Item 1. Business.
The Company
Sepracor Inc., incorporated in 1984, is a research-based pharmaceutical
company focused on the discovery, development and commercialization of
differentiated products that address large and growing markets and unmet medical
needs, and can be marketed to primary care physicians through our sales force.
Our proprietary compounds are either:
º •
º Single-isomer or active-metabolite forms of existing drugs, or
º •
º New chemical entity compounds that are unrelated to currently marketed
products.
Our drug research and development program has yielded an extensive portfolio
of drug candidates intended to treat a broad range of indications. We are
currently concentrating our product development efforts in two therapeutic
areas: respiratory and central nervous system disorders.
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In our isomer and metabolite development program, we identify existing drugs
that might, in single-isomer or active-metabolite forms, provide significant
advances over existing therapies within the indications of the parent compound
or in new indications. We then develop isomers or metabolites designed to offer
benefits over both the parent drugs and competitive compounds, such as reduced
side effects, improved therapeutic efficacy, effectiveness for new indications
or improved dosage forms.
Our development program for new chemical entities encompasses a more
traditional approach to drug development. In this program, we are seeking to
discover novel compounds unrelated to existing commercial compounds that have
the potential to provide benefits over existing treatments or provide new
therapies for diseases currently lacking effective treatment.
We currently manufacture and sell XOPENEX (levalbuterol HCl) Inhalation
Solution, a short-acting bronchodilator, for the treatment or prevention of
bronchospasm in patients with reversible obstructive airway disease, such as
asthma, which we commercially introduced in May 1999. Our revenues from sales of
XOPENEX have grown to $319.8 million in 2004 from $286.8 and $190.2 in 2003 and
2002, respectively. XOPENEX accounted for approximately 84%, 83% and 80% of our
total revenues in 2004, 2003 and 2002, respectively. We expect that XOPENEX will
account for a substantial portion of our revenue in 2005.
In December 2004, we received an approval letter from the United States Food
and Drug Administration, or FDA, for our New Drug Application, or NDA, for
LUNESTA™ brand eszopiclone, formerly referred to as ESTORRA, for the treatment
of insomnia. We expect to commercially launch LUNESTA before the end of the
first quarter of 2005. On February 14, 2005, the United States Drug Enforcement
Administration, or DEA, published a proposed rule under which LUNESTA would be
classified as a Schedule IV controlled substance under the Controlled Substances
Act. The proposed rule was published with a thirty-day period for public
comment, after which the rule will be made final by the DEA. Contingent upon an
expeditious completion of the rulemaking process, we expect that LUNESTA will
account for a significant portion of our revenue in 2005. Under our original
license agreement with Rhone-Poulenc Rorer SA (the predecessor to Aventis),
dated October 1999, for eszopiclone, we are obligated to pay a 5% royalty on
sales of LUNESTA in the U.S. and, as part of the July 2004 amendment to this
agreement, we permitted Aventis, now sanofi-aventis, to assign our royalty
obligation to a third party in exchange for the right to read and reference
Aventis' regulatory filings related to eszopiclone outside of the U.S. for the
purpose of development and regulatory registration of eszopiclone outside of the
U.S., and Aventis has assigned to us the foreign counterparts to the U.S. patent
covering eszopiclone and its therapeutic use.
On March 11, 2005, we received an approval letter from the FDA for our NDA
for XOPENEX HFA™ (levalbuterol tartrate) Inhalation Aerosol, a
hydrofluoroalkane, or HFA, metered-dose inhaler, or MDI, for the treatment or
prevention of bronchospasm in adults, adolescents and children 4 years of age
and older with reversible obstructive airway disease. MDIs are hand-held
pressurized canisters that deliver inhaled medications directly to the lungs. We
are working to resolve outstanding manufacturing issues and to complete process
validation work. Contingent upon successful resolution of these issues, we are
targeting commercial launch of the product around the end of 2005. Under our
supply agreement with Minnesota Mining and Manufacture Company, or 3M, and 3M
Innovative Properties Company, we are obligated to pay to 3M a combination of a
fixed price per unit of product purchased and a percentage royalty based on our
net sales of XOPENEX HFA MDI.
We have, from time to time, licensed our technology and patent rights to
third parties. These out-licensing agreements include Schering-Plough
Corporation for CLARINEX (desloratadine); sanofi-aventis, formerly Aventis, for
ALLEGRA (fexofenadine HCl); and UCB Pharma for XYZAL/XUSAL™ (levocetirizine). As
a result of these agreements, we earned royalties in 2004, 2003 and 2002 on
sales of CLARINEX, ALLEGRA and XYZAL/XUSAL. Royalty revenue was $52.2, $51.5
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and $48.5 million or approximately 14%, 15% and 20% of our revenue in 2004, 2003
and 2002, respectively.
