10-K

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TABLE OF CONTENTS

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
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 (State or Other Jurisdiction of Incorporation or Organization)	22-2536587 (IRS Employer Identification No.)
84 Waterford Drive, Marlborough, Massachusetts (Address of Principal Executive Offices)	01752 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.10 par value
(Title of class)

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. 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 filer ý    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 Act). Yes o    No ý

        The aggregate market value of voting common stock held by nonaffiliates of the registrant based, on the last reported sale price of the common stock on the Nasdaq Stock Market on June 30, 2005, was approximately $6,320,191,000.

        The number of shares outstanding of the registrant's class of common stock as of March 1, 2006 was 104,419,960 shares.

DOCUMENTS INCORPORATED BY REFERENCE

2005 Annual Report to Stockholders—Part II
Proxy Statement for the 2006 Annual Meeting of Stockholders—Part III

Sepracor Inc.
FORM 10-K

TABLE OF CONTENTS

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	33
Item 2.	Properties	33
Item 3.	Legal Proceedings	33
Item 4.	Submission of Matters to a Vote of Security Holders	34
EXECUTIVE OFFICERS OF THE REGISTRANT		35
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6.	Selected Financial Data	36
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	38
PART III
Item 10.	Directors and Executive Officers of Sepracor Inc.	38
Item 11.	Executive Compensation	38
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationships and Related Transactions	38
Item 14.	Principal Accounting Fees and Services	38
PART IV
Item 15.	Exhibits and Financial Statement Schedules	39
SIGNATURES		40
	Report of Independent Registered Public Accounting Firm on Financial Statement Schedules	S-1
Schedule II	Valuation and Qualifying Accounts and Reserves	S-2
Exhibit Index
Exhibits	(Attached to this Report on Form 10-K)

Cautionary Statement Regarding Forward-Looking Statements

        This annual report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition, including statements with respect to the safety, efficacy and potential benefits of our products under development, expectations with respect to the timing and success of the development and commercialization of our products and product candidates and acquisitions of technologies, product candidates, approved products and/or businesses, the timing and success of the submission, acceptance and approval of regulatory filings, the scope of patent protection with respect to these product candidates and our products and information with respect to the other plans and strategies for our business and the business of our subsidiaries. All statements other than statements of historical facts included in this annual report on Form 10-K regarding our strategy, future operations, timetables for product testing, development, regulatory approvals and commercialization, acquisitions, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this annual report on Form 10-K the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report on Form 10-K.

        You should read these forward-looking statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other "forward-looking" information. You should be aware that the occurrence of any of the events described under "Risk Factors" and elsewhere in this annual report on Form 10-K could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline.

        We cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this annual report on Form 10-K represent our expectations as of the date of this annual report on Form 10-K and should not be relied upon as representing our expectations as of any other date. Subsequent events and developments 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, even if our expectations change.

PART I

Item 1. Business.

The Company

        Sepracor Inc. is a research-based pharmaceutical company focused on the discovery, development and commercialization of differentiated products that address large and growing markets, unmet medical needs, and are prescribed principally by primary care physicians. Our proprietary compounds are either:

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Single isomers or active metabolites of existing drugs, or



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New chemical entities that are unrelated to marketed drugs.

        Our drug research and development program has yielded a portfolio of drugs and drug candidates intended to treat a broad range of indications. We are currently concentrating our product development efforts in two therapeutic areas: respiratory disease and central nervous system disorders.

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        In our isomer and metabolite development program, we identify existing drugs that might, in single-isomer or active-metabolite forms, provide significant advances over existing therapies within the indications of the parent compound or in new indications. We then develop isomers or metabolites designed to offer benefits over both the parent drugs and competitive compounds, such as reduced side effects, improved therapeutic efficacy, effectiveness for new indications or improved dosage forms.

        Our development program for new chemical entities encompasses a more traditional approach to drug development. In this program, we are seeking to discover novel compounds unrelated to existing commercial compounds that have the potential to provide benefits over existing treatments or provide new therapies for diseases currently lacking effective treatment.

        We currently manufacture and sell three products:

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XOPENEX® (levalbuterol HCl) Inhalation Solution, a short-acting bronchodilator, for the treatment or prevention of bronchospasm in patients with reversible obstructive airway disease;



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XOPENEX HFA™ (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



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LUNESTA™ (eszopiclone) for the treatment of insomnia.

        We currently market these products in the U.S. to primary care physicians, allergists, pulmonologists, pediatricians, hospitals, psychiatrists and sleep specialists, as appropriate, through our 1,500-person sales organization.

        We have, from time to time, licensed our technology and patent rights to third parties. These out-licensing agreements include Schering-Plough Corporation for CLARINEX® (desloratadine); sanofi-aventis, formerly Aventis, for ALLEGRA® (fexofenadine HCl); and UCB Pharma for XYZAL®/XUSAL™ (levocetirizine). As a result of these agreements, we earned royalties in 2005, 2004 and 2003 on sales of CLARINEX, ALLEGRA and XYZAL/XUSAL.

        In 2005 our key developments included the following:

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We commercially launched LUNESTA brand eszopiclone for the treatment of insomnia in April 2005, supported by an extensive direct-to-patient and physician education campaign and the efforts of our primary care and specialty sales force;



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In March 2005, we received U.S. Food and Drug Administration, or FDA, approval for XOPENEX HFA™ brand levalbuterol tartrate, an HFA MDI, and in December, we commercially introduced the product in the U.S. Indicated for the treatment or prevention of bronchospasm in patients with reversible obstructive airway disease, XOPENEX HFA complements our existing XOPENEX Inhalation Solution product line;



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We expanded our sales force in 2005 in anticipation of the launch of XOPENEX HFA by hiring an additional 175 sales professionals to call on respiratory specialists and hospitals;



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In December 2005, we submitted our New Drug Application, or NDA, for arformoterol tartrate as a long-term maintenance treatment of chronic obstructive pulmonary disease, or COPD. Arformoterol, a single isomer of arformoterol, is the first long-acting bronchodilator to be developed in an inhalation solution for use with a nebulizer, which is a machine that converts liquid medication into a fine mist that is inhaled through a mask;



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Data from four Phase IIIB/IV studies of LUNESTA were presented at medical society meetings throughout 2005. These studies included a six-month, placebo-controlled study in patients with

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primary chronic insomnia as well as three studies in patients experiencing insomnia associated with co-existing conditions including depression, rheumatoid arthritis and perimenopause; and

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We filed an Investigational New Drug, or IND, application with the FDA and began a Phase I clinical study of a triple reuptake inhibitor that we are investigating for the treatment of major depressive disorder, or MDD.

        For the year ended December 31, 2005, our total revenues and net income were $820.9 million and $5.0 million, respectively. The fourth quarter of 2005 was our first profitable quarter since inception. We have funded our operations primarily through convertible debt financings, sales of our products, license agreements for our drug compounds, and the issuance of common stock, including the exercise of stock options. We now plan to finance our operations primarily from profits and cash flow from operations. In order to achieve continued profitability, we will need to continue to grow our product sales. The rate of our future sales growth depends, in part, upon our ability to successfully develop or acquire and commercialize new product candidates.

        Our future success is also highly dependent on obtaining and maintaining patent protection for our products. In September 2005, we received notification that the FDA had received an abbreviated new drug application, or ANDA, from Breath Limited for a generic version of levalbuterol hydrochloride inhalation solution. Breath Limited's submission includes a Paragraph IV certification alleging that our patents for XOPENEX Inhalation Solution listed in the FDA publication entitled "Approved Drug Products With Therapeutic Equivalence Evaluations", commonly know as the "Orange Book", are invalid, unenforceable or not infringed by Breath Limited's proposed product. We were notified in January 2006 of a second levalbuterol inhalation solution ANDA including a paragraph IV certification, which was submitted to the FDA by Dey, L.P. We own five U.S. patents on methods of treating patients with levalbuterol, with patent terms expiring between 2010 and 2013. Our sixth patent covering stable levalbuterol formulations expires in 2021. We have filed civil actions for patent infringement against Breath Limited and Dey, L.P. 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. The loss of patent protection on levalbuterol or any of our other products would materially impact our results of operations.

Background on Science

Chiral Compounds

        Approximately 500 currently available drugs are chiral compounds. Chiral compounds frequently exist as mixtures of mirror-image molecules known as isomers. When a chiral compound contains equal amounts of both isomers, it is a racemic mixture, or a racemate. These two isomers are generally referred to as (S)-isomers (left) and (R)-isomers (right). While isomers have identical molecular weights and physical properties, they can show remarkable selectivity within biological systems and therefore can have different biological actions. In many cases, only one isomer of the racemic drug is responsible for the drug's efficacy. The other may be an unnecessary component or may cause side effects. Typically, in our product development process, we separate racemic mixtures containing two isomers into compounds containing only one isomer.

Active Metabolites

        Drugs administered to treat diseases are sometimes transformed, or metabolized, within the body into a variety of related chemical forms known as metabolites, some of which may have therapeutic activity. Metabolites that have therapeutic activity are known as active metabolites. Active metabolites can also be synthesized in the laboratory. During preclinical and clinical testing of a parent drug,

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subjects are exposed to metabolites of the parent drug. Therefore, a developer of an active metabolite may be able to rely upon certain known clinical information from the parent drug in its NDA submission for the active metabolite, including safety data. In some cases, this can eliminate the need for certain clinical studies and expedite the development process of an active metabolite drug.

        In contrast to traditional new drug development, the safety and efficacy of the racemates and parent drugs of our pharmaceuticals under development are often well understood before clinical trials begin. Parent drugs have been successfully taken through clinical studies and may have been on the market for years. We evaluate isomers or active metabolites in an accelerated and focused manner that allows us to efficiently identify potential advantages in our candidates such as improvements in potency, onset of action, duration of activity, dosage, additional indications or meaningful reductions in side effects or adverse reactions.

New Chemical Entities

        We have expanded our efforts to look beyond single isomers and active metabolites as sources of discovering new compounds. We are actively pursuing novel new chemical entity research and licensing activities focusing primarily on central nervous system disorders and respiratory diseases.

Marketed Products

XOPENEX® INHALATION SOLUTION

Overview

        XOPENEX (levalbuterol HCl) Inhalation Solution is a short-acting beta-agonist used to treat and prevent bronchospasm in children and adults. XOPENEX Inhalation Solution is used to relax the constricted or narrowed bronchial tubes and reduce bronchospasm in the lung. Bronchospasm occurs most commonly in patients with reversible obstructive airway disease, such as asthma, but can also occur in patients with COPD, including chronic bronchitis and emphysema, lung infections, acute bronchitis and other medical conditions. XOPENEX Inhalation Solution comes in a liquid form that is turned into a vapor-like mist in a nebulizer machine and is then inhaled. XOPENEX Inhalation Solution is marketed in 0.31 mg and 0.63 mg dosage strengths for routine treatment of children 6 to 11 years old, and 0.63 mg and 1.25 mg for patients 12 years of age and older. We sell XOPENEX Inhalation Solution in the U.S. through our sales force, which consists of approximately 1,500 sales professionals.

        According to the American Lung Association, approximately 26 million Americans have been diagnosed with asthma in their lifetime. It is the most common childhood illness and affects approximately 8.6 million children in the U.S. under the age of 18.

        We commercially introduced XOPENEX Inhalation Solution in May 1999. XOPENEX Inhalation Solution revenues tend to be greater during the colder weather months, when asthma symptoms are more prevalent, thus our first quarter and fourth quarter revenues historically have exceeded those of the second and third quarters. Our revenues from sales of XOPENEX Inhalation Solution grew to $428.5 million in 2005 from $319.8 million in 2004 and $286.8 million in 2003. XOPENEX Inhalation Solution accounted for approximately 52%, 84% and 83% of our total revenues in 2005, 2004 and 2003, respectively. We expect that XOPENEX Inhalation Solution will account for a substantial portion of our revenues in 2006.

Intellectual Property Position

        We have five issued U.S. patents covering the approved therapeutic use of XOPENEX Inhalation Solution, expiring between January 2010 and August 2013. We have one other issued U.S. patent covering the marketed formulation of XOPENEX Inhalation Solution, expiring in March 2021. In

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September 2005, we received notification that the FDA had received an ANDA from Breath Limited for a generic version of levalbuterol hydrochloride inhalation solution. 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 were notified in January 2006 of a second levalbuterol inhalation solution ANDA including a paragraph IV certification, which was submitted to the FDA by Dey, L.P. We have filed civil actions for patent infringement against Breath Limited and Dey, L.P. 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. Our patent litigation will involve complex legal and factual questions, and we may not be able to exclude a generic company, for the full term of our patents, from marketing a generic version of XOPENEX Inhalation Solution.

Manufacturing and Product Supply

        We manufacture the active pharmaceutical ingredient, or API, for XOPENEX Inhalation Solution at our manufacturing facility in Nova Scotia, Canada. This facility is part of Sepracor Canada Ltd., our wholly owned subsidiary. We also have a qualified second source for API manufacturing at Rhodia-Chirex, Inc. in the United Kingdom. We currently have one qualified manufacturer of finished commercial supplies of XOPENEX Inhalation Solution, Cardinal Health—Sterile Technologies, a division of Cardinal Health, Inc., based near Chicago, Illinois. We are in the process of qualifying a second source manufacturer for this product. Any future change to manufacturers or the manufacturing process requires regulatory approval. We seek to maintain sufficient inventories of API and finished products to protect against supply disruptions.

Competition

        In the asthma market, XOPENEX Inhalation Solution faces competition from albuterol, a generic drug. Albuterol has been sold for many years, is well established and sells at prices substantially lower than XOPENEX Inhalation Solution. To continue to be successful in the marketing of XOPENEX Inhalation Solution, we must continue to demonstrate that the efficacy and safety features of the drug outweigh its higher price.

XOPENEX HFA™ METERED-DOSE INHALER

Overview

        XOPENEX HFA™ (levalbuterol tartrate) Inhalation Aerosol, an HFA MDI, is indicated for the treatment or prevention of bronchospasm in adults, adolescents and children four years of age and older with reversible obstructive airway disease. MDIs are hand-held pressurized canisters that deliver inhaled medications directly to the lungs. XOPENEX HFA combines levalbuterol with a propellant to produce a fine mist that delivers a specific amount of medication to a patient's lungs. XOPENEX HFA complements the XOPENEX Inhalation Solution product line and provides patients with a portable means of administering XOPENEX.

        XOPENEX HFA does not contain any ozone depleting chlorofluorocarbons, or CFCs, but instead contains, as its propellant, only hydrofluoroalkane, which is not ozone-depleting. Approximately 95 percent of the short-acting beta-agonist inhalers sold in 2005 contained CFC propellants, according to IMS Health information. Under provisions in the Montreal Protocol on Substances that Deplete the Ozone Layer, an international agreement that requires the phase-out of substances that deplete the ozone layer, MDIs containing CFC propellants would qualify for removal from the marketplace. In March 2005, the FDA issued its final rule for the removal of the essential use exemption for albuterol,

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which currently permits the use of CFC-containing albuterol inhalers despite environmental concerns. Under the rule, all production and sales of CFC-containing albuterol MDIs in the U.S. are required to cease by the end of 2008.

        On March 11, 2005, we announced that we had received approval from the FDA for our NDA for XOPENEX HFA. In December 2005, we commercially launched XOPENEX HFA in the U.S. XOPENEX HFA is marketed through our sales force of approximately 1,500 sales professionals, including 175 respiratory specialist sales professionals who were hired in October 2005 in anticipation of the launch of XOPENEX HFA. These additional sales professionals call on hospitals and respiratory specialists, including pulmonologists, allergists, hospitals and pediatricians, in support of XOPENEX HFA.

        Revenues from sales of XOPENEX HFA in 2005 were related to product stocking at the retail level and were approximately $12.0 million or just over 1% of our overall revenues in 2005. XOPENEX HFA revenues are expected to be greater during the colder weather months, when asthma symptoms are more prevalent, thus our first quarter and fourth quarter revenues are expected to exceed those of the second and third quarters. In 2006, we expect that XOPENEX HFA will account for less than 10% of our overall revenues.

Intellectual Property Position

        We have five issued U.S. patents covering the approved therapeutic use of XOPENEX HFA, expiring between January 2010 and August 2013. We also have a non-exclusive license under certain patents owned by 3M that relate to HFA inhalation aerosol technology.

Manufacturing and Product Supply

        We manufacture the API for XOPENEX HFA at our facility in Nova Scotia, Canada. We also have a qualified second source for API manufacturing at Rhodia-Chirex, Inc. in the United Kingdom. We currently have one qualified manufacturer of finished commercial supplies of XOPENEX HFA, which is Minnesota Mining and Manufacturing Company, or 3M. Under our supply agreement with 3M, we are obligated to pay to 3M a combination of a fixed price per unit of product purchased and a percentage royalty based on our net sales of XOPENEX HFA. We have several suppliers from whom we order components that go into the manufacture of the canister. These parts are shipped to a 3M Healthcare site in California for final manufacturing, which includes aerosol filling and packaging. Any future change to manufacturers or the manufacturing process requires regulatory approval. We seek to maintain sufficient inventories of API and finished products to protect against supply disruptions.

Competition

        In the asthma market, XOPENEX HFA faces competition from generic and branded albuterol inhalers. Albuterol MDIs have been on the market for many years and are well established. In this market, we face competition from generic CFC-containing albuterol MDIs and branded CFC-free albuterol MDIs, such as VENTOLIN® and PROVENTIL®. CFC-containing albuterol MDIs sell at prices substantially less than XOPENEX HFA. In addition, XOPENEX HFA sells at a slight premium to CFC-free albuterol MDIs. To be successful in the marketing of XOPENEX HFA, we must demonstrate that the efficacy and safety features of the drug outweigh its higher price.

LUNESTA

Overview

        LUNESTA brand eszopiclone is a non-narcotic non-benzodiazepine used for the treatment of insomnia. Symptoms of insomnia include difficulty falling asleep, awakening frequently during the night,

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waking up too early, an inability to fall back to sleep, or awakening feeling unrefreshed. LUNESTA is approved for long- or short-term treatment of sleep onset and sleep maintenance insomnia. LUNESTA is classified as a schedule IV controlled substance and is marketed in 1 mg, 2 mg and 3 mg film-coated tablets.

        In December 2004, we received approval from the FDA for our NDA for LUNESTA brand eszopiclone. We commercially introduced LUNESTA in the U.S. in April 2005, and the product is marketed through our sales force. Our revenues from sales of LUNESTA were $329.2 million in 2005, representing 40% of our total 2005 revenues. We expect that LUNESTA will account for a substantial portion of our revenues in 2006.

        Under our original license agreement with Rhone-Poulenc Rorer SA (the predecessor to sanofi-aventis) for eszopiclone, dated October 1999, we are obligated to pay a 5% royalty on sales of LUNESTA in the U.S. and, as part of the July 2004 amendment to this agreement, we permitted Aventis, now sanofi-aventis, to assign our royalty obligation to a third party in exchange for the right to read and reference Aventis' regulatory filings related to zopiclone outside of the U.S. for the purpose of development and regulatory registration of eszopiclone outside of the U.S. Aventis has assigned to us the foreign counterparts to the U.S. patent covering eszopiclone and its therapeutic use.

        During 2005, we devoted significant resources to the completion of Phase IIIB/IV studies related to LUNESTA. We expect that we will continue to devote significant resources to Phase IV post-marketing studies of LUNESTA during 2006.

Intellectual Property Position

        We have two issued U.S. patents covering the therapeutic use of LUNESTA (eszopiclone) and another issued U.S. patent covering the compound eszopiclone and pharmaceutical formulations containing eszopiclone. The natural terms of the compound/formulation patent and one of the use patents expire in January 2012 while the natural term of the other use patent expires in August 2012. Under the Drug Price Competition and Patent Term Extension Act of 1984, known as the Hatch-Waxman Act, we have applied for a patent term extension for the compound/formulation patent. We cannot predict whether or not the patent term extension will be granted or the length of any patent term extension that might be granted.

        The Hatch-Waxman Act also provides for a five-year period of exclusivity beginning on the date of approval of LUNESTA, during which the FDA will not approve an ANDA for any product containing eszopiclone.

Manufacturing and Product Supply

        We manufacture the LUNESTA API at our manufacturing facility in Nova Scotia, Canada. We also have a qualified second source for API manufacturing at Dow Chemical Inc. in Michigan. Our final tablet manufacturing and packaging takes place at Patheon, Inc., outside of Toronto, Canada, with a second Patheon site, currently used for packaging only, in Cincinnati, Ohio. Currently, Patheon is the only qualified manufacturer of finished commercial supplies of LUNESTA. Any future change to manufacturers or the manufacturing process requires regulatory approval. We seek to maintain sufficient inventories of API and finished products to protect against supply disruptions.

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Competition

        In the sleep disorder market, LUNESTA faces intense competition from established products such as AMBIEN® and SONATA®. In 2005, other competitive therapies were commercially introduced, including AMBIEN CR™ and ROZEREM™. We expect that LUNESTA will face increasing competition from these new entrants in the insomnia market as well as from other potentially competitive therapies in clinical development and under FDA review for the treatment of insomnia.

        We plan to compete to a large extent through our emphasis on LUNESTA's product labeling and through dissemination of scientific and medical information. LUNESTA's product label describes the results of one of our long-term, placebo-controlled studies of LUNESTA in which sustained efficacy and safety of LUNESTA were demonstrated nightly over a period of six months, without any evidence of tolerance. Currently, no other insomnia treatments on the market have data in their product labels that describe placebo-controlled safety and efficacy studies conducted for longer than five weeks of nightly use. We have also completed Phase IIIB/IV studies of LUNESTA for the treatment of insomnia in patients with co-existing diseases or conditions as well as a second six-month, placebo-controlled study. We have published or are seeking to publish this data and believe that the results of these studies provide a science-based competitive advantage over many other marketed insomnia treatments.

Research and Development Pipeline

RESPIRATORY

        XOPENEX HFA.    In 2006, we plan to submit three supplemental NDAs to the FDA in support of XOPENEX HFA. These supplemental NDAs are intended to refine our existing XOPENEX HFA product and relate to the product's actuator, dose counter and a new smaller canister that may be introduced as a sample, or as another version of the product.

        ARFORMOTEROL.    In December 2005, we submitted our NDA to the FDA for arformoterol tartrate inhalation solution, a long-acting beta-agonist formulation for long-term maintenance treatment of COPD. The Prescription Drug User Fee Act date, or PDUFA date, for the arformoterol NDA is October 12, 2006. A PDUFA date is the date by which the FDA is expected to review and act on an NDA submission. We completed more than 100 preclinical and 16 clinical studies of arformoterol involving more than 2,000 patients. Among the clinical studies conducted were two 12-week pivotal studies, each with more than 700 patients, as well as a large-scale, 12-month safety study. In Phase III studies, patients treated with arformoterol demonstrated a statistically significant improvement in FEV₁, which is a test of lung function, versus those patients administered placebo. We intend to market arformoterol if approved through our sales force. We cannot be certain arformoterol will be approved based on the NDA we submitted to the FDA, or at all.

CENTRAL NERVOUS SYSTEM (CNS)

        LUNESTA.    We are currently pursuing opportunities to develop and market LUNESTA outside the U.S. In the European Union, or E.U., we are pursuing a path toward registration and filing of a Marketing Authorization Application, or MAA, with regulatory authorities. In support of this effort, we are planning to initiate a European clinical study of LUNESTA in patients with depression. In Japan, in 2005, we completed a Phase I pharmacokinetic study of LUNESTA for use in connection with registration with the Japanese regulatory authorities. We are seeking a meeting with the Japanese health authorities in 2006 to discuss our plans for further study and development of LUNESTA in Japan.

        We have responded to the FDA regarding their request for pediatric studies of LUNESTA. If the FDA accepts our proposed pediatric plan, we anticipate commencing those studies in 2006.

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        SEP-225289.    In October 2005, we initiated a Phase I, single-blind, randomized, placebo-controlled safety, tolerability and pharmacokinetic clinical study for SEP-225289, a serotonin, norepinephrine and dopamine reuptake inhibitor, or SNDRI, for the treatment of major depressive disorder, or MDD. SEP-225289 has been shown in preclinical studies to be a potent and balanced reuptake inhibitor of serotonin, norepinephrine and dopamine, which are three neurotransmitters associated with depression. While there are currently no triple reuptake inhibitors on the market, studies suggest that a triple mechanism of action may provide a profile superior to those of currently marketed antidepressants. Contingent on successful completion of the Phase I studies of SEP-225289, we intend to initiate a Phase II study of SEP-225289 in 2006 for the treatment of depression.

        SEP-227162.    SEP-227162 is a serotonin and norepinephrine reuptake inhibitor for which we are targeting submission of an IND for the treatment of depression in 2006.

        SEP-226330.    SEP-226330 is a norepinephrine and dopamine reuptake inhibitor. In 2001, we submitted an IND to the FDA, and in 2002, we completed a Phase I clinical study of SEP-226330. In 2005, we completed a Phase II proof-of-concept study for the treatment of restless legs syndrome. In this study, SEP-226330 did not meet our standards for efficacy on the compound's primary efficacy outcome measure. However, we expect to continue to conduct preclinical evaluations of SEP-226330 as a potential novel mechanistic approach for the treatment of other central nervous system disorders, such as Parkinson's disease, in 2006.

CARDIOVASCULAR

        (S)-Amlodipine.    In 2005, we continued our clinical evaluation of (S)-amlodipine as a potential treatment for hypertension. We have conducted both Phase I and Phase II clinical studies of (S)-amlodipine. Amlodipine, marketed by Pfizer Inc. as NORVASC®, is the leading calcium channel antagonist approved for use for the treatment of hypertension and angina. The evolving paradigms for hypertension treatment are focusing on the use of multiple mechanistic approaches as initial therapy, such as the use of calcium channel blockers, known as CCBs, with angiotensin converting enzyme, known as ACE inhibitors, or angiotensin II receptor blockers, known as ARBs. We have completed our evaluations of (S)-amlodipine and consider the compound to be a potential out-licensing candidate.

        All of our drug candidates will require significant additional research, development, successful preclinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to commercialization.

Drug Discovery

        We are continuing our research efforts for novel compounds for treatment of CNS disorders. In this program we are seeking to discover novel compounds, unrelated to existing commercial compounds, which we believe may have the potential to provide benefits over existing treatments or address unmet medical needs.

Partnered Research

        ACADIA Pharmaceuticals.    In January 2005, we entered into a license, option and collaboration agreement, or collaboration agreement, with ACADIA Pharmaceuticals Inc., or ACADIA, for the development of new drug candidates targeted toward the treatment of central nervous system disorders. The collaboration has been established to investigate potential clinical candidates resulting from applying ACADIA's medicinal chemistry and discovery platform against a broad array of selective muscarinic receptors, which are receptors that respond to acetylcholine, a neurotransmitter in the central nervous system. The collaboration includes ACADIA's m₁ agonist program, which is designed to target neuropsychiatric/neurologic conditions and neuropathic pain. The agreement also encompasses an option to select a preclinical program from ACADIA's 5-HT_2a program for use in combination with

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LUNESTA. 5-HT_2a antagonists have been shown in clinical studies to affect sleep architecture in humans. Under the collaboration agreement, the parties have agreed to collaborate with each other to research and develop certain compounds that interact with these muscarinic receptors. We will have exclusive worldwide rights in any field outside of the prevention or treatment of ocular disease to develop and commercialize compounds developed under our collaboration with ACADIA.

        In connection with the collaboration, we have purchased an aggregate of $20 million of ACADIA common stock. During the three-year research term of the collaboration agreement, we will provide ACADIA with research funding. In addition, we have agreed to make milestone payments to ACADIA upon the achievement by ACADIA of specified development and regulatory milestones for each product developed under the collaboration, including any product to be used in combination with LUNESTA that is developed under the collaboration. We have also agreed to pay royalties to ACADIA on net worldwide sales on products developed under the collaboration. Assuming the successful development of a single product in the muscarinic program, we will be required to pay ACADIA up to $40 million in aggregate payments plus applicable royalties. In addition, should the collaboration successfully develop a combination product with LUNESTA, we will also be obligated to pay ACADIA up to approximately $35 million in aggregate payments plus applicable royalties.

Partnered Products

        Royalty revenues from our out-licensing agreements were $51.2, $52.2 and $51.5 million for the years ended December 31, 2005, 2004 and 2003, respectively. These royalty revenues represented 6%, 14% and 15% of our total revenues in 2005, 2004 and 2003, respectively.

        sanofi-aventis for Fexofenadine HCl.    In July 1993, we licensed to Hoechst Marion Roussel, Inc., now sanofi-aventis (formerly Aventis), our U.S. patent rights covering fexofenadine HCl. In October 1996, Aventis commercially introduced ALLEGRA®, which is fexofenadine hydrochloride. Since March 1, 1999, we have been entitled to receive royalties on fexofenadine product sales in countries where we have patents related to fexofenadine. In February 2001, we began earning royalties on fexofenadine sales in the U.S. However, since the introduction of a generic version of ALLEGRA in the U.S. during the third quarter of 2005, we have ceased to earn royalties on U.S. sales of ALLEGRA. We are currently receiving royalties from sanofi-aventis for sales of ALLEGRA in Japan, Canada and Australia and in certain E.U. member states.

        Schering-Plough Corporation for Desloratadine.    In December 1997, we licensed to Schering-Plough Corporation, or Schering, exclusive worldwide rights to our patents and patent applications relating to desloratadine, an active-metabolite of loratadine, which is marketed by Schering as CLARITIN®. In December 2001, Schering announced that CLARINEX® brand desloratadine 5 mg tablets had received marketing clearance from the FDA for the treatment of seasonal allergic rhinitis, or SAR, in adults and children 12 years of age and older. In January 2002, Schering commercially launched CLARINEX 5 mg tablets for the treatment of SAR in adults and children 12 years of age and older. In February 2002, Schering received FDA approval to market CLARINEX tablets for the treatment of chronic idiopathic urticaria, or CIU, which is hives of an unknown cause, in adults and children 12 years of age and older. Under the terms of our license agreement with Schering, we are currently receiving royalties on sales of CLARINEX in countries in which we hold patents.

        UCB Pharma for Levocetirizine.    On February 23, 2006, we announced that we entered into a licensing agreement with UCB, relating to the antihistamine levocetirizine. 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. In June 1999, we licensed to UCB Farchim SA, now UCB Pharma, or UCB, all of our issued patents and patent applications covering levocetirizine, a single isomer of UCB's antihistamine, ZYRTEC®, to develop, market and sell levocetirizine as a nonsedating antihistamine, worldwide, except in the U.S. and Japan.

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Under the agreement, we receive royalties from UCB on sales of levocetirizine in E.U. member states in which the product has been launched and where we hold patents relating to levocetirizine. Levocetirizine is marketed as XUSAL™ in Germany and as XYZAL® in other E.U. member states. XYZAL/XUSAL is indicated for the treatment of seasonal and perennial allergic rhinitis in adults and children aged six years and older. XYZAL is also indicated for persistent allergic rhinitis, which is characterized as allergic symptoms that are present for at least four days per week, and last at least four consecutive weeks. Under the agreement, we are currently receiving royalties on sales of all formulations of levocetirizine in countries where we have issued patents, and royalties will escalate upon achievement of sales volume milestones.

Research and Development

        Our research and development activities are primarily directed toward discovering and developing potentially improved versions of widely-prescribed drugs and new chemical entities unrelated to commercial compounds.

        Our total research and development expenses were $144.5, $160.0 and $220.2 million for 2005, 2004 and 2003, respectively. We have included in the 2003 expenses $18.8 million relating to the write-off of patents and intangible assets relating to tecastemizole. We discontinued development of tecastemizole in December 2003.

        Our spending during the past three years has centered on advancing our drug candidates through clinical trials. We expend the majority of funds on programs closest to NDA submission. Over the three-year period ended December 31, 2005, our principal research and development programs were (1) the development of LUNESTA brand eszopiclone, formerly referred to as ESTORRA, or (s)-zopiclone, for which we received an approval letter from the FDA in December 2004, and which we commercially launched in April 2005; (2) the development of XOPENEX HFA, for which we announced on March 11, 2005 that we received approval from the FDA and which we commercially launched in December 2005; (3) the development of arformoterol, for which we submitted an NDA to the FDA in December 2005; (4) Phase IV studies of levalbuterol HCl inhalation solution, known as XOPENEX Inhalation Solution; and (5) the development of (S)-oxybutynin, which we elected to no longer fund in 2004.

        In 2006, we expect research and development expenditures to increase over 2005 and that our principal research and development activities will be (1) Phase IV studies for LUNESTA; (2) additional Phase IIIB/IV studies in support of XOPENEX HFA; (3) additional Phase IIIB studies in support of arformoterol; (4) additional studies related to the advancement of SEP-225289 and (5) drug discovery.

Marketing and Sales

        We market and sell our products through our sales force and we out-license our intellectual property rights in exchange for royalties. We believe that in certain situations, partnering arrangements allow us to use the partner's development and marketing expertise to market our drug candidates more quickly. We currently have partnering agreements with Schering, sanofi-aventis and UCB. In each of these partnering arrangements, we are dependent upon the efforts, including marketing and sales efforts, of our partners, and these efforts may not be successful.

