The Dainippon-Sepracor Deal Worst-Case Scenario

Holders of Sepracor stock considering Dainippon Sumitomo Pharma's offer of $23 a share to take over the company might want to ask themselves, Might this company be willing to pay more than a 27.6 percent premium? A brief look at the two companies suggests that Dainippon needs this more than Sepracor, and thus shareholders have reason to believe the Japanese company could reach further into its wallet to get what it wants.

The basics: Dainippon just reported ¥66 million in sales in the last quarter, down 5.8 percent. Its biggest product is Amlodin, which had sales of ¥13.6 million, down 17 percent. No other Dainippon product has more than ¥5.5 million in sales. This is a company that sells lots of small products and is seeing a broad decline in its fortunes across its portfolio. It has also failed to cut its costs to maintain its margins.

Dainippon's strategy is to use Sepracor's sales force to sell its Phase III schizophrenia/bipolar disorder drug, Lurasidone, in the U.S. That makes some sense, as Sepracor's sales force has some CNS experience with sleeping pill Lunesta.

Sepracor, on the other hand, is a company moving in the opposite direction. Its sales are increasing, and so is the efficiency of its sales force -- amazing achievements given that Lunesta has plenty of generic competition. (Note that Lunesta survived the cut on Walmart's list of approved drugs for its employee health benefit program, the largest in the U.S.)

In other words, the two companies are as unlike each other as the languages they speak. That suggests a challenge for Dainippon's management: Although their strategy is sound, are they really equipped to manage an American company that relies on a small portfolio of a few blockbusters when their experience is managing a large portfolio of niche drugs in Japan?

For shareholders, Sepracor's strength and Dainippon's neediness suggest that it may be worth asking for a little more. As the board of Sepracor didn't get more than a 27.6 percent permium, one presumes that shareholder litigation will commence shortly ...

Image: Sepracor CEO Adrian Adams.