,000) (0.29)---------- ------- --------- ------- Total special items beforeincome taxes - - (34,000) (0.29) Income tax benefit from specialitems - - 1,153 0.01 ---------- --------- Net income, as reportedunder GAAP $ 4,811 $ 23,626 ========== ------- ========= -------Diluted income per common share, as reported under GAAP $ 0.04 $0.20 ======= ======= Weighted average shares outstanding - diluted2008 115,764 115,747 Weighted average shares outstanding - diluted2007 116,635 116,839

Sepracor Inc. Condensed Consolidated Balance Sheets (Unaudited) (Inthousands) June 30, December 31, ASSETS 2008 2007 ---------------------- Cash, short- and long- term investments $ 853,347 $1,065,619 Accounts receivable, net 166,711 159,644 Inventory, net71,135 53,125 Property, plant and equipment, net 100,004 87,308Investment in affiliate 3,612 4,313 Goodwill and intangibles, net193,409 501 Deferred taxes, net 467,006 - Other assets 36,12734,216 ---------- ------------ Total assets $1,891,351 $ 1,404,726========== ============ LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable and accrued expenses $ 159,943 $ 227,426 Deferredtaxes 10,630 - Other liabilities 400,588 277,462 Debt payable 2,0122,605 Convertible subordinated debt 720,820 720,820 Totalstockholders' equity 597,358 176,413 ---------- ------------ Totalliabilities and stockholders' equity $1,891,351 $ 1,404,726========== ============ *T Email Print Back Share