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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended March 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

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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

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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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ý    No o

The number of shares outstanding of the registrant's class of Common Stock as of May 2, 2005 was: 104,767,808 shares.



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SEPRACOR INC.

INDEX



|Part IFinancial Information
|----------------------------
|Item 1.                     
|                            
|                            
|                            
|                            
|Item 2.                     
|Item 3.                     
|Item 4.                     
|Part IIOther Information   
|Item 1.                     
|Item 6.                     
|                            
|                            

2

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SEPRACOR INC.        CONSOLIDATED BALANCE SHEETS        (Unaudited)        (In Thousands)

|                                                                                                                                                                                                      |  | March 31, 2005 |            | December 31, 2004 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ----------------- | -
|Assets                                                                                                                                                                                                |  |                |            |                   |  
|Current assets:                                                                                                                                                                                       |  |                |            |                   |  
|Cash and cash equivalents                                                                                                                                                                             |  | $              | 175,262    |                   | $
|Short-term investments                                                                                                                                                                                |  |                | 490,411    |                   |  
|Accounts receivable, net                                                                                                                                                                              |  |                | 62,257     |                   |  
|Inventories                                                                                                                                                                                           |  |                | 15,948     |                   |  
|Other assets                                                                                                                                                                                          |  |                | 21,244     |                   |  
|                                                                                                                                                                                                      |  |                |            |                   |  
|Total current assets                                                                                                                                                                                  |  |                | 765,122    |                   |  
|Long-term investments                                                                                                                                                                                 |  |                | 106,416    |                   |  
|Property and equipment, net                                                                                                                                                                           |  |                | 70,267     |                   |  
|Investment in affiliate                                                                                                                                                                               |  |                | 5,367      |                   |  
|Patents and deferred financing costs, net                                                                                                                                                             |  |                | 25,979     |                   |  
|Other assets                                                                                                                                                                                          |  |                | 1,054      |                   |  
|                                                                                                                                                                                                      |  |                |            |                   |  
|Total assets                                                                                                                                                                                          |  | $              | 974,205    |                   | $
|                                                                                                                                                                                                      |  |                |            |                   |  
|Liabilities and Stockholders' Equity (Deficit)                                                                                                                                                        |  |                |            |                   |  
|Current liabilities:                                                                                                                                                                                  |  |                |            |                   |  
|Accounts payable                                                                                                                                                                                      |  | $              | 4,674      |                   | $
|Accrued expenses                                                                                                                                                                                      |  |                | 86,307     |                   |  
|Current portion of notes payable and capital lease obligation                                                                                                                                         |  |                | 1,926      |                   |  
|Other current liabilities                                                                                                                                                                             |  |                | 66,832     |                   |  
|                                                                                                                                                                                                      |  |                |            |                   |  
|Total current liabilities                                                                                                                                                                             |  |                | 159,739    |                   |  
|Notes payable and capital lease obligation                                                                                                                                                            |  |                | 2,026      |                   |  
|Other long-term liabilities                                                                                                                                                                           |  |                | 2,802      |                   |  
|Convertible subordinated debt                                                                                                                                                                         |  |                | 1,160,820  |                   |  
|                                                                                                                                                                                                      |  |                |            |                   |  
|Total liabilities                                                                                                                                                                                     |  |                | 1,325,387  |                   |  
|Stockholders' equity (deficit):                                                                                                                                                                       |  |                |            |                   |  
|Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at March 31, 2005 and December 31, 2004                                                                                   |  |                |           |                   |  
|Common stock, $.10 par value, 240,000 and 240,000 shares authorized; 105,600 and 105,309 shares issued, 103,666 and 103,376 shares outstanding, at March 31, 2005 and December 31, 2004,
respectively |  |                | 10,560     |                   |  
|Treasury stock, at cost (1,934 and 1,933 shares at March 31, 2005 and December 31, 2004, respectively)                                                                                                |  |                | (100,400   | )                 |  
|Additional paid-in capital                                                                                                                                                                            |  |                | 1,374,495  |                   |  
|Accumulated deficit                                                                                                                                                                                   |  |                | (1,648,059 | )                 |  
|Accumulated other comprehensive income                                                                                                                                                                |  |                | 12,222     |                   |  
|                                                                                                                                                                                                      |  |                |            |                   |  
|Total stockholders' equity (deficit)                                                                                                                                                                  |  |                | (351,182   | )                 |  
|                                                                                                                                                                                                      |  |                |            |                   |  
|Total liabilities and stockholders' equity (deficit)                                                                                                                                                  |  | $              | 974,205    |                   | $
|                                                                                                                                                                                                      |  |                |            |                   |  

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

3

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SEPRACOR INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)        (In Thousands, Except Per Share Amounts)

|                                                                      |                                             | Three Months Ended       |  
|--------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | -
|
|Revenues:                                                             |                                             |                          |  
|                                                                      | Product sales                               |                          | $
|                                                                      | Royalties and other                         |                          |  
|                                                                      |                                             |                          |  
|                                                                      |                                             | Total revenues           |  
|                                                                      |                                             |                          |  
|Costs and expenses:                                                   |                                             |                          |  
|                                                                      | Cost of product sold                        |                          |  
|                                                                      | Cost of royalties and other                 |                          |  
|                                                                      | Research and development                    |                          |  
|                                                                      | Selling, marketing and distribution         |                          |  
|                                                                      | General and administrative                  |                          |  
|                                                                      |                                             |                          |  
|                                                                      |                                             | Total costs and expenses |  
|                                                                      |                                             |                          |  
|                                                                      | Loss from operations                        |                          |  
|Other income (expense):                                               |                                             |                          |  
|                                                                      | Interest income                             |                          |  
|                                                                      | Interest expense                            |                          |  
|                                                                      | Loss on redemption of debt                  |                          |  
|                                                                      | Equity in investee (losses)                 |                          |  
|                                                                      | Other income (expense), net                 |                          |  
|                                                                      |                                             |                          |  
|                                                                      | Net loss                                    |                          | $
|                                                                      |                                             |                          |  
|                                                                      | Basic and diluted net loss per common share |                          | $
|Shares used in computing basic and diluted net loss per common share: |                                             |                          |  
|                                                                      | Basic and diluted                           |                          |  

