When a new drug comes out, investors tend to think that either it will be a complete flop, or the competition will lose all its market share. But in many cases, similar drugs have competed successfully against each other -- witness the cholesterol-lowering statins, or the interferons that treat multiple sclerosis. Sepracor (NASDAQ:SEPR), with its marketing battle against Sanofi-Aventis' (NYSE:SNY) sleep drug, Ambien, has been very interesting to watch, too.

Sepracor seems to be convincing people to switch to, or at least try, its insomnia drug Lunesta. Third-quarter sales for the drug were up 41% compared with the same time last year. The big surprise was the 50% jump in the sales of Sepracor's other drug, Xopenex, to $139 million. Gross margins have consistently been extremely high at 91%, as is expected in the pharmaceutical industry, and total revenues grew solidly on the back of Lunesta and Xopenex sales.



Operating margin

Sales costs / revs.*

Q3 06





Q2 06





Q1 06





Q4 05





*Sales and marketing expenses as a percent of revenues

Sepracor showed good profitability this quarter, with net income of $64 million and diluted earnings per share of $0.56, compared with a loss in the third quarter last year. A lot of this profitability was due to finally scaling back some sales and marketing expenses. They had been extremely high the past 12 months, as Sepracor tried to gain share for Lunesta in the very competitive insomnia market with expensive direct-to-consumer advertisements.

If Sepracor can slim down its marketing spending even further, earnings should skyrocket the way they did this quarter, in which sales and marketing expenses were a much smaller proportion of revenues compared with past quarters.

Even though Sepracor did have a solid quarter of revenue and earnings growth, and it's only trading at 50 times its trailing-12-month earnings with a lot of growth ahead, it's almost tough to recommend the stock. Management seems very unrepentant about the company's whole stock-option backdating mess. Hopefully, this issue will be resolved soon, and management will take some blame for its actions -- as Costco did -- so that I can go ahead and get excited about Sepracor again.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .