-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZlYV5vCw1ZyQG83tpFdXpAJiktulUGWBT0MdtKZcnD2GVKpUGO4ngm3wBQ9GwiN afqehogTA9uW42mxshh2Wg== 0001104659-07-038248.txt : 20070510 0001104659-07-038248.hdr.sgml : 20070510 20070510154209 ACCESSION NUMBER: 0001104659-07-038248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070510 DATE AS OF CHANGE: 20070510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEPRACOR INC /DE/ CENTRAL INDEX KEY: 0000877357 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222536587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19410 FILM NUMBER: 07837509 BUSINESS ADDRESS: STREET 1: 84 WATERFORD DRIVE CITY: MARLBOROUGH STATE: MA ZIP: 01757 BUSINESS PHONE: 5084816700 MAIL ADDRESS: STREET 1: 84 WATERFORD DRIVE CITY: MARLBOROUGH STATE: MA ZIP: 01752 10-Q 1 a07-11008_110q.htm 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2007

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

For the transition period from to

Commission file number 0-19410

Sepracor Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

The number of shares outstanding of the registrant’s class of Common Stock as of April 30, 2007 was: 106,431,299 shares.

SEPRACOR INC.

INDEX

Part I—Financial Information
Item 1.	Condensed Consolidated Interim Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (Unaudited)	5
	Notes to Condensed Consolidated Interim Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
Part II—Other Information		25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	27
Item 6.	Exhibits	47
	Signatures	48
	Exhibit Index

SEPRACOR INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)

	March 31, 2007			December 31, 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	187,744		$	415,411
Short-term investments	379,356			568,037
Accounts receivable, net	198,333			175,103
Inventories	34,122			37,087
Other assets	50,663			25,390
Total current assets	850,218			1,221,028
Long-term investments	263,177			182,876
Property and equipment, net	78,499			72,811
Investment in affiliate	4,954			5,107
Deferred financing costs and patents, net	10,554			11,881
Other assets	83			90
Total assets	$	1,207,485		$	1,493,793
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	27,277		$	10,751
Accrued expenses	164,041			113,099
Current portion of notes payable and capital lease obligation	1,468			385
Current portion of convertible subordinated debt	—			440,000
Other current liabilities	148,823			115,877
Total current liabilities	341,609			680,112
Notes payable and capital lease obligation	2,743			693
Convertible subordinated debt	720,820			720,820
Total liabilities	1,065,172			1,401,625
Stockholders’ equity:
Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at March 31, 2007 and December 31, 2006	—			—
Common stock, $.10 par value, 240,000 shares authorized at March 31, 2007 and December 31, 2006, respectively; 110,534 and 110,040 shares issued, 106,273 and 105,779 shares outstanding, at March 31, 2007 and December 31, 2006, respectively	11,053			11,004
Treasury stock, at cost (4,261 shares at March 31, 2007 and December 31, 2006)	(232,028		)	(232,028		)
Additional paid-in capital	1,804,399			1,788,417
Accumulated deficit	(1,455,516		)	(1,478,065		)
Accumulated other comprehensive income	14,405			2,840
Total stockholders’ equity	142,313			92,168
Total liabilities and stockholders’ equity	$	1,207,485		$	1,493,793

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

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

	Three Months Ended
	March 31, 2007			March 31, 2006
Revenues:
Product sales	$	321,297		$	277,505
Royalties	10,137			8,173
Total revenues	331,434			285,678
Costs and expenses:
Cost of product sold	31,352			25,533
Cost of royalties	266			159
Research and development	40,702			49,269
Selling, marketing and distribution	192,118			189,991
General and administrative	18,892			14,508
Litigation settlement (net)	34,000			—
Total costs and expenses	317,330			279,460
Income from operations	14,104			6,218
Other income (expense):
Interest income	12,602			9,794
Interest expense	(2,757		)	(5,551		)
Equity in investee losses	(272		)	(258		)
Other income (expense)	272			(56		)
Income before income taxes	23,949			10,147
Income taxes	1,400			111
Net income after income taxes	$	22,549		$	10,036
Basic net income per common share	$	0.21		$	0.10
Diluted net income per common share	$	0.19		$	0.09
Shares used in computing basic and diluted net income per common share:
Basic	105,980			104,292
Diluted	117,050			115,470

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

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

	Three Months Ended
	March 31, 2007			March 31, 2006
Cash flows from operating activities:
Net income	$	22,549		$	10,036
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,779			4,968
Equity in investee losses	272			258
Stock compensation	8,772			10,048
Changes in operating assets and liabilities:
Accounts receivable	(23,230		)	(10,137		)
Inventories	3,004			(3,836		)
Other current assets	(25,238		)	(10,976		)
Accounts payable	16,515			15,138
Accrued expenses	50,936			(71,196		)
Other current liabilities	32,946			28,130
Net cash provided by (used in) operating activities	92,305			(27,567		)
Cash flows from investing activities:
Purchases of short and long-term investments	(284,226		)	(333,674		)
Sales and maturities of short and long-term investments	403,632			310,825
Additions to property and equipment	(6,498		)	(5,833		)
Investment in non-affiliate	—			(8,939		)
Net cash provided by (used in) investing activities	112,908			(37,621		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	7,258			6,987
Repayments of long-term debt and capital leases	(440,093		)	(588		)
Net cash provided by (used in) financing activities	(432,835		)	6,399
Effect of exchange rate changes on cash and cash equivalents	(45		)	(20		)
Net decrease in cash and cash equivalents	(227,667		)	(58,809		)
Cash and cash equivalents at beginning of period	$	415,411		$	178,144
Cash and cash equivalents at end of period	$	187,744		$	119,335
Supplemental schedule of cash flow information:
Cash paid during the period for interest	$	11,004		$	11,019
Cash paid during the period for income taxes	$	1,411		$	25
Non cash activities:
Additions to capital leases	$	3,260		$	—

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

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying condensed consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited financial statements. Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The 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, 2007 and 2006.

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

The consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2006, which are contained in our annual report on Form 10-K for the year ended December 31, 2006, 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 February 2007, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS 159, which allows entities the option to measure eligible financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 159 to have a material impact on our consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. FIN 48 clarifies the application of SFAS No. 109, “Accounting for Income Taxes,” by providing detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Tax positions must meet a more likely than not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We adopted FIN 48 during the quarter ended March 31, 2007. As noted in footnote 10 below, the adoption of FIN 48 did not have a material impact on our consolidated financial statements or results of operations.

3. Basic and Diluted Earnings Per Common Share

Basic earnings per share, or EPS, excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average potential common shares during the period. Potential common shares result from the assumed conversion of 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. Potential common shares are not included in the per share calculation when the effect of their inclusion would be anti-dilutive.

For the three months ended March 31, 2007 and 2006, the following securities were excluded from the computation of diluted EPS because they would have had an anti-dilutive effect. These securities include the following:

a. Options to purchase shares of common stock:

	Three Months Ended March 31, 2007		Three Months Ended March 31, 2006
	(in thousands, except price per share data)
Number of options	6,188		7,853
Price range per share	$	44.78 to $87.50	$	44.15 to $87.50

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

	March 31, 2007		March 31, 2006
	(in thousands)
5% convertible subordinated debentures due 2007		—		4,763
Total		—		4,763

We have issued 0% convertible subordinated notes due 2024, which were not convertible into equity as of March 31, 2007 or 2006 or at any time during the three months ended March 31, 2007 or 2006. Once these notes become convertible into equity, shares of common stock will be reserved under the conversion formula for issuance upon conversion if and when our common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to such occurrence, the notes are only convertible into cash.

4. Inventories

Inventories consist of the following:

	March 31, 2007			December 31, 2006
	(in thousands)
Raw materials		$	22,106		$	21,611
Finished goods		12,016			15,476
Total		$	34,122		$	37,087

5. Deferred Financing and Patents Costs

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

	March 31, 2007			December 31, 2006
	(in thousands)
Deferred financing costs, gross	$	20,407			$	34,440
Accumulated amortization	(10,458		)		(23,215		)
Deferred financing costs, net	$	9,949			$	11,225
Patents, gross	$	2,259			$	2,259
Accumulated amortization	(1,654		)		(1,603		)
Patents, net	$	605			$	656

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

	Three Months Ended
	March 31, 2007			March 31, 2006
	(in thousands)
Amortization of deferred financing costs		$	1,276		$	1,435
Amortization of patents		51			56
Total		$	1,327		$	1,491

6. Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

	March 31, 2007		December 31, 2006
	(in thousands)
5% convertible subordinated debentures due February 2007	$	—		$	440,000
0% Series A convertible senior subordinated notes due December 2008	72,800			72,800
0% Series B convertible senior subordinated notes due December 2010	148,020			148,020
0% convertible senior subordinated notes due October 2024	500,000			500,000
Total	$	720,820		$	1,160,820

7. Comprehensive Income

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

	Three Months Ended
	March 31, 2007			March 31, 2006
	(in thousands)
Comprehensive income:
Net income		$	22,549		$	10,036
Net foreign currency translation adjustment		53			(41		)
Unrealized gain on available-for-sale securities		11,512			10,806
Total comprehensive income		$	34,114		$	20,801

8. Legal Proceedings

Tecastemizole Class Action Complaints

On April 20, 2007, we entered into a Memorandum of Understanding, or MOU, regarding the settlement of two securities class action lawsuits, or class actions, pending in the United States District Court for the District of Massachusetts, or the Court, naming Sepracor and certain of our current and former officers and one director as defendants. As previously disclosed, the class actions, which were filed on behalf of certain purchasers of our equity and debt securities, or the plaintiffs, allege that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the United States Food and Drug Administration, or FDA.

Under the terms of the MOU, which outlines certain elements of a settlement that will require the execution by all parties of definitive settlement agreement(s), notice to the plaintiffs and final approval by the Court, we have agreed with counsel for the lead plaintiffs to pay or cause to be paid $52.5 million in settlement of the class actions. Of this amount, we expect to pay $34.0 million, and we expect that our insurance carriers will pay the remaining $18.5 million. In consideration of this settlement payment, counsel for the lead plaintiffs has agreed that the settlement will include a dismissal of the class actions with prejudice and a release of claims by the plaintiffs.

The MOU contains no admission of wrongdoing. Sepracor and the other defendants have always maintained and continue to believe that we did not engage in any wrongdoing or otherwise commit any violation of Federal or state securities laws or other laws. However, given the potential cost and burden of continued litigation, we believe the settlement is in our best interests and the best interests of our stockholders.

We can provide no assurance that we will be able to settle these lawsuits on the terms described above or at all. We may not be able to agree on final settlement terms with lead counsel to the plaintiffs and, if we do, the Court may not approve the settlement, the plaintiffs may appeal or raise objections to the settlement and the insurers may not contribute to the settlement the amounts to which they have agreed. If we are unable to settle these lawsuits, we will need to continue to defend against them, which could have a material adverse effect on our financial condition and business. If these matters were concluded in a manner adverse to us, we could be required to pay substantially more in damages than the proposed settlement amount. 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.

Levalbuterol Hydrochloride Inhalation Solution Abbreviated New Drug Applications

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

In April 2006, we were notified of an ANDA seeking approval of a generic version of our 1.25 mg, 0.63 mg and 0.31 mg levalbuterol hydrochloride inhalation solution including a Paragraph IV certification, which was submitted to the FDA by Watson Laboratories, Inc. Watson’s Paragraph IV certification was limited to our patent that expires in 2021 and covers certain levalbuterol hydrochloride inhalation solutions, including XOPENEX Inhalation Solution. We have decided not to file a civil action against Watson Laboratories, Inc. for patent infringement at this time.

In August 2006, we received notification that the FDA had received an ANDA, including a Paragraph IV certification, from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL levalbuterol hydrochloride inhalation solution concentrate. We have filed a civil action against Dey, L.P. for patent infringement.

Should we successfully enforce our patents, ANDA approval will not occur until the expiration of the applicable patents. Otherwise, the FDA will stay its approval of the relevant ANDA until 30 months

following the date we received notice of such ANDA or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier.

Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of the lawsuit. If we are not successful in enforcing our patents, we will not be able to exclude the generic companies, for the full term of our patents, from marketing their generic version of XOPENEX Inhalation Solution. Introduction of a generic copy of XOPENEX Inhalation Solution before the expiration of our patents would have a material adverse effect on our business.

BROVANA Patent Infringement Claim

On April 5, 2007, we were served with a complaint filed by Dey, L.P. and Dey, Inc., referred to collectively as Dey, alleging that BROVANA™ (arformoterol tartrate) Inhalation Solution infringes or will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. We have filed an answer and counterclaim to this complaint, however it is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss related to this lawsuit due to its uncertain resolution.

Stock Option Inquiry and Derivative Stockholder Complaints

We announced in June 2006 that the SEC is conducting an informal inquiry into our stock option grants and stock option granting practices. A special committee of our outside directors, with the assistance of outside legal counsel and outside accounting specialists, reviewed the stock option grants to our officers, directors and employees from 1996 to June 2006 under our various stock option plans in effect during this period. Our finance department also reviewed the stock option grants and stock option practices from 1996 to June 2006. Their review resulted in the restatement of our financial statements for the quarters ended March 31, June 30 and September 30, 2005, the quarter ended March 31, 2006 and the years ended December 31, 2005, 2004 and 2003. Representatives from the U.S. Attorneys Office have been present at meetings that our outside counsel has had with the SEC. While the U.S. Attorneys Office has not initiated an investigation, we cannot be certain that it will not. In October 2006, the Internal Revenue Service, or IRS, commenced an audit into our 2005 and 2004 U.S. Federal income tax returns and has requested, among other things, certain information relating to our stock option grants and granting practices. The SEC and/or any other governmental agency that may initiate a formal investigation may reach different conclusions and, if so, we could be subject to monetary damages, fines and penalties, and our officers and/or directors could be prohibited from serving as officers and directors of any public company and could be subject to criminal penalties and disgorgement.

We have accepted service of three stockholder derivative complaints relating to certain of our stock option grants that were filed in the Superior Court, Middlesex County, Commonwealth of Massachusetts, naming Sepracor as nominal defendant and also naming as defendants certain current members of our board of directors and certain of our current and former employees. The complaints allege purported breaches of fiduciary duties and unjust enrichment in connection with certain stock option grants made by us between June 1998 and May 2001. The complaints seek monetary damages in unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the Court. On September 12, 2006, the three complaints were consolidated into one action, and on September 22, 2006, the action was transferred to the Business Litigation Session of the Superior Court, Suffolk County, Commonwealth of Massachusetts. On October 19, 2006, plaintiffs filed a consolidated complaint alleging breaches of fiduciary duty and unjust enrichment in connection with certain stock option grants we made between December 1995 and April 2003. On November 20, 2006, we moved to dismiss the Consolidated Amended Complaint and a hearing on the motion was held on March 20, 2007. No decision on this motion has been rendered at this time.

Three stockholder derivative complaints relating to the same subject matter were filed against Sepracor, certain current and former members of our board of directors and certain of our current and former employees in the United States District Court for the District of Massachusetts on September 28, 2006, October 3, 2006 and October 12, 2006. In addition to several common law theories alleging breaches of fiduciary duty and unjust enrichment, these complaints allege violations of Federal securities laws. On January 30, 2007, the Court consolidated the actions and a consolidated complaint was filed. On April 9, 2007, we moved to stay the Federal court lawsuit pending resolution of the state court motion to dismiss, and on May 4, 2007 the Court entered an order granting the motion and staying the Federal case.

We are unable to reasonably estimate any possible range of loss or liability associated with the stock option inquiry and/or derivative suits due to their uncertain resolution.

LUNESTA Trademark Claim

In September 2006, Tharos Laboratories, Inc. filed suit against us in the United States District Court, District of Utah, Central Division, alleging trademark infringement, dilution, unfair competition, false advertising and false designation of origin arising out of our use of our silk moth design in connection with LUNESTA® (eszopiclone). Tharos seeks unspecified monetary damages and an injunction of our use of the silk moth design. In October 2006, we filed a motion to dismiss Tharos’ claims. On February 9, 2007, the court granted our motion in respect of the state unfair competition claims and denied it in respect of Tharos’ other claims. We are unable to reasonably estimate any possible range of loss related to this lawsuit due to its uncertain resolution.

From time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a material adverse effect on our business or financial condition.

9. Commitments and Contingencies

In conjunction with the review of our stock option granting practices, we have also evaluated the related tax issues to determine if we may be subject to additional tax liability as a result of the matters under review. As a result of such charges, previously deducted compensation related to exercised stock options may be non-deductible under Section 162(m) of the Internal Revenue Code. Accordingly, our net operating loss carryforward, may be reduced; however, we have a full valuation allowance against our deferred tax assets and, as a result, do not expect any material impact on our financial position or results of operations. In addition, due to the revision of measurement dates, certain stock options that we previously treated as incentive stock options do not actually qualify for such treatment and must be treated as non-statutory stock options. Accordingly, we may be subject to fines and/or penalties relating to the tax treatment of such stock options. However, we do not believe it is probable that we will incur any material additional tax liability as a result of the matters under review and any such amount is not expected to have a material impact on our financial position or results of operations. The SEC and/or any other governmental agency that may initiate a formal investigation may reach different conclusions and, if so, we could be subject to monetary damages, fines and penalties, and our officers and/or directors could be prohibited from serving as officers and directors of any public company and could be subject to criminal penalties and disgorgement.

10. Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation

allowance is established if, based on management’s review of both positive and negative evidence, it is more likely than not that all or a portion of the deferred tax asset will not be realized. Our historical losses from operations represent significant negative evidence that indicates the need for a valuation allowance. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. If we determine, based on future profitability, that these deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax provisions in future periods.

We adopted FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on our consolidated financial statements or results of operations. We are currently in the process of conducting a study of our research and development credit carryforwards. This study may result in an adjustment to our research and development credit carryforwards. However, until the study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under FIN 48.

We file tax returns in the U.S. Federal jurisdiction and in various state, local and foreign jurisdictions. During the fourth quarter of 2006, the IRS commenced an audit of our 2005 and 2004 U.S. Federal income tax returns. We are no longer subject to IRS examination for years prior to 2004, although carryforward attributes that were generated prior to 2004 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. There are currently no state audits in progress. With limited exceptions, we are no longer subject to state or local examinations for years prior to 2003, however, carryforward attributes that were generated prior to 2003 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

The foreign jurisdictions where we currently file income tax returns are Canada and the Netherlands Antilles. We are currently under examination by Canada Revenue Agency, or CRA, for our Scientific Research and Experimental Development claims for the years ended December 31, 2003 and 2004. There are currently no examinations being conducted by the tax authorities in the Netherlands Antilles. With limited exceptions, we are no longer subject to examination in Canada and the Netherlands Antilles for years prior to 2003 and 1999, respectively, although carryforward attributes that were generated prior to these respective periods may still be adjusted upon examination if they either have been or will be used in a future period.

We recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. For the quarter ended March 31, 2007 we did not recognize any accrued interest and penalties in our consolidated statement of operations or our consolidated balance sheet.

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 “Risk Factors” below for a discussion of important factors that could cause our actual results to differ materially from the results we discuss in our forward-looking statements.

Executive Overview

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

We currently manufacture and sell four products:

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

· XOPENEX HFA® (levalbuterol tartrate) Inhalation Aerosol, a hydrofluoroalkane, or HFA, metered-dose inhaler, or MDI, for the treatment or prevention of bronchospasm in adults, adolescents and children four years of age and older with reversible obstructive airway disease;

· BROVANA™ (arformoterol tartrate) Inhalation Solution as a long-term, twice-daily maintenance treatment of bronchoconstriction in patients with chronic obstructive pulmonary disease, or COPD, including chronic bronchitis and emphysema;

· LUNESTA® (eszopiclone) for the treatment of insomnia.

We market and sell XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and LUNESTA directly through our sales force. We have entered into out-licensing arrangements with respect to several other compounds. We expect to commercialize any additional products that we may successfully develop or acquire through our sales force, through co-promotion agreements and/or through out-licensing partnerships.

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

· continue to increase our LUNESTA revenues, despite increasing competition;

· continue to increase our XOPENEX Inhalation Solution revenues by maintaining targeted sales and marketing efforts aimed at the retail, hospital and home health care market segments, which could be adversely affected by potential restrictions on Medicare Part B reimbursement or changes in the Medicare Part B reimbursement amount for XOPENEX Inhalation Solution;

· continue to increase our XOPENEX HFA revenues;

· successfully market and sell BROVANA;

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

· maintain patent protection for our products, particularly for XOPENEX Inhalation Solution for which three Abbreviated New Drug Applications, or ANDAs, have been submitted to the United States Food and Drug Administration, or FDA.