Background on Science
Chiral Compounds
Approximately 500 currently available drugs are chiral compounds. Chiral
compounds frequently exist as mixtures of mirror-image molecules known as
isomers. When a chiral compound contains equal amounts of both isomers, it is a
racemic mixture, or a racemate. These two isomers are generally referred to as
(S)-isomers (left) and (R)-isomers (right). While isomers have identical
molecular weights and physical properties, they can show remarkable selectivity
within biological systems and therefore can have different biological actions.
In many cases, only one isomer of the racemic drug is responsible for the drug's
efficacy. The other may be an unnecessary component or may cause side effects.
Typically, in our product development process, we separate racemic mixtures
containing two isomers into compounds containing only one isomer.
Active Metabolites
Drugs administered to treat diseases are sometimes transformed, or
metabolized, within the body into a variety of related chemical forms known as
metabolites, some of which may have therapeutic activity. Metabolites that have
therapeutic activity are known as active metabolites. Active metabolites can
also be synthesized in the laboratory. During preclinical and clinical testing
of a parent drug, subjects are exposed to the active metabolite of the parent
drug. Therefore, a developer of an active metabolite may be able to rely upon
certain known clinical information from the parent drug in its NDA submission
for the active metabolite, including safety data. In some cases, this can
eliminate the need for certain clinical studies and expedite the development
process of an active metabolite drug.
In contrast to traditional new drug development, the safety and efficacy of
the racemates and parent drugs of our pharmaceuticals under development are
often well understood before clinical trials begin. Parent drugs have been
successfully taken through clinical studies and may have been on the market for
years. We evaluate isomers or active metabolites in a highly accelerated and
focused manner. Our directed research effort allows us to identify potential
advantages in our candidates such as improvements in potency, onset of action,
duration of activity, dosage, additional indications or meaningful reductions in
side effects or adverse reactions.
New Chemical Entities
We have recently expanded our efforts to look beyond single isomer and
active metabolites as sources of discovering new compounds. We are actively
pursuing novel new chemical entity research and licensing activities focusing
primarily on central nervous system, pain management and respiratory diseases.
Self-Marketed Products and Research and Development Pipeline
RESPIRATORY
Asthma
XOPENEX INHALATION SOLUTION. In May 1999, we commercially introduced
XOPENEX brand levalbuterol HCl Inhalation Solution, which we market under the
name XOPENEX, for the treatment or prevention of bronchospasm in patients with
reversible obstructive airway disease, such as asthma. We sell XOPENEX in the
United States through our sales force, which consists of
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approximately 1,250 sales professionals. We currently market XOPENEX for use in
a nebulizer at 0.31 milligrams, or mg, and 0.63 mg dosage strengths for
treatment of children six to 11 years old, and in dosage strengths of 0.63 mg
and 1.25 mg for patients 12 years of age and older. XOPENEX is the first
pharmaceutical product that we developed and commercialized.
XOPENEX HFA METERED-DOSE INHALER. On March 11, 2005, we received an
approval letter from the FDA for our NDA for XOPENEX HFA MDI for the treatment
or prevention of bronchospasm in adults, adolescents and children 4 years of age
and older with reversible obstructive airway disease. Reversible obstructive
airway disease includes respiratory disorders such as asthma and chronic
obstructive pulmonary disease, or COPD. MDIs are hand-held pressurized canisters
that deliver inhaled medications directly to the lungs. We are working to
resolve outstanding manufacturing issues and to complete process validation
work. Contingent upon successful resolution of these issues, we are targeting
commercial launch of the product around the end of 2005.
The MDI development program included approximately 1,870 pediatric and adult
subjects and 54 studies (preclinical and clinical). In 2003, we completed our
Phase III studies of XOPENEX HFA. In each of the three, large-scale, pivotal
Phase III trials that we conducted, the XOPENEX HFA MDI was well tolerated and
met the targeted efficacy endpoints in both adults and children with asthma. In
the primary airway function measure, FEV1 (a test of lung function that measures
the amount of air forcefully exhaled in one second), the XOPENEX HFA MDI
produced statistically and clinically significant improvements relative to
placebo (p<0.001).
In June 2004, the FDA issued a proposed rule for the removal of the
essential use exemption that currently permits the use of albuterol inhalers
that contain chlorofluorocarbon, or CFC, propellants despite environmental
concerns. Removal of this essential use exemption would prevent albuterol
products, including MDIs, containing CFC propellants from being marketed in the
United States. The XOPENEX MDI uses HFA technology and does not contain a CFC
propellant.
Chronic Obstructive Pulmonary Disease (COPD)
ARFORMOTEROL. We have completed more than 100 preclinical studies and have
initiated or completed 16 clinical studies for arformoterol inhalation solution,
a long-acting, beta-agonist bronchodilator for the treatment of bronchospasm in
patients with COPD. We completed two Phase III studies of arformoterol and
recently completed a chronic safety study. We are currently in the process of
preparing the NDA for submission to the FDA. In our Phase III studies, patients
treated with arformoterol demonstrated a significant improvement in FEV1 after
dosing with a duration of action of up to 24 hours. Currently marketed
long-acting beta-agonists require twice-a-day dosing and are not currently
available in an inhalation solution. We have completed a pre-NDA meeting with
the FDA and anticipate submitting our NDA to the FDA in the second half of 2005.