        We have established a sales force to market XOPENEX Inhalation Solution, our short-acting bronchodilator; LUNESTA brand eszopiclone, for the treatment of insomnia; and XOPENEX HFA, for the treatment or prevention of bronchospasm in adults, adolescents and children four years of age and older with reversible obstructive airway disease. As of December 31, 2005, we had approximately 1,500 sales professionals who market our drugs to primary care physicians, psychiatrists, pediatricians, pulmonologists, allergists, sleep specialists and hospitals in the U.S.

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        All of our products are primarily sold directly to pharmaceutical wholesalers and retail pharmacy chains. There are a limited number of major wholesalers and retail chains as a result of significant consolidation among companies in the industry. Therefore, as is typical in the pharmaceutical industry, a few customers provide a significant portion of our overall revenues. Also, our terms of sale typically allow for the return of unused product up to one year after product expiration.

        Product sales of XOPENEX Inhalation Solution, XOPENEX HFA and LUNESTA to McKesson Corp., AmerisourceBergen Corp. and Cardinal Health, Inc. provided approximately 27%, 24% and 18%, respectively, of our revenues in 2005. No other customer accounted for more than 10% of our revenues in 2005.

        We currently warehouse and ship all of our products through Cardinal SPS, a division of Cardinal Health, Inc. based near Nashville, Tennessee. Our expectation for 2006 and beyond is to continue to distribute all of our products through one third-party vendor with at least two locations.

        In 2006, we expect sales and marketing expenses to increase as we:

•

increase our sales commission and distribution costs as a result of expected increases in sales of our products;



•

continue marketing programs for LUNESTA, including significant spending on physician and direct-to-consumer advertising; and



•

incur costs related to our planned sales force expansion of approximately 500 sales professionals and managers. We expect this hiring to be complete sometime in the second quarter of 2006.

Manufacturing

        We prepare our drug compounds for research purposes primarily at our laboratories in Marlborough, Massachusetts. We also own and operate a current Good Manufacturing Processes compliant, or GMP-compliant, 39,000 square foot fine chemical manufacturing facility in Windsor, Nova Scotia, which we believe has sufficient capacity to support the production of our product candidates in quantities required for our clinical trials. If we successfully develop and receive regulatory approval for additional product candidates, we will need to either manufacture the drugs ourselves or rely on third parties for manufacturing. While we believe that we have the capability to scale up our manufacturing process to support the production in commercial quantities of certain of the drugs that we intend to market and sell directly, we must contract out to third-party manufacturers the production of a substantial portion of those drugs. See the discussions above for specific information on the manufacture of our marketed products.

        We have established a quality assurance/quality control program to ensure that our products and product candidates are manufactured in accordance with applicable regulations. We require that our contract manufacturers adhere to current GMP. The facilities of our contract manufacturers must pass regular post-approval FDA inspections. The FDA or other regulatory agencies must approve the processes and the facilities that may be used for the manufacture of any of our potential products.

Competition

        Competition in our industry is intense and includes many large and small competitors. The principal means of competition varies from product to product and from time to time. Efficacy, safety, patients' ease of use and cost effectiveness are important factors for success. As discussed in more detail above, all of our products face competition in the marketplace. We cannot be sure that we will be able to demonstrate advantages of our products to prescribing physicians and their patients in comparison to presently marketed products.

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        If competitors introduce new products or develop new processes or new information about existing products, then our products, even those protected by patents, may be replaced in the marketplace or we may be required to lower our prices.

        In the antihistamine market, there is intense competition among established products such as CLARINEX, ALLEGRA and ZYRTEC. These products are established and currently each has a significant share of the prescription antihistamine market. This competition has a direct impact on our ability to earn royalties in this market. In September 2005, a generic equivalent to ALLEGRA (fexofenadine) was introduced to the U.S. market. As a result of this generic introduction, we have ceased to earn royalties on U.S. sales of ALLEGRA. Additionally, CLARITIN is sold without a prescription, and there is uncertainty relating to possible changes in the market with much discussion about other allergy products possibly being sold without a prescription. Finally, there is a possibility that generic drug companies may succeed in their patent challenges relating to other drugs with large market share. This could result in the introduction of other generic equivalents, which may increase price competition among antihistamines and lower market share for the branded drugs.

Government Regulation

Government Approval Process

        We, our collaboration partners and our customers are required to obtain the approval of the FDA and similar health authorities in foreign countries to test clinically and sell commercially pharmaceuticals and biopharmaceuticals for human use.

        Human therapeutics are generally subject to rigorous preclinical and clinical testing. The standard process required by the FDA before a drug may be marketed in the U.S. includes:

•

preclinical laboratory tests and animal studies of toxicity and, often, carcinogenicity;



•

submission to the FDA of an IND application, which must be accepted before human clinical trials may commence;



•

adequate and well-controlled human clinical trials to establish safety and efficacy of the drug for its intended indication;



•

submission to the FDA of an NDA; and



•

FDA approval of the NDA prior to any commercial sale or shipment of the drug.

        We sometimes attempt to shorten the regulatory approval process of our drug candidates by relying on preclinical and clinical toxicology data with respect to the parent drug.

        Typically, clinical evaluation involves a three-phase process. In Phase I, the initial introduction of the drug to humans, the drug is tested for safety, or adverse effects, dosage tolerance, absorption, distribution, metabolism and excretion. Phase II involves studies in a limited patient population to:

•

determine the efficacy of the drug for specific targeted indications;



•

determine dosage tolerance and optimal dosage; and



•

identify possible adverse effects and safety risks.

        When a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to test further for safety within an expanded patient population at geographically dispersed clinical study sites. The process of completing clinical testing, obtaining FDA regulatory approval and commencing commercial marketing is likely to take a number of years. We may not successfully complete Phase I, Phase II or Phase III testing within any specified time period, if at all, with respect to any of our products subject

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to this testing. Even if we successfully complete clinical testing and the FDA accepts an NDA for filing, the FDA may determine not to approve an NDA. Furthermore, even if an NDA is approved the FDA may not accept our evidence that a particular product meets our claims of superiority.

Other Regulations Relating to the Sale of Pharmaceuticals

        FDA regulations pertain not only to health care products, but also to the processes and production facilities used to produce such products. Although we have designed the required areas of our facilities in the U.S. and Canada to conform to current GMP, the FDA will not review the facilities for compliance until we produce a product for which we are seeking marketing approval. Environmental legislation provides for restrictions and prohibitions on releases or emissions of various substances produced in, and waste by-products from, our operations.

        The Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements of this act, if any, applicable to a product is its actual or potential abuse profile. A pharmaceutical product may be listed as a Schedule II, III, IV or V substance, with Schedule II substances considered to present the highest risk of substance abuse and Schedule V substances the lowest. Eszopiclone, the active drug substance in LUNESTA, has been scheduled under the Controlled Substances Act as a Schedule IV substance. Prescriptions for Schedule IV substances may not be filled or refilled more than six months after they are written and they may not be refilled more than five times unless they are renewed. Schedule IV substances are also subject to special handling procedures relating to storage, shipment, inventory control and disposal. In addition to federal scheduling, LUNESTA is subject to state controlled substance regulation, and may be placed in more restrictive state schedules than those determined by the U.S. Drug Enforcement Agency and FDA. To date, LUNESTA has not been placed in a more restrictive schedule by any state.

        The FDA also imposes requirements relating to the marketing of drug products after approval, including requirements relating to the advertising and promotion of drug products to health care professionals and consumers and the reporting to the FDA of adverse drug experiences known to companies holding approved applications. Our failure to adhere to these requirements could lead to regulatory action by the FDA. Information reported to the FDA in compliance with these requirements could cause the FDA to withdraw drug approval or to require modification of labeling, for example to add warnings or contraindications. The FDA has the statutory authority to seek judicial remedies and sanctions and to take administrative corrective action for violation of these and other FDA requirements and standards.

        We are also subject to various federal and state laws pertaining to health care fraud, including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the utilization of products or services reimbursed by a Federal health care program, including the purchase or prescribing of a particular drug. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payors, including Medicare and Medicaid, false or fraudulent claims for reimbursed drugs or services, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Penalties for violations of health care fraud laws can include disgorgement of profits, fines, and exclusion from Federal health care programs such as Medicare.

        The cost of pharmaceutical products is continually being investigated and reviewed by various government agencies, legislative bodies and private organizations in the United States and throughout the world. In the United States, most states have enacted generic legislation permitting, or even

14

requiring, a dispensing pharmacist to substitute a different manufacturer's generic version of a pharmaceutical product for the one prescribed.

Reimbursement

        In the U.S. and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. We cannot assure you that any of our products will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive and profitable basis.

        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 to each participating state agency for each unit of our product reimbursed by Medicaid. The amount of the rebate for each product is set by law as a minimum 15.1% of the average manufacturer price, or AMP, of that product, or if it is greater, the difference between AMP and the best price available from us to any customer. The rebate amount also includes an inflation adjustment if AMP increases faster than inflation. The rebate amount is recomputed each quarter based on our reports of our current AMP and best price for each of our products to the Centers for Medicare and Medicaid Services. Federal and state government agencies continue to advance efforts to reduce costs of Medicare and Medicaid programs, including supplemental rebates and restrictions on the amounts that agencies will reimburse for the use of products. Participation in the Medicaid rebate program includes requirements such as extending discounts comparable to the Medicaid rebate under the Public Health Service, or PHS, pharmaceutical pricing program to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of poor Medicare and Medicaid beneficiaries.

        We also are required to pay certain statutorily defined rebates on Medicaid purchases for reimbursement on prescription drugs under state Medicaid plans. Since 1993, as a result of the Veterans Health Care Act of 1992, or VHC Act, federal law has required that product prices for purchases by the Veterans Administration, the Department of Defense, Coast Guard, and the PHS, including the Indian Health Service, be discounted by a minimum of 24% off the AMP to non-federal customers, which is referred to as the non-federal average manufacturer price, or non-FAMP.

        We are also required by governmental regulatory agencies to pay substantial fees relating to the approval, manufacture and sale of proprietary prescription drugs.

Availability and Delivery of Pharmaceutical Products

        We expect debate to continue during 2006 at the federal and state levels over the availability and delivery of and payment for pharmaceutical products. We believe that if certain legislation is enacted, it could have the effect of reducing prices or limiting price increases of pharmaceutical products.

        At this time it is not possible to predict the extent to which we, or the pharmaceutical industry in general, might be affected by the issues discussed above.

        Our research and development activities involve the controlled use of hazardous materials, chemicals, biological materials, and various radioactive compounds. We believe that our procedures comply with the standards prescribed by state and federal regulations; however, the risk of injury or accidental contamination cannot be completely eliminated.

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Patents and Proprietary Technology

General

        We and our affiliates and subsidiaries have filed patent applications in the U.S. and selected other countries relating to compositions of, formulations of, methods of making, and methods of using our drugs and drug candidates, and chiral synthesis and separations. In addition, we have licensed from third parties certain rights under various patents and patent applications.

        To the extent that we invent or discover a new, useful and non-obvious invention and file a U.S. patent application for such invention, a composition or method-of-use patent may be issued. We are currently pursuing a policy of seeking patent protection for our drug candidates and discovery programs.

        Many of the compounds that we are investigating or developing may be subject to patents held by third parties. There may be foreign equivalents to these third-party patents, the scope and expiration of which may vary from country to country. Even if we are issued a patent for the use of a single isomer or active metabolite that is currently claimed by one or more third-party patents, products based on any such patent issued to us may not be sold until all of such third-party patents expire unless a license is obtained to such third-party patents or such third-party patents are determined to be invalid, unenforceable, or not infringed by a court of proper jurisdiction. In addition, there may be pending additional third-party patent applications covering our drugs in development, which, if issued, may preclude the sale of our drug.

        We have a significant number of other U.S. patents and patent applications covering composition of, methods of making and methods of using our product candidates. 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. Patents and/or patent applications covering our product candidates would become increasingly material to our business if and when we seek to commercialize these candidates. Our ability to commercialize any drug successfully will largely depend on our ability to obtain and maintain patents of sufficient scope to prevent third parties from developing and commercializing similar or competitive products.

Related Party

BioSphere Medical, Inc.

        In 1994, we established and independently financed BioSepra Inc. as a subsidiary through an initial public offering of its common stock. From 1994 to 1999, the company operated as BioSepra Inc., developing proprietary microsphere beads used as chromatography media in the production of pharmaceuticals.

        In February 1999, BioSepra determined that it would refocus on embolotherapy, which is the occlusion of the blood supply to fibroids and vascular defects. BioSepra acquired a 51% interest in French-based BioSphere Medical, S.A., referred to as BioSphere France, with an option to purchase the remaining 49% interest in BioSphere France, and changed its corporate name to BioSphere Medical, Inc., or BioSphere. The acquisition enabled BioSphere to gain ownership of technology know-how and European regulatory approval of Embosphere® Microspheres. Between February 1999 and October 2001, BioSphere acquired the remaining 49% interest in BioSphere France.

        In November 2004, we purchased, in a private placement, 4,000 shares of BioSphere Series A Convertible Preferred Stock and warrants to purchase 200,000 shares of BioSphere common stock from BioSphere for an aggregate purchase price of $4,000,000.

        At December 31, 2005, we owned 3,224,333 shares, or approximately 21%, of BioSphere's outstanding common stock, 4,280 shares of Series A Convertible Preferred Stock and warrants to

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purchase an additional 200,000 shares of common stock. Assuming conversion of the shares of Series A Convertible Preferred Stock of BioSphere and the exercise of our warrants, we would own approximately 26% of the outstanding common stock of BioSphere. We account for our investment in BioSphere under the equity method.

Employees

        On March 1, 2006, we and our wholly-owned subsidiaries employed 2,059 persons. Of these 2,059 employees, 258 were primarily engaged in research, development and engineering activities, 38 were primarily engaged in manufacturing, 1,439 were engaged in direct sales and 324 were primarily engaged in marketing, sales administration, finance and accounting and corporate administration.

Investor Information

        We are a Delaware corporation and were founded in 1984. Our principal executive offices are located at 84 Waterford Drive, Marlborough, Massachusetts 01752. Our phone number is (508) 481-6700.

        We maintain a web site with the address www.sepracor.com. We are not including the information contained on our web site as part of, or incorporating by reference into, this annual report. We make available free of charge on or through our web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. In addition, we intend to disclose on our web site any amendments to, or waivers from, our code of business conduct and ethics that are required to be disclosed pursuant to rules of the Securities and Exchange Commission.

        We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy materials that we have filed with the Securities and Exchange Commission at the Securities and Exchange Commission public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room.

        Our Securities and Exchange Commission filings are also available to the public on the Securities and Exchange Commission's Internet website at www.sec.gov.

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 quarter ended December 31, 2005, 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, although we achieved profitability for the year ended December 31, 2005, 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.

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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 94% and 92% of our revenues for the quarter and year ended December 31, 2005, respectively, 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 XOPENEX Inhalation Solution and LUNESTA 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, two generic companies have filed ANDAs with the FDA seeking to market a generic version of levalbuterol hydrochloride inhalation solution. We have commenced litigation against both of these generic companies related to the patents covering this product. 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 efficacy, both in an absolute sense and relative to that of competing products;



•

the introduction of new products into the respiratory or sleep 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 December 31, 2005, our total long-term debt was approximately $1.2 billion and our stockholders' equity (deficit) was ($165.5) 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

18

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 March 1, 2006, the closing sale price of our common stock was $58.15. 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 year ended December 31, 2005, net cash used in operating activities was approximately $22.6 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 December 31, 2005, 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 than 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.

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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 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 April 11, 2003, two consolidated amended 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 consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. 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. 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.

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Fluctuations in the demand for products, the success and timing of collaboration arrangements and regulatory approval, 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 of product sales and market penetration;



•

timing 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 of product launch;



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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;

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•

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 ROZEREM and AMBIEN CR. There are also other potentially competitive therapies that are in late-stage clinical 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.

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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 process 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. 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 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. With respect to products under development, we may incur significant costs in expanding our sales force before the products 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

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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 do not expect to re-introduce XOPENEX Inhalation Solution Concentrate before the second quarter 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

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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.

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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 and 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. More states may adopt this practice. 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.

        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.

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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,

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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,

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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 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. 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.

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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.

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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.

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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.

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        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.

Item 1B. Unresolved Staff Comments.

        None.

Item 2. Properties.

        Our main facility at 84 Waterford Drive, Marlborough, Massachusetts, consists of approximately 58 acres and a 192,600 square foot research and development and corporate office building, which we occupied and began leasing in June 2002 and purchased in November 2002.

        We also lease 32,477 square feet and 68,815 square feet, for a total of 101,292 square feet, of space at 33 and 111 Locke Drive, Marlborough, MA, respectively, under two leases that each expire on June 30, 2007. In July 2002, we completed the move out of these facilities into the facility at 84 Waterford Drive. At that time, we began seeking to sublease our facilities at 33 and 111 Locke Drive. In aggregate, we have recorded $4,981,000 as future minimum lease obligations under these leases, and at December 31, 2005 and 2004 the remaining accruals were $240,000 and $1,126,000, respectively. In mid-2004, due to our sales force expansion for the commercial launch of LUNESTA, we re-occupied the 111 Locke Drive facility and it now serves as our regional sales office for the northeast region and as our sales training facility. In early 2004, we were able to sublease 9,975 square feet of space at 33 Locke Drive under a sublease agreement that extends through the expiration of the lease. We expect that in 2006 we will re-occupy 33 Locke Drive for use as lab space.

        Our primary manufacturing location is a 39,000 square-foot fine chemical manufacturing facility located on a four-acre site in Windsor, Nova Scotia. We acquired the facility in March 1994. Production at the Nova Scotia facility began in February 1995.

        Due to our sales force expansion for the commercial launch of LUNESTA during 2004, we entered into four leases for office space that serve as regional sales offices. These offices are located in Irvine, California; Alpharetta, Georgia; Deerfield, Illinois and Flower Mound, Texas. These leases expire on October 31, 2009, August 31, 2011, September 30, 2009 and September 30, 2009, respectively.

Item 3. 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 FDA approval of tecastemizole. On April 11, 2003, two consolidated amended 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 consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. In both the debt purchasers' action and equity purchasers' action, the court has granted the plaintiffs' motion for class certification. The parties are currently engaged in discovery. We are unable to reasonably

33

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 ANDA from Breath Limited for a generic version of levalbuterol hydrochloride inhalation solution. 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 a civil action against Breath Limited for patent infringement. We were notified in January 2006 of a second ANDA 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. 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.

Item 4. Submission of Matters to a Vote of Security Holders.

        No matters were submitted to a vote of our security holders, through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 2005.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth the names, ages and positions of our current executive officers as of December 31, 2005.

Name	Age	Position
Timothy J. Barberich	58	Chairman, Chief Executive Officer
William J. O'Shea	56	President, Chief Operating Officer
David P. Southwell	45	Executive Vice President, Chief Financial Officer and Secretary
Robert F. Scumaci	46	Executive Vice President, Finance and Administration and Treasurer
Mark H. N. Corrigan, M.D.	48	Executive Vice President, Research and Development
Douglas E. Reedich, Ph.D., J.D.	48	Senior Vice President, Legal Affairs

        Mr. Barberich, a founder of Sepracor, has been a director of Sepracor and our Chief Executive Officer since our inception in 1984. Mr. Barberich also served as President of Sepracor from 1984 to October 1999. Prior to founding Sepracor, Mr. Barberich served in a number of executive and managerial capacities at Millipore Corporation, which he joined in 1973. Most recently, prior to founding Sepracor, Mr. Barberich served as Vice President and General Manager of Millipore's Medical Products Division and as General Manager of Millipore's Laboratory Products Division. In addition to being Sepracor's Chairman of the Board, Mr. Barberich is a director of Point Therapeutics Inc., BioSphere Medical, Inc., the Pharmaceutical Research and Manufacturers of America, or PhRMA, and Gemin X Biotechnologies.

        Mr. O'Shea has served as our President and Chief Operating Officer since October 1999. Prior to joining Sepracor, Mr. O'Shea was Senior Vice President of Sales and Marketing and Medical Affairs for Zeneca Pharmaceuticals, a business unit of Zeneca, Inc. Mr. O'Shea joined Zeneca in the United Kingdom in 1975 and held management positions in the United Kingdom and the United States in the areas of international sales and marketing. Mr. O'Shea is a director of CollaGenex and is an executive board member and past chairman of the National Pharmaceutical Council.

        Mr. Southwell has served as our Executive Vice President and Chief Financial Officer since October 1995 and served as our Senior Vice President and Chief Financial Officer from July 1994 to October 1995. From August 1988 until July 1994, Mr. Southwell was associated with Lehman Brothers Inc., a securities firm, in various positions with the investment banking division, most recently in the position of Vice President. Mr. Southwell is Chairman of the Board of BioSphere Medical, serves as a director of PTC Therapeutics, Inc. and is on the MBA Advisory Board of the Tuck School at Dartmouth College.

        Mr. Scumaci has served as our Executive Vice President, Finance and Administration since February 2001 and as our Treasurer since March 1996. He served as our Senior Vice President, Finance and Administration from March 1996 to February 2001 and as our Vice President and Controller from March 1995 until March 1996. From 1987 to 1994, Mr. Scumaci was employed by Ares-Serono Group, a multinational pharmaceutical company, most recently as Vice President, Finance and Administration of North American Operations. Previously, he was associated with Revlon and Coopers & Lybrand in various finance and accounting capacities.

        Dr. Corrigan has served as our Executive Vice President, Research and Development since April 2003. Prior to joining Sepracor, Dr. Corrigan was Group Vice President of Global Clinical Research and Experimental Medicine at Pharmacia, a pharmaceutical company, from 1998 to 2003. After spending seven years in academic research, Dr. Corrigan joined Upjohn in 1993 and served in several senior management positions in clinical research and development for Upjohn and Pharmacia Upjohn. Dr. Corrigan is board certified in psychiatry and neurology and is a board member of Neuromed Technologies Inc.

        Dr. Reedich has served as our Senior Vice President, Legal Affairs since January 1999 and has served as our Chief Patent Counsel since June 1995. From October 1987 to June 1995, he was employed by 3M Company, most recently as patent counsel for the Pharmaceuticals Division of 3M Company.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        The following table provides information about the purchases of our equity securities that we made during the quarter ended December 31, 2005.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
10/01/05–10/31/05	—		—	—	—
11/01/05–11/30/05	—		—	—	2,661,432
12/01/05–12/31/05	2,326,263	$	56.75	2,326,263	—
Total	2,326,263	$	56.75	2,326,263	2,661,432

(1)

On November 8, 2005, we announced that we intended to reacquire up to 2,661,432 shares of our common stock upon the settlement of call spread options that we purchased in December 2003. On December 14, 2005, in connection with the settlement of 4,919,496 call spread options, we repurchased 2,326,263 shares of our common stock. The call spread options expired on various dates between November 12, 2005 and December 9, 2005 and the actual number of shares repurchased was based on the average trading price of our common stock on the expiration dates. We will not make any additional purchases under this program, as all of our call spread options have been settled.

        The additional information required by this item is incorporated by reference from our 2005 Annual Report, under the headings "Supplemental Stockholder Information—Price Range of Common Stock" and "Supplemental Stockholder Information—Dividend Policy."

Item 6. Selected Financial Data.

        The information required by this item is incorporated by reference from our 2005 Annual Report under the heading "Sepracor Inc. Selected Financial Data."

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The information required by this item is incorporated by reference from our 2005 Annual Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

        The information required by this item is incorporated by reference from our 2005 Annual Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk."

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Item 8. Financial Statements and Supplementary Data.

        The information required by this item is incorporated by reference from our 2005 Annual Report under the heading "Consolidated Financial Statements" and the notes thereto and are listed under Item 15 below.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

        There have been no disagreements with our Independent Registered Public Accounting Firm on accounting and financial disclosure matters.

Item 9A. Controls and Procedures.

Disclosure Controls

        We have carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer, the Chief Financial Officer, and the Executive Vice President, Finance and Administration, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005. The term "disclosure controls and procedures," as defined in Rule 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 in the reports that the company 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 financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon our evaluation, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President, Finance and Administration, have concluded that, as of December 31, 2005, our disclosure controls and procedures were effective at the reasonable assurance level.

Management's Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

        Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control—Integrated Framework. Management concluded that, based on its assessment, our internal control over financial reporting was effective as of December 31, 2005 based on those criteria. Our management's

37

assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 25 of our 2005 Annual Report, which is attached to this annual report on Form 10-K as Exhibit 13.

Changes in Internal Control

        There has been no change in our internal control over financial reporting during our quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

        None.

PART III

Items 10-14.

        We have included information about our executive officers in Part I of this report under the caption "Executive Officers of the Registrant."

        The information required by Part III, Items 10-14 of this report is incorporated by reference from our definitive proxy statement for our 2006 Annual Meeting of Stockholders. Such information will be contained in the sections of such proxy statement captioned "Stock Ownership of Certain Beneficial Owners and Management," "Proposal 1—Election of Directors," "Corporate Governance," "Compensation of Executive Officers," "Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance."

        We have adopted a written code of business conduct and ethics that applies to all employees, including but not limited to, our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted our code of business conduct and ethics, and intend to disclose any amendments to, or waivers from, the code, on our web site, which is located at www.sepracor.com in the corporate governance section.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

        The following documents are included or incorporated by reference from the 2005 Annual Report, selected portions of which are filed as Exhibit 13 to this report.

1.

The following financial statements (and related notes) of the Company are incorporated by reference from the 2005 Annual Report:

	Page*
Report of Independent Registered Public Accounting Firm	25
Consolidated Balance Sheets at December 31, 2005 and 2004	27
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003	28
Consolidated Statements of Stockholders' Equity (deficit) and Comprehensive Income for the Years Ended December 31, 2005, 2004 and 2003	29
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003	30
Notes to the Consolidated Financial Statements	31

*

Refers to page number of the Selected Portions of the 2005 Annual Report to Stockholders filed as Exhibit 13 to this report.

2.

The schedule listed below and the Report of Independent Registered Public Accounting Firm on Financial Statement Schedule are filed as part of this report:

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule	S-1
Schedule II—Valuation and Qualifying Accounts and Reserves	S-2

        All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes.

3.

The Exhibits listed in the Exhibit Index immediately preceding the Exhibits filed as a part of this Annual Report on Form 10-K.

        The following trademarks are mentioned in this report:

        Sepracor, LUNESTA and XOPENEX HFA are trademarks and XOPENEX is a registered trademark of Sepracor. BioSphere and EmboSphere are trademarks of BioSphere. This report also contains trademarks of other companies.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/s/  TIMOTHY J. BARBERICH Timothy J. Barberich Chairman and Chief Executive Officer

Date: March 16, 2006

        Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/  TIMOTHY J. BARBERICH Timothy J. Barberich	Chairman, Chief Executive Officer and Director (Principal Executive Officer)	March 16, 2006
/s/  DAVID P. SOUTHWELL David P. Southwell	Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)	March 16, 2006
/s/  ROBERT F. SCUMACI Robert F. Scumaci	Executive Vice President, Finance and Administration and Treasurer (Principal Accounting Officer)	March 16, 2006
/s/  JAMES G. ANDRESS James G. Andress	Director	March 16, 2006
/s/  DIGBY W. BARRIOS Digby W. Barrios	Director	March 16, 2006
/s/  ROBERT J. CRESCI Robert J. Cresci	Director	March 16, 2006
/s/  JAMES F. MRAZEK James F. Mrazek	Director	March 16, 2006
/s/  TIMOTHY J. RINK Timothy J. Rink	Director	March 16, 2006
/s/  ALAN A. STEIGROD Alan A. Steigrod	Director	March 16, 2006

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Sepracor Inc.:

        Our audits of the consolidated financial statements, of management's assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated March 16, 2006 appearing in the 2005 Annual Report to Shareholders of Sepracor Inc. (which report, consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 16, 2006

S-1

SEPRACOR INC.
Schedule II
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2005, 2004 and 2003
(In Thousands)

Description		Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
Allowance for Doubtful Accounts (1)
Year Ended December 31, 2005		$	510	$	—	$	40	$	470
Year Ended December 31, 2004		$	510	$	—	$	—	$	510
Year Ended December 31, 2003		$	392	$	219	$	101	$	510
	(1) Additions to Allowance for Doubtful Accounts are recorded as an expense.
Sales Rebates, Chargebacks & Allowances (2)
Year Ended December 31, 2005		$	32,114	$	100,554	$	75,152	$	57,516
Year Ended December 31, 2004		$	19,520	$	79,643	$	67,049	$	32,114
Year Ended December 31, 2003		$	8,825	$	48,362	$	37,667	$	19,520
	(2) Additions to Sales Rebates, Chargebacks and Allowances are recorded as a reduction of revenue.
Sales Return Reserves (3)
Year Ended December 31, 2005		$	8,654	$	21,830	$	14,215	$	16,269
Year Ended December 31, 2004		$	8,362	$	4,449	$	4,157	$	8,654
Year Ended December 31, 2003		$	5,605	$	8,365	$	5,608	$	8,362
	(3) Additions to Sales Return Reserves are recorded as a reduction of revenue.