Our long-term success depends in part on our ability to successfully develop or acquire and commercialize new product candidates.

We expect that sales of LUNESTA and XOPENEX Inhalation Solution will represent the majority of our total revenues in 2007. We do not have long-term sales contracts with our customers and we rely on purchase orders for sales of our products. Reductions, delays or cancellations of orders for LUNESTA, XOPENEX Inhalation Solution or XOPENEX HFA could adversely affect our operating results. If sales of XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and LUNESTA do not meet our expectations, we may not have sufficient revenue to achieve our business plan and our business will not be successful.

In 2007, we expect to be profitable for the year on an operating and net income basis. We expect sales and marketing expenses to increase as compared to 2006 as we incur increasing sales commission and marketing costs related to anticipated product revenue growth. We expect to continue to invest in marketing programs related to LUNESTA, and marketing support for the BROVANA commercial introduction. We expect research and development expenses to increase as compared to 2006 as we continue to invest in research and development activities relating to studies for LUNESTA, for additional studies for BROVANA, and for continued development of our SEP-225289 and SEP-227162 drug candidates, as well as increased drug discovery efforts. As part of our business strategy, for 2007 and the future, we expect to consider and, as appropriate, consummate acquisitions of other technologies, product candidates, approved products and/or businesses.

Significant 2007 Developments

In April 2007, we announced the commercial availability of BROVANA (arformoterol tartrate) Inhalation Solution for the treatment of COPD. In October 2006, we announced that the FDA approved

BROVANA Inhalation Solution 15 micrograms (mcg) as a long-term, twice-daily (morning and evening), maintenance treatment of bronchoconstriction in patients with COPD including chronic bronchitis and emphysema. BROVANA is for use by nebulization only.

In March 2007, we announced that we received notice that Dey, L.P. and Dey, Inc., referred to collectively as Dey, had filed a patent infringement suit concerning BROVANA. On April 5, 2007, we were served with a complaint filed by Dey alleging that BROVANA infringes or will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. We have filed an answer and counterclaim to this complaint, however it is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss related to this lawsuit due to its uncertain resolution.

In March 2007, we announced that W. James O’Shea had resigned as our President and Chief Operating Officer and had been elected as Vice Chairman. In addition, we announced that, effective March 1, 2007, our board had elected Adrian Adams to the positions of President and Chief Operating Officer and Andrew I. Koven to the positions of Executive Vice President, General Counsel and Secretary. The board, upon the recommendation of the nominating and corporate governance committee, also elected Mr. Adams to the board of directors, as a Class II director. We expect that Mr. Adams will be elected to the position of Chief Executive Officer in the near future. Douglas E. Reedich, Senior Vice President, Legal Affairs, plans to leave Sepracor but will remain in this position for a short transition period to ensure an orderly transition in the handling of our legal matters.

In February 2007, we paid in full $440.0 million in aggregate principal amount of outstanding 5% convertible subordinated debentures, which matured on February 15, 2007, plus approximately $11.0 million in accrued interest.

Three Month Periods ended March 31, 2007 and 2006

Revenues

Product sales were $321.3 million and $277.5 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 16%.

Sales of LUNESTA were $148.3 million and $138.1 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 7%. The increase is primarily the result of a 10% increase in the gross selling price and a 2% increase in the number of units sold, offset by a higher rate of sales discounts and allowances. Adjustments recorded to gross sales are disclosed below under the heading “Analysis of gross sales to net sales.”

Sales of XOPENEX Inhalation Solution were $152.5 million and $134.1 million for the three months ended March 31, 2007 and 2006, an increase of approximately 14%. The increase is primarily due to a 10% increase in the number of units sold and a lower rate of sales discounts and allowances. Adjustments recorded to gross sales are disclosed below under the heading “Analysis of gross sales to net sales.”

Sales of XOPENEX HFA were $20.5 million and $5.3 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 283%. The increase is due to a lower rate of sales discounts and allowances and a 202% increase in the number of units sold. Adjustments recorded to gross sales are disclosed below under the heading “Analysis of gross sales to net sales.”

Analysis of gross sales to net sales—We record product sales net of the following significant categories of product sales allowances: payment term discounts, government rebates and contractual discounts, returns and other discounts. We recompute these amounts each quarter and, historically, our estimates have not materially differed from actual results. Calculating each of these items involves significant

estimates and judgments and requires us to use information from external sources. The following table presents the adjustments deducted from gross sales to arrive at total net sales:

	For the Three Months Ended March 31,
	2007		% of Sales		2006		% of Sales		$ Change			% Change
	(dollars in thousands)
Gross sales	$	411,786	100.0	%	$	340,415	100.0	%	$	71,371			21	%
Adjustments to gross sales:
Payment term discounts	8,225		2.0	%	6,885		2.0	%	1,340				19	%
Wholesaler fee-for-service	10,150		2.5	%	8,561		2.5	%	1,589				19	%
Government rebates and contractual discounts	65,887		16.0	%	40,192		11.8	%	25,695				64	%
Returns	5,119		1.2	%	6,282		1.9	%	(1,163		)		(19	)%
Other (includes product introduction discounts)	1,108		0.3	%	990		0.3	%	118				12	%
Sub-total adjustments	90,489		22.0	%	62,910		18.5	%	27,579				44	%
Net sales	$	321,297	78.0	%	$	277,505	81.5	%	$	43,792			16	%

The increase in adjustments to gross sales as a percentage of gross sales for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 primarily reflects an increase in government rebates and contractual discounts as a result of an increase in Medicaid discounts that we offered on the sales of XOPENEX HFA and discounts given through Medicare Part D and Managed Care programs that we offered on the sales of LUNESTA, partially offset by a reduction in chargebacks due to the termination of contractual discounts to a governmental agency related to the sale of XOPENEX HFA during the first quarter of 2007. Partially offsetting this increase in adjustments to gross sales as a percentage of gross sales was a decrease in sales returns adjustments primarily due to lower accrued return rates for XOPENEX Inhalation Solution as a result of actual returns trending lower over the past year.

A reserve has been established for Medicaid primary and supplemental rebates that is included in the government rebates and contractual adjustment to gross sales. We must pay a minimum primary rebate of 15.1% on all utilization of our products by Medicaid beneficiaries. This primary rebate may be higher if we provide discounts to commercial customers that are greater than the statutorily mandated minimum rebate. In addition, several state Medicaid programs have implemented preferred drug lists, or PDLs. Products placed on a state Medicaid program’s PDL are not subject to restrictions on their utilization such as prior authorization before use. To secure a place on a given state PDL, we provide discounts to the state Medicaid program in the form of supplemental rebates.

As reflected in the table above, the allowance for government rebates and discounts, which includes, among other things, Medicaid rebates and Medicare discounts, represents a significant portion of our sales allowances. Both the Federal and several state and local governments have initiated investigations and filed lawsuits concerning the rebate and discount practices of many pharmaceutical companies to ensure compliance with these programs, and we were recently named as a defendant, together with numerous other companies, in one such suit. The formulas for determining these rebates and discounts are set by law, are based on a number of different factors and can be complicated. We recompute these amounts each quarter based on our up-to-date knowledge of the statutory requirements and believe our calculations are accurate and based on reasonable assumptions and judgments. However, as a result of an investigation or lawsuit, we could be required to pay additional rebates and/or discounts on sales made in prior periods and/or be subject to fines and/or other penalties. In addition, even if decided in our favor, an investigation or lawsuit concerning our rebate and discount practices could be costly, could divert attention of our management from our core business and could harm our reputation.

Royalties were $10.1 million and $8.2 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 24%. The increase is primarily due to the increase in royalties earned on sales of CLARINEX®(desloratadine), under our agreement with Schering-Plough Corporation, or Schering-Plough, which were $3.3 million for the three months ended March 31, 2007 compared to $2.0 million for the same period in 2006. In August 2006, we were notified that several ANDAs containing Paragraph IV certifications had been received by the FDA seeking approval of generic versions of certain of Schering-Plough’s CLARINEX products. If and while a generic version of a CLARINEX product is marketed in the United States without Schering-Plough’s consent, Schering-Plough will have no obligation to pay royalties to us on the U.S. sales of CLARINEX products.

Royalties earned on the sales of ALLEGRA® (fexofenadine HCl), under our agreement with sanofi-aventis, increased slightly to $5.9 million for the three months ended March 31, 2007 compared to $5.4 million for the same period in 2006.

Royalties earned on sales of XYZAL®/XUSAL™ (levocetirizine) under our agreement with UCB, increased slightly to $954,000 for the three months ended March 31, 2007 as compared $753,000 for the same period in 2006.

Costs of Revenues

Cost of products sold was $31.4 million and $25.5 million for the three months ended March 31, 2007 and 2006, respectively.

Cost of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 6% for the three months ended March 31, 2007 and 2006, with the largest portion being the royalty paid on net sales of LUNESTA to a third party.

Cost of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 7% and 9% for the three months ended March 31, 2007 and 2006, respectively. The decrease in the cost as a percentage of gross sales is primarily due to an increase in our gross sales price, which occurred in the first quarter of 2006.

Cost of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 16% and 14% for the three months ended March 31, 2007 and 2006, respectively. Included in the costs of XOPENEX HFA sold is a royalty paid on net sales of XOPENEX HFA to Minnesota Mining and Manufacturing Company, or 3M, our third-party finished goods manufacturer of the product. The increase in the cost as a percentage of gross sales is primarily due to an increase in the cost of materials used in manufacturing.

Cost of royalties earned was $266,000 and $159,000 for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 67%. The cost of royalties in both periods relates to an obligation to a third party as a result of royalties we earn from Schering-Plough based on its sales of CLARINEX. This increase in third-party obligations is due to the increase in royalties earned in the three months ended March 31, 2007 as compared with the same period in 2006.

Research and Development

Research and development expenses were $40.7 million and $49.3 million for the three months ended March 31, 2007 and 2006, respectively, a decrease of approximately 17%. The decrease is primarily due to lower spending on our XOPENEX HFA MDI formulation and co-morbid Phase IV LUNESTA clinical development programs.

Drug development and approval in the United States is a multi-step process regulated by the FDA. The process begins with the filing of an investigational new drug application, or IND, which, if successful,

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

Successful development of our product candidates is highly uncertain. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. The lengthy process of seeking FDA approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or delay in obtaining, regulatory approvals could materially adversely affect our business. We cannot provide assurance that we will obtain any approval required by the FDA on a timely basis, if at all.

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

Below is a summary of development of our products and product candidates that represent approximately 10% or more of our direct project research and development spending for the three months ended March 31, 2007 or 2006. 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; however, there can be no assurance that the FDA will accept for filing, or approve, any NDA. The actual timing of completion of phases could differ materially from the estimates provided in the table. In the table below, the three FDA-approved products and the one product candidate listed accounted for approximately 66% of our direct project research and development spending for the three months ended March 31, 2007. No other product candidate accounted for more than 5% of our direct research and development spending in this period.

Product or Product Candidate

Indication

Phase of
Development

Estimate of
Completion of
Phase

LUNESTA (eszopiclone)

Insomnia

XOPENEX HFA (levalbuterol tartrate)

Respiratory—Asthma

BROVANA (arformoterol tartrate)

Respiratory—COPD

***

SEP-225289

Depression

Phase I

2007

* We commercially introduced LUNESTA in April 2005.

** We commercially introduced XOPENEX HFA in December 2005.

*** We commercially introduced BROVANA in April 2007.

Below is a summary of expenditure information related to our products and product candidates representing approximately 10% or more of our direct project research and development spending during the three months ended March 31, 2007 or 2006, 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, share-based compensation or other costs that benefit multiple projects. As a result, fully-loaded research and development cost summaries by project are not presented.

	Project costs for the three months ended March 31, 2007			Project costs to date through March 31, 2007			Project costs for the three months ended March 31, 2006			Project costs to date through March 31, 2006
	(in thousands)
LUNESTA (eszopiclone)		$	5,605		$	225,628		$	7,981		$	207,703
XOPENEX HFA (levalbuterol tartrate)		$	960		$	170,258		$	5,287		$	162,078
BROVANA (arformoterol tartrate)		$	3,526		$	177,457		$	3,643		$	165,221
SEP-225289		$	1,859		$	14,969		$	2,799		$	6,750

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

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $192.1 million and $190.0 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 1%. The increase is primarily attributable to a $19.9 million increase in personnel-related expense as a result of hiring

additional sales representatives and management in the second quarter of 2006 to support our marketed products, in addition to increased costs associated with our April 2007 commercialization of BROVANA. These increases were largely offset by a $20.4 million decrease in marketing, advertising and promotional expenses primarily related to costs to support LUNESTA.

General and Administrative

General and administrative costs were $18.9 million and $14.5 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 30%. The increase is primarily the result of increased legal fees largely related to patent and shareholder litigation, as well as expenses associated with responding to the Securities and Exchange Commission, or SEC’s, informal inquiry into our stock option practices and the related internal investigation and derivative lawsuits.

Litigation Settlement

Litigation settlement expense was $34.0 million and $0 for the three months ended March 31, 2007 and 2006, respectively. In April 2007, we entered into a MOU regarding the settlement of two class actions alleging that the we and certain of our current and former officers and one director violated the Federal securities laws by making false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the FDA. Under the terms of the MOU, which outlines certain elements of a settlement that will require the execution by all parties of definitive settlement agreement(s), notice to the plaintiffs and final approval by the Court, we have agreed with counsel for the lead plaintiffs to pay or cause to be paid $52.5 million in settlement of the class actions. Of this amount, we expect to pay $34.0 million, and expect that our insurance carriers will pay the remaining $18.5 million. In consideration of this settlement payment, counsel for the lead plaintiffs has agreed that the settlement will include a dismissal of the class actions with prejudice and a release of claims by the plaintiffs.

Other Income (Expense)

Interest income was $12.6 million and $9.8 million for the three months ended March 31, 2007 and 2006, respectively, an increase of approximately 29%. The increase is primarily due to higher interest rates earned on investments in 2007. For the three months ended March 31, 2007 and 2006, the average annualized interest rate that we earned on our investments was 5.26% and 4.13%, respectively.

Interest expense was $2.8 million and $5.6 million for the three months ended March 31, 2007 and 2006, respectively. The expense in both periods is primarily related to the interest we paid on our 5% convertible subordinated debentures, which we repaid in full upon their maturity on February 15, 2007.

Equity in investee losses were $272,000 and $258,000 for the three months ended March 31, 2007 and 2006, respectively. The loss represents our portion of BioSphere losses.

Income Taxes

Income tax expense was $1.4 million and $111,000 for the three months ended March 31, 2007 and 2006, respectively. The increase in income tax expense for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 is primarily due to U.S. Federal and state alternative minimum tax, or AMT, as a result of an increase in net income. Although we had Federal and state tax net operating loss carryforwards of approximately $1,197.3 million as of December 31, 2006, the utilization of these loss carryforwards is limited in the calculation of AMT. For the three months ended March 31, 2006, income tax expense includes state tax expense and foreign income tax expense. Our historical losses from operations continue to represent significant negative evidence that indicates the need for a valuation allowance. Accordingly, a valuation allowance has been established for the full amount of our deferred tax asset. If we determine, based on future profitability, that these deferred tax assets are more likely than not

to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax provisions in future periods.

Liquidity and Capital Resources

Our liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses, capital expenditures, working capital, debt service and general corporate expenses. Historically, we have funded these requirements and the growth of our business primarily through convertible subordinated debt offerings, the issuance of common stock, including the exercise of stock options, sales of our products and license agreements for our drug compounds. We now expect to fund our liquidity requirements primarily with revenue generated from product sales. We also believe we have the ability to meet our short-term liquidity needs through the use of our cash and short-term investments on hand at March 31, 2007.

Cash, cash equivalents and short- and long-term investments totaled $830.3 million, or 69% of total assets, at March 31, 2007, compared to $1.2 billion, or 78% of total assets, at December 31, 2006.

Net cash provided by operating activities for the three months ended March 31, 2007 was $92.3 million, which includes net income of $22.5 million. Our net income includes non-cash charges of $14.8 million, consisting primarily of share-based compensation and depreciation and amortization expense. Accounts receivable increased by $23.2 million primarily due to LUNESTA and XOPENEX Inhalation Solution sales. Inventory decreased by $3.0 million in an effort to reduce the number of days of inventory on hand. Other current assets increased by $25.3 million, which is primarily attributable to an increase in prepaid expenses and the insurance receivable resulting from the preliminary settlement of two class actions. Accounts payable increased by $16.5 million primarily due to timing of vendor payments. Accrued expenses increased by $50.9 million primarily due to the charge related to the preliminary settlement of two class actions and increased sales and marketing costs relating to the commercialization of BROVANA, off set by a decline in accrued interest as a result of the February 2007 payment in full of our 5% convertible subordinated debentures. Other current liabilities increased by $32.9 million primarily due to an increase in accruals for product revenue rebates related to XOPENEX and LUNESTA product sales.

Net cash provided by investing activities for the three months ended March 31, 2007 was $112.9 million, which is primarily attributable to cash provided by net sales of short- and long-term investments of $119.4 million offset by purchases of property and equipment of $6.5 million.

Net cash used in financing activities for the three months ended March 31, 2007 was $432.8 million. We received proceeds of $7.3 million from issuing common stock upon the exercise of stock options issued under our stock option plans and we used $440.1 million to repay capital lease obligations and long-term debt.

We believe our existing cash and the cash flow that we anticipate from operations and current strategic alliances will be sufficient to support existing operations through at least 2008. In the longer term, we expect to continue to fund our operations with revenue generated from product sales. Our actual future cash requirements and our ability to generate revenue, however, will depend on many factors, including:

· LUNESTA sales;

· XOPENEX Inhalation Solution and XOPENEX HFA sales;

· successful commercialization of BROVANA;

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

· successful expansion into foreign markets;

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

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

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

· achievement of milestones under our strategic alliance arrangements;

· royalties from agreements with parties to which we have licensed our technology; and

· the outcome of pending litigation and/or the informal SEC inquiry.

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 otherwise borrowing money. However, we may not be able to raise such funds on favorable terms, or at all.

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

Critical Accounting Policies and Estimates

We identified critical accounting policies and estimates in our annual report on Form 10-K for the year ended December 31, 2006. These critical accounting policies relate to product revenue recognition, royalty revenue recognition, rebate and return reserves, patents, intangibles and other assets, accounts receivable and bad debt, income taxes, induced conversion of debt, inventory write-downs and stock-based compensation. These policies require us to make estimates in the preparation of our financial statements as of a given date. Because of the uncertainty inherent in these matters, our actual results could differ from the estimates we use in applying the critical accounting policies.

A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006 in the “Critical Accounting Policies and Estimates” section. Other than as described below, our critical accounting policies and estimates are as set forth in the Form 10-K.

Product sales allowances and reserves—The following table summarizes activity in each of our product sales allowances and reserve categories for the three months ended March 31, 2007:

	Payment Terms Discount				Wholesaler Fee for Service				Government Rebates and Contractual Discounts				Returns			Other Discounts				Total
	(in thousands)
Balance at December 31, 2006		$	(4,351	)		$	(16,669	)		$	(74,249	)	$	(23,218	)		$	(1,511	)	$	(119,998	)
Current provision:
Current year		(8,225		)		(10,150		)		(65,250		)	(5,119		)		(1,407		)	(90,151		)
Prior year		—				—				(637		)	—				299			(338		)
Total		(8,225		)		(10,150		)		(65,887		)	(5,119		)		(1,108		)	(90,489		)
Actual:
Current year		3,932				—				13,984			—				368			18,284
Prior year		4,378				6,404				20,942			6,613				1,005			39,342
Total		8,310				6,404				34,926			6,613				1,373			57,626
Balance at March 31, 2007		$	(4,266	)		$	(20,415	)		$	(105,210	)	$	(21,724	)		$	(1,246	)	$	(152,861	)

Calculating each of these product sales allowances and reserves involves significant estimates and judgments and requires us to use information from external sources. Based on known market events and trends, internal and external historical trends, third party data, customer buying patterns and up-to-date knowledge of contractual and statutory requirements, we are able to make reasonable estimates of sales discounts. Historically, our estimates have not materially differed from our actual results.

Provision for Income Taxes—Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if, based on management’s review of both positive and negative evidence, it is more likely than not that all or a portion of the deferred tax asset will not be realized. Our historical losses from operations represent significant negative evidence that indicates the need for a valuation allowance. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. If we determine, based on future profitability, that these deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax provisions in future periods.

