Sunovion Pharmaceuticals 10Q/A 2006 Q1 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

AMENDMENT NO. 1

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2006

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-19410

Sepracor Inc.

(Exact name of registrant as specified in its charter)

Delaware	22-2536587
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
84 Waterford Drive Marlborough, Massachusetts	01752
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (508) 481-6700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated file x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s class of Common Stock as of May 1, 2006 was: 108,749,416 shares.

EXPLANATORY NOTE

Restatement of Consolidated Financial Statements

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the three months ended March 31, 2006, originally filed on May 9, 2006, which we refer to as the March 31, 2006 Form 10-Q, to restate our consolidated balance sheets as of March 31, 2006, our consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2006 and 2005, and our consolidated statements of cash flows for the three months ended March 31, 2006 and 2005. Please refer to Note 11 to the accompanying condensed consolidated financial statements for additional information.

In June 2006, we were contacted by the Securities and Exchange Commission, or SEC, with respect to our option practices. In June 2006, we appointed a special committee of outside directors to conduct an internal review relating to our stock option grants and stock option practices. The special committee, with the assistance of outside legal counsel and outside accounting specialists, reviewed the stock option grants to our officers, directors and employees from 1996 to the present under our various stock option plans in effect during this period. Our finance department has also reviewed the stock option grants and stock option practices from 1996 to present.

Based on these reviews, we have determined that the measurement dates for certain stock option grants to employees, officers and directors during prior periods differed from the recorded dates for such awards primarily due to the following circumstances: (i) stock option grants which specified effective dates that may have preceded the dates of receipt of all necessary signatures or approvals, finalization of lists specifying stock option grants or an employee’s first date of employment; and (ii) stock option awards that were approved with exercise prices lower than fair market value on the effective date of grant. In addition, we have determined that (a) the modification of certain stock option grants in connection with an employee’s termination of employment and (b) the exercise of certain stock options that had not vested prior to an employee’s termination resulted in a new measurement date for such stock options. As a result, we are required to record non-cash adjustments for additional stock-based compensation. For periods prior to January 1, 2006, such charges are recorded in accordance with Accounting Principles Board, or APB, No. 25, “Accounting for Stock Issued to Employees’’, or APB 25, and for subsequent periods in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, or SFAS 123(R), for the three months ended March 31, 2006 and 2005. These non-cash charges had no impact on previously reported revenues, cash or cash equivalents or total assets.

Although the special committee has completed its review, the committee will remain in place for the duration of the SEC's inquiry. Should additional information become available to us in connection with the SEC inquiry, the special committee may be required to reopen its review and our current determination of stock-based compensation could change.

On August 9, 2006, our audit committee concluded that our consolidated financial statements referred to above should be restated to record the additional non-cash stock-based compensation expense items that had been incorrectly accounted for under generally accepted accounting principles, or GAAP. As we have previously announced, the consolidated financial statements and related financial information contained in such previously filed reports should no longer be relied upon. We have not modified or updated disclosures presented in the March 31, 2006 Form 10-Q in this Form 10-Q/A, except as required to reflect the effects of the items discussed above. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of the March 31, 2006 Form 10-Q or modify or update those disclosures affected by subsequent events or discoveries. Therefore, this Form 10-Q/A should be read in conjunction with the filings we have made with the SEC subsequent to the filing of the March 31, 2006 Form 10-Q, including our amended filings.

We have accepted service of three stockholder derivative complaints relating to certain of our stock option grants were filed in the Superior Court, Middlesex County, Commonwealth of Massachusetts, naming Sepracor as nominal defendant and also naming as defendants certain current members of our board of directors and certain of our current and former employees. The complaints allege purported

breaches of fiduciary duties and unjust enrichment in connection with certain stock option grants made by us between June 1998 and May 2001. The complaints seek monetary damages in unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the Court. On August 30, 2006, the parties in all three actions moved to consolidate the actions and to transfer them to the Business Litigation Session of the Superior Court, Suffolk County.

For the convenience of the reader, this Form 10-Q/A restates the March 31, 2006 Form 10-Q in its entirety. However, we have only amended disclosures presented in the March 31, 2006 Form 10-Q as required to reflect the matters described above and, accordingly, have amended only the following items:

· Part I—Item 1—Financial Information

· Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

· Part I—Item 4—Controls and Procedures

· Part II—Item 1—Legal Proceedings

· Part II—Item 6—Exhibits

In addition, in accordance with applicable SEC rules, this Form 10-Q/A includes updated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2.

SEPRACOR INC.

INDEX

Part I—Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 (Restated and Unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Restated and Unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Restated and Unaudited)	5
	Notes to Condensed Consolidated Interim Financial Statements (Restated and Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
Part II—Other Information
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 6.	Exhibits	44
	Signatures	45
	Exhibit Index	46

SEPRACOR INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

	March 31, 2006			December 31, 2005
	(as restated)			(as restated)
Assets
Current assets:
Cash and cash equivalents	$	119,335		$	178,144
Short-term investments	685,697			666,615
Accounts receivable, net	150,602			140,465
Inventories	42,779			38,951
Other assets	33,355			22,370
Total current assets	1,031,768			1,046,545
Long-term investments	155,169			131,442
Property and equipment, net	74,667			72,467
Investment in affiliate	5,460			5,829
Deferred financing costs and patents, net	16,606			18,097
Other assets	117			117
Total assets	$	1,283,787		$	1,274,497
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	26,685		$	11,544
Accrued expenses	116,218			187,409
Current portion of notes payable and capital lease obligation	1,539			2,030
Other current liabilities	105,014			76,923
Total current liabilities	249,456			277,906
Notes payable and capital lease obligation	1,164			1,260
Convertible subordinated debt	1,160,820			1,160,820
Total liabilities	1,411,440			1,439,986
Stockholders’ equity (deficit):
Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at March 31, 2006 and December 31, 2005	—			—
Common stock, $.10 par value, 240,000 shares authorized at March 31, 2006 and December 31, 2005, respectively; 108,729 and 108,354 shares issued, 104,468 and 104,093 shares outstanding, at March 31, 2006 and December 31, 2005, respectively	10,873			10,835
Treasury stock, at cost (4,261 and 4,261 shares at March 31, 2006 and December 31, 2005, respectively)	(232,028		)	(232,028		)
Additional paid-in capital	1,728,650			1,711,653
Accumulated deficit	(1,652,591		)	(1,662,627		)
Accumulated other comprehensive income	17,443			6,678
Total stockholders’ equity (deficit)	(127,653		)	(165,489		)
Total liabilities and stockholders’ equity (deficit)	$	1,283,787		$	1,274,497

The accompanying notes are an integral part of the condensed consolidated financial statements.

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Per Share Amounts)

	Three Months Ended
	March 31, 2006 (as restated)				March 31, 2005 (as restated)
Revenues:
Product sales		$	277,505			$	106,648
Royalties		8,173				12,397
Total revenues		285,678				119,045
Costs and expenses:
Cost of product sold		25,533				10,037
Cost of royalties		159				203
Research and development		49,269				28,569
Selling, marketing and distribution		189,991				93,207
General and administrative		14,508				8,707
Total costs and expenses		279,460				140,723
Income (loss) from operations		6,218				(21,678		)
Other income (expense):
Interest income		9,794				5,248
Interest expense		(5,551		)		(5,842		)
Equity in investee losses		(258		)		(168		)
Other expense		(56		)		(394		)
Income (loss) before income taxes		10,147				(22,834		)
Income taxes		111				—
Net income (loss) after income taxes		$	10,036			$	(22,834	)
Basic net income (loss) per common share		$	0.10			$	(0.22	)
Diluted net income (loss) per common share		$	0.09			$	(0.22	)
Shares used in computing basic and diluted net income (loss) per common share:
Basic		104,292				103,593
Diluted		115,470				103,593

The accompanying notes are an integral part of the condensed consolidated financial statements

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

	Three Months Ended
	March 31, 2006 (as restated)				March 31, 2005 (as restated)
Cash flows from operating activities:
Net income (loss)		$	10,036			$	(22,834	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		4,968				4,256
Equity in investee losses		258				168
Stock compensation		10,048				261
Changes in operating assets and liabilities:
Accounts receivable		(10,137		)		6,657
Inventories		(3,836		)		(2,888		)
Other current assets		(10,976		)		(2,537		)
Accounts payable		15,138				(1,095		)
Accrued expenses		(71,196		)		(40,389		)
Other current liabilities		28,130				(2,850		)
Net cash used in operating activities		(27,567		)		(61,251		)
Cash flows from investing activities:
Purchases of short and long-term investments		(333,674		)		(278,090		)
Sales and maturities of short and long-term investments		310,825				84,881
Additions to property and equipment		(5,833		)		(2,636		)
Investment in non-affiliate		(8,939		)		(7,143		)
Net cash used in investing activities		(37,621		)		(202,988		)
Cash flows from financing activities:
Net proceeds from issuance of common stock		6,987				4,074
Repayments of long-term debt and capital leases		(588		)		(463		)
Net cash provided by financing activities		6,399				3,611
Effect of exchange rate changes on cash and cash equivalents		(20		)		(15		)
Net decrease in cash and cash equivalents		(58,809		)		(260,643		)
Cash and cash equivalents at beginning of period		$	178,144			$	435,905
Cash and cash equivalents at end of period		$	119,335			$	175,262

The accompanying notes are an integral part of these condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(RESTATED AND UNAUDITED)

1. Basis of Presentation

The accompanying condensed consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited financial statements. Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The consolidated interim financial statements, in the opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended March 31, 2006 and 2005.

The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including Sepracor Canada Limited. We also have an investment in BioSphere Medical, Inc., or BioSphere, which we record under the equity method.

The consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2005, which are contained in our annual report on Form 10-K/A for the year ended December 31, 2005, filed with the Securities and Exchange Commission, or SEC.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the following: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the dates of the financial statements and (3) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

2. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123(R) (revised 2004), “Share-Based Payment”, or SFAS 123(R). SFAS 123(R) is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, supersedes Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and stock purchases under employee stock purchase plans, to be recognized in the financial statements based on their fair values. We adopted SFAS 123(R) using the modified prospective method during the quarter ended March 31, 2006. As noted in footnote 4 below, the adoption of SFAS 123(R) had a material impact on our condensed consolidated statements of operations and net income per share.

3. Basic and Diluted Net Loss Per Common Share

Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average potential common shares during the period. Potential common shares are not included in the per share calculation when the effect of their inclusion would be anti-dilutive. Potential common shares result from the assumed conversion of convertible subordinated debt, vesting of restricted stock awards and the assumed exercise of outstanding stock options, the proceeds of which are then assumed to have been used to repurchase outstanding stock options using the treasury stock method. Purchased call

options are also not included in the per share calculations for the period ending March 31, 2005 because including them would be anti-dilutive. There were no outstanding purchased call options as of March 31, 2006.

For the three months ended March 31, 2006, basic and diluted net income per common share is computed based on the weighted-average number of common shares outstanding during the period; however, diluted net income for that period also includes the dilutive effect of potential common shares. For the three months ended March 31, 2005 basic and diluted net loss per common share is computed based on the weighted-average number of common shares outstanding during the period because the effect of potential common shares would be anti-dilutive. Certain securities were not included in the computation of diluted earnings per share because they would have an anti-dilutive effect due to exercise price or net losses for such periods. These securities include the following:

a. Options to purchase shares of common stock:

	March 31, 2006		March 31, 2005
	(in thousands, except price per share data)
Number of options	7,853		13,048
Price range per share	$	44.15 to $87.50	$	5.00 to $87.50

b. Shares of common stock reserved for issuance upon conversion of convertible subordinated debt:

	March 31, 2006		March 31, 2005
	(in thousands)
5% convertible subordinated debentures due 2007		4,763		4,763
0% Series A convertible senior subordinated notes due 2008		—		2,283
0% Series B convertible senior subordinated notes due 2010		—		4,961
Total		4,763		12,007

We have issued 0% convertible subordinated notes due 2024, which were not convertible as of March 31, 2006 and 2005 or at any time during the three months ended March 31, 2006 and 2005. Once these notes become convertible, shares of common stock will be reserved under the conversion formula for issuance upon conversion if and when our common stock price exceeds $67.20 per share on the Nasdaq National Market. Prior to such occurrence, the notes are only convertible into cash.

4. Accounting for Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of SFAS 123(R), which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006, we accounted for share-based compensation to employees in accordance with APB 25 and related interpretations. We also followed the disclosure requirements of SFAS 123. We elected to adopt the modified prospective transition method as provided by SFAS 123(R) and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation.

Our stock option plans were adopted in 1997, 1999, 2000 and 2002 (“option plans”). Options granted under the option plans are generally non-qualified stock options but the option plans permit some options granted to qualify as “incentive stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option generally is equal to the fair market value of our common stock on the option grant date. The contractual term of options granted is generally 10 years.

Under the option plans, in addition to options, we granted certain employees restricted stock awards. Restricted stock awards are non-vested stock awards. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest annually over a two to five year period from the date of grant. Ownership of restricted stock typically cannot be transferred until the shares have vested. In connection with restricted stock grants, we record compensation expense based on the fair value of the shares granted. This stock compensation is being amortized on a straight-line basis over the vesting periods.