S-2

EXHIBIT INDEX

			Incorporated by Reference to
Exhibit Number	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number
3.1	Restated Certificate of Incorporation	Form 10-K for 12/31/2002	3.1	3/31/2003	000-19410
3.2	Amended and Restated By-Laws of the Registrant	Form 10-K for 12/31/2000	3.2	3/28/2001	000-19410
4.1	Specimen Certificate for shares of common stock, $0.10 par value, of the Registrant	Form S-1	4.1	9/20/1991	333-41653
4.2	Rights Agreement, dated June 30, 2002, between the Registrant and EquiServe Trust Company, N.A., as Rights Agent	Form 8-K	4.1	6/4/2002	000-19410
4.3	Form of 5% Convertible Subordinated Notes due 2007	Form 10-K for 12/31/1999	4.5	3/30/2000	000-19410
4.4	Form of 0% Series A Convertible Subordinated Notes due 2008	Form 10-K for 12/31/2003	4.5	3/15/2004	000-19410
4.5	Form of 0% Series B Convertible Subordinated Notes due 2010	Form 10-K for 12/31/2003	4.6	3/15/2004	000-19410
4.6	Form of 0% Convertible Senior Subordinated Notes due 2024	Form 10-K for 12/31/2004	4.7	3/15/2004	000-19410
10.1#	The Registrant's 1991 Amended and Restated Stock Option Plan	Form 10-Q for 9/30/1999	10.1	11/12/1999	000-19410
10.2#	The Registrant's 1991 Director Stock Option Plan, as amended and restated	Form 10-K for 12/31/1998	10.3	3/31/1999	000-19410
10.3#	The Registrant's 1997 Stock Option Plan	Form 10-K for 12/31/1997	10.36	3/31/1998	000-19410
10.4#	The Registrant's 1998 Employee Stock Purchase Plan, as amended	Form 10-K for 12/31/2003	10.5	3/15/2004	000-19410
10.5#	The Registrant's 1999 Director Stock Option Plan	Form 10-Q for 9/30/1999	10.2	11/12/1999	000-19410
10.6#	The Registrant's 2000 Stock Incentive Plan, as amended	Form 10-Q for 6/30/2005	10.1	8/9/2005	000-19410
10.7	The Registrant's 2002 Stock Incentive Plan, as amended	Form 10-Q for 6/30/2002	10.1	8/14/2004	000-19410
10.8	Lease as to Marlboro Industrial Park, dated December 12, 1995, between Valerie A. Colbert, Trustee of Second Marlboro Development Trust under Declaration of Trust dated September 15, 1972, and the Registrant (the "Marlboro Lease")	Form 10-K for 12/31/1995	—	—	000-19410
10.9	First Amendment to Marlboro Lease, dated February 1, 1997, and Second Amendment to Marlboro Lease, dated July 1, 1997	Form 10-K for 12/31/1997	10.22	3/31/1998	000-19410
10.10	Technology Transfer and License Agreement, dated as of January 1, 1994, between the Registrant and BioSepra Inc.	Form 10-K for 12/31/1998	10.10	3/31/1999	000-19410
10.11	Technology Transfer and License Agreement, dated as of January 1, 1994, between the Registrant and HemaSure Inc.	Form 10-K for 12/31/1998	10.11	3/31/1999	000-19410
10.12	Technology Transfer and License Agreement, effective January 1, 1995, between the Registrant and SepraChem Inc.	Form 10-K for 12/31/1998	10.12	3/31/1999	000-19410
10.13#	Letter Agreement, dated June 10, 1994, between the Registrant and David Southwell	Form 10-K for 12/31/1994	—	—	000-19410

10.14#	Letter Agreement, dated February 23, 1995, between the Registrant and Robert F. Scumaci	Form 10-K for 12/31/1996	10.15	3/31/1997	000-19410
10.15†	Agreement, dated as of December 5, 1997, by and between the Registrant and Schering-Plough Ltd.	Form 10-K for 12/31/1997	10.31	3/31/1998	000-19410
10.16†	License Agreement, dated January 30, 1998, by and between the Registrant and Janssen Pharmaceutica N.V.	Form 10-K for 12/31/1997	10.30	3/31/1998	000-19410
10.17†	Norcisapride Development and License Agreement, dated as of July 20, 1998, between Janssen Pharmaceutica NV and the Registrant	Form 10-Q for 9/30/1998	10.1	11/13/1998	000-19410
10.18	Assignment Agreement, dated as of August 25, 1999, by and between the Registrant and Georgetown University	Form 10-Q for 9/30/1999	10.3	11/12/1999	000-19410
10.19	Indenture, dated as of February 14, 2000, between the Registrant and the Chase Manhattan Bank, as trustee, relating to the 5% Convertible Subordinated Debentures due 2007	Form 10-K for 12/31/1999	10.27	3/30/2000	000-19410
10.20	Registration Rights Agreement, dated as of February 8, 2000, by and among the Registrant and Deutsche Bank Securities Inc.	Form 10-K for 12/31/1999	10.28	3/30/2000	000-19410
10.21†	License Agreement, dated August 31, 1999, by and between the Registrant and Hoechst Marion Roussel, Inc.	Form 10-K for 12/31/1999	10.30	3/30/2000	000-19410
10.22†	EX-US License Agreement, dated August 31, 1999, by and between the Registrant and Hoechst Marion Roussel, Inc.	Form 10-K for 12/31/1999	10.31	3/30/2000	000-19410
10.23†	License and Assignment Agreement, dated September 30, 1999, by and between the Registrant and Rhone-Poulenc Rorer SA	Form 10-K for 12/31/1999	10.32	3/30/2000	000-19410
10.24†	License Agreement, dated May 27, 1999, by and between UCB Farchim S.A. and the Registrant	Form 10-K for 12/31/1999	10.33	3/30/2000	000-19410
10.25#	Summary of Plan regarding "Parachute Payments" and Section 280G Gross-Up Payments.	Form 10-K for 12/31/1999	10.35	3/30/2000	000-19410
10.26#	Letter Agreement, dated September 21, 1999, between the Registrant and William James O'Shea	Form 10-K for 12/31/2001	10.42	4/1/2002	000-19410
10.27†	Agreement, dated December 20, 2001, between Minnesota Mining and Manufacture Company, 3M Innovative Properties Company and the Registrant	Form 10-K for 12/31/2001	10.43	4/1/2002	000-19410
10.28	Indenture, dated as of December 12, 2003, by and between the Registrant and the JPMorgan Chase Bank, as Trustee	Form 8-K	4.1	12/19/2003	000-19410
10.29	Registration Rights Agreement, dated as of December 12, 2003, by and between the Registrant, Morgan Stanley & Co. Incorporated, U.S. Bancorp Piper Jaffray Inc. and Credit Suisse First Boston LLC	Form 8-K	10.1	12/19/2003	000-19410
10.30#	Letter Agreement, dated March 11, 2003, between the Registrant and Mark H.N. Corrigan, M.D.	Form 10-Q for 3/31/2003	10.1	5/14/2003	000-19410

10.31	Indenture, dated September 22, 2004, between the Registrant and JPMorgan Chase Bank, as trustee	Form 8-K	4.1	9/24/2004	000-19410
10.32	Registration Rights Agreement, dated September 22, 2004, between the Registrant and Morgan Stanley & Co. Incorporated	Form 8-K	10.1	9/24/2004	000-19410
10.33†	Manufacturing Services Agreement, dated March 1, 2004, between Patheon and the Registrant	Form 8-K	99.1	12/21/2004	000-19410
10.34†	License, Option and Collaboration Agreement, dated as of January 10, 2005, by and between ACADIA Pharmaceuticals, Inc. and the Registrant	Form 8-K filed by ACADIA Pharmaceuticals	99.1	1/14/2005	000-50768
10.35†	Common Stock Purchase Agreement, dated January 10, 2005, by and between ACADIA Pharmaceuticals, Inc. and the Registrant	Form 8-K filed by ACADIA Pharmaceuticals	99.2	1/14/2005	000-50768
10.36	Form of Incentive Stock Option Agreement Granted under the Registrant's 2000 Stock Incentive Plan	Form 10-K for 12/31/2004	10.42	3/16/2005	000-19410
10.37	Form of Nonstatutory Stock Option Agreement Granted under the Registrant's 2000 Stock Incentive Plan	Form 10-K for 12/31/2004	10.43	3/16/2005	000-19410
10.38#	Summary of Executive Officer Compensation for 2006	Form 10-K for 12/31/2004	10.44	3/16/2005	000-19410
10.39#	Summary of Non-Employee Director Compensation for 2006	Form 10-K for 12/31/2004	10.45	3/16/2005	000-19410
10.40†	Exclusive Supply and Distribution Agreement, dated as of November 16, 2004, by and among 3M Company, through its 3M Drug Delivery Systems Division, 3M Innovative Properties Company and the Registrant	Form 10-K for 12/31/2004	10.46	3/16/2005	000-19410
10.41#	Executive Retention Agreement, made as of February 1, 2002, by and between the Registrant and Timothy J. Barberich	*
10.42#	Form of Executive Retention Agreement by and between the Registrant and each of W. James O'Shea, David P. Southwell, Robert F. Scumaci, Mark H.N. Corrigan and Douglas E. Reedich	*
10.43†	U.S. License Agreement for Levoceterizine, dated as of February 17, 2006, by and between UCB S.A. and the Registrant	*
13	Selected portions of the 2005 Annual Report to Stockholders (which shall be deemed filed only with respect to those portions specifically incorporated by reference herein)	*
21	Subsidiaries of the Company	*
23	Consent of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm	*
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	*

*

Filed herewith

(#)

Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Item 14(c) of Form 10-K.

(†)

Confidential treatment has been requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.

EX-10.41

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Exhibit 10.41

SEPRACOR INC.

Executive Retention Agreement

        THIS EXECUTIVE RETENTION AGREEMENT by and between Sepracor Inc., a Delaware corporation (the "Company"), and Timothy J. Barberich (the "Executive") is made as of February 1, 2002 (the "Effective Date").

        WHEREAS, the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders, and

        WHEREAS, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company's key personnel without distraction from the possibility of a change in control of the Company and related events and circumstances.

        NOW, THEREFORE, as an inducement for and in consideration of the Executive remaining in its employ, the Company agrees that the Executive shall receive the severance benefits set forth in this Agreement (including a certain "gross up" payment originally authorized by the Board on February 25, 1999 and set forth in Section 4.3 of this Agreement) upon the occurrence of a Change in Control (as defined in Section 1.1).

        1.    Key Definitions.    As used herein, the following terms shall have the following respective meanings:

        1.1    "Change in Control"    means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection):

        (a)   the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 30% or more of either (x) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or

        (b)   such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose

election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or

        (c)   the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) the beneficial owners of all or substantially all of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively; and (ii) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination); or

        (d)   approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

        1.2    "Change in Control Date"    means the first date during the Term (as defined in Section 2) on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if (a) a Change in Control occurs, (b) the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and (c) either (i) such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (y) otherwise arose in connection with or in anticipation of a Change in Control, or (ii) such termination of employment occurs following the execution of a definitive agreement for such Change in Control, then for all purposes of this Agreement the "Change in Control Date" shall mean the date immediately prior to the date of such termination of employment.

        2.    Term of Agreement.    This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the Term, (b) the termination of the Executive's employment with the Company prior to the Change in Control Date, or (c) if a Change in Control has occurred during the Term, the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 and 5.3. "Term" shall mean the period commencing as of the Effective Date and continuing in effect through March 31, 2007; provided, however, that commencing on April 1, 2005 and each April 1 thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any

2

extension thereof), the Company shall have given the Executive written notice that the Term will not be extended.

        3.    Employment Status; Not an Employment Contract.    The Executive acknowledges that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain the Executive as an employee and that this Agreement does not prevent the Executive from terminating employment at any time. If the Executive's employment with the Company terminates for any reason and subsequently a Change in Control shall occur, the Executive shall not be entitled to any benefits hereunder except as otherwise provided pursuant to Section 1.2.

        4.    Benefits to Executive.

        4.1    Stock Acceleration.    If the Change in Control Date occurs during the Term, then, effective upon the Change in Control Date, (a) each outstanding option to purchase shares of Common Stock of the Company held by the Executive shall become immediately exercisable in full and shares of Common Stock of the Company received upon exercise of any options will no longer be subject to a right of repurchase by the Company, (b) each outstanding restricted stock award shall be deemed to be fully vested and will no longer be subject to a right of repurchase by the Company and (c) notwithstanding any provision in any applicable option agreement to the contrary, if Executive's employment is terminated in connection with, in anticipation of, or within six months after a Change in Control, each such option shall continue to be exercisable by the Executive (to the extent such option was exercisable on the Change in Control Date) for a period of six months following the date of termination of such employment.

        4.2    Compensation.    If the Change in Control Date occurs during the Term:

        (a)   the Company shall pay to the Executive in a lump sum in cash within 30 days after the Change in Control Date the aggregate of the following amounts:

        (i)    the sum of (1) the Executive's base salary through the Change in Control Date, (2) the product of (A) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (B) a fraction, the numerator of which is the number of days in the current fiscal year through the Change in Control Date, and the denominator of which is 365 and (3) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and

        (ii)   the amount equal to (1) two multiplied by (2) the sum of (A) the Executive's highest annual base salary during the five-year period prior to the Change in Control Date and (B) the Executive's highest annual bonus during the five-year period prior to the Change in Control Date.

        (b)   for 24 months after the Change in Control Date, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive's family at least equal to those provided to them immediately prior to the Change in Control Date, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive's employment is terminated during this period and the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive

3

and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family; and

        (c)   if the Executive's employment is terminated during the 24-month period following the Change in Control Date, to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive's termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits").

        4.3    Taxes.

        (a)   In the event that the Company undergoes a "Change in Ownership or Control" (as defined below), the Company shall, within 30 days after each date on which the Executive becomes entitled to receive (whether or not then due) a Contingent Compensation Payment (as defined below) relating to such Change in Ownership or Control, determine and notify the Executive (with reasonable detail regarding the basis for its determinations) (i) which of the payments or benefits due to the Executive (under this Agreement or otherwise) following such Change in Ownership or Control constitute Contingent Compensation Payments, (ii) the amount, if any, of the excise tax (the "Excise Tax") payable pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), by the Executive with respect to such Contingent Compensation Payment and (iii) the amount of the Gross-Up Payment (as defined below) due to the Executive with respect to such Contingent Compensation Payment. Within 30 days after delivery of such notice to the Executive, the Executive shall deliver a response to the Company (the "Executive Response") stating either (A) that he agrees with the Company's determination pursuant to the preceding sentence or (B) that he disagrees with such determination, in which case he shall indicate which payment and/or benefits should be characterized as a Contingent Compensation Payment, the amount of the Excise Tax with respect to such Contingent Compensation Payment and the amount of the Gross-Up Payment due to the Executive with respect to such Contingent Compensation Payment. The amount and characterization of any item in the Executive Response shall be final; provided, however, that in the event that the Executive fails to deliver an Executive Response on or before the required date, the Company's initial determination shall be final. Within 90 days after the due date of each Contingent Compensation Payment to the Executive, the Company shall pay to the Executive, in cash, the Gross-Up Payment with respect to such Contingent Compensation Payment, in the amount determined pursuant to this Section 4.3(a).

        (b)   For purposes of this Section 4.3, the following terms shall have the following respective meanings:

        (i)    "Change in Ownership or Control" shall mean a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 280G(b)(2) of the Code.

        (ii)   "Contingent Compensation Payment" shall mean any payment (or benefit) in the nature of compensation that is made or made available (under this Agreement or otherwise) to a "disqualified individual" (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Ownership or Control of the Company.

4

        (iii)  "Gross-Up Payment" shall mean an amount equal to the sum of (i) the amount of the Excise Tax payable with respect to a Contingent Compensation Payment and (ii) the amount necessary to pay all additional taxes imposed on (or economically borne by) the Executive (including the Excise Taxes, state and federal income taxes and all applicable employment taxes) attributable to the receipt of such Gross-Up Payment. For purposes of the preceding sentence, all taxes attributable to the receipt of the Gross-Up Payment shall be computed assuming the application of the maximum tax rates provided by law.

        4.4    Mitigation.    The Executive shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4. Further, except as provided in Section 4.2(b), the amount of any payment or benefits provided for in this Section 4 shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise.

        4.5    Outplacement Services.    In the event of the termination of the Executive's employment in connection with, in anticipation of, or within six months after a Change in Control, the Company shall provide outplacement services through one or more outside firms of the Executive's choosing up to an aggregate amount equal to 15 percent of the Executive's annual base salary, with such services to extend until the earlier of (i) 12 months following the termination of Executive's employment or (ii) the date the Executive secures full time employment.

        5.    Disputes.

        5.1    Settlement of Disputes; Arbitration.    All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors of the Company and shall be in writing. Any denial by the Board of Directors of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction.

        5.2    Expenses.    The Company agrees to pay as incurred, to the full extent permitted by law, all legal, accounting and other fees and expenses which the Executive may reasonably incur as a result of any claim or contest by the Company or others, or any bona fide claim or contest by the Executive, regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code, provided that the Executive shall reimburse any fees and expenses to the extent any such claim or contest is not resolved in favor of the Executive.

        5.3    Compensation During a Dispute.    If the Change in Control Date occurs during the Term and the Executive's employment with the Company terminates within 24 months following the Change in Control Date, and the right of the Executive to receive benefits under Section 4 (or the amount or nature of the benefits to which he is entitled to receive) are the subject of a dispute between the Company and the Executive, the Company shall continue (a) to pay to the Executive his base salary in effect as of the Measurement Date and (b) to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them, if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans

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in effect on the Measurement Date, until such dispute is resolved either by mutual written agreement of the parties or by an arbitrator's award pursuant to Section 5.1. Following the resolution of such dispute, the sum of the payments made to the Executive under this Section 5.3 shall be deducted from any cash payment which the Executive is entitled to receive pursuant to Section 4; and if such sum exceeds the amount of the cash payment which the Executive is entitled to receive pursuant to Section 4, the excess of such sum over the amount of such payment shall be repaid (with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code) by the Executive to the Company within 60 days of the resolution of such dispute.

        6.    Successors.

        6.1    Successor to Company.    The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law or otherwise.

        6.2    Successor to Executive.    This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive or his family hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.

        7.    Notice.    All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable nationwide overnight courier service, in each case addressed to the Company, at 111 Locke Drive, Marlborough, MA 01752, and to the Executive at the Executive's address indicated on the signature page of this Agreement (or to such other address as either the Company or the Executive may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered five business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. Either party may give any notice, instruction or other communication hereunder using any other means, but no such notice, instruction or other communication shall be deemed to have been duly delivered unless and until it actually is received by the party for whom it is intended.

        8.    Miscellaneous.

        8.1    Employment by Subsidiary.    For purposes of this Agreement, the Executive's employment with the Company shall not be deemed to have terminated solely as a result of the Executive continuing to be employed by a wholly-owned subsidiary of the Company.

        8.2    Severability.    The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

        8.3    Injunctive Relief.    The Company and the Executive agree that any breach of this Agreement by the Company is likely to cause the Executive substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Executive shall have the right to specific performance and injunctive relief.

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        8.4    Governing Law.    The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the Commonwealth of Massachusetts, without regard to conflicts of law principles.

        8.5    Waivers.    No waiver by the Executive at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time.

        8.6    Counterparts.    This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together shall constitute one and the same instrument.

        8.7    Tax Withholding.    Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

        8.8    Entire Agreement.    This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled.

        8.9    Amendments.    This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive.

        8.10    Executive's Acknowledgements.    The Executive acknowledges that he: (a) has read this Agreement; (b) has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of the Executive's own choice or has voluntarily declined to seek such counsel; (c) understands the terms and consequences of this Agreement; and (d) understands that the law firm of Hale and Dorr LLP is acting as counsel to the Company in connection with the transactions contemplated by this Agreement, and is not acting as counsel for the Executive.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above.

SEPRACOR INC.
By:	/s/  ROBERT F. SCUMACI Robert F. Scumaci Title: Executive Vice President, Finance and Administration
/s/  TIMOTHY J. BARBERICH Timothy J. Barberich

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SEPRACOR INC. Executive Retention Agreement

EX-10.42

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Exhibit 10.42

SEPRACOR INC.

Executive Retention Agreement

        THIS EXECUTIVE RETENTION AGREEMENT by and between Sepracor Inc., a Delaware corporation (the "Company"), and                (the "Executive") is made as of February 1, 2002 (the "Effective Date").

        WHEREAS, the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders, and

        WHEREAS, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company's key personnel without distraction from the possibility of a change in control of the Company and related events and circumstances.

        NOW, THEREFORE, as an inducement for and in consideration of the Executive remaining in its employ, the Company agrees that the Executive shall receive the severance benefits set forth in this Agreement (including a certain "gross up" payment originally authorized by the Board on February 25, 1999 and set forth in Section 4.3 of this Agreement) in the event the Executive's employment with the Company is terminated under the circumstances described below subsequent to a Change in Control (as defined in Section 1.1).

        1.    Key Definitions.    As used herein, the following terms shall have the following respective meanings:

        1.1   "Change in Control" means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection):

        (a)   the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 30% or more of either (x) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or

        (b)   such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the

directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or

        (c)   the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) the beneficial owners of all or substantially all of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively; and (ii) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination); or

        (d)   approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

        1.2   "Change in Control Date" means the first date during the Term (as defined in Section 2) on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if (a) a Change in Control occurs, (b) the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and (c) either (i) such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (y) otherwise arose in connection with or in anticipation of a Change in Control, or (ii) such termination of employment occurs following the execution of a definitive agreement for such Change in Control, then for all purposes of this Agreement the "Change in Control Date" shall mean the date immediately prior to the date of such termination of employment.

        1.3   "Cause" means:

        (a)   the Executive's willful and continued failure to substantially perform his reasonable assigned duties (other than any such failure resulting from incapacity due to physical or mental illness or any failure after the Executive gives notice of termination for Good Reason and Good Reason exists), which failure is not cured within 30 days after a written demand for substantial performance is received by the Executive from the Board of Directors of the

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Company which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed the Executive's duties; or

        (b)   the Executive's willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

        For purposes of this Section 1.3, no act or failure to act by the Executive shall be considered "willful" unless it is done, or omitted to be done, in bad faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company.

        1.4   "Good Reason" means the occurrence, without the Executive's written consent, of any of the events or circumstances set forth in clauses (a) through (f) below. Notwithstanding the occurrence of any such event or circumstance, such occurrence shall not be deemed to constitute Good Reason if, prior to the Date of Termination specified in the Notice of Termination (each as defined in Section 3.2(a)) given by the Executive in respect thereof, such event or circumstance has been fully corrected and the Executive has been reasonably compensated for any losses or damages resulting therefrom (provided that such right of correction by the Company shall only apply to the first Notice of Termination for Good Reason given by the Executive).

        (a)   the assignment to the Executive of duties inconsistent in any material respect with the Executive's position (including status, offices, titles or reporting requirements), authority or responsibilities in effect immediately prior to the earliest to occur of (i) the Change in Control Date, (ii) the date of the execution by the Company of the initial written agreement or instrument providing for the Change in Control or (iii) the date of the adoption by the Board of Directors of a resolution providing for the Change in Control (with the earliest to occur of such dates referred to herein as the "Measurement Date"), or any other action or omission by the Company which results in a material diminution in such position, authority or responsibilities;

        (b)   a reduction in the Executive's annual base salary or bonus eligibility as in effect on the Measurement Date or as the same was or may be increased thereafter from time to time;

        (c)   the failure by the Company to (i) continue in effect any material compensation or benefit plan or program (including without limitation any life insurance, medical, health and accident or disability plan and any vacation or automobile program or policy) (a "Benefit Plan") in which the Executive participates or which is applicable to the Executive immediately prior to the Measurement Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or program, (ii) continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, in terms of the amount of benefits provided, than the basis existing immediately prior to the Measurement Date or (iii) award cash bonuses to the Executive in amounts and in a manner substantially consistent with past practice in light of the Company's financial performance;

        (d)   a change by the Company in the location at which the Executive performs his principal duties for the Company to a new location that increases the Executive's daily commute by more than 40 miles (as measured immediately prior to the Measurement Date); or a requirement by the Company that the Executive travel on Company business to a substantially greater extent than required immediately prior to the Measurement Date;

        (e)   the failure of the Company to obtain the agreement from any successor to the Company to assume and agree to perform this Agreement, as required by Section 6.1; or

        (f)    any failure of the Company to pay or provide to the Executive any portion of the Executive's compensation or benefits due under any Benefit Plan within seven days of the

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date such compensation or benefits are due, or any material breach by the Company of this Agreement or any employment agreement with the Executive.

        The Executive's right to terminate his employment for Good Reason shall not be affected by his incapacity due to physical or mental illness.

        1.5   "Disability" means the Executive's absence from the full-time performance of the Executive's duties with the Company for 180 consecutive calendar days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative.

        2.    Term of Agreement.    This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the Term, (b) the termination of the Executive's employment with the Company prior to the Change in Control Date, (c) the date 24 months after the Change in Control Date, if the Executive is still employed by the Company as of such later date (unless the Company has provided notice of termination of Executive's employment within such 24 month period in which case the Agreement shall expire on the termination of the Executive's employment with the Company), or (d) the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 and 5.3 if the Executive's employment with the Company terminates within 24 months (or after 24 months if the Company provides notice to the Executive of termination of his employment within such 24 month period) following the Change in Control Date. "Term" shall mean the period commencing as of the Effective Date and continuing in effect through March 31, 2007; provided, however, that commencing on April 1, 2007 and each April 1 thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any extension thereof), the Company shall have given the Executive written notice that the Term will not be extended.

        3.    Employment Status; Termination Following Change in Control.

        3.1    Not an Employment Contract.    The Executive acknowledges that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain the Executive as an employee and that this Agreement does not prevent the Executive from terminating employment at any time. If the Executive's employment with the Company terminates for any reason and subsequently a Change in Control shall occur, the Executive shall not be entitled to any benefits hereunder except as otherwise provided pursuant to Section 1.2.

        3.2    Termination of Employment.

        (a)   If the Change in Control Date occurs during the Term, any termination of the Executive's employment by the Company or by the Executive within 24 months following the Change in Control Date (other than due to the death of the Executive) shall be communicated by a written notice to the other party hereto (the "Notice of Termination"), given in accordance with Section 7. Any Notice of Termination shall: (i) indicate the specific termination provision (if any) of this Agreement relied upon by the party giving such notice, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the Date of Termination (as defined below). The effective date of an employment termination (the "Date of Termination") shall be the close of business on the date specified in the Notice of Termination (which date may not be less than 15 days or more than 45 days after the date of delivery of such Notice of Termination), in the case of a termination other than one due to the Executive's death, or the date of the Executive's death, as the case may be. In the event the Company fails to satisfy the requirements of Section 3.2(a) regarding a Notice of Termination, the purported termination of the Executive's employment pursuant to such Notice of Termination shall not be effective for purposes of this Agreement.

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        (b)   The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting any such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.

        (c)   Any Notice of Termination for Cause given by the Company must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Cause. Prior to any Notice of Termination for Cause being given (and prior to any termination for Cause being effective), the Executive shall be entitled to a hearing before the Board of Directors of the Company at which he may, at his election, be represented by counsel and at which he shall have a reasonable opportunity to be heard. Such hearing shall be held on not less than 15 days prior written notice to the Executive stating the Board of Directors' intention to terminate the Executive for Cause and stating in detail the particular event(s) or circumstance(s) which the Board of Directors believes constitutes Cause for termination.

        (d)   Any Notice of Termination for Good Reason given by the Executive must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Good Reason.

        4.    Benefits to Executive.

        4.1    Stock Acceleration.    If the Change in Control Date occurs during the Term, then, effective upon the Change in Control Date, (a) each outstanding option to purchase shares of Common Stock of the Company held by the Executive shall vest and become immediately exercisable in full and shares of Common Stock of the Company received upon exercise of any options will no longer be subject to a right of repurchase by the Company, (b) each outstanding restricted stock award shall be deemed to be fully vested and will no longer be subject to a right of repurchase by the Company and (c) if the Executive's employment is thereafter terminated for any reason (other than by the Company for Cause), then each such option (or any option into which such option is converted, exchanged or substituted in connection with the Change in Control) shall continue to be exercisable by the Executive (to the extent such option was exercisable on the Date of Termination) for a period of six months following the Date of Termination, notwithstanding any provision in any applicable option agreement to the contrary; provided however that if stock options held generally by employees of the Company under the stock option or stock incentive plan under which Executive's stock option was granted terminate or expire if not exercised upon, immediately prior to or otherwise in connection with the Change in Control, such stock option held by Executive shall likewise terminate or expire.

        4.2    Compensation    If the Change in Control Date occurs during the Term and the Executive's employment with the Company terminates within 24 months following the Change in Control Date, the Executive shall be entitled to the following benefits:

        (a)    Termination Without Cause or for Good Reason.    If the Executive's employment with the Company is terminated by the Company (other than for Cause, Disability or Death) or by the Executive for Good Reason within 24 months following the Change in Control Date, then the Executive shall be entitled to the following benefits:

        (i)    the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:

        (1)   the sum of (A) the Executive's base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the numerator of which is the number of days in the

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current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and

        (2)   the amount equal to (A) two multiplied by (B) the sum of (x) the Executive's highest annual base salary during the five-year period prior to the Change in Control Date and (y) the Executive's highest annual bonus during the five-year period prior to the Change in Control Date.

        (ii)   for 24 months after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family; and

        (iii)  to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive's termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits").

        (b)    Resignation without Good Reason; Termination for Death or Disability.    If the Executive voluntarily terminates his employment with the Company within 24 months following the Change in Control Date, excluding a termination for Good Reason, or if the Executive's employment with the Company is terminated by reason of the Executive's death or Disability within 24 months following the Change in Control Date, then the Company shall (i) pay the Executive (or his estate, if applicable), in a lump sum in cash within 30 days after the Date of Termination, the Accrued Obligations and (ii) timely pay or provide to the Executive the Other Benefits.

        (c)    Termination for Cause.    If the Company terminates the Executive's employment with the Company for Cause within 24 months following the Change in Control Date, then the Company shall (i) pay the Executive, in a lump sum in cash within 30 days after the Date of Termination, the sum of (A) the Executive's annual base salary through the Date of Termination and (B) the amount of any compensation previously deferred by the Executive, in each case to the extent not previously paid, and (ii) timely pay or provide to the Executive the Other Benefits.

        4.3    Taxes.

        (a)   In the event that the Company undergoes a "Change in Ownership or Control" (as defined below), the Company shall, within 30 days after each date on which the Executive becomes entitled to receive (whether or not then due) a Contingent Compensation Payment

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(as defined below) relating to such Change in Ownership or Control, determine and notify the Executive (with reasonable detail regarding the basis for its determinations) (i) which of the payments or benefits due to the Executive (under this Agreement or otherwise) following such Change in Ownership or Control constitute Contingent Compensation Payments, (ii) the amount, if any, of the excise tax (the "Excise Tax") payable pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), by the Executive with respect to such Contingent Compensation Payment and (iii) the amount of the Gross-Up Payment (as defined below) due to the Executive with respect to such Contingent Compensation Payment. Within 30 days after delivery of such notice to the Executive, the Executive shall deliver a response to the Company (the "Executive Response") stating either (A) that he agrees with the Company's determination pursuant to the preceding sentence or (B) that he disagrees with such determination, in which case he shall indicate which payment and/or benefits should be characterized as a Contingent Compensation Payment, the amount of the Excise Tax with respect to such Contingent Compensation Payment and the amount of the Gross-Up Payment due to the Executive with respect to such Contingent Compensation Payment. The amount and characterization of any item in the Executive Response shall be final; provided, however, that in the event that the Executive fails to deliver an Executive Response on or before the required date, the Company's initial determination shall be final. Within 90 days after the due date of each Contingent Compensation Payment to the Executive, the Company shall pay to the Executive, in cash, the Gross-Up Payment with respect to such Contingent Compensation Payment, in the amount determined pursuant to this Section 4.3.

        (b)   For purposes of this Section 4.3, the following terms shall have the following respective meanings:

        (i)    "Change in Ownership or Control" shall mean a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 280G(b)(2) of the Code.

        (ii)   "Contingent Compensation Payment" shall mean any payment (or benefit) in the nature of compensation that is made or made available (under this Agreement or otherwise) to a "disqualified individual" (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Ownership or Control of the Company.

        (iii)  "Gross-Up Payment" shall mean an amount equal to the sum of (i) the amount of the Excise Tax payable with respect to a Contingent Compensation Payment and (ii) the amount necessary to pay all additional taxes imposed on (or economically borne by) the Executive (including the Excise Taxes, state and federal income taxes and all applicable employment taxes) attributable to the receipt of such Gross-Up Payment. For purposes of the preceding sentence, all taxes attributable to the receipt of the Gross-Up Payment shall be computed assuming the application of the maximum tax rates provided by law.

        4.4    Mitigation    The Executive shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4 by seeking other employment or otherwise. Further, except as provided in Section 4.2(a)(ii), the amount of any payment or benefits provided for in this Section 4 shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise.

        4.5    Outplacement Services    In the event the Executive is terminated by the Company (other than for Cause, Disability or Death), or the Executive terminates employment for Good Reason, within 24 months following the Change in Control Date, the Company shall provide outplacement

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services through one or more outside firms of the Executive's choosing up to an aggregate amount equal to 15 percent of the Executive's annual base salary, with such services to extend until the earlier of (i) 12 months following the termination of Executive's employment or (ii) the date the Executive secures full time employment.

        5.    Disputes.

        5.1    Settlement of Disputes; Arbitration    All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors of the Company and shall be in writing. Any denial by the Board of Directors of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction.

        5.2    Expenses    The Company agrees to pay as incurred, to the full extent permitted by law, all legal, accounting and other fees and expenses which the Executive may reasonably incur as a result of any claim or contest by the Company or others, or any bona fide claim or contest by the Executive, regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code, provided that the Executive shall reimburse any fees and expenses to the extent any such claim or contest is not resolved in favor of the Executive, provided further that notwithstanding the forgoing, the Executive shall not be required to reimburse any fees and expenses if such claim or contest relates to termination by the Executive for Good Reason.

        5.3    Compensation During a Dispute.    If the Change in Control Date occurs during the Term and the Executive's employment with the Company terminates within 24 months following the Change in Control Date, and the right of the Executive to receive benefits under Section 4 (or the amount or nature of the benefits to which he is entitled to receive) are the subject of a dispute between the Company and the Executive, the Company shall continue (a) to pay to the Executive his base salary in effect as of the Measurement Date and (b) to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them, if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date, until such dispute is resolved either by mutual written agreement of the parties or by an arbitrator's award pursuant to Section 5.1. Following the resolution of such dispute, the sum of the payments made to the Executive under clause (a) of this Section 5.3 shall be deducted from any cash payment which the Executive is entitled to receive pursuant to Section 4; and if such sum exceeds the amount of the cash payment which the Executive is entitled to receive pursuant to Section 4, the excess of such sum over the amount of such payment shall be repaid (with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code) by the Executive to the Company within 60 days of the resolution of such dispute.

        6.    Successors.

        6.1    Successor to Company    The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place.

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Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if the Executive elects to terminate employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law or otherwise.

        6.2    Successor to Executive    This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive or his family hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.

        7.    Notice.    All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable nationwide overnight courier service, in each case addressed to the Company, at 111 Locke Drive, Marlborough, MA 01752, and to the Executive at the Executive's address indicated on the signature page of this Agreement (or to such other address as either the Company or the Executive may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered five business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. Either party may give any notice, instruction or other communication hereunder using any other means, but no such notice, instruction or other communication shall be deemed to have been duly delivered unless and until it actually is received by the party for whom it is intended.

        8.    Miscellaneous.

        8.1    Employment by Subsidiary    For purposes of this Agreement, the Executive's employment with the Company shall not be deemed to have terminated solely as a result of the Executive continuing to be employed by a wholly-owned subsidiary of the Company.

        8.2    Severability    The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

        8.3    Injunctive Relief    The Company and the Executive agree that any breach of this Agreement by the Company is likely to cause the Executive substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Executive shall have the right to specific performance and injunctive relief.

        8.4    Governing Law    The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the Commonwealth of Massachusetts, without regard to conflicts of law principles.

        8.5    Waivers    No waiver by the Executive at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time.

        8.6    Counterparts    This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together shall constitute one and the same instrument.

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        8.7    Tax Withholding    Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

        8.8    Entire Agreement    This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled, including without limitation the letter Agreement dated                               by and between the Company and the Executive. Notwithstanding the foregoing, (a) in the event that this Agreement is terminated as a result of (i) the expiration of the Term prior to the occurrence of a Change in Control or (ii) the termination of the Executive's employment by the Company prior to the Change in Control Date, the Letter Agreement dated                               by and between the Company and the Executive shall not be superseded and shall continue in full force and effect in accordance with its terms and (b) for the avoidance of doubt, except as specifically described herein in Section 4.1, the stock options and restricted stock awards held by Executive shall continue to be governed by the applicable stock option or stock incentive plan under which they were granted or issued (or any successor plan thereto) and any related stock option or restricted stock agreement, as the same may be amended or modified.

