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Sepracor Inc. (SEPR)

Q1 2006 Earnings Conference Call

April 25th 2006, 8.30 AM

Executives:

Timothy Barberich, Chairman of the Board, Chief Executive Officer

William (Jim) O’Shea, President, Chief Operating Officer

Mark Corrigan, Executive Vice President of Research and Development

David Southwell, Chief Financial Officer, Executive Vice President, Secretary

James Roach, Senior Vice President, Medical Affairs

Robert Scumaci, Executive Vice President of Finance and Administration, Treasurer

Jonae Barnes, Vice President of Investor Relations and Corporate Communications

Analysts:

Greg Gilbert, Merrill Lynch

Corey Davis, BCF Capital

Richard Silver, Lehman Brothers

Adam Greene, JP Morgan

John Stephenson, Summer Street Research

Andrew Swanson, Citigroup

Lawrence Neibor, W. Baird & Co

(Danny Franck, Sterber?)

William Tanner, Leerink Swann

Matt Duffy, Black Diamond Research

Presentation

Operator

Welcome to Sepracor’s Q1 2006 earnings conference call. Hosting the call today from Sepracor is Timothy Barberich, Chairman and Chief Executive Officer. Operator instructions. It is now my pleasure to turn the floor over to our host, Timothy Barberich. Sir, you may begin.

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Thank you. Good morning and thank you for joining us. With me this morning are Jim O’Shea, President and Chief Operating Officer, Dr. Mark Corrigan, EVP R&D, David Southwell, EVP and Chief Financial Officer, Dr. Jim Roach, SVP of Medical Affairs, Bob Scumaci, Executive VP of Finance and Administration and Jonae Barnes, Vice President of Investor Relations and Corporate Communications. Before we begin, I’ve asked Jonae to read the safe harbor statement.

Jonae Barnes, Vice President of Investor Relations and Corporate Communications

Various remarks that we make about our future expectations, plans and forecasts constitute forward-looking statements for purposes of the SEC safe harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors which are discussed in our most recent annual report on form 10-K which is on file with the SEC, and other reports that we file with the SEC. In addition, these forward-looking statements represent the company’s expectations only as of today. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. Any forward-looking statements should not be relied upon as representing our estimates or our views as of any date subsequent to today. Due to the length of today’s presentation, Sepracor will not be advancing the slides with the audio of the conference call, however a PDF file of the slides is available for individuals to follow on their own. The PDF file is available in the ‘For Investors’ section of the website as well as on the left-hand navigation menu of the webcast view. Thank you.

Timothy Barberich

Thank you, Jonae. This morning, we are pleased to report our Q1 results, which in our view was quite a successful quarter. This is our second consecutive quarter of operating profits. Results have exceeded our internal forecasts, which serve as the basis for the annual guidance we provided earlier this year in terms of earnings and have met or exceeded our revenue forecasts for LUNESTA and XOPENEX UDV, and have come in somewhat below forecast for XOPENEX HFA. Overall, our revenues were within 3% of forecast for the quarter. We do recognize that while external expectations by and large reflect our guidance for the year, analyst models differ widely on a quarterly basis from our internal forecast in terms of revenues, SG&A and earnings per share. As you know, we do not guide by quarter, but as a consequence of today’s results, David will be providing some color on quarterly spreads going forward.

After one year on the market, LUNESTA has achieved remarkable success, with approximately $465 million in its first full year of sales. The market for sleep therapies has expanded significantly since the introduction of LUNESTA. YoverY growth continued during the last quarter. Toward the end of Q1, negative publicity surrounding potential side effects of a competitive product had what we believe will be a short-term dampening effect on the overall market. In spite of this, growth for the quarter and new Rxs approached 30% YoverY. Proper treatment of insomnia in patients with coexisting conditions such as depression, anxiety or pain, as well as conditions such as menopause or simply the aging process itself, has far-reaching implications in terms of benefit to society, which we believe will be important to continued growth in the insomnia market. We believe that additional entrants to the insomnia market can serve to expand the scope to this unusual opportunity.

We recognize that (share voice?) is important, and to that end we have hired and trained during 1Q a third Primary Care sales organization of approximately 500 reps, bringing our total coverage for LUNESTA and XOPENEX to just under 2,000. However, the real battle for market share will ultimately be fought and won with clinical data. We believe that Sepracor has developed the most robust and impressive data set in the Sedative Hypnotic class. We have completed two six-month placebo controlled trials which have established the efficacy and safety of LUNESTA in primary insomnia over the long term, without evidence of tolerance or rebound. Given differences in mechanism of action and half life between the various drugs in this class, it is difficult to speculate on whether similar results could be obtained with other products. Furthermore, we believe also that moving forward, the duration of the clinical trials performed in support of efficacy will actually be reflected within the indications and usage section of the package insert for drugs in this class. This quarter, a milestone Sepracor study conducted in patients with concomitant insomnia and depression was published in the journal Biological Psychiatry. This is just the tip of the iceberg and the first in a series of such publications.

Later this morning, Dr. Jim Roach, Senior VP of Medical Affairs, will provide an overview of our extensive Phase IIIB/IV program, including the top line results of a driving study that further supports LUNESTA’s first in class profile. While these are early days in the launch of our new product, the XOPENEX HFA metered dose inhaler, the uptake in the retail sector has been a bit slower than expected. However, activity in other channels which are controlled by contracts has actually accelerated more quickly than we had anticipated due to the reduction in supply of propellants for ischemic albuterol CFC products. As a result, long-term our confidence in ultimately achieving success with XOPENEX HFA is, if anything, more robust. Today, David Southwell will review the financial results of Q1 and provide guidance for the year, with some color on the upcoming three quarters. Jim O’Shea will review the progress of LUNESTA and XOPENEX brands and provide a review of commercial operations. Dr. Mark Corrigan will review R&D progress and Jim Roach will review our IIIB/IV program. We will then follow with a question and answer session. David?