We adopted the Financial Accounting Standards Board, or FASB, interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48, on January 1, 2007. The implementation of FIN 48 did not have a material impact on our consolidated financial statements or results of operations. We are currently in the process of conducting a study of our research and development credit carryforwards. This study may result in an adjustment to our research and development credit carryforwards. However, until the study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under FIN 48.

We file tax returns in the U.S. Federal jurisdiction and in various state, local and foreign jurisdictions. During the fourth quarter of 2006, the Internal Revenue Service, or IRS, commenced an audit of our 2005 and 2004 U.S. Federal income tax returns. We are no longer subject to IRS examination for years prior to 2004, although carryforward attributes that were generated prior to 2004 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. There are currently no state audits in progress. With limited exceptions, we are no longer subject to state or local examinations for years prior to 2003, however, carryforward attributes that were generated prior to 2003 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

Contractual Obligations

As of March 31, 2007, our contractual obligations disclosure in our annual report on Form 10-K for the year ended December 31, 2006 has not materially changed with the exception of the February 2007 payment in full of our 5% convertible subordinated debentures.

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, 2006. As of May 10, 2007, 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, 2006. 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

Evaluation of 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, 2007. 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, 2007, 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.

Change in and Evaluation of 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, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Tecastemizole Class Action Complaints

On April 20, 2007, we entered into a MOU regarding the settlement of two class actions pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. As previously disclosed, the class actions, which were filed on behalf of certain purchasers of our equity and debt securities, or the plaintiffs, allege that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the FDA.

Levalbuterol Hydrochloride Inhalation Solution Abbreviated New Drug Applications

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

which was submitted to the FDA by Watson Laboratories, Inc. Watson’s Paragraph IV certification was limited to our patent that expires in 2021 and covers certain levalbuterol hydrochloride inhalation solutions, including XOPENEX Inhalation Solution. We have decided not to file a civil action against Watson Laboratories, Inc. for patent infringement at this time.

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

Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of the lawsuit. If we are not successful in enforcing our patents, we will not be able to prevent the generic companies, for the full term of our patents, from marketing their generic version of XOPENEX Inhalation Solution. Introduction of a generic copy of XOPENEX Inhalation Solution before the expiration of our patents would have a material adverse effect on our business.

BROVANA Patent Infringement Claim

On April 5, 2007, we were served with a complaint filed by Dey alleging that BROVANA™ (arformoterol tartrate) Inhalation Solution infringes or will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. We have filed an answer and counterclaim to this complaint, however it is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss related to this lawsuit due to its uncertain resolution.

Stock Option Inquiry and Derivative Stockholder Complaints

We announced in June 2006, that the SEC is conducting an informal inquiry into our stock option grants and stock option granting practices. A special committee of our outside directors, with the assistance of outside legal counsel and outside accounting specialists, reviewed the stock option grants to our officers, directors and employees from 1996 to June 2006 under our various stock option plans in effect during this period. Our finance department also reviewed the stock option grants and stock option practices from 1996 to June 2006. Their review resulted in the restatement of our financial statements for the quarters ended March 31, June 30 and September 30, 2005, the quarter ended March 31, 2006 and the year ended December 31, 2005, 2004 and 2003. Representatives from the U.S. Attorneys Office have been present at meetings that our outside counsel have had with the SEC. While the U.S. Attorneys Office has not initiated an investigation, we cannot be certain that it will not. In October 2006, the IRS commenced an audit into our 2005 and 2004 U.S. Federal income tax returns and has requested, among other things, certain information relating to our stock option grants and granting practices. The SEC and/or any other governmental agency that may initiate a formal investigation may reach different conclusions and, if so, we could be subject to monetary damages, fines and penalties, and our officers and/or directors would be prohibited from serving as officers and directors of any public company and could be subject to criminal penalties and/or disgorgement.

We are unable to reasonably estimate any possible range of loss or liability associated with the stock option inquiry and/or derivative suits due to their uncertain resolution.

LUNESTA Trademark Claim

ITEM 1A. RISK FACTORS

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

Risks Related to Our Financial Results and Our Common Stock

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

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

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

Approximately 91% of our total revenues for the three months ended March 31, 2007 and 94% of our total revenues for the twelve months ended December 31, 2006 resulted from sales of LUNESTA and XOPENEX Inhalation Solution, and we expect that sales from these two products will continue to represent a significant majority of our revenues for the coming year. In April 2005, we commercially introduced LUNESTA as a new product in a highly and increasingly competitive market, and we cannot be certain that it will achieve continued commercial success. In addition, we do not have long-term sales contracts with our customers, and we rely on purchase orders for sales of LUNESTA and XOPENEX Inhalation Solution. Reductions, delays or cancellations of orders for LUNESTA or XOPENEX Inhalation Solution could adversely affect our operating results. If sales of LUNESTA and XOPENEX Inhalation Solution do not continue to increase, we may not have sufficient revenues to achieve our business plan or repay our outstanding debt, and our business will not be successful. In December 2005, we commercially introduced XOPENEX HFA and in April 2007, we commercially introduced BROVANA. We cannot be certain that either XOPENEX HFA or BROVANA will achieve commercial success.

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

In addition, Medicare reimbursement rates for XOPENEX Inhalation Solution have been favorable since January 2005, but we cannot be certain these favorable rates will continue. In December 2006, the Centers for Medicare and Medicaid Services, or CMS, commenced a National Coverage Analysis, or NCA, to determine when use of nebulized levalbuterol in treating COPD in the Medicare population is reasonable and necessary. We expect the NCA process to be concluded before the end of 2007. We estimate that approximately 25 to 30 percent of our XOPENEX Inhalation Solution units sold are subject to reimbursement under Medicare Part B, and if the NCA results in significant restrictions on uses of nebulized levalbuterol, revenue from sales of XOPENEX Inhalation Solution could be materially adversely affected.

We filed a healthcare common procedure coding system application, commonly referred to as a J Code application, for BROVANA Inhalation Solution in January 2007 and it was accepted by CMS as part of the 2008 coding cycle review. In April 2007, CMS announced that its preliminary determination on the BROVANA J Code application was favorable and CMS recommended that BROVANA be awarded a unique J Code. The final decision on the BROVANA J Code application is expected in November 2007. If BROVANA is awarded a unique J Code by CMS in November 2007, it would become effective on January 1, 2008. In April 2007, CMS informed us that the scope of the NCA includes BROVANA. Coverage provided for BROVANA under any permanent J Code awarded for the product would be as established by the NCA. Prior to January 1, 2008, we expect providers to submit claims for reimbursement of BROVANA under a miscellaneous J Code. Coverage for BROVANA under this miscellaneous J Code remains under review by the Durable Medical Equipment Program Safeguard Contractor or DME-PSCs.

With respect to BROVANA, Dey has filed a patent infringement complaint alleging that BROVANA infringes or will induce infringement of a U.S. patent for which they own all rights, title and interest. We believe we have strong defenses to the allegations made in the complaint and intend to vigorously defend against this action, however, it is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. If we are not successful in defending against this action, our ability to continue to commercialize of BROVANA could be materially adversely affected.

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

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

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

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

· any unfavorable publicity regarding these products or similar products;

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

· a finding that our patents are invalid or unenforceable or that generic versions of our products do not infringe our products;

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

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

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

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

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

As of March 31, 2007, our total debt was approximately $721.0 million. None of our 0% Series A notes due December 2008, our 0% Series B notes due December 2010 nor our 0% notes due October 2024 restricts us or our subsidiaries’ ability to incur additional indebtedness, including debt that ranks senior to the notes. The 0% notes due 2024 are senior to the Series A notes due 2008 and Series B notes due 2010. Additional indebtedness that we incur may in certain circumstances rank senior to or on parity with this debt. Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. The conversion prices for the 0% Series A notes due

2008 and 0% Series B notes due 2010 are $31.89 and $29.84, respectively. On April 30, 2007, the closing sale price of our common stock was $53.68. 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. For example, the holders of our 5% debentures did not convert such debentures into common stock, and on February 15, 2007, the maturity date for the 5% debentures, we repaid the entire principal amount of $440.0 million, plus $11.0 million of accrued interest in cash. Our 0% notes due 2024 are convertible into cash at various times upon the occurrence of certain events 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, and in 2006, we experienced our first full year of positive cash flow from operating activities. Unless we have sufficient cash or are able to generate sufficient operating cash flow to pay off the principal of our outstanding debt, we will be required to raise additional funds or default on our obligations under the debentures and notes. If revenue generated from sales of LUNESTA and XOPENEX Inhalation Solution do not meet expected levels, it is unlikely that we would have sufficient cash flow to repay our outstanding convertible debt and/or make cash payments upon conversion of the 0% notes due 2024. There can be no assurance that, if required, we would be able to raise the additional funds on favorable terms, if at all.

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

As of March 31, 2007, we had approximately $721.0 million of outstanding debt that could be converted into common stock. In order to reduce future payments due at maturity, we may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for shares of our common stock, warrants, preferred stock, debt or other consideration; or a combination of any of the foregoing. If we exchange shares of our capital stock, or securities convertible into or exercisable for our capital stock, for outstanding convertible debt or use proceeds from the issuance of convertible debt to fund redemption of outstanding convertible debt with a higher conversion ratio, the number of shares that we might issue as a result of such exchanges would significantly exceed the number of shares originally issuable upon conversion of such debt and, accordingly, such exchanges would result in material dilution to holders of our common stock. We cannot assure you that we will repurchase or exchange any additional outstanding convertible debt.

If the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those 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, net revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We cannot assure you, however, that our estimates, or the assumptions underlying them, will not be materially different from actual results. For example, our royalty revenue is recognized based upon our estimates of our collaboration partners’ sales during the period and, if these sales estimates are greater than the actual sales that occur during the period, our net income would be reduced. This, in turn, could adversely affect our stock price.

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

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit of regulatory approvals, license or acquisition opportunities and

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

· patent developments;

· licensing or acquisition opportunities;

· drug discovery efforts;

· relationships with collaboration partners;

· the FDA regulatory process;

· expansion into foreign markets;

· litigation and government inquiries and investigations;

· our capital requirements; and

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

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

On April 20, 2007, we entered into a MOU, regarding the settlement of two class actions, pending in the Court, naming Sepracor and certain of our current and former officers and one director as defendants. As previously disclosed, the class actions, which were filed on behalf of certain purchasers of our equity and debt securities, or the plaintiffs, allege that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the FDA.

settlement amount. 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.

Our stock option granting practices are the subject of an informal inquiry by the SEC.

As we announced on June 2, 2006, the SEC is conducting an informal inquiry into our stock option grants and stock option practices and a special committee of our outside directors oversaw a review of our stock option granting practices and the documentation relating to such grants. Representatives from the U.S. Attorneys office have also been present at meetings that our outside legal counsel has had with the SEC. While the U.S. Attorneys Office has not initiated an investigation, we cannot assure you that it will not. In addition, as we have previously announced, during October 2006, the IRS commenced an audit into our 2005 and 2004 U.S. Federal income tax returns and has requested, among other things, certain information relating to our stock option grants and granting practices. As a result of the SEC inquiry, the IRS audit and/or other governmental proceedings that could be initiated in the future, we could be subject to monetary damages, fines and penalties and our officers and/or directors could be prohibited from serving as officers and directors of any public company and could be subject to criminal penalties and disgorgement.

Based on the results of the special committee’s review, we have restated our financial statements for the quarters ended March 31, June 30, and September 30, 2005, the quarter ended March 31, 2006 and the fiscal years ended December 31, 2005, 2004 and 2003, and revised the financial information contained in our earnings release for the period ended June 30, 2006. If the SEC disagrees with the conclusions we and our special committee have made, including with regard to measurement dates for certain stock option grants, the amount of additional stock-based compensation expense we incurred and/or the adjustments we have recorded to non-cash charges to reflect the additional stock-based compensation, we may be required to further restate our historical financial statements.

We have civil litigation pending that relates to our stock option granting practices, and we cannot predict the ultimate outcome of this litigation.

We and certain of our directors and officers are defendants in several derivative actions relating to our stock option granting practices. The complaints allege purported breaches of fiduciary duties and unjust enrichment in connection with certain stock option grants made by us between June 1998 and May 2001. The complaints seek monetary damages in unspecified amounts, equitable and injunctive relief, including disgorgement of profits obtained by certain defendants and other relief as determined by the Court. These actions are in preliminary stages and we cannot predict the ultimate outcome or impact of this litigation.

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

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

· timing and extent of product sales and market penetration;

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

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

· timing and success of product introductions;

· introduction of competitive products into the market;

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

· a finding that our patents are invalid or unenforceable or that generic versions of our products do not infringe our products;

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

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

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

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

· timing and success of any business and/or product acquisitions;

· timing and success of expansion into foreign markets;

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

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

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

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

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

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

· non-cumulative voting for directors;

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

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

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

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

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

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

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

Risks Related to Commercialization

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

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

In the sleep disorder market, LUNESTA faces intense competition from established products such as AMBIEN®, SONATA®, AMBIEN CR™ and ROZEREM™. We expect that LUNESTA will face increasing competition from other potentially competitive therapies, such as a generic version of AMBIEN, which was introduced in April of 2007, and therapies in clinical development and under FDA review for the treatment of insomnia. To continue to be successful in the market with LUNESTA, we must continue to demonstrate that LUNESTA’s safety and efficacy features are superior to those of competing branded and generic products, some of which may be less expensive than LUNESTA.

In the asthma and COPD markets, XOPENEX Inhalation Solution, a short-acting beta-agonist, faces competition from generic albuterol and DUONEB®. Albuterol has been available generically for many years, is well established and sells at prices substantially lower than XOPENEX Inhalation Solution. DUONEB offers combination therapy of albuterol with ipratropium bromide. To continue to be successful in the marketing of XOPENEX Inhalation Solution, we must continue to demonstrate that the efficacy and safety features of the drug outweigh its higher price relative to generic albuterol.

Albuterol MDIs have been on the market for many years and are well established. In the asthma market, we face competition from chlorofluorocarbons, or CFC-containing albuterol MDIs and branded HFA albuterol MDIs such as PROAIR® HFA, VENTOLIN® HFA and PROVENTIL® HFA. With the cessation of CFC albuterol MDI production, we expect that competition from branded HFA MDIs will increase substantially. There are currently no generic short-acting beta-agonist HFA MDIs available. To be successful in the marketing of XOPENEX HFA, we must demonstrate that the efficacy and safety features of the drug outweigh its higher price as compared to generic CFC albuterol MDIs and that these attributes differentiate the product from other HFA MDIs on the market.

BROVANA competes in the COPD market, as it does not have an asthma indication. Competitive products include all nebulized products used in the treatment of COPD including albuterol, ATROVENT® (ipratropium bromide) and DUONEB. Even though BROVANA is a nebulized product, it also faces competition from long-acting beta-agonists and anticholinergics delivered by MDI and dry powder inhaler, or DPI, including SEREVENT®, SPIRIVA® and FORADIL®. BROVANA also competes with combination therapy products used for COPD including ADVAIR® (salmeterol and fluticasone) and soon to be commercialized SYMBICORT® (formoterol and budesonide). We are also aware of products in clinical development for treatment of COPD that, if approved, will compete with BROVANA. To be successful in the marketing of BROVANA, we must demonstrate that patients with COPD who use a nebulizer will benefit by adding BROVANA as adjunctive therapy.

For all of our products, we need to demonstrate to physicians, patients and third-party payors that the cost of our product is reasonable and appropriate in light of its safety and efficacy, and the health care benefits, each as compared to other competing products.

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

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

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

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

We have established a sales force to market XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA and LUNESTA through our sales force. We have incurred significant expense in expanding our sales force and we may incur additional expense if we further expand. If we successfully develop and obtain regulatory approval for the products we are developing, we may (1) market and sell them through our sales force, (2) license some of them to other pharmaceutical companies or (3) market and sell them through other arrangements, including co-promotion arrangements or contract sales forces. We may incur significant costs in expanding our sales force before the products under development have been approved for marketing. For example, we expanded our sales force in 2004 in anticipation of marketing and selling LUNESTA, in 2005 in anticipation of marketing and selling XOPENEX HFA and in 2006 in anticipation of increased competition versus LUNESTA, and increased sales of our products generally. In addition, we have expanded our sales force in anticipation of sales growth that may never occur.

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

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

The FDA and other regulatory authorities require that our products be manufactured according to their GMP regulations. The failure by us, our collaborative development partners or our third-party manufacturers to comply with current GMP regulations could lead to delay in our development programs or refusal by the FDA to approve marketing applications. Following marketing approval of a product, failure in either respect could also impede commercial introduction or on-going distribution of the product and/or be the basis for action by the FDA to withdraw approvals previously granted, to recall products and for other regulatory action.

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

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

Risks Related to the Regulatory Environment

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

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

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

Our ability to maintain profitability will depend in large part on successful development and commercialization of additional products. All of our product candidates are in the early stages of development. We cannot assure you that we will be able to develop or acquire and commercially introduce new products in a timely manner or that new products, if developed, will be approved for the indications and/or with the labeling we expect, or that they will achieve market acceptance. Before we commercialize any other product candidate in the United States, we will need to successfully develop the product candidate by completing successful clinical trials, submitting an NDA for the product candidate that is accepted for filing by the FDA and receiving FDA approval to market the candidate. We must comply with similar requirements in foreign jurisdictions before commercializing any products in the jurisdiction. If we fail to successfully develop a product candidate and/or the FDA or similar foreign agency delays or denies approval of any NDA, or foreign equivalent, that we submit in the future, then commercialization of our products under development may be delayed or terminated, which could have a material adverse effect on our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The MMA established a prescription drug benefit beginning in 2006 for all Medicare beneficiaries. We do not know the extent to which our products will continue to be included in the Medicare prescription drug benefit, and we may be required to provide significant discounts or rebates to drug plans participating in the Medicare drug benefit. Moreover, Congress may enact legislation that permits the Federal government to directly negotiate price and demand discounts on pharmaceutical products that may implicitly create price controls on prescription drugs. In addition, Managed Care Organizations, or MCOs, Health Maintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs, health care institutions and other government agencies continue to seek price discounts. MCOs, HMOs, PPOs and private health plans will administer the Medicare drug benefit, leading to managed care and private health

plans influencing prescription decisions for a larger segment of the population. In addition, certain states have proposed, and certain other states have adopted, various programs to control prices for their seniors’ and low-income drug programs, including price or patient reimbursement constraints, restrictions on access to certain products, importation from other countries, such as Canada, and bulk purchasing of drugs.

In March 2006, the DME-PSCs issued a draft local coverage determination, or LCD, under which Medicare reimbursement for XOPENEX Inhalation Solution would be reduced to the level of reimbursement for generic albuterol under Medicare Part B, which is substantially less than the current level of reimbursement for XOPENEX Inhalation Solution. In December 2006, the CMS commenced an NCA on XOPENEX Inhalation Solution to determine when use of nebulized levalbuterol for treating COPD in the Medicare population is reasonable and necessary. The comments to the NCA remain under review by CMS and we expect the NCA process to be concluded before the end of 2007. In March 2007, Tricenturion announced that they would not pursue the LCD while the CMS review of the NCA is ongoing. We anticipate that the final national coverage determination that results from the NCA will take precedence over any LCDs that have been implemented or are under consideration for XOPENEX Inhalation Solution. We estimate that approximately 25 to 30 percent of our XOPENEX Inhalation Solution units sold are subject to reimbursement under Medicare Part B. If the NCA results in significant restrictions on the use of nebulized levalbuterol, revenue from these sales of XOPENEX Inhalation Solution would be materially adversely affected.

We filed a J Code application, for BROVANA Inhalation Solution in January 2007 and it was accepted by CMS as part of the 2008 coding cycle review. In April 2007, CMS announced that its preliminary determination on the BROVANA J Code application was favorable and CMS recommended that BROVANA be awarded a unique J Code. The final decision on the BROVANA J Code application is expected in November 2007. If BROVANA is awarded a unique J Code by CMS in November 2007, it would become effective on January 1, 2008. In April 2007, CMS informed us that the scope of the NCA includes BROVANA. Coverage provided for BROVANA under any permanent J Code awarded for the product would be as established by the NCA. If the NCA results in significant restrictions on the use of BROVANA, revenue from the sales of BROVANA could be materially adversely affected. Prior to January 1, 2008, we expect providers to submit claims for reimbursement of BROVANA under a miscellaneous J Code. Coverage for BROVANA under this miscellaneous J Code remains under review by the DME-PSCs.

