111 Locke Dr.
Telephone: (508) 481-6700
Fax: (508) 357-7499
Web site: http://www.sepracor.com
Sales: $85.2 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: SEPR
NAIC: 325412 Pharmaceutical Preparation Manufacturing
Sepracor Inc. is a Marlborough, Massachusetts, pharmaceutical company. During much of the 1990s, investors enticed by promises of spectacular profits were attracted to the company; such profits, however, failed to materialize. Innovative techniques used to purify drugs, which allowed Sepracor to patent variations on some of the world’s most lucrative prescription drugs, are giving way to the development of original products and the creation of a marketing operation, as the company endeavors to join the ranks of traditional pharmaceutical firms, with the hope of finally becoming a profitable business.
Founding in 1984
Timothy J. Barberich cofounded Sepracor in 1984 and became its president and chief executive officer. After earning a college degree in chemistry, Barberich went to work in 1971 as a junior chemist for American Cyanamid Co., where he gained first-hand knowledge about the vagaries of synthetic drugs. In Brazil he participated in the demonstration of a deworming medicine, in which a prized bull was injected with a new wonder drug, only to watch along with a square filled with farmers as the animal dropped dead, the victim of an unintended side effect. The underlying chemical problem had been known for well over a hundred years, uncovered in the mid-1800s by famed scientist Louis Pasteur, who discovered that some organic molecules, called chiral chemicals, feature mirror images—that is, left-handed and right-handed versions called optical isomers. (Chiral is derived from the Greek word for hands, kheir.) In short, while a medicine provides beneficial traits on the one hand, it may also contain devastating side effects on the other. Perhaps the most famous and tragic example of this phenomena is the 1950s’ drug Thalidomide. One of its isomers relieved pregnant women of morning sickness, while its mirror image produced horrifying birth defects. Despite their knowledge of optical isomers, researchers until recently simply did not have the expertise to separate the left-handed and right-handed versions, resulting in medicines that contained mixtures of both, with side effects tolerated as long as they failed to prove too harmful.
Barberich began to work on separation techniques when he joined Millipore Corporation, a Bedford, Massachusetts, firm that developed separation products for high-tech companies. By the time he left to form Sepracor he was the general manager of the company’s medical products division. Striking out on his own, Barberich was interested in using the new separation technology to purify chemicals, then sell them to pharmaceutical companies. A friend introduced him to venture capitalist Robert Johnson, who a couple of years earlier had been instrumental in funding Genex, one of the first biotech start-ups. With Johnson providing $500,000 in seed money, Barberich teamed with James Mrazek, president of Carnegie Venture Resources, and Dr. Robert Bratzler to create Sepracor. Soon after the new company began its operations, however, it became apparent that the demand for pure chemicals from biotech companies, Sepracor’s target customers, would not materialize. Biotechs, after several years of hype and investor enthusiasm, were now facing the stark reality of backing up their expansive claims with profits, but product development was slow and venture capital dried up, which in turn had an adverse effect on Sepracor’s business plan. As a result, Sepracor would change its strategy, and its history would begin to mirror the other biotech startups.
In 1985 Sepracor created a subsidiary, BioSepra, devoted to its original chemical purification business, while it began to focus on developing purified versions of well-known drugs, in effect eliminating sinister (left-handed) side effects to create an improved strain. Barberich hoped to sell the company’s expertise to the large pharmaceuticals, only to find no interest. He then decided to commit $10 million to the development of purified drugs without outside help, compounds that by law the company would be able to patent. It appeared to be a potentially lucrative niche, especially in light of pharmaceutical companies’ disdain for pursuing the work. The culture of research departments was one that placed a high emphasis on original work. Moreover, to eliminate side effects by using separation techniques was a tacit admission that something might be wrong with a pharmaceutical firm’s product. Sepracor, therefore, found itself in a strong position in the late 1980s: it could develop what amounted to new drugs with far less developmental resources. It concentrated on the most profitable medicines that were nearing the end of their 14-year patent terms, at which point generic drug makers would be able to manufacture cheaper versions. Sepracor’s strategy was to present pharmaceutical companies with a patented, purified version of their compound, then strike a deal. The pharmaceutical would be able to pump new life into an old brand, since the new form of the drug would overshadow the generic knockoff with the old side effects, while essentially gaining a new patent term. The pharmaceutical would bear the manufacturing and marketing costs, and Sepracor would pocket a royalty as well as make money by selling the purified active ingredients to their partners. Moreover, Sepracor was well aware that the pharmaceutical could better fund legal teams, so that by working with the pharmaceutical it could avoid costly and potentially devastating patent litigation. In many ways it was an elegant plan that would one day capture the imagination of many investors, while at the same time causing pharmaceuticals to label Sepracor as little more than a pirate operation. By 1990 Sepracor had applied for patents on purified forms of 40 major drugs.
