Washington Editor

Sepracor Inc. had good and bad news for shareholders this week.

In what the Marlborough, Mass.-based firm viewed as positive news, it acquired the U.S. development, marketing and commercialization rights to Nycomed's ciclesonide-based products in a deal worth at least $430 million.

On the negative side, Sepracor said it likely will need to restate financial statements going back as far as 2002 after finding errors in its Medicaid price reporting, which could result in the firm paying $80 million to $100 million to the Centers for Medicare & Medicaid Services.

The mistakes involved the exclusion of transactions for the Pennsylvania General Assistance Program in the company's calculation of the so-called best price under the Medicaid drug rebate program. The firm also may have provided prices to its customers that are reserved for Public Health Service entities.

Under the acquisition deal, Sepracor will pay Zurich, Switzerland-based Nycomed an up-front payment of $150 million and subsequent payments of up to $280 million if certain development and sales milestones are met.

Nycomed also is eligible to receive compensation for providing finished products and royalties of an undisclosed amount on sales of ciclesonide-based products.

Ciclesonide, a corticosteroid, is the active ingredient in Nycomed's Alvesco HFA (hydrofluoroalkane), an inhalation aerosol in a metered-dose inhaler used to treat asthma, and Omnaris AQ, a nasal spray used to treat symptoms associated with seasonal allergic rhinitis.

Nycomed has retained all rights to ciclesonide outside the U.S. and has partnered the product with Japan-based Teijin Pharmaceuticals.

Under the deal, Sepracor also gained the development rights to several ciclesonide line extensions.

Those programs include Omnaris HFA in a meter-dose inhaler, which currently is in Phase II development, and an inhalation solution of Alvesco, which is in preclinical development.

Also included is an early clinical program for Alvesco in combination with a long-acting beta-agonist.

Nycomed has retained the rights outside the U.S. to certain line extensions and additional products developed by Sepracor under the agreement.

Sepracor said it plans to launch Alvesco HFA and Omnaris AQ, both approved by the FDA, in the U.S. this year.

While both products are expected to help improve the firm's operating margins over the medium term, both face stiff competition, noted biotech analyst Biren Amin, of Houston-based Stanford Group Co.

Competitors to Omnaris, he noted in an analyst report, include GlaxoSmithKline plc's Flonase (fluticasone propionate) - a product that also is sold generically by Apotex Inc., Hi Tech Pharmacal and Roxane Laboratories - Sanofi-Aventis Group's Nasacort (triamcinolone acetonide) and AstraZeneca plc's Rhinocort (budesonide).

Alvesco, Amin said, "will find itself up against a formidable competitor" in GSK's Flovent (fluticasone propionate), which has been marketed for over a decade to treat asthma and generated revenues of $551 million in 2006. AstraZeneca also markets another Alvesco rival, Pulmicort (budesonide), he noted.

While Alvesco is approved for ages 12 years or older - the drug failed to establish efficacy in patients ages 4 to 11 years in a randomized, double-blind, placebo-controlled study - Flovent is approved to treat asthma in patients 4 years or older, and Pulmicort can be used in children as young as 6 months, Amin said.

Efforts by Sepracor's sales force to position Omnaris and Alvesco could cannibalize market share from the firm's other pulmonary agents, he warned.

The firm markets Xopenex (levalbuterol HCl), a short-acting bronchodilator indicated for the treatment or prevention of bronchospasm in patients 6 years or older with reversible obstructive airway disease, such as asthma, and Brovana (arformoterol tartrate), a long-acting beta-2-agonist used as a long-term, twice-daily maintenance treatment of bronchoconstriction in patients with chronic obstructive pulmonary disease, including chronic bronchitis and emphysema.

"If we read the tea leaves of this deal, it suggests that while management is aggressively hunting for deals, this one simply does not make sense considering the competitive market and the heavy commercial investment needed to build a successful brand," Amin asserted.

He said he maintained a hold rating on Sepracor based on the uncertainty around revenue growth across the firm's major brands, which also includes the sleeping aid Lunesta (eszopiclone), in addition to a thin late-stage pipeline.

Shares of Sepracor (NASDAQ:SEPR) were up 82 cents, to close at $29.55.