David Southwell, Chief Financial Officer, Executive Vice President, Secretary

Thank you, Tim. For the three months ended March 31 2006, Sepracor’s consolidated revenues were approximately $285.7 million, of which revenues from Sepracor’s pharmaceutical product sales were approximately $277.5 million. XOPENEX franchise revenues were $139.4 million and LUNESTA revenues were $138.1 million. Net income for Q1 2006 was approximately $10.3 million, or $0.09 per diluted share. Reported results for Q1 2006 included charges of $9.8 million, or $0.09 per diluted share, for stock-based compensation due to Sepracor’s adoption of SFAS123R. These consolidated results compare with consolidated revenues of $119 million of which revenues from pharmaceutical product sales, which is XOPENEX inhalation solution, were approximately $106.6 million and a net loss of $22.6 million or $0.22 per diluted share for the three months ended March 31 2005.

Reported results for Q1 2005 did not include charges for stock-based compensation, as Sepracor did not adopt SFAS123R until January 1 2006. As of March 31 2006, Sepracor had approximately $960 million in cash and long and short-term investments. I’ll start by addressing guidance for the year as usual, then as Tim said, I’ll comment on how this guidance is expected to be achieved by quarter. For the year, none of the numbers we guided to at the beginning of the year are being changed. To reiterate, the LUNESTA revenue guidance is approximately $650 million for 2006. XOPENEX revenue guidance is approximately $590 million for the year. Of the $590 million, UDV revenues are expected to be approximately $500 million and we expect a target of approximately $90 million in HFA revenue. Alliance revenue is estimated to be $35 million, and total revenue guidance remains approximately $1.275 billion for the year.

On the expense side, the SG&A expense guidance is about $755 million, R&D is approximately $185 million for the year, and stock option expense, which will be absorbed into other line items during the year, is estimated to be $40 million for the year. We are still guiding to primary EPS of approximately $1.70 per share, based on weighted average shares outstanding for the year of 105 million shares. On a fully-diluted share count of 121 million shares, this equates to EPS of approximately $1.50. We anticipate escalating revenues for each quarter of the year, to a maximum level in Q4, reflecting primarily the seasonality of XOPENEX UDV, the growth of the MDI, with the bulk of sales coming in the second half of the year and LUNESTA which we will expect to begin to benefit from the expanded sales force in 3Q. Our SG&A expense is heavily influenced by both marketing costs and sales force expense. During the year, we expect the ratio of sales force expense to marketing expense to increase in the second half of the year. As a result, we expect overall SG&A to remain at roughly the Q1 levels for Q2, then go down in Q3 and Q4 as we optimize the efficiency of our sales and marketing investments.

The R&D expense which was relatively high this quarter as we funded the 700 patients Generalized Anxiety Disorder study, which Mark will talk about, which is now nearly complete. We expect lower levels to roughly equally be distributed between the remaining quarters to meet our guidance of $185 million for the year. Our internal plan at the time we initially gave 2006 guidance called for a lot in Q1, and as you can see we were in fact profitable. But over the balance of the year, we see earnings increasing sequentially as revenues grow against the expenses which with the exception of sales and marketing in Q2, are relatively constant. Tim?

Timothy Barberich

Thank you, David. I will now turn it over to Jim O’Shea.

William O’Shea, President, Chief Operating Officer

Thank you, Tim, and good morning everyone. As Tim has indicated, this has been another successful quarter with continuing strong XOPENEX sales and LUNESTA completing a very successful first full year on the market. First slide, and the top of this slide should read ‘Robust Revenue Growth’. Firstly, overall revenues. The Q1 2006 revenue was $285.7 million, up 140% on Q1 2005, with the principle drivers of growth being overwhelmingly the sales of LUNESTA and XOPENEX. On XOPENEX, another robust sales quarter, with the Q1 2006 sales being $134.1 million, up 25.8% YoverY. Sales growth coming from both positive price and volume contributions, the volume growth being principally in the non-retail sector. For reference, we finished this quarter with approximately 5 weeks of inventory at wholesaler and retail pharmacy.

Specifically at the Rx level, against the start of the normal seasonal decline in the market, XOPENEX finished the quarter with a new Rx market share of 24.8%, and a TRx market share of 25.4%. At the doctor specialty level, we finished the quarter with allergists virtually maintaining their market share at 45.8%, pediatricians lost some ground at 30.7%, while both Pulmonologists and Primary Care doctors increased their TRx market shares: Pulmonologists to 33.3% and Primary Care doctors to 18.7%. This growth picture is being repeated with a prescriber base, with approximately 56,000 doctors prescribing XOPENEX in February (inaudible). In hospitals, we continue to see growth with the latest DDD data indicating a 33.3% market share for March.

Finally on XOPENEX, one event on XOPENEX that occurred this quarter that is worthy of comment is the proposition of a so-called LCA – Least Costly Alternative – being introduced by the DMERCs on XOPENEX. The DMERCs are the organizations that manage Medicare Part D drug coverage policies and reimbursements. Under an LCA policy, doctors who treat Medicare recipients would be unable to ensure that their patients most in need to XOPENEX would actually receive it. We believe that the weight of XOPENEX clinical and pre-clinical evidence, combined with the market acceptance, and use of XOPENEX, not only among commercial lines but also among Medicare beneficiaries and their physicians, supports Sepracor’s position that an LCA should not be imposed on XOPENEX. Furthermore, the proposed action by the DMERCs of arbitrarily designating XOPENEX as not being medically necessary, compared to (rack med?) albuterol is directly contradicted by the CMS’s original decision to aware XOPENEX a unique J-Code in 2005. We are, and will be, very active in striving to maintain Medicare beneficiary access to XOPENEX, and we’ll be very active during and after the comment period for the LCA proposal, which closes on May 8th.

Sepracor is launching an aggressive, nationwide campaign, designed to highlight the dramatic clinical consequences associated with denying Medicare beneficiaries access to XOPENEX. As part of this campaign, we are working closely with members of Congress and key policy makers on this issue. We also believe that an LCA is not legally permissible under the Medicare Modernization Act, and although litigation is not our preference, we are prepared to protect beneficiary access to XOPENEX. If an LCA were to be implemented in October, we would expect it to have only a modest impact on XOPENEX sales in 2006. Going forward, however, an LCA will effectively eliminate XOPENEX utilization governed by Medicare Part C. CMS did not publish market share information, therefore it is very difficult to estimate the percentage of XOPENEX total sales going through with this channel. However, CMS reported that in 2005, approximately 12% of total XOPENEX sales were reported to be associated with Home Healthcare. Finally, on this issue, we would not expect an LCA to have significant spill over in effect in terms of price attenuation or indeed utilization in the XOPENEX retail or hospital market. Also, we would not expect an LCA to have an impact on XOPENEX HFA MDI.