The 1998 Employee Stock Purchase Plan, or 1998 ESPP, permits an aggregate of 900,000 shares of common stock to be purchased by employees at 85% of market value on the first or last day of each six-month offering period, whichever is lower, through accumulation of payroll deductions ranging from 1% to 10% of compensation as defined, subject to certain limitations.

As required by SFAS 123(R), management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

The following table presents stock-based employee compensation expenses included in our unaudited condensed consolidated statements of operations:

	Three Months Ended
	March 31, 2006 (as restated)			March 31, 2005 (as restated)
	(in thousands)
Cost of products sold		$	134		$	—
Research and development		2,425			—
Selling, marketing and distribution		3,304			35
General and administrative		4,185			226
Stock-based compensation expense		$	10,048		$	261

As a result of adopting SFAS 123(R), our net income for the quarter ended March 31, 2006, is $9,825,000 less than if we had continued to account for stock-based compensation under APB 25. Basic and diluted income per share for the quarter ended March 31, 2006 were also less by $0.09 and $0.08, respectively, due to the adoption of SFAS 123(R).

The following table presents stock-based employee compensation expenses by type of award:

	Three Months Ended
	March 31, 2006 (as restated)			March 31, 2005 (as restated)
	(in thousands)
Employee stock options		$	9,262		$	261
Restricted shares		302			—
Employee stock purchase plan		484			—
Stock-based compensation expense		$	10,048		$	261

granted in the three months ended March 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Assumptions used to determine the fair value of options granted during the three months ended March 31, 2006, using the Black-Scholes valuation model were:

	Three Months Ended March 31, 2006
	Employee Stock Option Plans			Employee Stock Purchase Plan
Expected term		5.7 years			0.5 years
Expected volatility factor		28.6	%		28.6	%
Risk-free interest rate		4.6	%		4.3	%
Expected annual dividend yield		—			—

Prior to January 1, 2006, we accounted for stock-based compensation to employees in accordance with APB 25. We also had previously adopted the disclosure provisions of SFAS 123, which required disclosure only of stock-based compensation and its impact on net loss and net loss per share. The following table illustrates the effects on net loss and net loss per share for the three months ended March 31, 2005 as if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards.

	Three Months Ended March 31, 2005 (as restated)
	(in thousands, except price per share data)
Net loss as reported		$	(22,834	)
Add: Stock-based employee compensation expense included in restated results		261
Less: Total stock-based employee compensation expense determined under the fair value method		(12,114		)
Pro forma net loss		$	(34,687	)
Net loss per share:
Basic and Diluted—as reported		$	(0.22	)
Basic and Diluted—pro-forma		$	(0.33	)

In determining the stock-based compensation expense to be disclosed under SFAS 123, we were required to estimate the fair value of stock awards granted to employees using a Black-Scholes valuation model. However, differences between the requirements of SFAS 123(R) and SFAS 123 resulted in a different set of assumptions for our valuation model, including the utilization of a forfeiture rate. Assumptions used to determine the fair value of options granted under SFAS 123 during the three months ended March 31, 2005 were:

	Three Months Ended March 31, 2005
	Employee Stock Option Plans		1998 Employee Stock Purchase Plan
Expected term		5.0 years		0.5 years
Volatility		80.0%		36.0%
Risk-free interest rate		3.9%		2.4%
Dividend yield		—		—

We issue common stock from previously authorized but unissued shares to satisfy option exercises, restricted stock grants and purchases under the 1998 Employee Stock Purchase Plan.

A summary of our stock option activity for the three months ended March 31, 2006 is as follows:

	Number of Options (in thousands)			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)
Outstanding, December 31, 2005		10,859			$	32.78
Granted		1,393			$	55.54
Exercised		(375	)		$	18.63
Cancelled		(90	)		$	43.41
Outstanding, March 31, 2006		11,787			$	35.83		6.2
Exercisable at March 31, 2006		6,475			$	26.80		2.9

All options granted during the three months ended March 31, 2006 and 2005 were granted with exercise prices equal to the fair market value of our common stock on the grant date and had weighted average grant date fair values of $20.50 and $42.85, respectively.

At March 31, 2006, the aggregate intrinsic value of options outstanding and options exercisable was $201,139,000 and $172,822,000, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The aggregate intrinsic value of options exercised during the three months ended March 31, 2006 was $13,973,000.

The following table summarizes the stock options outstanding at March 31, 2006:

	Options Outstanding							Options Exercisable
Exercise Price Range	Number (in thousands)		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Number (in thousands)		Weighted Average Exercise Price
$5.75- $8.31		738		$	6.31		6.4		719		$	6.27
$11.25- $16.78		2,199		$	13.06		4.7		1,627		$	12.70
$18.38- $27.15		2,561		$	21.25		4.8		1,840		$	20.60
$27.70- $39.07		1,098		$	34.43		4.4		966		$	35.30
$42.38- $59.45		4,032		$	52.26		8.2		1,053		$	53.15
$64.50- $87.50		1,159		$	74.31		6.8		270		$	75.43
$5.75-$87.50		11,787		$	35.83		6.2		6,475		$	26.80

Our non-vested share activity for the three months ended March 31, 2006 was as follows:

	Stock Options						Restricted Stock
	Number of Shares (in thousands)			Weighted Average grant date Fair Value			Number of Shares (in thousands)		Weighted Average grant date Fair Value
Non-vested at December 31, 2005		4,563			$	43.77		—		$	—
Granted		1,393			$	55.54		174		$	55.54
Vested		(554	)		$	32.44		—		—
Forfeited		(90	)		$	43.40		—		—
Non-vested at March 31, 2006		5,312			$	48.05		174		$	55.54

At March 31, 2006, unrecognized compensation expense related to non-vested stock options and restricted stock was $112,113,000, and $8,974,000, respectively, which are expected to be recognized over weighted average periods of 3.75 years and 4.34 years, respectively.

The fair market value of the December 1, 2005 offering period of the 1998 ESPP, which concludes on May 31, 2006, was determined to be $968,000, or approximately $11.91 per share. The associated expense is amortized on a straight-line basis over the offering period. For the three months ended March 31, 2006, we recorded $484,000 of expense related to an ongoing ESPP offering period. No offering periods concluded during the three months ended March 31, 2006.

5. Inventories

Inventories consist of the following:

	March 31, 2006			December 31, 2005
	(in thousands)
Raw materials		$	23,012		$	21,780
Finished goods		19,767			17,171
Total		$	42,779		$	38,951

6. Deferred Financing and Patents Costs

The following schedule details the carrying value of our patents and deferred financing costs:

	March 31, 2006			December 31, 2005
	(in thousands)
Deferred financing costs, gross	$	34,440			$	34,440
Accumulated amortization	(18,909		)		(17,474		)
Deferred financing costs, net	$	15,531			$	16,966
Patents, gross	$	2,785			$	2,785
Accumulated amortization	(1,710		)		(1,654		)
Patents, net	$	1,075			$	1,131

The following schedule details our amortization expense related to patents and deferred financing costs:

	Three Months Ended
	March 31, 2006			March 31, 2005
	(in thousands)
Amortization of deferred financing costs		$	1,435		$	903
Amortization of patents		56			153
Total		$	1,491		$	1,056

We currently estimate that our amortization expense will be $4,482,000, $4,344,000, $3,994,000, $2,861,000 and $729,000 for the remainder of 2006 and for the years ending December 31, 2007, 2008, 2009 and 2010, respectively.

7. Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

	March 31, 2006			December 31, 2005
	(in thousands)
5% convertible subordinated debentures due 2007		$	440,000		$	440,000
0% Series A convertible senior subordinated notes due 2008		72,800			72,800
0% Series B convertible senior subordinated notes due 2010		148,020			148,020
0% convertible senior subordinated notes due 2024		500,000			500,000
Total		$	1,160,820		$	1,160,820

8. Comprehensive Income (Loss)

Total comprehensive income (loss) consists of net income (loss), net foreign currency translation adjustments and net unrealized gain (loss) on available-for-sale securities.

	Three Months Ended
	March 31, 2006 (as restated)				March 31, 2005 (as restated)
	(in thousands)
Comprehensive income (loss):
Net income (loss)		$	10,036			$	(22,834	)
Net foreign currency translation adjustment		(41		)		(82		)
Unrealized gain (loss) on available-for-sale securities		10,806				(1,485		)
Total comprehensive income (loss)		$	20,801			$	(24,401	)

9. Legal Proceedings

We and several of our current and former officers and a current director are named as defendants in several class action complaints which have been filed on behalf of certain persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all ending on March 6, 2002. These complaints allege violations of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily, they allege that the defendants made certain materially false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the United States Food and Drug Administration, or FDA. In both the debt purchasers’ action and equity purchasers’ action, the court has granted the plaintiffs’ motion for class certification. In late February 2006, two corrected and amended consolidated complaints were filed, one on behalf of the purchasers of our common stock and the other on behalf of the purchasers of our debt securities. These corrected and amended consolidated complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. The parties are currently engaged in discovery. We are unable to reasonably estimate any possible range of loss related to the lawsuits due to their uncertain resolution. However, any conclusion of these matters in a manner adverse to us would have a material adverse effect on our financial position and results of operations.

In September 2005, we received notification that the FDA had received an abbreviated new drug application, or ANDA, from Breath Limited seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution. Breath Limited’s submission includes a Paragraph IV certification alleging that our patents listed in the FDA publication entitled “Approved Drug Products With Therapeutic Equivalence Evaluations,” commonly referred to as the “Orange Book,” for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by Breath Limited’s proposed

product. We have filed a civil action against Breath Limited for patent infringement. We were notified in January 2006 of a second ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Dey, L.P. We have filed a civil action against Dey, L.P. for patent infringement. In April 2006, we were notified of a third ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Watson Laboratories, Inc. We have yet to decide whether we will file a civil action against Watson Laboratories, Inc. for patent infringement.

10. Investment in ACADIA

On January 13, 2006, we completed the second $10 million purchase of ACADIA Pharmaceuticals Inc. common stock in connection with the collaboration between the two companies formed in January 2005. Our purchase was made at a price of approximately $12.29 per share, which represented a 25 percent premium over the 30-day trailing average closing price of ACADIA’s common stock on the Nasdaq National Market and resulted in the issuance to us of 813,393 shares of ACADIA common stock. We recorded the premium amount of $1,061,000 as research and development expense and the remaining amount of $8,939,000 as an investment in ACADIA.

On January 10, 2005, we completed the initial $10 million purchase of ACADIA Pharmaceuticals Inc. common stock in connection with the collaboration. Our purchase was made at a price of approximately $9.28 per share, which represented a 40 percent premium over the 30-day trailing average closing price of ACADIA’s common stock on the Nasdaq National Market and resulted in the issuance to us of 1,077,029 shares of ACADIA common stock. We recorded the premium amount of $2,857,000 as research and development expense and the remaining amount of $7,143,000 as an investment in ACADIA.

11. Restatement of Financial Statements Based on Review of Stock Option Practices

Subsequent to the filing of our Form 10-Q for the period ended March 31, 2006, we concluded that based on errors identified in a stock option investigation, we would need to restate our financial statements for the three months ended March 31, 2006 and 2005.

As previously announced, the Securities and Exchange Commission, or SEC, is conducting an informal inquiry into our stock option practices. In June 2006, we appointed a special committee of outside directors to conduct an internal review relating to our stock option grants and stock option practices. The special committee, with the assistance of outside legal counsel and outside accounting specialists, has reviewed our stock option grants to our officers, directors and employees from 1996 to the present under our various stock option plans in effect during this period.

we are required to record non-cash adjustments for stock-based compensation expense for the three months ended March 31, 2006 and 2005. For periods prior to January 1, 2006, such charges are recorded in accordance with APB 25 and for subsequent periods in accordance with SFAS 123(R). These non-cash charges had no impact on reported revenue, cash or cash equivalents.

The table below sets forth the impact of the non-cash charges for stock-based compensation expense within our consolidated statement of operations that we recorded for the three months ended March 31, 2006 and 2005.

	Three Months Ended
	March 31,				March 31,
	2006				2005
	(in thousands, except per share data)
Net income (loss) as previously reported		$	10,259			$	(22,573	)
Charge for additional stock-based compensation		(223		)		(261		)
Net income (loss) as restated		$	10,036			$	(22,834	)
Basic net income (loss) per common share as previously reported		$	0.10			$	(0.22	)
Basic net income (loss) per common share as restated		$	0.10			$	(0.22	)
Diluted net income (loss) per common share as previously reported		$	0.09			$	(0.22	)
Diluted net income (loss) per common share as restated		$	0.09			$	(0.22	)

The table below sets forth the impact of the non-cash charges for stock-based compensation expense within our consolidated balance sheet that we recorded for the quarters ended March 31, 2006 and 2005.

