Daniel Nathel

Pfizer, J&J Would Be Front Runners in a Sepracor Buyout

Sepracor (SEPR), known for its popular sleep aid drug Lunesta, took a dive in value of more than 20% over the last month. It has been bad news for them all year, now trading at less than 50% of their high. Most of the focus is on bad management issues: over paying for a new drug, miscalculating Medicare rebates, not getting enough market share of insomniacs. But I don't think they are all that bad. I looked into their management a little bit and they seem like they are a good combination of guys creating a pipeline drug business that is going to be around for a long time.

To start the drug that they "supposedly" over payed for was part of a move to hedge out into different therapeutic areas of the pharmaceutical industry, which I think is a great move. SEPR is no 11 figure Glaxosmithkline (GSK) or Merck & Co. Inc (MRK), but its also not a monotone bio-pharma like Bio-Marin Pharmaceutical Inc. (BMRN) trading at 77 times earnings. Sepracor has approved drugs for allergies, asthma and insomnia, they are in phase 3 with an epilepsy med and have a bunch more in the pipeline.

The numbers look decent too. The market cap right now is just over $2.5, bil, but it does half of that in revenue. It trades like the big barons (PFE, LLY, SNY, MRK, GSK) in terms of P:E but still offers huge growth prospects; being that it is valued at a percent or two of those companies and the introduction of one of SEPR's drugs could tsunami their balance sheet.

Analysts don't expect Serpacor to earn as much money as management does, but when they announced that the stock plummeted. They also supplemented their contradiction with a downgrade and I think that is why it is already a value. Institutions have their entire fist in this company, but there is still over 2 million shares trading daily. If management can follow through at the end of the week I would expect the news to travel.

The reported mess that could exist at Serpacor is a huge short term risk. I read an expectation as low as $20 for a share. If it gets down that low before Friday it would seem to be a good buy because bad news would just provide evidence for that price and would probably not send it any lower. But, if the mess is not as bad as everyone expects, this stock has good upside potential.

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Disclosure: I may buy this stock in the near future.