Turning to XOPENEX MDI, the full-scale representative launch of the MDI extensive(?) ( inaudible) as Tim said, in January, following December 2005’s wholesaler and retail stockings, amounting to about $12 million, and the relatively extensive sampling product recognition program targeted at potential high prescribers. In Q1, we have sold a further $5.3 million of XOPENEX MDI, bringing the total XOPENEX sales to $139.4 million for the quarter. The initial sales of the MDI did involve both the retail and the contract sectors, the retail sector being slightly slower than expected and the contract sales being above expectation. On the retail side, our strategy is to focus heavily on those doctors who have already prescribed XOPENEX in the form of the UDV units decile, with the Respiratory sales force being the vanguard sales force supplemented by the Primary Care sales forces. To date, you will see we have captured 1.6% of new prescriptions and 1.1% of total prescriptions of the MDI market, which is a little bit below our retail market share capture expectations.

However, very encouragingly, our strategy of focusing on XOPENEX UDV writers appears sound, with already a very high adoption rate for XOPENEX MDI being demonstrated in XOPENEX UDV users, with market shares approaching 14%. I think clearly, with increased coverage and frequency over time, we will see progressive retail market share gains for XOPENEX MDI. Indeed, to further put our retail performance to date into perspective, we have already captured nearly 30% of the HFA new prescriptions in Q1, although obviously we do not class the HFA market as our target, but rather the MDI market as a whole. On the MDI contract side, we have been encouraged in Q1 by the reaction to the introduction of XOPENEX HFA MDI, which we believe will gather significant momentum throughout the year, in line with the clearly documented shortages of CFCs, which we believe will effectively mean a much sooner phase-out of the CFCs and a phase-in of HFAs, much sooner than December of 2008.

Indeed, if one looks at the CFC essential use allocation by years with manufacturers of CFCs MDI, we can see there’s been a dramatic cut in the allocation: 1,700 metric tons versus 1,000 metric tons 2005-2006, whereas the demand for MDI has not diminished. In fact, it has grown somewhat. This potential gap in supply has to be met with a HFA MDI, and in this situation, the product profile of XOPENEX and the acknowledged capabilities and capacities(?) of 3M, our manufacturing partner, we believe it places us in a very good position to gain significant contract business in the future.

I would now like to turn to LUNESTA and Q1 2006 performance which also represents the first full year on the market. The Q1 2006 sales were $138.1 million, which brought the first full year sales to $467.3 million. For reference, there was some destocking at wholesalers this quarter, in that we ended the quarter with under 5.5 weeks of inventory at wholesalers and retail pharmacy. Also, in this quarter, the benefit of the 9% price rise in January was mediated by contract activity and wholesaler buy-ins associated with the price rise. However, going forward, we expect to realize more normal returns from the price rise. The impressive first year sales were as a result of over 240,000 doctors prescribing LUNESTA, with 2-3,000 new prescribers being added every week. Also, throughout the first year on the market, we’ve seen progressive improvement in the percentage of (call down?) physicians prescribing LUNESTA by doctor decile. Judging that we have, at the end of Q4 on the market over 90% of doctors prescribing LUNESTA in the top six deciles, I think clearly illustrates the effectiveness of our sales force.

At the prescription level, almost 5 million prescriptions have been written with a current resale rate of 40.7%. This has resulted in LUNESTA capturing 14.6% of new Rxs and 13.8% of total Rxs as of the week ending April 7th. This very encouraging picture is also reflected in Managed Care Access, with the latest picture as of March 2006 showing that LUNESTA is in Tier 2/Tier 3 in 82% of Managed Care Lives which, importantly, compares very well with that of AMBIEN CR’s Managed Care Access, which stands at 59% as of March 2006. Furthermore, this growth pattern is reflected in the underlying Sedative Hypnotic market, which has demonstrated dramatic growth, down to LUNESTA’s introduction in April 2005. If we look at the growth rate by quarter, we see that prior to LUNESTA’s introduction, Q1 2005 was growing in terms of TRx volume at 5.8%, where the latest quarter, Q1 2006 rate, is 26% for TRxs, and almost 30% for new Rxs. I think overall, a good quarter for LUNESTA, completing a very impressive first full year on the market.

Finally, looking forward to key market share drivers in the year, LUNESTA’s clinical data and the sales force expansion, Dr. Jim Roach will provide significant information on the rollout of our Phase IIIB/IV data in his presentation following. As for the sales force expansion, recruitment was completed in Q1, which means that the Primary Care sales force of 450 representatives will be fully operational on May 1st. This expansion will enable us to deliver an additional 700,000 primary details on LUNESTA. The profile of the new representatives mirrors our established sales force, with representatives coming from primarily (big pharma?), and with significant experience. In fact, 30% have 2-5 years experience, and almost 50% with greater than five years experience. Add to the deployment of this third Primary Care sales force, our intention is to (go back to?) increased frequency in the top decile and reach M(?) frequency on the middle to bottom decile. In addition to using the third sales to supplement the activity of the (C&F sales force on psychiatrists?), to increase both reach and frequency with these important doctors. With that update, I would now like to hand over to Dr. Mark Corrigan.

Mark Corrigan, Executive Vice President of Research and Development

Thank you, Jim. I’m on Pharmaceutical Pipeline. In this R&D update, we are going to feature an in-depth review of our LUNESTA Phase IIIB/IV program by Dr. Jim Roach, Senior Vice President of Medical Affairs. This will feature new data from the RESST study, as well as from a driving study on LUNESTA. We continue to work diligently to advance toward filing the MAA in Europe and the JMDA in Japan. In Europe, we anticipate meetings with regulatory authorities this summer, and we have a meeting scheduled with the PMDA, the health authority in Japan, to review our proposed MDA content in Q2. Firstly, though, I’d like to comment on the progress of our other assets, Arformoterol, our nebulized formulation of long-acting Beta-agonist for COPD, is under review with FDA. Our Paducah date is October 12th and we have not received any individual discipline review questions as yet. We have submitted the 120-day safety update ahead of schedule, and have a mid-cycle meeting with the FDA scheduled for this quarter. We’re excited about this opportunity and are looking forward to updating you further in an upcoming webcast.