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

4

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SEPRACOR INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)        (In Thousands)

|                                                                            |                                                              | Three Months Ended |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------ | -
|
|Cash flows from operating activities:                                       |                                                              |                    |  
|                                                                            | Net loss                                                     |                    | $
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                              |                    |  
|                                                                            | Depreciation and amortization                                |                    |  
|                                                                            | Equity in investee losses                                    |                    |  
|                                                                            | Loss on redemption of debt                                   |                    |  
|Changes in operating assets and liabilities:                                |                                                              |                    |  
|                                                                            | Accounts receivable                                          |                    |  
|                                                                            | Inventories                                                  |                    |  
|                                                                            | Other current assets                                         |                    |  
|                                                                            | Accounts payable                                             |                    |  
|                                                                            | Accrued expenses                                             |                    |  
|                                                                            | Other current liabilities                                    |                    |  
|                                                                            | Other liabilities                                            |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net cash used in operating activities                        |                    |  
|                                                                            |                                                              |                    |  
|Cash flows from investing activities:                                       |                                                              |                    |  
|                                                                            | Purchases of short and long-term investments                 |                    |  
|                                                                            | Sales and maturities of short and long-term investments      |                    |  
|                                                                            | Additions to property and equipment                          |                    |  
|                                                                            | Investment in ACADIA                                         |                    |  
|                                                                            | Change in other assets                                       |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net cash (used in) provided by investing activities          |                    |  
|                                                                            |                                                              |                    |  
|Cash flows from financing activities:                                       |                                                              |                    |  
|                                                                            | Redemption of convertible subordinated notes                 |                    |  
|                                                                            | Net proceeds from issuance of common stock                   |                    |  
|                                                                            | Proceeds from sale of convertible subordinated debt          |                    |  
|                                                                            | Costs associated with sale of convertible subordinated debt  |                    |  
|                                                                            | Repayments of long-term debt and capital leases              |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net cash provided by (used in) financing activities          |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Effect of exchange rate changes on cash and cash equivalents |                    |  
|                                                                            |                                                              |                    |  
|                                                                            | Net decrease in cash and cash equivalents                    |                    |  
|                                                                            | Cash and cash equivalents at beginning of period             |                    | $
|                                                                            |                                                              |                    |  
|                                                                            | Cash and cash equivalents at end of period                   |                    | $
|                                                                            |                                                              |                    |  
|Non cash activities:                                                        |                                                              |                    |  
|                                                                            | Additions to capital leases                                  |                    |  

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

5

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited financial
statements. Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The year-end consolidated condensed balance
sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The consolidated interim financial statements, in
the opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended March 31, 2005
and 2004.

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

The
consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated interim
financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004, which are contained in our annual report on
Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission, or SEC.

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

2. Recent Accounting Pronouncements

In 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 No. 151, in an effort to conform U.S. accounting standards for inventories to International Accounting
Standards. SFAS No. 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 No. 151 will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 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", which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principal Board Opinion No. 25, "Accounting for Stock Issued to Employees", or APB 25. 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. 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. The SEC recently approved a rule delaying the implementations of SFAS No. 123(R) until the first annual reporting period that begins after June 15,
2005. 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

6

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in
the first fiscal quarter of 2006. We expect the adoption of SFAS No. 123(R) to have a material adverse impact on our results of operations and net income per share. We are currently in the
process of evaluating the extent of such impact. We do not anticipate early adoption of SFAS No. 123(R) and are currently evaluating whether we will implement SFAS No. 123(R)
prospectively or whether we will restate prior periods.

In
December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary Assetsan amendment of APB Opinion
No. 29." The amendments made by SFAS No. 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 No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the
adoption of SFAS No. 153 to have a material impact on our financial condition or our results of operations.

3. Basic and Diluted Net Loss Per Common Share

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

For
the three months ended March 31, 2005 and 2004, 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 common stock equivalents would be anti-dilutive. Certain securities were not included in the computation of diluted earnings per share for the three
months ended March 31, 2005 and 2004 because they would have an anti-dilutive effect due to net losses for such periods. These excluded securities include the following:



(in thousands, except price per share data)

March 31, 2005

March 31, 2004Number of options


13,048


13,987Price range per share

$
5.00 to $87.50

$
2.63 to $87.50


7

---





(in thousands)

March 31, 2005

March 31, 20045% convertible subordinated debentures due 2007

4,763

4,7630% Series A convertible senior subordinated notes due 2008

2,283

7,8390% Series B convertible senior subordinated notes due 2010

4,961

16,75612,007

29,358


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

4. Accounting for Stock-Based Compensation

We have elected to follow APB 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for our stock-based compensation plans,
rather than the alternative fair value accounting method provided for under 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 loss and loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation:

Three Months Ended
March 31,(in thousands, except per share data)2005

2004Net loss attributable to common stockholders

$
(22,573
)
$
(50,441
)Total stock-based employee compensation expense determined under fair value based method for all awards


(11,853
)

(11,038
)Pro forma net loss

$
(34,426
)
$
(61,479
)Amounts per common share:Basic and dilutedas reported

$
(0.22
)
$
(0.59
)Basic and dilutedpro forma

$
(0.33
)
$
(0.72
)


8

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5. Inventories

Inventories consist of the following:

(in thousands)

March 31, 2005

December 31, 2004Raw materials

$
3,735

$
3,905Work in progress


212


292Finished goods


12,001


8,889$
15,948

$
13,086


We
expense costs relating to inventory until such time as we receive an approval letter from the United States Food and Drug Administration, or FDA, for a new product, and then we begin
to capitalize the inventory costs relating to that product. As a result of this policy, we capitalized $1,735,000 of LUNESTA brand eszopiclone inventory during the first quarter of 2005.

6. Patents and Deferred Financing Costs

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

(in thousands)

March 31, 2005

December 31, 2004Deferred finance costs, gross

$
34,440

$
34,440Accumulated amortization


(12,103
)

(11,200
)Deferred finance costs, net

$
22,337

$
23,240Patents, gross

$
6,439

$
6,439Accumulated amortization


(2,797
)

(2,644
)Patents, net

$
3,642

$
3,795


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

Three Months
Ended March 31,(in thousands)2005

2004Amortization of deferred finance costs

$
903

$
1,380Amortization of patents


153


174Total

$
1,056

$
1,554


We
currently estimate that our amortization expense will be $3,167,000, $4,201,000, $2,564,000, $2,208,000 and $1,807,000 for the remainder of 2005 and for the years ending
December 31, 2006, 2007, 2008 and 2009, respectively.