Some states have adopted PDLs for their Medicaid programs and more states may adopt this practice. Medicaid PDLs indicate which drugs a provider is permitted under the Medicaid program to prescribe without first seeking prior authorization from the state Medicaid agency. If our drugs are not included on Medicaid PDLs, use of our drugs in the Medicaid program may be adversely affected. In some states that have adopted PDLs, we have been, and may continue to be, required to provide substantial supplemental rebates to state Medicaid authorities in order for our drugs to be included on the PDL.

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

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

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

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

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

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

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

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

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

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

· state and foreign law equivalents of the foregoing;

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

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

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

interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from operating our business and damage our reputation.

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

We are a participant in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990. Under the Medicaid rebate program, we pay a minimum primary rebate of 15.1% on all utilization of our products by Medicaid beneficiaries. Congress is considering legislation that may raise the minimum rebate level that we must pay to state Medicaid programs. In addition, this primary rebate may be higher if we provide discounts to commercial customers that are greater than the statutorily mandated minimum. Also, several state Medicaid programs have implemented PDLs. Products placed on a state Medicaid program’s PDL are not subject to restrictions on their utilization such as prior authorization before use. To secure a place on a given state PDL, we provide discounts to the state Medicaid program in the form of supplemental rebates. Both the Federal government and state and local governments have initiated investigations and lawsuits concerning the rebate practices of many pharmaceutical companies to ensure compliance with these rebate programs. We were recently named as a defendant, together with numerous other companies, in one such suit. While we believe our calculations of rebates and discounts are accurate and based on reasonable assumptions and judgments, as a result of an investigation or lawsuit we may be required to pay additional rebates and/or discounts on sales made in prior periods or be subject to fines and other penalties. In addition, an investigation or lawsuit concerning our rebate practices could be costly, could divert the attention of our management from our core business and could damage our reputation.

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

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

Risks Related to Our Intellectual Property

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

Our success depends in large part on our ability to obtain, maintain and enforce patents, and protect trade secrets. Our ability to commercialize any drug successfully will largely depend upon our ability to obtain and maintain patents of sufficient scope to prevent third parties from developing substantially equivalent products. In the absence of patent and trade secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products. It is also possible that we could incur substantial costs if we are required to initiate litigation against others to protect or enforce our intellectual property rights.

We have filed patent applications covering composition of, methods of making, and/or methods of using, our drugs and drug candidates. Our revenues under collaboration agreements with pharmaceutical companies depend in part on the existence and scope of issued patents. We may not be issued patents based on patent applications already filed or that we file in the future and if patents are issued, they may be insufficient in scope to cover the products licensed under these collaboration agreements. Generally, we do

not receive royalty revenue from sales of products licensed under collaboration agreements in countries where we do not have a patent for such products. The issuance of a patent in one country does not ensure the issuance of a patent in any other country. Furthermore, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and has been and remains the subject of much litigation. Legal standards relating to scope and validity of patent claims are evolving. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United States Patent and Trademark Office may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business. In addition, if we are not successful in enforcing our patents, we will not be able to prevent others from introducing generic versions of our products.

A number of our products and products for which we receive royalties are the subject of patent invalidation claims.

XOPENEX brand levalbuterol HCl Inhalation Solution is currently the subject of patent invalidity claims. The FDA has received ANDAs from Breath Limited, Dey, L.P. and Watson Laboratories, Inc. seeking marketing approval for generic copies of our XOPENEX Inhalation Solution products. These submissions include Paragraph IV certifications alleging that our patents listed in the Orange Book for XOPENEX Inhalation Solution are invalid, unenforceable or not infringed by the submitter’s proposed product. We have filed civil actions against Breath Limited and Dey, L.P. for patent infringement. Should we successfully enforce our patents, the FDA will not approve the ANDA until expiration of the applicable patents. Otherwise, the FDA will stay its approval of the relevant ANDA until 30 months following the date we received notice of such ANDA or until a court decides that our patents are invalid, unenforceable or not infringed, whichever is earlier. Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the outcome or the duration of the lawsuits. Any conclusion of these matters in a manner adverse to us would have a material adverse effect on our financial condition and business. If we are not successful in enforcing our patents, we will not be able to prevent the generic company, for the full term of our patents, from marketing their generic version of XOPENEX Inhalation Solution. Introduction of a generic copy of XOPENEX Inhalation Solution before the expiration of our patents would have a material adverse effect on our business.

The costs to us of these proceedings, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and other key personnel from our core business and our resources in general. Uncertainties resulting from the initiation and continuation of this and any other litigation proceedings could harm our ability to compete in the marketplace.

In June 2006, we were notified that Teva Pharmaceutical Industries Limited and Teva UK Limited, referred to collectively as Teva, have filed a claim naming us as defendant in the United Kingdom’s High Court of Justice, Chancery Division, Patents Court. The claim alleges that our two patents relating to fexofenandine, which we have licensed to sanofi-aventis in connection with its sale of ALLEGRA, are invalid, and seeks to have them invalidated. Sanofi-aventis is defending this action. If patent-based exclusivity for ALLEGRA is lost in the United Kingdom or in any other jurisdiction where a similar action is brought, our rights to receive royalty revenue in any such jurisdiction will terminate.

In August 2006, we were notified that several ANDAs containing Paragraph IV certifications had been received by the FDA seeking approval of generic versions of certain of Schering-Plough’s CLARINEX products. If and while a generic version of a CLARINEX product is marketed in the U.S. without Schering-Plough’s consent, Schering-Plough will have no obligation to pay royalties to us on the U.S. sales of CLARINEX products.

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

Our success depends in part on our ability to operate without infringing upon proprietary rights of others, including patent and trademark rights. Third parties, typically drug companies, hold patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for some of the drug candidates for which we have patents or patent applications. Third parties also hold patents relating to drug delivery technology that may be necessary for development or commercialization of some of our drug candidates. In each of these cases, unless we have or obtain a license agreement, we generally may not commercialize the drug candidates until these third-party patents expire or are declared invalid or unenforceable by the courts. Licenses may not be available to us on acceptable terms, if at all.

Others may file suit against us alleging that our products or product candidates infringe patents they hold. Even if resolved in our favor, any patent infringement litigation would be costly, would require significant time and attention of our management, could prevent us from commercializing our products for a period of time and could require us to pay significant damages and could have a material adverse effect on our business. If the matter is not resolved in our favor, we could be required to pay significant damages and/or be prevented from commercializing our product and our business could be materially adversely affected. On April 5, 2007, we were served with a complaint filed by Dey, alleging that BROVANA infringes or will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. We have filed an answer and counterclaim to this complaint and believe we have strong defenses to the allegations made in the complaint, however, it is too early to make a reasonable assessment as to the likely outcome or impact of this litigation.

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. In September 2006, Tharos Laboratories, Inc. filed suit against us in the United States District Court, District of Utah, Central Division, alleging trademark infringement, dilution, unfair competition, false advertising, and false designation of origin arising out of our use of our silk moth design in connection with LUNESTA. Tharos seeks unspecified monetary damages and an injunction of our use of the silk moth design. In October 2006, we filed a motion to dismiss Tharos’ claims. On February 9, 2007, the court granted our motion in respect of the state unfair competition claims and denied it in respect of Tharos’ other claims. We are unable to reasonably estimate any possible range of loss related to this lawsuit due to its uncertain resolution.

Risks Related to Our Dependence on Third Parties

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

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

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

We have entered into licensing arrangements pursuant to which we license patents to pharmaceutical companies and our revenues under these licensing arrangements consist primarily of royalties on sales of products. Payments and royalties under these arrangements depend in large part on the commercialization efforts of our licensing partners in countries where we hold patents, including sales efforts and enforcement of patents, which we cannot control. If any of our licensing partners does not devote sufficient time and resources to its licensing arrangement with us or focuses its efforts in countries where we do not hold patents, we may not realize the potential commercial benefits of the arrangement, our revenues under these arrangements may be less than anticipated and our results of operations may be adversely affected. If any of our licensing partners was to breach or terminate its agreement with us or fail to perform its obligations to us in a timely manner, the royalties we receive under the licensing agreement could decrease or cease. If we are unable or fail to perform, or breach in our performance of, our obligations under a licensing agreement, the royalties and benefits to which we are otherwise entitled under the agreement could be reduced or eliminated. Any delay or termination of this type could have a material adverse effect on our financial condition and results of operations because we may lose technology rights and milestone or royalty payments from licensing partners and/or revenues from product sales, if any, could be delayed, reduced or terminated.

In June 2006, we were notified that Teva had filed a claim in the United Kingdom alleging that our two patents relating to fexofenandine, which we have licensed to sanofi-aventis in connection with its sale of ALLEGRA, are invalid, and seeks to have them invalidated. Sanofi-aventis is defending this action. If patent-based exclusivity for ALLEGRA is lost in the United Kingdom or in any other jurisdiction where a similar action is brought our rights to receive royalty revenue in any such jurisdiction will terminate. In addition, in August 2006, we were notified that several ANDAs containing Paragraph IV certifications had been received by the FDA seeking approval of generic versions of certain of Schering-Plough’s CLARINEX products. If and while a generic version of a CLARINEX product is marketed in the U.S. without Schering-Plough’s consent, Schering-Plough will have no obligation to pay royalties to us on the U.S. sales of CLARINEX products.

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

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

we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines, including FDA guidelines. The delays associated with the verification of a new manufacturer for XOPENEX Inhalation Solution, XOPENEX HFA, BROVANA or LUNESTA could negatively affect our ability to produce such products in a timely manner or within budget.

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

Risks Related to Growth of Our Business

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

We are currently commercializing four products. However, all of our product candidates are in the early stages of development. In order to increase the likelihood that we will be able to successfully develop and/or commercialize additional drugs, we intend to acquire and develop additional product candidates and/or approved products. The success of this growth strategy depends upon our ability to correctly establish criteria for such acquisitions and successfully identify, select and acquire product candidates and/or products that meet such criteria. We will be required to integrate any acquired product candidates into our research and development operations and any acquired products into our sales and marketing operations. Managing the development and/or commercialization of a new product involves numerous financial and operational risks, including difficulties allocating resources between existing and acquired assets and attracting and retaining qualified employees to develop and/or sell the product.

Any product candidate we acquire may require additional research and development efforts prior to commercial sale, including extensive preclinical and/or clinical testing and approval by the FDA and corresponding foreign regulatory authorities. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be safe and effective or approved by regulatory authorities.

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

· manufactured or produced economically;

· successfully commercialized or be reimbursed at rates sufficient for us to achieve or maintain profitability with respect to such products;

· complementary to our existing product portfolio; or

· widely accepted in the marketplace.

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

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

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

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

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

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

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

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

· revenue from product sales could be delayed; or

· we may elect not to commercialize the drugs.

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

ITEMS 2-5. NONE

ITEM 6. EXHIBITS

10.1		Employment Agreement by and between the Registrant and Adrian Adams dated March 1, 2007.
10.2		Executive Retention Agreement by and between the Registrant and Adrian Adams dated March 1, 2007.
10.3		Employment Agreement by and between the Registrant and Andrew I. Koven dated March 1, 2007.
10.4		Executive Retention Agreement by and between the Registrant and Andrew I. Koven dated March 1, 2007.
10.5		Transition and Severance Agreement by and between the Registrant and W. James O’Shea dated March 1, 2007.
10.6		Letter Agreement by and between the Registrant and Douglas E. Reedich dated March 1, 2007.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

	SEPRACOR INC.
Date: May 10, 2007	By:	/s/ TIMOTHY J. BARBERICH
		Timothy J. Barberich
		Chairman and Chief Executive Officer (Principal Executive Officer)
Date: May 10, 2007	By:	/s/ ROBERT F. SCUMACI
		Robert F. Scumaci
		Executive Vice President, Finance and Administration, and Treasurer (Principal Accounting Officer)

Exhibit Index

Exhibit No.				Description
10.1				Employment Agreement by and between the Registrant and Adrian Adams dated March 1, 2007.
10.2				Executive Retention Agreement by and between the Registrant and Adrian Adams dated March 1, 2007.
10.3				Employment Agreement by and between the Registrant and Andrew I. Koven dated March 1, 2007.
10.4				Executive Retention Agreement by and between the Registrant and Andrew I. Koven dated March 1, 2007.
10.5				Transition and Severance Agreement by and between the Registrant and W. James O’Shea dated March 1, 2007.
10.6				Letter Agreement by and between the Registrant and Douglas E. Reedich dated March 1, 2007.
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.

EX-10.1 2 a07-11008_1ex10d1.htm EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”), made this 1st day of March 2007, is entered into by Sepracor Inc., a Delaware corporation with its principal place of business at 84 Waterford Drive, Marlborough, Massachusetts 01752-7231(the “Company”), and Adrian Adams, residing at (the “Executive”).

The Company desires to employ the Executive and the Executive desires to be employed by the Company. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows:

1. Term of Employment. The Company hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, upon the terms set forth in this Agreement, for the period commencing on March 1, 2007 (the “Commencement Date”) and ending on March 1, 2012 (the “Term”). Notwithstanding the foregoing, the Term shall be extended automatically without further action by either party by one (1) additional year (added to the end of the Term) on each succeeding anniversary of March 1, 2012, unless either party shall have served written notice upon the other party at least sixty (60) days preceding the date upon which such Term would end (such period, as it may be extended, the “Employment Period”), unless sooner terminated in accordance with the provisions of Section 4.

2. Title and Capacity. The Executive shall initially serve as President and Chief Operating Officer of the Company and in that capacity Executive shall report directly to the Chief Executive Officer of the Company and shall, except as permitted

hereby, devote all of his business time and services to the business and affairs of the Company. The Company acknowledges that it is the present expectation of the Board and the parties hereto that Executive will be elected to the position of Chief Executive Officer within six months of the Commencement Date. At such time as the Executive is elected to the position of Chief Executive Officer, he shall report directly to the Board and shall assume the duties and responsibilities inherent in such position and such other duties and responsibilities as the Board shall from time to time reasonably assign to him.

Executive shall also perform such other duties consistent with his position at such time as may be reasonably assigned by the Chief Executive Officer (if Executive does not then hold such position) and/or the Board of Directors of the Company (the “Board”) from time to time. Executive shall serve on the Board and may also serve as a director or officer of any of the Company’s operating subsidiaries if the Executive shall be elected to such position, for no additional compensation or benefits. The Executive hereby accepts such service and agrees to undertake the duties and responsibilities inherent in such positions. The Executive agrees to abide by the rules, regulations, instructions, personnel practices and policies of the Company and any changes therein that may be adopted from time to time by the Company.

Notwithstanding anything herein to the contrary, Executive shall be entitled to engage in (a) service on the board of directors of a no more than three other companies, businesses or trade organizations, provided, that, the Executive shall provide the Company prior written notice of his intention to join any such board and provided further that he shall not serve on the board of any entity that competes with the Company, (b) service on the board of directors of not-for-profit or charitable organizations, (c) other

charitable activities and community affairs and (d) managing his personal investments and affairs, in each case to the extent such activities do not materially interfere with the performance of his duties and responsibilities to the Company.

3. Compensation and Benefits.

3.1 Salary. During the term of this Agreement, the Company agrees to pay to the Executive a base salary at the annualized rate of $800,000 (“Base Salary”) commencing on the Commencement Date. The Base Salary shall be subject to annual review by the Board but shall not be reduced below $800,000 per annum. Such salary shall be payable to Executive in bi-weekly installments and in accordance with the Company’s normal payroll procedures.

3.2 Bonus. The Executive shall be eligible for a performance-based annual bonus for each fiscal year of the Term (the “Annual Bonus”). The Annual Bonus shall be based upon annual quantitative and qualitative performance targets as established by the Board in its sole discretion in accordance with the Company’s bonus plan; provided, that the Executive’s annual bonus level target shall be set at one hundred percent (100%) of Base Salary. For fiscal year 2007, the Executive shall be entitled to a pro rata guaranteed bonus based on an Annual Bonus of one hundred percent (100%) of his Base Salary. The Annual Bonus is not earned until the close of business on the last business day of the Company’s fiscal year. Any Annual Bonus payable hereunder shall be payable, if at all, after the date of the delivery of the audited financial statements for the applicable fiscal year.

3.3 Stock and Option Grant. At the first meeting of the Compensation Committee of the Board of Directors following the Executive’s first day of employment,

the Company shall grant to the Executive, under the Company’s 2000 Stock Incentive Plan (the “Stock Plan”), 125,000 shares of restricted stock and an option to purchase 500,000 shares of Company stock (the “Initial Grant”). The terms and conditions of the Initial Grant (other than the exercise price per share, which shall be equal to the closing price of the Company’s stock on the grant date) shall be set forth in the award agreements attached hereto as Schedules A and B. The stock option portion of the Initial Grant shall vest in five equal installments on each of the first five anniversaries of the grant date, and the restricted stock award portion of the Initial Grant shall vest in three equal installments on each of the first three anniversaries of the grant date. The Board, in its sole discretion, may grant further incentive compensation awards to the Executive from time to time. The Company represents and warrants to Executive that the Company has full power and authority, subject to Compensation Committee approval, and shares available under the Stock Plan to make the Initial Grant.

3.4 Benefits. The Executive shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its employees, to the extent that the Executive is eligible under (and subject to the provisions of) the plan documents governing those programs. The Executive shall be entitled to four (4) weeks paid vacation per year, accruing at a rate of 1.67 days per month during the Employment Period and to be taken at such times as may be reasonably determined by Executive consistent with his duties.

3.5 Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable travel (which shall be deemed to include first class airfare or reimbursement or equivalent to a first class airfare ticket in the event Executive uses his

personal time-share aircraft), entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement or in connection with Executive’s commuting to and from his personal residence in the Philadelphia area and the Company’s offices, upon presentation by the Executive of documentation, expense statements, vouchers and/or such other supporting information as the Company may request.

3.6 Housing Expenses. The Company understands that the Executive intends to maintain his primary residence outside the Massachusetts area. The Company agrees to provide the Executive with a housing allowance for reasonable housing and living expenses of $5,600 per month, related to the rental or purchase of a home, within suitable distance to the Company’s headquarters, which payment shall be made on a fully tax grossed-up basis. The Company also will reimburse the Executive for (i) reasonable travel, meals and lodging expenses incurred by him for up to two trips for the purpose of securing such house or apartment within a suitable distance to the Company’s headquarters and (ii) reasonable moving expenses in relocating his belongings from his residence in Florida to such house or apartment.

3.7 Executive’s Legal Fees. The Company agrees to pay the Executive’s reasonable legal costs and expenses in connection with negotiating and drafting this Agreement up to a maximum of $15,000.

3.8 Automobile. The Company agrees to provide the Executive with an automobile allowance or a leased automobile with a retail value of up to $75,000, which payments shall be made on a fully tax grossed-up basis. In addition, the Company

agrees to pay all insurance, maintenance, fuel and other customary costs associated with operating the automobile.

3.9 Withholding. All salary, bonus and other compensation payable to the Executive shall be subject to applicable withholding taxes.

4. Employment Termination. This Agreement and the employment of the Executive under this Agreement shall terminate upon the occurrence of any of the following:

4.1 At the election of the Executive if the Company fails to name him Chief Executive Officer of the Company within six (6) months from the Commencement Date, on the date of such election.

4.2 On the expiration date of the Employment Period.

4.3 At the election of the Company, for Cause (as defined below), immediately upon written notice by the Company to the Executive, which notice shall identify the Cause upon which termination is based. For the purposes of this Section 4.3, Cause for termination shall mean: (a) the Executive’s willful and continued failure to substantially perform his reasonable assigned duties (other than any such failure resulting from incapacity due to physical or mental illness or any failure after the Executive gives notice of termination for Good Reason and Good Reason exists), which failure is not cured within 30 days after a written demand for substantial performance is received by the Executive from the Board of Directors of the Company which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed the Executive’s duties; (b) the Executive’s willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the

Company; or (c) a material breach of Section 6 or 7 this Agreement by the Executive. For purposes of this Section 4.3, no act or failure to act by the Executive shall be considered “willful” unless it is done, or omitted to be done, in bad faith and without reasonable belief that the Executive’s action or omission was in the best interests of the Company.