Our pre-clinical work on SEP-330, our dopamine reuptake inhibitor, has demonstrated efficacy in the model for Parkinson’s disease and we continue to look at taking it forward to IND and into clinical trial. We will file our IND for SEP-162, a dual reuptake inhibitor for depression, this quarter and anticipate commencing Phase I this summer. We continue to advance SEP-929 for psychosis and look toward an IND around the end of the year. Our investment in discovery, both internal and through our ACADIA labs, have deals in promising leads, and we’re hopeful to see a development candidate emerge later this year with further launch in 2007. Over to you, Dr. Roach.

James Roach, Senior Vice President, Medical Affairs

Thank you, Mark. The Phase IIIB/IV program has primarily focused on evaluating LUNESTA in co-morbid conditions in which insomnia is prevalent, such as major depressive disorder, rheumatoid arthritis and women in menopause. As we designed the Phase IIIB/IV program we believed it would be important to obtain data in these patient populations, as it has been well-established that most patients with insomnia in fact have secondary insomnia. In each of these aforementioned studies, LUNESTA was first and foremost effective in treating insomnia and salutary effects were observed in the underlying condition. We have also completed the safety study in patients with mild to moderate Obstructive Sleep Apnea and a second six-month study in patients with chronic insomnia. The main results from these studies have already been presented at major scientific meetings. Additionally, ongoing and planned studies include a large study evaluating co-therapies with LUNESTA and LEXAPRO, for the treatment of Generalized Anxiety Disorder and notably, this represents the second study combining LUNESTA with an SSRI to treat patients with both insomnia and an underlying psychiatric disorder and the large long-term study evaluating co-therapy with LUNESTA and EFFEXOR XR and SNRI for major depressive disorder.

In addition, we are planning a study designed to evaluate long-term treatments in elderly patients with primary insomnia, which will be later this year. We have also recently completed a driving study in healthy adult volunteers as well as a large clinical experience trial and I will be sharing top line results from these studies with you today.

Let’s begin with the driving study. This study was a randomized double-blind placebo-controlled crossover study in normal healthy subjects. The primary endpoint was on the road Brake Reaction Time, evaluated the morning after treatment. Brake Reaction Time is a test sensitive to psychotropic drug effects and provides results which are consistent with laboratory measures of psychomotor performance. A red light on the hood of the car simulates the brake lights of an imaginary vehicle in front of the test car, and during driving on a closed circuit track, this light is illuminated at random intervals and the time required for the subject to depress the brake pedal after seeing the light is measured. This happens 25 times during the driving test.

Secondary endpoints in this study included several additional objective and subjective measures of psychomotor and cognitive function in information processing. We have submitted the results for this study as a late-breaking abstract for consideration for presentation in an upcoming scientific meeting. With respect to the primary endpoint of Brake Reaction Time, measured in milliseconds, as you can see there were no statistically significant differences between treatment groups in the primary endpoint.

Now I would like to share the results of the RESST, or Regimen of Eszopiclone Sleep Satisfaction Trial. The objective with this study was to assess patient satisfaction with Eszopiclone for the treatment of insomnia in the clinical setting. There were a number of secondary objectives as well, related primarily to patient satisfaction and preference as well as safety and tolerability. With respect to the design, this was a large open label study, evaluating 2,600 patients with insomnia. Notably, and in contrast to our development program, patients with secondary insomnia were also eligible to participate in this study. At Phase 1, patients completed a number of questionnaires to determine their sleep history, insomnia treatment history and satisfaction with their current sleep aid. Afterwards, patients administered Eszopiclone for up to 10 nights over a 10-14 day period returned to the office to complete questionnaires. The dose prescribed by the physician was according to the package labeling, and approximately two-thirds of the patients were prescribed a 3mg dose.

The mean age of the patients in this trial was 50, and most patients were female. Interestingly, most had insomnia for more than one year. In addition, this was a severe patient population in that 50% of the patients reported total sleep time of less than four hours per night and 40% reported a total sleep time of between 4-6 hours per night. Over half of the patients had a secondary or coexisting insomnia, most commonly related to underlying psychiatric disease such as depression and anxiety and arthritis. As an aside, we believe that the data obtained in the mass trial validates the selection of studies that we conducted in the Phase IIIB/IV program to date. The most common prescription medication used treat insomnia were AMBIEN – approximately one third of the population, a little over – other prescription medications and Trazodone.

This is a busy slide, but let’s take just a little bit of time to walk through it. Shown here are the percentage of patients who rated their satisfaction with their current sleep aid at base line as either very satisfied or extremely satisfied. This is represented in the hatched bars with respect to eight specific insomnia symptoms as well as overall satisfaction and satisfaction considering benefits and side effects. The solid bars show the percentage of patients who were either very satisfied or extremely satisfied with LUNESTA at the end of the treatment period. As you can see, as compared with their current sleep aid, approximately two to three-fold more patients were either very or extremely satisfied with LUNESTA with respect to all these specific insomnia symptoms as well as overall satisfaction and satisfaction considering the benefits and side effects.

Let’s look at a couple of medications, AMBIEN and Trazodone. First we’ll look at AMBIEN. This graph shows the same data for the sub-group of patients whose most currently used sleep aid at base line was AMBIEN. At the end of the treatment period, as you can see, patient satisfaction with the respect to the ability to fall asleep quickly was about the same for AMBIEN and LUNESTA. However, with respect to all the other parameters of sleep maintenance and next day, as well as overall satisfaction and satisfaction considering the benefits and side effects, more patients reported being very or extremely satisfied with Eszopiclone.

A similar pattern was noted for the subgroup of patients who reported Trazodone as their most currently used sleep aid. At the end of the treatment period, more patients reported being very or extremely satisfied with Eszopiclone again across the board for specific insomnia symptoms as well as overall satisfaction and satisfaction considering benefits and side effects. This data has been accepted for presentation at the APS SEPS meeting in June. I’m on slide number 46, the GAD study.

Now I would like to share some information on an ongoing study designed to evaluate the efficacy of LUNESTA 3mg administered with LEXAPRO in patients with insomnia related to Generalized Anxiety Disorder. The primary objectives of this large, multi-center study was to evaluate the subjective sleep efficacy of LUNESTA 3mg, administered concomitantly with LEXAPRO. In addition, we will also examine if co-therapy results in greater improvements in GAD versus LEXAPRO alone, as well as evaluate the safety of co-therapy. 700 patients were enrolled into this trial and I’m happy to report that the last patient is out of the trial as of last week. We anticipate date being available early in Q3.