	Periods Ended
	March 31,			December 31,
	2006			2005
	(in thousands)
Additional paid-in capital
As previously reported	$	1,686,315		$	1,669,541
As restated	$	1,728,650		$	1,711,653
Accumulated deficit
As previously reported	$	(1,610,256	)	$	(1,620,515	)
As restated	$	(1,652,591	)	$	(1,662,627	)

Derivative Stockholder Complaints Relating to Stock Option Grants

We have accepted service of three stockholder derivative complaints relating to certain of our stock option grants that were filed in the Superior Court, Middlesex County, Commonwealth of Massachusetts, naming Sepracor as nominal defendant and also naming as defendants certain current members of our board of directors and certain of our current and former employees. The complaints allege purported breaches of fiduciary duties and unjust enrichment in connection with certain stock option grants made by us between June 1998 and May 2001. The complaints seek monetary damages in unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the Court. On August 30, 2006, the parties in all three actions moved to consolidate the actions and to transfer them to the Business Litigation Session of the Superior Court, Suffolk County.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement of Financial Statements Based on Review of Stock Option Practices

In June 2006, we announced that the Securities and Exchange Commission, or SEC, had initiated an informal inquiry into our stock option practices. We appointed a special committee of outside directors in June 2006 to conduct an internal review relating to our stock option grants and stock option practices. The special committee, with the assistance of outside legal counsel and outside accounting specialists, has reviewed the stock option grants to our officers, directors and employees from 1996 to the present under our various stock option plans in effect during this period. We have been cooperating with this review and our finance department has also reviewed the stock option grants and stock option practices from 1996 to present. Although the special committee has completed its review, the committee will remain in place for the duration of the SEC's inquiry. Should additional information become available to us in connection with the SEC inquiry, the special committee may be required to reopen its review and our current determination of stock-based compensation could change.

The discussion and analysis set forth in this Item 2 has been amended to reflect the restatement as described in the Explanatory Note at the beginning of this quarterly report on Form 10-Q/A and in Note 11 to our condensed consolidated financial statements. The impact of additional stock-based compensation expense for the three months ended March 31, 2006 and 2005 is approximately $223,000 and $261,000, respectively. See the Explanatory Note and Note 11 for additional information about the review and restatement.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q/A contains, in addition to historical information, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. These forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of these words and similar expressions are intended to identify forward-looking statements. Our actual results could differ significantly from the results we discuss in these forward-looking statements. These forward-looking statements represent our expectations as of the date of our quarterly report on Form 10-Q for the three months ended March 31, 2006 filed with the Securities and Exchange Commission on May 9, 2006. Subsequent events will cause our expectations to change. However, while we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. See the section entitled “Risk Factors” below for a discussion of important factors that could cause our actual results to differ materially from the results we discuss in our forward-looking statements.

Executive Overview

We are a research-based pharmaceutical company focused on discovering, developing and commercializing differentiated products that address large and growing markets, and unmet medical needs, and can be marketed to primary care physicians through our sales force.

We currently manufacture and sell three products, XOPENEX® (levalbuterol HCl) Inhalation Solution, a short-acting bronchodilator, for the treatment or prevention of bronchospasm in patients with reversible obstructive airway disease; XOPENEX HFAÔ (levalbuterol tartrate) Inhalation Aerosol, a hydrofluoroalkane, or HFA, metered-dose inhaler, or MDI, for the treatment or prevention of bronchospasm in adults, adolescents and children four years of age and older with reversible obstructive airway disease; and LUNESTAÔ (eszopiclone) for the treatment of insomnia.

We market and sell XOPENEX Inhalation Solution, LUNESTA and XOPENEX HFA directly through our sales force. We have entered into out-licensing arrangements with respect to several other

compounds. We expect to commercialize products that we successfully develop through our sales force, through co-promotion agreements and through out-licensing partnerships.

Significant 2006 Developments

On February 23, 2006, we announced that we entered into a licensing agreement with UCB, relating to levocetirizine, which is an antihistamine being developed by UCB. Under this agreement, we have exclusively licensed to UCB all of our patents and patent applications in the U.S. regarding levocetirizine and royalties will be payable to us on U.S. sales of levocetirizine products. Under a separate agreement, we currently earn royalties from UCB on sales of levocetirizine in European countries where the product is sold. Levocetirizine is marketed by UCB under the brand names XYZAL® and XUSALÔ in the European Union, or E.U., for treatment of symptoms of seasonal and perennial allergic rhinitis, persistent allergic rhinitis, and chronic idiopathic urticaria, or CIU, also known as hives of unknown cause, in adults and children aged 6 years and older.

On January 17, 2006, we announced that we had completed the second $10 million purchase of ACADIA Pharmaceuticals Inc., or ACADIA, common stock in connection with our license, option and collaboration agreement, or collaboration, with ACADIA that we entered into in January 2005. Our purchase was made at a price of approximately $12.29 per share, which represented a 25 percent premium to the 30-day trailing average closing price on the Nasdaq National Market as of the one-year anniversary of the collaboration, and resulted in the issuance to us, of 813,393 shares of ACADIA common stock.

On January 12, 2006, we announced that we had been notified that the United States Food and Drug Administration, or FDA had received an abbreviated new drug application, or ANDA, from Dey, L.P. for a generic version of levalbuterol hydrochloride inhalation solution. Dey’s submission includes a Paragraph IV certification alleging our patents listed in the FDA publication entitled “Approved Drug Products With Therapeutic Equivalence Evaluations,” commonly referred to as the “Orange Book,” for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by Dey’s proposed product. On September 7, 2005, we announced that the FDA had received an ANDA from Breath Limited seeking marketing approval for generic copies of our 1.25 mg, 0.63 mg and 0.31 mg XOPENEX Inhalation Solution (levalbuterol hydrochloride) unit-dose vial product. XOPENEX Inhalation Solution Concentrate is not subject to the ANDA. Breath Limited’s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by Breath Limited’s proposed product. We have filed civil actions against Breath Limited and Dey, L.P. for patent infringement. In April 2006, we were notified of a third ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Watson Laboratories, Inc. We have yet to decide whether we will file a civil action against Watson Laboratories, Inc. for patent infringement.

Should we successfully enforce our patents, the FDA will not approve the relevant ANDA until expiration of the applicable patents. Otherwise, the FDA will stay its approval of the relevant ANDA for 30 months following the date we received notice of such ANDA or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier.

Critical Accounting Policies

We identified critical accounting policies in our annual report on Form 10-K/A for the year ended December 31, 2005. These critical accounting policies relate to product revenue recognition, royalty revenue recognition, rebate and return reserves, patents, intangibles and other assets, accounts receivable and bad debt, income taxes, induced conversion of debt, inventory write-downs and stock-based compensation. These policies require us to make estimates in the preparation of our financial statements as of a given date. Because of the uncertainty inherent in these matters, our actual results could differ from

the estimates we use in applying the critical accounting policies. Other than the adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” or SFAS 123(R), no changes to these critical accounting policies have taken place since December 31, 2005; however, we have expanded the disclosure of our accounting policies relating to product sale allowances and reserves.

Product Sales Allowances and Reserves: We record product sales net of the following significant categories of product sales allowances: payment term discounts, wholesaler fee for service discounts, government rebates and contractual discounts (includes Medicaid discounts, Medicare discounts, managed care discounts, chargebacks and group purchasing organization, or GPO, contract discounts), returns and other discounts. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources. Based on known market events and trends, internal and external historical trends, third party data, customer buying patterns and up-to-date knowledge of contractual and statutory requirements, we are able to make reasonable estimates of sales discounts. Historically, our estimates have not materially differed from our actual results.

1) Payment Term Discounts—We offer our wholesaler customers a 2% prompt-pay cash discount as an incentive to remit payment within the first thirty days after the date of the invoice. Prompt-pay discount calculations are based on the gross amount of each invoice. We account for these discounts by reducing sales by the 2% discount amount when product is sold, and apply earned cash discounts at the time of payment. Since we began selling our products commercially in 1999, our customers have routinely taken advantage of this discount. Based on common industry practices and our customers’ overall payment performance, we accrue for cash discounts on product sales recorded during the period. We adjust the accrual to reflect actual experience as necessary.

2) Wholesaler Fee for Service Discounts—In the second quarter of 2005, we entered into letter agreements with certain wholesaler customers that provide these wholesalers with the opportunity to earn discounts in exchange for the performance of certain services. These agreements are subject to termination upon thirty days prior written notice. Our effective rate of wholesaler discounts applied across all product sales in the first quarter of 2006 was approximately 2.5%. If the percentage of gross sales sold to wholesalers with letter agreements increases, our liability related to wholesaler discounts could increase materially. For example, a 0.5% increase in the effective rate of wholesaler discounts on the first quarter of 2006 gross sales from our three marketed products would result in a sales reduction of approximately $1.7 million.

3) Government Rebates and Contractual Discounts—

Medicaid Discounts—We record accruals for rebates to be provided through the Medicaid Drug Rebate Program as a reduction of sales when the product is sold. We rebate individual states for all eligible units purchased under the Medicaid program based on a rebate per unit calculation driven off our Average Manufacturer Price, or AMP. We estimate the expected rebate per unit to be used and adjust our rebate accruals based on expected changes in rebate pricing. We also examine the historical rebate trends and the trend of sales that become eligible for Medicaid programs and any changes expected to these trends. In addition, certain states have supplemental rebate programs, which provide such states with an additional rebate. Supplemental rebates, like rebates under the Medicaid Drug Rebate Program, are recorded as a reduction of sales when the product is sold. Rebate amounts are generally invoiced quarterly in arrears and paid thirty days after they are invoiced. As a result, our accrual consists of (i) an estimate of the amount we expect to be incurred for the current quarter’s prescriptions, (ii) an accrual for prior quarters’ unpaid rebates and (iii) an accrual for estimated inventory in the distribution channel.

We recorded a provision for Medicaid rebates of 6.0% and 8.7% of gross sales for the three months ended March 31 2006 and 2005, respectively. The reduction was principally due to a change in product mix, with LUNESTA, which we commercially introduced in 2005, having significantly lower Medicaid eligible units than XOPENEX Inhalation Solution. Actual Medicaid discounts could exceed historical experience and our estimates of expected Medicaid activity and rebate per unit amounts. If the Medicaid discount

provision percentage were to increase by 0.5% of first quarter 2006 gross sales from our marketed products, an additional provision of $1.7 million would result.

Medicare Discounts—Part B—We record accruals for rebates to be provided through Medicare programs as a reduction of sales when the product is sold. We provide rebates to medicare pharmacy providers, or MPPs, on XOPENEX Inhalation Solution that is dispensed to Medicare beneficiaries. XOPENEX is covered under a Medicare code for drugs used with durable medical equipment, in our case, nebulizers. We estimate the expected rebate using historical data and by examining trends and expected changes in Medicare codes. Medicare payments are paid to MPPs primarily on a monthly basis. Accordingly, the provision typically relates to the activity over a one-month period and, as a result, the total provision consists of (i) an estimate of the amount expected to be incurred for the current month’s prescriptions, (ii) an accrual for prior months’ unpaid rebates and (iii) an accrual for estimated inventory in the distribution channel.

Medicare Discounts—Part D—Effective January 1, 2006, Medicare created a prescription drug benefit for its beneficiaries known as Medicare Part D. CMS, the Centers for Medicare and Medicaid Services, contracted with numerous health plans and prescription drug benefit plans to design and administer the drug benefit, including the development of a formulary (which defines which products are covered and at what co-pay level). We pay rebates to certain Part D health plans and prescription drug plans on the sale of Lunesta and Xopenex HFA. Xopenex UDV has been and will remain covered as a Part B product, resulting in minimal Part D utilization. Our accruals for Part D are for rebates required for Lunesta and Xopenex HFA and are estimated based on projected sales volumes through the contacted health and drug plans.

The provision for Medicare rebates was less than 1% of gross sales for both the three months ended March 31, 2006 and 2005. Actual Medicare discounts could change significantly in the future based on future Medicare reimbursement classifications. If the Medicare discount provision percentage were to increase by 0.5% of first quarter 2006 gross sales of our marketed products, we would incur an additional provision of approximately $1.7 million.

Managed Care Discounts—We have entered into agreements with certain managed care organizations, or MCOs, whereby we provide agreed upon discounts to such entities based on the achievement of sales volume and/or market share purchasing targets. We record accruals for these discounts as a reduction of sales when product is sold based on discount rates and expected levels of sales volumes of these MCOs during a period. We estimate eligible sales based on historical amounts and sales trends and expected changes to these trends. Discounts are generally invoiced and paid quarterly in arrears. Accordingly, our accrual consists of (i) the amount expected to be incurred for the current quarter’s prescriptions, (ii) an accrual for prior quarters unpaid discounts and (iii) an accrual for estimated inventory in the distribution channel.

The provision for MCO rebates was approximately 1.6% and 1.1% of gross sales in the three months ended March 31, 2006 and 2005, respectively. Actual MCO discounts could exceed historical experience and our estimates of expected future participation in these programs. If the MCO discount provision percentage were to increase by 0.5% of first quarter 2006 gross sales of our marketed products, an additional provision of approximately $1.7 million would result.

Chargebacks and GPO Contract Discounts—We have entered into agreements with certain group purchasing organizations, or GPOs, in which its members can purchase product from our wholesalers at a specified price. GPOs are organizations that represent a group of end buyers in the purchase of goods. These agreements involve the wholesalers who receive a stated margin on sales to GPOs. When the difference between the wholesaler’s purchase price and the GPO’s price creates a margin less than the amount agreed between us and the wholesaler, the wholesaler requests a credit, which is referred to as a chargeback. We record accruals for these discounts as a reduction of sales when product is sold. We

estimate eligible sales based on a history of the average actual chargebacks and an average of the chargeback cycle time, which is the time from when a wholesaler sells to a GPO until we issue a credit to the wholesaler. We examine the history of sales that qualify for chargebacks and monitor sales trends and contractual changes. Our accrual consists of the amount we expect to be incurred for the current sales in the calculated chargeback cycle, plus an accrual for estimated inventory in the distribution channel.