4.4 Upon the death or disability of the Executive. As used in this Agreement, the term “disability” shall mean the Executive’s absence from the full-time performance of the Executive’s duties with the Company for one hundred eighty (180) consecutive calendar days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

4.5 At the election of the Executive for Good Reason as defined herein. The Executive may terminate his employment for Good Reason at any time, following 30-days prior written notice of such termination to the Company. Such notice shall provide factual details of the basis behind such termination and the Company shall have a thirty (30) day period thereafter to cure such matter. As used herein, the term “Good Reason” shall mean: (a) a material breach by the Company of the terms of this Agreement, including the failure to pay Base Salary or any Annual Bonus when due; or (b) any material adverse change by the Company in Executive’s titles, authorities, duties, responsibilities or lines of reporting inconsistent with the terms hereof or the assignment to Executive by the Company of titles, authorities, duties, responsibilities or lines of reporting inconsistent with the terms hereof, or (c) a relocation of the principal offices of

the Company to an area more than forty (40) miles from the location of such offices as of the date hereof.

4.6 At the election of the Executive without Good Reason, upon not less than sixty (60) calendar days prior written notice of termination by the Executive to the Company; provided, however, that the Company may, in its sole discretion, determine that the termination of the Executive shall become effective immediately and in which case the termination shall still be considered at the election of the Executive without Good Reason.

4.7 At the election of the Company, without Cause, upon not less than sixty (60) days written notice to Executive.

4.8 At the election of the Company or the Executive in connection with a Change in Control of the Company as set forth in the Executive Retention Agreement between the Company and the Executive (the “ERA”), dated as of the date hereof. For purposes of this Agreement, “Change in Control” shall have the meaning set forth in the ERA.

5. Effect of Termination.

5.1 Termination For Failing To Name Executive CEO. In the event the Company fails to name Executive to the position of Chief Executive Officer of the Company within six (6) months from the Commencement Date, and he elects to terminate his employment, provided the Executive executes and does not revoke a Separation Agreement and Release of Claims for the benefit of the Company substantially in the form set forth on Schedule C hereto (the “Separation Agreement”), the Company shall pay or cause to be paid to Executive, within thirty (30) days of the

date of his termination: (1) a lump-sum payment of two million dollars ($2,000,000); and (2) the amount of any accrued but unpaid Base Salary, unused vacation and unreimbursed business, housing and automobile expenses and the Company thereafter shall have no further obligation to Executive under this Agreement, other than for payment of any other amounts or benefits accrued and vested under any applicable benefit plan or otherwise in accordance with applicable law.

5.2 Non-Renewal, Termination Without Good Reason By the Executive or Termination For Cause By the Company. In the event the Executive’s employment is terminated by non-renewal pursuant to Section 4.2, for Cause by the Company pursuant to Section 4.3, or at the election of the Executive pursuant to Section 4.6, the Company shall pay to the Executive the compensation and benefits otherwise payable to him under Section 3 through the last calendar day of his actual employment by the Company.

5.3 Termination for Death or Disability. In the event the Executive’s employment is terminated by death or because of disability pursuant to Section 4.4, the Company shall pay to the estate of the Executive or to the Executive, as the case may be, (A) within thirty (30) days of the date of the Executive’s death or determination of disability, the compensation which would otherwise be payable to the Executive up to the end of the month in which the termination of his employment because of death or disability occurs; and (B) an annual bonus in an amount equal to the total bonus he would be paid for such year, if any, multiplied by a fraction, the numerator of which is the number of days in the year that have elapsed since January 1 and the denominator of which is 365, payable when bonuses are paid for that year (a “Pro Rata Bonus”). In

addition, the Company shall permit Executive or Executive’s estate or representative to exercise the vested stock option portion of the Initial Grant for a period of no less than one year after any such termination of employment.

5.4 Termination By the Executive With Good Reason or By the Company Without “Cause”. In the event the Executive’s employment is terminated by the Executive with Good Reason pursuant to Section 4.5 or by the Company without Cause pursuant to Section 4.7, the Company shall pay to the Executive the compensation and benefits otherwise payable to him under Section 3 through the last calendar day of his actual employment by the Company. In addition, provided the Executive executes and does not revoke the Separation Agreement, the Company shall: (1) continue to pay the Executive the Base Salary for twenty-four (24) months in accordance with the Company’s regular payroll practices; (2) pay the Executive a Pro Rata Bonus; (3) pay the Executive, in bi-weekly installments, over a twenty-four month period, an amount equal in the aggregate to two (2) times the average Annual Bonus earned for the two years prior to the date of his termination (in the event Executive has not been employed for a sufficient period to earn two such bonuses, such calculation shall be made assuming Executive earned a bonus for any such year at a target level of performance (taking into account any minimum bonus amount)); (4) provide to the Executive for two (2) years following the date of his termination, payment of COBRA premiums for medical, dental, and vision benefits pursuant to plans maintained by the Company under which Executive and/or Executive’s family is eligible to receive benefits; provided, however, that, notwithstanding the foregoing, the benefits described in this subsection may be discontinued prior the end of the period, but only to the extent, that Executive receives

substantially similar benefits from a subsequent employer; and (5) permit Executive to exercise the stock option portion of the Initial Grant for a period of no less than six months after the date of termination.

5.5 Termination Following a Change in Control. In the event the Executive’s employment is terminated pursuant to Section 4.8 by the Company or by the Executive within 24 months following the Change in Control Date, as defined in the ERA, the Executive will be entitled to the benefits set forth in the ERA in accordance with the terms of the ERA.

5.6 Six Month Delay. If any payment, compensation or other benefit provided to the Executive in connection with his employment termination is determined, in whole or in part, to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Executive is a specified employee as defined in Section 409A(a)(2)(B)(i), no part of such payments shall be paid before the day that is six (6) months plus one (1) day after the date of his termination (the “New Payment Date”). In the case of welfare benefit continuation, the Company shall use its best efforts to enable Executive to obtain such benefits at Executive’s expense prior to the New Payment Date. The aggregate of any payments that otherwise would have been paid to the Executive (or on Executive’s behalf) during the period between the date of his termination and the New Payment Date shall be paid to the Executive in a lump sum on such New Payment Date. Thereafter, any payments that remain outstanding as of the day immediately following the New Payment Date shall be paid without delay over the time period originally scheduled, in accordance with the terms of this Agreement.

6. Non-Competition and Non-Solicitation.

(a) While the Executive is employed by the Company and for a period of twelve (12) months following the Executive’s termination or cessation of such employment for any reason, the Executive will not directly or indirectly:

(i) Engage in any business or enterprise (whether as an owner, partner, officer, employee, director, investor, lender, consultant, independent contractor or otherwise, except as the holder of not more than 5% of the combined voting power of the outstanding stock of a publicly held company) that (A) is competitive with the Company’s business and (B) develops, designs, produces, markets, sells or renders any product or service competitive with any product or service developed, produced, marketed, sold or rendered by the Company while the Executive was employed by the Company;

(ii) Either alone or in association with others, recruit or solicit any person who was employed by the Company at any time during the period of the Executive’s employment with the Company, except for an individual whose employment with the Company has been terminated for a period of six months or longer; and

(iii) Either alone or in association with others, solicit, divert or take away, or attempt to divert or take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of the Company which were contacted, solicited or served by the Executive while he was employed by the Company.

(b) If any restriction set forth in this Section 6 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable.

(c) The Executive acknowledges that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and are considered by the Executive to be reasonable for such purpose. The Executive agrees that any material breach of this Agreement will cause the Company substantial and irrevocable damage and therefore, in the event of any such material breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief without posting a bond.

(d) The geographic scope of this Section shall extend to anywhere the Company or any of its subsidiaries is doing business during the Term or has plans, during the Term, to do business.

(e) The Executive agrees to provide a copy of this Agreement to all person and Entities with whom the Executive seeks to be hired or do business before accepting employment or engagement with any of them.

(f) If the Executive violates the provisions of this Section, the Executive shall continue to be held by the restrictions set forth in this Section, until a period equal to the period of restriction has expired without any violation.

7. Proprietary Information and Developments.

7.1 Proprietary Information.

(a) The Executive agrees that all information, whether or not in writing, of a private, secret or confidential nature concerning the Company’s business, business relationships or financial affairs (collectively, “Proprietary Information”) is and shall be the exclusive property of the Company. By way of illustration, but not limitation, Proprietary Information may include discoveries, inventions, products, product improvements, product enhancements, processes, methods, techniques, formulas, compositions, compounds, negotiation strategies and positions, projects, developments, plans (including business and marketing plans), research data, clinical data, financial data (including sales, costs, profits and pricing methods), personnel data, computer programs (including software used pursuant to a license agreement), customer and supplier lists, and contacts at or knowledge of customers or prospective customers of the Company. Except as required by applicable law, the Executive will not disclose any Proprietary Information to any person or entity other than employees of the Company or use the same for any purposes (other than in the performance of his duties as an employee of the Company) without prior written approval from the Board of Directors or a designee of the Board of Directors, either during or after his employment with the Company, unless and until such Proprietary Information has become public knowledge without fault by the Executive.

(b) The Executive agrees that all files, documents, letters, memoranda, reports, records, data, sketches, drawings, methods, laboratory notebooks, program listings, computer equipment or devices, computer programs or other written,

photographic, or other tangible material containing Proprietary Information, whether created by the Executive or others, which shall come into his custody or possession, shall be and are the exclusive property of the Company and are to be used by the Executive only in the performance of his duties for the Company. All such materials or copies thereof and all tangible property of the Company in the custody or possession of the Executive shall be delivered to the Company upon the earlier of (i) a request by the Company or (ii) termination of his employment. After such delivery, the Executive shall not retain any such materials or copies thereof or any such tangible property.

(c) The Executive agrees that his obligation not to disclose or to use information and materials of the types set forth in subsections (a) and (b) above, and his obligation to return materials and tangible property set forth in subsection (b) above, also extends to such types of information, materials and tangible property of customers of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Executive.

7.2 Developments.

(a) The Executive will make full and prompt disclosure to the Company of all inventions, creations, improvements, discoveries, trade secrets, secret processes, technology, know-how, copyrightable materials, methods, developments, software, and works of authorship or other creative works, whether patentable or not, which are created, made, conceived or reduced to practice by him or under his direction or jointly with others during his employment by the Company, whether or not during normal working hours or on the premises of the Company (all of which are collectively referred to in this Agreement as “Developments”).

(b) The Executive agrees to assign and does hereby assign to the Company (or any person or entity designated by the Company) all his right, title and interest in and to all Developments and all related patents, patent applications, copyrights and copyright applications. However, this subsection (b) shall not apply to Developments that do not relate to any business or research and development conducted or planned to be conducted by the Company at the time such Development is created, made, conceived or reduced to practice and that are made and conceived by the Executive not during normal working hours, not on the Company’s premises and not using the Company’s tools, devices, equipment or Proprietary Information. The Executive understands that, to the extent this Agreement shall be construed in accordance with the laws of any state that precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this subsection (b) shall be interpreted not to apply to any invention that a court rules and/or the Company agrees falls within such classes. The Executive also hereby waives all claims to moral rights in any Developments.

(c) The Executive agrees to cooperate fully with the Company and to take such further actions as may be necessary or desirable, both during and after his employment with the Company, with respect to the procurement, maintenance and enforcement of copyrights, patents and other intellectual property rights (both in the United States and foreign countries) relating to Developments. The Executive shall sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignments of priority rights and powers of attorney, that the Company may deem necessary or desirable in order to protect its rights

and interests in any Development. The Executive further agrees that if the Company is unable, after reasonable effort, to secure the signature of the Executive on any such papers, the Executive Vice President of Research and Development or the General Counsel of the Company shall be entitled to execute any such papers as the agent and the attorney-in-fact of the Executive, and the Executive hereby irrevocably designates and appoints the Executive Vice President of Research and Development or the General Counsel of the Company as his agent and attorney-in-fact to execute any such papers on his behalf and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in any Development under the conditions described in this sentence.

7.3 United States Government Obligations. The Executive acknowledges that the Company from time to time may have agreements with other parties or with the United States Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. The Executive agrees to be bound by all such obligations and restrictions that are made known to the Executive and to take all action necessary to discharge the obligations of the Company under such agreements.

7.4 Other Agreements. The Executive hereby represents that, other than documents filed with the Securities and Exchange Commission, he is not bound by the terms of any agreement with any previous employer or other party to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. The Executive further represents that his performance of all the terms of this

Agreement and the performance of his duties as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his employment with the Company and that the Executive will not disclose to the Company or induce the Company to use any confidential or proprietary information, knowledge or material belonging to any previous employer or others. The Executive further represents that his performance of all the terms of this Agreement and the performance of his duties as an employee of the Company does not and will not breach any agreement to refrain from (i) competing, directly or indirectly, with the business of any former employer or others or (ii) from soliciting employees, customers or suppliers of any former employer or others.

8. Indemnification. The Company shall indemnify the Executive in accordance with its Certificate of Incorporation and By-Laws.

9. Survival. The provisions of Sections 6, 7 and 8 shall survive the termination of this Agreement for any reason.

10. Notices. Any notices delivered under this Agreement shall be deemed duly delivered three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one (1) business day after it is sent for next-business day delivery via a reputable nationwide overnight courier service, in each case to the address of the recipient set forth in the introductory paragraph hereto. Either party may change the address to which notices are to be delivered by giving notice of such change to the other party in the manner set forth in this Section 10.

11. Compliance with Code Section 409A. It is intended that this Agreement comply with or be exempt from the requirements of Sections 409A(a)(2) through (4) of

the Internal Revenue Code of 1986, as amended, and all regulations issued thereunder. The Agreement shall be interpreted and administered for all purposes in accordance with this intent and may be amended by the Company, following consultation with Executive and Executive’s legal and tax advisors, at any time if such amendment is deemed necessary to satisfy this intent.

12. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa.

13. Entire Agreement. This Agreement, together with the ERA, constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement.

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

15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (without reference to the conflict of laws provisions thereof). Any action, suit or other legal proceeding arising under or relating to any provision of this Agreement shall be commenced only in a court of the Commonwealth of Massachusetts (or, if appropriate, a federal court located within the Commonwealth of Massachusetts), and the Company and the Executive each consents to the jurisdiction of such a court. The Company and the Executive each hereby irrevocably waive any right to a trial by jury in any action, suit or other legal proceeding arising under or relating to any provision of this Agreement or any other dealing between

them relating to the subject matter of this transaction and the relationship that is being established.

16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business; provided, however, that the obligations of the Executive are personal and shall not be assigned by him.

17. Acknowledgment. The Executive states and represents that he has had an opportunity to fully discuss and review the terms of this Agreement with an attorney. The Executive further states and represents that he has carefully read this Agreement, understands the contents herein, freely and voluntarily assents to all of the terms and conditions hereof, and signs his name of his own free act.

18. Miscellaneous.

18.1 No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar to or waiver of any right on any other occasion.

18.2 The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement.

18.3 In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

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

	Sepracor Inc.


	By:	/s/ Timothy J. Barberich
	Title:	Chairman and CEO


	/s/ Adrian Adams
	Adrian Adams

SCHEDULE A
FORM OF RESTRICTED STOCK AGREEMENT

SEE ATTACHED AGREEMENT

SEPRACOR INC.

Restricted Stock Agreement

Name of Recipient:

Number of shares of restricted common stock awarded:

Grant Date:

Sepracor Inc. (the “Company”) has selected you to receive the restricted stock award described above, which is subject to the provisions of the Company’s 2000 Stock Incentive Plan (the “Plan”) and the terms and conditions contained in this Restricted Stock Agreement. Please confirm your acceptance of this restricted stock award and of the terms and conditions of this Agreement by signing a copy of this Agreement where indicated below.

		SEPRACOR INC.

		By:
		[insert name and title]

Accepted and Agreed:


[insert name of recipient]

SEPRACOR INC.

Restricted Stock Agreement

The terms and conditions of the award of shares of restricted common stock of the Company (the “Restricted Shares”) made to the Recipient, as set forth on the cover page of this Agreement, are as follows:

1. Issuance of Restricted Shares.

(a) The Restricted Shares are issued to the Recipient, effective as of the Grant Date (as set forth on the cover page of this Agreement), in consideration of employment services rendered and to be rendered by the Recipient to the Company.

(b) The Restricted Shares will initially be issued by the Company in book entry form only, in the name of the Recipient. Following the vesting of any Restricted Shares pursuant to Section 2 below, the Company shall, if requested by the Recipient, issue and deliver to the Recipient a certificate representing the vested Restricted Shares. The Recipient agrees that the Restricted Shares shall be subject to the forfeiture provisions set forth in Section 3 of this Agreement and the restrictions on transfer set forth in Section 4 of this Agreement.

2. Vesting.

(a) Vesting Schedule. Unless otherwise provided in this Agreement or the Plan, the Restricted Shares shall vest in accordance with the following vesting schedule: [ % of the total number of Restricted Shares shall vest on the first anniversary of the Grant Date and % of the total number of Restricted Shares shall vest on each successive anniversary thereafter, through and including the anniversary of the Grant Date]. Any fractional number of Restricted Shares resulting from the application of the foregoing percentages shall be rounded down to the nearest whole number of Restricted Shares.

(b) Acceleration of Vesting. Notwithstanding the foregoing vesting schedule, as provided in the Plan, all unvested Restricted Shares shall vest effective immediately prior to a Change in Control Event (as defined in the Plan).

3. Forfeiture of Unvested Restricted Shares Upon Employment Termination.

In the event that the Recipient ceases to be employed by, a director of, or a consultant or advisor to, the Company for any reason or no reason, with or without cause all of the Restricted Shares that are unvested as of the time of such employment termination shall be forfeited immediately and automatically to the Company, without the payment of any consideration to the Recipient, effective as of such termination of employment. The Recipient shall have no further rights with respect to any Restricted Shares that are so forfeited. If the Recipient is employed by a subsidiary of the Company, any references in this Agreement to employment with the Company shall instead be deemed to refer to employment with such subsidiary.

4. Restrictions on Transfer.

The Recipient shall not sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively “transfer”) any Restricted Shares, or any interest therein, until such Restricted Shares have vested, except that the Recipient may transfer such Restricted Shares as part of the sale of all or substantially all of the shares of capital stock of the Company (including pursuant to a merger or consolidation). The Company shall not be required (i) to transfer on its books any of the Restricted Shares which have been transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Restricted Shares or to pay dividends to any transferee to whom such Restricted Shares have been transferred in violation of any of the provisions of this Agreement.

5. Restrictive Legends.

The book entry account reflecting the issuance of the Restricted Shares in the name of the Recipient shall bear a legend or other notation upon substantially the following terms:

“These shares of stock are subject to forfeiture provisions and restrictions on transfer set forth in a certain Restricted Stock Agreement between the corporation and the registered owner of these shares (or his or her predecessor in interest), and such Agreement is available for inspection without charge at the office of the Secretary of the corporation.”

6. Rights as a Shareholder.

Except as otherwise provided in this Agreement, for so long as the Recipient is the registered owner of the Restricted Shares, the Recipient shall have all rights as a shareholder with respect to the Restricted Shares, whether vested or unvested, including, without limitation, any rights to receive dividends and distributions with respect to the Restricted Shares and to vote the Restricted Shares and act in respect of the Restricted Shares at any meeting of shareholders.

7. Provisions of the Plan.

This Agreement is subject to the provisions of the Plan, a copy of which is furnished to the Recipient with this Agreement. As provided in the Plan, upon the occurrence of a Reorganization Event (as defined in the Plan), the rights of the Company hereunder (including the right to receive forfeited Restricted Shares) shall inure to the benefit of the Company’s successor and, unless the Board determines otherwise, shall apply to the cash, securities or other property which the Restricted Shares were converted into or exchanged for pursuant to such Reorganization Event in the same manner and to the same extent as they applied to the Restricted Shares under this Agreement.

8. Tax Matters.

(a) Acknowledgments; Section 83(b) Election. The Recipient acknowledges that he or she is responsible for obtaining the advice of the Recipient’s own tax advisors with respect to the acquisition of the Restricted Shares and the Recipient is relying solely on such advisors and not on any statements or representations of the Company or any of its agents with respect to the tax consequences relating to the Restricted Shares. The Recipient understands that the Recipient (and not the Company) shall be responsible for the Recipient’s tax liability that may arise in connection with the acquisition, vesting and/or disposition of the Restricted Shares.

The Recipient acknowledges that he or she has been informed of the availability of making an election under Section 83(b) of the Internal Revenue Code, as amended, with respect to the issuance of the Restricted Shares and that the Recipient has decided not to file a Section 83(b) election.