        8.9    Amendments    This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive.

        8.10    Executive's Acknowledgements    The Executive acknowledges that he: (a) has read this Agreement; (b) has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of the Executive's own choice or has voluntarily declined to seek such counsel; (c) understands the terms and consequences of this Agreement; and (d) understands that the law firm of Hale and Dorr LLP is acting as counsel to the Company in connection with the transactions contemplated by this Agreement, and is not acting as counsel for the Executive.

[Remainder of Page Intentionally Left Blank]

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        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above.

SEPRACOR INC.

By:

Title:

[Executive]

Address:

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SEPRACOR INC. Executive Retention Agreement

EX-10.43

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Exhibit 10.43

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

U.S. LICENSE AGREEMENT FOR LEVOCETIRIZINE

BETWEEN

UCB S.A., having its registered office at Allée de la Recherche, 60, 1070 Brussels, Belgium, acting in its own name and on behalf of its AFFILIATES, hereinafter "UCB", on the one hand,

AND

SEPRACOR INC., having its registered office at 84 Waterford Drive, Marlborough, MA 01752, USA, hereinafter "SEPRACOR", on the other hand, (individually a Party and collectively the Parties)

WITNESSETH:

        WHEREAS, SEPRACOR owns patents relating to Levocetirizine;

        WHEREAS, UCB has expertise and resources in manufacturing, marketing, distribution and management of pharmaceutical products (more particularly in the field of respiratory diseases) and owns patents relating to Cetirizine and Levocetirizine; and

        WHEREAS, UCB desires to obtain an exclusive license under SEPRACOR's patents to manufacture, promote, distribute and sell pharmaceutical products containing Levocetirizine subject to the terms and conditions herein set forth and SEPRACOR is willing to grant said license.

NOW, THEREFORE, IT HAS BEEN AGREED AS FOLLOWS:

ARTICLE 1—DEFINITIONS

        For purposes of this Agreement, initially capitalized terms used in this Agreement, whether used in the singular or plural, shall have the following meanings, unless the context clearly requires otherwise:

1.1

"ACTIVE INGREDIENT" means the pharmaceutical compound (-) Cetirizine, also known as Levocetirizine, or (-) [2-[4-[(4-Chlorophenyl)phenylmethyl]-1-piperazinyl]ethoxy]a cetic acid, including pharmaceutically acceptable salts and esters thereof. For the avoidance of any doubt, the parties expressly agree that racemic Cetirizine is not included within the definition of ACTIVE INGREDIENT.

1.2

"AFFILIATE" shall mean, as to a party to this Agreement, any corporation or non-corporate business entity which controls, is controlled by, or is under common control with such party. A corporation or non-corporate business entity shall be regarded as in control of another corporation if it owns, or directly or indirectly controls, at least fifty (50%) percent of the voting stock of the other corporation, or (a) in the absence of the ownership of at least fifty (50%) percent of the voting stock of a corporation or (b) in the case of a non-corporate business entity, or non-profit corporation, if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation or non-corporate business entity, as applicable.

1.3

"CALENDAR QUARTER" shall mean a three (3) month period ending on March 31, June 30, September 30, and December 31 of each year.

1.4

"COMBINATION PRODUCT" means any PRODUCT containing ACTIVE INGREDIENT and a leukotriene inhibitor and/or a decongestant.

1.5

"MARKETING YEAR" means each calendar year during the term of this Agreement, provided that the first MARKETING YEAR shall begin on the first day of the month during which UCB first invoices PRODUCT in the TERRITORY and shall end on December 31 of the same year, and the last MARKETING YEAR shall begin on the last January 1 during the term of this Agreement and shall end upon its expiration or termination.

1.6

"MARKET SALES" means the sales of PRODUCT invoiced to an independent third party by UCB or by any of its sublicensees or AFFILIATE in the TERRITORY for all therapeutic indications. For the avoidance of doubt, in the event that sales of PRODUCT are invoiced by UCB to its AFFILIATES or sublicensees in the TERRITORY, such sales shall not be included in the MARKET SALES; rather, MARKET SALES shall include the invoiced sale by UCB AFFILIATES or sublicensee(s) to their customers.

1.7

"MONO-PRODUCT" means any PRODUCT containing the ACTIVE INGREDIENT as its sole pharmaceutically active substance.

1.8

"NET SALES" means the net value of MARKET SALES, being the gross amount minus (i) customary trade, quantity and cash discounts, rebates and chargebacks (including without limitation Medicaid rebates and product specific rebates to pharmacy benefit managers, HMO's and other managed care and healthcare organizations) actually allowed and taken (ii) allowance for credits actually given to customers for rejected, or returned products, (iii) costs of freight and insurance, if same are included in the gross amount invoiced and (iv) value added tax, sales tax, excise taxes, duties or other governmental charges, if same are included in the gross amount invoiced.

1.9

"PRODUCT" means any pharmaceutical product containing the ACTIVE INGREDIENT as an active substance. PRODUCT shall include MONO-PRODUCT and COMBINATION PRODUCT.

1.10

"SEPRACOR KNOW-HOW" shall mean information which (i) as of the effective date hereof, is a trade secret in the sole possession of SEPRACOR, which relates specifically to the manufacture, sale, distribution, registration, use or testing of ACTIVE INGREDIENT or PRODUCT, or (ii) hereafter, during the term of this Agreement, is developed or acquired or used by SEPRACOR as a trade secret and which relates specifically to the manufacture, sale, distribution, registration, use or testing of ACTIVE INGREDIENT or PRODUCT.

1.11

"SEPRACOR PATENT(S)" means the patents and patent applications in the TERRITORY listed in Schedules 1.11(a) SEPRACOR BASIC PATENT and 1.11(b) SEPRACOR COMBINATION PATENTSattached hereto, together with continuations, continuations in part, divisionals and reissues thereof in the TERRITORY, and any extensions of the foregoing.

1.12

"TERRITORY" means the United States (including Puerto Rico).

ARTICLE 2—OBJECT OF THE AGREEMENT

        2.1    Grant of license    Subject to the terms and conditions of this Agreement, SEPRACOR hereby grants UCB, and UCB hereby accepts, (a) an exclusive license, including the right to sublicense, within the TERRITORY, under SEPRACOR PATENTS to manufacture, have manufactured, use, promote, co-promote, distribute, offer for sale, sell or import PRODUCT in the TERRITORY, and (b) a nonexclusive license in the TERRITORY, including the right to sublicense within the TERRITORY, under SEPRACOR KNOW-HOW, to manufacture, have manufactured, use, promote, distribute, offer for sale, sell or import PRODUCT.

        2.2    SEPRACOR KNOW-HOW    Promptly upon execution of this Agreement and throughout the term hereof SEPRACOR shall disclose to UCB the SEPRACOR KNOW-HOW. At UCB's request, SEPRACOR shall request in writing from third parties towards which it may be bound by confidentiality obligations (if any) their consent to the disclosure, by SEPRACOR to UCB and its sublicensees, if any, of SEPRACOR KNOW-HOW.

        2.3    Trademark    UCB shall be free to select the trademark for the sale and marketing of PRODUCT in the TERRITORY; no rights in such trademark shall vest in or inure to the benefit of SEPRACOR.

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        2.4    PRODUCT Registration

(a)

UCB shall, in its sole discretion, and at its sole expense, use reasonable efforts to obtain marketing approval from the U.S. Food and Drug Administration ("FDA") to sell and promote MONO-PRODUCT in the TERRITORY;



(b)

UCB shall be responsible for conducting, to the extent UCB deems appropriate and at UCB's sole expense, clinical trials with the ACTIVE INGREDIENT and interacting with the FDA to obtain marketing registration for PRODUCT.

        2.5    Development Reports    UCB shall keep SEPRACOR generally advised within forty-five (45) days of the end of the second and fourth CALENDAR QUARTERS of each year, of the status of its development program for PRODUCT and discussions with the FDA regarding the registration of the PRODUCT until such time as UCB obtains marketing approval from the FDA for the MONO-PRODUCT. It is understood that UCB will not be required to disclose detailed information or confidential data to SEPRACOR relating to UCB's development programs or discussion with the FDA or UCB's regulatory filings.

ARTICLE 3—ROYALTIES

        3.1    Calculation

(a)

In partial consideration for granting the license pursuant to Section 2.1 of this Agreement, UCB shall pay to SEPRACOR a running royalty at the rate of [**]percent ([**]%) of the total NET SALES of MONO-PRODUCT. Royalties under this Section 3.1(a) shall be payable until the earlier of (i) such time as all of the SEPRACOR PATENTS covering MONO-PRODUCT(S) and licensed hereunder expire, are held invalid or unenforceable by a United States Federal District Court or by a United States Court of Appeals (whichever comes first) in a decision unappealable or not appealed in the time allowed for appeal, and/or (ii) such time as MONO-PRODUCT is introduced in the Territory by a Third Party not authorized by UCB. Thereafter, in the event that all MONO-PRODUCTS not authorized by UCB are removed from the market as a consequence of enforcement of SEPRACOR PATENTS, the royalty obligation of this Section 3.1(a) shall recommence until such time as an unauthorized MONO-PRODUCT is once again introduced in the Territory.



(b)

In partial consideration for granting the license pursuant to Section 2.1 of this Agreement, UCB shall pay to SEPRACOR, on a product-by-product basis, a running royalty at the rate of [**]percent ([**]%) of the total NET SALES of COMBINATION PRODUCT. Royalties under this Section 3.1(b) shall be payable on a product-by-product basis until the earlier of (i) such time as all of the SEPRACOR PATENTS covering such COMBINATION PRODUCT and licensed hereunder expire, are held invalid or unenforceable by a United States Federal District Court or by a United States Court of Appeals (whichever comes first) in a decision unappealable or not appealed in the time allowed for appeal, and/or (ii) such time as such COMBINATION PRODUCT is introduced in the TERRITORY by a Third Party not authorized by UCB. Thereafter, in the event that such COMBINATION PRODUCT not authorized by UCB is removed from the market as a consequence of enforcement of SEPRACOR PATENTS, the royalty obligation of this Section 3.1(b) shall recommence as to that COMBINATION PRODUCT until such time as said unauthorized COMBINATION PRODUCT is once again introduced in the Territory.

        3.2    Financial Reporting    UCB shall provide a report in writing to SEPRACOR within forty-five (45) days of the end of each CALENDAR QUARTER which will set forth the NET SALES for the considered CALENDAR QUARTER and the detailed calculation of the royalties due to SEPRACOR pursuant to Section 3.1 for the same period.

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        3.3    Terms of payment    At the same time as the report required under Section 3.2 above, UCB shall pay to SEPRACOR at its address set forth in Section 3.7 below, the full amount of royalties due as per Section 3.1 hereabove for the said period. At the end of each MARKETING YEAR, UCB shall reconcile the amount of royalty due to SEPRACOR against the actual amounts paid for the MARKETING YEAR concerned. In case of underpayment by UCB, UCB shall promptly pay the difference; in case of overpayment by UCB, UCB shall be entitled to payment from SEPRACOR or offset the difference against the royalties due for the next CALENDAR QUARTER. Any such payment shall be made in U.S. Dollars.

        3.4    Taxes    All royalties to be paid to SEPRACOR by UCB pursuant to this Agreement shall be paid after deduction of the withholding taxes lawfully imposed thereon, which taxes shall be paid by UCB for the account of SEPRACOR; provided that UCB shall upon request supply SEPRACOR with original or certified copies of official certificates stating that the aforesaid taxes have been actually paid for the account of SEPRACOR. The previous sentence notwithstanding, the parties hereto will reasonably cooperate in completing and filing documents required under the provisions of any applicable tax laws or under any other applicable law, in order to enable UCB to make such payments to SEPRACOR without any deduction or withholding.

        3.5    Records

(a)

UCB shall keep and maintain, and shall cause its AFFILIATES, sublicensees and assigns to keep and maintain, complete and accurate records and books of account in sufficient detail and form so as to enable royalties to be determined, including but not limited to, true and accurate records of sales of PRODUCT and calculations of NET SALES and royalties. SEPRACOR shall have the right to audit the records of UCB at its own expense using a nationally recognized firm of independent certified accountants. Such accountants will have access on reasonable notice to UCB and its AFFILIATES and sublicensees' records during reasonable business hours for the purpose of verifying royalties. Notwithstanding the foregoing, this right may not be exercised more than once in any calendar year, and once a calendar year is audited it may not be reaudited, and said accountant shall disclose to SEPRACOR and UCB only information relating solely to the accuracy of the reports provided to SEPRACOR and the payments made to SEPRACOR under this Agreement.



(b)

Any adjustment required as a result of an audit conducted under this Section 3.5 shall be made within forty-five (45) days after the date on which the accountant conducting the audit issues a written report to SEPRACOR and UCB containing the results of the audit. If any underpayment by UCB is greater than ten percent (10%) of the amount previously paid to SEPRACOR for the relevant quarter, the costs and expenses of the audit shall be paid for by UCB. In the case of overpayment, UCB may, at its option, offset royalties and interest (if any) payable to SEPRACOR by the amount of the overpayment, but otherwise SEPRACOR shall remit any such overpayment to UCB.



(c)

UCB shall have the right to contest the accountants' results. If the parties cannot reconcile their differences, the parties agree to have the issue resolved by a mutually acceptable third party accounting expert. The non-prevailing party, as determined by the expert, shall be liable for the cost of the proceeding and, if bad faith, gross negligence or intentional misconduct on the part of UCB is found by the expert, the expert may impose the whole or partial cost of the audit on UCB. If the expert finds that SEPRACOR pursued a frivolous claim, the expert may require SEPRACOR to pay all legal costs and expenses.

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        3.6    No part of any amount payable to SEPRACOR under this Agreement may be reduced due to any counterclaim, set-off, adjustment or other right which UCB might have against SEPRACOR, any other party or otherwise, except as expressly stated to the contrary in this Agreement.

        3.7    All payments to SEPRACOR pursuant to this Agreement shall be made by wire transfer, to Fleet Bank of Massachusetts, 75 State Street, Boston, Massachusetts 02109 (ABA #011000138) to Account No. [**]or such other bank or account as SEPRACOR may from time to time designate in writing.

ARTICLE 4—SALES

        4.1    Reasonable efforts    After MONO-PRODUCT is approved and launched into the Rx market according to a timetable established by UCB, UCB shall use reasonable efforts to sell MONO-PRODUCT within the TERRITORY and to promote the same to potential purchasers thereof, all in a manner consistent with the efforts used and decisions made by UCB in connection with other products of similar strategic and financial significance.

        4.2    Launch Date    UCB by itself and/or through a third party intends to launch MONO-PRODUCT into the Rx market at the most commercially advantageous time. UCB reserves for itself, however, the sole discretion of the timing of such launch. Both parties understand and agree that UCB shall not be required to launch before [**] and that UCB will generally keep SEPRACOR advised on a confidential basis of its proposed launch dates, if after [**].

ARTICLE 5—INTELLECTUAL PROPERTY RIGHTS

        5.1    Patent protection    SEPRACOR shall be responsible for maintaining and prosecuting at its own expense the SEPRACOR PATENTS.

        5.2    Registration of License    UCB shall be entitled to register the present license at any government offices if such registration is permissible or needed by law. SEPRACOR shall give UCB any powers and authorization necessary for this purpose. The expenses of such registrations shall be borne by UCB.

        5.3    Enforcement of SEPRACOR PATENTS

        (a)   UCB and SEPRACOR shall promptly inform each other in writing of any suspected infringement of any SEPRACOR PATENTS that come to their attention. SEPRACOR shall have the right, but not the obligation, to take legal action against third parties for infringement of any SEPRACOR PATENTS in the TERRITORY, and shall promptly notify UCB of its intention whether or not to initiate legal action within any such legally imposed timeframe [but in no event later than ten (10) days before any deadline for filing suit which, if missed, would prejudice UCB's exclusive rights under this Agreement (e.g. the 45-day deadline imposed under 21 USC 355(j)(5)(B)(iii))] or if no such legally imposed deadline within forty-five (45) days of written notice to the other party. If SEPRACOR takes such legal action within such timeframe, or if no timeframe, within thirty (30) days following notification of its intention to take such action, it shall have full control thereover. UCB shall have the right to consult with SEPRACOR and be represented by its own counsel at its own expense, and SEPRACOR shall in good faith consider UCB's interests in the conduct of any such suit. UCB shall have the right, but not the obligation, prior to commencement of an action brought by SEPRACOR, to join such action as a party; provided, however, that SEPRACOR shall retain control of such action as set forth above. UCB shall reasonably cooperate with SEPRACOR in any such action. In the event that UCB has been joined in the action, no settlement, consent judgment or other voluntary final disposition of the action may be entered into without the consent of UCB. If UCB has been joined in the action,

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SEPRACOR shall not enter into any consent judgment or other voluntary final disposition of the action or threatened action which affects UCB's exclusivity granted herein without the consent of UCB, prior to offering UCB the right to continue the action at its own cost and discretion.

        (b)   In case SEPRACOR notifies UCB that it will not take legal action against the infringer, or if SEPRACOR does not initiate legal action within the timeframes specified above, or in case SEPRACOR has not notified UCB of its decision to take action as prescribed in Section 5.3(a), UCB shall have the right, but not the obligation to undertake the same at its own cost and discretion, and any amounts recovered shall be retained by UCB. SEPRACOR will reasonably cooperate with UCB in any such action.

        (c)   The cost of an action brought by a party against an infringer shall be borne by the party bringing the action. Any amounts recovered shall, after deduction of the costs of litigation, including all legal costs and expenses incurred by UCB and/or SEPRACOR, be apportioned between UCB and SEPRACOR in the ratio of [**] in favor of UCB, provided however, that any recovered punitive, exemplary or other enhanced damages shall be apportioned equally between the parties.

        5.4    Infringement of third party rights    In the event of institution of an infringement action in the TERRITORY by a third party against UCB alleging infringement of any intellectual property rights of such third party in connection with the manufacture, use, promotion, co-promotion, distribution, offer for sale, sale or import of PRODUCT by UCB, UCB shall undertake the defense thereof at their own expense and discretion.

ARTICLE 6—REPRESENTATIONS AND WARRANTIES

        6.1   SEPRACOR warrants and represents to UCB that, as of the date of this Agreement:

        (a)   it has all right, title and interest in the SEPRACOR PATENTS;

        (b)   to the best of its knowledge, the SEPRACOR PATENTS issued as of the effective date of this agreement are valid and enforceable;

        (c)   it has not entered into any agreement, oral or written, with any third party preventing the use of the SEPRACOR PATENTS or the SEPRACOR KNOW-HOW in the TERRITORY by UCB;

        (d)   it possesses the necessary right, power and authority to enter into this Agreement;

        (e)   it is aware of no third party using or infringing all or any of the SEPRACOR PATENTS in derogation of the rights granted pursuant to this Agreement;

        (f)    it is aware of no third party claim to any rights in the SEPRACOR PATENTS or the SEPRACOR KNOW-HOW;

        (g)   it is aware of no pending interference or opposition proceeding or litigation or any communication which threatens an interference or opposition proceeding or litigation before any patent and trademark office, court, or any other governmental entity or court in any jurisdiction in regard to the SEPRACOR Patents;

        (h)   to its knowledge, there is no failure to comply with, no violation of or any default under, any law, permit or court order applicable to it which might have a material adverse effect on its ability to execute, deliver and perform this Agreement or on its ability to consummate the transactions contemplated hereby; and

        (i)    it neither owns nor controls any patents or pending patent applications not listed in Schedules 1.15(a) or 1.15(b) that would be infringed by the manufacture, use, promotion,

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co-promotion, distribution, offer for sale, sale or import of PRODUCT nor will it enforce against UCB any SEPRACOR patents that will restrict UCB's right under this Agreement to manufacture, have manufactured, use, promote, co-promote, distribute, offer for sale, sell, or import (i) MONO-PRODUCT or (ii) COMBINATION PRODUCT containing ACTIVE INGREDIENT, a leukotriene inhibitor and/or a decongestant as its sole active substances.

        6.2   UCB warrants and represents to SEPRACOR that, as of the date of this Agreement:

        (a)   it possesses the necessary right, power and authority to enter into this Agreement;

        (b)   to its knowledge, there is no failure to comply with, no violation of or any default under, any law, permit or court order applicable to it which might have a material adverse effect on its ability to execute, deliver and perform this Agreement or on its ability to consummate the transactions contemplated hereby;

        (c)   that it is not a party to, and during the term of this Agreement will not enter into any agreements, oral or written, that are inconsistent with its obligations under this Agreement; and

        (d)   it is aware of no third party using or infringing all or any of the SEPRACOR PATENTS in derogation of the rights granted pursuant to this Agreement.

ARTICLE 7—CONFIDENTIALITY

        7.1   Each party ("Receiving Party") acknowledges that any information supplied to it by the other party ("Disclosing Party") under this Agreement is confidential and undertakes to keep secret any such confidential information. The Receiving Party shall not, without the Disclosing Party's prior written consent, disclose the confidential information to any third party other than AFFILIATES, sublicensees or co-promotion partners nor use the same for any purpose other than the exercise of its rights and/or fulfillment of its obligations under the terms of this Agreement.

        7.2   The Receiving Party shall ensure that each of its employees to whom any such information is disclosed is made aware prior to such disclosure of the restrictions herein contained and that such employees observe such restrictions.

        7.3   The obligations of Section 7.1 shall have no application when and to the extent that confidential information: was known to the receiving party prior to receipt from the disclosing party; was generally available to the trade or to the public prior to receipt thereof from the disclosing party; through no act on the part of the receiving party, hereafter becomes information generally available to the trade or to the public; corresponds in substance to information received in good faith by the receiving party from a third party and is not subject to an obligation of confidentiality owed by the third party to the disclosing party; is hereafter independently developed by an employee or agent of the receiving party without reference to information received hereunder; or is required to be disclosed by law, regulation, or other act of governmental or judicial authority, provided, however, that the receiving party shall give prompt notice to the disclosing party of any such required disclosure in order to afford the disclosing party an opportunity to oppose or limit the required disclosure.

        7.4   Nothing in this Article 7 shall prevent UCB or its sublicensees from exercising their rights granted under or pursuant to this Agreement.

ARTICLE 8—TERM AND TERMINATION

        8.1    Term    This Agreement shall be effective on the date of last signature hereof and shall continue on a product by product basis for the duration of the last to expire of the SEPRACOR PATENTS covering such products.

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        8.2    Termination by either party    In addition to other termination rights provided in this Agreement, either Party may terminate this Agreement on written notice to the other party, effective immediately:

        (i)    if the other Party commits a material breach of any of its obligations under this Agreement which is not cured within ninety (90) days of written notice from the other Party specifying the breach. Such right of termination shall be without prejudice, and in addition to any other remedy the non-defaulting Party may have at law or in equity due to the other Party's breach of its obligations hereunder; or

        (ii)   if the other party is dissolved or liquidated, files or has filed against it a petition under any bankruptcy or insolvency law, makes an assignment for the benefit of its creditors or has a receiver appointed for all or substantially all if its property.

        8.3    Termination by SEPRACOR    SEPRACOR shall have the right to terminate this Agreement, effective immediately, if after the effective date, UCB, its AFFILIATES, sublicensees or assigns, or any third party which SEPRACOR can demonstrate acted on behalf of UCB, its AFFILIATES, sublicensees or assigns, persists, despite a written notice sent by SEPRACOR, in any proceeding or action alleging invalidity or unenforceability of SEPRACOR PATENT in the TERRITORY, or non-infringement of SEPRACOR PATENT by any UCB MONO-PRODUCT, before any court, administrative or other government agency, or patent authority in the TERRITORY, or initiates or participates, unless under court order, in any such proceeding or action before any court, administrative or other government agency, or patent authority in the TERRITORY.

        8.4    Termination by UCB    UCB shall have the right to terminate this Agreement at any time upon six (6) months prior written notice to SEPRACOR. All rights and licenses granted by SEPRACOR to UCB shall be revoked and reconveyed, upon termination, to SEPRACOR and UCB shall have no right to any continued use of the licensed technology. All SEPRACOR know-how and written proprietary information communicated to UCB shall be reconveyed to SEPRACOR.

ARTICLE 9—EFFECTS OF TERMINATION

        9.1    No relief    Expiration or termination of this Agreement in whole or in part shall not relieve the parties of the obligation to pay any amounts owing between them nor shall it relieve the parties of their obligations under Articles 7, 9, 10 and 11, and any other Article providing for its survival, which shall survive such expiration or termination, in accordance with their terms.

        9.2    Stocks    On termination of this Agreement for any reason whatsoever SEPRACOR shall grant UCB sufficient time (which period of time shall not exceed twelve months) to sell its existing stocks of PRODUCT including stock on order at that time (subject to payment of the applicable royalty obligations of this Agreement).

        9.3    Bankruptcy    All rights and licenses granted under or pursuant to this Agreement by SEPRACOR to UCB are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101(56) of the Bankruptcy Code. The parties agree UCB, as a licensee of such rights and licenses, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The parties further agree that, in the event that any proceeding shall be instituted by or against SEPRACOR seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief of composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking an entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property

8

or it shall take any action to authorize any of the foregoing actions (each a "Proceeding"), UCB shall have the right to retain and enforce its rights under this Agreement, including the following rights:

        (i)    the right to continue to use the SEPRACOR Patents and SEPRACOR Know-How and all versions and derivatives thereof, and all documentation and other supporting material related thereto, in accordance with the terms and conditions of this Agreement; and

        (ii)   the right to a complete duplicate of (or complete access to, as appropriate) all SEPRACOR Patents and SEPRACOR Know-How and all embodiments of such, and the same, if not already in UCB's possession, shall be promptly delivered to UCB (a) upon any such commencement of a Proceeding upon written request therefor by UCB, unless SEPRACOR elects to continue to perform all of its obligations under this Agreement; or (b) if not delivered under (a) above, upon the rejection of this Agreement by or on behalf of SEPRACOR upon written request therefor by UCB; and

        (iii)  the right to obtain from SEPRACOR all documentation and other supporting materials related to the SEPRACOR Patents, SEPRACOR IMPROVEMENT PATENTS and SEPRACOR Know-How and all versions and derivatives thereof.

ARTICLE 10—GOVERNING LAW—JURISDICTION

        This Agreement shall be ruled and interpreted according to the laws of the State of Delaware, without reference to conflict of law principles.

ARTICLE 11—GENERAL PROVISIONS

        11.1    Force majeure    Any delays in, or failure of performance of, any party to this Agreement, shall not constitute a default hereunder, or give rise to any claim for damages, if and to the extent caused by occurrences beyond the control of the party affected, including, but not limited to, acts of God, strikes or other concerted acts of workmen, civil disturbances, fires, floods, explosions, riots, war, rebellion, sabotage, acts of governmental authority or failure of governmental authority to issue licenses or approvals which may be required ("Force Majeure"), provided that any such delay shall not extend for more than ninety (90) days; if such event causes or is reasonably anticipated to cause delay in performance for more than ninety (90) days, then either party may terminate this Agreement, effective upon written notice to the other party, provided:

        (i)    The party asserting the Force Majeure shall promptly notify the other party of the event constituting Force Majeure and of all relevant details of the occurrence and where appropriate an estimate of how long such Force Majeure event shall continue.

        (ii)   If such Force Majeure event continues thereafter and in any event, the parties shall consult with each other in order to find a fair solution and shall use all reasonable endeavors to minimize the consequences of such Force Majeure.

        11.2    Assignment—Subcontracting    This Agreement and each and every covenant, term and condition herein is binding upon and enures to the benefit of the parties hereto and their respective successors.

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        Neither Party may without the prior written approval of the other, such approval not to be unreasonably withheld, assign this Agreement in whole or in part to any party other than its respective AFFILIATE, provided, however, either party may, without such approval, assign the Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its assets related to the division or the subject business, or in the event of its merger or consolidation or change in control or similar transaction. In the interest of clarity, the Parties agree that UCB may sublicense or enter into a co-promotion or co-marketing agreement with any third party without consent from SEPRACOR but shall provide notice to SEPRACOR.

        Any assignment of this Agreement, in whole or in part, in violation of this Section 11.2 shall be void.

        In the event of subcontracting to an AFFILIATE or assignment, the respective AFFILIATE or assignee shall be bound by the provisions of this Agreement.

        11.3    Indemnification

        (a)   UCB agrees to defend, indemnify and hold harmless SEPRACOR, its successors and assigns, and its officers, directors, employees, stockholders, agents, AFFILIATE and any person who controls any of such persons (an "Indemnified SEPRACOR Party"), at UCB's cost and expense, from and against any and all liabilities, claims, demands, judgments, losses, costs, damages, fees or expenses whatsoever (including reasonable attorneys', consultants' and other professional fees and disbursements of every kind, nature and description incurred by such Indemnified SEPRACOR Party in connection therewith) (collectively, "Damages") that such Indemnified SEPRACOR Party may sustain, suffer or incur arising out of or in connection with claims by a third party alleging infringement of any intellectual property rights of such third party in connection with the manufacture, use, or sale of PRODUCT, and any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession, use or consumption of any PRODUCT, whether claimed by reason of breach of warranty, negligence, PRODUCT defect or otherwise, and regardless of the form in which any such claim is made.

        (b)   SEPRACOR shall defend, indemnify and hold harmless UCB its successors and assigns, and its officers, directors, employees, stockholders, agents, AFFILIATES and any person who controls any of such persons (an "Indemnified UCB Party") at SEPRACOR's cost and expense from and against any liabilities, claims, demands, judgments, losses, costs, damages or expenses whatsoever (including reasonable attorneys', consultants' and other professional fees and disbursements of every kind, nature and description incurred by such Indemnified UCB Party in connection therewith) (collectively, "Damages") that such Indemnified UCB Party may sustain, suffer or incur to the extent that such Damages are attributed to it from any breach of any representation, warranty, covenant or agreement of SEPRACOR contained in this Agreement or from any action(s) by SEPRACOR with respect to any SEPRACOR PATENT.

        (c)   The indemnification obligations provided for in this Section 11.3 shall be contingent upon the following additional terms and conditions:

        (i)    the party claiming indemnification shall have promptly given the indemnifying party timely notice of the facts giving rise to such claim and reasonable co-operation, information and assistance in connection therewith;

        (ii)   the indemnifying party shall have sole control and authority with respect to the defense, settlement or compromise of the claim against the indemnified party.

        (d)   NOTWITHSTANDING ANYTHING IN THIS AGREEMENT OR OTHERWISE, EXCEPT FOR THE INDEMNIFICATION PROVISIONS IN THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS

10

AGREEMENT, WHETHER UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY, FOR ANY INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE, MULTIPLE, OR CONSEQUENTIAL DAMAGES OF THE OTHER PARTY.

        11.4    Publicity    SEPRACOR and UCB shall jointly issue a press release promptly after the execution hereof concerning this Agreement, which press release shall be agreed to between the parties prior to issue. A party may not publicize or disclose the existence of this Agreement of the terms or conditions hereof without the prior written consent of the other party, except in furtherance of the exercise of the rights to assign to a third party under Section 11.2 hereof. Nothing in the foregoing, however, shall prohibit a party from making such disclosures to the extent deemed necessary by counsel under applicable federal or state securities laws or any rule or regulation of any nationally recognized securities exchange, provided same is accurate and complete. In such event, however, the disclosing party shall consult with the other party prior to such disclosure and, where applicable, shall request confidential treatment to the extent available.

        11.5    Headings    Headings are inserted for convenience and shall not affect the meaning or interpretation of this Agreement or any article thereof.

        11.6    Waiver    No waiver of any default hereunder by either party or any failure to enforce any rights hereunder shall be deemed to constitute a waiver of any subsequent default with respect to the same or any other provision hereof.

        11.7    Severability    Should any part of this Agreement be held unenforceable or in conflict with the applicable laws or regulations of any jurisdiction, the invalid or unenforceable part or provision shall be replaced with a provision which accomplishes, to the extent possible, the original business purpose of such part or provision in a valid and enforceable manner, and the remainder of this Agreement shall remain binding upon the parties hereto.

        11.8    Notices    All notices given by one party to the other party shall be in writing. They shall be deemed given the sooner of receipt or three business days after having been posted.

        They shall be addressed to the addresses indicated on the first page of this Agreement:

if to UCB:	UCB S.A.
	Attn: Executive V.P. Global Operations
With a copy to:	UCB S.A.
	Attn: Executive V.P. & General Counsel
if to SEPRACOR:	SEPRACOR Inc.
	Attn: President

or to the latest address of such party as shall have been communicated in writing to the other party.

        11.9    Entire agreement    This Agreement and the Schedules hereto constitute the whole understanding between the parties on the subject matter hereof and shall prevail on any other terms. Any amendment or modification to this Agreement shall only be made in writing and shall only be valid when signed by both parties.

        11.10    Independent Contractor    The activities to be performed by either Party hereunder are undertaken by it as an independent contractor and not as an agent of the other Party. Neither Party shall at any time, enter into or incur, or hold itself out to third parties as having authority to enter into or incur on behalf of the other Party, any commitments, expenses or liabilities whatsoever. It is not the

11

intent of the Parties hereto to form any partnership or joint venture and it is understood and agreed that no such partnership or joint venture shall be created by this Agreement.