If successfully developed and approved, we intend to market arformoterol through
our sales force.
CENTRAL NERVOUS SYSTEM (CNS)
Insomnia
LUNESTA. In December 2004, we received an approval letter from the FDA for
our NDA for LUNESTA brand eszopiclone, formerly referred to as ESTORRA, 1 mg, 2
mg and 3 mg tablets for the treatment of insomnia. The recommended dosing to
improve sleep onset and/or maintenance is 2 mg or 3 mg for adult patients (ages
18 to 64). In older adult patients (ages 65 and older), 2 mg is recommended for
improvement in sleep onset and/or maintenance while the 1 mg dose is recommended
for sleep onset in older adult patients whose primary complaint is difficulty
falling asleep. On February 14, 2005, the DEA published a proposed rule under
which LUNESTA would be classified as a Schedule IV controlled substance under
the Controlled Substances Act. The proposed rule was published with a thirty-day
period for public comment, after which the DEA will evaluate any
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comments and finalize the rule. Contingent upon an expeditious completion of the
rulemaking process, we expect to commercially launch LUNESTA before the end of
the first quarter of 2005. We will sell LUNESTA in the United States through our
sales force, which we expanded to approximately 1,250 professionals in
anticipation of the commercial launch of LUNESTA. During 2005, we intend to
devote significant resources to Phase IIIB/IV studies related to LUNESTA.
Restless Legs Syndrome
SEP-226330. SEP-226330 is a norepinephrine and dopamine reuptake inhibitor.
In 2001, we submitted an Investigational New Drug application, or IND, to the
FDA, and in 2002, we completed a Phase I clinical study of SEP-226330. In the
fourth quarter of 2004, we initiated a Phase II proof-of-concept study in
support of SEP-226330 for the treatment of restless legs syndrome, which is a
movement disorder that is reported to afflict approximately 16 percent of the
U.S. adult population. Subject to additional clinical studies, we believe that
this compound may have advantages over currently used dopamine agonists in the
treatment of restless legs syndrome. We are also conducting preclinical
evaluations of this compound as a potential novel mechanistic approach for the
treatment of Parkinson's disease.
Depression
SEP-225289. SEP-225289 is a norepinephrine, dopamine and serotonin reuptake
blocker, for the treatment of depression, for which we are targeting submission
of an IND during 2005.
Anxiety
SEP-174559. We are seeking to develop SEP-174559 for the treatment of
muscle spasms and spasticity. SEP-174559 is a GABA-A agonist with a selectivity
profile that favors the a2 subunit of the gamma-aminobutyric acid, or GABA,
receptor. The term "GABA-A" refers to a specific neurotransmitter receptor in
the central nervous system. In 2001, we submitted an IND to the FDA, and in
2002, we completed a Phase I clinical study for SEP-174559. During 2005, we
expect to complete additional preclinical trials. Pending the outcome of these
preclinical trials, we will determine if we will proceed with Phase II
proof-of-concept studies of SEP-174559 for the treatment of anxiety, muscle
spasms and spasticity.
With the development of LUNESTA, SEP-226330, SEP-225289 and SEP-174559, we
are seeking to establish a strong portfolio of candidates for the treatment of
CNS disorders.
Cardiovascular-Hypertension
(S)-Amlodipine We are investigating (S)-amlodipine as a potential treatment
for hypertension and have conducted both Phase I and Phase II clinical studies.
Amlodipine, marketed by Pfizer Inc. as NORVASC, is the leading calcium channel
antagonist approved for use for the treatment of hypertension and angina. The
evolving paradigms for hypertension treatment are focusing on the use of
multiple mechanistic approaches as initial therapy, such as the use of calcium
channel blockers, known as CCBs, with angiotensin converting enzyme, known as
ACE inhibitors or angiotensin II receptor blockers, known as ARBs. During 2005,
we expect to continue our clinical evaluation of (S)-amlodipine.
Other Product Candidates
We are also conducting preclinical and clinical studies on a number of other
compounds. All of our drug candidates will require significant additional
research, development, successful preclinical and/or clinical testing,
regulatory approval and a commitment of significant additional resources prior
to their commercialization.
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We have elected not to fund certain development candidates at this time,
including SEP-226332, a potential sleep apnea candidate, as we devote our
resources to other compounds in the product pipeline.
