Sepracor (Nasdaq: SEPR) announced results from its first quarter yesterday, but the numbers were overshadowed by other announcements.

Let's run through the numbers real quickly. Revenue was down 2.1% year over year because sleep aid Lunesta -- down 8% -- continues to receive indirect generic competition from knockoffs of Sanofi-Aventis' (NYSE: SNY) Ambien. Asthma franchise Xopenex didn't help much, and was down 6.5% year over year. The only bright spot was royalties the company receives from Schering-Plough's (NYSE: SGP) Clarinex and Sanofi's Allegra. These were up 50%, although they're only a small part of the revenue stream.

Thanks to cutbacks in spending, the bottom line didn't look quite so bad. Excluding a $40 million charge for a licensing agreement with Nycomed and a $9.5 million milestone payment to license Bial's epilepsy treatment, earnings were $0.53 per share -- an 18% improvement over the year-ago quarter's non-GAAP EPS.

Now, here's where it gets interesting.

Sepracor has been doing its best to diversify recently, spending the proceeds from its cash-cow drugs before they become cash-hamburger. Yesterday Sepracor added to its licensed drugs list when it bought Canadian Oryx Pharmaceuticals for $50 million. Sepracor is on the hook for another $20 million if the company gets unspecified drug(s) approved. Oryx essentially licenses drugs to market in Canada.

Without knowing the details of royalty payments, we can't judge whether Sepracor got a good deal. It'll certainly make it easier for Sepracor to market its own drugs in Canada, but couldn't it have accomplished the same thing with just a licensing agreement? Clearly the lure of a more diversified revenue stream was something Sepracor just couldn't pass up.

The company also announced that it had settled its patent litigation with Breath Limited over Xopenex. Breath Limited agreed not to launch a generic version of the drug until 2012. Afterward, it will pay Sepracor a double-digit royalty on gross profits. Nice!

Sepracor still has lawsuits pending with Mylan (NYSE: MYL) and Barr Pharmaceuticals (NYSE: BRL), but this current settlement might goad the others to settle.

So, the good news is that management isn't just sitting there while Sepracor's top two drugs continue a steady decline. The bad news is that it may take awhile before investors figure out if what it's doing is enough to turn the company around.

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