Sepracor’s Great Value Recognized by Japan’s Dainippon Sumitomo

Sepracor (SEPR) shares surged up to 30% higher in early afternoon trading as news broke from the Nikkei of an approximately $2.71 billion offer from Dainippon Sumitomo. Sepracor’s stock has been hammered over the last few years, and recently there have been some disappointing clinical trial results. We wrote about one of these disappointing trials in early July (Study of Sepracor’s Depression Drug Has Investors Gloomy), on that day the stock was down nearly 20% after two trials had been less than impressive. However, at that time we reiterated that this stock was simply too cheap, selling for just a 6.5x multiple of the most conservative analyst estimate.

Since we first wrote about Sepracor, analysts have become more positive on Sepracor’s ability to increase earnings. Even though the price had come up somewhat since July, the stock was still selling for a lowly 6.5x the lowest analyst estimate for full year earnings. We had upgraded SEPR to Greatly Undervalued from just Undervalued. So, we were not surprised to see that Dainippon Sumitomo had seen an opportunity in Sepracor and their steady stream of revenue from Lunesta.