9

---





7. Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

(in thousands)

March 31, 2005

December 31, 20045% convertible subordinated debentures due 2007

$
440,000

$
440,0000% Series A convertible senior subordinated notes due 2008


72,800


72,8000% Series B convertible senior subordinated notes due 2010


148,020


148,0200% convertible senior subordinated notes due 2024


500,000


500,000Total

$
1,160,820

$
1,160,820


8. Equity

In December 2003, we used approximately $94,820,000 of the proceeds from the issuance of the 0% Series A convertible senior subordinated notes due
2008 and 0% Series B convertible senior subordinated notes due 2010 to purchase call spread options on our common stock. 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. We
recorded the full amount of the call spread option settlements as an increase to additional paid-in capital. Our remaining outstanding call spread options expire at various dates through
2005 and we have the option to settle the remaining outstanding call spread options in either net shares or in cash. We currently expect to settle these call spread options for cash, although the
amount we receive upon settlement, if any, will vary based on the price of our common stock on the option expiration dates. Proceeds from a cash settlement of these options are calculated based on the
difference between our stock price and the option price if our stock price is below the cap price or the difference between the cap price and the option price if our stock price exceeds the cap price.
Any cash received in settlement of the remaining call spread options will be recorded as additional paid-in capital.

The
following table sets forth the potential proceeds from our remaining call spread options if settled in cash using the closing price of our common stock on May 2, 2005 of
$59.73:

|Expiration period                          |  | Number of Options |  | Option
Price |       | Cap
Price |   | Proceeds
|------------------------------------------ |  | ----------------- |  | ------------ | ----- | --------- | - | --------
|May 12, 2005 through June 9, 2005          |  | 4,919,496         |  | $            | 29.84 |           | $ | 55.00   
|November 11, 2005 through December 9, 2005 |  | 4,919,496         |  | $            | 29.84 |           | $ | 65.00   
|                                           |  |                   |  |              |       |           |   |         
|Total                                      |  | 9,838,992         |  |              |       |           |   |         
|                                           |  |                   |  |              |       |           |   |         

10

---



9. Comprehensive Loss

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

Three Months Ended(in thousands)

March 31, 2005

March 31, 2004Comprehensive loss:Net loss

$
(22,573
)
$
(50,441
)Net foreign currency translation adjustment


(82
)

820Net unrealized gain (loss) on available-for-sale securities


(1,485
)

3,769Total comprehensive loss

$
(24,140
)
$
(45,852
)


10. Commitments and Contingencies

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
defects in our products, (2) negligence in the manufacture or distribution of the products or (3) a material breach by us. We have no liabilities recorded for these guarantees at
March 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.

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 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 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. We filed a motion to dismiss both consolidated amended complaints on
May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did allow much of the case to proceed. The parties are currently engaged in discovery. We are
unable to reasonably estimate any possible range of loss related to these 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 condition and business.

11

---



11. Investment in ACADIA Pharmaceuticals

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 towards 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 includes an option to select a preclinical program from ACADIA's 5-HT2A program for use in combination with LUNESTA. 5-HT2A antagonists
have been shown in clinical studies to affect sleep architecture in humans. Under the collaboration agreement, we and ACADIA 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. We will
have exclusive worldwide rights to develop and commercialize compounds developed under our collaboration with ACADIA.

In
connection with the collaboration, we purchased 1,077,029 shares of ACADIA common stock for an aggregate purchase price of $10,000,000 based on a per share price of approximately
$9.2848, which represents a 40 percent premium to the average closing price for the 30 trading days prior to the signing of the agreement. 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 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, subject to certain conditions. During the three-year research term of the 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.

12

---





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

Cautionary Statement Regarding Forward-Looking Statements

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

Executive Overview

We are a research-based pharmaceutical company focused on 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 two products: XOPENEX® (levalbuterol HCl) Unit Dose Vial, or UDV, Inhalation Solution, a short-acting bronchodilator, for the treatment or
prevention of bronchospasm in patients with reversible obstructive airway disease, such as asthma, and LUNESTA (eszopiclone), for the treatment of insomnia. On March 11, 2005, we
received an approval letter from the United States Food and Drug Administration, or FDA for our
New Drug Application, or NDA, for XOPENEX HFA (levalbuterol tartrate) Inhalation Aerosol, a hydrofluoroalkane, or HFA, metered-dose inhaler, or MDI.

We
market and sell XOPENEX UDV and LUNESTA directly through our sales force and we expect to market and sell XOPENEX HFA MDI, if commercialized, through our sales force. We have entered
into out-licensing arrangements with respect to several other compounds. We expect to commercialize products that we successfully develop through our sales force, through
co-promotion agreements and through out-licensing partnerships.

Significant 2005 Developments

On April 7, 2005, we announced the commercial availability of LUNESTA brand eszopiclone for the treatment of insomnia. On December 15, 2004, we
received an approval letter from the FDA for our NDA for LUNESTA 1 mg, 2 mg and 3 mg tablets for the treatment of insomnia. The recommended dosing to improve sleep onset and/or maintenance is 2 mg or
3 mg for adult patients (ages 18 to 64). In older adult patients (ages 65 and older), 2 mg is recommended for improvement in sleep onset and/or maintenance while the 1 mg dose is recommended for sleep
onset in older adult patients whose primary complaint is difficulty falling asleep. We capitalized $1,735,000 of LUNESTA inventory during the first quarter of 2005.

On
March 11, 2005, we received an approval letter from the FDA for our XOPENEX HFA MDI. On May 12, 2004, we submitted our NDA to the FDA for XOPENEX HFA MDI for the
treatment or prevention of bronchospasm in adults, adolescents and children 4 years of age and older with reversible obstructive airway disease. MDIs are hand-held, pressurized
canisters that deliver inhaled medications directly to the lungs. We are working to resolve outstanding manufacturing issues and to complete

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process
validation work. Contingent upon successful resolution of these issues, we are targeting commercial launch of the product around the end of 2005. Under our supply agreement with Minnesota
Mining and Manufacture Company, or 3M, and 3M Innovative Properties Company, 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 MDI. If we are unable to resolve manufacturing issues or complete process validation for XOPENEX HFA MDI, then commercialization of this product candidate could be
delayed or terminated, which would have a material adverse effect on our business.

