Sepracor: Takeover Target From Pharma Major?

| About: Sepracor Inc. (SEPR)

Sepracor (SEPR) has held a P/E ratio of approximately 100 for most of this year, due to both significant growth in earnings and takeover rumors. The company has managed significant revenue growth (especially Q4 2005) during the past year, and has begun posting positive earnings.

SEPR will post earnings tomorrow. If SEPR meets its estimates of $0.19 per share, it would still have a P/E of about 70 (which is still significantly more than the P/E ratio which its competitors trade around -- typically between 15 and 25). However, one very positive note is that SEPR's forward P/E is near that range. If they are able to consistently meet their estimates, they could definitely be worth their current price.

Why then is SEPR valued so high? reported SEPR takeover rumors as early as November 2005. Starting May 11, 2006 more reports of takeover chatter circulated. Again, throughout at least 5 days in June 2006 the takeover rumors were reported. During this time, SEPR reached its 52 week high of $60.75. SEPR's 52 week low occurred in April at $42.29 after posting their earnings -- which at the time still meant it had a P/E of over 100.

During the last year and a half, the valuation of SEPR has dropped 20% from $62.00 per share to just under $50.00. SEPR's current market cap is just over $5.3B.

sepr chart

Sepracor owns only a few drugs: Brovana (an inhalation solution for chronic bronchitis and emphysema), Lunesta (a prescription sleep aid), and Xopenex (to prevent bronchospasms). See Sepracor's Website

Potential suitors for SEPR have included Pfizer (NYSE:PFE) -- most recently, Johnson & Johnson (NYSE:JNJ), Schering-Plough (SGP), GlaxoSmithKline (NYSE:GSK), among others.

Pfizer (PFE):
PFE currently has a market cap of $197B with cash reserves of almost $15B. PFE owns many drugs including: Lipitor (cholesterol lowering), Viagra (erectile dysfunction), Celebrex (arthritis), Norvasc (high blood pressure), Zoloft (depression and anxiety), Zyrtec (allergies), and many other over-the-counter products. See a list on Pfizer's Website. If Pfizer wanted to, they could purchase SEPR with cash.
Pfizer currently does not appear to own inhalant drugs to treat bronchospasms, and so a takeover of SEPR could be an addition to Pfizer's line of products.

Johnson & Johnson (JNJ):
JNJ currently has a market cap of $200B with cash reserves of almost $15B. JNJ owns a vast line of products from Tylenol (pain relief) to BandAid (adhesive bandages). See JNJ's Product Offerings.
JNJ also does not appear to own inhalant drugs that treat bronchospasms, and so a takeover of SEPR would also be an addition to JNJ's current line of products.

Schering-Plough (SGP):
SGP currently has a market cap of $34B with cash reserves of $5B. SGP also owns a vast line of products from Claritin (allergies) to Nuflor (A drug for cattle). See SGP's Product Listing.
SGP does own an inhalant drug for bronchospasms (Proventil HFA), and so an acquisition by SGP would only make sense if they were trying to capture a larger portion of the market.

GlaxoSmithKline (GSK):
GSK currently has a market cap of $163B and cash reserves of $9B. GSK has products from Amoxil (antibiotic) to Havrix (Hepatitis A vaccine).
GSK also owns an inhalant drug for bronchospasms (Ventolin HFA), and as with SGP, an acquisition of SEPR would make less sense.

All of the above companies could acquire SEPR, but because Sepracor has only a very thin product line it is much less likely that SGP or GSK would make the move. SGP would most likely be the least-likely of the above to acquire SEPR, as its market cap and cash reserves are the smallest of the 4 companies mentioned.

When would an acquisition of SEPR happen?
At the current P/E of 100, an acquisition is unlikely but still possible. However, depending on the earnings that are released tomorrow and the reaction of the market, it could happen fairly soon. SEPR has a decent looking forward P/E and could be very attractive to a large firm that does not have a drug for bronchospasms.

The rumors have come from many different sources, many of which are credible. The takeover speculation has been going around for a long time, and has been one of the more active rumors spurring up quite frequently.

We may just see the acquisition of SEPR by a larger firm yet.

Disclosure: Author has no position in Sepracor