Partnered Products
Sanofi-aventis for Fexofenadine HCl. In July 1993, we licensed to Hoechst
Marion Roussel, Inc., now sanofi-aventis (formerly Aventis), our U.S. patent
rights covering fexofenadine HCl. In October 1996, Aventis commercially
introduced ALLEGRA, which is fexofenadine hydrochloride. In 1999, under an
amendment to our agreement with Aventis, we assigned to Aventis our U.S. patent
relating to fexofenadine and licensed to Aventis certain United States patent
applications relating to fexofenadine. Under the terms of a separate agreement,
Aventis obtained an exclusive license to our fexofenadine patents that had been
the subject of litigation in Europe, and various other patent oppositions
between the two companies outside the United States. Since March 1, 1999, we
have been entitled to receive royalties on fexofenadine product sales in
countries where we have patents related to fexofenadine. We have been entitled
to receive royalties on any fexofenadine sales in the United States since
February 2001. We are currently receiving royalties from sanofi-aventis for
sales of ALLEGRA in the United States, Japan, Canada and Australia and in
certain European Union, or EU, member states.
Schering-Plough Corporation for Desloratadine. In December 1997, we
licensed to Schering-Plough Corporation, or Schering, exclusive worldwide rights
to our patents and patent applications relating to desloratadine, an
active-metabolite of loratadine, which is marketed by Schering as CLARITIN. In
December 2001, Schering announced that CLARINEX brand desloratadine 5 mg tablets
had received marketing clearance from the FDA for the treatment of seasonal
allergic rhinitis, or SAR, in adults and children 12 years of age and older. In
January 2002, Schering commercially launched CLARINEX 5 mg tablets for the
treatment of SAR in adults and children 12 years of age and older. In
February 2002, Schering received FDA approval to market CLARINEX tablets for the
treatment of chronic idiopathic urticaria, or CIU, which is hives of an unknown
cause, in adults and children 12 years of age and older. Under the terms of our
license agreement with Schering, we are currently receiving royalties on sales
of CLARINEX in countries in which we hold patents.
UCB Pharma for Levocetirizine. In June 1999, we licensed to UCB Farchim SA,
now UCB Pharma, or UCB, all of our issued patents and patent applications
covering levocetirizine, a single isomer of UCB's antihistamine, ZYRTEC, to
develop, market and sell levocetirizine as a nonsedating antihistamine,
worldwide, except in the United States and Japan. Under the agreement, we
receive royalties from UCB on sales of levocetirizine in EU member states in
which the product has been launched and where we hold patents relating to
levocetirizine. Levocetirizine is marketed as XUSAL™ in Germany and as XYZAL in
other EU member states. XYZAL/XUSAL is indicated for the treatment of seasonal
and perennial allergic rhinitis in adults and children aged 6 years and older.
XYZAL is also indicated for persistent allergic rhinitis, which is characterized
as allergic symptoms that are present for at least four days per week, and last
at least four consecutive weeks. Under the agreement, we are currently receiving
royalties on sales of all formulations of levocetirizine in countries where we
have issued patents, and royalties will escalate upon achievement of sales
volume milestones.
Drug Discovery
We are continuing our research in discovering novel compounds in the areas
of pain management and treatments for CNS disorders. In this program, we are
seeking to discover novel compounds unrelated to existing commercial compounds,
which we believe may have the potential to provide benefits over existing
treatments or address unmet medical needs.
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Partnered Research
ACADIA Pharmaceuticals. In January 2005, we entered into a license, option
and collaboration agreement, or collaboration agreement, with ACADIA
Pharmaceuticals Inc., or ACADIA, for the development of new drug candidates
targeted towards the treatment of central nervous system disorders. The
collaboration has been established to investigate potential clinical candidates
resulting from using ACADIA's medicinal chemistry and discovery platform against
a broad array of selective muscarinic receptors, which are receptors that
respond to acetylcholine, a neurotransmitter in the central nervous system. The
collaboration includes ACADIA's m1 agonist program, which is designed to target
neuropsychiatric/neurologic conditions and neuropathic pain. The agreement also
encompasses an option to select a preclinical program from ACADIA's 5-HT2A
program for use in combination with LUNESTA. 5-HT2A antagonists have been shown
in clinical studies to affect sleep architecture in humans. Under the
collaboration agreement, the parties have agreed to collaborate with each other
to research and develop certain compounds that interact with these muscarinic
receptors. These compounds may be developed and commercialized in any field
outside of the prevention or treatment of ocular disease. We will have exclusive
worldwide rights to develop and commercialize compounds developed under our
collaboration with ACADIA.
In connection with the collaboration we have purchased shares of ACADIA
common stock and have agreed to purchase additional shares, subject to customary
closing conditions. During the three-year research term of the collaboration
agreement, we will provide ACADIA with research funding. In addition, we have
agreed to make milestone payments to ACADIA upon the achievement by ACADIA of
specified development and regulatory milestones for each product developed under
the collaboration, including any product to be used in combination with LUNESTA
that is developed under the collaboration. We have also agreed to pay royalties
to ACADIA on net worldwide sales on products developed under the collaboration.
Research and Development
Our research and development activities are primarily directed toward
discovering and developing potentially improved versions of widely-prescribed
drugs as well as initiating novel target discovery through collaborations.