        11.11    Notification and Authorization Under Drug Price Competition and Patent term Restoration Act

        (a)    Notices Relating to the Act.    SEPRACOR shall notify UCB of each notice pertaining to any patent included among the SEPRACOR which SEPRACOR receives as patent owners pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984 (hereinafter the "Act"), including but not necessarily limited to notices pursuant to Sections 101 and 103 of the Act from persons who have filed an abbreviated NDA or a "paper" NDA. Such notices shall be given promptly, but in any event within ten (10) days of receipt of each such notice pursuant to the Act.

        (b)    Authorization Relating to Patent Term Extension.    SEPRACOR hereby authorizes UCB (a) to include in any NDA for a PRODUCT, as UCB may deem appropriate under the Act, a list of patents included among the SEPRACOR PATENTS that relate to such PRODUCT and such other information as UCB in its reasonable discretion believes is appropriate to be filed pursuant to the Act; and (b) in consultation with SEPRACOR, to exercise any rights that may be exercisable by SEPRACOR as patent owners under the Act to apply for an extension of the term of any patent included among the SEPRACOR PATENTS. SEPRACOR agrees to cooperate with UCB or its sublicensees, as applicable, in the exercise of the authorizations granted herein or which may be granted pursuant to this Section 11.11 and will execute such documents and take such additional action as UCB may reasonably request in connection therewith.

        (c)    SEPRACOR    shall undertake at its cost and expense to file any relevant information in order to ensure appropriate listing of the relevant SEPRACOR patents in the Orange Book relating to PRODUCT, provided that UCB notifies SEPRACOR promptly upon approval of PRODUCT and provides SEPRACOR promptly after approval with a copy of the approved labeling for PRODUCT.

        11.12    Further Actions    Each party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be reasonably necessary or appropriate in order to carry out the purposes and intent of this Agreement.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives.

Done in two copies, each party having received its copy.

UCB S.A.	SEPRACOR Inc.
/S/ R. Doliveux	/S/ W. J. O'Shea
Name: R. Doliveux	Name: W. J. O'Shea
Title: CEO	Title: President and CEO
Place: Brussels	Place: Marl. MA. USA
Date: 17th Feb 2006	Date: 16th Feb 2006
/S/ Robert J. Trainor
Name: Robert J. TRAINOR
Title: Executive Vice-President & General Counsel
Place: Brussels, Belgium
Date: February 17, 2006

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Schedule 1.11(a)
To the US License Agreement for Levocetirizine
between UCB S.A. and SEPRACOR INC.

BASIC PATENTS

Issued Patents

Our Reference Number	Patent Number	Filling Date	Issue Date	Title
P 057C	US 5,698,558	January 27, 1997	December 16, 1997	Methods for Treating Allergic Disorders Using Optically Pure (-) Cetirizine

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Schedule 1.11(b)
To the US License Agreement for Levocetirizine
between UCB S.A. and SEPRACOR INC.

COMBINATION PATENTS

Issued Patents

Our Reference Number	Patent Number	Filling Date	Issue Date	Title
P 139A	6,384,038	April 14, 1998	May 7, 2002	Methods and Compositions Using Cetirizine in Combination with Leukotriene Inhibitors or Decongestants
P 139B	6,790,849	March 26, 2002	September 14, 2004	Methods and Compositions Using Optically Pure (-) Cetirizine in Combination with Leukotriene Inhibitors or Decongestants

Pending Applications

Our Reference Number	Application Number	Filling Date	Issue Date	Title
[**]	[**]	[**]	[**]	[**]

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QuickLinks

U.S. LICENSE AGREEMENT FOR LEVOCETIRIZINE
WITNESSETH
ARTICLE 1—DEFINITIONS
ARTICLE 2—OBJECT OF THE AGREEMENT
ARTICLE 3—ROYALTIES
ARTICLE 4—SALES
ARTICLE 5—INTELLECTUAL PROPERTY RIGHTS
ARTICLE 6—REPRESENTATIONS AND WARRANTIES
ARTICLE 7—CONFIDENTIALITY
ARTICLE 8—TERM AND TERMINATION
ARTICLE 9—EFFECTS OF TERMINATION
ARTICLE 10—GOVERNING LAW—JURISDICTION
ARTICLE 11—GENERAL PROVISIONS
Schedule 1.11(a) To the US License Agreement for Levocetirizine between UCB S.A. and SEPRACOR INC.
BASIC PATENTS
Issued Patents
Schedule 1.11(b) To the US License Agreement for Levocetirizine between UCB S.A. and SEPRACOR INC.
COMBINATION PATENTS
Issued Patents
Pending Applications

EX-13

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Exhibit 13

Selected Portions of the
2005 Annual Report to Stockholders

SEPRACOR INC. SELECTED FINANCIAL DATA

		Year Ended December 31,
		2005			2004			2003			2002			2001
		(In Thousands, Except Per Share Data)
STATEMENT OF OPERATIONS DATA:
Revenues:
	Product sales	$	769,685		$	319,781		$	286,819		$	190,227		$	125,248
	Royalties		51,243			52,150			51,487			48,491			25,663
	Collaborative research and development		—			—			—			—			—
	License fees and other		—			8,946			5,734			250			1,184
Total revenues			820,928			380,877			344,040			238,968			152,095
Costs and expenses:
	Cost of revenue		67,431			35,427			30,219			24,609			15,904
	Research and development		144,504			159,974			220,224			243,797			231,278
	Selling, general and administrative and patent costs		625,566			388,165			196,920			177,863			131,386
Total costs and expenses			837,501			583,566			447,363			446,269			378,568
Loss from operations			(16,573	)		(202,689	)		(103,323	)		(207,301	)		(226,473	)
Other income (expense):
	Interest income		27,462			8,470			6,179			15,553			25,669
	Interest expense		(23,368	)		(23,646	)		(50,907	)		(63,720	)		(47,793	)
	Debt conversion expense(1)		—			(69,768	)		—			(63,258	)		—
	Gain (loss) on early extinguishment of debt(2)		—			(7,022	)		(4,645	)		44,265			—
	Equity in investee losses(3)		(665	)		(1,485	)		(1,921	)		(1,514	)		(1,601	)
	Other		(79	)		482			157			(515	)		997
	Gain on sale of affiliate stock(4)		18,345			—			18,524			—			23,034
Income (loss) before minority interest			5,122			(295,658	)		(135,936	)		(276,490	)		(226,167	)
Minority interest in subsidiary			—			—			—			—			2,152
Income taxes			151			—			—			—			—
Net income (loss)		$	4,971		$	(295,658	)	$	(135,936	)	$	(276,490	)	$	(224,015	)
Basic net income (loss) per common share		$	0.05		$	(3.21	)	$	(1.61	)	$	(3.34	)	$	(2.89	)
Diluted net income (loss) per common share		$	0.04		$	(3.21	)	$	(1.61	)	$	(3.34	)	$	(2.89	)
Shares used in computing basic and diluted net income (loss) per common share:
	Basic		104,839			92,017			84,639			82,899			77,534
	Diluted		118,162			92,017			84,639			82,899			77,534
BALANCE SHEET DATA:
Cash and short and long-term investments		$	976,201		$	833,912		$	840,388		$	556,434		$	941,024
Total assets			1,274,497			1,039,118			1,020,225			727,113			1,093,531
Long-term debt(5)			1,161,587			1,161,670			1,040,789			982,852			1,260,817
Stockholders' deficit		$	(165,489	)	$	(331,115	)	$	(619,211	)	$	(392,180	)	$	(313,702	)

(1)

Represents: (a) inducement costs associated with our conversion of $177,200 of our 0% Series A notes due 2008 and $351,980 of our 0% Series B notes due 2010 in 2004, and (b) our exchange of approximately $147,000 of our convertible subordinated debt in privately negotiated transactions in 2002.

(2)

Represents a loss on our redemption in 2004 of the then remaining outstanding $430,000 principal amount of our 5.75% convertible subordinated notes due 2006, a loss on our redemption in 2003 of the remaining $111,870 principal amount of our 7% convertible subordinated debentures due 2005 and a gain from our repurchase in 2002 of approximately $131,090 of our 7% convertible subordinated debentures in privately negotiated transactions.

(3)

Represents: (a) our portion of BioSphere Medical, Inc. losses in 2005, 2004, 2003, 2002 and 2001 (beginning July 3, 2001),(b) our portion of HemaSure Inc. (now known as Point Therapeutics, Inc.) losses and, (c) a gain of $5,000 resulting from the release of a HemaSure loan guarantee in 2000 as a result of HemaSure's repayment in full of the loan.

(4)

Represents a gain on the sale of 688 and 1,170 shares of Vicuron Pharmaceuticals Inc. common stock in 2005 and 2003, respectively, and 2,600 shares of common stock of BioSphere Medical in 2001.

(5)

Long-term debt includes convertible subordinated debt and a Canadian Government grant.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report to Stockholders contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition, including statements with respect to the safety, efficacy and potential benefits of our products under development, expectations with respect to the timing and success of development and commercialization of our products and product candidates and acquisitions of technologies, product candidates, approved products and/or business, the timing and success of the submission, acceptance and approval of regulatory filings, the scope of patent protection with respect to these product candidates and our products and information with respect to the other plans and strategies for our business and the business of our subsidiaries. All statements other than statements of historical facts included in this Annual Report to Stockholders regarding our strategy, future operations, timetables for product testing, development, regulatory approvals and commercialization, acquisitions, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this Annual Report to Stockholders, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report to Stockholders.

        You should read these forward-looking statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other "forward-looking" information. You should be aware that the occurrence of any of the events described under the heading "Risk Factors" and elsewhere in this Annual Report to Stockholders could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline.

        We cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this Annual Report to Stockholders represent our expectations as of the date of this Annual Report to Stockholders and should not be relied upon as representing our expectations as of any other date. Subsequent events and developments 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, even if our expectations change.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Executive Overview

        We are a research-based pharmaceutical company focused on the discovery, development and commercialization of 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 HFA™ (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 LUNESTA™ (eszopiclone) for the treatment of insomnia. We currently market these products in the U.S. to primary care physicians, allergists, pulmonologists, pediatricians hospitals, psychiatrists and sleep specialists, as appropriate, through our 1,500-person sales organization.

        We have entered into out-licensing arrangements with respect to several other compounds. We expect to commercialize any future products that we successfully develop or acquire through our sales force, through co-promotion agreements and through out-licensing partnerships.

        Critical near-term success factors for us include our ability to:

•

continue to increase our LUNESTA revenues, despite increasing competition;



•

continue to increase our XOPENEX Inhalation Solution revenues by maintaining targeted sales and marketing efforts aimed at retail, hospital and home health care market segments;



•

successfully market and sell XOPENEX HFA, a metered-dose inhaler formulation of levalbuterol, which we believe provides an enhancement to our XOPENEX franchise;



•

manage expenses effectively to ensure profitability and positive cash flow from operations; and



•

maintain patent protection for our products, particularly for XOPENEX Inhalation Solution for which two abbreviated new drug applications, or ANDAs have been recently submitted to the U.S. Food and Drug Administration, or FDA.

        We believe that success in each of these areas should allow us to continue to be profitable in the near term and provide us the ability to repay our outstanding convertible debt of $1,160,820,000. If not converted, repurchased, at the noteholders' or our option, or otherwise refinanced earlier, the principal amount of this debt becomes due as follows:

Principal Amount of Convertible Debt	Maturity Date
$440,000,000	2007
72,800,000	2008
148,020,000	2010
500,000,000	2024

        Our material sources of revenue in 2005 were product revenues from XOPENEX Inhalation Solution and LUNESTA, and to a lesser extent, royalty revenues received from sales of ALLEGRA® (fexofenadine HCl), CLARINEX® (desloratadine) and XYZAL®/XUSAL™ (levocetirizine). All of our revenues from product sales for the years ended December 31, 2004 and 2003 resulted from sales of XOPENEX Inhalation Solution. We expect that sales of XOPENEX Inhalation Solution and LUNESTA will represent the majority of our total revenues in 2006. We do not have long-term sales contracts with our customers and we rely on purchase orders for sales of our products. Reductions, delays or cancellations of orders for XOPENEX Inhalation Solution, LUNESTA or XOPENEX HFA

3

could adversely affect our operating results. If sales of XOPENEX Inhalation Solution, LUNESTA and XOPENEX HFA do not meet our expectations, we may not have sufficient revenue to achieve our business plan and our business will not be successful.

        In 2006, we expect to be profitable for the year on an operating and net income basis. We expect sales and marketing expenses to increase significantly as compared to 2005 as we incur increasing sales commission and marketing costs related to anticipated product revenue growth. We expect to continue to invest in marketing programs related to LUNESTA, including significant spending on physician and direct-to-consumer advertising, and to incur the additional costs of adding approximately 500 sales representatives and managers to our existing sales force. We expect research and development expenses to increase as compared to 2005 as we continue to invest in research and development activities relating to Phase IIIB/IV studies for LUNESTA, for additional studies for XOPENEX HFA and arformoterol, and for continued development of our SEP-225289 drug candidate. As part of our business strategy, in 2006, and in the future, we expect to consider and, as appropriate, consummate acquisitions of other technologies, product candidates, approved products, and/or businesses.

Significant 2006 and 2005 Developments

        On February 23, 2006, we announced that we entered into a licensing agreement with UCB, relating to the antihistamine levocetirizine. 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 XUSAL™ 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 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 FDA had received an 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. 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.

4

        On December 14, 2005, pursuant to call spread option agreements that we entered into in December 2003, we settled 4,919,496 call spread options and received an aggregate of 2,326,263 shares of our common stock. The settled options expired at various dates beginning on November 12, 2005 and ending on December 9, 2005. The shares are being held in treasury at cost.

        On December 13, 2005, we announced that we submitted an NDA to the FDA for arformoterol tartrate inhalation solution, a long-acting beta-agonist formulation for long-term maintenance treatment of COPD. In February 2006, the FDA notified us that the NDA had been filed and is under formal review. The Prescription Drug User Fee Act, or PDUFA, date, or date by which the FDA is expected to review and act on an NDA submission, is October 12, 2006. A PDUFA date is the date by which the FDA is expected to review and act on an NDA submission. Arformoterol, a single isomer of formoterol, is the first long-acting bronchodilator to be developed in an inhalation solution for use with a nebulizer; other long-acting bronchodilators currently available are formulated in dry-powder inhalers or metered-dose inhalers.

        On December 12, 2005, we announced that XOPENEX HFA (levalbuterol tartrate) Inhalation Aerosol, an HFA MDI, was available by prescription in pharmacies nationwide. XOPENEX HFA is a short-acting beta-agonist indicated for the treatment or prevention of bronchospasm in patients four years of age and older with reversible obstructive airway disease. The XOPENEX HFA is a portable, hand-held device consisting of a pressurized canister containing medication and a mouthpiece through which the medicine is inhaled. On March 11, 2005, we announced that we had received approval from the FDA for the XOPENEX HFA NDA.

        During the second quarter of 2005, pursuant to call spread option agreements we entered into in December 2003, we settled 4,919,496 call spread options and received cash in the amount of $123,798,000. The settled options expired at various dates beginning on May 12, 2005 and ending on June 9, 2005. We recorded the full amount of the call spread option settlement as an increase to additional paid-in capital.

        On April 4, 2005, we commercially launched LUNESTA brand eszopiclone for the treatment of insomnia, following receipt of an approval letter from the FDA on December 15, 2004 for our NDA for LUNESTA 1 mg, 2 mg and 3 mg tablets.

        On January 10, 2005, we entered into a collaboration with ACADIA, for the development of new drug candidates targeted toward the treatment of central nervous system disorders. The collaboration has been established to investigate potential clinical candidates resulting from using ACADIA's medicinal chemistry and discovery platform against a broad array of selective muscarinic receptors, which are receptors that respond to acetylcholine, a neurotransmitter in the central nervous system. The collaboration includes ACADIA's m₁ agonist program, which is designed to target neuropsychiatric/neurologic conditions and neuropathic pain. The agreement also encompasses an option to select a preclinical program from ACADIA's 5-HT_2a program for use in combination with LUNESTA. 5-HT_2a antagonists have been shown in clinical studies to affect sleep architecture in humans. Under the collaboration agreement, the parties have agreed to collaborate with each other to research and develop certain compounds that interact with these muscarinic receptors. We will have exclusive worldwide rights in any field outside of the prevention or treatment of ocular disease to develop and commercialize compounds identified under our collaboration with ACADIA.

        In connection with the collaboration, we purchased 1,077,029 shares of ACADIA common stock in January 2005 for an aggregate purchase price of $10,000,000 based on a per share price of approximately $9.2848, which represented a 40 percent premium to the average closing price for the 30 trading days prior to the signing of the agreement, subject to customary closing conditions. 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, which we have classified as an available-for-sale security and will adjust to its fair value at each reporting date with unrealized gains and losses recorded

5

as a component of accumulated other comprehensive income (loss). We also agreed to purchase up to an additional $10,000,000 of ACADIA common stock at a 25 percent premium to the trailing 30-day average closing price per share as of the one-year anniversary of the signing of the agreement, which we completed in January 2006. During the three-year research term of the collaboration agreement, we will provide ACADIA with $2,000,000 of research funding each year, which we record as research and development expense. In addition, we have agreed to make milestone payments to ACADIA upon the achievement by ACADIA of specified development and regulatory milestones for each product developed under the collaboration, including any product to be used in combination with LUNESTA that is developed under the collaboration. We have also agreed to pay royalties to ACADIA on net worldwide sales on products developed under the collaboration.

Revenue-Related Agreements

        Fexofenadine HCl.    In July 1993, we licensed to Hoechst Marion Roussel, Inc., now sanofi-aventis (formerly Aventis), our U.S. patent rights covering fexofenadine HCl. In October 1996, sanofi-aventis commercially introduced ALLEGRA, which is fexofenadine hydrochloride. In 1999, under an amendment to our agreement with sanofi-aventis, we assigned to sanofi-aventis our United States patent relating to fexofenadine and licensed to sanofi-aventis certain United States patent applications relating to fexofenadine. Under the terms of a separate agreement, sanofi-aventis obtained an exclusive license to our fexofenadine patents that had been the subject of litigation in Europe, and various other patent oppositions between the two companies outside the U.S.. Since March 1, 1999, we have been entitled to receive royalties on fexofenadine product sales in countries where we have patents related to fexofenadine. We have been entitled to receive royalties on any fexofenadine sales in the United States since February 2001. However, since the introduction of a generic version of ALLEGRA in the U.S. during the third quarter of 2005, we have ceased to earn royalties on U.S. sales of ALLEGRA. We are currently receiving royalties from sanofi-aventis for sales of ALLEGRA in Japan, Canada and Australia and in certain E.U. member states where we hold patents. We recorded approximately $36,945,000, $35,005,000 and $34,697,000 of royalty revenues under these agreements in 2005, 2004 and 2003, respectively.

        Desloratadine.    In December 1997, we licensed to Schering-Plough Corporation, or Schering, exclusive worldwide rights to our patents and patent applications relating to desloratadine, an active metabolite of loratadine, which is used as an antihistamine. Schering has marketed desloratadine as CLARINEX since 2002. We recorded approximately $9,364,000, $13,320,000 and $15,633,000 of royalty revenue under this agreement in 2005, 2004 and 2003, respectively.

        Levocetirizine.    On February 23, 2006, we announced that we entered into a licensing agreement with UCB, relating to the antihistamine levocetirizine. 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. In June 1999, we entered into a license agreement with UCB Farchim SA, now UCB Pharma, an affiliate of UCB, relating to levocetirizine, an isomer of cetirizine, which is marketed by UCB as ZYRTEC®, for the treatment of allergic rhinitis. Under the terms of the agreement with UCB, we have exclusively licensed to UCB all of our issued patents and pending patent applications relating to levocetirizine in all countries, except the United States and Japan. UCB has marketed levocetirizine under the brand names XUSAL and XYZAL in Germany since February 2001, and in other European countries since the fourth quarter of 2001. We recorded approximately $4,933,000, $3,734,000 and $1,127,000 of royalty revenue under the agreement with UCB in 2005, 2004 and 2003, respectively.

        Eszopiclone.    We entered into an agreement in October 1999 with sanofi-aventis' predecessor, Rhone-Poulenc Rorer SA, under which we exclusively licensed preclinical, clinical and post-marketing surveillance data package relating to zopiclone, its isomers and metabolites, to develop, make, use and

6

sell eszopiclone in the U.S. Zopiclone is marketed by sanofi-aventis in approximately 80 countries worldwide under the brand names of IMOVANE® and AMOBAN®. Under this agreement with sanofi-aventis, sanofi-aventis assigned all U.S. patent applications relating to (S)-zopiclone to us. Upon signing of the agreement, we paid a $5,000,000 license fee to sanofi-aventis. In 2000, we paid a $1,000,000 milestone payment to sanofi-aventis upon initiation of Phase III clinical trials of eszopiclone. In 2003, we paid a $5,000,000 milestone payment to sanofi-aventis upon our submission to the FDA of an NDA for LUNESTA. Under the amended agreement, we have the right to read and reference sanofi-aventis' regulatory filings related to zopiclone outside of the U.S. for the purpose of development and regulatory registration of eszopiclone outside of the U.S., and sanofi-aventis has assigned to us the foreign counterparts to the U.S. patent covering eszopiclone and its therapeutic use. Also as part of the amendment, we permitted sanofi-aventis to assign our obligation to pay a royalty on sales of LUNESTA in the U.S. to a third party.

Results of Operations

Year Ended December 31, 2005 Compared to 2004

Revenues

        Product sales were $769,685,000 in 2005 as compared with $319,781,000 in 2004, an increase of approximately 141%, primarily as a result of the commercial introduction of LUNESTA in April 2005 and a significant increase in XOPENEX Inhalation Solution revenue.

        Sales of LUNESTA were $329,221,000 in 2005, as compared to $0 in 2004.

        Sales of XOPENEX Inhalation Solution were $428,506,000 in 2005 as compared with $319,781,000 in 2004, an increase of approximately 34%. The increase in product sales in 2005 as compared with 2004 is due primarily to an increase in unit volume sales of XOPENEX of 21% and also due to a net selling price per unit increase of approximately 11%. The 21% increase in unit volume sales is due to growth in the underlying unit-dose vial, or UDV, market and higher market share in the non-retail sector, particularly sales to hospitals and home health care customers. The 11% increase in the net selling price per unit is due to a gross unit price increase of approximately 6% and a decrease in sales rebates and allowances as a percentage of sales. The decrease in sales rebates and allowances is primarily attributable to favorable reimbursement rate changes, as mandated by the Medicare Prescription Drug Improvement and Modernization Act of 2003, which substantially reduced discounts in the home health care market sector. We cannot be certain whether, or for how long, this favorable reimbursement rate will remain in effect.

        Sales of XOPENEX HFA were $11,958,000 in 2005, as compared to $0 in 2004. We commercially launched XOPENEX HFA in December 2005, and our revenues in 2005 relate primarily to initial stocking of the product by wholesalers.

        Royalties were $51,243,000 in 2005 as compared with $52,150,000 in 2004, a decrease of approximately 2%. The decrease in 2005 as compared with 2004 is due primarily to a decrease in royalties earned on sales of CLARINEX. The royalties earned on CLARINEX sales were $9,364,000 in 2005 as compared to $13,320,000 in 2004, a decrease of approximately 30%. CLARINEX sales continue to decline in the U.S. due to the availability of competitor allergy drugs without a prescription. Offsetting the decrease in royalties earned on sales of CLARINEX is an increase in royalties earned on sales of XUSAL/XYZAL and ALLEGRA. The royalties earned on XUSAL/XYZAL sales were $4,933,000 in 2005 as compared to $3,734,000 in 2004, an increase of approximately 32%, resulting from increased European sales of XUSAL/XYZAL. The royalties earned on ALLEGRA sales were $36,945,000 in 2005 as compared to $35,005,000 in 2004, an increase of approximately 6%. We expect revenues from royalties earned on CLARINEX to continue to decline in 2006. Also, pursuant to terms of our U.S. agreement with sanofi-aventis, we expect our royalties on the sale of

7

ALLEGRA in the U.S., which have historically been between $15 and $20 million per year, will terminate because a generic equivalent of this product was introduced in September 2005 and under the terms of our agreement, we are not entitled to receive royalties for sales in any country where a generic equivalent has been introduced. We are still entitled to receive royalties on the sale of ALLEGRA outside the U.S. in countries where we hold patents related to fexofenadine.

        License fees and other revenues were $0 in 2005 as compared to $8,946,000 in 2004. Other revenues in 2004 represented co-promotion revenue of $902,000 received from MedPointe for our co-promotion of ASTELIN and $8,044,000 of other MedPointe-related revenue. We terminated our co-promotion agreement with MedPointe on October 1, 2004.

Costs of Revenues

        Cost of products sold was $66,682,000 in 2005 as compared with $34,451,000 in 2004. Cost of product sales as a percentage of product sales decreased to 9% in 2005 as compared to 11% in 2004, because manufacturing costs for LUNESTA, which was commercially introduced in 2005, were slightly lower than XOPENEX Inhalation Solution as a percentage of their respective product sales.

        Cost of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution sales was approximately 10% for 2005, as compared with 11% in 2004, mainly due to lower inventory expiry and quality control write-downs in 2005 as compared to 2004.

        Cost of LUNESTA sold as a percentage of LUNESTA sales was approximately 7% for 2005, 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 as inventory until the FDA approved the LUNESTA NDA. As a result, we expect costs of LUNESTA sold as a percentage of LUNESTA sales to increase slightly after we have sold all of our product for which we have not capitalized manufacturing costs. We expect this to occur in the first quarter of 2006.

        Cost of XOPENEX HFA sold as a percentage of XOPENEX HFA sales was approximately 13% for 2005. 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 approximately $749,000 in 2005 as compared with $976,000 in 2004. The cost of royalties in 2005 and 2004 relates to an obligation to a third-party as a result of royalties we received from Schering-Plough Corporation based upon their sales of CLARINEX.

Research and Development

        Research and development expenses were $144,504,000 in 2005 as compared with $159,974,000 in 2004, a decrease of approximately 10%. The decrease in 2005 as compared with 2004 is primarily due to decreased spending on two of our late-stage programs, LUNESTA and arformoterol. Our decreased spending on these programs was partially offset by our increased spending on drug discovery efforts largely related to our collaboration with ACADIA, an increase in payroll and related expenses resulting from an increase in employee headcount and spending related to early-stage projects, such as SEP-225289 and SEP-226330.

        In 2006, we expect research and development expenditures to increase from 2005. Our principal research and development activities will be (1) Phase IV studies for LUNESTA; (2) ongoing studies to support XOPENEX HFA; (3) arformoterol; (4) SEP-225289; and (5) drug discovery.

        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.

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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 product candidates that represented 10% or more of our direct project research and development spending for the year ended December 31, 2005. The "Estimate of Completion of Phase" 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 in 2005, and the three product candidates listed accounted for approximately 64% of our direct project research and development spending in 2005. No other product candidate accounted for more than 5% of our direct research and development spending in 2005.

Product or Product Candidate	Indication	Phase of Development	Estimate of Completion of Phase
XOPENEX HFA (levalbuterol tartrate)	Respiratory—Asthma	*	*
Arformoterol	Respiratory—COPD	**	**
LUNESTA (eszopiclone)	Insomnia	***	***

*

We announced on March 11, 2005 that the FDA approved XOPENEX HFA. We commercially launched the product in December 2005.

**

We submitted an NDA to the FDA in December 2005. The PDUFA date is October 12, 2006.

***

We commercially launched LUNESTA in April 2005.

        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 year ended December 31, 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 or other costs which

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benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not presented.

(in thousands)	Project costs for the year ended December 31, 2005		Project costs through December 31, 2005		Project costs for the year ended December 31, 2004		Project costs through December 31, 2004
XOPENEX HFA (levalbuterol tartrate)	$	24,094	$	156,791	$	21,934	$	132,697
Arformoterol		18,059		161,578		25,395		143,519
LUNESTA (eszopiclone)		16,159		199,722		47,833		183,563

        Due to the length of time necessary to develop a product, the uncertainties related to the ability to obtain governmental approval for commercialization and the 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 $585,631,000 in 2005 as compared with $357,820,000 in 2004, an increase of approximately 64%. Of the increase, 83% is primarily due to direct to consumer media and print campaigns for the launch of LUNESTA as well as a product sampling program, market research, and medical communications initiatives. Expenses also increased due to marketing costs related to the commercial launch of XOPENEX HFA, as well as a result of increased salaries, commissions and associated fringe benefit costs associated with a sales expansion of approximately 175 sales representatives. These increases were offset by a decrease in sales commission expense paid to the Ross Products Division of Abbott Laboratories for the co-promotion of XOPENEX Inhalation Solution. Our co-promotion agreement with Ross terminated effective December 31, 2004.

        In 2006, we expect selling, marketing and distribution expenses to increase significantly in support of our anticipated product revenue growth. We expect to incur an increase in expenses for our marketing and advertising programs for LUNESTA, marketing and advertising programs associated with the commercial launch of XOPENEX HFA, and marketing investment towards our arformoterol compound currently under FDA review. In addition, we will incur additional sales, marketing and distribution expenses to increase our sales representatives and sales management personnel by approximately 500 to support our LUNESTA and XOPENEX sales efforts in 2006.

General and Administrative

        General and administrative costs were $39,935,000 in 2005 as compared with $30,345,000 in 2004, an increase of approximately 32%. The increase in 2005 as compared with 2004 is primarily due to payroll and related expenses resulting from an increase in permanent and temporary employees and contracted service providers supporting the commercialization of LUNESTA. The increase is also attributable to increased legal fees related to patent support and litigation, as well as patent write-offs relating to several compounds that we are no longer supporting, and an increase in the amortization of deferred financing costs primarily associated with our 0% notes due 2024.

Other Income (Expense)

        Interest income was $27,462,000 in 2005 as compared with $8,470,000 in 2004, an increase of approximately 224%. 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 2005. Our monthly average cash and investment balance was approximately $889,423,000 and $609,013,000 for

10

2005 and 2004, respectively. For 2005 and 2004, the average annualized interest rate that we earned on our investments was 3.09% and 1.39%, respectively.

        Interest expense was $23,368,000 in 2005 as compared with $23,646,000 in 2004. The expense in both periods is primarily related to the interest we paid on our 5% convertible subordinated debentures due 2007.

        Debt conversion expense was $0 in 2005 as compared with $69,768,000 in 2004. In 2004, we converted $177,200,000 of our 0% Series A notes due 2008 and $351,980,000 of our 0% Series B notes due 2010. The expense represents the cash payments of $23,868,000 and $45,900,000 that we paid to the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, as an inducement to convert their notes.

        Loss on debt redemption was $0 in 2005 as compared with $7,022,000 in 2004. In 2004, we redeemed the remaining outstanding $430,000,000 principal amount of our 5.75% convertible subordinated notes due 2006 for aggregate cash consideration of $430,000,000, excluding accrued interest. The loss in 2004 represents the write-off of $7,022,000 of deferred financing costs related to the 5.75% convertible subordinated notes due 2006.

        Equity in investee losses were $665,000 in 2005 as compared with $1,485,000 in 2004. The equity in investee loss in 2005 and 2004 represents our portion of the losses of BioSphere Medical, Inc., referred to as BioSphere, for 2005 and 2004.

        Gain on sale of equity investment was $18,345,000 in 2005 as compared with $0 in 2004. This gain represents the gain we recorded when we received cash in exchange for our shares of Vicuron Pharmaceuticals, Inc., referred to as Vicuron, in connection with the merger of Pfizer and Vicuron in September 2005.

Year Ended December 31, 2004 Compared to 2003

Revenues

        Product sales were $319,781,000 in 2004 as compared with $286,819,000 in 2003, an increase of approximately 11%. Sales of XOPENEX Inhalation Solution accounted for all of the 2004 and 2003 product sales. The increase in product sales in 2004 as compared with 2003 is due primarily to an increase in unit volume sales of XOPENEX Inhalation Solution of 9% and also due to a net selling price per unit increase of approximately 2%. The 9% increase in unit volume sales was significantly less than the increase in unit volume sales during recent prior periods. We believe this decrease in unit volume sales growth was primarily attributable to: (1) an atypically mild allergy and flu season, which resulted in reduced unit volume sales growth for respiratory drugs generally during the period and (2) changes in the status of XOPENEX Inhalation Solution on Medicaid preferred drug lists in certain states, which resulted in a decrease in the number of Medicaid beneficiaries having access to XOPENEX Inhalation Solution without prior authorization from their state Medicaid agency. The 2% increase in the net selling price per unit is due to a gross unit price increase of approximately 6% offset by a 4% increase in sales rebates, including supplemental rebates and additional discounting, which are accounted for as a reduction in gross product sales. The increase in rebates is primarily attributable to an increase in supplemental Medicaid rebates that we provided in connection with the inclusion of XOPENEX Inhalation Solution on the Medicaid preferred drug lists in certain states.