(b) Withholding. The Recipient acknowledges and agrees that the Company has the right to deduct from payments of any kind otherwise due to the Recipient any federal, state, local or other taxes of any kind required by law to be withheld with respect to the vesting of the Restricted Shares. On each date on which Restricted Shares vest, the Company shall deliver written notice to the Recipient of the amount of withholding taxes due with respect to the vesting of the Restricted Shares that vest on such date; provided, however, that the total tax withholding cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). The Recipient shall satisfy such tax withholding obligations by making a cash payment to the Company on the date of vesting of the Restricted Shares, in the amount of the Company’s withholding obligation in connection with the vesting of such Restricted Shares.

9. Miscellaneous.

(a) No Right to Continued Employment. The Recipient acknowledges and agrees that, notwithstanding the fact that the vesting of the Restricted Shares is contingent upon his or her continued employment by the Company, this Agreement does not constitute an express or implied promise of continued employment or confer upon the Recipient any rights with respect to continued employment by the Company.

(b) Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Delaware without regard to any applicable conflicts of laws provisions.

SCHEDULE B
FORM OF STOCK OPTION AGREEMENTS

SEE ATTACHED AGREEMENT

SEPRACOR INC.

Form of Incentive Stock Option Agreement

Granted Under 2000 Stock Incentive Plan

1. Grant of Option.

This agreement evidences the grant by Sepracor Inc., a Delaware corporation (the “Company”), on the Grant Date indicated on the preceding Certificate of Stock Option Grant (the “Certificate”) to an employee, consultant, or director of the Company (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2000 Stock Incentive Plan (the “Plan”), the number of shares (the “Shares”) of common stock, $.10 par value per share, of the Company (“Common Stock”),indicated on the certificate at the price per Share indicated on the Certificate. Unless earlier terminated, this option shall expire on the Grant Expiration Date indicated on the Certificate (“Grant Expiration Date”).

It is intended that the option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

2. Vesting Schedule.

This option will become exercisable (“vest”) pursuant to the Vesting Schedule indicated on the Certificate (“Vesting Schedule”).

The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all shares for which it is vested until the earlier of the Grant Expiration Date or the termination of this option under Section 3 hereof or the Plan.

3. Exercise of Option.

(a) Form of Exercise. Each election to exercise this option shall be in writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b) Continuous Relationship with the Company Required. Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an [employee or officer of], or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an “Eligible Participant”).

(c) Termination of Relationship with the Company. If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Grant Expiration Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if, following the time the Participant has ceased to be an Eligible Participant, but prior to the Grant Expiration Date, the Participant materially breaches Section 6 or 7 of the Employment Agreement between the Participant and the Company dated March 1, 2007 (the “Employment Agreement”), the right to exercise this option shall terminate immediately upon written notice to the Participant from the Company describing such violation.

(d) Exercise Period Upon Death or Disability. If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Grant Expiration Date while he or she is an Eligible Participant and the Company has not terminated such relationship for “cause” as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Grant Expiration Date.

(e) Discharge for Cause. If the Participant, prior to the Grant Expiration Date, is discharged by the Company for “cause” (as defined below), the right to exercise this option shall terminate immediately upon the effective date of such discharge. “Cause” shall have the meaning set forth in the Employment Agreement.

4. Withholding.

No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

5. Nontransferability of Option.

This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

6. Disqualifying Disposition.

If the Participant diposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition.

7. Provisions of the Plan.

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

	SEPRACOR INC.

	By:

PARTICIPANT’S ACCEPTANCE

The Participant hereby accepts the foregoing option and agrees to the terms and conditions thereof. The Participant hereby acknowledges receipt of a copy of the Company’s 2000 Stock Incentive Plan.


	Name:

SEPRACOR INC.

Nonstatutory Stock Option Agreement
Granted Under 2000 Stock Incentive Plan

1. Grant of Option.

2. Vesting Schedule.

This option will become exercisable (“vest”) pursuant to the Vesting Schedule indicated on the Certificate (“Vesting Schedule”).

3. Exercise of Option.

4. Withholding.

5. Nontransferability of Option.

6. Provisions of the Plan.

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

	SEPRACOR INC.

	By:

PARTICIPANT’S ACCEPTANCE

The Participant hereby accepts the foregoing option and agrees to the terms and conditions thereof. The Participant hereby acknowledges receipt of a copy of the Company’s 2000 Stock Incentive Plan.


	Name:

SCHEDULE C
FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS

SEE ATTACHED FORM

FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS

In connection with your employment separation from Sepracor, Inc. (the “Company”) on [INSERT TERMINATION DATE], and in order to receive the benefits as set forth in Section 5 of the Employment agreement, this agreement must become binding between you and the Company. By signing and returning this agreement, you will be entering into a binding agreement with the Company and will be agreeing to the terms and conditions set forth in the numbered paragraphs below, including the release of claims set forth in paragraph 1. Therefore, you are advised to consult with an attorney before signing this agreement and you have been given more than twenty-one (21) days to do so. If you sign this agreement, you may change your mind and revoke your agreement during the seven (7) day period after you have signed it. If you do not so revoke, this agreement will become a binding agreement between you and the Company upon the expiration of the seven (7) day revocation period.

The following numbered paragraphs set forth the terms and conditions which will apply if you timely sign and return this agreement and do not revoke it within the seven (7) day revocation period:

1. Mutual Releases - In consideration of the payment of the severance benefits, which you acknowledge you would not otherwise be entitled to receive, you hereby fully, forever, irrevocably and unconditionally release, remise and discharge the Company, its officers, directors, stockholders, corporate affiliates, subsidiaries, parent companies, successors and assigns, agents and employees (each in their individual and corporate capacities) (hereinafter, the “Released Parties”) from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including attorneys’ fees and costs), of every kind and nature which you ever had or now have against the Released Parties, including, but not limited to, those claims arising out of your employment with and/or separation from the Company, including, but not limited to, all claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., the Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq., the Americans With Disabilities Act of 1990, 42 U.S.C. § 12101 et seq., the Family and Medical Leave Act, 29 U.S.C. § 2601 et seq., the Worker Adjustment and Retraining Notification Act (“WARN”), 29 U.S.C. § 2101 et seq., Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514(A), the Rehabilitation Act of 1973, 29 U.S.C. § 701 et seq., Executive Order 11246, Executive Order 11141, the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., the Massachusetts Fair Employment Practices Act., M.G.L. c. 151B, § 1 et seq., the Massachusetts Civil Rights Act, M.G.L. c. 12, §§ 11H and 11I, the Massachusetts Equal Rights Act, M.G.L. c. 93, § 102 and M.G.L. c. 214, § 1C, the Massachusetts Labor and Industries Act, M.G.L. c. 149, § 1 et seq., the Massachusetts Privacy Act, M.G.L. c. 214, § 1B, and the Massachusetts Maternity Leave Act, M.G.L. c. 149, § 105D, all as amended; all common law claims including, but not limited to, actions in tort, defamation and breach of contract; all claims to any non-vested ownership interest in the Company, contractual or otherwise, including, but not limited to, claims to stock or stock options; and any claim or damage arising out of your employment with or

separation from the Company (including a claim for retaliation) under any common law theory or any federal, state or local statute or ordinance not expressly referenced above; provided, however, that nothing in this Agreement prevents you from filing, cooperating with, or participating in any proceeding before the EEOC or a state Fair Employment Practices Agency (except that you acknowledge that you may not be able to recover any monetary benefits in connection with any such claim, charge or proceeding). Notwithstanding the foregoing, the release set forth in this Section 1 shall not apply to (a) any claim to severance benefits under the Employment Agreement or your rights under this agreement or (b) any vested equity interest in the Company, including vested stock options.

The Company hereby fully, forever, irrevocably and unconditionally releases, remises and discharges you from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities and expenses (including attorney’s fees and costs), of every kind and nature that the Company ever had or now has against you as of the date of this agreement.

2. Non-Disclosure, Non-Competition and Non-Solicitation Obligations – You acknowledge and reaffirm your obligation to keep confidential and not to disclose any and all non-public information concerning the Company which you acquired during the course of your employment with the Company, including, but not limited to, any non-public information concerning the Company’s business affairs, business prospects and financial condition, as is stated more fully in the [Name of the Non-Disclosure Agreement] you executed at the inception of your employment, which remains in full force and effect. You further acknowledge and reaffirm your obligations under the [Name of the Non-Competition and/or Non-Solicitation Agreement(s)] you previously executed for the benefit of the Company at the inception of your employment, which also remain(s) in full force and effect.

3. Return of Company Property - You confirm that you have returned to the Company all keys, files, records (and copies thereof), equipment (including, but not limited to, computer hardware, software and printers, wireless handheld devices, cellular phones, pagers, etc.), Company identification, Company vehicles and any other Company-owned property in your possession or control and have left intact all electronic Company documents, including but not limited to, those that you developed or helped develop during your employment. You further confirm that you have cancelled all accounts for your benefit, if any, in the Company’s name, including but not limited to, credit cards, telephone charge cards, cellular phone and/or pager accounts and computer accounts.

4. Business Expenses and Compensation - - You acknowledge that you have been reimbursed by the Company for all business expenses incurred in conjunction with the performance of your employment and that no other reimbursements are owed to you. You further acknowledge that you have received payment in full for all services rendered in conjunction with your employment by the Company and that no other compensation is owed to you except as provided herein.

5. Non-Disparagement - You understand and agree that, as a condition for payment to you of the consideration herein described, you shall not make any false, disparaging or derogatory statements to any media outlet, industry group, financial institution or current or former employee, consultant, client or customer of the Company regarding the Company or any of its directors, officers, employees, agents or representatives or about the Company’s business affairs and financial condition; provided, however, that nothing herein shall prevent you from making truthful disclosures to any governmental entity or in any litigation or arbitration.

6. Amendment - This agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by duly authorized representatives of the parties hereto. This agreement is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators.

7. Waiver of Rights - No delay or omission by the Company in exercising any right under this agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion.

8. Validity - Should any provision of this agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be a part of this agreement.

9. Cooperation – You agree to cooperate with the Company in the investigation, defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Company. Your cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with the Company’s counsel to prepare for discovery or any mediation, arbitration, trial, administrative hearing or other proceeding or to act as a witness when reasonably requested by the Company at mutually agreeable times and at locations mutually convenient to you and the Company. You also agree to cooperate with the Company in the transitioning of your work, and will be available to the Company for this purpose or any other purpose reasonably requested by the Company.

10. Tax Provision – In connection with the severance benefits provided to you pursuant to this agreement, the Company shall withhold and remit to the tax authorities the amounts required under applicable law, and you shall be responsible for all applicable taxes with respect to such severance benefits under applicable law. You acknowledge that you are not relying upon advice or representation of the Company with respect to the tax treatment of any of the severance benefits.

11. Section 409A - No payments that may be made pursuant to this agreement that constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Internal Revenue Code and the guidance issued thereunder (“Section 409A”) may be accelerated or deferred by the Company or by you. Notwithstanding anything else to the

contrary in this agreement, to the extent that any of the payments that may be made hereunder constitute “nonqualified deferred compensation”, within the meaning of Section 409A and you are a “specified employee” upon your separation (as defined under Section 409A), any such payment shall be delayed following your separation date if, absent such delay, such payment would otherwise be subject to penalty under Section 409A. In any event, the Company makes no representation or warranty and shall have no liability to you or to any other person if any provisions of this agreement are determined to constitute “nonqualified deferred compensation” subject to Section 409A but do not satisfy the requirements of that section.

12. Nature of Agreement - You understand and agree that this agreement is a severance agreement and does not constitute an admission of liability or wrongdoing on the part of the Company.

13. Acknowledgments - You acknowledge that you have been given at least twenty-one (21) days to consider this agreement and that the Company advised you to consult with an attorney of your own choosing prior to signing this agreement. You understand that you may revoke this agreement for a period of seven (7) days after you sign this agreement, and the agreement shall not be effective or enforceable until the expiration of this seven (7) day revocation period. You understand and agree that by entering into this agreement you are waiving any and all rights or claims you might have under The Age Discrimination in Employment Act, as amended by The Older Workers Benefit Protection Act, and that you have received consideration beyond that to which you were previously entitled.

14. Voluntary Assent - You affirm that no other promises or agreements of any kind have been made to or with you by any person or entity whatsoever to cause you to sign this agreement, and that you fully understand the meaning and intent of this agreement. You state and represent that you have had an opportunity to fully discuss and review the terms of this agreement with an attorney. You further state and represent that you have carefully read this agreement, understand the contents herein, freely and voluntarily assent to all of the terms and conditions hereof, and sign your name of your own free act.

15. Applicable Law - This agreement shall be interpreted and construed by the laws of the Commonwealth of Massachusetts, without regard to conflict of laws provisions. You hereby irrevocably submit to and acknowledge and recognize the jurisdiction of the courts of the Commonwealth of Massachusetts, or if appropriate, a federal court located in Massachusetts (which courts, for purposes of this agreement, are the only courts of competent jurisdiction), over any suit, action or other proceeding arising out of, under or in connection with this agreement or the subject matter hereof.

16. Entire Agreement - This agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to your severance benefits and the settlement of claims against the Company and cancels all previous oral and written negotiations, agreements, commitments and writings in connection therewith. Nothing in this paragraph, however, shall modify, cancel or supersede your obligations set forth in paragraph 2 herein.

	SEPRACOR INC.


	By:
	Name:
	Title:

I hereby agree to the terms and conditions set forth above. I have been given at least twenty-one (21) days to consider this agreement and I have chosen to execute this on the date below. I intend that this agreement become a binding agreement between me and the Company if I do not revoke my acceptance in seven (7) days by notifying in writing.

		Date
Employee Name:

EX-10.2 3 a07-11008_1ex10d2.htm EX-10.2

Exhibit 10.2

SEPRACOR INC.

Executive Retention Agreement

THIS EXECUTIVE RETENTION AGREEMENT by and between Sepracor Inc., a Delaware corporation (the “Company”), and Adrian Adams (the “Executive”) is made as of March 1, 2007 (the “Effective Date”).

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

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

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

1. Key Definitions.

As used herein, the following terms shall have the following respective meanings:

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

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

Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or

(b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term “Continuing Director” means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or

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

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

1.2 “Change in Control Date” means the first date during the Term (as defined in Section 2) on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if (a) a Change in Control occurs, (b) the Executive’s employment with the

Company is terminated prior to the date on which the Change in Control occurs, and (c) either (i) such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (y) otherwise arose in connection with or in anticipation of a Change in Control, or (ii) such termination of employment occurs following the execution of a definitive agreement for such Change in Control, then for all purposes of this Agreement the “Change in Control Date” shall mean the date immediately prior to the date of such termination of employment.

2. Term of Agreement. This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the Term, (b) the termination of the Executive’s employment with the Company prior to the Change in Control Date, or (c) if a Change in Control has occurred during the Term, the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 and 5.3. “Term” shall mean the period commencing as of the Effective Date and continuing in effect through March 1, 2010; provided, however, that commencing on March 1, 2010 and each March 1 thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any extension thereof), the Company shall have given the Executive written notice that the Term will not be extended.

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

4. Benefits to Executive.

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

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

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

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

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

(b) for 24 months after the Change in Control Date, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive’s family at least equal to those provided to them immediately prior to the Change in Control Date, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive’s employment is terminated during this period and the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family; and

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

4.3 Taxes.

(a) In the event that the Company undergoes a “Change in Ownership or Control” (as defined below), the Company shall, within 30 days after each date on which the Executive becomes entitled to receive (whether or not then due) a Contingent Compensation Payment (as defined below) relating to such Change in Ownership or Control, determine and notify the Executive (with reasonable detail regarding the basis for its determinations) (i) which of the payments or benefits due to the Executive (under this Agreement or otherwise) following such Change in Ownership or Control constitute Contingent Compensation Payments, (ii) the amount, if any, of the excise tax (the “Excise Tax”) payable pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), by the Executive with respect to such

Contingent Compensation Payment and (iii) the amount of the Gross-Up Payment (as defined below) due to the Executive with respect to such Contingent Compensation Payment. Within 30 days after delivery of such notice to the Executive, the Executive shall deliver a response to the Company (the “Executive Response”) stating either (A) that he agrees with the Company’s determination pursuant to the preceding sentence or (B) that he disagrees with such determination, in which case he shall indicate which payment and/or benefits should be characterized as a Contingent Compensation Payment, the amount of the Excise Tax with respect to such Contingent Compensation Payment and the amount of the Gross-Up Payment due to the Executive with respect to such Contingent Compensation Payment. The amount and characterization of any item in the Executive Response shall be final; provided, however, that in the event that the Executive fails to deliver an Executive Response on or before the required date, the Company’s initial determination shall be final. Within 90 days after the due date of each Contingent Compensation Payment to the Executive, the Company shall pay to the Executive, in cash, the Gross-Up Payment with respect to such Contingent Compensation Payment, in the amount determined pursuant to this Section 4.3(a).

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

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

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

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

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

4.5 Outplacement Services. In the event of the termination of the Executive’s employment in connection with, in anticipation of, or within six months after a Change in Control, the Company shall provide outplacement services through one or more outside firms of

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

4.6 Six Month Delay. If any payment, compensation or other benefit provided to the Executive in connection with his employment termination is determined, in whole or in part, to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Executive is a specified employee as defined in Section 409A(2)(B)(i), no part of such payments shall be paid before the day that is six (6) months plus one (1) day after the date of his termination (the “New Payment Date”). In the case of welfare benefit continuation, the Company shall use its best efforts to enable Executive to obtain such benefits at Executive’s expense prior to the New Payment Date. The aggregate of any payments that otherwise would have been paid to the Executive (or on Executive’s behalf) during the period between the date of his termination and the New Payment Date shall be paid to the Executive in a lump sum on such New Payment Date. Thereafter, any payments that remain outstanding as of the day immediately following the New Payment Date shall be paid without delay over the time period originally scheduled, in accordance with the terms of this Agreement.

5. Disputes.

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

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

5.3 Compensation During a Dispute. If the Change in Control Date occurs during the Term and the Executive’s employment with the Company terminates within 24 months following the Change in Control Date, and the right of the Executive to receive benefits under Section 4 (or the amount or nature of the benefits to which he is entitled to receive) are the

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

6. Successors.

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

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

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

deemed to have been duly delivered unless and until it actually is received by the party for whom it is intended.

8. Miscellaneous.

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

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

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

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

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

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

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

8.8 Entire Agreement. This Agreement, together with the Employment Agreement by and between the Company and the Executive of even date herewith, sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. For the avoidance of doubt, except as specifically described herein in Section 4.1, the stock options and restricted stock awards held by Executive shall continue to be governed by the applicable stock option or stock incentive plan under which they were granted or issued (or any successor plan thereto) and any related stock option or restricted stock agreement, as the same may be amended or modified.

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

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

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

SEPRACOR INC.

By:	/s/ Timothy J. Barberich

Title:		Chairman and CEO


/s/ Adrian Adams
Adrian Adams

Address:

EX-10.3 4 a07-11008_1ex10d3.htm EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

1. Term of Employment. The Company hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, upon the terms set forth in this Agreement, for the period commencing on March 1, 2007 (the “Commencement Date”) and ending on March 1, 2010 (the “Term”). Notwithstanding the foregoing, the Term shall be extended automatically without further action by either party by one (1) additional year (added to the end of the Term) on each succeeding anniversary of March 1, 2010, unless either party shall have served written notice upon the other party at least sixty (60) days preceding the date upon which such Term would end (such period, as it may be extended, the “Employment Period”), unless sooner terminated in accordance with the provisions of Section 4.

2. Title and Capacity. The Executive shall serve as Executive Vice-President, General Counsel and Corporate Secretary of the Company. Executive shall report directly to the Chief Executive Officer of the Company and shall, except as permitted hereby, devote all of his business time and services to the business and affairs of the Company. Executive shall also perform such other duties consistent with his position as Executive Vice-President, General

Counsel and Corporate Secretary as may be reasonably assigned by the Chief Executive Officer and the Board of Directors of the Company (the “Board”) from time to time. The Executive agrees to abide by the rules, regulations, instructions, personnel practices and policies of the Company and any changes therein that may be adopted from time to time by the Company.

Notwithstanding anything herein to the contrary, Executive shall be entitled to engage in (a) service on the board of directors of one company, businesses or trade organization with prior Board approval, (b) service on the board of directors of not-for-profit or charitable organizations with prior Board approval, (c) other charitable activities and community affairs and (d) managing his personal investments and affairs, in each case to the extent such activities do not materially interfere with the performance of his duties and responsibilities to the Company.

3. Compensation and Benefits.

3.1 Salary. During the term of this Agreement, the Company agrees to pay to the Executive a base salary at the annualized rate of $500,000 (“Base Salary”) commencing on the Commencement Date. The Base Salary shall be subject to annual review by the Board but shall not be reduced below $500,000 per annum. Such salary shall be payable to Executive in bi-weekly installments and in accordance with the Company’s normal payroll procedures.