Our total research and development expenses were $159,974,000, $220,224,000
and $243,797,000 for 2004, 2003 and 2002, respectively. We have included in the
2003 expenses $18,814,000 relating to the write-off of patents and intangible
assets relating to tecastemizole. We discontinued development of tecastemizole
in December 2003.
Our spending during the past three years has centered on advancing our drug
candidates through clinical trials, and we expend the majority of funds on
programs closest to NDA submission. Over the three-year period ended
December 31, 2004, our principal research and development programs were (1) the
development of LUNESTA, formerly referred to as ESTORRA, (s)-zopiclone and
eszopiclone, for which we received an approval letter from the FDA in
December 2004, and which, contingent upon final rulemaking by the DEA, we expect
to commercially launch before the end of the first quarter of 2005; (2) the
development of XOPENEX HFA MDI, for which we received an approval letter from
the FDA for our NDA that we submitted in May 2004; (3) the development of
arformoterol, for which we expect to submit an NDA to the FDA in the second half
of 2005; (4) additional studies of levalbuterol HCl inhalation solution, or
XOPENEX; and (5) the development of tecastemizole, for which we received a "not
approvable" letter from the FDA for our NDA in March 2002, and the development
of (S)-oxybutynin, which we elected to no longer fund in 2004.
In 2005, we expect research and development expenditures to increase from
2004 and that our principal research and development activities will be
(1) Phase IIIB/IV studies for LUNESTA; (2) Phase IIIB studies for arformoterol;
and (3) drug discovery. We expect to submit one NDA in 2005.
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Marketing and Sales
We market and sell our products through our sales force and we out-license
our intellectual property rights in exchange for royalties. We believe that in
certain situations, partnering arrangements allow us to use the partner's
development and marketing expertise to market our drug candidates more quickly.
We currently have partnering agreements with Schering, sanofi-aventis and UCB.
In each of these partnering arrangements, we are dependent upon the efforts,
including marketing and sales efforts, of our partners, and these efforts may
not be successful.
We have established a sales force to market XOPENEX, our short-acting
bronchodilator, LUNESTA brand eszopiclone, for the treatment of insomnia, and
XOPENEX HFA MDI, for the treatment or prevention of bronchospasm in adults,
adolescents and children 4 years of age and older with reversible obstructive
airway disease. As of December 31, 2004, we had approximately 1,250
representatives in our field sales force. We currently sell XOPENEX and, upon
commercialization, will sell LUNESTA and XOPENEX HFA MDI in the United States
and our sales force markets the drugs to primary care physicians, psychiatrists,
pediatricians, pulmonologists, allergists, sleep specialists and hospitals in
all 50 states.
XOPENEX is, and Lunesta and Xopenex HFA MDI will also be, primarily sold
directly to pharmaceutical wholesalers and retail pharmacy chains. In the
pharmaceutical industry, there are a limited number of major wholesalers and
retail chains resulting from significant consolidation among companies in the
industry. Therefore, as is typical in the industry, a few customers provide a
significant portion of our overall revenue. Also, our terms of sale typically
allow for the return of unused product up to one year after product expiration.
Product sales of XOPENEX to AmerisourceBergen Corp., McKesson Corp. and
Cardinal Health Inc. provided approximately 24%, 23% and 15%, respectively, of
our revenue in 2004. No other customer accounted for more than 10% of our
revenue in 2004.
We currently warehouse and ship all XOPENEX products and, upon commercial
launch, we will warehouse and ship all LUNESTA products through Cardinal SPS, a
division of Cardinal Health, Inc., based near Nashville, Tennessee. Our
expectation is to continue to distribute all of our products through third-party
vendors.
In 2005, we expect sales and marketing expenses to increase significantly as
we:
º •
º increase our sales commission and distribution costs as sales of our
products increase;
º •
º undertake marketing programs for commercial launch of LUNESTA,
including significant spending on physician and direct-to-consumer
advertising; and
º •
º incur costs of our sales force of approximately 1,250 representatives
for the entire year.
Manufacturing
We prepare our drug compounds for research purposes primarily at our
laboratories in Marlborough, Massachusetts. We also own and operate a current
Good Manufacturing Processes, or GMP-compliant, 39,000 square foot fine chemical
manufacturing facility in Windsor, Nova Scotia, which we believe has sufficient
capacity to support the production of our product candidates in quantities
required for our clinical trials. If we successfully develop and receive
regulatory approval for additional product candidates, we will need to either
manufacture the drugs ourselves or rely on third parties for manufacturing.
While we believe that we have the capability to scale up our manufacturing
process to support the production in commercial quantities of certain of the
drugs that we intend to market and sell directly, we must contract out to
third-party manufacturers the production of a substantial portion of those
drugs. Cardinal Health-Sterile Technologies, a division of Cardinal
Health, Inc., based near Chicago, Illinois, is currently the sole finished goods
manufacturer of XOPENEX, and Sepracor
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Canada Ltd. is the sole manufacturer of XOPENEX's active pharmaceutical
ingredient, or API. Patheon, Inc. will be the sole finished goods manufacturer
of LUNESTA brand eszopiclone, Sepracor Canada Ltd. and Dow Chemical will
manufacture LUNESTA's API and 3M Company will be the sole manufacturer and
supplier of XOPENEX HFA MDI.
