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Make Some $$$s From Your Lack Of ZZZs

Posted: Mar 09, 2009 13:16 PM by Will Ashworth

Tickers in this Article: RX, SNY, SEPR, TEVA, COV, KG

According to the latest edition of Advertising Age, sales of prescription sleeping pills and antidepressants are way up due to the recession. With ever-growing financial insecurities, it seems consumers can't get enough of them. As an investor, the companies that manufacture these drugs present buying opportunities. And here's why.

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Drug Companies
According to IMS Health (NYSE:RX), in 2008, sales of major sleeping pill brands and antidepressant brands increased 7% and 15%, respectively. Moreover, the National Sleep Foundation reports that 31% of Americans are having trouble sleeping due to the economy. With demand up, but the economy down, pharmaceutical companies have had to reduce marketing expenditures, allowing them to generate greater profits on the sale of these products. Sanofi-Aventis (NYSE:SNY), maker of Ambien CR, spent $150 million to market the sleep aid in 2008 - a reduction of $40 million, or 21%, from 2007. Sepracor (Nasdaq:SEPR), maker of Lunesta, spent $107 million on marketing in 2008, a whopping $164 million, or 61%, less than it spent in 2007. And Takeda Pharmaceuticals-owned Rozerem cut its 2008 marketing expenditures to $40 million, down from $140 million a year earlier.

Pure Play
If you're interested in pure play, Sepracor is the way to go. Lunesta's fourth quarter and full-year numbers are interesting. Its revenues in 2008 were down marginally to $600.3 million from $600.9 million in 2007. If investors look at that figure alone, they move on. But the fourth quarter number tells a different story entirely. In Q4 2008, its sales were up $12.1 million to $161.9 million, or 8% year-over-year, which is quite a feat in this economy. For the entire year, Lunesta's sales accounted for 46% of Sepracor's total revenues, which explains why the company is looking to expand the uses for Lunesta beyond insomnia. Unfortunately, Sepracor's clinical trial of the drug's ability to reduce anxiety symptoms in patients did not produce tangible results. Therefore, the company is evaluating whether it should continue developing new uses for the drug.

As a whole, Sepracor had a good year, generating $167.4 million in operating income, up 21% from $138.5 million in 2007. More importantly, cost savings, including reduced marketing expenditures, improved the company's operating margin 170 basis points to 13%. In 2009, it is looking to cut expenses by an additional $190 million and expects non-GAAP EPS to fall between $2.10 and $2.70 per share, an increase of 50% from 2008. On the revenue side, Sepracor management expects sales to drop by approximately 7% to between $1.15 billion and $1.25 billion. In addition, it expects some generic competition for Lunesta from Teva Pharmaceuticals (Nasdaq:TEVA) and Cobalt Laboratories, both of which are filing abbreviated new drug applications with the U.S. Food and Drug Administration in February. Sepracor could take legal action, but no decision has been made yet. (To learn more about investing in companies such as this, read Measuring The Medicine Makers.)

Indirect Play
For those looking for less risk, pharmaceutical giant Sanofi-Aventis manufactures three sleep aids: Ambien CR and Ambien IR, which are sold in the U.S., and Myslee, the leading seller in Japan. In the fourth quarter, the three drugs delivered $255.9 million in sales and $985.5 million for all of 2008. What looks like a lot of pills gets brought into perspective when you consider that the company's revenues in 2008 totaled $34.8 billion worldwide. Specifically, Sanofi-Aventis's sleep aids contributed a mere 2.8% to its overall revenue. Its adjusted net income in 2008, excluding impairment charges related to the acquisition of Aventis, totaled $9.1 billion, or seven times Sepracor's total revenue. If you need a large cap pharmaceutical company in your portfolio, Sanofi-Aventis wouldn't be a bad call. Other players in the sleep aid market include Covidien's (NYSE:COV) Restoril, Japanese pharmaceutical giant Takeda Pharmaceutical's Rozerem and King Pharmaceutical's (NYSE:KG) Sonata.

Bottom Line
With the exception of King Pharmaceuticals, I'd have no problem owning any of these companies. For those interested in dividends, Sanofi-Aventis's annual payment of $1.62 should help you sleep a little easier.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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