3.2 Bonus. The Executive shall receive a one-time “Sign On” bonus of $150,000 less applicable taxes and withholdings to be paid within thirty (30) days of the Commencement Date, provided, however, if the Executive’s employment is terminated, within twelve (12) months of the Commencement Date, for Cause by the Company pursuant to Section 4.2 or at the election of the Executive pursuant to Section 4.5, the Executive will be required to repay the portion of the Sign On bonus retained by Executive after the payment of all taxes. In addition, the Executive shall be eligible for a performance-based annual bonus for each fiscal

year of the Term (the “Annual Bonus”). The Annual Bonus shall be based upon annual quantitative and qualitative performance targets as established by the Board in its sole discretion in accordance with the Company’s bonus plan; provided, that the Executive’s annual bonus level target shall be set at fifty percent (50%) of Base Salary. For 2007, Executive shall be entitled to a pro rata guaranteed bonus based on an Annual Bonus of fifty percent (50%) of his Base Salary. The Annual Bonus is not earned until the close of business on the last business day of the Company’s fiscal year. Any Annual Bonus payable hereunder shall be payable, if at all, after the date of the delivery of the audited financial statements for the applicable fiscal year.

3.3 Stock and Option Grant. At the first meeting of the Compensation Committee of the Board of Directors following the Executive’s first day of employment, the Company shall grant to the Executive, under the Company’s 2000 Stock Incentive Plan (the “Stock Plan”), 30,000 shares of restricted stock and an option to purchase 70,000 shares of Company stock (the “Initial Grant”). The terms and conditions of the Initial Grant (other than the exercise price per share, which shall be equal to the closing price of the Company’s stock on the grant date) shall be set forth in the award agreements attached hereto as Schedules A and B. The stock option portion of the Initial Grant shall vest in five equal installments on each of the first five anniversaries of the grant date, and the restricted stock award portion of the Initial Grant shall vest in three equal installments on each of the first three anniversaries of the grant date. The Board, in its sole discretion, may grant further incentive compensation awards to the Executive from time to time. The Company represents and warrants to Executive that the Company has full power and authority, subject to Compensation Committee approval, and shares available under the Stock Plan to make the Initial Grant.

3.4 Benefits. The Executive shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its employees, to the extent that the Executive is eligible under (and subject to the provisions of) the plan documents governing those programs. The Executive shall be entitled to no less than four weeks paid vacation per year, subject to the other terms of the Company’s standard vacation policy (Schedule C).

3.5 Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable travel (which shall be deemed to include first class airfare), entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement or in connection with Executive’s commuting to and from his personal residence in New Jersey and the Company’s offices, upon presentation by the Executive of documentation, expense statements, vouchers and/or such other supporting information as the Company may request.

3.6 Housing Expenses. The Company understands that the Executive intends to maintain his primary residence outside the Massachusetts area for up to eighteen (18) months and then intends to relocate to the Massachusetts area. Until the Executive relocates to the Massachusetts area, the Company agrees to provide the Executive with a housing allowance of $3,750 per month, related to the rental or purchase of a home, within suitable distance to the Company’s headquarters, which payments shall be made on a fully tax grossed-up basis. The Company also will reimburse the Executive for reasonable travel, meals and lodging expenses incurred by him for up to two trips for the purpose of securing such house or apartment within a suitable distance to the Company’s headquarters. Executive shall be entitled to relocation

benefits afforded by the Company to other Company executives if and when Executive decides to permanently relocate his primary residence to the Massachusetts area.

3.7 Executive’s Legal Fees. The Company agrees to pay the Executive’s reasonable legal costs and expenses in connection with negotiating and drafting this Agreement up to a maximum of $15,000.

3.8 Automobile. The Company agrees to provide the Executive with an automobile allowance or a leased automobile with a retail value of up to $60,000, which payments shall be made on a fully tax grossed-up basis. In addition, the Company agrees to pay all insurance, maintenance, fuel and other customary costs associated with operating the automobile.

3.9 Withholding. All salary, bonus and other compensation payable to the Executive shall be subject to applicable withholding taxes.

4. Employment Termination. The employment of the Executive under this Agreement shall terminate upon the occurrence of any of the following:

4.1 On the expiration date of the Employment Period.

4.2 At the election of the Company, for Cause (as defined below), immediately upon written notice by the Company to the Executive, which notice shall identify the Cause upon which termination is based. For the purposes of this Section 4.2, Cause for termination shall mean: (a) the Executive’s willful and continued failure to substantially perform his reasonable assigned duties (other than any such failure resulting from incapacity due to physical or mental illness or any failure after the Executive gives notice of termination for Good Reason and Good Reason exists), which failure is not cured within 30 days after a written demand for substantial performance is received by the Executive from the Board of Directors of

the Company which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed the Executive’s duties; (b) the Executive’s willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company; or (c) a material breach of Section 6 or 7 of this Agreement by the Executive. For purposes of this Section 4.2, no act or failure to act by the Executive shall be considered “willful” unless it is done, or omitted to be done, in bad faith and without reasonable belief that the Executive’s action or omission was in the best interests of the Company.

4.3 Upon the death or disability of the Executive. As used in this Agreement, the term “disability” shall mean the Executive’s absence from the full-time performance of the Executive’s duties with the Company for one hundred eighty (180) consecutive calendar days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

4.4 At the election of the Executive for Good Reason as defined herein. The Executive may terminate his employment for Good Reason at any time, following 30-days prior written notice of such termination to the Company. Such notice shall provide factual details of the basis behind such termination and the Company shall have a thirty (30) day period thereafter to cure such matter. As used herein, the term “Good Reason” shall mean: (a) a material breach by the Company of the terms of this Agreement, including the failure to pay Base Salary or any Annual Bonus when due; or (b) any material adverse change by the Company in Executive’s titles, authorities, duties, responsibilities or lines of reporting inconsistent with the terms hereof or the assignment to Executive by the Company of titles, authorities, duties, responsibilities or lines of reporting inconsistent with the terms hereof, or (c) a relocation of the principal offices of

the Company to an area more than forty (40) miles from the location of such offices as of the date hereof.

4.5 At the election of the Executive without Good Reason, upon not less than sixty (60) calendar days prior written notice of termination by the Executive to the Company; provided, however, that the Company may, in its sole discretion, determine that the termination of the Executive shall become effective immediately and in which case the termination shall still be considered at the election of the Executive without Good Reason.

4.6 At the election of the Company, without Cause, upon not less than sixty (60) days written notice to Executive.

4.7 At the election of the Company or the Executive in connection with a Change in Control, as set forth in the Executive Retention Agreement between the Company and the Executive (the “ERA”), dated as of the date hereof. “Change in Control” shall have the meaning set forth in the ERA.

5. Effect of Termination.

5.1 Non-Renewal, Termination Without Good Reason By the Executive or Termination For Cause By the Company. In the event the Executive’s employment is terminated by non-renewal pursuant to Section 4.1, for Cause by the Company pursuant to Section 4.2, or at the election of the Executive pursuant to Section 4.5, the Company shall pay to the Executive the compensation and benefits otherwise payable to him under Section 3 through the last calendar day of his actual employment by the Company.

5.2 Termination for Death or Disability. In the event the Executive’s employment is terminated by death or because of disability pursuant to Section 4.3, the Company shall pay to the estate of the Executive or to the Executive, as the case may be, (A) within thirty

(30) days of the date of the Executive’s death or determination of disability, the compensation which would otherwise be payable to the Executive up to the end of the month in which the termination of his employment because of death or disability occurs; and (B) an annual bonus, payable when bonuses are paid for that year, in an amount equal to the total bonus he would be paid for such year, if any, multiplied by a fraction, the numerator of which is the number of days in the year that have elapsed since January 1 and the denominator of which is 365 (a “Pro Rata Bonus”). In addition, the Company shall permit Executive or Executive’s estate or representative to exercise the vested stock option portion of the Initial Grant for a period of no less than one year after any such termination of employment.

5.3 Termination By the Executive With Good Reason or By the Company Without “Cause”. In the event the Executive’s employment is terminated by the Executive with Good Reason pursuant to Section 4.4 or by the Company without Cause pursuant to Section 4.6, the Company shall pay to the Executive the compensation and benefits otherwise payable to him under Section 3 through the last calendar day of his actual employment by the Company. In addition, provided the Executive executes and does not revoke a Separation Agreement and Release of Claims for the benefit of the Company substantially in the form set forth on Schedule D hereto, the Company shall (a) continue to pay the Executive the Base Salary for eighteen (18) months in accordance with the Company’s regular payroll practices; (b) pay the Executive a Pro Rata Bonus; (c) pay the Executive, in bi-weekly installments, over an eighteen-month period, an amount equal in the aggregate to 1.5 times the average Annual Bonus earned for the two years prior to the date of his termination (in the event Executive has not been employed for a sufficient period to earn two such bonuses, such calculation shall be made assuming Executive earned a bonus for any such year at a target level of performance (taking into account any minimum

bonus amount)); (d) provide to the Executive for 18 months following the date of his termination payment of COBRA premiums for medical, dental, and vision benefits pursuant to plans maintained by the Company under which Executive and/or Executive’s family is eligible to receive benefits; provided, however, that, notwithstanding the foregoing, the benefits described in this subsection may be discontinued prior the end of the period, but only to the extent, that Executive receives substantially similar benefits from a subsequent employer; and (e) permit Executive to exercise the stock option portion of the Initial Grant for a period of no less than six months after the date of termination.

5.4 Termination Following a Change in Control. In the event the Executive’s employment is terminated pursuant to Section 4.7 by the Company or by the Executive within 24 months following the Change in Control Date as defined in the ERA, the Executive will be entitled to the benefits set forth in the ERA in accordance with the terms of the ERA.

5.5 Six Month Delay. If any payment, compensation or other benefit provided to the Executive in connection with his employment termination is determined, in whole or in part, to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Executive is a specified employee as defined in Section 409A(a)(2)(B)(i), no part of such payments shall be paid before the day that is six (6) months plus one (1) day after the date of termination (the “New Payment Date”). In the case of welfare benefit continuation, the Company shall use its best efforts to enable Executive to obtain such benefits at Executive’s expense prior to the New Payment Date. The aggregate of any payments that otherwise would have been paid to the Executive (or on Executive’s behalf) during the period between the date of termination and the New Payment Date shall be paid to the Executive in a lump sum on such New Payment Date. Thereafter, any payments that remain outstanding as of the day immediately

following the New Payment Date shall be paid without delay over the time period originally scheduled, in accordance with the terms of this Agreement.

6. Non-Competition and Non-Solicitation.

(a) While the Executive is employed by the Company and for a period of twelve (12) months following the Executive’s termination or cessation of such employment for any reason, the Executive will not directly or indirectly:

(i) Engage in any business or enterprise (whether as an owner, partner, officer, employee, director, investor, lender, consultant, independent contractor or otherwise, except as the holder of not more than 5% of the combined voting power of the outstanding stock of a publicly held company) that (A) is competitive with the Company’s business and (B) develops, designs, produces, markets, sells or renders any product or service competitive with any product developed, produced, marketed, sold or rendered by the Company while the Executive was employed by the Company;

(ii) Either alone or in association with others, recruit or solicit, any person who was employed by the Company at any time during the period of the Executive’s employment with the Company, except for an individual whose employment with the Company has been terminated for a period of six months or longer; and

(iii) Either alone or in association with others, solicit, divert or take away, or attempt to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of the Company which were contacted, solicited or served by the Executive while he was employed by the Company.

(b) If any restriction set forth in this Section 6 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable.

(c) The Executive acknowledges that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and are considered by the Executive to be reasonable for such purpose. The Executive agrees that any breach of this Agreement will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief without posting a bond.

(d) The geographic scope of this Section shall extend to anywhere the Company or any of its subsidiaries is doing business during the Term or has plans, during the Term, to do business.

(e) The Executive agrees to provide a copy of this Agreement to all person and Entities with whom the Executive seeks to be hired or do business before accepting employment or engagement with any of them.

(f) If the Executive violates the provisions of this Section, the Executive shall continue to be held by the restrictions set forth in this Section, until a period equal to the period of restriction has expired without any violation.

7. Proprietary Information and Developments.

7.1 Proprietary Information.

(a) The Executive agrees that all information, whether or not in writing, of a private, secret or confidential nature concerning the Company’s business, business relationships or financial affairs (collectively, “Proprietary Information”) is and shall be the exclusive property of the Company. By way of illustration, but not limitation, Proprietary Information may include discoveries, inventions, products, product improvements, product enhancements, processes, methods, techniques, formulas, compositions, compounds, negotiation strategies and positions, projects, developments, plans (including business and marketing plans), research data, clinical data, financial data (including sales, costs, profits and pricing methods), personnel data, computer programs (including software used pursuant to a license agreement), customer and supplier lists, and contacts at or knowledge of customers or prospective customers of the Company. Except as required by applicable law, the Executive will not disclose any Proprietary Information to any person or entity other than employees of the Company or use the same for any purposes (other than in the performance of his duties as an employee of the Company) without prior written approval from the Chief Executive Officer, either during or after his employment with the Company, unless and until such Proprietary Information has become public knowledge without fault by the Executive.

(b) The Executive agrees that all files, documents, letters, memoranda, reports, records, data, sketches, drawings, methods, laboratory notebooks, program listings, computer equipment or devices, computer programs or other written, photographic, or other tangible material containing Proprietary Information, whether created by the Executive or others, which shall come into his custody or possession, shall be and are the exclusive property of the

Company and are to be used by the Executive only in the performance of his duties for the Company. All such materials or copies thereof and all tangible property of the Company in the custody or possession of the Executive shall be delivered to the Company upon the earlier of (i) a request by the Company or (ii) termination of his employment. After such delivery, the Executive shall not retain any such materials or copies thereof or any such tangible property.

(c) The Executive agrees that his obligation not to disclose or to use information and materials of the types set forth in subsections (a) and (b) above, and his obligation to return materials and tangible property set forth in subsection (b) above, also extends to such types of information, materials and tangible property of customers of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Executive.

7.2 Developments.

(a) The Executive will make full and prompt disclosure to the Company of all inventions, creations, improvements, discoveries, trade secrets, secret processes, technology, know-how, copyrightable materials, methods, developments, software, and works of authorship or other creative works, whether patentable or not, which are created, made, conceived or reduced to practice by him or under his direction or jointly with others during his employment by the Company, whether or not during normal working hours or on the premises of the Company (all of which are collectively referred to in this Agreement as “Developments”).

(b) The Executive agrees to assign and does hereby assign to the Company (or any person or entity designated by the Company) all his right, title and interest in and to all Developments and all related patents, patent applications, copyrights and copyright applications. However, this subsection (b) shall not apply to Developments that do not relate to

any business or research and development conducted or planned to be conducted by the Company at the time such Development is created, made, conceived or reduced to practice and that are made and conceived by the Executive not during normal working hours, not on the Company’s premises and not using the Company’s tools, devices, equipment or Proprietary Information. The Executive understands that, to the extent this Agreement shall be construed in accordance with the laws of any state that precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this subsection (b) shall be interpreted not to apply to any invention that a court rules and/or the Company agrees falls within such classes. The Executive also hereby waives all claims to moral rights in any Developments.

(c) The Executive agrees to cooperate fully with the Company and to take such further actions as may be necessary or desirable, both during and after his employment with the Company, with respect to the procurement, maintenance and enforcement of copyrights, patents and other intellectual property rights (both in the United States and foreign countries) relating to Developments. The Executive shall sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignments of priority rights and powers of attorney, that the Company may deem necessary or desirable in order to protect its rights and interests in any Development. The Executive further agrees that if the Company is unable, after reasonable effort, to secure the signature of the Executive on any such papers, the Chief Executive Officer of the Company shall be entitled to execute any such papers as the agent and the attorney-in-fact of the Executive, and the Executive hereby irrevocably designates and appoints the Chief Executive Officer of the Company as his agent and attorney-in-fact to execute any such papers on his behalf and to take any and all actions as the

Company may deem necessary or desirable in order to protect its rights and interests in any Development under the conditions described in this sentence.

7.3 United States Government Obligations. The Executive acknowledges that the Company from time to time may have agreements with other parties or with the United States Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. The Executive agrees to be bound by all such obligations and restrictions that are made known to the Executive and to take all action necessary to discharge the obligations of the Company under such agreements.

7.4 Other Agreements. The Executive hereby represents that he is not bound by the terms of any agreement with any previous employer or other party to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. The Executive further represents that his performance of all the terms of this Agreement and the performance of his duties as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his employment with the Company and that the Executive will not disclose to the Company or induce the Company to use any confidential or proprietary information, knowledge or material belonging to any previous employer or others. The Executive further represents that his performance of all the terms of this Agreement and the performance of his duties as an employee of the Company does not and will not breach any agreement to refrain from soliciting employees, customers or suppliers of any former employer or others.

8. Indemnification. The Company shall indemnify the Executive in accordance with its Certificate of Incorporation and By-Laws.

9. Survival. The provisions of Sections 6, 7 and 8 shall survive the termination of this Agreement for any reason.

10. Notices. Any notices delivered under this Agreement shall be deemed duly delivered three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one (1) business day after it is sent for next-business day delivery via a reputable nationwide overnight courier service, in each case to the address of the recipient set forth in the introductory paragraph hereto. Either party may change the address to which notices are to be delivered by giving notice of such change to the other party in the manner set forth in this Section 10.

11. Compliance with Code Section 409A. It is intended that this Agreement comply with or be exempt from the requirements of Sections 409A(a)(2) through (4) of the Internal Revenue Code of 1986, as amended, and all regulations issued thereunder. The Agreement shall be interpreted and administered for all purposes in accordance with this intent and may be amended by the Company, following consultation with Executive and Executive’s legal and tax advisors, at any time if such amendment is deemed necessary to satisfy this intent.

12. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa.

13. Entire Agreement. This Agreement, together with the ERA, constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement.

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

15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (without reference to the conflict of laws provisions thereof). Any action, suit or other legal proceeding arising under or relating to any provision of this Agreement shall be commenced only in a court of the Commonwealth of Massachusetts (or, if appropriate, a federal court located within the Commonwealth of Massachusetts), and the Company and the Executive each consents to the jurisdiction of such a court. The Company and the Executive each hereby irrevocably waive any right to a trial by jury in any action, suit or other legal proceeding arising under or relating to any provision of this Agreement or any other dealing between them relating to the subject matter of this transaction and the relationship that is being established.

16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business; provided, however, that the obligations of the Executive are personal and shall not be assigned by him.

17. Acknowledgment. The Executive states and represents that he has had an opportunity to fully discuss and review the terms of this Agreement with an attorney. The Executive further states and represents that he has carefully read this Agreement, understands the contents herein, freely and voluntarily assents to all of the terms and conditions hereof, and signs his name of his own free act.

18. Miscellaneous.

18.1 No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar to or waiver of any right on any other occasion.

18.2 The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement.

18.3 In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

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

	Sepracor Inc.


	By:	/s/ Timothy J. Barberich
	Title:	Chairman and CEO


	/s/ Andrew I. Koven
	Andrew I. Koven

SCHEDULE A
FORM OF RESTRICTED STOCK AGREEMENT

SEE ATTACHED AGREEMENT

SEPRACOR INC.

Restricted Stock Agreement

Name of Recipient:

Number of shares of restricted common stock awarded:

Grant Date:

		SEPRACOR INC.

		By:
		[insert name and title]

Accepted and Agreed:


[insert name of recipient]

SEPRACOR INC.

Restricted Stock Agreement

1. Issuance of Restricted Shares.

2. Vesting.

3. Forfeiture of Unvested Restricted Shares Upon Employment Termination.

4. Restrictions on Transfer.

5. Restrictive Legends.

The book entry account reflecting the issuance of the Restricted Shares in the name of the Recipient shall bear a legend or other notation upon substantially the following terms:

6. Rights as a Shareholder.

7. Provisions of the Plan.

8. Tax Matters.

9. Miscellaneous.

SCHEDULE B
FORM OF STOCK OPTION AGREEMENTS

SEE ATTACHED AGREEMENT

SEPRACOR INC.

Form of Incentive Stock Option Agreement

Granted Under 2000 Stock Incentive Plan

1. Grant of Option.

2. Vesting Schedule.

This option will become exercisable (“vest”) pursuant to the Vesting Schedule indicated on the Certificate (“Vesting Schedule”).