We have established a quality assurance/quality control program to ensure
that our products and product candidates are manufactured in accordance with
applicable regulations. We require that our contract manufacturers adhere to
current GMP. The facilities of our contract manufacturers must pass regular
post-approval FDA inspections. The FDA or other regulatory agencies must approve
the processes or the facilities that may be used for the manufacture of any of
our potential products.
Competition
General
Competition in our industry is intense and includes many large and small
competitors. The principal means of competition varies from product to product
and from time to time. Efficacy, safety, patient's ease of use and cost
effectiveness are important factors for success.
If competitors introduce new products or develop new processes or new
information about existing products, then our products, even those protected by
patents, may be replaced in the market place or we may be required to lower our
prices.
Product Specific
In the asthma market, XOPENEX and XOPENEX HFA MDI face competition from
generic albuterol. Albuterol has existed for many years, is well established and
sells at prices substantially less than XOPENEX and at prices that will be less
than our anticipated pricing of XOPENEX HFA MDI. To continue to be successful in
the marketing of XOPENEX and to successfully market XOPENEX HFA MDI, we must
continue to demonstrate that the efficacy and safety features of the drug
outweigh its higher price.
In the sleep disorder market, LUNESTA faces intense competition from
established products such as AMBIEN and SONATA. There are also other potentially
competitive therapies in late-stage clinical development for the treatment of
insomnia.
In the antihistamine market, intense competition among established products
such as CLARINEX, ALLEGRA and ZYRTEC exists. These products are established and
currently each has a significant share of the current prescription antihistamine
market. This competition has a direct impact on our ability to earn royalties in
this market. Additionally, CLARITIN is now sold without a prescription and there
is uncertainty relating to possible changes in the market with much discussion
about other allergy products possibly being sold without a prescription.
Finally, there is a possibility that generic drug companies may succeed in their
patent challenges of drugs with large market share. This could result in the
introduction of generic equivalents, which may increase price competition among
antihistamines and lower market share for the branded drugs.
Government Regulation
Government Approval Process
We, our collaboration partners and our customers are required to obtain the
approval of the FDA and similar health authorities in foreign countries to test
clinically and sell commercially pharmaceuticals and biopharmaceuticals for
human use.
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Human therapeutics are generally subject to rigorous preclinical and
clinical testing. The standard process required by the FDA before a drug may be
marketed in the United States includes:
º •
º preclinical laboratory tests and animal studies of toxicity and,
often, carcinogenicity;
º •
º submission to the FDA of an IND application, which must be accepted
before human clinical trials may commence;
º •
º adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication;
º •
º submission to the FDA of an NDA; and
º •
º FDA approval of the NDA prior to any commercial sale or shipment of
the drug.
We sometimes attempt to shorten the regulatory approval process of our drug
candidates by relying on preclinical and clinical toxicology data with respect
to the parent drug.
Typically, clinical evaluation involves a three-phase process. In Phase I,
the initial introduction of the drug to humans, the drug is tested for safety,
or adverse effects, dosage tolerance, absorption, distribution, metabolism and
excretion. Phase II involves studies in a limited patient population to:
º •
º determine the efficacy of the drug for specific targeted indications;
º •
º determine dosage tolerance and optimal dosage; and
º •
º identify possible adverse effects and safety risks.
When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
further clinical efficacy and to test further for safety within an expanded
patient population at geographically dispersed clinical study sites. The process
of completing clinical testing, obtaining FDA regulatory approval and commencing
commercial marketing is likely to take a number of years. We may not
successfully complete Phase I, Phase II or Phase III testing within any
specified time period, if at all, with respect to any of our products subject to
this testing. Even if we successfully complete clinical testing and the FDA
accepts an NDA for filing, the FDA may determine not to approve an NDA.
Furthermore, the FDA may not accept our evidence that a particular product meets
our claims of superiority.
Other Regulations Relating to the Sale of Pharmaceuticals
FDA regulations pertain not only to healthcare products, but also to the
processes and production facilities used to produce such products. Although we
have designed the required areas of our facilities in the United States and
Canada to conform to current GMP, the FDA will not review the facilities for
compliance until we produce a product for which we are seeking marketing
approval. Environmental legislation provides for restrictions and prohibitions
on releases or emissions of various substances produced in, and waste
by-products from, our operations.