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        Royalties were $52,150,000 in 2004 as compared with $51,487,000 in 2003, an increase of approximately 1%. The increase in 2004 as compared with 2003 is due primarily to an increase in royalties earned on sales of XUSAL/XYZAL and to a lesser extent an increase in royalties earned on sales of ALLEGRA. The royalties earned on XUSAL/XYZAL sales were $3,734,000 in 2004 as compared to $1,127,000 in 2003, an increase of approximately 231% that was the result of increased European sales of XUSAL/XYZAL. The royalties earned on ALLEGRA sales were $35,005,000 in 2004 as compared to $34,697,000 in 2003, an increase of approximately 1%. Offsetting the increase in royalties earned on sales of XUSAL/XYZAL and ALLEGRA is a decrease in royalties earned on sales of CLARINEX. The royalties earned on CLARINEX sales were $13,320,000 in 2004 as compared to $15,633,000 in 2003, a decrease of approximately 15%.

        License fees and other revenues were $8,946,000 in 2004 as compared with $5,734,000 in 2003. Other revenues represent co-promotion revenue of $902,000 and $5,078,000 in 2004 and 2003, respectively, received from MedPointe for our co-promotion of ASTELIN and $8,044,000 and $656,000 in 2004 and 2003, respectively, of other MedPointe related revenue. We terminated our co-promotion agreement with MedPointe on October 1, 2004.

Costs of Revenues

        Cost of products sold was $34,451,000 in 2004 as compared with $28,879,000 in 2003. Cost of product sales as a percentage of product sales increased to 11% in 2004 as compared to 10% in 2003 due to an increase in inventory expiry and quality control write-downs in 2004 compared to 2003.

        Cost of royalties earned was approximately $976,000 in 2004 as compared with $1,340,000 in 2003. The cost of royalties in 2004 and 2003 relates to an obligation that we have to a third party as a result of royalties we received from Schering-Plough Corporation based upon their sales of CLARINEX.

Research and Development

        Research and development expenses were $159,974,000 in 2004 as compared with $220,224,000 in 2003, a decrease of approximately 27%. The decrease in 2004 as compared with 2003 is primarily due to our decreased spending on two of our late-stage programs, XOPENEX HFA and arformoterol, and two of our discontinued programs, tecastemizole and (S)-oxybutynin. We submitted an NDA for XOPENEX HFA to the FDA in May 2004 and on March 11, 2005 we announced that we had received approval from the FDA for the NDA. We completed Phase III clinical trials for arformoterol in 2004 and submitted an NDA to the FDA in 2005. We discontinued our development of tecastemizole in December 2003, at which time we recorded a charge of $18,814,000 related to the write-off of patents and other intangible assets related to tecastemizole, and we elected in 2004 not to fund the (S)-oxybutynin clinical program. Our decreased spending in these programs was partially offset by our increased spending on Phase IIIB/IV studies under our LUNESTA program.

        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 product candidates that represented 10% or more of our direct project research and development spending for the year ended December 31, 2004. The "Estimate of Completion of Phase" 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 in 2004, and the three product candidates listed accounted for

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approximately 86% of our direct project research and development spending in 2004. No other product candidate accounted for more than 4% of our direct research and development spending in 2004.

Product Candidate	Indication	Phase of Development	Estimate of Completion of Phase
LUNESTA (eszopiclone)	Insomnia	*	*
Arformoterol	Respiratory—COPD	**	**
XOPENEX HFA (levalbuterol tartrate)	Respiratory—Asthma	***	***

*

The FDA approved LUNESTA on December 15, 2004.

**

We submitted an NDA for arformoterol in December 2005.

***

We announced on March 11, 2005 that the FDA approved XOPENEX HFA.

        Below is a summary of expenditure information related to our product candidates that represented 10% or more of our direct project research and development spending during the year ended December 31, 2004, 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 or other costs which benefit multiple projects. As a result, fully-loaded research and development cost summaries by project are not presented.

(in thousands)	Project costs for the year ended December 31, 2004		Project costs through December 31, 2004		Project costs for the year ended December 31, 2003		Project costs through December 31, 2003
LUNESTA (eszopiclone)	$	47,833	$	183,563	$	20,206	$	135,730
Arformoterol		25,395		143,519		44,712		118,124
XOPENEX HFA (levalbuterol tartrate)		21,934		132,697		53,367		110,763

        Due to the length of time necessary to develop a product, the uncertainties related to the ability to obtain governmental approval for commercialization and the 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 $357,820,000 in 2004 as compared with $172,762,000 in 2003, an increase of approximately 107%. Of the 107% increase, 18%, or $30,671,000, represents the then-present value of the termination payments totaling $33,000,000 that we made to Ross in connection with the termination of our co-promotion agreement with Ross, which was effective as of December 31, 2004. The remaining increase of 89% in 2004 as compared with 2003 is primarily due to increases in salary, commission, travel and benefit costs as a result of having approximately 800 more sales representatives in 2004 as compared to 2003 in anticipation of the commercialization of LUNESTA. We also incurred increased spending in 2004 as compared to 2003 for trade shows and promotions relating to preparation for the expected commercialization of LUNESTA. Additionally, we incurred increased sales commission expense paid to internal sales representatives and to Ross as a result of the 11% increase in XOPENEX product sales in 2004 as compared with 2003.

General and Administrative

        General and administrative costs were $30,345,000 in 2004 as compared with $24,158,000 in 2003, an increase of approximately 26%. The increase in 2004 as compared with 2003 is primarily due to payroll and related expenses resulting from an increase in permanent and temporary employees and contracted service providers to support the expected commercialization of LUNESTA.

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Other Income (Expense)

        Interest income was $8,470,000 in 2004 as compared with $6,179,000 in 2003. The increase in 2004 as compared with 2003 is due primarily to an increase in the interest rates earned on investments in 2004.

        Interest expense was $23,646,000 in 2004 as compared with $50,907,000 in 2003. The decrease in 2004 as compared with 2003 is due primarily to lower outstanding average balances on all of our interest-bearing convertible debentures, particularly on our 5.75% convertible subordinated notes due 2006. On January 9, 2004, we completed the redemption of $430,000,000 aggregate principal amount of our 5.75% convertible subordinated notes due 2006. This decrease accounts for approximately $24,107,000, or 88%, of the decrease in interest expense for 2004 as compared with 2003. We expect interest expense to be $22,000,000 in 2005.

        Debt conversion expense was $69,768,000 in 2004 as compared with $0 in 2003. In 2004, we converted $177,200,000 of our 0% Series A notes due 2008 and $351,980,000 of our 0% Series B notes due 2010. The expense represents the cash payments of $23,868,000 and $45,900,000 that we paid to the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, as an inducement to convert their notes.

        Loss on debt redemption was $7,022,000 in 2004 as compared with $4,645,000 in 2003. In 2004, we redeemed the remaining outstanding $430,000,000 principal amount of our 5.75% convertible subordinated notes due 2006 for aggregate cash consideration of $430,000,000, excluding accrued interest. The loss in 2004 represents the write-off of $7,022,000 of deferred financing costs related to the 5.75% convertible subordinated notes due 2006. In 2003, we redeemed the remaining outstanding $111,870,000 principal amount of our 7% convertible subordinated debentures due 2005 for aggregate cash consideration of $115,226,000, excluding accrued interest. The 2003 loss of $4,645,000 includes the write-off of $1,289,000 of deferred financing costs related to the 7% debentures due 2005.

        Equity in investee losses were $1,485,000 in 2004 as compared with $1,921,000 in 2003. The equity in investee loss in 2004 and 2003 represents our portion of the losses of BioSphere for 2004 and 2003.

        Gain on sale of equity investment was $0 in 2004 as compared with $18,524,000 in 2003. The gain in 2003 represents a gain recognized on our sale of shares of common stock of Vicuron.

Critical Accounting Policies

        In December 2001, the Securities and Exchange Commission, or SEC, requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of a company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are more fully described in Note B to our consolidated financial statements included in this report, we believe the following accounting policies are critical:

        Revenue Recognition:    We recognize revenue from product sales, upon delivery, when title to product and associated risk of loss has passed to the customer and collectability is reasonably assured. We record revenues from product sales net of applicable allowances for returns, rebates and other applicable discounts and allowances.

        The timing of product shipments and receipts can have a significant impact on the amount of revenue recognized in a period. Also, the majority of our products are sold through distributors. Revenue could be adversely affected if distributor inventories increased to an excessive level. If this were to happen, we could experience reduced purchases in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration. We have invested in resources to track channel inventories in order to prevent distributor inventories from

14

increasing to excessive levels. If we determine that distributor inventories are at excessive levels, we do not recognize revenue for those shipments that we believe represent excessive inventory.

        License fees and other revenue include non-refundable upfront license fees, co-promotion agreement revenue, milestones and other revenue. Non-refundable upfront license fees are recorded as revenue over the related performance period or at such time when there are no remaining performance obligations. Co-promotion revenue is recognized when cash is received from our co-promotion partner, usually one quarter in arrears from when the revenue is recognized by our co-promotion partner, because this revenue is not reasonably estimable. Milestones are recorded as revenue when achieved and only if there are no remaining performance obligations and the fees are non-refundable.

        Royalty Revenue Recognition:    Royalty revenue is recognized based upon estimates of sales in licensed territories in the period in which the sales occur. These estimates are derived when possible from information from the company paying the royalty, or from historical data and third-party prescription data. Changes in market conditions, such as the introduction of competitive products, can lead to significant deviations from historical patterns and therefore cause estimates to be inaccurate. When estimates differ from actual results, the difference is recognized in the following quarter, provided the difference is not material to the results of either quarter. Historically, our estimates have not materially differed from our actual results.

        Rebate and Return Reserves:    Certain product sales qualify for rebates from standard list pricing due to government sponsored programs or other contractual agreements. We also allow for return of our product for up to one year after product expiration. We record an estimate for these allowances as reductions of revenue at the time product sales are recorded. We derive reserves for product returns and rebates through an analysis of historical experience updated for changes in facts and circumstances as appropriate and by utilizing reports obtained from external, independent sources. These allowances require us to make significant judgments and estimates, which could require adjustments in the future. Reserves for rebate programs are shown as other current liabilities on the balance sheet and were $57,516,000 and $32,114,000 at December 31, 2005 and 2004, respectively. The largest of these rebate reserves is related to state Medicaid rebates. If government contracts change materially, the associated reserves estimated for those programs can change significantly. Reserves for returns are shown as other current liabilities on the balance sheet and were $16,269,000 and $8,654,000 at December 31, 2005 and 2004, respectively. Estimates of reserves for returns are impacted by the extended return cycle, and by other factors such as introduction of a new competitive product, or other changes in market conditions leading to a change in historical return patterns. Historically, our estimates have not materially differed from our actual results.

        Amortization, Depreciation and Certain Long-Lived Assets:    Long-lived assets include:

•

Property and Equipment—Property and equipment are stated at cost. Costs of major additions and betterments are capitalized; maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operations. On disposal, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations as other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computers and software, which are recorded in office equipment, have estimated useful lives of three years. All laboratory, manufacturing and office equipment have estimated useful lives of three to ten years. Buildings have an estimated useful life of 30 years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining term of the lease.



•

Deferred Financing Costs—Deferred finance costs relating to expenses incurred to complete convertible subordinated debt offerings are amortized evenly over the earlier of the term of the debt, or the date on which we can first be obligated to repurchase all or part of the debt.



•

Patents—Patent costs relating to expenses associated with the filing of patent applications are amortized evenly over their estimated useful lives.

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        Accounts Receivable and Bad Debt:    Our trade receivables in 2005 and 2004 primarily represent amounts due to us from wholesalers, distributors and retailers of our commercial products. We perform ongoing credit evaluations of our customers and generally do not require collateral. Bad debt write-offs were not significant in 2005, 2004 and 2003; however, they could be significant in the future and we monitor our receivables closely because a few customers make up a large portion of our overall revenues. In 2005 and 2004, our top four customers accounted for 74% and 71%, respectively, of our total revenues.

        Income Taxes:    We recognize deferred tax liabilities and assets for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. Of the total valuation allowance of $723,167,000, approximately $149,020,000 relates to stock option compensation deductions. The tax benefit associated with the stock option compensation deductions will be credited to equity if realized.

        Induced Conversion of Debt:    We account for the conversion of convertible debt to equity securities pursuant to an inducement in accordance with Statement of Financial Standards, or SFAS, No. 84, "Induced Conversions of Convertible Debt". We recognize as debt conversion expense, in other expense, an amount equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms. If we choose to induce conversion of debt to equity, this inducement charge could have a material impact on the financial results for the reporting period.

        Inventory Write-downs:    Inventory represents bulk material, work-in-process and finished goods relating to our commercial products on hand, valued at lower of cost or market value. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical, and through a review of the expiration dates. Our current sales projections provide for full utilization of the inventory balance. If product sales levels differ from projections, inventory may not be fully utilized and could be subject to impairment, at which point we would write down the value of the inventory to its net realizable value.

        We expense costs relating to inventory until such time as we receive an approval letter from the FDA for a new product, and then we begin to capitalize the inventory costs relating to that product.

Recent Accounting Pronouncements

        In November 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 151, "Inventory Costs—an amendment of ARB No. 43, Chapter 4," or SFAS 151, in an effort to conform U.S. accounting standards for inventories to International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the relevant production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 to have a material impact on our financial condition or our results of operations.

        In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", or SFAS No. 123(R), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) requires compensation costs relating to share-based payment transactions be recognized in financial statements, as well as more extensive disclosures concerning stock options than required under current guidance.

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The new rule applies to option grants made after adoption as well as options that are not vested at the date of adoption. The pro forma disclosure previously permitted under SFAS No. 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS No. 123(R) is effective as of the beginning of the first annual reporting period that begins after June 15, 2005, with early adoption encouraged. We currently measure compensation costs related to share-based payments under APB 25, as allowed by SFAS No. 123, and provide disclosure in notes to financial statements as required by SFAS No. 123. We are required to adopt SFAS No. 123(R) starting in the first fiscal quarter of 2006. We expect the adoption of SFAS No. 123(R) will have a material adverse impact on our results of operations and net income per share.

        In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29," or SFAS 153. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The amendment also eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our financial condition or our results of operations.

        In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3." This statement changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2005. We do not expect this statement to have a material impact on our financial condition or our results of operations.

        In September 2005, the FASB reached a final consensus on Emerging Issues Task Force, or EITF, Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same Counterparty." EITF 04-13 concludes that two or more legally separated exchange transactions with the same counterparty should be combined and considered as a single arrangement for purposes of applying APB Opinion No. 29, "Accounting for Nonmonetary Transactions," when the transactions were entered into "in contemplation" of one another. The consensus contains several indicators to be considered in assessing whether two transactions are entered into in contemplation of one another. If, based on consideration of the indicators and the substance of the arrangement, two transactions are combined and considered a single arrangement, an exchange of finished goods inventory for either raw material or work-in-process should be accounted for at fair value. The provisions of EITF 04-13 are applied to transactions completed in reporting periods beginning after March 15, 2006. We do not expect this statement to have a material impact on our financial condition or our results of operations.

        In November 2005, the FASB issued FASB Staff Position, or FSP, SFAS No. 115-1 and SFAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statements No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and APB Opinion No. 118, "The Equity Method of Accounting for Investments in Common Stock." The FSP is

17

effective for reporting periods beginning after December 15, 2005. We do not expect this to have a significant impact on the carrying value of our investments.

Liquidity and Capital Resources

        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 have the ability to meet our short-term liquidity needs through the use of our cash and short-term investments on hand at December 31, 2005.

Cash Flows

        Cash, cash equivalents and short- and long-term investments totaled $976,201,000, or 77% of total assets at December 31, 2005, compared to $833,912,000, or 80% of total assets at December 31, 2004.

        The net cash used in operating activities for the year ended December 31, 2005 was $22,617,000 as compared to a use of $183,329,000 for the year ended December 31, 2004. The major decreases in cash used in operating activities in 2005 were the result of having net income of $4,971,000 and increased accrued expenses of $60,729,000 in 2005 compared to a loss of $295,658,000 and increased accrued expenses of $3,152,000 in 2004. The 2004 loss was offset by a non-cash debt conversion expense of $69,768,000 and a loss on the extinguishment of debt of $7,022,000. Offsetting the improvement in net income in 2005 was a combined increase in accounts receivable and inventory of $97,246,000 in 2005 compared to an increase of $24,161,000 in 2004. Accounts receivable and inventory increased as a result of product revenues increasing 141% in 2005 over the prior year. The 2005 net income includes an $18,345,000 gain on the sale of an equity investment.

        The net cash used in investing activities for the year ended December 31, 2005 was $400,908,000 as compared to $279,730,000 for the year ended December 31, 2004. The difference is primarily due to cash used in net purchases of short and long-term investments of $380,974,000 in 2005 as compared to $265,324,000 in 2004. We also made purchases of property and equipment of $13,728,000 and investments in ACADIA of $7,143,000 in 2005.

        The net cash provided by financing activities for the year ended December 31, 2005 was $165,591,000 as compared to $193,060,000 for the year ended December 31, 2004. In 2005, we received proceeds from the settlement of call spread options of $123,798,000 and proceeds from the issuance of common stock under employee stock purchase plans and stock option plans of $43,968,000. In 2004 we received similar proceeds from call spread settlements and stock options, but provided additional net cash through the sale of convertible debt, after taking into account repurchases of debt, other debt costs and the acquisition of treasury shares.

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        We expect our capital expenditures will be approximately $33,000,000 in 2006, with the majority related to computer hardware and software purchases to support various technology upgrades and initiatives, equipment purchases to support research and development and marketing initiatives and leasehold improvements planned for our Canada facility.

        Our annual debt service through 2006, assuming no additional interest-bearing debt is incurred and no additional 5% convertible debentures due 2007 are converted, redeemed, repurchased or exchanged, is approximately $22,000,000.

        Our wholly-owned subsidiary, Sepracor Canada Limited, has a Canadian Government grant, which may become repayable if Sepracor Canada Limited fails to meet certain conditions. The grant is recorded as debt and is being amortized over the useful lives of the related capital assets. The unamortized balance as of December 31, 2005 was approximately $767,000.

        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.

Acquisition Strategy

        As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, approved products, product candidates and/or technologies. Our cash reserves and other liquid assets may be inadequate to consummate these acquisitions and it may be necessary for us to raise substantial additional funds and/or issue shares of our capital stock in the future to consummate these transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts

19

are successful) that may include transaction costs, closing costs or acquired in-process research and development charges.

Convertible Subordinated Debt

        In December 1998, we issued $300,000,000 in principal amount of 7% convertible subordinated debentures due 2005, or 7% debentures. In July 2003, we redeemed the $111,870,000 principal amount of 7% debentures that remained outstanding. Pursuant to their terms, we redeemed the 7% debentures at 103% of the principal amount, plus accrued but unpaid interest from June 15, 2003 to, but excluding, the redemption date of July 10, 2003. The total aggregate redemption price for the $111,870,000 principal amount of 7% debentures was approximately $115,770,000, including approximately $544,000 in accrued interest. As a result of our redemption of the 7% debentures, we recorded a loss of $4,645,000, which included $1,289,000 of deferred financing costs that were written-off.

        In February 2000, we issued $400,000,000 in principal amount of 5% convertible subordinated debentures due 2007, or 5% debentures. On March 9, 2000, we issued an additional $60,000,000 in principal amount of 5% debentures pursuant to an option granted to the initial purchaser of the 5% debentures. The 5% debentures are convertible into our common stock, at the option of the holder, at a price of $92.38 per share and bear interest at 5% payable semi-annually, commencing on August 15, 2000. The 5% debentures are redeemable at our option if the trading price of our common stock exceeds 120% of the conversion price ($110.86) for 20 trading days in a period of 30 consecutive trading days. We may be required to repurchase the 5% debentures at the option of the holders if a change in control occurs. As part of the sale of the 5% debentures, we incurred approximately $14,033,000 of offering costs, which were recorded as intangible assets and are being amortized over seven years, the term of the 5% debentures. The net proceeds to us after offering costs were approximately $445,967,000. In March 2002, we exchanged $20,000,000 of our 5% debentures in privately negotiated transactions for 640,327 shares of our common stock. We charged to other expense associated inducement costs of $8,659,000, which represents the fair market value of the 216,497 shares of our common stock issued as an inducement to the holders for conversion of their 5% debentures. At December 31, 2005, $440,000,000 principal amount of the 5% debentures remained outstanding.

        In November 2001, we issued $400,000,000 in principal amount of 5.75% convertible subordinated notes due 2006, or 5.75% notes. In December 2001, we issued an additional $100,000,000 in principal amount of 5.75% notes pursuant to an option granted to the initial purchaser of the 5.75% notes. In March and April 2002, we exchanged $70,000,000 of our 5.75% notes in privately negotiated transactions for 2,790,613 shares of our common stock. We charged to other expense associated inducement costs of $28,000,000, which represented the fair market value of the 1,623,947 shares of our common stock issued as an inducement to the holders for conversion of their 5.75% notes. In January 2004, we redeemed the $430,000,000 principal amount of 5.75% notes that remained outstanding. Pursuant to their terms, we redeemed the 5.75% notes at 100% of the principal amount, plus accrued but unpaid interest from November 15, 2003 to, but excluding, the redemption date of January 9, 2004. The total aggregate redemption price for the 5.75% notes was approximately $433,709,000, including approximately $3,709,000 in accrued interest. As a result of our redemption of the 5.75% notes, we recorded a loss of $7,022,000 in January 2004, which represents the deferred financing costs that were written-off. At December 31, 2005, $0 of the 5.75% notes remained outstanding.

        In January 2004 and December 2003, we issued an aggregate of $750,000,000 in principal amount of 0% convertible senior subordinated notes including $250,000,000 principal amount of 0% Series A convertible senior subordinated notes due 2008, or Series A notes due 2008, and $500,000,000 principal amount of 0% Series B convertible senior subordinated notes due 2010, or Series B notes due 2010. Note holders may convert the Series A notes due 2008 into shares of our common stock at a

20

conversion price of $31.89 per share and the Series B notes due 2010 into shares of our common stock at a conversion price of $29.84 per share. In each case, the conversion price is subject to adjustment, at any time before close of business on December 15, 2008, in the case of the 0% Series A notes due 2008, or December 15, 2010, in the case of the 0% Series B notes due 2010. We may not redeem the notes prior to maturity. The net proceeds to us after offering costs were approximately $728,932,000. During September 2004, certain holders of our 0% Series A notes due 2008 and 0% Series B notes due 2010, agreed, in separately negotiated transactions, to convert $177,200,000 and $351,980,000 in aggregate principal amount of their 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, into an aggregate of 5,556,104 and 11,797,483 shares of our common stock, respectively. As an inducement to convert their notes, we paid the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010 aggregate cash payments of $23,868,000 and $45,900,000, respectively. At December 31, 2005, $72,800,000 and $148,020,000 of the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, remained outstanding.

        In December 2003, we used approximately $94,820,000 of the proceeds from the issuance of 0% Series A convertible senior subordinated notes due 2008 and 0% Series B convertible senior subordinated notes due 2010 to purchase four series of call spread options on our common stock expiring at various dates between May 12, 2004 and December 9, 2005. The call spread options, which are now completed, could have been settled at our option in either net shares or in cash. During the second and fourth quarters of 2004, we settled series one and two for cash resulting in payments to us in the amount of $124,333,000. The first series of settled options expired at various dates beginning on May 12, 2004 and ending on June 9, 2004 and the second series of options expired at various dates beginning on November 11, 2004 and ending on December 9, 2004. During the second quarter of 2005, the third series of settled options expired at various dates beginning on May 12, 2005 and ending on June 9, 2005. We settled the third series for cash resulting in a payment to us in the amount of $123,798,000. In the fourth quarter of 2005, the fourth and final series expired in equal installments on each business day from November 11, 2005 through December 9, 2005. We elected to settle the fourth series in net shares for which we received 2,326,263 shares of our common stock, which we currently hold as treasury stock.

        On September 22, 2004, we issued $500,000,000 in principal amount of 0% convertible senior subordinated notes due 2024, or 0% notes due 2024. In connection with the sale of these notes, we incurred offering costs of approximately $14,190,000. The net proceeds to us after offering costs were approximately $485,810,000. We used $100,321,000 of the proceeds from the issuance of these notes to purchase 1,933,200 shares of our common stock which we recorded as treasury stock. At December 31, 2005, $500,000,000 of the 0% notes due 2024 remained outstanding.

        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 considerations, or otherwise extinguish debt through 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, the number of shares that we might issue as a result of such exchanges could significantly exceed the number of shares originally issuable upon conversion of such debt and, accordingly, such exchanges could 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.

BioSphere

        BioSphere was a consolidated subsidiary from 1994 through July 2, 2001. As a result of a public offering of BioSphere common stock in 2001, our ownership of BioSphere was reduced from approximately 55% to 26%. Therefore, effective July 3, 2001, we changed the method of accounting for our investment in BioSphere from consolidating the results of BioSphere operations to the equity

21

method. On November 10, 2004, we purchased, in a private placement, 4,000 shares of BioSphere Series A Convertible Preferred Stock and warrants to purchase an additional 200,000 shares of BioSphere common stock from BioSphere for an aggregate purchase price of $4,000,000. At December 31, 2005 and 2004, we owned 3,224,333 shares, or approximately 21% and 23%, respectively, of BioSphere's outstanding common stock. The fair market value of those shares was approximately $26,117,000 and $12,543,000 as of December 31, 2005 and 2004, respectively. In addition, as of December 31, 2005 and 2004 we owned 4,280 and 4,000 shares of Series A Convertible Preferred Stock, respectively, and warrants to purchase an additional 200,000 shares of common stock. Assuming conversion of the Series A Convertible Preferred Stock and the exercise of our warrants, we would own approximately 26% of BioSphere's common stock as of December 31, 2005. We have recorded $665,000, $1,485,000 and $1,921,000 as our share of BioSphere losses for the periods ended December 31, 2005, 2004 and 2003, respectively.

Contractual Obligations

        Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities for which we cannot reasonably predict future payment. The following chart summarizes our material contractual obligations as of December 31, 2005:

Contractual Obligations (In Thousands)	Total		2006		2007		2008		2009		2010		2010 and beyond
Convertible subordinated debt—principal(1)	$	1,160,820	$	—	$	440,000	$	72,800	$	—	$	—	$	648,020
Convertible subordinated debt—interest(1)		24,750		22,000		2,750		—		—		—		—
Ross termination payments		3,000		3,000		—		—		—		—		—
ACADIA collaboration agreement		14,500		12,500		2,000		—		—		—		—
Capital lease obligations		2,583		2,063		386		134		—		—		—
Operating leases(2)		2,750		1,151		767		345		299		112		76
Purchase obligations(3)		320,759		310,137		10,622		—		—		—		—
Total material contractual cash obligations	$	1,529,162	$	350,851	$	456,525	$	73,279	$	299	$	112	$	648,096

(1)

If the convertible subordinated debt were converted into common stock, these amounts would no longer be a contractual cash obligation.

(2)

Operating leases include the leased facility located at 33 Locke Drive, which we vacated in July 2002. The amounts reported include rent through the end of the lease in June 2007. We have, however, accrued $240,000 and $1,126,000 at December 31, 2005 and 2004, respectively, for our estimated cumulative future minimum lease obligation, net of estimated sublease income.

(3)

Purchase obligations relate to research and development commitments for new and existing products and open purchase orders for the acquisition of goods and services in the ordinary course of business. Our obligation to pay certain of these amounts may be reduced or eliminated based on certain future events.

        We have had no material related party activities in 2005 or 2004, other than those relating to the purchase of BioSphere Series A Convertible Preferred Stock and warrants.

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.

22

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. We manage our exposure to these risks through our regular operating and financing activities.

        Interest Rates:    Although our investments are subject to credit risk and interest rate risk, our investment policy specifies credit quality standards for our investments and our investment portfolio is monitored for compliance with our investment policy. The primary objective of the investment policy is the preservation of capital. Due to the conservative nature and relatively short duration of our investments, interest rate risk is mitigated.

        The interest rates on our convertible subordinated debt and capital lease obligations are fixed and, therefore, not subject to interest rate risk.

        Equity Prices:    Our convertible subordinated debt is sensitive to fluctuations in the price of our common stock into which the debt is convertible. Changes in equity prices would result in changes in the fair value of our convertible subordinated debt due to the difference between the current market price of the debt and the market price at the date of issuance of the debt. At December 31, 2005, a 10% decrease in the price of our common stock could have resulted in a decrease of approximately $129,086,000 on the net fair value of our convertible subordinated debt.

        Additionally, we have cost investments in the equity securities of ACADIA Pharmaceuticals, Inc. and Point Therapeutics, Inc. These investments had a market value of $10,609,000 and $1,495,000, respectively at December 31, 2005. A 10% decrease in the equity prices of these securities would result in a combined decrease of approximately $1,210,000 in our investments.

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 FDA approval of tecastemizole. On April 11, 2003, two consolidated amended 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 consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. In both the debt purchasers' action and equity purchasers' action, the court has granted the plaintiffs' motion for class certification. 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 ANDA from Breath Limited for a generic version of levalbuterol hydrochloride inhalation solution. 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 a civil action against Breath Limited for patent infringement. We were notified in January 2006 of a second ANDA 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. Should we successfully enforce our patents, ANDA approval will not occur until the

23

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.

Supplemental Stockholder Information

Price Range of Common Stock

        Our common stock is traded on the Nasdaq National Market under the symbol SEPR. On March 1, 2006, the closing price of our common stock, as reported on the Nasdaq National Market, was $58.15 per share. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported by the Nasdaq National Market.

	High		Low
2006
First Quarter (through March 1, 2006)	$	58.66	$	48.38

	High		Low
2005
First Quarter	$	65.70	$	54.67
Second Quarter		63.24		55.60
Third Quarter		59.98		49.06
Fourth Quarter		59.79		51.06

	High		Low
2004
First Quarter	$	49.57	$	23.84
Second Quarter		54.06		41.89
Third Quarter		53.54		39.85
Fourth Quarter		59.96		41.83

        On March 1, 2006, we had approximately 425 stockholders of record.

Dividend Policy

        We have never paid cash dividends on our common stock. We currently intend to reinvest our future earnings, if any, for use in the business and do not expect to pay cash dividends.

Form 10-K

A copy of our Annual Report on Form 10-K for the year ended December 31, 2005 is available without charge upon written request to:

INVESTOR RELATIONS
SEPRACOR INC.
84 WATERFORD DRIVE
MARLBOROUGH, MA 01752

24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Sepracor Inc.:

        We have completed an integrated audit of Sepracor Inc.'s 2005 and 2004 consolidated financial statements and of its internal controls over financial reporting as of December 31, 2005 and 2004, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity (deficit) and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Sepracor Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

        Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing in item 9A on pages 37 and 38 of the Form 10-K, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal

25

control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 16, 2006

26

SEPRACOR INC.