The provision for chargebacks and GPO contract credits was approximately 3.5% and 1.8% of gross sales in the three months ended March 31, 2006 and 2005, respectively. The increase in the three months ended March 31, 2006 as compared to March 31, 2005 is mainly due to chargebacks related to sales discounts on XOPENEX HFA units that were ultimately sold to the Veterans Administration, or VA. Actual chargeback and GPO contract credits could exceed historical experience and our estimates of expected future participation in these programs. Additionally our estimate of the average chargeback cycle time could vary. If the provision for chargeback and GPO contract credits was to increase by 0.5% of first quarter 2006 gross sales of our marketed products, then an additional provision of approximately $1.7 million would result.

4) Returns—Customers can return short-dated or expired product that meets the guidelines set forth in our returns good policy. Product shelf life from the date of manufacture for XOPENEX Inhalation Solution is 15 months, XOPENEX HFA is 21 months and LUNESTA is 15-24 months. Returns are accepted from wholesalers and retail pharmacies. Customers can return product with six months or less of shelf life remaining and expired product within twelve months following the expiration date. We record an estimate for returns as reductions of revenue at the time product sales are recorded. We base our estimates of product returns on the percentage of returns that we have experienced historically and on a historical aging of the average time a return occurs from the time the product was sold. For products with insufficient return history, we estimate by examining data of similar drugs. For example, with LUNESTA we researched industry data on return patterns of widely prescribed insomnia drugs. We may adjust our estimate of product returns if we are aware of other factors that we believe could significantly impact our expected return percentages. These factors include our estimate of inventory levels of our products in the distribution channel, competitive issues such as new product entrants and other known changes in sales trends.

The provision for returns was approximately 1.9% and 2.5% for the three months ended March 31, 2006 and 2005, respectively. The decrease in return percentage provision in 2006 from 2005 is due to the introduction of LUNESTA in the second quarter of 2005, which has a significantly lower return percentage than XOPENEX Inhalation Solution. Actual returns could exceed historical experience and, accordingly, our estimates of expected future returns due to factors such as wholesaler and retailer stocking patterns and inventory levels and/or competitive changes. If the returns provision percentage were to increase by 0.5% of first quarter 2006 gross sales for each of these products, then an additional provision of $1.7 million would be necessary.

Many of our accruals include an estimate of inventory in the distribution pipeline. At March 31, 2006, we believe a reasonable estimate of the value of our pipeline inventory is approximately $63.0 million for XOPENEX Inhalation Solution, $11.0 million for XOPENEX HFA and $74.0 million for LUNESTA.

5) Other Discounts—At times we offer special programs and discounts. In 2005, we implemented discount programs related to the launch of LUNESTA and XOPENEX HFA to support the goal of making the products widely available. These programs include discounts for auto-shipments to pharmacies, coupons and vouchers. Under the auto-shipments to pharmacies program, we give a discount to wholesalers that provide evidence that they have delivered product to an agreed upon number of pharmacies in a timely manner. Under the coupon program, physicians give patients coupons to purchase the prescribed drug at a discount from any retail pharmacy. We reimburse retail pharmacies for these discounts through a third party administrator. Under the voucher program, physicians give patients vouchers to obtain free samples of the prescribed drug from any retail pharmacy. We reimburse retail

pharmacies for the cost of these products through a third party administrator. We use the voucher program primarily in states where samples cannot be shipped directly to physicians.

In each case mentioned above, we estimate the cost of reimbursement as a reduction of gross sales when the product is sold. In addition, we maintain an accrual for unused coupons and vouchers based on outstanding total coupons and vouchers and their historical usage rates and adjust this accrual whenever changes in such historical usage rate occur. Each of these programs has a defined expiration date.

The following table summarizes activity in each of the above product sales allowances and reserve categories for the period ended December 31, 2005 and the three months ended March 31, 2006:

	Payment Terms Discount				Wholesaler Fee for Service				Government Rebates and Contractual Discounts				Returns			Other Discounts				Total
	(in thousands)
Balance at December 31, 2005		$	(2,632	)		$	(9,503	)		$	(47,462	)	$	(16,269	)		$	(553	)	$	(76,419	)
Current provision:		(6,885		)		(8,561		)		(40,192		)	(6,282		)		(990		)	(62,910		)
Actual:
Current periods		3,577				—				572			—				267			4,416
Prior periods		2,958				1,953				21,384			3,185				597			30,077
Total		6,535				1,953				21,956			3,185				864			34,493
Balance at March 31, 2006		$	(2,982	)		$	(16,111	)		$	(65,698	)	$	(19,366	)		$	(679	)	$	(104,836	)

Stock-Based Compensation—Effective January 1, 2006, we adopted the provisions of SFAS 123(R), which resulted in changes to our financial statements as detailed in Note 4 to the financial statements. Determining the amount and distribution of expense for stock-based compensation, as well as the associated impact to the balance sheets and statements of cash flows, requires us to develop estimates of the fair value of stock-based compensation expenses.

We estimate the fair value of stock options using the Black-Scholes valuation model. This valuation model takes into account the exercise price of the award, as well as a variety of assumptions. These assumptions used to estimate the fair value of stock options include the expected term, the expected volatility of our stock over the expected term, the risk-free interest rate over the expected term, and our expected annual dividend yield. As required by SFAS 123(R), management has also made an estimate of expected forfeitures in determining the amount of expense to be recorded, and is recognizing compensation expense only for those equity awards expected to vest. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of stock-based compensation expenses. These estimates are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Three Month Periods ended March 31, 2006 and 2005 (Restated)

Revenues

Product sales were $277,505,000 and $106,648,000 for the three months ended March 31, 2006 and 2005, respectively, an increase of approximately 160%. This increase is primarily a result of the commercial introduction of LUNESTA in April 2005, a significant increase in XOPENEX Inhalation Solution revenue and the commercial introduction of XOPENEX HFA in December 2005.

Sales of LUNESTA were $138,085,000 for the three months ended March 31, 2006 as compared to $0 for the same period in 2005. LUNESTA was commercially introduced in April 2005.

Sales of XOPENEX Inhalation Solution were $134,065,000 for the three months ended March 31, 2006 as compared to $106,648,000 for the same period in 2005, an increase of approximately 26%. The

sales increase for XOPENEX Inhalation Solution for the three months ended March 31, 2006 as compared with the same period in 2005 is due to a 16% increase in the number of units sold and an 8% increase in the net selling price per unit, which is due to a gross unit price increase of approximately 8%. Adjustments recorded to gross sales remained relatively unchanged as disclosed in the table below.

Sales of XOPENEX HFA were $5,355,000 for the three months ended March 31, 2006, as compared to $0 for the same period in 2005. XOPENEX HFA was commercially introduced in December 2005.

Analysis of gross sales to net sales—The following table presents the adjustments deducted from gross sales to arrive at a net sales figure:

	For the three months ended March 31,
	2006		% of sales		2005		% of sales		Change		% Change
	(dollars in thousands)
Gross sales	$	340,415	100	%	$	129,030	100	%	$	211,385		164	%
Adjustments to gross sales:
Payment term discounts	6,885		2.0	%	2,750		2.1	%	4,135			150	%
Wholesaler fee for service	8,561		2.5	%	—		0.0	%	8,561			100	%
Government rebates and contractual discounts	40,192		11.8	%	16,284		12.6	%	23,908			147	%
Returns	6,282		1.9	%	3,276		2.5	%	3,006			92	%
Other (includes product launch discounts)	990		0.3	%	72		0.1	%	918			1,275	%
Sub-total adjustments	62,910		18.5	%	22,382		17.3	%	40,528			181	%
Net sales	$	277,505	81.5	%	$	106,648	82.7	%	$	170,857		160	%

Increases in the adjustments to gross sales as a percentage of gross sales from the quarter ended March 31, 2005 to the quarter ended March 31, 2006 primarily reflect the establishment of wholesaler fee for service discount arrangements in 2006 to provide for fees consistent with the terms of the wholesaler service agreements we executed in the second quarter of 2005, offset by, lower returns reserve as a percentage of gross sales due to LUNESTA being accrued at a lower rate than XOPENEX Inhalation Solution and an overall decrease in government rebates and contractual discounts as a percentage of gross sales. Part of the decrease is associated with lower Medicare Part B discounts resulting from favorable Medicare reimbursement rates for XOPENEX Inhalation Solution. We cannot be certain these favorable rates will continue. In March 2006, the Medicare Durable Medical Equipment Program Safeguard Contractors, or DME-PSCs, issued a draft local coverage determination under which Medicare reimbursement for XOPENEX Inhalation Solution would be reduced to the level of reimbursement for generic albuterol. If this local coverage determination is implemented, our sales of XOPENEX Inhalation Solutions would be material adversely affected.

Royalties were $8,173,000 and $12,397,000 for the three months ended March 31, 2006 and 2005, respectively, a decrease of approximately 34%. The decrease is primarily due to the decrease in royalties earned on the sales of ALLEGRA under our agreement with sanofi-aventis, which were $5,439,000 for the three months ended March 31, 2006 compared to $9,277,000 for the same period in 2005, with the majority of the decrease occurring in the United States. Pursuant to the terms of our U.S. agreement with sanofi-aventis, our royalties on the sale of ALLEGRA in the United States, which have historically been $15 to $20 million per year, terminated based on the introduction of a generic equivalent of this product in September 2005. We are still entitled to receive royalties on the sale of ALLEGRA outside of the United States in countries where we hold patents covering ALLEGRA and no generic equivalent product has been introduced. Royalties earned on sales of CLARINEX®, under our agreement with Schering-Plough Corporation, decreased to $1,981,000 from $2,340,000 for the three months ended March 31, 2006 versus the same period in 2005.

Costs of Revenues

Cost of product sold was $25,533,000 and $10,037,000 for the three months ended March 31, 2006 and 2005, respectively.

Cost of LUNESTA sold as a percentage of LUNESTA sales was approximately 6% for the three months ended March 31, 2006, with the largest portion being the royalty paid on net sales of LUNESTA to a third party. In accordance with our accounting policies, we did not begin to capitalize product manufacturing costs associated with LUNESTA inventory until the FDA approved the new drug application, or NDA, for LUNESTA. Therefore, we expect costs of LUNESTA sold as a percentage of LUNESTA sales to increase after we have sold all of our product for which we have not capitalized manufacturing costs. We expect this to occur around mid to late 2006.

Cost of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution sales was approximately 9% for the three months ended March 31, 2006 and for the same period in 2005.

Cost of XOPENEX HFA sold as a percentage of XOPENEX HFA sales was approximately 14% for the three months ended March 31, 2006. Included in the costs of XOPENEX HFA sold is a royalty paid on net sales of XOPENEX HFA to 3M Company, or 3M, our third-party finished goods manufacturer of the product.

Cost of royalties earned was $159,000 and $203,000 for the three months ended March 31, 2006 and 2005, respectively. The cost of royalties in both periods relates to an obligation to a third party as a result of royalties we earn from Schering-Plough Corporation based upon its sales of CLARINEX. This decrease in third-party obligations is due to the decrease in royalties earned in the three months ended March 31, 2006 as compared with the same period in 2005.

Research and Development

Research and development expenses were $49,269,000 and $28,569,000 for the three months ended March 31, 2006 and 2005, respectively, an increase of approximately 72%. The increase is primarily due to our increased spending on our LUNESTA Phase IIIB/IV program as well as drug discovery efforts. We also incurred increased spending on one of our early-stage programs, SEP-225289, targeted for the treatment of depression. In addition, stock compensation expense resulting from the January 1, 2006 implementation of FAS123(R) was $2,425,000 for the period ended March 31, 2006 as compared to $0 for the period ended March 31, 2005.

Drug development and approval in the United States is a multi-step process regulated by the FDA. The process begins with the filing of an investigational new drug application, or IND, which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study: Phase I, II and III. The most significant costs in clinical development are in Phase III clinical trials, as they tend to be the longest and largest studies in the drug development process. Following successful completion of Phase III clinical trials, an NDA must be submitted to, and accepted by, the FDA, and the FDA must approve the NDA prior to commercialization of the drug. We may elect either on our own, or at the request of the FDA, to conduct further studies that are referred to as Phase IIIB and IV studies. Phase IIIB studies are initiated and either completed or substantially completed while the NDA is under FDA review. These studies are conducted under an IND. Phase IV studies, also referred to as post-marketing studies, are studies that are initiated and conducted after the FDA has approved a product for marketing. Phase IV studies may be requested by the FDA either before or after the FDA has approved an NDA. These studies may also be independently initiated by the company whose NDA has been approved. The FDA uses post-marketing studies to gather additional information about a product’s safety, efficacy or optimal use.

Successful development of our product candidates is highly uncertain. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. The lengthy

process of seeking FDA approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or delay in obtaining, regulatory approvals could materially adversely affect our business. We cannot assure you that we will obtain any approval required by the FDA on a timely basis, if at all.