The FDA also imposes requirements relating to the marketing of drug products
after approval, including requirements relating to the advertising and promotion
of drug products to healthcare professionals and consumers and the reporting to
the FDA of adverse drug experiences known to companies holding approved
applications. Our failure to adhere to these requirements could lead to
regulatory action by the FDA. Information reported to the FDA in compliance with
these requirements could cause the FDA to withdraw drug approval or to require
modification of labeling, for example to add warnings or contraindications. The
FDA has the statutory authority to seek judicial remedies and sanctions and to
take administrative corrective action for violation of these and other FDA
requirements and standards.
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We are also subject to various federal and state laws pertaining to health
care fraud, including anti-kickback laws and false claims laws. Anti-kickback
laws make it illegal for a prescription drug manufacturer to solicit, offer,
receive, or pay any remuneration in exchange for, or to induce, the utilization
of products or services reimbursed by a Federal healthcare program, including
the purchase or prescribing of a particular drug. False claims laws prohibit
anyone from knowingly and willingly presenting, or causing to be presented for
payment to third-party payors, including Medicare and Medicaid, claims for
reimbursed drugs or services that are false or fraudulent, claims for items or
services not provided as claimed, or claims for medically unnecessary items or
services. Penalties for violations of health care fraud laws can include
disgorgement of profits, fines and exclusion from Federal health care programs
such as Medicare.
The cost of pharmaceutical products is continually being investigated and
reviewed by various government agencies, legislative bodies and private
organizations in the United States and throughout the world. In the United
States, most states have enacted generic legislation permitting, or even
requiring, a dispensing pharmacist to substitute a different manufacturer's
generic version of a pharmaceutical product for the one prescribed.
Reimbursement
In addition, in the United States and elsewhere, sales of therapeutic and
other pharmaceutical products are dependent in part on the availability of
reimbursement to the consumer from third-party payors, such as government and
private insurance plans. Third-party payors are increasingly challenging the
prices charged for medical products and services. We cannot assure you that any
of our products will be considered cost effective and that reimbursement to the
consumer will be available or will be sufficient to allow us to sell our
products on a competitive and profitable basis.
We are a participant in the Medicaid rebate program established by the
Omnibus Budget Reconciliation Act of 1990, and under amendments of that law that
became effective in 1993. Under the Medicaid rebate program, we pay a rebate to
each participating state agency for each unit of our product reimbursed by
Medicaid. The amount of the rebate for each product is set by law as a minimum
15.1% of the average manufacturer price, or AMP, of that product, or if it is
greater, the difference between AMP and the best price available from us to any
customer. The rebate amount also includes an inflation adjustment if AMP
increases faster than inflation. The rebate amount is recomputed each quarter
based on our reports of our current AMP and best price for each of our products
to the Centers for Medicare and Medicaid Services. Federal and state government
agencies continue to advance efforts to reduce costs of Medicare and Medicaid
programs, including supplemental rebates and restrictions on the amounts that
agencies will reimburse for the use of products. Participation in the Medicaid
rebate program includes requirements such as extending discounts comparable to
the Medicaid rebate under the Public Health Service, or PHS, pharmaceutical
pricing program to a variety of community health clinics and other entities that
receive health services grants from the PHS, as well as hospitals that serve a
disproportionate share of poor Medicare and Medicaid beneficiaries.
We also are required to pay certain statutorily defined rebates on Medicaid
purchases for reimbursement on prescription drugs under state Medicaid plans.
Since 1993, as a result of the Veterans Health Care Act of 1992, or VHC Act,
federal law has required that product prices for purchases by the Veterans
Administration, the Department of Defense, Coast Guard, and the PHS, including
the Indian Health Service, be discounted by a minimum of 24% off the AMP to
non-federal customers, which is referred to as the non-federal average
manufacturer price, or non-FAMP.
We are also required by governmental regulatory agencies to pay substantial
fees relating to the approval, manufacture and sale of proprietary prescription
drugs.
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Availability and Delivery of Pharmaceutical Products
We expect debate to continue during 2005 at the federal and state levels
over the availability and delivery and payment for pharmaceutical products. We
believe that if certain legislation is enacted, it could have the effect of
reducing prices or limiting price increases of pharmaceutical products.
At this time it is not possible to predict the extent to which we, or the
pharmaceutical industry in general, might be affected by the issues discussed
above.
Our research and development activities involve the controlled use of
hazardous materials, chemicals, biological materials, and various radioactive
compounds. We believe that our procedures comply with the standards prescribed
by state and federal regulations; however, the risk of injury or accidental
contamination cannot be completely eliminated.
Patents and Proprietary Technology
We and our affiliates and subsidiaries have filed patent applications in the
United States and selected other countries relating to compositions of,
formulations of, methods of making, and methods of using our drugs and drug
candidates, and chiral synthesis and separations. In addition, we have licensed
from third parties certain rights under various patents and patent applications.
To the extent that we invent or discover a new, useful and non-obvious
invention and file a United States patent application for such invention, a
composition or method-of-use patent may be issued. We are currently pursuing a
policy of aggressively seeking patent protection for our drug candidates and
discovery programs.