CONSOLIDATED BALANCE SHEETS

		December 31,
		2005			2004
		(In Thousands, Except Par Value Amounts)
ASSETS
Current assets:
	Cash and cash equivalents	$	178,144		$	435,905
	Short-term investments		666,615			303,303
	Accounts receivable, net of allowances of $3,103 and $1,786 at December 31, 2005 and 2004		140,465			68,914
	Inventories		38,951			13,086
	Other current assets		22,370			18,722
Total current assets			1,046,545			839,930
	Long-term investments		131,442			94,704
	Property and equipment, net		72,467			70,860
	Investment in affiliate		5,829			5,535
	Deferred financing costs and patents, net		18,097			27,035
	Other assets		117			1,054
Total assets		$	1,274,497		$	1,039,118
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable	$	11,544		$	5,772
	Accrued expenses		187,409			126,701
	Notes payable and current portion of capital lease obligation		2,030			1,926
	Other current liabilities		76,923			69,711
Total current liabilities			277,906			204,110
	Notes payable and capital lease obligation		1,260			2,529
	Convertible subordinated debt		1,160,820			1,160,820
	Other long-term liabilities		—			2,774
Total liabilities			1,439,986			1,370,233
Commitments and contingencies (Notes L and M)
Stockholders' equity (deficit)
	Preferred stock, $1.00 par value, 1,000 shares authorized, none outstanding at December 31, 2005 and 2004		—			—
	Common stock, $.10 par value, 240,000 and 240,000 shares authorized at December 31, 2005 and 2004, respectively; 108,354 and 105,309 shares issued; 104,093 and 103,376 shares outstanding, at December 31, 2005 and 2004, respectively		10,835			10,531
	Treasury stock, at cost (4,261 and 1,933 shares at December 31, 2005 and 2004, respectively)		(232,028	)		(100,321	)
	Additional paid-in capital		1,669,541			1,370,372
	Accumulated deficit		(1,620,515	)		(1,625,486	)
	Accumulated other comprehensive income		6,678			13,789
Total stockholders' equity (deficit)			(165,489	)		(331,115	)
Total liabilities and stockholders' equity (deficit)		$	1,274,497		$	1,039,118

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

27

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2005			2004			2003
		(In Thousands, Except Per Share Amounts)
Revenues:
	Product sales	$	769,685		$	319,781		$	286,819
	Royalties		51,243			52,150			51,487
	License fees and other revenues		—			8,946			5,734
Total revenues			820,928			380,877			344,040
Costs and expenses:
	Cost of products sold		66,682			34,451			28,879
	Cost of royalties earned		749			976			1,340
	Research and development		144,504			159,974			220,224
	Selling, marketing and distribution		585,631			357,820			172,762
	General and administrative and patent costs		39,935			30,345			24,158
Total costs and expenses			837,501			583,566			447,363
Loss from operations			(16,573	)		(202,689	)		(103,323	)
Other income (expense):
	Interest income		27,462			8,470			6,179
	Interest expense		(23,368	)		(23,646	)		(50,907	)
	Debt conversion expense		—			(69,768	)		—
	Loss on early extinguishment of debt		—			(7,022	)		(4,645	)
	Equity in investee losses		(665	)		(1,485	)		(1,921	)
	Gain on sale of equity investment		18,345			—			18,524
	Other income (expense)		(79	)		482			157
	Income (loss) before income taxes		5,122			(295,658	)		(135,936	)
Income taxes			151			—			—
Net income (loss) after income taxes		$	4,971		$	(295,658	)	$	(135,936	)
Basic net income (loss) per common share		$	0.05		$	(3.21	)	$	(1.61	)
Diluted net income (loss) per common share		$	0.04		$	(3.21	)	$	(1.61	)
Shares used in computing basic and diluted net income (loss) per common share:
	Basic		104,839			92,017			84,639
	Diluted		118,162			92,017			84,639

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

28

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT) AND COMPREHENSIVE INCOME

(In Thousands)

			Common Stock			Treasury Stock													Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity (Deficit)
										Additional Paid-in Capital			Unearned Compensation			Accumulated Deficit
			Shares	Amount		Shares	Amount
BALANCE AT DECEMBER 31, 2002			84,356	$	8,436	—	$	—		$	776,704		$	(52	)	$	(1,193,892	)	$	16,624		$	(392,180	)
Comprehensive income (loss):
	Net loss																(135,936	)					(135,936	)
	Foreign currency translation																			(203	)		(203	)
	Unrealized loss on marketable equity securities																			(4,214	)		(4,214	)
		Total comprehensive income (loss)																					(140,353	)
	Issuance of common stock to employees under stock plans		669		67						8,023												8,090
	Amortization of unearned compensation, net													52									52
	Purchased call options on 0% subordinated debt										(94,820	)											(94,820	)
BALANCE AT DECEMBER 31, 2003			85,025	$	8,503	—	$	—		$	689,907		$	—		$	(1,329,828	)	$	12,207		$	(619,211	)
Comprehensive income (loss):
	Net loss																(295,658	)					(295,658	)
	Foreign currency translation																			1,765			1,765
	Unrealized loss on marketable equity securities																			(183	)		(183	)
		Total comprehensive income (loss)																					(294,076	)
	Issuance of common stock to employees under stock plans		2,930		293						41,777												42,070
	Issuance of common stock from conversion of subordinated convertible debentures		17,354		1,735						527,445												529,180
	Deferred finance costs from the conversion of subordinated convertible debentures										(13,090	)											(13,090	)
	Settlement of call spread options for cash										124,333												124,333
	Acquisition of treasury stock					1,933		(100,321	)														(100,321	)
BALANCE AT DECEMBER 31, 2004			105,309	$	10,531	1,933	$	(100,321	)	$	1,370,372		$	—		$	(1,625,486	)	$	13,789		$	(331,115	)
Comprehensive income (loss):
	Net income																4,971						4,971
	Foreign currency translation																			527			527
	Unrealized loss on marketable equity securities																			(7,638	)		(7,638	)
		Total comprehensive income (loss)																					(2,140	)
	Issuance of common stock to employees under stock plans		3,045		304						43,743												44,047
	Employee stock options exercised and settled with shares					2		(79	)														(79	)
	Settlement of call spread options for cash										123,798												123,798
	Settlement of call spread options for stock					2,326		(131,628	)		131,628												—
BALANCE AT DECEMBER 31, 2005			108,354	$	10,835	4,261	$	(232,028	)	$	1,669,541		$	—		$	(1,620,515	)	$	6,678		$	(165,489	)

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

29

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year Ended December 31,
		2005			2004			2003
		(In Thousands)
Cash flows from operating activities:
	Net income (loss)	$	4,971		$	(295,658	)	$	(135,936	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Depreciation and amortization		17,154			18,751			19,551
	Debt conversion expense		—			69,768			—
	Loss on early extinguishment of debt		—			7,022			4,645
	Gain on sale of equity investment		(18,345	)		—			(18,524	)
	Equity in investee losses		665			1,485			1,921
	Provision for bad debt		—			—			192
	(Gain) loss on disposal of property and equipment		803			—			(7	)
	Loss on write-off of patents		2,129			531			18,814
Changes in operating assets and liabilities:
	Accounts receivable		(71,551	)		(18,323	)		(29,129	)
	Inventories		(25,695	)		(5,838	)		1,145
	Other current assets		(3,626	)		(1,120	)		(562	)
	Accounts payable		5,669			(6,608	)		7,398
	Accrued expenses		60,729			3,152			11,594
	Other liabilities		4,480			43,509			14,547
Net cash used in operating activities			(22,617	)		(183,329	)		(104,351	)
Cash flows from investing activities:
	Purchases of short and long-term investments		(1,293,075	)		(490,613	)		(283,656	)
	Sales and maturities of short and long-term investments		912,101			225,289			343,946
	Additions to property and equipment		(13,728	)		(11,393	)		(4,692	)
	Proceeds from sale of property and equipment		—			—			90
	Investment in affiliate		—			(4,000	)		—
	Investment in non-affiliate		(7,143	)		—			—
	Release of cash restrictions		—			1,500			—
	Change in other assets		937			(513	)		(144	)
Net cash provided by (used in) investing activities			(400,908	)		(279,730	)		55,544
Cash flows from financing activities:
	Net proceeds from issuance of common stock		43,968			42,070			8,090
	Cash used for repurchase of convertible subordinated debt		—			(433,709	)		(115,770	)
	Proceeds from sale of convertible subordinated debt		—			650,000			600,000
	Costs associated with sale of convertible subordinated debt		—			(18,315	)		(16,943	)
	Debt conversion payments		—			(69,768	)		—
	Purchase of call spread options in connection with sale of convertible debt		—			—			(94,820	)
	Settlement of call spread options		123,798			124,333			—
	Repayments of long-term debt and capital leases		(2,175	)		(1,230	)		(1,039	)
	Acquisition of treasury stock		—			(100,321	)		—
Net cash provided by financing activities			165,591			193,060			379,518
Effect of exchange rate changes on cash and cash equivalents			173			102			(347	)
Net increase (decrease) in cash and cash equivalents			(257,761	)		(269,897	)		330,364
Cash and cash equivalents at beginning of year			435,905			705,802			375,438
Cash and cash equivalents at end of year		$	178,144		$	435,905		$	705,802
Supplemental schedule of cash flow information:
	Cash paid during the year for interest	$	22,102		$	25,787		$	51,233
	Cash paid during the year for income taxes	$	151		$	—		$	—
Non cash activities:
	Conversion of convertible subordinated debt	$	—		$	529,180		$	—
	Capital lease obligations incurred	$	1,092		$	4,707		$	—

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A)    Nature of the Business

        Sepracor Inc. was incorporated in 1984 to research, develop and commercialize products for the synthesis and separation of pharmaceutical and biopharmaceutical compounds. We have become a research-based pharmaceutical company focused on the discovery, development and commercialization of differentiated products that address large and growing markets and unmet medical needs which can be marketed to primary care doctors through our sales force. Our corporate headquarters are located in Marlborough, Massachusetts.

        Our consolidated financial statements include the accounts of Sepracor Inc. and our wholly-owned subsidiaries, including Sepracor Canada Limited. Our consolidated financial statements include our investment in BioSphere Medical, Inc., or BioSphere, which is recorded under the equity method and our investments in Point Therapeutics, Inc., or Point Therapeutics (formerly known as Hemasure Inc. and HMSR Inc.) and ACADIA Pharmaceuticals Inc., or ACADIA, which we account for as marketable equity securities. During September 2005, we sold our ownership in Vicuron Pharmaceuticals Inc., or Vicuron (formerly known as Versicor, Inc.), which we had accounted for as marketable equity securities.

        We and our subsidiaries are subject to risks common to companies in the industry including, but not limited to, the safety, efficacy and successful development and regulatory approval of product candidates, fluctuations in operating results, protection of proprietary technology, limited sales and marketing experience, dependence on third-party collaboration partners and third-party sales efforts, limited manufacturing capacity, risk of product liability, compliance with government regulations and dependence on key personnel.

B)    Summary of Significant Accounting Policies

        Principles of Consolidation:    Our consolidated financial statements include our accounts and all of our wholly-owned subsidiaries accounts. All material intercompany transactions have been eliminated. Investments in affiliated companies, which are 20% to 50% owned, and over which we do not exercise control, are accounted for using the equity method. Investments in affiliated companies, which are less than 20% owned, and over which we do not exercise significant influence, are accounted for using the cost method.

        Use of Estimates and Assumptions in the Preparation of Financial Statements:    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 materially from those estimates.

        Translation of Foreign Currencies:    The assets and liabilities of our international subsidiaries are translated into United States dollars using current exchange rates. Statement of operations amounts are translated at average exchange rates prevailing during the period. The resulting translation adjustment is recorded in accumulated other comprehensive income (loss). Foreign exchange transaction gains and losses are included in other income (expense).

        Cash and Cash Equivalents:    Cash equivalents are highly liquid, temporary cash investments having original maturity dates of three months or less.

        Short- and Long-Term Investments:    Short and long-term investments include government securities and corporate commercial paper, which can be readily purchased or sold using established markets. Those investments with a maturity of less than one year are classified as short-term. Short- and

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long-term investments are classified as either "available-for-sale" or "held-to-maturity". Available-for-sale investments are adjusted to their fair market value with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss). Realized gains and losses for securities classified as available-for-sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Held-to-maturity investments are recorded at cost plus accrued amortization, which approximates fair value.

        Concentration of Credit Risk:    We have no significant off balance sheet concentration of credit risk. Financial instruments that potentially subject us to concentrations of credit risk primarily consist of the cash and cash equivalents, short- and long-term investments and trade accounts receivable. We place our cash, cash equivalents and short-term and long-term investments with high credit quality financial institutions.

        The percentage of total revenues from significant customers is as follows:

	Year Ended December 31,
	2005		2004		2003
Customer A	27	%	23	%	27	%
Customer B	18	%	15	%	16	%
Customer C	5	%	9	%	10	%
Customer D	24	%	24	%	16	%

        Certain prior year percentages have been reclassified to give effect for a merger of two of our customers.

        Accounts Receivable and Bad Debt:    Our trade receivables in 2005 and 2004 primarily represent amounts due from wholesalers, distributors and retailers of our pharmaceutical product. We perform ongoing credit evaluations of our customers and we generally do not require collateral. Bad debt write-offs were not significant in 2005, 2004 and 2003; however, we monitor our receivables closely because a few customers make up a large portion of our overall revenues.

        Inventories:    Inventories are stated at the lower of cost (first-in, first-out) or market using a standard cost method. We expense costs relating to inventory until such time as we receive approval from the FDA for a new product, and then we begin to capitalize the costs relating to that product. We write down our inventory for expiration and probable quality assurance and quality control issues identified in the manufacturing process.

        Amortization, Depreciation and Certain Long-Lived Assets:    Long-lived assets include:

•

Property and Equipment—Property and equipment are stated at cost. Costs of major additions and betterments are capitalized; maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operations. On disposal, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations as other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computers and software, which are recorded in office equipment, have estimated useful lives of three years. All laboratory, manufacturing and office equipment have estimated useful lives of three to ten years. Buildings have an estimated useful life of 30 years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining term of the lease.



•

Deferred Financing Costs—Deferred finance costs relating to expenses incurred to complete convertible subordinated debt offerings are amortized evenly over the earlier of the term of

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the debt, or the date on which we can first be obligated to repurchase all or part of the debt.

•

Patents—Patent costs relating to expenses associated with the filing of patent applications are amortized evenly over their estimated useful lives.

        Long-lived assets are reviewed for impairment by comparing the undiscounted projected cash flows of the related assets with their carrying amount. Impairment tests take place at least annually or whenever significant adverse events in the business or industry takes place, when a significant change in the manner an asset is used takes place or when a projection or forecast demonstrates continued losses associated with the asset. Any write-downs are treated as permanent reductions in the carrying amount of the assets.

        Revenue Recognition:    We recognize revenue from product sales, upon delivery, when title to product and associated risk of loss has passed to our customer and collectability is reasonably assured. All revenues from product sales are recorded net of applicable allowances for returns, rebates and other applicable discounts and allowances.

        We receive royalties related to the manufacture, sale or use of products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, we recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize revenue upon receipt of royalty statements from the licensee.

        License fees and other revenue include non-refundable upfront license fees, co-promotion agreement revenue, milestones and other revenue. Non-refundable upfront license fees are recorded as revenue over the related performance period or at such time when there are no remaining performance obligations. Co-promotion revenue is recognized when cash is received from our co-promotion partner, usually one quarter in arrears from when the revenue is recognized by our co-promotion partner, because this revenue is not reasonably estimable. Milestones are recorded as revenue when achieved and only if there are no remaining performance obligations and the fees are non-refundable.

        We record collaborative research and development revenue from research and development contracts over the term of the applicable contract, as we incur costs related to the contract.

        Rebate and Return Reserves:    Certain product sales qualify for rebates from standard list pricing due to government sponsored programs or other contractual agreements. We also allow for return of our product for up to one year after product expiration. We record an estimate for these allowances as reductions of revenue at the time product sales are recorded. We derive reserves for product returns and rebates through an analysis of historical experience updated for changes in facts and circumstances as appropriate and by utilizing reports obtained from external, independent sources. Reserves for rebate programs are shown as other current liabilities on our balance sheet and were $57,516,000 and $32,114,000 at December 31, 2005 and 2004, respectively. Reserves for returns are shown as other current liabilities on our balance sheet and were $16,269,000 and $8,654,000 at December 31, 2005 and 2004, respectively.

        Research and Development Expenses:    Research and development expenses are expensed as incurred. These expenses are comprised of the costs of our proprietary research and development efforts, including salaries, benefits, facilities costs, overhead costs, clinical trial and related clinical manufacturing costs, manufacturing costs related to non-FDA approved products, contract services and other outside costs, as well as costs incurred in connection with our third-party collaboration efforts. Milestone payments made by us to third parties under contracted research and development arrangements are expensed when the specific milestone has been achieved.

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        Advertising Costs:    Advertising costs are expensed as incurred. These costs are comprised of media, agency and production expenses and are included in selling, marketing and distribution expense on the consolidated statements of operations. Advertising expense for the years ended December 31, 2005, 2004 and 2003 was $206,203,000, $32,917,000 and $15,274,000, respectively.

        Income Taxes:    We recognize deferred tax liabilities and assets for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. Of the total valuation allowance of $723,167,000, approximately $149,020,000 relates to stock option compensation deductions. The tax benefit associated with the stock option compensation deductions will be credited to equity when realized.

        Derivatives:    We record all derivative instruments as either assets or liabilities in our consolidated balance sheet and measure those instruments at fair value and subsequent changes in fair value are reflected in current earnings. In November 2004, we acquired warrants to purchase 200,000 shares of BioSphere common stock. Based on the application of the Black-Scholes option pricing model which incorporates current stock price, expected stock price volatility, expected interest rates and the expected holding period of the warrants, we determined the estimated fair value of the warrants to be $959,000 at December 31, 2005. We estimated the warrants to have deminimis value at December 31, 2004.

        Comprehensive Income (Loss):    Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments.

        Basic and Diluted Net Loss Per Common Share:    Basic earnings (loss) per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders 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 calculations where the effect of their inclusion would be anti-dilutive. Potential common shares result from the assumed conversion of preferred stock, convertible subordinated debt and the assumed exercises 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 because including them would be anti-dilutive.

        For the year ended December 31, 2005, 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 common stock equivalents. For the years ended December 31, 2004 and 2003, 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 for the years ended December 31, 2005,

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2004 and 2003 because they would have an anti-dilutive effect due to net income or losses for such periods. These securities include the following:

        Options to purchase shares of common stock:

	2005	2004	2003
	(In Thousands, Except Per Share Data)
Number of options	1,919	12,724	13,645
Price range per share	$59.13 to $87.50	$5.00 to $87.50	$2.50 to $87.50

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

	2005	2004	2003
	(In Thousands)
5% convertible subordinated debentures due 2007	4,763	4,763	4,763
5.75% convertible subordinated notes due 2006	—	—	7,166
0% Series A convertible senior subordinated notes due 2008	—	2,283	6,271
0% Series B convertible senior subordinated notes due 2010	—	4,961	13,407
Total	4,763	12,007	31,607

        The 0% convertible subordinated notes due 2024 are not convertible as of December 31, 2005. If the notes were currently convertible, no shares of common stock would need to be reserved under the conversion formula for issuance upon conversion until our stock price exceeds $67.20 per share.

        Stock-Based Compensation:    We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," or APB 25, and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative fair value accounting method provided for under FASB SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB 25, when the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

        The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

	Year Ended December 31,
	2005			2004			2003
	(In Thousands)
Net loss attributable to common stockholders	$	4,971		$	(295,658	)	$	(135,936	)
Total stock-based employee compensation expense determined under fair value based method for all awards		(46,665	)		(50,564	)		(58,590	)
Pro forma net loss	$	(41,694	)	$	(346,222	)	$	(194,526	)
Amounts per common share:
Basic—as reported	$	0.05		$	(3.21	)	$	(1.61	)
Diluted—as reported	$	0.04		$	(3.21	)	$	(1.61	)
Basic—pro forma	$	(0.40	)	$	(3.76	)	$	(2.30	)
Diluted—pro forma	$	(0.40	)	$	(3.76	)	$	(2.30	)

        No employee stock-based compensation was recorded in our Statement of Operations in 2005, 2004, or 2003.

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        The weighted-average per share fair value of options granted during 2005, 2004 and 2003 was $31.39, $27.58 and $15.42, respectively.

        The fair value of stock options and common shares issued pursuant to the stock option and stock purchase plans at the date of grant were estimated using the Black-Scholes model with the following weighted-average assumptions:

	Stock Options
	2005		2004		2003
Expected life (years)	5.0		5.0		6.0
Interest rate	3.98	%	3.30	%	3.25	%
Weighted average volatility	62	%	80	%	80	%

        We have never declared cash dividends on any of our capital stock and do not expect to do so in the foreseeable future.

        The effects on 2005, 2004, and 2003 pro forma net loss and net loss per share of expensing the estimated fair value of stock options and common shares issued pursuant to the stock option and stock purchase plans are not necessarily representative of the effects on reported results of operations for future years as options vest over several years and we intend to grant varying levels of stock options in future periods.

Recent Accounting Pronouncements:

        In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs—an amendment of ARB No. 43, Chapter 4," or SFAS 151, in an effort to conform U.S. accounting standards for inventories to International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the relevant production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 to have a material impact on our financial condition or our results of operations.

        In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", or SFAS No. 123(R), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) requires compensation costs relating to share-based payment transactions be recognized in financial statements. The pro forma disclosure previously permitted under SFAS No. 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS No. 123(R) is effective as of the beginning of the first annual reporting period that begins after June 15, 2005, with early adoption encouraged. We currently measure compensation costs related to share-based payments under APB 25, as allowed by SFAS No. 123, and provide disclosure in notes to financial statements as required by SFAS No. 123. We are required to adopt SFAS No. 123(R) starting from the first fiscal quarter of 2006. We expect the adoption of SFAS No. 123(R) will have a material adverse impact on our results of operations and net income per share.

        In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29," or SFAS 153. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The amendment also eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of SFAS 153 are effective for nonmonetary

36

asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our financial condition or our results of operations.

        In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3." This statement changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2005. We do not expect this statement to have a material impact on our financial condition or our results of operations.

        In September 2005, the FASB reached a final consensus on Emerging Issues Task Force ("EITF") Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same Counterparty." EITF 04-13 concludes that two or more legally separated exchange transactions with the same counterparty should be combined and considered as a single arrangement for purposes of applying APB Opinion No. 29, "Accounting for Nonmonetary Transactions," when the transactions were entered into "in contemplation" of one another. The consensus contains several indicators to be considered in assessing whether two transactions are entered into in contemplation of one another. If, based on consideration of the indicators and the substance of the arrangement, two transactions are combined and considered a single arrangement, an exchange of finished goods inventory for either raw material or work-in-process should be accounted for at fair value. The provisions of EITF 04-13 are applied to transactions completed in reporting periods beginning after March 15, 2006. We do not expect this to have a material impact on our financial condition.

        In November 2005, the FASB issued FASB Staff Position ("FSP") SFAS No. 115-1 and SFAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statements No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and APB Opinion No. 118, "The Equity Method of Accounting for Investments in Common Stock." The FSP is effective for reporting periods beginning after December 15, 2005. We do not expect this to have a significant impact on the carrying value of the our investments.

C)    Investment in Affiliate

        BioSphere was a consolidated subsidiary from 1994 through July 2, 2001. As a result of a public offering by BioSphere in 2001, our ownership of BioSphere was reduced from approximately 55% to 26%. Therefore, effective July 3, 2001, we changed the method of accounting for our investment in BioSphere from consolidating the results of BioSphere operations to the equity method. On November 10, 2004, we purchased from BioSphere, in a private placement, 4,000 shares of BioSphere Series A Convertible Preferred Stock and warrants to purchase an additional 200,000 shares of BioSphere common stock for an aggregate purchase price of $4,000,000. The Series A Convertible Preferred Stock is convertible into common shares at a conversion price of $4.00 per share and pays quarterly dividends of 6% per annum in cash or additional shares of Series A Convertible Preferred Stock at BioSphere's election.

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        At December 31, 2005 and 2004, we owned 3,224,333 shares, or approximately 21% and 23%, respectively, of BioSphere's outstanding common stock. The fair market value of those shares was approximately $26,117,000 and $12,543,000 as of December 31, 2005 and 2004, respectively. In addition, as of December 31, 2005 and 2004 we owned 4,280 and 4,000 shares of Series A Convertible Preferred Stock, respectively, and warrants to purchase an additional 200,000 shares of common stock, which based on the application of the Black-Scholes option pricing model, we determined the estimated fair value of the warrants to be $959,000 and $0 at December 31, 2005 and December 31, 2004, respectively, which was recorded as an investment in affiliate. Assuming conversion of the Series A Convertible Preferred Stock and the exercise of our warrants, we would own approximately 26% and 27% of BioSphere's common stock as of December 31 2005 and 2004, respectively. We recorded $665,000 and $1,485,000 as our share of BioSphere's losses for the years ended December 31, 2005 and 2004, respectively.

D)    Cash, Cash Equivalents and Short-Term and Long-Term Investments

        Cash, cash equivalents and restricted cash consist of the following at December 31:

		2005		2004
		(In Thousands)
Cash and cash equivalents:
	Cash and money market funds	$	158,283	$	433,855
	Corporate and government commercial paper		19,861		2,050
Total cash, cash equivalents and restricted cash		$	178,144	$	435,905

        Due to the nature of our investments, amortized cost approximates market value as of December 31, 2005 and 2004.

        Short and long-term investments classified as available-for-sale or held-to-maturity consist of the following at December 31:

		2005				2004
		Available- For-Sale		Held-to-Maturity		Available- For-Sale		Held-to-Maturity
		(In Thousands)
Due within 1 year:
	Corporate and bank obligations	$	47,235	$	136,276	$	30,900	$	43,333
	Government and agency securities		1,510		481,594		17,091		211,979
	Equity securities		—		—		—		—
Due in greater than 1 year:
	Corporate and bank obligations		36,538		52,800		27,450		10,000
	Government and agency securities		—		30,000		—		42,957
	Equity securities		12,104		—		14,297		—
Total short-term and long-term investments		$	97,387	$	700,670	$	89,738	$	308,269

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        Held-to-maturity securities are recorded at cost plus accrued amortization, which approximates fair value. Realized gains and losses on held-to-maturity securities were insignificant in 2005 and 2004.

        Available-for-sale securities are carried at fair market value with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss). Realized gains and losses on available-for-sale securities were $18,345,000 in 2005 and insignificant in 2004. Unrealized holding losses greater than one year were immaterial in 2005 and 2004. The following is a summary of available-for-sale securities:

Type of Security	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In Thousands)
December 31, 2005
Corporate and bank obligations	$	83,949	$	19	$	195	$	83,773
Government and agency securities		1,515		—		5		1,510
Equity securities		7,143		4,961		—		12,104
	$	92,607	$	4,980	$	200	$	97,387

Type of Security	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In Thousands)
December 31, 2004
Corporate and bank obligations	$	58,551	$	4	$	205	$	58,350
Government and agency securities		17,099		1		9		17,091
Equity securities		1,132		13,165		—		14,297
	$	76,782	$	13,170	$	214	$	89,738

        Our available-for-sale securities include our equity investments in Point Therapeutics Inc. and ACADIA at December 31, 2005 and Point Therapeutics Inc and Vicuron at December 31, 2004.

        HemaSure Inc. was originally established as our subsidiary in 1995. From that time until March 31, 2002, we recorded our investment in HemaSure Inc. as an equity investment. On May 29, 2001, following a sale of most of its assets to Whatman Bioscience Inc., HemaSure Inc. changed its corporate name to HMSR Inc. On March 15, 2002, HMSR Inc. completed a merger with Point Therapeutics, Inc. Following the merger, we changed the accounting method for our investment in Point Therapeutics, Inc. from the equity method to the cost method primarily because we determined that we no longer had significant influence over the operations of Point Therapeutics, Inc. At December 31, 2005 and 2004, we owned 433,333 shares, or approximately 1.3% and 2.4%, respectively, of Point Therapeutics, Inc. and this investment had a market value of approximately $1,495,000 and $2,323,000, respectively.

        Vicuron was originally established as our subsidiary in 1995. From that time until August 2000, we recorded our investment in Vicuron as an equity investment. In August 2000, Vicuron completed an initial public offering of 5,290,000 shares of its common stock. As a result of the initial public offering, we changed the accounting method for our investment in Vicuron from consolidating the results of Vicuron operations to the cost method. During the third and fourth quarters of 2003, we sold, on the open market, 1,170,000 shares of Vicuron common stock for net proceeds of $20,448,000 and recognized a gain of $18,524,000. On June 15, 2005, Vicuron entered into an agreement and plan of merger, or merger agreement, with Pfizer, Inc., where Pfizer agreed to purchase all outstanding shares of Vicuron for a purchase price of $29.10 per share in cash. The merger closed on September 11, 2005

39

and we received cash proceeds of approximately $20,014,000 in exchange for our 687,766 shares of Vicuron common stock. In accordance with the cost method and the classification of our investment in Vicuron as available-for-sale, we were carrying our investment at fair market value with the corresponding unrealized gain recorded through equity. Upon closing of the merger, we recognized the unrealized gain of approximately $18,345,000 and included that amount in other income on the consolidated statements of operations. At December 31, 2005, we had no ownership in Vicuron. At December 31, 2004, we owned 687,766 shares, or approximately 1.1% of Vicuron and this investment had a market value of approximately $11,974,000.

        On January 10, 2005, we entered into a license, option and collaboration agreement, or collaboration, with ACADIA Pharmaceuticals Inc., or ACADIA, for the development of new drug candidates targeted toward the treatment of central nervous system disorders. The collaboration has been established to investigate potential clinical candidates resulting from screening ACADIA's medicinal chemistry compound library against a broad array of selective muscarinic receptors, which are receptors that respond to acetylcholine, a neurotransmitter in the central nervous system. The collaboration includes ACADIA's m₁ agonist program, which is designed to target neuropsychiatric/neurologic conditions and neuropathic pain. We have agreed to collaborate with each other to research and develop certain compounds that interact with these muscarinic receptors. We are permitted to develop and commercialize these compounds in any field outside of the prevention or treatment of ocular disease. The agreement also includes an option to select a preclinical program from ACADIA's 5-HT_2a program for use in combination with LUNESTA. Antagonists of the 5-HT_2a receptor have been shown in clinical studies to affect sleep architecture in humans. We will have exclusive worldwide rights to develop and commercialize compounds developed under our collaboration with ACADIA.

        During the three-year research term of the ACADIA collaboration agreement, we will provide ACADIA with $2,000,000 of research funding each year, which will be recorded as research and development expense. In addition, we have agreed to make milestone payments to ACADIA upon the achievement by ACADIA of specified development and regulatory milestones for each product developed under the collaboration, including any product to be used in combination with LUNESTA that is developed under the collaboration. We have also agreed to pay royalties to ACADIA on net worldwide sales of products developed under the collaboration.

        In connection with the ACADIA collaboration, we purchased 1,077,029 shares of ACADIA common stock for an aggregate purchase price of $10,000,000, which represented a 40 percent premium over its trading value. 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, which we have classified as an available-for-sale security. We will adjust this investment to its fair value at each reporting date with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss). Subject to certain conditions, we also agreed to purchase up to an additional $10,000,000 of ACADIA common stock at a 25 percent premium over its trading value as of the one-year anniversary of the signing of the agreement.

E)    Accounts Receivable

        Our trade receivables in 2005 and 2004 primarily represent amounts due from wholesalers, distributors and retailers of our pharmaceutical product. We perform ongoing credit evaluations of our customers and generally do not require collateral. Our allowance for doubtful accounts was $470,000 and $510,000 at December 31, 2005 and 2004, respectively, and our allowance for payment term discounts related to accounts receivable was $2,633,000 and $1,276,000 at December 31, 2005 and 2004, respectively.

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        Customers with amounts due that represent greater than 10% of our accounts receivable balance are as follows at December 31:

	2005		2004
Customer A	26	%	37	%
Customer B	28	%	32	%
Customer C	25	%	10	%

F)    Inventories

        Inventories consist of the following at December 31:

	2005		2004
	(In Thousands)
Raw materials	$	21,780	$	3,905
Work in progress		—		292
Finished goods		17,171		8,889
	$	38,951	$	13,086

G)   Property and Equipment

        Property and equipment consist of the following at December 31:

	2005			2004
	(In Thousands)
Land	$	4,125		$	4,121
Building		46,457			45,842
Laboratory and manufacturing equipment		35,512			28,436
Office equipment		43,568			37,330
Leasehold improvements		2,786			5,847
		132,448			121,576
Accumulated depreciation and amortization		(59,981	)		(50,716	)
	$	72,467		$	70,860

        Property and equipment under capital leases at December 31, 2005 and 2004 was $6,824,000 and $4,707,000, respectively. Accumulated amortization related to property and equipment under capital leases at December 31, 2005 and 2004 was $3,743,000 and $1,675,000, respectively. Depreciation expense was $12,689,000, $13,208,000 and $10,793,000 including amortization on capital leases of $2,067,000, $1,675,000 and $875,000, for the years ended December 31, 2005, 2004 and 2003, respectively.

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H)   Deferred Financing Costs and Patents

        Deferred financing costs and patents, net, consist of the following at December 31:

	2005			2004
	(In Thousands)
Deferred finance costs, gross	$	34,440		$	34,440
Accumulated amortization		(17,474	)		(11,200	)
Deferred finance costs, net	$	16,966		$	23,240
Patents, gross	$	2,785		$	6,439
Accumulated amortization		(1,654	)		(2,644	)
Patents, net	$	1,131		$	3,795

        During 2005, we wrote off the remaining unamortized patents and other intangible assets of $2,129,000 related to various compounds we are no longer pursuing. During 2003, we discontinued development of SOLTARA brand tecastemizole and wrote off the remaining unamortized patents and other intangible assets of $18,814,000 related to tecastemizole, which was included in research and development expense on the consolidated statement of operations.

        Amortization of intangible assets is computed on the straight-line method based on the estimated useful lives of the assets. The following schedule details our amortization expense related to patents and deferred financing costs:

	Year Ended December 31,
	2005		2004		2003
	(In Thousands)
Amortization of deferred finance costs	$	6,274	$	4,831	$	4,870
Amortization of patents		535		667		1,810
Total amortization	$	6,809	$	5,498	$	6,680

        The estimated aggregate amortization expense for each of the next five years is as follows: 2006, $5,973,000; 2007, $4,344,000; 2008, $3,994,000; 2009, $2,861,000; and 2010, $729,000.

        We have no goodwill recorded at December 31, 2005 or 2004.

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I)     Accrued Expenses and Other Current Liabilities

        Accrued expenses and other current liabilities consist of the following at December 31:

	2005		2004
	(In Thousands)
Research and development costs	$	19,394	$	33,540
Sales and marketing costs		51,264		41,409
Interest on convertible subordinated debt		8,250		8,250
Compensation costs		72,310		26,924
Other		36,191		16,578
Total accrued expenses	$	187,409	$	126,701
Revenue reserves	$	73,785	$	40,768
Current portion of Ross termination payment		2,887		28,847
Other		251		96
Total other current liabilities	$	76,923	$	69,711

J)    Notes Payable and Capital Lease Obligations

        Notes payable and capital lease obligations consist of the following at December 31:

	2005			2004
	(In Thousands)
Government grant from Nova Scotia Department of Economic Development(1)	$	767		$	850
Obligations under capital leases (See Note L)		2,523			3,605
		3,290			4,455
Less current portion		(2,030	)		(1,926	)
Total	$	1,260		$	2,529

(1)

Our wholly-owned subsidiary, Sepracor Canada Limited, has a Canadian Government grant which Sepracor Canada Limited may be required to repay if it fails to meet certain conditions. The grant is recorded as debt and is being amortized over the useful lives of the related capital assets.