For additional discussion of the risks and uncertainties associated with completing development of potential product candidates, see “Risk Factors”.

Below is a summary of development of our products and product candidates that represent 10% or more of our direct project research and development spending for the three months ended March 31, 2006. The “Estimate of Completion of Stage” column contains forward-looking statements regarding expected timing of completion of product development phases. Completion of product development, if successful, culminates in the submission of an NDA to the FDA. The actual timing of completion of phases could differ materially from the estimates provided in the table. The table is sorted by highest to lowest spending amounts, and the three product candidates listed accounted for approximately 89% of our direct project research and development spending for the three months ended March 31, 2006. No other product candidate accounted for more than 6% of our direct research and development spending in this period.

Product or Product Candidate

Indication

Phase of
Development

Estimate of
Completion of Phase

LUNESTA (eszopiclone)

Insomnia

XOPENEX HFA (levalbuterol tartrate)

Respiratory—Asthma

Arformoterol

Respiratory—COPD

***

SEP-225289

Depression

Phase I

2007

* We commercially launched LUNESTA in April 2005.

** We commercially launched XOPENEX HFA in December 2005.

*** We submitted an NDA to the FDA in December 2005. The Prescription Drug User Fee Act, or PDUFA, date is October 12, 2006.

Below is a summary of expenditure information related to our product candidates representing 10% or more of our direct project research and development spending during the three months ended March 31, 2006, and 2005, as well as the costs incurred to date on these projects. The costs in this analysis include only direct costs and do not include certain indirect labor, overhead, stock based compensation, or other costs which benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not presented.

	Project costs for the three months ended March 31, 2006			Project costs to date through March 31, 2006			Project costs for the three months ended March 31, 2005			Project costs to date through March 31, 2005
	(in thousands)
LUNESTA (eszopiclone)		$	7,981		$	207,703		$	—		$	183,369
XOPENEX HFA (levalbuterol tartrate)		$	5,287		$	162,078		$	5,246		$	137,943
Arformoterol		$	3,643		$	165,221		$	3,796		$	147,315
SEP-225289		$	2,799		$	6,750		$	493		$	493

Due to the length of time necessary to develop a product, uncertainties related to the ability to obtain governmental approval for commercialization, and difficulty in estimating costs of projects, it is difficult to make accurate and meaningful estimates of the ultimate cost to bring our product candidates to FDA approved status. We do not believe it is possible to estimate, with any degree of accuracy, the costs of product candidates that are in stages earlier than Phase III.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $189,991,000 and $93,207,000 for the three months ended March 31, 2006 and 2005, respectively, an increase of approximately 104%. Of this increase, approximately 65% is due to an increase in marketing, advertising and promotion costs in support of the commercial launch of LUNESTA, which took place in April 2005. Additionally, we incurred increased payroll and related expense as a result of hiring additional sales representatives and management to support the commercialization of LUNESTA and XOPENEX HFA. We also experienced increased sales training costs for the three months ended March 31, 2006 compared to the same period last year as a result of sales training for our sales force expansion in 2006. In addition, stock-based compensation expense was $3,304,000 for the period ended March 31, 2006, which included $3,274,000 resulting from our January 1, 2006 implementation of SFAS 123(R) as compared to $35,000 of stock-based compensation expense for the period ended March 31, 2005.

General and Administrative

General and administrative costs were $14,508,000 and $8,707,000 for the three months ended March 31, 2006 and 2005, respectively, an increase of approximately 67%. Of this increase, stock-based compensation expense was approximately $4,185,000 or 72%, which included $3,992,000 resulting from the January 1, 2006 implementation of SFAS 123(R) as compared to $226,000 of stock-based compensation expense for the same period in 2005.

Other Income (Expense)

Interest income was $9,794,000 and $5,248,000 for the three months ended March 31, 2006 and 2005, respectively, an increase of approximately 87%. The increase is due to higher average balances of cash and short- and long-term investments combined with an increase in the interest rates earned on investments in 2006. Our monthly average cash and investment balance was approximately $978,657,000 and $813,591,000 for the three months ended March 31, 2006 and 2005, respectively. For the three months ended March 31, 2006 and 2005 the average annualized interest rate that we earned on our investments was 4.00% and 2.58%, respectively.

Interest expense was $5,551,000 and $5,842,000 for the three months ended March 31, 2006 and 2005, respectively. The expense in both periods is primarily related to the interest we paid on our 5% convertible subordinated debentures.

Equity in investee losses were $258,000 and $168,000 for the three months ended March 31, 2006 and 2005, respectively, an increase of approximately 54%. The loss represents our portion of BioSphere losses.

Liquidity and Capital Resources (Restated)

Our liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses, capital expenditures, working capital, debt service and general corporate expenses. We have funded these requirements and the growth of our business primarily through convertible subordinated debt offerings, the issuance of common stock, including the exercise of stock options, and sales of product and license agreements for our drug compounds. We now expect to fund our liquidity requirements primarily through the generation of positive cash flow from our operations. We also believe we have the ability to meet our short-term liquidity needs through the use of our cash and short-term investments on hand at March 31, 2006.

Cash, cash equivalents and short- and long-term investments totaled $960,201,000, or 75% of total assests at March 31, 2006, compared to $976,201,000, or 77% of total assets at December 31, 2005.

Net cash used in operating activities for the three months ended March 31, 2006 was $27,567,000 which includes net income of $10,036,000, which includes non-cash charges of $15,274,000, consisting

primarily of stock compensation and depreciation and amortization expense. Accounts receivable and inventory increased by $10,137,000 and $3,836,000, respectively due primarily to LUNESTA and XOPENEX Inhalation Solution sales. Other current assets increased by $10,976,000, which is primarily attributable to an increase in prepaid expenses as well as an increase in interest receivable on our investments. Accounts payable increased by $15,138,000 primarily due to timing of vendor payments. Accrued expenses decreased by $71,196,000 primarily due to the timing of payments relating to commissions, interest and sales and marketing accruals as well as a decrease in manufacturing accruals due to the production timing of LUNESTA and XOPENEX HFA. Other current liabilities increased by $28,130,000 primarily due to an increase in accruals for product revenue rebates related to LUNESTA and XOPENEX HFA product sales.

Net cash used in investing activities for the three months ended March 31, 2006 was $37,621,000. Cash used in net purchases of short- and long-term investments was $22,849,000. We made purchases of property and equipment of $5,833,000. We also made an investment in ACADIA of $8,939,000.

Net cash provided by financing activities for the three months ended March 31, 2006 was $6,399,000. We received proceeds of $6,987,000 from issuing common stock upon the exercise of stock options issued under our stock option plans. We also used $588,000 to repay capital lease obligations and long-term debt.

We believe our existing cash and the anticipated cash flow from operations and current strategic alliances will be sufficient to support existing operations through 2007. In the longer term, we expect to continue to fund our operations with revenue generated from product sales. Our actual future cash requirements and our ability to generate revenue, however, will depend on many factors, including:

· LUNESTA sales;

· XOPENEX Inhalation Solution sales;

· successful commercialization of XOPENEX HFA;

· FDA approval of our arformoterol NDA;

· acquisitions of technologies, product candidates, approved products and/or businesses;

· our ability to establish and maintain additional strategic alliances and licensing arrangements;

· achievement of milestones under our strategic alliance arrangements;

· progress of our preclinical, clinical and research programs and the number and breadth of these programs; and

· progress of our development efforts and the development efforts of our strategic partners.

If our assumptions underlying our beliefs regarding future revenues and expenses change, or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling debt or equity securities or borrowing money from a bank. However, we may not be able to raise such funds on favorable terms, or at all.

Based on our current operating plan, we believe that we will not be required to raise additional capital to fund the repayment of our outstanding convertible debt when due. If we are not able to successfully continue to grow our revenue and properly manage our expenses, it is likely that our business would be materially and adversely affected and that we would be required to raise additional funds in order to repay our outstanding convertible debt. We cannot assure that, if required, we would be able to raise the additional funds on favorable terms, if at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than operating leases in the normal course of business, or variable interest entities or activities that include non-exchange traded contracts accounted for at fair value.

Contractual Obligations

As of March 31, 2006, our contractual obligations disclosure in our annual report on Form 10-K/A for the year ended December 31, 2005 has not materially changed.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risk from changes in interest rates and equity prices, which could affect our future results of operations and financial condition. These risks are described in our annual report on Form 10-K/A for the year ended December 31, 2005. As of May 9, 2006, there have been no material changes to the market risks described in our annual report on Form 10-K/A for the year ended December 31, 2005. Additionally, we do not anticipate any near-term changes in the nature of our market risk exposures or in our management’s objectives and strategies with respect to managing such exposures.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In August 2006, our management, with the participation of our chief executive officer and chief financial officer, re-evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2006 taking into account the results of the special committee’s stock option review. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the re-evaluation of our disclosure controls and procedures as of March 31, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal Proceedings As of March 31, 2006

The following legal proceedings were pending as of March 31, 2006:

Levalbuterol Hydrochloride Inhalation Solution ANDAs. In September 2005, we received notification that the FDA had received an ANDA from Breath Limited seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution. Breath Limited’s submission includes a Paragraph IV certification alleging that our patents listed in the FDA publication entitled “Approved Drug Products With Therapeutic Equivalence Evaluations,” commonly referred to as the “Orange Book,” for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by Breath Limited’s proposed product. We have filed a civil action against Breath Limited for patent infringement. We were notified in January 2006 of a second ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Dey, L.P. We have filed a civil action against Dey, L.P. for patent infringement. In April 2006, we were notified of a third ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Watson Laboratories, Inc. We have yet to decide whether we will file a civil action against Watson Laboratories, Inc. for patent infringement.

Should we successfully enforce our patents, ANDA approval will not occur until the expiration of the applicable patents. Otherwise, the FDA will stay its approval of the relevant ANDA until 30 months following the date we received notice of such ANDA or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier. Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of the lawsuit. If we are not successful in enforcing our patents, we will not be able to exclude the generic company, for the full term of our patents, from marketing their generic version of XOPENEX Inhalation Solution. Introduction of a generic copy of XOPENEX Inhalation Solution before the expiration of our patents would have a material adverse effect on our business.

Tecastemizole Class Action Complaints. We and several of our current and former officers and a current director are named as defendants in several class action complaints which have been filed on behalf of certain persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all ending on March 6, 2002. These complaints allege violations of the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily they allege that the defendants made certain materially false and misleading statements relating to the testing, safety and likelihood of FDA approval of tecastemizole. In both the debt purchasers’ action and equity purchasers’ action, the court has granted the plaintiffs’ motion for class certification. In late February 2006, two corrected and amended consolidated complaints were filed, one on behalf of the purchasers of our common stock and the other on behalf of the purchasers of our debt securities. These corrected and amended consolidated complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. The parties are currently engaged in discovery. We are unable to reasonably estimate any possible range of loss related to the lawsuits due to their uncertain resolution. However, any conclusion of these matters in a manner adverse to us would have a material adverse effect on our financial position and results of operation.

Legal Proceedings Relating to Stock Option Review

The following legal proceedings relating to the stock option review discussed in the Explanatory Note at the beginning of this Form 10-Q/A and Note 11 to the consolidated financial statements set forth herein were initiated after March 31, 2006:

Stock Option Inquiry. In June 2006, we announced that we had received an informal letter of inquiry from the SEC requesting documents related to our stock option grants and stock option practices. We appointed a special committee of outside directors to conduct an internal review relating to our stock option grants and stock option practices. The special committee, with the assistance of outside legal counsel and outside accounting specialists, has reviewed stock option grants to our officers, directors and employees from 1996 to present under our various stock option plans in effect during this period. We have been cooperating with the review and our finance department has also reviewed our stock option grants and stock option practices. Although the special committee has completed its review, the committee will remain in place for the duration of the SEC's inquiry. Should additional information become available to us in connection with the SEC inquiry, the special committee may be required to reopen its review and our current determination of stock-based compensation could change. See Note 11 to our financial statements for additional information concerning these reviews.

Derivative Stockholder Complaints. We have accepted service of three stockholder derivative complaints that were filed in the Superior Court, Middlesex County, Commonwealth of Massachusetts, naming Sepracor as nominal defendant and also naming as defendants certain current members of our board of directors and certain of our current and former employees. The complaints allege purported breaches of fiduciary duties and unjust enrichment in connection with certain stock option grants made by us between June 1998 and May 2001. The complaints seek monetary damages in unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the Court. On August 30, 2006, the parties in all three actions moved to consolidate the actions and to transfer them to the Business Litigation Session of the Superior Court, Suffolk County.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

Risks Related to Our Financial Results

We have a history of net losses and we may not be able to generate revenues sufficient to achieve and maintain profitability on a quarterly and annual basis.

Except for our fiscal quarters ended December 31, 2005 and March 31, 2006, we have incurred net losses each quarter since our inception. It is possible we will not be able to achieve profitability again or maintain profitability on a quarterly or annual basis. We expect to continue to incur significant operating expenditures to further develop and commercialize our products and product candidates. As a result, we will need to generate significant revenues in future periods to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues or that we will ever achieve profitability again. Even if we do achieve profitability again, we may not be able maintain profitability for any substantial period of time. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected. In addition, if we are unable to achieve or maintain profitability on a quarterly or annual basis, the market price of our common stock may decline.