Many of the compounds that we are investigating or developing may be subject
to patents held by third parties. There may be foreign equivalents to these
third-party patents, the scope and expiration of which may vary from country to
country. Even if we are issued a patent for the use of a single isomer or active
metabolite that is currently claimed by one or more third-party patents,
products based on any such patent issued to us may not be sold until all of such
third-party patents expire unless a license is obtained to such third-party
patents or such third-party patents are determined to be invalid, unenforceable,
or not infringed by a court of proper jurisdiction. In addition, there may be
pending additional third-party patent applications covering our drugs in
development, which, if issued, may preclude the sale of our drug.
We have five issued United States patents covering the approved therapeutic
use of XOPENEX, expiring between January 2010 and August 2012. We have one other
issued United States patent covering the marketed formulation of XOPENEX,
expiring in March 2021. Each of these patents is listed in the FDA's publication
entitled "Approved Drug Products with Therapeutic Equivalence Evaluations",
commonly referred to as the "Orange Book". Should a generic drug company submit
an abbreviated new drug application, or ANDA, to the FDA seeking approval of a
generic version of XOPENEX, we would expect to enforce these patents against the
generic drug company. However, the resulting patent litigation would involve
complex legal and factual questions, and we may not be able to exclude a generic
company, for the full term of our patents, from marketing a generic version of
XOPENEX.
We have two issued United States patents covering the therapeutic use of
LUNESTA and another issued United States patent covering the compound
eszopiclone and pharmaceutical formulations containing eszopiclone. The natural
terms of the compound/formulation patent and one of the use patents expire in
January 2012 while the natural term of the other use patent expires in
August 2012. However, under the Drug Price Competition and Patent Term Extension
Act of 1984, known as the Hatch-Waxman Act, due to approval of our NDA for
eszopiclone, the compound/formulation patent, at our selection, will be eligible
for a patent term extension. We cannot predict the length of the patent term
extension at this time.
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We have a significant number of other United States patents and patent
applications covering composition of, methods of making and methods of using our
product candidates. We may not be issued patents based on patent applications
already filed or that we file in the future and if patents are issued they may
be insufficient in scope. Patents and/or patent applications covering our
product candidates would become increasingly material to our business if and
when we seek to commercialize these candidates. Our ability to commercialize any
drug successfully will largely depend on our ability to obtain and maintain
patents of sufficient scope to prevent third parties from developing and
commercializing similar or competitive products.
Related Party
BioSphere Medical, Inc.
In 1994, we established and independently financed BioSepra Inc. as a
subsidiary through an initial public offering of its common stock. From 1994 to
1999, the company operated as BioSepra Inc., developing proprietary microsphere
beads used as chromatography media in the production of pharmaceuticals.
In February 1999, BioSepra determined that it would refocus on
embolotherapy, which is the occlusion of the blood supply to fibroids and
vascular defects. BioSepra acquired a 51% interest in French-based BioSphere
Medical, S.A., referred to as BioSphere France, with an option to purchase the
remaining 49% interest in BioSphere France, and changed its corporate name to
BioSphere Medical, Inc., or BioSphere. The acquisition enabled BioSphere to gain
ownership of technology know-how and European regulatory approval of Embosphere
Microspheres. Between February 1999 and October 2001, BioSphere acquired the
remaining 49% interest in BioSphere France.
In November 2004, we purchased, in a private placement, 4,000 shares of
BioSphere Series A Convertible Preferred Stock and warrants to purchase 200,000
shares of BioSphere common stock from BioSphere for an aggregate purchase price
of $4,000,000.
At December 31, 2004, we owned 3,224,333 shares, or approximately 23%, of
BioSphere's outstanding common stock, 4,000 shares of Series A Convertible
Preferred Stock and warrants to purchase an additional 200,000 shares of common
stock. Assuming conversion of the shares of Series A Convertible Preferred Stock
of BioSphere and the exercise of our warrants, we would own approximately 27% of
the outstanding common stock of BioSphere. We account for our investment in
BioSphere under the equity method.
Employees
On March 1, 2005, we and our wholly-owned subsidiaries employed 1,782
persons. Of these 1,782 employees, 228 were primarily engaged in research,
development and engineering activities, 30 were primarily engaged in
manufacturing, 1,271 were engaged in direct sales and 253 were primarily engaged
in marketing, sales administration, finance and accounting and corporate
administration.
Investor Information
We maintain a web site with the address www.sepracor.com. We are not
including the information contained on our web site as part of, or incorporating
by reference into, this annual report. We make available free of charge on or
through our web site our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. In addition, we intend to
disclose on our web site any amendments to, or waivers from, our code of
business conduct and ethics that are required to be disclosed pursuant to rules
of the Securities and Exchange Commission.
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We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
materials that we have filed with the Securities and Exchange Commission at the
Securities and Exchange Commission public reference room located at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference room.
Our Securities and Exchange Commission filings are also available to the
public on the Securities and Exchange Commission's Internet website at
http://www.sec.gov.
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