Sepracor's Dream Drug?

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Sepracor (Nasdaq: SEPR) scored a major victory yesterday, though investors should have their eyes wide open when considering the stock.

Shares in the biotech company gained 10% in trading yesterday after it disclosed that the Food and Drug Administration had approved Lunesta, a new prescription sleep aid. Although such a drug normally wouldn't be terribly exciting -- especially since Sanofi-Aventis (NYSE: SNY) already controls a large portion of the market with its medicine Ambien -- Lunesta has the unique trait of being approved for use beyond the seven- to 10-day period to which most sleep aids are restricted.

Despite this advantage, Lunesta may not be the home run that some analysts are projecting. True, Sepracor has tested the drug in humans for six months, and it has proven safe and effective over that timeline. But in the wake of Merck's (NYSE: MRK) recall of arthritis drug Vioxx and, most recently, Pfizer's (NYSE: PFE) study showing potential cardiovascular risks associated with its own arthritis treatment Celebrex, doctors and patients alike are probably going to be jittery about a new prescribed medicine for long-term use.

Further, Lunesta is not going to come cheap. Sepracor is setting the treatment's wholesale price at $3.70 a pill, roughly 10% higher than Ambien, according to TheNew York Times. The company believes insurance providers will cover at least some of Lunesta's price tag. But as Motley Fool contributor Charly Travers has pointed out, recent research shows that insurers may be less inclined to pay for such treatments, and even if they do, they are likely to steer patients toward the cheapest product.

Finally, Sepracor plans to invest heavily in the drug's sales and marketing, cutting into its profit, at least in the near term. The firm has already boosted its sales force from 450 to 1,250 to accommodate Lunesta's launch. All told, Sepracor intends to spend about $100 million marketing the drug in its first year, including $60 million in direct-to-consumer advertising.

Gaining approval for a new drug is no mean feat. But Sepracor has cleared that hurdle before, and yet it remains unprofitable. The company may finally move into the black with Lunesta, but that alone won't make its stock worthy of investors' dreams.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here. To discuss this or other Sepracor news, go to The Motley Fool's handy Sepracor discussion board.