Almost all of our revenues are derived from sales of LUNESTA and XOPENEX Inhalation Solution and our future success depends on the continued commercial success of these products.

Approximately 95% of our revenues for the three months ended March 31, 2006 resulted from sales of LUNESTA and XOPENEX Inhalation Solution and we expect sales from these two products to represent substantially all of our revenues for the foreseeable future. In April 2005, we commercially launched LUNESTA as a new product in a highly and increasingly competitive market and we cannot be certain that it will achieve continued commercial success. In addition, we do not have long-term sales contracts with our customers, and we rely on purchase orders for sales of LUNESTA and XOPENEX Inhalation Solution. Reductions, delays or cancellations of orders for LUNESTA or XOPENEX Inhalation Solution could adversely affect our operating results. If sales of LUNESTA and XOPENEX Inhalation Solution do not continue to increase, we may not have sufficient revenues to achieve our business plan or repay our outstanding debt, and our business will not be successful. In December 2005, we commercially launched XOPENEX HFA and we cannot be certain that it will achieve commercial success.

With respect to XOPENEX Inhalation Solution, three generic companies have filed ANDAs with the FDA seeking to market a generic version of levalbuterol hydrochloride inhalation solution. We have commenced patent litigation against two of these generic companies and we have yet to decide whether to commence litigation against the third. A finding that the products these companies wish to market do not infringe our patents or that our patents are invalid or unenforceable will likely lead to introduction of generic levalbuterol inhalation solution. If this occurs, sales of XOPENEX Inhalation Solution will be adversely affected.

We cannot be certain that we will be able to continue to successfully commercialize our products or that any of our products will continue to be accepted in their markets. Specifically, the following factors, among others, could affect the level of success and market acceptance of LUNESTA, XOPENEX Inhalation Solution and/or XOPENEX HFA:

· a change in the perception of the health care community of their safety and/or efficacy, both in an absolute sense and relative to that of competing products;

· the introduction of new products into the sleep or respiratory markets;

· the level and effectiveness of our sales and marketing efforts;

· any unfavorable publicity regarding these products or similar products;

· litigation or threats of litigation with respect to these products;

· the price of the product relative to other competing drugs or treatments;

· any changes in government and other third-party payor reimbursement policies and practices; and

· regulatory developments affecting the manufacture, marketing or use of these products.

Any adverse developments with respect to the sale of LUNESTA or XOPENEX Inhalation Solution could significantly reduce revenues and have a material adverse effect on our ability to maintain profitability and achieve our business plan.

We have significant long-term debt and we may not be able to make principal payments when due.

As of March 31, 2006, our total long-term debt was approximately $1.2 billion and our stockholders’ equity (deficit) was ($127.7) million. None of our 5% debentures due 2007, our 0% Series A notes due 2008, our 0% Series B notes due 2010 nor our 0% notes due 2024 restricts us or our subsidiaries’ ability to incur additional indebtedness, including debt that ranks senior to the notes. The 0% notes due 2024 are senior to the Series A notes due 2008 and Series B notes due 2010, which are senior to the 5% debentures due 2007. Additional indebtedness that we incur may in certain circumstances rank senior to or on parity

with this debt. Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. The conversion prices for the 5% debentures due 2007, 0% Series A notes due 2008 and 0% Series B notes due 2010 are $92.38, $31.89 and $29.84, respectively. On May 1, 2006, the closing sale price of our common stock was $43.76. If the market price for our common stock does not exceed the conversion price, the holders of our outstanding convertible debt may not convert their securities into common stock. Our 0% notes due 2024 are convertible into cash and, if applicable, shares of our common stock at a conversion price of approximately $67.20, at the option of the holders under certain circumstances. We may not be able to make the required cash payments upon conversion of the 0% notes due 2024.

Historically, we have had negative cash flow from operations. For the three months ended March 31, 2006, net cash used in operating activities was approximately $27.6 million. Our annual debt service through 2006, assuming no additional interest-bearing debt is incurred and no additional 5% debentures due 2007 are converted, redeemed, repurchased or exchanged, is approximately $22.0 million. Unless we have sufficient cash or are able to generate sufficient operating cash flow to pay off the principal of our outstanding debt, we will be required to raise additional funds or default on our obligations under the debentures and notes. If revenue generated from sales of LUNESTA and XOPENEX Inhalation Solution do not meet expected levels, it is unlikely that we would have sufficient cash flow to repay our outstanding convertible debt and/or make cash payments upon conversion of the 0% notes due 2024. There can be no assurance that, if required, we would be able to raise the additional funds on favorable terms, if at all.

If we exchange debt for shares of common stock, there will be additional dilution to holders of our common stock.

As of March 31, 2006, we had approximately $1.2 billion of outstanding long-term debt. In order to reduce future cash interest payments, as well as future payments due at maturity, we may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for shares of our common stock, warrants, preferred stock, debt or other consideration; or a combination of any of the foregoing. If we exchange shares of our capital stock, or securities convertible into or exercisable for our capital stock, for outstanding convertible debt or use proceeds from the issuance of convertible debt to fund redemption of outstanding convertible debt with a higher conversion ratio, the number of shares that we might issue as a result of such exchanges would significantly exceed the number of shares originally issuable upon conversion of such debt and, accordingly, such exchanges would result in material dilution to holders of our common stock. We cannot assure you that we will repurchase or exchange any additional outstanding convertible debt.

If the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from these reflected in our projections and accruals.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We cannot assure you, however, that our estimates, or the assumptions underlying them will not be materially different from actual results. For example, our royalty revenue is recognized based upon our estimates of our collaboration partners’ sales during the period and, if these sales estimates are greater than the actual sales that occur during the period, our net income would be reduced. This, in turn, could adversely affect our stock price.

If sufficient funds to finance our business are not available to us when needed or on acceptable terms, then we may be required to delay, scale back, eliminate or alter our strategy for our programs.

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit of regulatory approvals, license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically, we have satisfied our funding needs through collaboration arrangements with corporate partners, sales of product, and equity and debt financings. These funding sources may not be available to us when needed in the future, and, if available, they may not be on terms acceptable to us. Insufficient funds could require us to delay, scale back or eliminate certain of our research and product development programs or to enter into license agreements with third parties to commercialize products or technologies that we would otherwise develop or commercialize ourselves. Our cash requirements may vary materially from those now planned because of factors including:

· patent developments;

· licensing or acquisition opportunities;

· relationships with collaboration partners;

· the FDA regulatory process;

· litigation;

· our capital requirements; and

· selling, marketing and manufacturing expenses in connection with commercialization of products.

Several class action lawsuits have been filed against us which may result in litigation that is costly to defend and the outcome of which is uncertain and may harm our business.

We and several of our current and former officers and a current director are named as defendants in several class action complaints which have been filed on behalf of certain persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all ending on March 6, 2002. These complaints allege violations of the Exchange Act and the rules and regulations promulgated thereunder by the SEC. Primarily they allege that the defendants made certain materially false and misleading statements relating to the testing, safety and likelihood of FDA approval of tecastemizole. On September 8, 2005, in both the debt purchasers’ action and the equity purchasers’ action, the district court granted the plaintiff’s motion for class certification. In late February 2006, two corrected and amended consolidated complaints were filed, one on behalf of the purchasers of our equity securities and the other on behalf the purchasers of our debt securities. These corrected and amended consolidated complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. The parties are currently engaged in discovery.

We can provide no assurance as to the outcome of these lawsuits. Any conclusion of these matters in a manner adverse to us would have a material adverse effect on our financial condition and business. In addition, the costs to us of defending any litigation or other proceeding, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and our resources in general. Uncertainties resulting from the initiation and continuation of any litigation or other proceedings could harm our ability to compete in the marketplace.

Fluctuations in the demand for products, the success and timing of clinical trials, regulatory approvals, product launches, collaboration arrangements and any termination of development efforts will cause fluctuations in our quarterly operating results, which could cause volatility in our stock price.

Our quarterly operating results are likely to fluctuate significantly, which could cause our stock price to be volatile. These fluctuations will depend on many factors, including:

· timing and extent of product sales and market penetration;

· timing and extent of operating expenses, including selling and marketing expenses and the costs of expanding and maintaining a direct sales force;

· success and timing of regulatory filings and approvals for products developed by us or our licensing partners or for collaborative agreements;

· timing and success of product launches;

· introduction of competitive products into the market;

· results of clinical trials with respect to products under development;

· the initiation of litigation against us, or adverse developments in any judicial proceedings in which we are involved;

· a change in the perception of the health care and/or investor communities with respect to our products;

· success and timing of collaboration agreements for development of our pharmaceutical candidates and development costs for those pharmaceuticals;

· timing of receipt of upfront, milestone or royalty payments under collaboration agreements;

· termination of development efforts of any product under development or any collaboration agreement; and

· timing of expenses we may incur with respect to any license or acquisitions of products or technologies.

We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders’ ability to sell their shares for a premium in a change of control transaction.

Various provisions of our certificate of incorporation and by-laws and of Delaware corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party that is opposed by our management and board of directors. Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and board of directors. These provisions include:

· preferred stock that could be issued by our board of directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock;

· classification of our directors into three classes with respect to the time for which they hold office;

· non-cumulative voting for directors;

· control by our board of directors of the size of our board of directors;

· limitations on the ability of stockholders to call special meetings of stockholders;

· inability of our stockholders to take any action by written consent; and

· advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.

In addition, in June 2002, our board of directors adopted a shareholder rights plan, the provisions of which could make it more difficult for a potential acquirer of Sepracor to consummate an acquisition transaction.

The price of our common stock historically has been volatile, which could cause you to lose part or all of your investment.

The market price of our common stock, like that of the common stock of many other pharmaceutical and biotechnology companies, may be highly volatile. In addition, the stock market has experienced extreme price and volume fluctuations. This volatility has significantly affected the market prices of securities of many pharmaceutical and biotechnology companies for reasons frequently unrelated to or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including variations in our financial results and investors’ perceptions of us, and changes in recommendations by securities analysts as well as their perceptions of general economic, industry and market conditions.

Risks Related to Commercialization

We face intense competition and our competitors have greater resources and capabilities than we have.

We face intense competition in the sale of our current products, and expect to face intense competition in the sale of any future products we sell. If we are unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may not achieve our product revenue objectives and because we may use our financial resources to seek to differentiate ourselves from our competition. Large and small companies, academic institutions, governmental agencies and other public and private organizations conduct research, seek patent protection, develop products, establish collaborative arrangements for product development and sell products in competition with us. Many of our competitors and potential competitors have substantially greater resources, manufacturing and sales and marketing capabilities, research and development staff and production facilities than we have. The fields in which we compete are subject to rapid and substantial technological change. Our competitors may be able to respond more quickly to new or emerging technologies or to devote greater resources to the development, manufacture and marketing of new products and/or technologies than we can. As a result, any products and/or technologies that we develop may become obsolete or noncompetitive before we can recover expenses incurred in connection with their development.

In the respiratory market, we compete primarily against albuterol. XOPENEX Inhalation Solution and generic albuterol inhalation solution currently account for the majority of beta-agonist inhalation solution prescriptions in the market. Albuterol has been marketed for many years, is well established and sells at prices substantially lower than XOPENEX Inhalation Solution. To continue successfully marketing XOPENEX Inhalation Solution, we must continue to demonstrate that the efficacy and safety features of our drug outweigh its higher cost. In the sleep disorder market, we face intense competition from established products, such as AMBIEN® and SONATA®. We also face competition from the newly approved sleep agents ROZEREMÔ and AMBIEN CRÔ. There are also other potentially competitive therapies that are in late-stage development for the treatment of insomnia. For all of our products, we need to demonstrate to physicians, patients and third-party payors that the cost of our product is reasonable and appropriate in light of its safety and efficacy, its price and the health care benefits, each as compared to other competing products.

We may be unable to commercialize products for which we receive approval from the FDA.

Commercialization of a product for which we have received an approval letter from the FDA could be delayed for a number of reasons, some of which are outside of our control, including delays in delivery of the product due to importation regulations and/or problems with our distribution channels or delays in the issuance of approvals from, or the completion of required procedures by, agencies other than the FDA, such as the United States Drug Enforcement Administration. In addition, commercialization of FDA-approved products may be delayed by our failure to timely finalize distribution arrangements, manufacturing processes and arrangements, produce sufficient inventory and/or properly prepare our sales force. If we are unable to commercialize a product promptly after receipt of an approval letter, our business and financial position may be materially adversely affected due to reduced revenue from product sales during the period or periods that commercialization is delayed and the shortening of any lead time to market we may have had over our competitors. In addition, the exclusivity period, which is the time during which the FDA will prevent generic pharmaceutical companies from introducing a generic copy of the product, begins to run upon FDA approval and, therefore, to the extent we are unable to commercialize a product promptly after receipt of an approval letter, our long-term product sales and revenues could be adversely affected.

Even if the FDA or similar foreign agencies grant us regulatory approval of a product, if we fail to comply with the applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizures of products, operating restrictions and criminal prosecution. In any such event, our product sales and revenues could be adversely affected.