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 towards 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 includes an option to select a preclinical program from ACADIA's 5-HT2A program for use in combination with LUNESTA.
5-HT2A antagonists have been shown in clinical studies to affect sleep architecture in humans. Under the collaboration agreement, we and ACADIA 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. We will have exclusive worldwide rights to develop and commercialize compounds developed under our collaboration with ACADIA.

In
connection with the collaboration, we purchased 1,077,029 shares of ACADIA common stock for an aggregate purchase price of $10,000,000 based on a per share price of approximately
$9.2848, which represents a 40 percent premium to the average closing price for the 30 trading days prior to the signing of the agreement. 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 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, subject to certain conditions. During the three-year research term of the 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.

Critical Accounting Policies

We identified critical accounting policies in our annual report on Form 10-K for the year ended December 31, 2004. These critical
accounting policies relate to product revenue recognition, royalty revenue recognition, rebate and return reserves, patents, intangibles and other assets, accounts receivable and bad debt, income
taxes, induced conversion of debt and inventory write-downs. These policies require us to make estimates in the preparation of our financial statements as of a given date. Because of the uncertainty
inherent in these matters, our actual results could differ from the estimates

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we
use in applying the critical accounting policies. No changes to these critical accounting policies have taken place since December 31, 2004.

Three Month Periods ended March 31, 2005 and 2004

Revenues

Product sales were $106,648,000 and $85,056,000 for the three months ended March 31, 2005 and 2004, respectively, an increase of approximately 25%. The
sales increase for XOPENEX UDV for the three months ended March 31, 2005 as compared with the same period in 2004 is due to unit volume growth of 12% and a 13% increase in the net selling price
per unit. The 12% increase in unit volume sales is a result of increased market growth and a slightly higher market share, particularly in the non-retail market sector. The unit growth
rates are consistent with growth rates over the past three fiscal quarters and, we believe, commensurate with where XOPENEX UDV is in its product life cycle. The 13% increase in the net selling price
per unit is due to a gross unit price increase of approximately 8% and a decrease in sales rebates and allowances of approximately 4%. 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, in the home healthcare sector of our business. Favorable
Medicare reimbursement has resulted in a decrease in the rebates we pay to home healthcare providers. We cannot be certain whether, or for how long, this favorable reimbursement rate will remain in
effect.

Royalties
were $12,397,000 and $14,422,000 for the three months ended March 31, 2005 and 2004, respectively, a decrease of approximately 14%. The decrease for the three months
ended March 31, 2005 as compared with the same period in 2004 is primarily due to a decrease in the combined royalties earned on sales of CLARINEX® under our agreement with
Schering-Plough Corporation, and on sales of ALLEGRA® under our agreement with sanofi-aventis, which were in the aggregate $11,618,000 for the three months ended March 31, 2005 as
compared with $12,958,000 for the three months ended March 31, 2004. We believe the decrease in royalty revenue earned from ALLEGRA and CLARINEX is due to decreased sales volume resulting from
the availability of other allergy drugs without a prescription. We expect this trend will continue and that it will continue to adversely affect our royalties earned from ALLEGRA and CLARINEX. In
addition, MedPointe-related revenue, which consists primarily of revenue related to the fair value of services performed pursuant to our agreement with MedPointe for the co-promotion of
ASTELIN® brand azelastine HCl, decreased to $0 for the three months ended March 31, 2005 as compared with $902,000 for the same period in 2004. This decrease was the result of our
termination, effective October 1, 2004, of our co-promotion agreement with MedPointe. Offsetting these decreases is an increase in royalties earned on sales of
XYZAL®/XUSAL under our agreement with UCB Farchim SA, which were $780,000 during the three months ended March 31, 2005 as compared with $344,000 for the same period in
2004.

Costs of Revenues

Cost of products sold was $10,037,000 and $8,860,000 for the three months ended March 31, 2005 and 2004, respectively. Cost of products sold as a
percentage of product sales decreased to 9% for the three months ended March 31, 2005 as compared to 10% for the same period in 2004 due to a lower manufacturing cost per unit which resulted
from an increase in the number of units of XOPENEX UDV produced in the three months ended March 31, 2005 as compared with the same period in 2004.

Cost
of royalties earned was $203,000 and $240,000 for the three months ended March 31, 2005 and 2004, respectively. The cost of royalties in both periods relates to an obligation
to a third-party as a result of royalties we received from Schering-Plough Corporation based upon its sales of CLARINEX.

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Research and Development

Research and development expenses were $28,569,000 and $37,296,000 for the three months ended March 31, 2005 and 2004, respectively, a decrease of
approximately 23%. The decrease in the three months ended March 31, 2005 as compared with the same period in 2004 is primarily due to our decreased spending on three of our
late-stage programs, LUNESTA, XOPENEX HFA MDI and arformoterol, and one of our discontinued programs, (S)-oxybutynin. We commercially launched LUNESTA on April 4, 2005, however we
continue to spend on Phase IIIB/IV studies under our LUNESTA program. We submitted an NDA for XOPENEX HFA MDI to the FDA in May 2004 and on March 11, 2005 we received an approval letter
from the FDA for the NDA. We have completed Phase III clinical trials for arformoterol and are currently preparing an NDA that we anticipate submitting to the FDA in the second half of 2005. We have
elected not to fund the (S)-oxybutynin clinical program at this time. Our decreased spending in these programs was partially offset by our increased spending on three of our early-stage programs,
SEP-226330, (S)-amlodipine and SEP-225289.

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 IND, which, if successful, allows
the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study: Phase I, II and III. The most significant costs in
clinical development are in the 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. As further discussed below, we currently have one product
candidate in NDA preparation stage. The
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 the 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 "Factors Affecting Future Operating Results".

