Shares of Sepracor (NASDAQ:SEPR) were hammered on Friday after the company announced lower than expected earnings and a not so bright future.

Sales of asthma drug Xoponex were down to $104.9 million for the second quarter, from $115.7 million for the second quarter of 2006. The decline was due to home health-care pharmacies cutting back on their inventory after Medicare announced last May that it would decrease the reimbursment rate for Xoponex to the level of generic asthma medications. Sales are only going to get worse from here because the reimbursement price took effect at the beginning of this month.

Sales of sleep aid Lunesta increased a pitiful 2.7% year over year for the quarter. The lackluster growth isn't really surprising, given that sales of the product have been relatively flat for almost two years now. On a positive note, Sepracor's drug was able to hold ground in the face of increased competition from recently released generic versions of Sanofi-Aventis' (NYSE:SNY) Ambien made by 13 generic drugmakers, including Mylan Pharmaceuticals (NYSE:MYL) and Teva Pharmaceutical (NASDAQ:TEVA).

On Friday, the company said it had applied for marketing approval in the European Union for Lunesta, which will be branded as Lumina. The increased market should increase sales of the drug, although the bump in sales is at least a year away because Sepracor will need to wait for European Medicines Agency approval and then negotiate prices with the individual European governments.

Saved by the increased sales of its other smaller products and larger royalty payments from partners like Schering-Plough (NYSE:SGP) and Sanofi-Aventis, total revenue was up 5.2% for the quarter. But because research and development and sales and marketing costs increased substantially, the profits for the quarter dropped 45% year over year.

The stock price was probably most affected by the company's outlook. For the second time this year, Sepracor lowered expected earnings per share for the year, to $1.28 to $1.58. That's as much as a 40% drop from its previous forecast of $2.11 per share in April.

It will probably take another couple of quarters to determine the trend for Lunesta and Xoponex sales. Sepracor could turn things around with increased sales outside the U.S., although competition will be just as fierce there as it is stateside. It certainly won't find any immediate relief from new products in its pipeline because all the candidates are in phase 1 trials. Sepracor shares may be a good value at their reduced price, but I'd caution investors to wait and see if it's a sinking ship before they jump on board.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.