We sell our products primarily through a direct sales force and if we are not successful in attracting and retaining qualified sales personnel, we may not be successful in commercializing our products.

We have limited marketing and sales experience. We have established a sales force to market XOPENEX Inhalation Solution, LUNESTA and XOPENEX HFA. We have incurred significant expense in expanding our sales force and expect to incur additional expense as we further expand. If we successfully develop and obtain regulatory approval for the products we are developing, we may (1) market and sell them through our sales force, (2) license some of them to large pharmaceutical companies or (3) market and sell them through other arrangements, including co-promotion arrangements. We may incur significant costs in expanding our sales force before the products under development have been approved for marketing. For example, we expanded our sales force in 2004 in anticipation of marketing and selling LUNESTA and in 2005 in anticipation of marketing and selling XOPENEX HFA. In addition, if we enter into co-promotion arrangements or market and sell additional products directly, we may need to significantly expand our sales force.

Our ability to realize significant revenues from direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel. Competition for these persons is intense. If we are unable to attract and retain qualified sales personnel, we will not be able to successfully expand our marketing and direct sales force on a timely or cost effective basis. We may also need to enter into additional co-promotion arrangements with third parties, for example where our own direct sales force is not large enough or sufficiently well aligned to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements may not be favorable to us.

If we or our third-party manufacturers do not comply with current Good Manufacturing Practices regulations, then the FDA could refuse to approve marketing applications or force us to recall or withdraw our products.

The FDA and other regulatory authorities require that our products be manufactured according to their Good Manufacturing Practices, or GMP, regulations. The failure by us, our collaborative development partners or third-party manufacturers to comply with current GMP regulations could lead to delay in our development programs or refusal by the FDA to approve marketing applications. Failure in either respect could also be the basis for action by the FDA to withdraw approvals previously granted, to recall products and for other regulatory action.

On October 22, 2004, we commenced notifying drug wholesalers, hospitals and pharmacies of a manufacturer-initiated voluntary Class III recall of one component of our XOPENEX Inhalation Solution product line, XOPENEX Inhalation Solution Concentrate (1.25mg/0.5mL), which we introduced in August 2004. The recall, which affects only XOPENEX Inhalation Solution Concentrate and no other components of our XOPENEX Inhalation Solution product line, was necessitated by packaging process validation issues relating to the automated process of placing finished vials into a foil pouch. We have suspended manufacture and sale of XOPENEX Inhalation Solution Concentrate until the issues giving rise to the recall have been fully addressed. We expect to re-introduce XOPENEX Inhalation Solution Concentrate before the end of 2006. If our manufacturer cannot remedy the GMP deficiencies giving rise to the recall of XOPENEX Inhalation Solution Concentrate, or if these or similar deficiencies are found to extend to other components or our XOPENEX Inhalation Solution product line, our ability to supply product to the market may be limited or interrupted indefinitely, which could have a material adverse effect on our business.

We could be exposed to significant liability claims that could prevent or interfere with our product commercialization efforts.

We may be subject to product liability claims that arise through testing, manufacturing, marketing, sale and use of pharmaceutical products. Product liability claims could distract our management and key personnel from our core business, require us to spend significant time and money in litigation or to pay significant damages, which could prevent or interfere with our product commercialization efforts and could adversely affect our business. Claims of this nature could also adversely affect our reputation, which could damage our position in the market and subject us to product recalls. Although we maintain product liability insurance coverage for both the clinical trials and commercialization of our products, it is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all, and that our insurance coverage may not provide adequate coverage against all potential claims.

Risks Related to the Regulatory Environment

If our products do not receive government approval, then we will not be able to commercialize them.

The FDA and similar foreign agencies must approve for commercialization any pharmaceutical products developed by us or our development partners. These agencies impose substantial requirements on drug manufacturing and marketing. Any unanticipated preclinical and clinical studies we are required to undertake could result in a significant increase in the cost of advancing our products to commercialization. In addition, failure by us or our collaborative development partners to obtain regulatory approval on a timely basis, or at all, or the attempt by us or our collaborative development partners to receive regulatory approval to achieve labeling objectives, could prevent or adversely affect the timing of commercial introduction of, or our ability to market and sell, our products.

If we fail to successfully develop and receive regulatory approval for arformoterol or other product candidates, we will be unable to commercialize the product candidates and future sales and earnings growth will be substantially hampered.

Our ability to maintain profitability will depend in large part on successful development and commercialization of additional products, including arformoterol. In February 2006, the FDA accepted our arformoterol NDA for filing. The PDUFA date for the arformoterol NDA is October 12, 2006. We cannot assure you that the FDA will approve our NDA for arformoterol on a timely basis, or at all. If the FDA does not approve our NDA for arformoterol, we will not be able to commercialize the product candidate and, therefore, will not receive any revenues from sales of the product.

Other than arformoterol, our product candidates are in the early stages of development. We cannot assure you that we will be able to develop or acquire and commercially introduce new products in a timely manner or that new products, if developed, will be approved for the indications, and/or with the labeling, we expect or that they will achieve market acceptance. Before we commercialize any other product candidate, we will need to successfully develop the product candidate by completing successful clinical trials, submitting an NDA for the product candidate that is accepted by the FDA and receiving FDA approval to market the candidate. If we fail to successfully develop a product candidate and/or the FDA delays or denies approval of any submitted NDA or any NDA that we submit in the future, then commercialization of our products under development may be delayed or terminated, which could have a material adverse effect on our business.

A number of problems may arise during the development of our product candidates:

· results of clinical trials may not be consistent with preclinical study results;

· results from later phases of clinical trials may not be consistent with results from earlier phases;

· results from clinical trials may not demonstrate that the product candidate is safe and efficacious;

· we may not receive regulatory approval for our product candidates;

· the product candidate may not offer therapeutic or other improvements over comparable drugs;

· we may elect not to continue funding the development of our product candidates; or

· funds may not be available to develop all of our product candidates.

In addition, our growth is dependent on our continued ability to penetrate new markets where we have limited experience and competition is intense. We cannot assure you that the markets we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that our products will achieve customer acceptance in these markets, that competitors will not force prices to an unacceptably low level or take market share from us, or that we can achieve or maintain profits in these markets.

If the FDA delays or denies approval of any NDA that we file in the future, then commercialization of the product subject to the NDA will be delayed or terminated, which could have a material adverse effect on our business.

The regulatory process to obtain marketing approval requires clinical trials of a product to establish its safety and efficacy. Problems that may arise during clinical trials include:

· results of clinical trials may not be consistent with preclinical study results;

· results from later phases of clinical trials may not be consistent with results from earlier phases; and

· products may not be shown to be safe and efficacious.

Even if the FDA or similar foreign agencies grant us regulatory approval of a product, the approval may take longer than we anticipate and may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing follow-up studies. Moreover, if we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Our sales depend on payment and reimbursement from third-party payors, and a reduction in payment rate or reimbursement could result in decreased use or sales of our products.

Sales of our products are dependent, in part, on the availability of reimbursement from third-party payors such as state and Federal governments under programs such as Medicare and Medicaid, and private insurance plans. Third-party payors continually attempt to contain or reduce the cost of health care by challenging the prices charged for medical products and services. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount.

There have been, there are, and we expect there will continue to be, state and Federal legislative and/or administrative proposals that could limit the amount that state or Federal governments will pay to reimburse the cost of pharmaceutical products. The Medicare Prescription Drug Improvement and Modernization Act of 2003, or the MMA, which was signed into law in December 2003, contains provisions that permit reductions in government reimbursement for drugs. We are not able to predict the full impact of the MMA and its regulatory requirements on our business. However, we believe that legislative or administrative acts that reduce reimbursement for our products could adversely affect our business. In addition, private insurers, such as managed care organizations, may adopt their own reimbursement reductions in response to legislation. Reduction in reimbursement for our products could have a material adverse effect on our results of operations. Also, the increasing emphasis on managed care in the U.S. may put increasing pressure on the price and usage of our products, which may adversely affect product sales. Further, when a new drug product is approved, governmental and/or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed. We cannot predict availability or amount of reimbursement for our approved products or product candidates, including those at a late stage of development, and current reimbursement policies for marketed products may change at any time.

The MMA also establishes a prescription drug benefit beginning in 2006 for all Medicare beneficiaries. We cannot be assured that our products will be included in the Medicare prescription drug benefit. Even if our products are included, we may be required to provide significant discounts or rebates to drug plans participating in the Medicare drug benefit. Moreover, the Federal government may acquire the ability to negotiate price and demand discounts on pharmaceutical products that may implicitly create price controls on prescription drugs. On the other hand, the drug benefit may increase the volume of pharmaceutical drug purchases, offsetting at least in part these potential price discounts. In addition, Managed Care Organizations, or MCOs, Health Maintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs, health care institutions and other government agencies continue to seek price discounts. MCOs, HMOs, PPOs and private health plans will administer the Medicare drug benefit, leading to managed care and private health plans influencing prescription decisions for a larger segment of the population. In addition, certain states have proposed and certain other states have adopted various programs to control prices for their seniors’ and low-income drug programs, including price or patient reimbursement constraints, restrictions on access to certain products, importation from other countries, such as Canada, and bulk purchasing of drugs.

Some states have adopted preferred drug lists, or PDLs, for their Medicaid programs and more states may adopt this practice. Medicaid PDLs indicate which drugs a provider is permitted under the Medicaid program to prescribe without first seeking prior authorization from the state Medicaid agency. If our drugs

are not included on Medicaid PDLs, use of our drugs in the Medicaid program may be adversely affected. In some states that have adopted PDLs, we have been, and may continue to be, required to provide substantial supplemental rebates to state Medicaid authorities in order for our drugs to be included on the PDL.

On March 24, 2006, the Medicare Durable Medical Equipment Program Safeguard Contractors, or DME-PSCs issued a draft local coverage determination under which Medicare reimbursement for XOPENEX Inhalation Solutions would be reduced to the level of reimbursement for generic albuterol. We oppose the DME-PSCs’ proposal and are seeking its withdrawal. However, if this local coverage determination is implemented, our sales of XOPENEX Inhalation Solution would be material adversely affected.

If reimbursement for our marketed products changes adversely or if we fail to obtain adequate reimbursement for our other current or future products, health care providers may limit how much or under what circumstances they will prescribe or administer them, which could reduce use of our products or cause us to reduce the price of our products.

We will spend considerable time and money complying with Federal and state laws and regulations and, if we are unable to fully comply with such laws and regulations, we could face substantial penalties.

We are subject to extensive regulation by Federal and state governments. The laws that directly or indirectly affect our business include, but are not limited to, the following:

· Federal Medicare and Medicaid Anti-Kickback laws, which prohibit persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under Federal health care programs such as the Medicare and Medicaid programs;

· other Medicare laws and regulations that establish requirements for coverage and payment for our products, including the amount of such payments;

· the Federal False Claims Act, which imposes civil and criminal liability on individuals and entities who submit, or cause to be submitted, false or fraudulent claims for payment to the government;

· the Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any health care benefit program, including private payors and, further, requires us to comply with standards regarding privacy and security of individually identifiable health information and conduct certain electronic transactions using standardized code sets;

· the Federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for health care benefits, items or services;

· the Federal Food, Drug and Cosmetic Act, which regulates manufacturing, labeling, marketing, distribution and sale of prescription drugs and medical devices;

· the Controlled Substances Act, which regulates handling of controlled substances such as LUNESTA;

· state and foreign law equivalents of the foregoing;

· state food and drug laws, pharmacy acts and state pharmacy board regulations, which govern sale, distribution, use, administration and prescribing of prescription drugs; and

· state laws that prohibit practice of medicine by non-physicians and fee-splitting arrangements between physicians and non-physicians, as well as state law equivalents to the Federal Medicare and Medicaid Anti-Kickback Laws, which may not be limited to government reimbursed items or services.

If our past or present operations are found to be in violation of any of the laws described above or other governmental regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from Medicare and Medicaid programs and curtailment or restructuring of our operations. Similarly, if our customers are found non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. In addition, if we are required to obtain permits or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from operating our business and damage our reputation.

If our Medicaid rebate program practices are investigated, the costs could be substantial and could divert the attention of management.

We are a participant in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990. Under the Medicaid rebate program, we pay a rebate for each unit of our product reimbursed by Medicaid. The amount of the rebate for each product is set by law. We are also required to pay certain statutorily defined rebates on Medicaid purchases for reimbursement on prescription drugs under state Medicaid plans. Both the Federal government and state governments have initiated investigations into the rebate practices of many pharmaceutical companies to ensure compliance with these rebate programs. Any investigation of our rebate practices could be costly, could divert the attention of our management from our core business and could damage our reputation.

The approval of sale of certain medications without a prescription may adversely affect our business.

In May 2001, an advisory panel to the FDA recommended that the FDA allow certain popular allergy medications to be sold without a prescription. In November 2002, the FDA approved CLARITIN®, an allergy medication, to be sold without a prescription. In the future, the FDA may also allow sale of other allergy medications without a prescription. The sale of CLARITIN and /or, if allowed, the sale of other allergy medications without a prescription, may have a material adverse effect on our business because the market for prescription drugs, including CLARINEX, for which we receive royalties on sales, has been and may continue to be adversely affected.