We also have a large study planned as a follow on to our previously completed insomnia and depression study and evaluated co-therapy with Prozac. This study will evaluate the effects of co-therapy with LUNESTA and EFFEXOR XR in SNRI in the treatment of insomnia in Major Depressive Disorder. Unlike our previously conducted trials, the primary endpoint to this trial will be a depression endpoint and we will also evaluate the effects of co-therapy administered for over six months on the maintenance of the antidepressant response as measured by the effect on both relapse rates and time to treatment failure. Slide 49, investigator-initiated studies. In an effort to support continued research, we have funded a number of investigator-initiated studies in a number of different areas.

These trials involve cutting-edge research, evaluating the utility of LUNESTA in several different areas, such as the relationship between sleep and metabolic changes, imaging studies and pre-clinical studies to further elucidate the mechanism of action, studies in other populations of patients with insomnia including elderly patients in a nursing home as well as other populations of patients suffering from insomnia coexisting with other diseases. We anticipate that these studies will result in many scientific data presentations and peer reviewed publications over the next several years and may also generate data to lead us to pursue additional indications for LUNESTA.

With respect to abstracts submitted in 2006, we have submitted over 30 abstracts to date and anticipate up to an additional 20 abstracts for the rest of the year. We have presented no only in the United States but in Japan and Europe as well. This year, we have six abstracts accepted for presentation at the American Psychiatric Association annual meeting. At the Associated Professional Sleep Societies annual meeting, four studies will be presented as oral platform presentations and four posters have also been accepted for presentation at the APSS. We are working diligently to have data from our Phase IIIB/IV program presented at scientific meetings and published in peer review literature. Our primary paper for describing the depression study, as you already know, has been published by Biological Psychiatry online, and we anticipate that it will appear in print later this quarter. We have also submitted a number of other manuscripts which are in the process of peer review, including our elderly PSG study, a paper evaluating the discontinuation phase – that is to say, the phase between weeks eight and ten in our insomnia and depression study, and the perimenopause study.

The cost-effectiveness model, developed from using data from our first six-month study, is also currently under review. In addition, we have a number of manuscripts in progress and planned for submission throughout the year. With that, back to you, Tim.

Timothy Barberich

Thank you, Jim. We will now open the session for Q&A.

Questions and Answers

Operator

Thank you. Operator instructions. Your first question is from Greg Gilbert of Merrill Lynch.

Q – Greg Gilbert, Merrill Lynch

Thanks, I have a couple. First for Jim O’Shea. Jim, you mentioned that the 9% price increase for LUNESTA was offset by a couple of factors, I think inventory reduction and I think you said something about contracting. Can you flesh that out a little bit?

A – William O’Shea

I probably can’t flesh out all the things in terms of contracting, but you’re right. The two elements that really meant that we really didn’t enjoy too much of the 9% price rise this quarter, although we do expect (inaudible) that that could be over the normal returns (inaudible) to be given to us going forward. The two principle ones were to the normal buy-ins that are associated with a price rise with wholesalers, and in many ways one-time contracting charges in Q1 related to the business.

Q – Greg Gilbert, Merrill Lynch

Is there anything different about the contracting strategy in this new year compared to last year?

A – William O’Shea

I think principally it’s the background environment of the access to the drugs, basically. Nothing different in terms of players, nothing different in terms of aggression, it’s really that we’re trying to make sure that we get appropriate (inaudible) which we believe is very important going forward.

Q – Greg Gilbert, Merrill Lynch

But just to be clear, you do expect the average price per Rx to be higher in Q2 and going forward versus…

A – William O’Shea

Yes we do. Yes, we do.

Q – Greg Gilbert, Merrill Lynch

Jim, can you also talk about how the LUNESTA marketing message has evolved to date and perhaps what you retrained or refocused the reps on when you last had them together?

A – William O’Shea

Yes. Two things. One is, I think, in terms of a bundle of information, we’re a year in the market now so we know a lot more. But also, we’ve done – I think I outlined on the last webcast – a pretty extensive ACU study, which showed that we’ve got very good awareness and that the long-term use of LUNESTA is well ingrained and actually understood by the doctors. We do need to upgrade, I think, the message around maintenance and that’s what we’ve been really doing, ensuring that the clinical data which really I think differentiates us around maintenance, and indeed long-term effects is actually being delivered to the doctors. And that message on differentiation versus our competitors will be really hammered home by our sales force.

Q – Greg Gilbert, Merrill Lynch

One for Dr. Roach: at what hour were the patients measured in the driving study, and how do you think that will compare to other studies that come out for competitive agents over time?

A – James Roach

I think the hour that it was measured is very consistent with the hour that it’s measured in many driving studies and we look forward to presenting these results, as I said, in an upcoming scientific meeting. It was between 9.5 and 10.25 hours.

Q – Greg Gilbert, Merrill Lynch

Thank you, I’ll get back in the queue.

Operator

Thank you. Your next question is from James Kelly of Goldman Sachs

Q – James Kelly, Goldman Sachs

(inaudible)

Operator

There seems to be interference on Mr. Kelly’s line, we’ll move onto the next question which is from Corey Davis of BCF Capital.

Q – Corey Davis, BCF Capital

Good morning. Just a question with respect to the depression study, now that it’s actually published online. Do sales reps actually promote that yet, or do you need to wait for the hard copy it’s actually published?

A – William O’Shea

Welcome, Corey, nice to talk to you. We’re waiting for the peer review journal to be published but obviously it’s been in the clinical environment for almost a year now really with the APSS and APAs, we’ve had (benefits from it?). Also the medical liaisons have been talking about that and it’s actually also in the slide kit for our speakers programs. But effectively, we’re going to be waiting for the publication to be in press before we can really put it into promotion. Obviously we still be stressing that the primary endpoint is insomnia and then coexisting with depression.

Q – Corey Davis, BCF Capital

Kind of a similar question on Trazodone, on why you haven’t been able to take more share from Trazodone yet, is it just that it’s so entrenched in physicians’ minds to use it? And will the publication of what you just showed today be presented APS really help that make a difference, or are people just so ingrained in their thinking that it’s going to be impossible to change that bracket?

