Sepracor explodes on surprise setback from FDA on new drug

By Ronda Fears

Nashville, Tenn., March 7 - Biopharmaceutical concern Sepracor Inc. was crushed Thursday after a surprise setback with regulators regarding its new antihistamine Soltara. The roughly $1 billion of Sepracor convertibles, three issues rated CCC+, plunged on a huge sell-off by 25 to 31.5 points as the stock lost close to 60% on the day. For investors who believe in the Sepracor story, however, analysts suggest this is a buying opportunity.

"Sepracor was destroyed today. This was an explosion, a bombshell that no one saw coming, so the fallout was really devastating," said a convertible trader at a hedge fund in New York.

"Because of the uncertainty surrounding a setback like this, everyone tends to just want to bailout, hit the sell button. That's exactly what happened today."

A large portion of the issues are held by hedge funds, one trader noted. What makes the cheapening in the convertibles more devastating than the mere point decline, the trader said, is that they fell even though most holders had set up a heavier hedge than the deltas would typically suggest.

The Sepracor 5.75% due 2006 fell 25.875 points to 58.75 bid. The 7% due 2005 lost 31.5 points to 64 bid. And the 5% due 2007 dropped 26.125 points to 52.125 bid. Sepracor shares plunged $27.63, or 58.45%, to $19.64.

If you like Sepracor's story, though, this would be a buying opportunity.

"If you believe the story and that ultimately they are going to proceed with this new drug, there could be a buying opportunity. The bonds did cheapen relative even to the already heavy hedge, which was to factor in volatility because these are momentum stocks," said Venu Krishna, head of convertible research at Salomon Smith Barney.

"It could be oversold. We don't know what the status is. We could see a big bounce back. When something happens, people just want to get out and it just shows the market's apprehension."

Sepracor announced before the market open that the Food and Drug Administration plans to issue a "not approvable" letter regarding the company's application to market Soltara, which indicates that the FDA believes there is insufficient information for an approval. Marlborough, Mass.-based Sepracor had hoped Soltara would challenge Claritin in the $5 billion U.S. market for prescription antihistamines and had already moved into launching mode for the drug with its sales force.

"This communication comes as a major disappointment, as we believed throughout the process that we would receive an approvable letter,'' said Timothy J. Barberich, chief executive of Sepracor, in a company statement.

"We had anticipated that Soltara would account for a significant part of our revenues in 2002 and beyond. However, at this point it is unlikely that Soltara will be commercialized for at least a year, and our guidance is therefore to remove both the revenue and expense associated with this product from financial models.''

Dr. Paul Rubin, executive vice president of drug development and research at Sepracor, explained in a conference call that the company expects to meet with FDA officials in two to three weeks and it is uncertain whether additional evidence will have to be collected or merely a new analysis of the existing data will answer the FDA's concerns. If a new study is needed, he said that will take 90 days, at most, but then four to eight weeks to analyze the data and resubmit it. Then, the FDA has six months to review the data.

David Southwell, chief financial officer of Sepracor, said during the call that the company was not prepared to issue new guidance as it was still in the process of digesting the news.

"This does not change the major focus of the company but the tactics of getting there,'' Southwell said, answering a question about whether the company might now be more open to partnering on research and development projects.

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