Completion of Initial Public Offering: 1991
Sepracor’s plan to make an initial public offering of stock was postponed by the Gulf War but eventually took place in September 1991 when the company worked with Lehman Brothers to sell 4.6 million shares at $10 per share. Despite losing almost $15 million in 1991 and no immediate prospects of gaining profitability, Sepracor had a market capitalization of $160 million. Also in 1991 it acquired IBF Biotechnics, a French firm, in order to become involved in the chromatography-based and membrane-based separation techniques used in the manufacture of peptides and proteins. A ruling by the Food and Drug Administration in early 1992 would then provide a boost to the company, as well as signal a long-term change in the pharmaceutical landscape. The FDA now required that all new chiral drugs be tested to determine if a pure isomer form would eliminate unwanted side effects. While Sepracor’s scientific principles may have been vindicated by this ruling, it also meant that the major pharmaceutical companies would now be forced to engage in similar research and that the number of future candidates for purification would eventually dry up. Nevertheless, Sepracor still held a large number of promising patents to exploit.
The first of these patents that forced a major pharmaceutical to deviate from the usual posture of disdain for Sepracor involved the antihistamine Seldane, produced by Marion Merrell Dow. An FDA ruling that required Seldane to carry a warning about potentially fatal cardiac arrhythmia had crippled sales, which dropped by some 30 percent, from $900 million in sales posted in 1992. Both Sepracor, looking for more cash, and Marion, saddled with declining sales, needed one another. In June 1993 they struck a deal that called for Marion to invest $10 million in Sepracor, thus gaining a 6 percent stake, as well as paying another $7.5 million in a licensing agreement, plus 8 percent in royalties. The new drug, Allegra, would not only be free of the FDA warning and regain lost sales, it would provide Marion with an extended life on its antihistamine product. For Sepracor, Allegra provided a welcome revenue stream, but the terms were not as advantageous as the company could have commanded if it had been better positioned financially and did not need help in getting Allegra through clinical trials. Nevertheless, the Marion agreement lent much needed credibility to Sepracor with investors as well as other pharmaceutical companies, which would now be more willing to do business. It was imperative, however, for Sepracor to have enough ready cash to fund development in order to hold out for the best possible licensing deals in the future.
In 1994 Sepracor engineered two simultaneous public spinoffs of divisions to improve its finances, while retaining a controlling interest in both. Underwritten by David Blech, who had gained a reputation for biotech IPOs, BioSepra netted $18.3 million, and two weeks later HemaSure, devoted to the purification of donated blood products, netted $13.1 million. By providing separate funding for these businesses, which were draining cash and required some time before they would become profitable, Sepracor was better positioned to finance its core business of purifying blockbuster drugs. Soon after, however, Blech’s firm was forced to suspend operations because of its own financial woes, and any company associated with it was punished by investors. Sepracor’s stock price fell from a high of $14 to just $4, while the recent spinoffs also suffered significant erosion. Believing that the company needed someone with credibility in the financial community to present Sepracor’s case, Barberich hired a new chief financial officer, luring David Southwell away from Lehman.
Sepracor Inc. is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development, and commercialization of innovative pharmaceutical products that are directed toward serving unmet medical needs.
The British Southwell knew Barberich since his involvement with Lehman’s underwriting of Sepracor’s IPO. His immediate priority as the new CFO was to raise at least $5 million cash before the end of 1994 in order to stave off failure. After considerable effort he lined up $10 million in financing from the Oscar Frank Delano Partners Fund. Conditions improved even more in January 1995 when news that the patent for Allegra had finally been issued bumped Sepracor’s stock price by 50 percent. The stock would receive a further boost later in the year when the company reported encouraging news on two other potential products. There was talk on the street that Sepracor would be generating $3 billion in sales in three years. In order to continue development of these drugs and realize that promise, however, Southwell estimated that the company’s burn rate of cash would have to increase from $30 million a year to $45 million. Over the next several months he engineered a variety of financial deals to meet the challenge. Taking advantage of a rebound in the stock market for biotech stocks, he raised $67 million on a secondary offering of Sepracor stock. He also raised an additional $47 million to fund HemaSure, which reduced Sepracor’s stake to 37 percent and allowed the company to remove the spinoff from its books. Southwell then raised $81 million in a convertible bond offer through Lehman. Finally, in March 1996 Southwell oversaw the IPO of a complicated spinoff and merger: The Sepracor SepraChem division, which created chemical synthesis products, merged with an Eastman Kodak spinoff, chemicals manufacturer Sterling Organics, to create ChiRex Inc. The $87 million raised in the offering funded the acquisition, while again taking the business off Sepracor’s books to allow it to focus on its central work. By the middle of 1996, when all the transactions were complete, Southwell had garnered over $120 million for Sepracor, which provided the company with a two-year financial cushion and, as a result, greater control over the rights of some potentially lucrative drugs it had in the pipeline.