A – William O’Shea

I think that’s a great question. The observation is Trazodone is well ingrained, particularly with family care doctors. We do believe, and I think the information around the depression trial will have some effect in terms of moving that market share, and that’s going to be an ongoing push by us, Corey.

Q – Corey Davis, BCF Capital

Last question, is have you had any anecdotal reports of somnambulance that give you any kind of counter detail against AMBIEN right now, or is it just better off to completely avoid the issue? I’m talking to docs.

A – William O’Shea

I’ll hand over to Mark, actually, Corey.

A – Mark Corrigan

In terms of the AE, our analysis of individual AE reports has not detected an associated between sleep driving and sleep eating and sleep walking with the parasomnia associated with the use of LUNESTA. I don’t think that – I’ll leave it to Jim – that we would use this as any kind of competitive edge, as parasomnia has actually occurred in insomnia populations. In fact, even the FDA in dealing with the AMBIEN issue has allowed them to aggressively refute the few reports that hit the media.

Corey Davis, BCF Capital

Thanks, everyone.

Operator

Thank you. Your next question is from Rich Silver of Lehman Brothers.

Q – Richard Silver, Lehman Brothers

The upcoming DMERCs hearings, can you give us a little bit better idea of what your approach is going to be there and how that might be different from the approach you had in order to get the J-Code in the first place? And do you know why there would be a hearing scheduled after the May 8th comment period deadline? Which there is?

A – William O’Shea

I’ll answer the first one and I’ll ask Jim Roach, who’s really been the center of attention here in terms of putting our defenses around this. Simply, I think the reiteration, Rich, in terms of the value of XOPENEX both clinically in terms of efficacy and safety will be the core element of why we believe, firstly, it enjoys a J-Code, and obviously there’s an element of that, and also why Medicare beneficiaries should have free access to XOPENEX. In terms of the extension of the date, Jim?

A – James Roach

Yes, just one comment. We obviously believe in the clinical differentiation of our product. We also will be putting forth the results from the XOPENEX COPD trial that was publicly presented last October, that we believe is very relevant to the Medicare population. We’ll be well represented at these public hearings, needless to say, and we were I think also surprised to see a hearing scheduled after the close of the comments period, but we’ll be there and we’ll see how it goes. On the COPD trial, Rich, that’s when we obtained the J-Code in its original test, in 2005. That trial was not available, so indeed this is additive information on the differentiation of XOPENEX.

Q – Richard Silver, Lehman Brothers

Which study – I’m sorry – was not available?

A – James Roach

A study on COPD that was presented last year in October at the Chest meeting, but as I recall from the bibliography in the LCA policy, this reference was not included. As an aside, that study has been accepted for publication in a peer review journal and we anticipate that publication in the fall.

Q – Richard Silver, Lehman Brothers

OK. Back to LUNESTA and inventory level, you said that it was less than 5.5 weeks. Can you be, number one, more specific, because you have been in the past about pretty much what exact level you’re at, at the end of the quarter? I guess the second question is, you may have mentioned this in the prepared remarks. What level would you expect, is it still going to be pretty wide-ranged between 4-6 weeks? And in the coming quarter, would you expect it to be pretty much where we were at the end of this quarter?

A – James Roach

Yes, it’s pretty difficult, as you can imagine, to get an accurate assessment of inventory. We do assess that it was somewhat less than 5.5 weeks, specifically between 5-5.5 weeks anyway, 5.3, 5.4 would be our best estimate. We do expect that the range will be between 4-6 weeks and we actually expect the inventory to be relatively flat going into the next quarter.

Q – Richard Silver, Lehman Brothers

OK. Then lastly, you mentioned that the driving study would be presented in the upcoming meeting. At what point will you be able to tell us which meeting that would actually be presented at?

A – James Roach

As I said, we had submitted it as a late-breaking abstract, we haven’t heard yet, and when we hear I presume we’ll be letting you know.

A – William O’Shea

Yes. We don’t want to compromise it, Richard, as you can imagine, so as soon as we know it’ll be free information.

Richard Silver, Lehman Brothers

OK. Thanks very much.

Operator

Thank you. Your next question is from Adam Greene of JP Morgan.

Q – Adam Greene, JP Morgan

Thanks. Good morning. Following up on Richard’s question, are you planning on filing the driving data to get it on the label, and I’m also wondering if the FDA requested it? Also, the XOPENEX HFA retail sales were obviously below your target. Is that $90 million still realistic? What do you think gets it there for the year?

A - Mark Corrigan

This is Mark, I’ll take the first one. We were not requested to do any driving studies by the FDA. We think that the warnings that apply to the class that are included in the label are prudent and appropriate. We will, as part of studies conducted, the FDA will be made aware of it, as we do for all of our research on LUNESTA. But we’re not going to be looking to negotiate a separate statement on the label with it.

A – William O’Shea

I think the second part of that question is around the $90 million guidance? Right, well obviously what we’re looking at is the combination of both retail growth and contract growth. Retail growth we do believe will come with increased reach and frequency, and as I indicated, I think in one of the slides, on those doctors who actually are prescribing it, we’re seeing that when they do turn to the HFA MDI, they’re writing it in significant numbers. So we do see it as a classic of the rep force getting in there and talking with frequency to the doctors. And we do believe then the retail growth will obviously escalate. But the principal drivers as well getting to the $90 million will be on the back of the shortages of CFCs, our ability to grab the contract business out there with the major players.

Q – Adam Greene, JP Morgan

OK, actually one more question for David. The $9.8 million impact from FAS123, was that primarily in SG&A?

A – Robert Scumaci

I’ll give you the three different components. R&D is $2.4 million, sales and marketing $3.4 million and general administrative expenses $4 million.

Adam Greene, JP Morgan

Thanks.

A – David Southwell

So you understand that it gradually gets absorbed during the year into those components, but is primarily based on headcount?

Adam Greene, JP Morgan

OK.

Operator

Thank you. Your next question is from John Stephenson, of Summer Street Research.

Q – John Stephenson, Summer Street Research

Thanks for taking my question. In terms of the second depression study, I just wanted to make sure I understood a couple of the nuances there. I was hoping that you could confirm the duration of the relapse phase, because I missed that? Then I was also wondering if this is designed with the goal of getting some kind of expanded indication for the product?