Below
is a summary of development of our product candidates that represent 10% or more of our direct project research and development spending for the three months ended March 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 for the three months ended March 31, 2005, and the two product candidates listed accounted for approximately 69% of our direct project research and
development spending for the three months ended March 31, 2005. No other product candidate accounted for more than 6% of our direct research and development spending for the three months ended
March 31, 2005.

|Product Candidate |  | Indication         |  | Stage of
Development |  | Estimate of
Completion of Stage |  
|----------------- |  | ------------------ |  | -------------------- |  | ------------------------------- | -
|XOPENEX HFA MDI   |  | RespiratoryAsthma |  | *                    |  |                                 | *
|Arformoterol      |  | RespiratoryCOPD   |  | NDA Preparation      |  | 2005                            |  

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Below
is a summary of expenditure information related to our product candidates representing 10% or more of our direct project research and development spending during the three months
ended March 31, 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 benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not presented.

|(in thousands)  |  | Project costs for
the three
months ended
March 31, 2005 |       | Project costs to
date through
March 31, 2005 |   | Project costs for
the three
months ended
March 31, 2004 |  | Project costs to
date through
March 31, 2004
|--------------- |  | ------------------------------------------------------- | ----- | -------------------------------------------- | - | ------------------------------------------------------- |  | --------------------------------------------
|XOPENEX HFA MDI |  | $                                                       | 5,246 |                                              | $ | 137,943                                                 |  | $                                           
|Arformoterol    |  |                                                         | 3,796 |                                              |   | 147,315                                                 |  |                                             

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. We estimate that the cost range to bring
arformoterol from its current state to an NDA submission is $11,000,000 to $13,000,000 based on a targeted NDA submission during the second half of 2005, provided that no significant delays are
imposed by internal resource constraints or unanticipated FDA requirements.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $93,172,000 and $84,434,000 for the three months ended March 31, 2005 and 2004, respectively, an increase
of approximately 10%. Included in the three months ended March 31, 2004 is an accrual for $30,671,000, which represents the then-current value of the termination payments totaling
$33,000,000 that we will make to the Ross Products Division of Abbott Laboratories, or Ross. The increase for the three months ended March 31, 2005 as compared with the same period in 2004 is
primarily due to increases in salary, commission, travel and benefit costs as a result of having approximately 800 more sales representatives in the three months ended March 31, 2005 as
compared to the same period in 2004 in anticipation of the commercial launch of LUNESTA, which took place in April 2005. Additionally, we incurred increased sales commission expense paid to
internal sales representatives as a result of the 25% increase in XOPENEX UDV product sales for the three months ended March 31, 2005 as compared with the same period in 2004. Offsetting these
increases was a decrease in sales commission expense paid to Ross for the co-promotion of XOPENEX UDV, since we terminated our co-promotion agreement with Ross effective
December 31, 2004.

General and Administrative

General and administrative costs were $8,481,000 and $7,034,000 for the three months ended March 31, 2005 and 2004, respectively, an increase of
approximately 21%. The increase for the three months ended March 31, 2005 as compared with the same period in 2004 is primarily due to payroll and related expenses resulting from an increase in
permanent and temporary employees and contracted service providers hired to support the commercialization of LUNESTA.

Other Income (Expense)

Interest income was $5,248,000 and $1,255,000 for the three months ended March 31, 2005 and 2004, respectively. The increase for the three months ended
March 31, 2005 as compared with the same period in 2004 is due primarily 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.

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Interest
expense was $5,842,000 and $6,124,000 for the three months ended March 31, 2005 and 2004, respectively. The decrease for the three months ended March 31, 2005 as
compared with the same period in 2004 is due to lower outstanding average balances on our interest-bearing debt. The average outstanding balance on our interest-bearing debt for the first quarter of
2005 was $440,000,000 as compared to the average outstanding balance in the first quarter of 2004 of approximately $655,000,000.

Loss
on redemption of debt was $0 and $7,022,000 for the three months ended March 31, 2005 and 2004, respectively. The loss in the three months ended March 31, 2004
resulted from our redemption of the remaining outstanding $430,000,000 face value of our 5.75% convertible subordinated notes due 2006 for aggregate cash consideration of $430,000,000, excluding
accrued interest. The loss represents the write-off of $7,022,000 of deferred financing costs related to the debentures.

Equity
in investee (losses) were ($168,000) and ($147,000) for the three months ended March 31, 2005 and 2004, respectively. The loss for the three-month periods ended
March 31, 2005 and 2004 represents our portion of BioSphere losses.

Liquidity and Capital Resources

Cash, cash equivalents and short- and long-term investments totaled $772,089,000 at March 31, 2005, compared to $833,912,000 at
December 31, 2004.

The
net cash used in operating activities for the three months ended March 31, 2005 was $61,251,000. The net cash used in operating activities includes a net loss of $22,573,000
adjusted by non-cash charges of $4,424,000, which consists primarily of depreciation and
amortization expense. Accounts receivable decreased by $6,657,000 due primarily to the decreased sales of XOPENEX UDV during March 2005 as compared to December 2004 due to customary
seasonal fluctuations. Inventory increased by $2,862,000 due primarily to the capitalization of LUNESTA inventory in the first quarter of 2005. Accounts payable decreased by $1,098,000 primarily due
to timing of vendor payments. Accrued expenses decreased by $40,394,000 primarily due to decreases in sales and marketing and research and development related accruals, which are the result of
decreased spending in these areas in the first quarter of 2005 as compared to the fourth quarter of 2004. A significant component of our decreased spending in sales and marketing is the result of the
termination of our co-promotion agreement with Ross effective December 31, 2004. This resulted in a decrease in accrued sales and marketing expenses of $19,537,000 at
March 31, 2005 as compared to December 31, 2004. Other current liabilities decreased by $2,879,000 primarily due to a reduction in accruals for product revenue rebates related to XOPENEX
UDV revenues.

The
net cash used in investing activities for the three months ended March 31, 2005 was $202,988,000. Cash used in net purchases of short- and long-term investments
was $193,209,000. We made purchases of property and equipment of $2,636,000. We also used $7,143,000 to purchase 1,077,029 shares of ACADIA common stock in connection with our collaboration agreement
with ACADIA.

The
net cash provided by financing activities for the three months ended March 31, 2005 was $3,611,000. We received proceeds of $4,074,000 from the issuance of common stock upon
the exercise of stock options issued under our stock option plans. We also used $463,000 to repay capital lease obligations and long-term debt.

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We believe our existing cash and the anticipated cash flow from our current strategic alliances and operations will be sufficient to support existing operations through 2006. In the
longer term, we expect 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:



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, if 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 revenue
generated from sales of XOPENEX UDV and LUNESTA do not meet expected levels, it is likely that we would be required to raise additional funds in order 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.

Off-Balance Sheet Arrangements

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

Contractual Obligations

Our contractual obligations disclosure in our annual report on Form 10-K for the year ended December 31, 2004 has not materially changed
since we filed that report.