3. Exercise of Option.

4. Withholding.

5. Nontransferability of Option.

6. Disqualifying Disposition.

7. Provisions of the Plan.

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

	SEPRACOR INC.

	By:

PARTICIPANT’S ACCEPTANCE

The Participant hereby accepts the foregoing option and agrees to the terms and conditions thereof. The Participant hereby acknowledges receipt of a copy of the Company’s 2000 Stock Incentive Plan.


	Name:

SEPRACOR INC.

Nonstatutory Stock Option Agreement
Granted Under 2000 Stock Incentive Plan

1. Grant of Option.

2. Vesting Schedule.

This option will become exercisable (“vest”) pursuant to the Vesting Schedule indicated on the Certificate (“Vesting Schedule”).

3. Exercise of Option.

4. Withholding.

5. Nontransferability of Option.

6. Provisions of the Plan.

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

	SEPRACOR INC.

	By:

PARTICIPANT’S ACCEPTANCE

The Participant hereby accepts the foregoing option and agrees to the terms and conditions thereof. The Participant hereby acknowledges receipt of a copy of the Company’s 2000 Stock Incentive Plan.


	Name:

SCHEDULE C

VACATION POLICY

SEE ATTACHED POLICY

SCHEDULE D
FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS

SEE ATTACHED FORM

FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS

The following numbered paragraphs set forth the terms and conditions which will apply if you timely sign and return this agreement and do not revoke it within the seven (7) day revocation period:

12. Nature of Agreement - You understand and agree that this agreement is a severance agreement and does not constitute an admission of liability or wrongdoing on the part of the Company.

	SEPRACOR INC.


	By:
	Name:
	Title:

		Date
Employee Name:

EX-10.4 5 a07-11008_1ex10d4.htm EX-10.4

Exhibit 10.5

SEPRACOR INC.

Executive Retention Agreement

THIS EXECUTIVE RETENTION AGREEMENT by and between Sepracor Inc., a Delaware corporation (the “Company”), and Andrew I. Koven (the “Executive”) is made as March 1, 2007 (the “Effective Date”).

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

1. Key Definitions.

As used herein, the following terms shall have the following respective meanings:

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

(a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 30% or more of either (x) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person

exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or

(b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term “Continuing Director” means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or

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

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

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

1.3 “Cause” means:

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

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

(c) a material breach by the Executive of Section 6 or 7 of the Employment Agreement between the Company and the Executive of even date herewith (the “Employment Agreement”).

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

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

(a) the assignment to the Executive of duties inconsistent in any material respect with the Executive’s position (including status, offices, titles or reporting requirements), authority or responsibilities in effect immediately prior to the earliest to occur of (i) the Change in Control Date, (ii) the date of the execution by the Company of the initial written agreement or instrument providing for the Change in Control or (iii) the date of the

adoption by the Board of Directors of a resolution providing for the Change in Control (with the earliest to occur of such dates referred to herein as the “Measurement Date”), or any other action or omission by the Company which results in a material diminution in such position, authority or responsibilities;

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

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

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

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

(f) any failure of the Company to pay or provide to the Executive any portion of the Executive’s compensation or benefits due under any Benefit Plan within seven days of the date such compensation or benefits are due, or any material breach by the Company of this Agreement or any employment agreement with the Executive.

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

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

2. Term of Agreement. This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the

Term, (b) the termination of the Executive’s employment with the Company prior to the Change in Control Date, (c) the date 24 months after the Change in Control Date, if the Executive is still employed by the Company as of such later date (unless the Company has provided notice of termination of Executive’s employment within such 24 month period in which case the Agreement shall expire on the termination of the Executive’s employment with the Company), or (d) the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 and 5.3 if the Executive’s employment with the Company terminates within 24 months (or after 24 months if the Company provides notice to the Executive of termination of his employment within such 24 month period) following the Change in Control Date. “Term” shall mean the period commencing as of the Effective Date and continuing in effect through March 1, 2010; provided, however, that commencing on March 1, 2010 and each March 1 thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any extension thereof), the Company shall have given the Executive written notice that the Term will not be extended.

3. Employment Status; Termination Following Change in Control.

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

3.2 Termination of Employment.

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

(b) The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or

preclude the Executive or the Company, respectively, from asserting any such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

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

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

4. Benefits to Executive.

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

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

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

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

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

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

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

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

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

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

4.3 Taxes.

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

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

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

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

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

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

4.5 Outplacement Services. In the event the Executive is terminated by the Company (other than for Cause, Disability or Death), or the Executive terminates employment for Good Reason, within 24 months following the Change in Control Date, the Company shall provide outplacement services through one or more outside firms of the Executive’s choosing up to an aggregate amount equal to 15 percent of the Executive’s annual base salary, with such services to extend until the earlier of (i) 12 months following the termination of Executive’s employment or (ii) the date the Executive secures full time employment.

4.6 Six Month Delay. If any payment, compensation or other benefit provided to the Executive in connection with his employment termination is determined, in whole or in part, to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Executive is a specified employee as defined in Section 409A(2)(B)(i), no part of such payments shall be paid before the day that is six (6) months plus one (1) day after the date of his termination (the “New Payment Date”). In the case of welfare benefit continuation, the Company shall use its best efforts to enable Executive to obtain such benefits at Executive’s expense prior to the New Payment Date. The aggregate of any payments that otherwise would have been paid to the Executive (or on Executive’s behalf) during the period between the date of his termination and the New Payment Date shall be paid to the Executive in a lump sum on such New Payment Date. Thereafter, any payments that remain outstanding as of the day immediately following the New Payment Date shall be paid without delay over the time period originally scheduled, in accordance with the terms of this Agreement.

5. Disputes.

5.1 Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors of the Company and shall be in writing. Any denial by the Board of Directors of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in

accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.

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

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

6. Successors.

6.1 Successor to Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if the Executive elects to terminate employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law or otherwise.

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

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

8. Miscellaneous.

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

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

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

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

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

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

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

8.8 Entire Agreement. This Agreement, together with the Employment Agreement between the Company and the Executive of even date herewith, sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. For the avoidance of doubt, except as specifically described herein in Section 4.1, the stock options and restricted stock awards held by Executive shall continue to be governed by the applicable stock option or stock incentive plan under which they were granted or issued (or any successor plan thereto) and any related stock option or restricted stock agreement, as the same may be amended or modified.

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

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

[Remainder of Page Intentionally Left Blank]

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

SEPRACOR INC.

By:	/s/ Timothy J. Barberich

Title:		Chairman and CEO


/s/ Andrew I. Koven
Andrew I. Koven

Address:

EX-10.5 6 a07-11008_1ex10d5.htm EX-10.5

Exhibit 10.5

TRANSITION AND SEVERANCE AGREEMENT

This Transition and Severance Agreement (the “Agreement”) is entered into as of March 1, 2007 (the “Effective Date”), by and between Sepracor Inc. (“Sepracor” or the “Company”) and W. James O’Shea (“O’Shea”) (individually, a “Party,” and collectively, the “Parties”).

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1. Transition Period Position and Responsibilities. Effective as of March 1, 2007 (the “Transition Date”), O’Shea shall resign from his positions as President and Chief Operating Officer of Sepracor. Beginning on the Transition Date and ending on August 31, 2007, or earlier if O’Shea voluntarily terminates his employment prior to August 31, 2007 (the “Transition Period”), O’Shea shall be employed by Sepracor as its Vice Chairman, reporting to Timothy Barberich, Sepracor’s Chief Executive Officer. During the Transition Period, O’Shea shall perform such duties consistent with his position as are reasonably assigned to him by Mr. Barberich. The Parties further agree that O’Shea shall perform all work and provide all assistance hereunder at such times and locations as are reasonably determined by Mr. Barberich.

2. Transition Period Compensation. During the Transition Period, the Company shall compensate O’Shea at the annual rate of $548,625, less applicable taxes and withholdings, (the “Base Salary”) to be paid in accordance with the Company’s regular payroll practices. In addition, provided O’Shea has not voluntarily terminated his employment prior to August 31, 2007, he shall be entitled to an annual bonus for calendar year 2007 equal to $219,450, less applicable taxes and withholdings. The bonus shall be paid to O’Shea in a lump sum, on or prior to March 1, 2008. For the duration of the Transition Period, the Company shall also continue to provide O’Shea with the benefits which he currently enjoys under the Company’s plans and policies, under the same terms that applied to him immediately prior to the Effective Date, subject to the terms of those plans and policies.

3. Severance Period and Compensation. Effective on August 31, 2007 (the “Separation Date”), O’Shea’s employment with the Company shall cease. Thereafter, provided O’Shea has not voluntarily terminated his employment prior to August 31, 2007 and executes, delivers and does not revoke a release of claims for the benefit of the Company in a form provided by the Company, the Company shall continue to pay O’Shea the Base Salary for a period of 12 months (the “Severance Period”), in accordance with its regular payroll practices.

For the duration of the Severance Period, if allowed under the Company’s life insurance policy, the Company further agrees to provide O’Shea with life insurance in the same amount the Company currently provides him, the full premium of which shall be paid by the Company.

Following the Separation Date, any entitlement O’Shea has, might have, had, or might have had to compensation, bonuses, wages or participation in any benefit plan, policy, program, contract or practice of the Company, shall terminate, except as required by federal or state law, by applicable plan terms or stock option agreements, or by the express terms of this Agreement.

4. Stock Options and Restricted Stock. The Parties acknowledge that O’Shea has been awarded options to purchase 700,000 shares of the Company’s common stock, all of which options are fully vested, as well as options to purchase an additional 25,700 shares of the Company’s stock which will vest prior to the Separation Date. The grant dates and exercise prices of such options are set forth in Exhibit A hereto. O’Shea shall have the right to exercise any or all of his options for a period of ninety (90) days after the Separation Date. The options shall terminate at the close of business on the ninetieth (90th) day following the Separation Date. In addition, the Parties acknowledge that O’Shea is the owner of certain shares of restricted stock of the Company. Of these shares, a total 6,850 shares will no longer be subject to any restriction as of March 16, 2007, and may be retained or sold by O’Shea after that date in his discretion, subject to the Company’s insider trading policy, the terms of the incentive stock plan and restricted stock agreement under which such shares were granted and the federal securities laws. Except where expressly modified by this Agreement, the options and shares of restricted stock set forth in Exhibit A shall continue to be governed by the terms of the applicable stock option agreements and restricted stock agreement executed by the Parties.

5. Cooperation. From the Effective Date forward, O’Shea agrees reasonably to cooperate with the Company in the defense or prosecution of any threatened or actual claims or actions which may be brought by, against or on behalf of the Company, its predecessors or any of its current or former partners, agents, employees, directors or affiliates and which relate to events or occurrences that transpired or are alleged to have transpired during his employment with the Company. Such cooperation shall include, without implication of limitation, being available to meet with the Company’s counsel to prepare for discovery or trial and to testify truthfully as a witness when reasonably requested by the Company at reasonable times and for reasonable time periods. In the event any such cooperation is required following the expiration of the Severance Period and requires more than de minimis time or effort, the Company agrees to compensate O’Shea at a reasonable hourly rate for any cooperation provided under this section.

6. Legal Fees. Nothing contained in this Agreement shall constitute a relinquishment or waiver by O’Shea of his right to be indemnified by the Company pursuant to the terms of the Company’s Restated Certificate of Incorporation, as amended (the “Indemnification Provisions”) with respect to conduct or events occurring during, or relating to, his employment by Sepracor, or of any right that he may have under, or with respect to, the Company’s Directors and Officers liability insurance policies. The Company agrees that to the full extent allowed by applicable law and subject to the terms of the Indemnification Provisions and any applicable Director and Officer liability insurance policy, it will continue to pay O’Shea’s reasonable legal fees relating to any matter that occurred during, or that relates to O’Shea’s employment by the Company.

7. Binding Nature of Agreement. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective heirs, administrators, representatives, executors, successors and assigns.

8. Use of the Agreement as Evidence. This Agreement may not be used as evidence in any subsequent proceeding of any kind, except one in which either Party alleges a breach of the terms of this Agreement or elects to use this Agreement as a defense to any claim.

9. Entire Agreement; Modifications. With the exception of the stock option and restricted stock agreements applicable to the grants set forth in Exhibit A hereto, the Company’s stock option and incentive stock plan under which such equity incentives were granted, the Invention, Non-Disclosure and Personal Conduct Agreement executed by O’Shea on October 1, 1999, and the Executive Retention Agreement dated February 1, 2002, which will survive and remain in full force and effect, this Agreement contains the entire agreement among the Parties hereto with respect to the matters covered hereby, and supersedes all prior and contemporaneous communications, e-mails, agreements, representations, understandings or negotiations between O’Shea, the Company and/or their agents and attorneys, including but not limited to the offer letter signed by the Parties and bearing the typed date September 10, 1999. This Agreement may be modified only by a written agreement signed by an authorized representative of each of the Parties hereto. No waiver of this Agreement or any provision hereof shall be binding upon the Party against whom enforcement of such waiver is sought unless it is made in writing and signed by or on behalf of such Party.

10. Section 409A. Notwithstanding anything else to the contrary in this agreement, to the extent that any of the payments that may be made hereunder constitute “nonqualified deferred compensation”, within the meaning of Section 409A and you are a “specified employee” upon your separation (as defined under Section 409A), the timing of any such payment following the Separation Date shall be modified if, absent such modification, such payment would otherwise be subject to penalty under Section 409A. In any event, the Company makes no representation or warranty and shall have no liability to you or to any other person if any provisions of this agreement are determined to constitute “nonqualified deferred compensation” subject to Section 409A but do not satisfy the requirements of that section.

11. Further Assurances. The Parties agree to execute, acknowledge (if reasonably requested), and deliver such documents, certificates or other instruments and take such other actions as may be reasonably required from time to time to carry out the intents and purposes of this Agreement, provided they do not impose any material additional obligations upon either Party.

12. Acknowledgments and Other Terms. O’Shea agrees that he has carefully read and understands all of the provisions of this Agreement, that he has been advised to consult with and has consulted with an attorney, and that he is voluntarily entering this Agreement. O’Shea further represents and acknowledges that in executing this Agreement, he is not relying and has not relied upon any representation or statement made by the Company with regard to the subject matter, basis or effect of this Agreement.

13. Interpretation. The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the Parties. This Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited or invalid under any such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating or nullifying the remainder of such provision or any other provisions of this Agreement. The captions of the sections of this Agreement are for convenience of reference only, and in no way define, limit or affect the scope or substance of any section of this Agreement.

14. Counterparts. This Agreement may be executed in any number of counterparts and may be delivered by facsimile, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

15. Governing Law; Prevailing Party. This Agreement shall take effect as an instrument under seal and shall be governed and construed in accordance with the laws of Massachusetts, without regard to its conflicts of laws principles. In the event either Party retains legal counsel in connection with the enforcement of its rights under this Agreement and the other Party is found by a court having competent jurisdiction to have breached its obligations hereunder, the prevailing Party shall be entitled to recover all reasonable legal fees and related reasonable charges and disbursements incurred by it in connection with such enforcement action and any negotiations leading up to it.

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as an instrument under seal as of the Effective Date.

SEPRACOR INC.

By:	/s/ Timothy J. Barberich

Name and Title:		Timothy J. Barberich, Chairman and CEO


/s/ W. James O’Shea
W. JAMES O’SHEA

Exhibit A

O’Shea Stock Option Grants

					Total Vesting
	Options			Total Currently	Prior to
Grant Date	Outstanding	Price		Vested	Separation Date

10/21/99	200,000	$	35.75	200,000	200,000
10/21/99	11,814	$	35.75	11,184	11,184
10/21/99	468,816	$	35.75	468,816	468,816
2/24/05	7,750	$	64.50	1,550	3,100
2/24/05	92,250	$	64.50	18,450	36,900
3/16/06	1,800	$	55.54	0	0
3/16/06	26,700	$	55.54	0	5,700

EX-10.6 7 a07-11008_1ex10d6.htm EX-10.6

Exhibit 10.6

March 1, 2007

Douglas E. Reedich

Dear Doug:

This letter sets forth the agreement between you and Sepracor concerning the terms of your resignation from Sepracor.

You will remain an employee of Sepracor carrying out your responsibilities at my direction or as I may delegate until at the latest December 31, 2007 or earlier as determined by either you or Sepracor, at which time your resignation will be effective.

If you remain an employee in good standing until December 31, 2007, or if your employment is terminated by Sepracor without cause prior to December 31, 2007, then (i) at the time Sepracor makes its regular bonus payments for 2007, you will be paid a pro rata share of your full bonus eligibility for 2007 (based on the proportion of 2007 during which you were employed by Sepracor), and (ii) you will be paid bi-weekly until the earlier of December 31, 2009, or the second anniversary of your termination from Sepracor, with each bi-weekly payment in the amount of 1/26 of your annual salary and bonus eligibility for 2007 for the first year, and 1/26 of your annual salary without bonus for the second year.

In addition, in the event that Sepracor establishes an executive retiree health benefit program prior to December 31, 2007, you will be eligible to participate. For such time as you elect to participate in any such program, you will reimburse Sepracor at the lesser of (a) the actual cost to Sepracor of your participation and (b) the rate applicable to former Sepracor employees who elect COBRA health coverage. In the event that Sepracor does not establish an executive retiree health benefit program prior to December 31, 2007, Sepracor will reimburse you the cost of your participation in COBRA for such time as you participate in COBRA.

You agree that, after the date of termination of your employment, you will undertake any necessary preparation testimony in Sepracor’s ongoing ANDA litigations at no charge to Sepracor aside from costs related to independent legal representation to which you may be entitled (if any) and reasonable travel, lodging and meals as applicable (“out-of-pocket costs”). You agree to provide up to 8 hours per month of transition assistance at Sepracor’s reasonable request until December 31, 2009, at no charge to Sepracor aside from out-of-pocket costs. You agree also to execute a Severance and Settlement Agreement and Release in a form provided by Sepracor which shall include, but not be limited to, provisions involving a general release of all claims, confidentiality, non-competition (in a business capacity), cooperation, non-disparagement and return of company property.

Notwithstanding anything else to the contrary in this letter agreement, to the extent that any of the payments that may be made hereunder constitute “nonqualified deferred compensation”, within the meaning of Section 409A and you are a “specified employee” upon your separation (as defined under Section 409A), the timing of any such payment following your separation date shall be modified if, absent such modification, such payment would otherwise be subject to penalty under Section 409A. In any event, the Company makes no representation or warranty and shall have no liability to you or to any other person if any provisions of this agreement are determined to constitute “nonqualified deferred compensation” subject to Section 409A but do not satisfy the requirements of that section.

This letter agreement constitutes the entire agreement between Sepracor and you and supercedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this letter agreement, other than the Executive Retention Agreement between Sepracor and you dated February 1, 2002. For the avoidance of doubt, the stock options and restricted stock awards you hold shall continue to be governed by the applicable stock option or stock incentive plan under which they were granted or issued (or any successor plan thereto) and any related stock option or restricted stock agreement.

Any changes to the terms of this letter agreement will be binding only if made in writing and agreed by both you and Sepracor.

Please acknowledge this letter by signing and dating in the space provided below. Return one signed original at your earliest convenience to me. You may keep the other for your files.

Best regards,

/s/ Timothy J. Barberich
Timothy J. Barberich
Chairman and Chief Executive Officer

Accepted and Agreed:

/s/ Douglas E. Reedich		3/1/2007
Douglas E. Reedich, Ph.D, J.D.		Date

EX-31.1 8 a07-11008_1ex31d1.htm EX-31.1

Exhibit 31.1

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

I, Timothy J. Barberich, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sepracor Inc.;

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

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

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

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

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

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

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007

	/s/ TIMOTHY J. BARBERICH
	Timothy J. Barberich
	Chairman and Chief Executive Officer

EX-31.2 9 a07-11008_1ex31d2.htm EX-31.2

Exhibit 31.2

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

I, David P. Southwell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sepracor Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007

	/s/ DAVID P. SOUTHWELL
	David P. Southwell
	Executive Vice President and Chief Financial Officer

EX-32.1 10 a07-11008_1ex32d1.htm EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Sepracor Inc. (the “Company”) for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Timothy J. Barberich, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2007
	/s/ TIMOTHY J. BARBERICH
	Timothy J. Barberich
	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Sepracor Inc. and will be retained by Sepracor Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 11 a07-11008_1ex32d2.htm EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Sepracor Inc. (the “Company”) for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David P. Southwell, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2007

	/s/ DAVID P. SOUTHWELL
	David P. Southwell
	Chief Financial Officer

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