A – James Roach

We expect the run out phase to be six months. We’re going to wait and see how the data breaks, clearly from a scientific perspective, understanding whether this effect is generalizable across the depressive classes is a very important scientific construct. And were it to be, I’m quite sure we’d be interested as would the agency in what the implications of that might be for patients who have co-morbid depression and insomnia.

Q – John Stephenson, Summer Street Research

And what impact did the FDA have in terms of the designing of the study, if any?

A – James Roach

We discussed various designs with them, but it’s ultimately our own design, actually in concert with some of the thought leaders in the field.

John Stephenson, Summer Street Research

OK. Great. Thanks.

Operator

Thank you. Your next question is from Andrew Swanson of Citigroup.

Q – Andrew Swanson, Citigroup

Hi. I was hoping you could remind us in terms of your guidance what you’ve assumed for an indepon(?) launch, and the launch of generic AMBIEN as well? Thanks.

A – David Southwell

We haven’t actually guided officially to that, what Neuracrone(?) have said is that they expect to launch it in the middle of the year. As you know, we’re hired a second sales force which is, you know, coming online very soon, so we believe we’ll be ready for a launch if it happens in the middle of the year. But we don’t know when they’re going to launch and we have to follow what they say.

A – James Roach

And we’re assuming AMBIEN generics appear in April of 2007.

Operator

Thank you. Your next question is from Larry Neibor of Baird.

Q – Lawrence Neibor, W. Baird & Co.

Thank you, good morning. Were you concerned that peers may try to force patients into the AMBIEN generic because of the price difference, versus LUNESTA?

A – William O’Shea

They will obviously the year – if you take the generic strategy that Managed Care will do, is they’ll try retain as much AMBIEN as possible ahead of the generic, to keep that into its position one. That’s a normal position. You find then that generally the impact of a product going generic, the main impact is on the product family itself and not on competitors. And we actually see that.

Q – Lawrence Neibor, W. Baird & Co.

Good. And then, you have another paragraph four challenger to XOLPENEX, could you please explain how your strategy will evolve from a legal point of view?

A - James Roach

Well we really can’t comment on our litigation beyond what’s disclosed in the SEC filings. We obviously are prepared to vigorously enforce our patents against infringers, and protect the XOLPENEX franchise. We believe our intellectual property position is very strong. The difference between one AMBA(?) filer and a few is marginal.

Q – Lawrence Neibor, W. Baird & Co.

And finally, with the co-morbidity study that you’re doing in depression and generalized anxiety, how do you intend to detail those studies to those physician groups that write prescriptions for those indications?

A – William O’Shea

Our general stance is to put it into a peer review process, and when the publication is published, we’ll use that in terms of communicating the results of the trial. Obviously we’ll be putting that to both the Primary Care sales forces for the Primary Care doctors and the CNS force that goes on neurologist sites and all the target audiences.

Lawrence Neibor, W. Baird & Co.

Thank you very much.

Operator

Thank you. Your next question is from (Danny Franck of Sterber?)

Q - (Danny Franck, Sterber?)

A couple of questions. There’s a discrepancy on slide 24. It shows your total Rxs in Q1 were 1,610,000 versus Q4 of 1,526,000 – I was just wondering, because the actual IMS data would have suggested that Q4 and Q1 were flat, yet you actually got 7% in total Rxs. Can you explain the discrepancy there?

A – David Southwell

Just getting to the slides now. By my calculations, there was a 6% growth in volume between Q1 2006 and Q4 2005. What is the discrepancy that you’re pointing out?

Q - (Danny Franck, Sterber?)

The actual IMS data that we all see would have suggested it would have been flat, that there wasn’t any growth. Could you explain where your data, the actual performance that you’re saying is different from the IMS data?

A – David Southwell

We may need to take this offline, Danny, to compare data sources. We believe that this is as it states on the bottom there, from the IMS Monthly Data. This is IMS, that’s what we report.

Mark Corrigan(?)

This is IMS monthly data, there are often differences in IMS weekly data from the monthly data. The sum of weeks doesn’t necessarily equal the monthly data, and that may be part of the issue, but we’ll have to resolve it off line.

(Danny Franck, Sterber?)

OK.

A – David Southwell

Danny, we’ll go through the data, but essentially I report on IMS data.

Q - (Danny Franck, Sterber?)

OK. But in effect, you did grow from Q4 to Q1?

A – David Southwell

In volume, yes.

Q - (Danny Franck, Sterber?)

The second thing is, I’m picking up now, there are shortages of CFC. I called the University of Utah Center, and there appear to be, especially on the west coast, what appear to be what you could almost refer to as acute shortages of CFC inhalers. Could you describe what’s going on in the real world as far as the rest of the country regarding the shortage of CFC inhalers?

A - William O’Shea

We’re seeing that. We actually saw it from about mid-year of last year, and actually it was reported on by the FDA. They’re actually acting as the mediator, in terms of ensuring that appropriate MDIs are available. They actually do say that the shortages can only be met by HFAs. What we’re finding is across the country, there are spot outages. We’re also finding some larger customers stockpiling. Essentially, as I showed in my essential use allocation, although the usage of MDIs is actually flat – virtually flat, there is a growth of about 1%, the availability of CFCs allocation is down by almost 60%. What this means is you’re going to get shortages, and increasingly what we’re seeing is major customers that will be looking for the HFA to fill that gap, Danny. And that’s what we’re really seeing, and we’ve actually enjoyed in Q1 some benefits from that. And we will hopefully enjoy the benefits from that going forward.

Q - (Danny Franck, Sterber?)

When you say major customers, can you give me a hypothetical example of what a major customer would look like?

A - William O’Shea

Well, PBMs and government agencies – you know, the BAEs, the DODs, the other care market medical types of customer.

Q - (Danny Franck, Sterber?)

OK. I would assume that those customers – would they be willing to entertain an ‘all or nothing’ contract where they would sit down and say look, we will give you all of our volume if you give us some kind of – theoretically, I don’t think you would answer the question.

A - William O’Shea

The answer is obviously we would go for that, but what they – they’re shy customers as well, what they’ll do is try to make sure that they get their needs met and then depending on price and depending on availability, they’ll give more business to the customer.

Q - (Danny Franck, Sterber?)