Factors Affecting Future Operating Results

Certain of the information contained in this report, including information with respect to the safety, efficacy and potential benefits of our drugs under
development, expectations with respect to the timing and success of development and commercialization of our products and product candidates, the timing and success of the submission, acceptance and
approval of regulatory filings, the scope and duration of patent protection with respect to our products and product candidates and information with respect to the other plans and strategies for our
business and the business of our subsidiaries and certain of our affiliates, consists of forward-looking statements. The forward-looking statements contained in this report represent our expectations
as of the date of this report. Subsequent events will

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cause
our expectations to change. However, while we may elect to update these forward-looking statements, we specifically disclaim any intention or obligation to do so. Important factors that could
cause actual results to differ materially from the forward-looking statements include the following:

We have never been profitable and we may not be able to generate revenues sufficient to achieve profitability.

We have not been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses on a consolidated basis of
approximately $22.6 million for the three months ended March 31, 2005 and $295.7 million for the year ended December 31, 2004. We expect to continue to incur significant
operating and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues or
that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the
future. 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.

If we or our development partners fail to successfully develop our principal product candidates, we will be unable to commercialize the product candidates and our ability to
become profitable will be adversely affected.

Our ability to achieve profitability will depend in large part on successful development and commercialization of our principal products under development and
successful commercialization of our existing products. If we fail to successfully commercialize any of our products or products under development, our business may be materially adversely affected.
Before we commercialize any product
candidate, we will need to successfully develop the product candidate by completing successful clinical trials, submit an NDA for the product candidate that is accepted by the FDA and receive 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:



Our
success significantly depends on our continued ability to develop and market new products. We cannot assure you that we will be able to develop and 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. 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

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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 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 MDI 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. On March 11, 2005, we received an approval letter from
the FDA for our NDA for XOPENEX HFA MDI. 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.

We may be unable to commercialize products for which we receive an approval letter from the FDA upon receipt of such letter.

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 or manufacturing 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, or the time during which
the FDA will prevent generic pharmaceuticals from introducing a generic copy of the product, begins to run upon receipt of approval from the FDA and, therefore, to the extent we are unable to
commercialize a product upon receipt of an approval letter, our long-term product sales and revenues could be adversely affected.

On
March 11, 2005, we received an approval letter from the FDA for our XOPENEX HFA MDI. We are working to resolve outstanding manufacturing issues and to complete process
validation work. Contingent upon successful resolution of these issues, we are targeting commercial launch of the product around the end of 2005. However, we cannot be certain that we will be able to
resolve these issues and we have not yet manufactured sufficient quantities of the product to begin commercial sales. If we are unable to resolve manufacturing issues or complete process validation,
we will be unable to bring the product to market. Any delays in the commercialization of XOPENEX HFA MDI, or any other product for which we may receive an approval letter from the FDA in the future,
may materially adversely affect our reputation, financial position and results of operations.

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

We have entered into collaboration arrangements pursuant to which we license patents to pharmaceutical companies and our revenues under these collaboration
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 collaboration partners in
countries where we hold patents, including sales efforts and the maintenance and protection of patents, which we cannot control. If any of our collaboration partners does not devote sufficient time
and resources to its collaboration 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 collaboration 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 collaboration agreement could decrease or cease. If we are unable or fail to perform, or breach
in our performance of, our obligations under a collaboration agreement, the royalties and benefits to which we are otherwise entitled under the agreement could be reduced or extinguished. 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
collaboration partners and/or revenue from product sales, if any, could be delayed, reduced or terminated.

The approval of the 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 the 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 ALLEGRA and CLARINEX, for which we receive royalties on sales, has been and may continue to be adversely affected. We expect revenues from royalties earned on both
CLARINEX and ALLEGRA to decrease slightly in 2005 due to the continued adverse impact on sales of these prescription allergy drugs resulting from the availability of competitor allergy drugs without a
prescription.

We will be required to expend significant resources for research, development, testing and regulatory approval of our drugs under development and these drugs may not be
developed successfully.

We develop and commercialize proprietary products for the primary care and specialty markets. Most of our drug candidates are still undergoing clinical trials or
are in the early stages of development. Our drugs may not provide greater benefits or fewer side effects than other drugs used to treat the same condition and our research efforts may not lead to the
discovery of new drugs with benefits over existing treatments or development of new therapies. All of our drugs under development will require significant additional research, development, preclinical
and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:



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Sales of XOPENEX UDV represent a majority of our revenues; if sales of XOPENEX UDV and LUNESTA do not continue to increase and we are unable to successfully commercialize other
products, we may not have sufficient revenues to achieve our business plan and our business will not be successful.

All of our revenues from product sales for the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002 resulted from
sales of XOPENEX UDV. Although, in April 2005 we commercially launched LUNESTA, we expect that sales of XOPENEX UDV will continue to represent a major portion at least over the next several
quarters. In addition, we are introducing LUNESTA as a new product in a competitive market. We cannot be certain that LUNESTA will achieve commercial success. In addition, we do not have
long-term sales contracts with our customers, and we rely on purchase orders for sales of XOPENEX UDV and LUNESTA. Reductions, delays or cancellations of orders for XOPENEX UDV or LUNESTA
could adversely affect our operating results. If sales of XOPENEX UDV and LUNESTA do not continue to increase, we may not have sufficient revenues to achieve our business plan and our business will
not be successful. On March 11, 2005, we received an approval letter from the FDA for XOPENEX HFA MDI. However, we do not expect to commercialize XOPENEX HFA MDI until around the end of 2005.
If we are unable to commercialize XOPENEX HFA MDI successfully, our revenues from XOPENEX UDV and LUNESTA sales may not be sufficient for us to achieve our business plan and our business and financial
position may be materially adversely affected.

XOPENEX
UDV competes primarily against generic albuterol in the asthma market. XOPENEX UDV is more expensive than generic albuterol. We must continue to demonstrate to physicians and
other healthcare professionals that the benefits of XOPENEX UDV justify the higher price. If XOPENEX UDV does not continue to compete successfully against competitive products, our business will not
be successful.