Favorable FDA Ruling in 1997
Early in 1997 the price of Sepracor stock rose significantly following an FDA ruling that forced the removal of Seldane from the shelves and paved the way for Allegra to replace it. Moreover, the company was nearing completion on a purified form of Albuterol, an asthma medication that generated $1.4 billion in sales each year, as well as a key ingredient used in the antihistamine Claritin. By the end of 1997 Sepracor would sign an agreement with Schering-Plough Corporation to develop a purer form of Claritin, which generated $1.3 billion in annual sales and was less than five years away from patent expiration. The price of Sepracor stock rose above $40. A few months later the prospects appeared even brighter when Sepracor received a patent for a purified form of fluoxetine, marketed as Prozac by Eli Lilly & Co., with sales approaching $3 billion a year. Then in July 1998 Sepracor licensed a new form of Propulsid, a popular heartburn medication with over $1 billion in annual sales, to Johnson & Johnson. Earlier in the year the companies had also agreed to work together on an improved version of Johnson’s Hismanal antihistamine. It appeared that Sepracor had finally gained acceptance with the major pharmaceutical firms and that it would soon begin to realize robust profits after years of loss, with some analysts predicting it would be a $10 billion company in a matter of years. Nevertheless, in 1997 the company generated just $15.3 million in revenues and posted net losses of $26.1 million. In 1998, revenues would increase modestly, coming in at $17.4 million, while the loss ballooned to $93.3 million.
Sepracor’s prospects were buoyed later on when it sold the rights for the purified form of Prozac to Lilly for $90 million. The price of the company’s stock soared to $140 per share by March 1999, giving it a market capitalization well over $3 billion. Not all investors were convinced, however, as an unusually high number of the company’s outstanding shares were controlled by short sellers anticipating that the price would tumble. When Johnson backed out of the Hismanal deal, investors began to question whether Sepracor’s other agreements were as solid as first believed, and the price of the company’s stock plummeted to $55 by May 1999. Sepracor received some good news, however, when the FDA granted approval for the company to market Xopenex, a purified version of an asthma medication, the first product that it would market on its own.
Sepracor’s hope for a future lucrative revenue stream derived from Prozac was dashed in 2000. The company suffered enough damage by its association to the drug, the integrity of which came into question when it was revealed that over the years Lilly had suppressed evidence of Prozac contributing to suicidal tendencies in a small percentage of patients. Worse news came in October 2000 when Lilly terminated its agreement with Sepracor after patients in clinical trials for the new version developed abnormal heart rhythms. The stock immediately lost almost one-third of its value. Over the next several months the price of Sepracor stock plunged to less than $24 per share.
Sepracor retained a number of other potential money-making refined versions of major selling drugs in the pipeline, but the company clearly had to use its purification techniques in the development of entirely new drugs. As part of its transition to becoming a more traditional pharmaceutical business, it initiated direct-to-consumer marketing efforts to sell its products in 2001. Although revenues in 2000 increased to $85.2 million, Sepracor lost $204 million after having lost $183 million in 1999. It remained very much an open question how much longer the company would be able to maintain such a high burn rate before being able to realize a profit.
BioSphere Medical Inc. (55%); Sepracor Canada Holdings, Inc.; Sepracor Securities Corporation; Sepracor, N.V. (Netherlands).
Bristol-Myers Squibb Company; Eli Lilly & Co.; Hi-Tech Pharmacal; Johnson & Johnson; Mylan Laboratories, Inc.; Pfizer Inc.; Schering-Plough Corporation; Watson Pharmaceuticals Inc.
- Company is incorporated.
- Initial public offering of stock is made.
- Company spins off BioSepra and HemaSure.
- Spinoff and merger produces ChiRex Inc.
- Rights to purified form of Prozac are sold to EliLilly.
- Prozac deal is terminated.
“Bulls, Pills and Patents,” Economist, June 28, 1997, p. 69. Gianturco, Michael, “Piggyback Drugs,” Forbes, September 22, 1997, p. 244.
Johannes, Laura, and Thomas M. Burton, “Son of Prozac,” Wall Street Journal, December 7, 1998, p. A1.
Kover, Amy, “One Hot Biotech Stock,” Fortune, January 11, 1999, p. 196.
O’Reilly, Brian, “Drug Pirates Make Good,” Fortune, October 12, 1998, p. 146.
Petersen, Melody, “As Lilly Ends Prozac Pact, Sepracor Stock Falls Nearly 30%,” New York Times, October 20, 2000, p. C6.
Picker, Ida, “Staying Alive,” Institutional Investor, May 1997, p. 80.
Young, Jeffrey, “Lefties, Righties and Anxieties,” Forbes, July 19, 1993, p. 208.