OK. And in the real world, is the market going to break to four customers, or is it really the low-end generic guy, i.e. IVAX with their product at the low end and then a better – is (inaudible) at the higher theoretical price point? Because it really doesn’t seem other than the fact that there’s a shortage, that there’s much room for a middle-priced, branded generic. Is that fair, or not fair?

A - William O’Shea

It’s probably evolving, so it would be difficult for me to be exact there, but essentially you’ve got a higher price retail business and you’ve got a slightly, somewhat lower price contract business. And HFAs obviously in a band that are significantly priced more than the current generic.

Q - (Danny Franck, Sterber?)

OK. And how many sample casters did you put out in the sampling program?

A - William O’Shea

We put 40,000 samples actually in December, and we’ve put another 40,000 samples in January, which we see as very good investment, but someone, realistically, we’ll (inaudible) the initial uptake in the retail sector. But we do believe it’ll bear fruit in the future.

Q - (Danny Franck, Sterber?)

OK. And one final question – could you give us some idea of the focus groups that you run with doctors when you present the depression data? Especially the Primary Care doctors, and how that would feed into your marketing program, and what they’re telling you about the depression data now that you can market it?

A - William O’Shea

We do continuous focus groups in terms of looking at these data. As you can imagine, interestingly the psychiatrists who really tend to experiment with drugs more than Primary Care, the depression data that we did find was more impactful to the Primary Care doctors than the psychiatrists, which is good news considering actually the end of the market that could well be open to the introduction of the depression data is Trazodone. That’s really where the Primary Care push.

Q - (Danny Franck, Sterber?)

And the new sales force is fully up and trained now in the field, or is that still some time away? Where does that stand?

A - William O’Shea

The new sales force is recruited on (inaudible), we’re paying for them, they need to return that investment in terms of some sales, they’re trained and in fact they’ll be in the field on May 1st. And Mark will be speaking to them tomorrow.

A - Mark Corrigan

They’ll be trained – they’re being trained now. They’ll be in their territories on May 1st.

(Danny Franck, Sterber?)

Excellent. Thank you.

Operator

Thank you. Your next question is from Bill Tanner of Leerink Swann.

Q – William Tanner, Leerink Swann

Thanks for taking the question. Maybe one for you, Jim O’Shea, you mentioned about XOLPENEX, about IMS data suggesting that sales of the drug in the CMS were 12%, I think your company’s actually suggested it’s maybe more on the order of 20%. So just clarification there, and what is the sequence of events, assuming that reimbursement cuts do go through? Is there a middle ground in terms of a rate that the company would find to be acceptable, or do you just perhaps forego sales into that channel?

A – William O’Shea

That’s a great question. It’s very, very difficult to look at what are the actual sales in this channel. My quote is the one that I could actually stand on, which is really the IMS reported sales last year to Home Healthcare. There may well be some spill over outside that, but 12% was the actual reported IMS. It’s very difficult to outsize that. In terms of your second question, I think it’s a very intuitive question. In fact, the hub for resource here would be a halfway house, where CMS would actually get some cost savings and DMERCs some cost savings, that the (axe full access?) would still be retained for XOLPENEX, and this is called a WAP, this is a Widely Available Price, and in fact we have been, and have been in the past, willing to discuss this with CMS, and indeed made a proposition around that. As you know, we get reimbursed at around WAP minus a small percentage. The Home Healthcare obviously get reimbursed under the current situation at somewhat more than that. This arbitrage is really what we’ve actually pointed out to CMS and would be willing to actually cut the reimbursement for XOLPENEX. What this would mean would be that we could have XOPLENEX available, they would get some cost savings and indeed, more importantly, the patients would have access. That would be, I think, a very good resolution.

Q – William Tanner, Leerink Swann

OK, great. Then maybe a question for Jim Roach on the RESST data, just curious, what is the ultimate usage of that data in terms of – I’m guessing you might use it for publication? Is it something that could be appended to the label? Then just curious on the level of statistical significance versus AMBIEN in the data that you showed on one of the slides? And also, what would be the expectation, do you think, versus AMBIEN CR?

A - James Roach

Just as a general comment, we look forward to presenting the data at a scientific forum. We don’t have any plans to try and get this open label study into the label, but we think that the main utility will be to get it out into the (inaudible). We’ll be reporting more details as we present the data in a scientific forum.

A - Mark Corrigan

This is Mark – it’s hard to speculate too on what that would look like versus AMBIEN CR, I think it’s pretty dramatic results against the kind of ‘all other groups’ that are represented, and that may be the way to infer how LUNESTA is comparing.

William Tanner, Leerink Swann

OK thank you.

A – William O’Shea

We can take one more final question please?

Operator

Your final question is from Matt Duffy of Black Diamond Research.

Q - Matt Duffy, Black Diamond Research

Good morning, and thanks for taking the question. Just two quick things, on the RESST study, to follow on Bill’s question, were those patients specifically selected for being dissatisfied with their current insomnia treatment?

A – James Roach

No, they weren’t.

Q - Matt Duffy, Black Diamond Research

Then, David or Jim, if you could give us perhaps a little bit more color – I know you probably won’t want to be too specific, but on the expected efficiencies on SG&A spend toward the second half of the year. I wonder if you could give us a little bit of color on how you might be able to realize some of those efficiencies?

A - David Southwell

Well you know, we said we’re shifting the mix from a mix that is heavy on the marketing side to a mix that is heavy on the sales force, as we hired a new sales force. We see that mix changing. For competitive reasons you can understand that we don’t want to go into a heck of a lot of detail on the marketing side, but you know the sales force is what it is. As you know, we’re hiring an additional sales force which is coming online next month. But that’s obviously going to be a higher expense in the second half than it was in the first.

Matt Duffy, Black Diamond Research

Thank you very much.

Operator

Thank you. I will turn the floor back over to Timothy Barberich for any additional or closing remarks.

Timothy Barberich

Thank you for joining us this morning. We look forward to reporting our progress at our next earnings webcast. I’d like to mention that we will continue to display webcasts of our past four quarters on the Sepracor website and we will add today’s telecast to our archive. Thank you again.

Operator

Thank you. This does conclude today’s teleconference. Operator instructions.

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Source: Sepracor Inc. Q1 2006 Earnings Conference Call Transcript (SEPR)
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