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 in the U.S., and private insurance plans. There have been, there are, and we expect there will continue to be, a number of state and Federal proposals that could limit
the amount that state or Federal governments will pay to reimburse the cost of pharmaceutical and biologic products. The Medicare Prescription Drug Improvement and Modernization Act of 2003, or the
MMA, was signed into law in December 2003. 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 impact our business. In addition, we believe that 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, we believe the increasing
emphasis on managed care in the U.S. has and will continue to put pressure on the price and usage of our products, which may adversely impact product sales. Further, when a new drug product is
approved, the availability of governmental and/or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed. We cannot predict the availability or
amount of reimbursement for our approved

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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 added 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, the Federal government may acquire the ability to negotiate price and demand discounts from pharmaceutical and biotechnology companies 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, 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.

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 the use of our products or cause us to reduce the price of our products.

If we fail to adequately protect or enforce our intellectual property rights, then we could lose revenue under our collaboration agreements or lose sales to generic versions 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 similar or competitive products. In the absence of patent and trade
secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products and technology. 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 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. 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 recently has been the subject of much litigation. Legal
standards relating to the scope and validity of patent claims are evolving. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United
States Patent and Trademark Office may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent
applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business.

Should
a generic drug company submit an Abbreviated New Drug Application to the FDA seeking approval of a generic version of XOPENEX UDV, we would expect to enforce patents against the

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generic
drug company. However, the resulting patent litigation would 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 UDV. Introduction of a generic copy of XOPENEX UDV before the expiration of our patents could have a material adverse effect on our business.

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 the 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 the 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 the 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.

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 the marketing and sale of pharmaceutical products developed by us or our development partners. These agencies
impose substantial requirements on the manufacture and marketing of drugs. Any unanticipated preclinical and clinical studies we are required to undertake could result in a significant increase in the
funds we will require to advance our products to commercialization. In addition, the 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 the commercial
introduction of, or our ability to market and sell, our products.

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:



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

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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.

The 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. The inability to enter into collaboration agreements could delay or preclude the 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
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 the expiration or earlier termination of the notice and waiting period under the HSR Act. If the
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.

Our limited sales and marketing experience may restrict our success 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 UDV, LUNESTA and XOPENEX HFA MDI. 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 the marketing and sale of LUNESTA. 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 personnel in the pharmaceutical industry and
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 where our own direct sales force is neither well situated nor large enough
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.

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If we do not maintain current Good Manufacturing Practices, then the FDA could refuse to approve marketing applications.

We do not have the capability to manufacture in sufficient quantities all of the products that may be approved for sale, and developing and obtaining this
capability will be time consuming and expensive. The FDA and other regulatory authorities require that our products be manufactured according to their Good Manufacturing Practices regulations. The
failure by us, our collaborative development partners or third-party manufacturers to maintain current Good Manufacturing Practices compliance and/or our failure to scale up our manufacturing
processes could lead to 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 UDV product line, XOPENEX Inhalation Solution Concentrate (1.25mg/0.5mL), which we had introduced in August 2004. The recall, which affects only XOPENEX Concentrate and no other
components of our XOPENEX UDV product line, was necessitated by packaging process validation issues relating to the automated process of placing the finished vials into a foil pouch. We have suspended
manufacture and sale of XOPENEX Concentrate until the issues giving rise to the recall have been fully addressed. We do not expect to re-introduce XOPENEX Concentrate before the fourth
quarter of 2005. If our manufacturer cannot remedy the Good Manufacturing Practices deficiencies giving rise to the recall of XOPENEX Concentrate, or if these or similar deficiencies are found to
extend to other components or our XOPENEX UDV product line, our ability to supply product to the market may be limited or interrupted indefinitely, which would have a material adverse effect on our
business.

Failure
to increase our manufacturing capabilities may mean that even if we develop promising new products, we may not be able to produce them. We currently operate a manufacturing
plant, which is compliant with current Good Manufacturing Practices, that we believe can produce commercial quantities of the active pharmaceutical ingredient for XOPENEX UDV and LUNESTA and support
the production of our product candidates in amounts needed for our clinical trials. However, we will
not have the capability to manufacture in sufficient commercial quantities all of the products that may be approved for sale. Accordingly, we will be required to spend money to expand our current
manufacturing facility, build an additional manufacturing facility or contract the production of these drugs to third-party manufacturers.

Our reliance on third-party manufacturers could adversely affect our ability to meet our customers' demands.

Cardinal Health, Inc. is currently the sole finished goods manufacturer of our XOPENEX UDV Inhalation Solution, Patheon Inc. is the sole
manufacturer of LUNESTA brand eszopiclone and 3M will be the sole manufacturer and supplier of XOPENEX HFA MDI. If Cardinal Health, Patheon or 3M experiences delays or difficulties in producing,
packaging or delivering XOPENEX UDV, LUNESTA, or XOPENEX HFA MDI, 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 UDV, LUNESTA or XOPENEX
HFA MDI 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 MDI. If 3M is unable or unwilling to fulfill its obligations to us under our agreement, we may be unable to
manufacture XOPENEX HFA MDI on terms that are acceptable to us, if at all. Our other current

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contract
manufacturers, as well as any future contract manufacturers, may also independently own technology related to the manufacture of our compounds. 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.

If we or our collaboration partners fail to obtain an adequate level of reimbursement for our existing or future products or services by third-party payors, there may be no
commercially viable markets for our products or services.

The availability and amounts of reimbursement by governmental and other third-party payors affects the market for any pharmaceutical product or service. These
third-party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. In certain foreign countries, including the
countries of the European Union, the pricing of
prescription pharmaceuticals is subject to governmental control. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount.

In
both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system. The potential effect on our business
of these changes is not yet clear. Further regulatory and legislative proposals are likely. The recent changes, and the potential for adoption of the additional proposals, may affect our ability to
raise capital, obtain additional collaboration partners and market our products. We expect to experience pricing pressure for our existing products and any future products for which marketing approval
is obtained due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

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

We may be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of human health care products. These claims
could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability claims could require us to spend significant time and money in
litigation or to pay significant damages. 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.

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 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:



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If
our past or present operations are found to be in violation of any of the laws described above or the 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 the Medicare and Medicaid programs and the 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, and additional legal or regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses, divert our management's attention from the operation of 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, and under amendments of that law that became
effective in 1993. Under the Medicaid rebate program, we pay a rebate for each unit of our product reimbursed by Medicaid, and 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

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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 and could damage our reputation.

