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

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

There is more than just valuation that appealed to Dainippon in this deal. They are anxious to add to their pipeline of central nervous system drugs and Sepracor does have some exciting potential in the drugs currently in clinical trials. Furthermore, Dainippon has an eye towards the established U.S. sales force of Sepracor, which is more than 1,000 strong. The Japanese drug maker is seeking approval from the FDA for its lurasidone schizophrenia treatment, making its first major effort in the U.S. market. If it is approved, sales of lurasidone should begin by 2011 and the drug has the potential to be a blockbuster.

Drug maker stocks can be volatile, as the results of trials often lead to huge swings in the stock’s price. However, Sepracor was one drug stock that we through meet our criteria for a great value stock with potential for appreciation. It was selling very cheaply and has been exceeding expectations for sales and earnings over the last two quarters. In addition, it still has a steady stream of revenue coming from Lunesta, in addition to having great potential in their pipeline. We are not surprised that Dainippon would bid for this company, and it seems to pave the way for a push into the U.S. market.

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