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K)   Convertible Subordinated Debt

        Convertible subordinated debt, including current portion, consists of the following at December 31:

	2005				2004
	Carrying Amount		Fair Value(1)		Carrying Amount		Fair Value(1)
	(In Thousands)
5% convertible subordinated debentures due 2007	$	440,000	$	437,800		440,000		460,372
0% Series A convertible senior subordinated notes due 2008		72,800		119,028		72,800		137,721
0% Series B convertible senior subordinated notes due 2010		148,020		259,035		148,020		307,142
0% convertible senior subordinated notes due 2024		500,000		475,000		500,000		540,515
Total	$	1,160,820	$	1,290,863	$	1,160,820	$	1,445,750

(1)

The fair value of all the convertible subordinated debt is from a quoted market source.

        In December 1998, we issued $300,000,000 in principal amount of 7% convertible subordinated debentures due 2005, or 7% debentures. As part of the sale of the 7% debentures, we incurred $9,919,000 of offering costs, which were recorded as other assets and were being amortized over seven years, the term of the 7% debentures. Our net proceeds after offering costs were approximately $290,081,000. In March and April 2002, we exchanged $57,000,000 of our 7% debentures in privately negotiated transactions for 2,280,696 shares of our common stock. We recorded, as debt conversion expense, associated inducement costs of $26,599,000, which represented the fair market value of the 1,367,784 additional shares of common stock issued as an inducement to the holders for conversion of their 7% debentures. In September and October 2002, we repurchased, in privately negotiated transactions, an aggregate of $131,090,000 face value of our 7% debentures, for an aggregate consideration of approximately $87,186,000 in cash, including accrued interest. This repurchase resulted in approximately $44,265,000 being recorded as a gain on early extinguishment of debt in 2002. In July 2003, we redeemed the remaining outstanding $111,870,000 face value of our 7% debentures for aggregate cash consideration of $115,226,000, excluding accrued interest. As a result of this redemption, we recorded a loss on early extinguishment of debt of approximately $4,645,000, including the write-off of $1,289,000 of deferred financing costs.

        In February 2000, we issued $400,000,000 in principal amount of 5% convertible subordinated debentures due 2007, or 5% debentures. On March 9, 2000, we issued an additional $60,000,000 in principal amount of 5% debentures pursuant to an option granted to the initial purchaser of the 5% debentures. The 5% debentures are convertible into common stock, at the option of the holder, at a price of $92.38 per share and bear interest at 5% payable semi-annually, commencing on August 15, 2000. The 5% debentures are redeemable at our option if the trading price of our common stock exceeds $110.86, which is equal to 120% of the conversion price, for 20 trading days in a period of 30 consecutive trading days. We may be required to repurchase the 5% debentures at the option of the holders if there is a change in control of Sepracor. As part of the sale of the 5% debentures, we incurred $14,033,000 of offering costs, which were recorded as other assets and are being amortized over seven years, the term of the 5% debentures. Our net proceeds after offering costs were approximately $445,967,000. In March 2002, we exchanged $20,000,000 of our 5% debentures in privately negotiated transactions for 640,327 shares of our common stock. We charged, to debt conversion expense, associated inducement costs of $8,659,000, which represented the fair market value of the 423,830 additional shares of common stock issued as an inducement to the holders for conversion of their 5% debentures. At December 31, 2005 and 2004, $440,000,000 of our 5% debentures remained outstanding.

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        In November 2001, we issued $400,000,000 in principal amount of 5.75% convertible subordinated notes due 2006, or 5.75% notes. In December 2001, we issued an additional $100,000,000 in principal amount of 5.75% notes pursuant to an option granted to the initial purchaser of the 5.75% notes. As part of the sale of the 5.75% notes, we incurred offering costs of $14,311,000 which were recorded as other assets and were being amortized over five years, which is the term of the 5.75% notes. Our net proceeds after offering costs were approximately $485,689,000. In March and April 2002, we exchanged $70,000,000 of our 5.75% notes in privately negotiated transactions for 2,790,613 shares of our common stock. We recorded as other expense, associated inducement costs of $28,000,000, which represented the fair market value of the 1,623,947 additional shares of common stock issued as an inducement to the holders for conversion of their 5.75% notes. On January 9, 2004, using funds from our December 2003 issuance of 0% Series A notes due 2008 and Series B notes due 2010, we redeemed the remaining outstanding $430,000,000 principal amount of our 5.75% convertible subordinated notes due 2006 for an aggregate redemption price of $433,709,000, including approximately $3,709,000 in accrued interest. As a result of this redemption, we recorded a loss of approximately $7,022,000 related to the write-off of deferred financing costs in the first quarter of 2004. At December 31, 2005 and 2004, none of the 5.75% notes remained outstanding.

        In December 2003, we issued an aggregate of $600,000,000 of 0% convertible senior subordinated notes, or 0% notes. We issued $200,000,000 in principal amount as 0% Series A convertible senior subordinated notes due 2008, or 0% Series A notes due 2008, and $400,000,000 in principal amount as 0% Series B convertible senior subordinated notes due 2010, or 0% Series B notes due 2010. The 0% notes are convertible into common stock, at the option of the holder, at a price of $31.89 and $29.84 per share for the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively. The 0% notes do not bear interest and are not redeemable. We may be required to repurchase the 0% notes at the option of the holders if there is a change in control of Sepracor or the termination of trading of our common stock on the Nasdaq or similar markets. As part of the sale of the 0% notes, we incurred offering costs of $16,943,000, which have been recorded as deferred financing costs and are being amortized over the term of the notes on a pro-rata basis based on the total amount of Series A and Series B notes issued. On January 15, 2004, pursuant to an option granted to the initial purchasers of our 0% notes, we issued an additional $50,000,000 of 0% Series A notes due 2008 and $100,000,000 of 0% Series B notes due 2010. These notes have the same terms and conditions as our previously issued 0% Series A notes due 2008 and 0% Series B notes due 2010. Net of issuance costs, our proceeds were approximately $145,875,000. The issuance costs have been recorded as deferred financing costs and are being amortized over 4 and 6 years, respectively, the remaining term of the debt. During September 2004, certain holders of our 0% Series A notes due 2008 and 0% Series B notes due 2010, agreed, in separately negotiated transactions, to convert $177,200,000 and $351,980,000 in aggregate principal amount of their 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, into an aggregate of 5,556,104 and 11,797,483 shares of our common stock, respectively. As an inducement to convert their notes, we paid the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010 aggregate cash payments of $23,868,000 and $45,900,000, respectively. These amounts were recorded as a loss on conversion of convertible notes. Deferred financing costs related to the converted 0% Series A notes due 2008 and 0% Series B notes due 2010 of $4,244,000 and $8,846,000, respectively, were netted against the amount of debt converted into equity. At December 31, 2005 and 2004, $72,800,000 and $148,020,000 of the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, remained outstanding.

        On September 22, 2004, we issued $500,000,000 in principal amount of 0% convertible senior subordinated notes due 2024, or 0% notes due 2024. The 0% notes due 2024 are convertible, at the option of the holder upon certain specified circumstances, into cash and, if applicable, shares of our common stock, at an initial price of $67.20 per share, subject to adjustment. Holders may convert the notes into cash and, if applicable, shares of our common stock at a conversion rate of 14.8816 shares of common stock per $1,000 principal amount of notes (which is equal to a conversion price of

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approximately $67.20 per share), subject to adjustment, before the close of business on the business day immediately preceding October 15, 2024 only under the following circumstances:

•

during any fiscal quarter beginning after December 31, 2004, if the closing sale price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last day of the preceding fiscal quarter is more than 130% of the conversion price per share of common stock on the last day of such preceding quarter;



•

during the five business day period following any five consecutive trading day period (the "measurement period") in which the trading price per note on each day of that measurement period is less than 98% of the closing sale price of our common stock multiplied by the conversion rate on each such day;



•

if the notes have been called for redemption;



•

upon the occurrence and continuance of specified corporate transactions; and



•

in connection with a transaction or event constituting a fundamental change occurring on or prior to October 20, 2009.

        Upon conversion of the notes, if the adjusted conversion value of the notes, which is defined as the product of (1) the conversion rate in effect on the conversion date; and (2) the average of the daily volume weighted average price of our common stock for each of the five consecutive trading days beginning on the second trading day immediately following the day the notes are tendered for conversion, is less than or equal to the principal amount of the notes, then we will convert the notes for an amount in cash equal to the adjusted conversion value of the notes. If the adjusted conversion value of the notes is greater than the principal amount of the notes, then we will convert the notes into whole shares of our common stock for an amount equal to the adjusted conversion value of the notes less the principal amount of the notes, plus an amount in cash equal to the principal amount of the notes plus the cash value of any fractional shares of our common stock. During 2005, none of the listed circumstances occurred resulting in a conversion of debt.

        The notes do not bear interest. On or after October 20, 2009, we have the option to redeem for cash all or part of the notes at any time at a redemption price equal to 100% of the principal amount of the notes to be redeemed. We may be required by the note holders to repurchase for cash all or part of the notes on October 15 of 2009, 2014 and 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased. We may be required to repurchase for cash all or part of the notes upon a change in control of Sepracor or a termination of trading of our common stock on the Nasdaq or similar markets at a repurchase price equal to 100% of the principal amount of the notes to be repurchased. In connection with the sale of the notes, we incurred offering costs of approximately $14,190,000, which have been recorded as deferred financing costs and are being amortized over 5 years, the note holders first potential redemption date. At December 31, 2005 and 2004, $500,000,000 of the 0% notes due 2024 remained outstanding.

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L)    Commitments and Contingencies

        Future minimum lease payments under all non-cancelable leases in effect at December 31, 2005, are as follows:

Year	Operating Leases		Capital Leases
	(In Thousands)
2006	$	1,151	$	2,063
2007		767		386
2008		345		134
2009		299		—
2010		112		—
Thereafter		76		—
Total minimum lease payments	$	2,750		2,583
Less amount representing interest				(60	)
Present value of minimum lease payments			$	2,523

        Future minimum lease payments under operating leases relate primarily to our vacated office, laboratory and production facilities at 33 Locke Drive, and our office facilities at 111 Locke Drive, both in Marlborough, Massachusetts. Additionally in the second half of 2004 we entered into four leases for office space for our regional sales offices. Most of the lease terms provide options to extend the leases and require us to pay our allocated share of taxes and operating costs in addition to the annual base rent payments. In July 2002, we completed the move out of our leased facilities at 33 and 111 Locke Drive, and moved into our newly constructed research and development and corporate office building in the Solomon Pond Corporate Center at 84 Waterford Drive, Marlborough, Massachusetts. Due to expansion related to the launch of LUNESTA, we reoccupied our former office space at 111 Locke Drive in June 2004. The above table includes costs of these operating leases through 2007; however, we accrued $2,263,000 for our estimated cumulative future minimum lease obligation under these leases net of estimated future sublease rental income through the term of the leases. In June 2003 and December 2004, due to revisions of our previously estimated future sublease income, we recorded additional accruals of $1,405,000 and $1,313,000, respectively. As of December 31, 2005 and 2004 the remaining accruals were $240,000 and $1,126,000, respectively.

        Our capital leases relate primarily to telephone systems and computer equipment purchased under capital lease agreements.

        Rental expense under operating leases amounted to $833,000, $895,000 and $899,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

        We enter into standard indemnification agreements in our ordinary course of business, under which we indemnify and hold harmless certain parties, including customers such as wholesalers, against claims, liabilities and losses brought by third parties to the extent that the claims arise out of (1) injury or death to person or property caused by defect in our product, (2) negligence in the manufacture or distribution of the product or (3) a material breach by Sepracor. We have no liabilities recorded for these guarantees at December 31, 2005 and, if liabilities were incurred, we have insurance policies covering product liabilities, which would mitigate any losses.

        We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited, however, we believe the fair value of these indemnification agreements is minimal.

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M)   Litigation

        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. On April 11, 2003, two consolidated amended 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 consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. In both the debt purchasers' action and equity purchasers' action, the court has granted the plaintiffs' motion for class certification. 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 ANDA from Breath Limited for a generic version of levalbuterol hydrochloride inhalation solution. 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 a civil action against Breath Limited for patent infringement. We were notified in January 2006 of a second ANDA 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. 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.

N)    Stockholders' Equity (Deficit)

        In December 2003, we used approximately $94,820,000 of the proceeds from the issuance of 0% Series A convertible senior subordinated notes due 2008 and 0% Series B convertible senior subordinated notes due 2010 to purchase four series of call spread options on our common stock expiring at various dates between May 12, 2004 and December 9, 2005. The call spread options could have been settled at our option in either net shares or in cash. Settlement of the call spread options in net shares on the expiration date would result in us receiving a number of shares, not to exceed 19,700,000 shares of our common stock with a value equal to the amount otherwise receivable on cash settlement.

        During the second quarter of 2005, the third series of settled options expired at various dates beginning on May 12, 2005 and ending on June 9, 2005. We settled the third series for cash resulting in a payment to us in the amount of approximately $123,798,000. We recorded the full amount of the call spread option settlements as an increase to additional paid-in capital in accordance with EITF 00-19. In the fourth quarter of 2005, the fourth and final series expired in equal installments on each business day from November 11, 2005 through December 9, 2005. We elected to settle the fourth series receiving 2,326,263 shares of our common stock. These shares are being held in treasury at cost and were recorded as increase in additional paid in capital.

        During the second and fourth quarters of 2004, we settled series one and two for cash resulting in payments to us in the amount of $124,333,000. The first series of settled options expired at various

48

dates beginning on May 12, 2004 and ending on June 9, 2004 and the second series of options expired at various dates beginning on November 11, 2004 and ending on December 9, 2004. We recorded the full amount of the call spread option settlements as an increase to additional paid-in capital in accordance with EITF 00-19.

Preferred Stock

        Our board of directors is authorized, without stockholder approval, but subject to any limitations prescribed by law, to issue up to 1,000,000 shares of preferred stock, in one or more series. Each such series will have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as will be determined by the board of directors.

Treasury Stock

        In November 2005, we received 2,326,263 shares of our common stock upon the settlement of call spread options we purchased in December 2003. The shares are being held in treasury at cost and may be issued in connection with our employee stock purchase plan and other corporate purposes.

        On September 22, 2004, we purchased 1,933,200 shares of our common stock for approximately $100,321,000, including transaction costs of $394,000. The shares are being held in treasury at cost and may be issued in connection with our employee stock purchase plan and other corporate purposes.

Accumulated Other Comprehensive Income

        The components of accumulated other comprehensive income at December 31, 2005 and 2004 were as follows:

	2005		2004
	(In Thousands)
Net unrealized gains on securities available for sale	$	4,779	$	12,417
Foreign currency translation		1,899		1,372
Total	$	6,678	$	13,789

O)   Stock Plans

        We have stock-based compensation plans, which are described below. We record the issuance of stock options using APB 25 and related interpretations in accounting for our plans.

        The 1997 Stock Option Plan, or 1997 Plan, permits us to grant non-qualified stock options, or NSOs, to purchase up to 1,000,000 shares of common stock to our employees and consultants. Executive officers are not entitled to receive stock options under the 1997 Plan. NSOs granted under the 1997 Plan have a maximum term of ten years from the date of grant and generally vest over five years.

        The 1999 Director Stock Option Plan, or 1999 Director Plan, permits us to grant NSOs to purchase up to 1,800,000 shares of common stock to our non-employee directors. Options granted under the 1999 Director Plan have a maximum term of ten years from the date of grant and have an exercise price not less than the fair value of the stock on the date of grant and generally vest over a period of one to five years.

        The 2000 Stock Incentive Plan, or 2000 Plan, permits us to grant incentive stock options, or ISOs, NSOs and restricted stock awards to purchase up to 9,500,000 shares of common stock to our employees, officers, directors and consultants. Stock options granted under the 2000 Plan have a

49

maximum term of ten years from the date of grant, have an exercise price not less than the fair value of the stock on the grant date and generally vest over five years. In May 2002, the stockholders approved an amendment to the 2000 Plan increasing the number of shares of common stock that could be granted under the 2000 Plan from 2,500,000 shares to 4,000,000 shares. In May 2003, the stockholders approved an amendment to the 2000 Plan increasing the number of shares of common stock that could be granted under the 2000 Plan from 4,000,000 shares to 5,500,000 shares. In May 2004, the stockholders approved an amendment to the 2000 Plan increasing the number of shares of common stock that could be granted under the 2000 Plan from 5,500,000 shares to 8,000,000 shares. In May 2005, the stockholders approved an amendment to the 2000 Plan increasing the number of shares of common stock that could be granted under the 2000 Plan from 8,000,000 shares to 9,500,000 shares.

        The 2002 Stock Incentive Plan, or 2002 Plan, permits us to grant NSOs and restricted stock awards to purchase up to 4,000,000 shares of common stock to our employees, other than executive officers. Stock options granted under the 2002 Plan have a maximum term of ten years from the date of grant, have an exercise price not less than the fair value of the stock on the grant date and generally vest over five years. In June 2002, the Board of Directors approved an amendment to the 2002 Plan increasing the number of shares of common stock that could be granted under the 2002 Plan from 500,000 shares to 4,000,000 shares.

        Stock options and other equity awards, if any, outstanding under the 1997 Plan, the 1999 Director Plan, the 2000 Plan and the 2002 Plan vest and become fully exercisable upon a change in control of Sepracor.

        The following tables summarize information about stock options outstanding at December 31, 2005 (in thousands, except for per share amounts and contractual life):

				Options Outstanding
								Options Exercisable
					Weighted-Average Remaining Contractual Life (Years)
Range of Exercise Price Per Share				Number of Options Outstanding		Weighted-Average Exercise Price Per Share		Number of Options Exercisable	Weighted-Average Exercise Price Per Share
$	5.75	–	8.31	742	6.6	$	6.31	722	$	6.27
	11.25	–	16.78	2,465	5.0		13.03	1,616		12.73
	18.38	–	27.15	2,628	5.1		21.29	1,895		20.67
	27.70	–	39.07	1,104	4.7		34.41	926		35.60
	42.38	–	59.45	2,758	7.5		50.37	997		53.52
	64.50	–	87.50	1,162	7.0		74.28	140		85.60
$	5.75	–	87.50	10,859	6.0	$	32.78	6,296	$	25.82

		2005					2004					2003
		Number of Options			Average Price Per Share		Number of Options			Average Price Per Share		Number of Options			Average Price Per Share
Balance at January 1,			12,724		$	25.72		13,645		$	20.56		7,960		$	24.03
	Granted		1,149			60.66		1,985			43.77		6,372			15.42
	Exercised		(2,885	)		12.75		(2,767	)		13.43		(460	)		11.52
	Cancelled		(128	)		32.90		(137	)		21.65		(211	)		15.14
	Expired		(1	)		45.97		(2	)		19.19		(16	)		27.21
Balance at December 31,			10,859		$	32.78		12,724		$	25.72		13,645		$	20.56
Options exercisable at December 31,			6,296					7,336					7,863
Weighted-average fair value of options granted during the year		$	33.94				$	28.87				$	9.25

50

        There were approximately 3,400,000 shares available under our stock option plans for future option grants as of December 31, 2005.

        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. Employees purchased approximately 160,000, 163,000 and 209,000 shares for a total of $6,725,000, $4,922,000 and $2,439,000, during the years ended December 31, 2005, 2004 and 2003, respectively. In May 2003, our stockholders approved an amendment to the 1998 ESPP increasing the number of shares of common stock authorized for issuance under the 1998 ESPP from 600,000 shares to 900,000 shares. At December 31, 2005, there were approximately 115,000 shares of common stock authorized for future issuance under the 1998 ESPP.

P)    Income Taxes

        The components of income tax expense consist of the following at December 31:

		2005		2004		2003
Current income tax expense
	Federal	$	—	$	—	$	—
	State		38		—		—
	Foreign		113		—		—
Total current income tax expense		$	151	$	—	$	—
Deferred income tax expense
	Federal	$	—	$	—	$	—
	State		—		—		—
	Foreign		—		—		—
Total deferred income tax expense		$	—	$	—	$	—
Total current and deferred income tax expense		$	151	$	—	$	—

        For each of the years ended December 31, 2005, 2004 and 2003, our U.S. federal statutory tax rate was 34% and our effective tax rate was 2.9%, 0%, and 0%, respectively. Our effective tax rate varies from our statutory tax rate for the years ended December 31 principally due to the following:

	2005		2004		2003
U.S. federal statutory tax rate	34.0	%	34.0	%	34.0	%
State income taxes, net of U.S. federal tax expense	0.7		—		—
Tax rate and tax law differential of foreign operations	30.0		(0.2	)	(0.1	)
U.S. federal research and development credits	(126.3	)	2.2		4.7
Change in valuation allowance	69.0		(27.6	)	(38.3	)
Other nondeductible expenses	(4.5	)	(8.4	)	(0.3	)
	2.9	%	0	%	0	%

        Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. Of the total valuation allowance of $723,167,000,

51

approximately $149,020,000 relates to stock option compensation deductions. The tax benefit associated with the stock option compensation deductions will be credited to equity when realized.

        At December 31, 2005, we had federal tax net operating loss carryforwards of approximately $1,374,176,000, which expire in the years 2006 through 2025 and state tax net operating loss carryforwards of approximately $812,025,000, which expire in the years 2006 through 2010. Based upon the Internal Revenue Code of 1986, as amended, and changes in company ownership, utilization of the net operating losses may be subject to an annual limitation. At December 31, 2005, we had federal and state research and experimentation credit carryforwards of approximately $55,287,000 and $42,629,000, respectively, which will expire from now through 2025 and 2020, respectively. We also had Canadian research and experimentation credits of $3,428,000, which expire in the years 2006 through 2015.

        The components of net deferred taxes were as follows at December 31:

		2005			2004
		(In Thousands)
Assets
	Net operating loss carryforwards	$	504,004		$	467,756
	Research and development capitalization		40,539			50,290
	Research and experimentation tax credit carryforwards		87,015			77,196
	Accrued expenses		43,844			52,103
	Reserves		29,662			17,873
	Depreciation		2,796			1,229
	Intangibles		8,950			9,136
	Other		6,663			2,080
Liabilities
	Basis difference of subsidiaries		(306	)		(3,956	)
	Valuation allowance		(723,167	)		(673,707	)
Net deferred taxes		$	—		$	—

        The United States and foreign components of income (loss) before income taxes were as follows for the years ended December 31:

	2005			2004			2003
United States	$	9,312		$	(294,940	)	$	(135,503	)
Foreign		(4,190	)		(718	)		(433	)
Total	$	5,122		$	(295,658	)	$	(135,936	)

Q)   Employees' Savings Plan

        We have a 401(k) savings plan for all domestic employees. Under the provisions of our 401(k) savings plan, employees may voluntarily contribute up to 15% of their compensation, up to the statutory limit. In addition, we can make a matching contribution at our discretion. We matched 50% of the first $3,000 contributed by employees up to $1,500 maximum per employee during 2005, 2004 and 2003. We incurred expenses of $2,286,000, $1,389,000, and $888,000 in 2005, 2004 and 2003, respectively, as a result of our matching contribution.

R)    Business Segment and Geographic Area Information

        We operate in one business segment, which is the discovery, research and development and commercialization of pharmaceutical products.

52

        All of our revenues in 2005, 2004 and 2003 were received from unaffiliated customers located in the United States or its territories. Product revenue by product is presented below:

		2005		2004		2003
		(In Thousands)
Product sales:
	XOPENEX Inhalation Solution	$	428,506	$	319,781	$	286,819
	LUNESTA		329,221		—		—
	XOPENEX HFA		11,958		—		—
Total product sales		$	769,685	$	319,781	$	286,819

        Long-lived asset information, which is comprised of property and equipment, by geographic area is presented below:

		2005		2004		2003
		(In Thousands)
Long-lived assets:
	United States	$	63,663	$	63,408	$	59,685
	Canada		8,804		7,452		6,743
Total long-lived assets		$	72,467	$	70,860	$	66,428

S)    Quarterly Consolidated Financial Data (Unaudited)

	For the Quarter Ended
	March 31, 2005			June 30, 2005			September 30, 2005			December 31, 2005
	(In Thousands, Except Per Share Data)
Net revenues	$	119,045		$	185,064		$	205,720		$	311,099
Gross profit		108,805			170,409			190,005			284,278
Net income (loss) applicable to common shares(1)		(22,573	)		(7,400	)		(2,224	)		37,168
Basic net income (loss) per common share	$	(0.22	)	$	(0.07	)	$	(0.02	)	$	0.35
Diluted net income (loss) per common share	$	(0.22	)	$	(0.07	)	$	(0.02	)	$	0.32

	For the Quarter Ended
	March 31, 2004			June 30, 2004			September 30, 2004			December 31, 2004
	(In Thousands, Except Per Share Data)
Net revenues	$	99,478		$	69,967		$	80,081		$	131,351
Gross profit		90,378			63,037			72,775			119,260
Net loss applicable to common shares		(50,441	)		(81,129	)		(130,363	)		(33,725	)
Basic and diluted loss per common share	$	(0.59	)	$	(0.93	)	$	(1.40	)	$	(0.33	)

(1)

For the three months ended December 31, 2005, includes:

•

a $2.1 million out-of-period charge related to correcting the cumulative amount of amortization expense of the $14.1 million in deferred finance costs relating to the issuance of the 0% notes due 2024. We previously amortized such costs through the convertible debt maturity date, which is 20 years after the date of issuance, and should have been amortizing such costs through the first date a bondholder can require us to repurchase the debt, which is October 20, 2009, or five years after the date of issuance. The amount of the out-of-period charge relating to each three-month period from December 31, 2004 to September 30, 2005 is approximately $500,000. We

53

have determined that this correction was not material to our financial statements for the year ended December 31, 2005, to the three-month period ended December 31, 2005 or any other previously reported interim or annual period;

•

a $1.7 million charge for write off of patent costs for patents which we are no longer supporting; and



•

a $3.1 million net reduction in legal costs for insurance reimbursements related to class action defense costs.

T)    Subsequent Event

        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 its trading value and resulted in the issuance to us, of 813,393 shares of ACADIA common stock.

54

Annual Meeting Information

Our Annual Meeting of Stockholders will be held at 9:00 a.m. on May 18, 2006 at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, Sixty State Street, Boston, MA.

Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol SEPR.

Primary Outside Legal Counsel

Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP, Boston, MA

Corporate Headquarters

Sepracor Inc.
84 Waterford Drive
Marlborough, MA 01752
Telephone: (508) 481-6700
Facsimile: (508) 357-7499

Transfer Agent and Registrar

Questions regarding accounts, address changes, stock transfers and lost certificates should be directed to:

Computershare
P.O. Box 43010
Providence, RI 02940-3010
Phone: (781) 575-3120

Directors

James G. Andress
Former Chairman, Beecham Pharmaceuticals,
Former President and COO, Sterling Drug Inc.

Timothy J. Barberich
Chairman of the Board and Chief Executive Officer, Sepracor Inc.

Digby W. Barrios
Former President and CEO, Boehringer Ingelheim Corporation

Robert J. Cresci
Managing Director, Pecks Management Partners Ltd.

James F. Mrazek
Former Vice President and General Manager,
Healthcare Division of Johnson & Johnson Products Inc.

Timothy J. Rink, MA, M.D., Sc.D.
Former Chairman and Chief Executive Officer, Aurora Biosciences, Inc.,
Former President and Chief Technical Officer, Amylin Pharmaceuticals, Inc.

Alan A. Steigrod
Former Executive Vice President, Glaxo Holdings plc

55

Officers and Senior Management

Timothy J. Barberich
Chairman of the Board and Chief Executive Officer

William J. O'Shea
President and Chief Operating Officer

Mark H.N. Corrigan, M.D.
Executive Vice President, Research and Development

David P. Southwell
Executive Vice President, Chief Financial Officer and Secretary

Robert F. Scumaci
Executive Vice President, Finance and Administration and Treasurer

Douglas E. Reedich, Ph.D., J.D.
Senior Vice President, Legal Affairs

Jack W. Britts
Senior Vice President, Marketing and Commercial Planning

Frederick H. Graff
Senior Vice President, Sales

Donna R. Grogan, M.D.
Senior Vice President, Clinical Research

Stewart H. Mueller
Senior Vice President, Regulatory Affairs and Quality Assurance

David S. Reasner, Ph.D.
Senior Vice President, Clinical Operations and Data Analysis

James M. Roach, M.D.
Senior Vice President, Medical Affairs

Thomas E. Rollins
Senior Vice President, Product Development

Chris J. Viau, Ph.D., DABT
Senior Vice President, Preclinical Development Operations

Stephen A. Wald
Senior Vice President, Commercial Technical Operations

David J. Aubuchon
Vice President, Corporate Controller

Jonae R. Barnes
Vice President, Investor Relations and Corporate Communications

Rudolf A. Baumgartner, M.D.
Vice President, Clinical Research

Judith Caron, Ph.D.
Vice President, Product Development

56

Regina M. DeTore
Vice President, Human Resources

Brian Graeff
Vice President, Commercial Quality Operations

Karim F. Lalji
Vice President, New Products Planning

Joseph J. McGrath
Vice President, Information Technologies

William K. McVicar, Ph.D.
Vice President, Development Operations

Walter Piskorski
Vice President, Manufacturing Operations

Mark Wanda
Vice President, Legal Affairs

Thomas C. Wessel, M.D., Ph.D.
Vice President, CNS Development

Jeffrey S. Wren
Vice President, Customer Strategy and Operations

William E. Yelle
Vice President, Business Development

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        LUNESTA and XOPENEX HFA are trademarks and XOPENEX is a registered trademark of Sepracor Inc. EmboSphere is a registered trademark of BioSphere Medical, Inc. XUSAL is a trademark and XYZAL and ZYRTEC are registered trademarks of UCB, Societe Anonyme. CLARITIN and CLARINEX are registered trademarks of Schering Corporation. ALLEGRA is a registered trademark of Merrell Pharmaceuticals. SONATA is a registered trademark of Jones Pharma Incorporated, a wholly owned subsidiary of King Pharmaceuticals Inc. ASTELIN is a registered trademark of Carter- Wallace, Inc. NORVASC is a registered trademark of Pfizer Inc. IMOVANE and AMOBAN are registered trademarks of Rhone-Poulenc Rorer, S.A. ROZEREM is a trademark of Takeda Pharmaceutical Company Limited. AMBIEN CR is a trademark and AMBIEN is a registered trademark of sanofi-aventis Corporation. DSM-IV is a registered trademark of the American Psychiatric Association.

58

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Exhibit 13

EX-21

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Exhibit 21

LIST OF SUBSIDIARIES

Name	Jurisdiction of Incorporation
Sepracor Canada Holdings, Inc. (100% owned subsidiary of Sepracor)	Delaware
Sepracor Canada Limited (100% owned subsidiary of Sepracor Canada Holdings, Inc.)	Canada
Sepracor Securities Corporation (100% owned subsidiary of Sepracor)	Massachusetts
Sepracor, N.V. (100% owned subsidiary of Sepracor)	Netherlands Antilles
Sepracor Research & Development Trust (100% owned subsidiary of Sepracor)	Delaware

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Exhibit 21

EX-23.1

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File Nos. 33-43460, 33-44808, 33-48428, 333-05217, 333-05219, 333-94774, 333-48719, 333-05221, 333-58557, 333-58559, 333-58563, 33-48427, 33-63710, 33-79724, 333-85003, 333-84983, 333-58368, 333-100888, 333-100887 and 333-112748) and Forms S-3 (File Nos. 333-00460, 333-51879, 333-75561, 333-36958, 333-76502, 333-114342 and 333-121465) of Sepracor Inc. of our report dated March 16, 2006, relating to the financial statements, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 16, 2006 relating to the financial statement schedule, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
March 16, 2006

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Exhibit 23.1

EX-31.1

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Exhibit 31.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy J. Barberich, certify that:

1.

I have reviewed this annual report on Form 10-K of Sepracor Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2006

/s/  TIMOTHY J. BARBERICH Timothy J. Barberich
Chairman and Chief Executive Officer

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Exhibit 31.1

EX-31.2

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Exhibit 31.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David P. Southwell, certify that:

1.

I have reviewed this annual report on Form 10-K of Sepracor Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2006

/s/  DAVID P. SOUTHWELL David P. Southwell
Executive Vice President and Chief Financial Officer

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Exhibit 31.2

EX-32.1

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the annual report on Form 10-K of Sepracor Inc. (the "Company") for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Timothy J. Barberich, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

        (1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

        Dated: March 16, 2006

/s/  TIMOTHY J. BARBERICH Timothy J. Barberich
Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Sepracor Inc. and will be retained by Sepracor Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Exhibit 32.1

EX-32.2

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Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the annual report on Form 10-K of Sepracor Inc. (the "Company") for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, David P. Southwell, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

        (1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

        Dated: March 16, 2006

/s/  DAVID P. SOUTHWELL David P. Southwell
Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Sepracor Inc. and will be retained by Sepracor Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Exhibit 32.2