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

As of March 31, 2005, our total long-term debt excluding the current portion was approximately $1.2 billion and our stockholders' equity
(deficit) was ($351.2) million. None of the 5% debentures due 2007, the 0% Series A notes due 2008, the 0% Series B notes due 2010 nor the 0% notes due 2024 restricts our ability or our
subsidiaries' ability to incur additional indebtedness, including debt that ranks senior to the notes. The 0% notes due 2024 are senior to the Series A notes due 2008 and Series B notes
due 2010, which are senior to the 5% debentures due 2007. Additional indebtedness that we incur may in certain circumstances rank senior to or on parity with the notes. Our ability to satisfy our
obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. The conversion prices for the 5% debentures due 2007, 0% Series A
notes due 2008 and 0% Series B notes due 2010 are $92.38, $31.89 and $29.84, respectively. On May 2, 2005, the closing sale price of our common stock was $59.73. If the market price for
our common stock does not exceed the conversion price, the holders of our outstanding convertible debt may not convert their securities into common stock. Our 0% notes due 2024 are convertible into
cash and, if applicable, shares of our common stock at a conversion price of approximately $67.20, at the option of the holders under certain circumstances. We may not be able to make the required
cash payments upon conversion of the 0% notes due 2024.

Historically,
we have had negative cash flow from operations. For the three months ended March 31, 2005, net cash used in operating activities was approximately
$61.3 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 are able to generate sufficient operating cash flow to service 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 XOPENEX UDV and LUNESTA do not meet expected levels, it is likely that we would be required to raise
additional funds in order 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.

Our exchanges of debt into shares of common stock would result in additional dilution.

As of March 31, 2005, we had approximately $1.2 billion of outstanding convertible 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 the proceeds from the issuance of convertible debt to fund the 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.

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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 be correct. For example, our royalty revenue is recognized based upon our estimates of our collaboration partners' sales during
the period and, if these sales estimates are greater than the actual sales that occur during the period, our net income would be reduced. This, in turn, could adversely affect our stock price.

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

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit of regulatory approvals,
license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically, we have satisfied our funding needs through collaboration arrangements with
corporate partners 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:



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

Developments by others may render our products or technologies obsolete or noncompetitive. We expect to encounter intense competition in the sale of our current
and future products. If we are unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may use our financial resources to
seek to differentiate ourselves from our competition and because we may not achieve our product revenue objectives. Many of our competitors and potential competitors, which include pharmaceutical
companies, biotechnology firms, universities and other research institutions, have substantially greater resources, manufacturing 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

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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.

XOPENEX
UDV and generic albuterol account for the majority of beta-agonist inhalation solution prescriptions. Albuterol has existed for many years, is well established and
sells at prices substantially less than XOPENEX UDV. To continue to be successful in the marketing of XOPENEX UDV, we must continue to demonstrate that the efficacy and safety features of the drug
outweigh its higher cost. In the sleep disorder market, we face intense competition from established products, such as AMBIEN® and SONATA®. There are also other potentially
competitive therapies that are in late-stage clinical development for the treatment of insomnia.

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 common stock 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. We filed a motion to dismiss both consolidated amended complaints on May 27, 2003. On March 11, 2004, the court, while granting in part
the motion to dismiss, did allow much of the case to proceed. The parties are currently engaged in discovery.

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

Fluctuations in the demand for products, the success and timing of collaboration arrangements and regulatory approval, any termination of development efforts, expenses and the
results of operations of our subsidiaries 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:



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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:



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 market place 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.

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Our diluted earnings per share may decrease in the future because we are now required to include the shares issuable upon conversion of our 0% notes due 2024 in our diluted
earnings per share calculation.

Because of our adoption of a recent accounting pronouncement, we are required to include in our diluted earnings per share calculation shares that are
contingently issuable upon conversion of a debt instrument, regardless of whether or not the contingency for issuance has been met. This recent accounting pronouncement superseded a prior
pronouncement that allowed such contingently issuable shares to be excluded from the diluted earnings per share calculation. Our 0% notes due 2024, unlike our other series of convertible debt, are
convertible into common stock only if certain conditions are met and, therefore, we had not previously included the shares issuable upon conversion of such notes in our diluted earnings per share
calculation. The inclusion of such contingently convertible shares in our diluted earnings per share calculation has had no effect on our current or prior period diluted earnings per share. However,
the inclusion of shares contingently issuable upon conversion of our 0% notes due 2024, may reduce our diluted earnings per share in future periods.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risk from changes in interest rates and equity prices, which could affect our future results of operations and financial condition. These
risks are described in our annual report on Form 10-K for the year ended December 31, 2004. As of May 6, 2005, there have been no material changes to the market risks
described in our annual report on Form 10-K for the year ended December 31, 2004. Additionally, we do not anticipate any near-term changes in the nature of our
market risk exposures or in our management's objectives and strategies with respect to managing such exposures.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2005. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls
and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2005,
our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during our quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II  OTHER INFORMATION

ITEM 1. 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 Exchange Act 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. We filed a motion to dismiss both consolidated
amended complaints on May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did allow much of the case to proceed. 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 condition and business.

ITEMS 25. NONE

ITEM 6. EXHIBITS

|         |  |                                                                                                                                                   
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 (1) |  | License, Option and Collaboration Agreement, dated as of January 10, 2005, by and between ACADIA Pharmaceuticals, Inc. and the Registrant.        
|10.2 (1) |  | Common Stock Purchase Agreement, dated January 10, 2005, by and between ACADIA Pharmaceuticals, Inc. and the Registrant.                          
|10.3 (2) |  | Summary of the Registrant's 2004 Bonus Plan.                                                                                                      
|10.4 (2) |  | Summary of the Registrant's 2005 Bonus Plan.                                                                                                      
|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.

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SIGNATURES

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

|                   |  | Sepracor Inc.
|------------------ |  | -------------
|Date: May 10, 2005 |  | By:          
|Date: May 10, 2005 |  | By:          

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 (1)    |  | License, Option and Collaboration Agreement, dated as of January 10, 2005, by and between ACADIA Pharmaceuticals, Inc. and the Registrant.        
|10.2 (1)    |  | Common Stock Purchase Agreement, dated January 10, 2005, by and between ACADIA Pharmaceuticals, Inc. and the Registrant.                          
|10.3 (2)    |  | Summary of the Registrant's 2004 Bonus Plan.                                                                                                      
|10.4 (2)    |  | Summary of the Registrant's 2005 Bonus Plan.                                                                                                      
|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.

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38

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