Risks Related to Our Intellectual Property

If we fail to adequately protect or enforce our intellectual property rights, then we could lose revenue under our licensing agreements or lose sales to generic copies of our products.

Our success depends in part on our ability to obtain, maintain and enforce patents, and protect trade secrets. Our ability to commercialize any drug successfully will largely depend upon our ability to obtain and maintain patents of sufficient scope to prevent third parties from developing substantially equivalent products. In the absence of patent and trade secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products. It is also possible

that we could incur substantial costs if we are required to initiate litigation against others to protect or enforce our intellectual property rights.

We have filed patent applications covering composition of, methods of making, and/or methods of using our drugs and drug candidates. Our revenues under collaboration agreements with pharmaceutical companies depend in part on the existence and scope of issued patents. We may not be issued patents based on patent applications already filed or that we file in the future and if patents are issued, they may be insufficient in scope to cover the products licensed under these collaboration agreements. Generally, we do not receive royalty revenue from sales of products licensed under collaboration agreements in countries where we do not have a patent for such products. The issuance of a patent in one country does not ensure the issuance of a patent in any other country. Furthermore, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and has been and remains the subject of much litigation. Legal standards relating to scope and validity of patent claims are evolving. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United States Patent and Trademark Office may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business.

On September 7, 2005, we announced that the FDA received an abbreviated new drug application, or ANDA from Breath Limited seeking marketing approval for generic copies of our 1.25 mg, 0.63 mg and 0.31 mg XOPENEX brand levalbuterol HCl Inhalation Solution unit-dose vial products. XOPENEX Inhalation Solution Concentrate is not subject to the ANDA. On January 12, 2006, we announced that we received notice that the FDA had received an ANDA from Dey, L.P. for a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution. Both submissions include a Paragraph IV certification alleging that our patents listed in the Orange Book for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the submitter’s proposed product. We have filed civil actions against Breath Limited and Dey, L.P. for patent infringement. In April 2006, we were notified of a third ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Watson Laboratories, Inc. We have yet to decide whether we will file a civil action against Watson Laboratories, Inc. for patent infringement.

Should we successfully enforce our patents, the FDA will not approve the ANDA until expiration of the applicable patents. Otherwise, the FDA will stay its approval of the relevant ANDA until 30 months following the date we received notice of such ANDA or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier. Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of the lawsuits. Any conclusion of these matters in a manner adverse to us would have a material adverse effect on our financial condition and business. If we are not successful in enforcing our patents, we will not be able to prevent the generic company, for the full term of our patents, from marketing their generic version of XOPENEX Inhalation Solution. Introduction of a generic copy of XOPENEX Inhalation Solution before the expiration of our patents would have a material adverse effect on our business. In addition, the costs to us of conducting these proceedings, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and other key personnel from our core business and our resources in general. Uncertainties resulting from the initiation and continuation of any litigation or other proceedings could harm our ability to compete in the marketplace.

If we face a claim of intellectual property infringement by a third party, then we could be liable for significant damages or be prevented from commercializing our products.

Our success depends in part on our ability to operate without infringing upon proprietary rights of others, including patent and trademark rights. Third parties, typically drug companies, hold patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for some of the drug candidates for which we have patents or patent applications. Third parties also hold patents relating to drug delivery technology that may be necessary for development or commercialization of some of our drug candidates. In each of these cases, unless we have or obtain a license agreement, we generally may not commercialize the drug candidates until these third-party patents expire or are declared invalid or unenforceable by the courts. Licenses may not be available to us on acceptable terms, if at all. In addition, it would be costly for us to contest validity of a third-party patent or defend any claim that we infringe a third-party patent. Moreover, litigation involving third-party patents may not be resolved in our favor. Such contests and litigation would be costly, would require significant time and attention of our management, could prevent us from commercializing our products, could require us to pay significant damages and could have a material adverse effect on our business. If any of our trademarks, or our use of any of our trademarks on our products, is challenged, we may be forced to rename the affected product or product candidate, which could be costly and time consuming, and would result in the loss of any brand equity associated with the product name.

Risks Related to Our Dependence on Third Parties

If any third-party collaborator is not successful in development of our product candidates, we may not realize the potential commercial benefits of the arrangement and our results of operations could be adversely affected.

We have entered into a collaboration agreement with 3M for the scale-up and manufacturing of XOPENEX HFA and we may enter into additional collaboration agreements in the future. Under our agreement with 3M, 3M is responsible for manufacturing an MDI formulation of XOPENEX. We commercially launched XOPENEX HFA in December 2005. If 3M, or any future development or commercialization collaborator, does not devote sufficient time and resources to its collaboration arrangement with us, breaches or terminates its agreement with us, fails to perform its obligation to us in a timely manner or is unsuccessful in its development and/or commercialization efforts, we may not realize the potential commercial benefits of the arrangement and our results of operations may be adversely affected. In addition, if regulatory approval or commercialization of any product candidate under development by or in collaboration with a partner is delayed or limited, we may not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement.

The royalties we receive under licensing arrangements could be delayed, reduced or terminated if our licensing partners terminate, or fail to perform their obligations under, their agreements with us, or if our licensing partners are unsuccessful in their sales efforts.

We have entered into licensing arrangements pursuant to which we license patents to pharmaceutical companies and our revenues under these licensing arrangements consist primarily of royalties on sales of products. Payments and royalties under these arrangements depend in large part on the commercialization efforts of our licensing partners in countries where we hold patents, including sales efforts and enforcement of patents, which we cannot control. If any of our licensing partners does not devote sufficient time and resources to its licensing arrangement with us or focuses its efforts in countries where we do not hold patents, we may not realize the potential commercial benefits of the arrangement, our revenues under these arrangements may be less than anticipated and our results of operations may be adversely affected. If any of our licensing partners was to breach or terminate its agreement with us or fail to perform its obligations to us in a timely manner, the royalties we receive under the licensing agreement could decrease

or cease. If we are unable or fail to perform, or breach in our performance of, our obligations under a licensing agreement, the royalties and benefits to which we are otherwise entitled under the agreement could be reduced or eliminated. Any delay or termination of this type could have a material adverse effect on our financial condition and results of operations because we may lose technology rights and milestone or royalty payments from licensing partners and/or revenues from product sales, if any, could be delayed, reduced or terminated.

We rely on third-party manufacturers, and this reliance could adversely affect our ability to meet our customers’ demands.

We currently operate a manufacturing plant that we believe can meet our commercial requirements of the active pharmaceutical ingredient for XOPENEX Inhalation Solution and XOPENEX HFA, partially fulfill our commercial requirements of the active pharmaceutical ingredient for LUNESTA, and support production of our product candidates in amounts needed for our clinical trials. We do not, however, have the capability to manufacture at our manufacturing facility all of our requirements for the active ingredients of our currently approved products, and we have no facilities for manufacturing pharmaceutical dosage forms or finished drug products. Developing and obtaining this capability would be time consuming and expensive. Unless and until we develop this capability, we will rely substantially, and in some cases, entirely, on third-party manufacturers. Cardinal Health, Inc. is currently the sole finished goods manufacturer of our XOPENEX Inhalation Solution, Patheon Inc. is the sole manufacturer of LUNESTA brand eszopiclone and 3M is the sole manufacturer and supplier of XOPENEX HFA. Certain components of XOPENEX HFA are available from only a single source. If Cardinal Health, Patheon, 3M, or any of our sole-source component suppliers experiences delays or difficulties in producing, packaging or delivering XOPENEX Inhalation Solution, LUNESTA, or XOPENEX HFA, as the case may be, we could be unable to meet our customers’ demands for such products, which could lead to customer dissatisfaction and damage to our reputation. Furthermore, if we are required to change manufacturers, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines, including FDA guidelines. The delays associated with the verification of a new manufacturer for XOPENEX Inhalation Solution, LUNESTA or XOPENEX HFA could negatively affect our ability to produce such products in a timely manner or within budget.

3M owns certain proprietary technology required to manufacture our XOPENEX HFA. If 3M is unable or unwilling to fulfill its obligations to us under our agreement, we may be unable to manufacture XOPENEX HFA on terms that are acceptable to us, if at all. Our other current contract manufacturers, as well as any future contract manufacturers, may also independently own technology related to manufacturing of our products. If so, we would be heavily dependent on such manufacturer and such manufacturer could require us to obtain a license in order to have another party manufacture our products.

Risks Related to Growth of Our Business

If we fail to acquire and develop additional product candidates or approved products, our ability to grow will be impaired.

We are currently commercializing three products. However, other than arformoterol, for which we have filed an NDA, our product candidates are in the early stages of development. In order to increase the likelihood that we will be able to successfully develop and/or commercialize additional drugs, we intend to acquire and develop additional product candidates and /or approved products. The success of this growth strategy depends upon our ability to correctly establish criteria for such acquisitions and successfully identify, select and acquire product candidates and/or products that meet such criteria. We will be required to integrate any acquired product candidates into our research and development operations and any

acquired products into our sales and marketing operations. Managing the development and/or commercialization of a new product involves numerous financial and operational risks, including difficulties allocating resources between existing and acquired assets and attracting and retaining qualified employees to develop and/or sell the product.

Any product candidate we acquire may require additional research and development efforts prior to commercial sale, including extensive pre-clinical and/or clinical testing and approval by the FDA and corresponding foreign regulatory authorities. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will be safe and effective or approved by regulatory authorities.

In addition, we cannot assure you that any products that we develop or acquire will be:

· manufactured or produced economically;

· successfully commercialized;

· complementary to our existing product portfolio; or

· widely accepted in the marketplace.

Proposing, negotiating and implementing an economically viable acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all.

We may undertake strategic acquisitions in the future and any difficulties from integrating such acquisitions could adversely affect our stock price, operating results and results of operations.

We may acquire additional businesses and products that complement or augment our existing business. We may not be able to integrate any acquired business or product successfully or operate any acquired business profitably. Integrating any newly acquired business or product could be expensive and time-consuming. Integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than we predict. The diversion of our management’s attention and any delay or difficulties encountered in connection with any future acquisitions we may consummate could result in the disruption of our on-going business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, collaborators, employees and others with whom we have business dealings. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses or products, which may result in dilution for stockholders or the incurrence of indebtedness.

As part of our efforts to acquire businesses or product candidates or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from acquisitions we may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks and other events, our business, results of operations and financial condition could be adversely affected. If we acquire product candidates, we will also need to make certain assumptions about, among other things, development costs, the likelihood of receiving regulatory approval and the market for such product candidates. Our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions.

In addition, we will likely experience significant charges to earnings in connection with our efforts, if any, to consummate acquisitions. For transactions that are ultimately not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts. Even if our efforts are successful, we may incur as part of a transaction substantial charges for closure costs associated with elimination of duplicate operations and facilities and acquired in-process research and development charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

Development and commercialization of our product candidates could be delayed or terminated if we are unable to enter into collaboration agreements in the future or if any future collaboration agreement is subject to lengthy government review.

Development and commercialization of some of our product candidates may depend on our ability to enter into additional collaboration agreements with pharmaceutical companies to fund all or part of the costs of development and commercialization of these product candidates. We may not be able to enter into collaboration agreements and the terms of the collaboration agreements, if any, may not be favorable to us. Inability to enter into collaboration agreements could delay or preclude development, manufacture and/or marketing of some of our drugs and could have a material adverse effect on our financial condition and results of operations because:

· we may be required to expend additional funds to advance the drugs to commercialization;

· revenue from product sales could be delayed; or

· we may elect not to commercialize the drugs.

We are required to file a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, for certain agreements containing exclusive license grants and to delay the effectiveness of any such exclusive license until expiration or earlier termination of the notice and waiting period under the HSR Act. If expiration or termination of the notice and waiting period under the HSR Act is delayed because of lengthy government review, or if the Federal Trade Commission or Department of Justice successfully challenges such a license, development and commercialization could be delayed or precluded and our business could be adversely affected.

ITEMS 2-5. NONE

ITEM 6. EXHIBITS

10.1	Summary of Executive Officer Compensation for 2006 (previously filed).
10.2†	U.S. License Agreement for Levoceterizine, dated as of February 17, 2006, by and between UCB S.A. and the Registrant (filed as Exhibit 10.43 to the Registrant’s Form 10-K (File No. 000-19410) for the annual period ended December 31, 2005 and incorporated herein by reference).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SEPRACOR INC.
Date: September 12, 2006	By:	/s/ TIMOTHY J. BARBERICH
		Timothy J. Barberich
		Chairman and Chief Executive Officer (Principal Executive Officer)
Date: September 12, 2006	By:	/s/ ROBERT F. SCUMACI
		Robert F. Scumaci
		Executive Vice President, Finance and Administration, and Treasurer (Principal Accounting Officer)

Exhibit Index

Exhibit No.		Description
10.1		Summary of Executive Officer Compensation for 2006 (previously filed).
10.2†		U.S. License Agreement for Levoceterizine, dated as of February 17, 2006, by and between UCB S.A. and the Registrant (filed as Exhibit 10.43 to the Registrant’s Form 10-K (File No. 000-19410) for the annual period ended December 31, 2005 and incorporated herein by reference).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Sunovion Pharmaceuticals (SEPR) Inactive 10-Q/A2006 Q1 Quarterly report (amended)