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SEPRACOR INC. INDEX

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number 0-19410

Sepracor Inc.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (508) 481-6700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:

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

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

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

        The number of shares outstanding of the registrant's class of Common Stock as of October 31, 2003 was: 84,891,310 shares.

SEPRACOR INC.

INDEX

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SEPRACOR INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

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

3

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Per Share Amounts)

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

4

SEPRACOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

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

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. Basis of Presentation

        The accompanying consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited financial statements. Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The year-end consolidated condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The consolidated interim financial statements, in the opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended September 30, 2003 and 2002. Certain prior amounts have been reclassified to conform with current year presentation.

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

        The consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2002, which are contained in our annual report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission.

        The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, our management evaluates its estimates, including those related to revenue recognition, accounts receivable, inventories, investments and intangible assets. Management bases these estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

2. Recent Accounting Pronouncements

        In July 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Our adoption of SFAS No. 146, effective January 1, 2003, has had no material impact on our financial statements through September 30, 2003.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which addresses financial accounting and reporting for the recording of expenses for the fair value of stock options. SFAS No. 148 provides alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation. Additionally, SFAS No. 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of this statement are effective for fiscal years ending after December 15, 2002. While we have not elected to adopt fair value

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accounting for our stock-based compensation, we have complied with the new disclosure requirements under SFAS No. 148 and provide interim disclosure on the effects of stock-based compensation in this report.

        Also during 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", referred to as FIN 45. FIN 45 elaborates on the existing disclosure requirements for most guarantees and clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. We have no history of any claims or losses under FIN 45 and therefore have no liabilities recorded for guarantees at September 30, 2003. Therefore, the adoption of FIN 45 has not had a material impact on our financial position, results of operations or cash flows.

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51", referred to as FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors (if any) do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We are required to apply FIN 46 to all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, we are required to apply FIN 46 on December 31, 2003. The adoption of FIN 46 is not expected to have a material effect on our financial statements.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45 and (4) amends certain other existing pronouncements. The provisions of this statement are effective for us for contracts entered into or modified after June 30, 2003. Our adoption of SFAS No. 149 has not had a material effect on our financial statements.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability (or an asset in some circumstances). Many of the instruments that fall within the scope of SFAS No. 150 were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is generally effective at the beginning of the first interim period beginning after June 15, 2003. Our adoption of SFAS No. 150 has not had a material effect on our financial statements.

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3. Basic and Diluted Net Loss Per Common Share

        Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares during the period. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be anti-dilutive. Common equivalent shares result from the assumed conversion of preferred stock and convertible subordinated debentures and notes 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.

        For the three and nine months ended September 30, 2003 and 2002, we calculated basic and diluted net loss per common share based on the weighted-average number of common shares outstanding during the period because the effect of common stock equivalents would be anti-dilutive. We did not include certain securities in the computation of diluted earnings per share for the three and nine months ended September 30, 2003 and 2002 because they would have an anti-dilutive effect due to net losses for such periods. These excluded securities include the following:

a.

Options to purchase shares of common stock:

b.

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

4. Accounting for Stock-Based Compensation

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

        If we had applied the fair value recognition provisions of SFAS No. 123 and determined the compensation costs for stock options issued to employees based on the estimated fair value upon grant as calculated in accordance with SFAS No. 123, our reported net loss and basic and diluted net loss per

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common share for the three and nine months ended September 30, 2003 and 2002 would have been adjusted to the pro forma amounts set forth in the table below.

5. Inventories

        Inventories consist of the following:

6. Patents and Other Intangible Assets

        The following schedule details the carrying value of our patents and other intangible assets as of September 30, 2003 and December 31, 2002:

        Amortization expense was $937,000 and $997,000 for the three months ended September 30, 2003 and 2002, respectively, and $2.8 million and $2.9 million for the nine months ended September 30, 2003 and 2002, respectively. We currently estimate that our amortization expense will be $937,000, $3.8 million, $3.8 million, $3.8 million and $3.8 million for the remainder of 2003 and for the years ending December 31, 2004, 2005, 2006 and 2007, respectively.

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7. Convertible Subordinated Debt

        Our outstanding convertible subordinated debt consists of the following:

        On July 10, 2003, we redeemed the remaining outstanding $111.9 million face value of our 7% convertible subordinated debentures due 2005 for aggregate cash consideration of $115.2 million, excluding accrued interest. As a result of this redemption, we recorded a loss in other income of approximately $4.6 million, including the write-off of $1.3 million of deferred financing costs, in the third quarter of 2003.

        In connection with each convertible subordinated debt offering, we incurred deferred finance costs that we have recorded as other assets on our balance sheet and are amortizing over the respective term of each convertible debt offering. Amortization of deferred finance costs was $1.1 million and $1.3 million for the three months ended September 30, 2003 and 2002, respectively, and $3.5 million and $4.3 million for the nine months ended September 30, 2003 and 2002, respectively.

8. Comprehensive Loss

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

9. Commitments and Contingencies

        Since November 15, 2002, eight purported class action lawsuits have been filed in the United States District Court for the District of Massachusetts against us and several of our current and former officers and directors. The complaints were filed allegedly on behalf of persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest of which is May 17, 1999, and all ending on March 6, 2002. The complaints are similar and allege violations of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily the complaints allege that the defendants disseminated to the investing public false and misleading statements relating to the

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testing, safety and likelihood of approval of SOLTARA™, our nonsedating antihistamine drug candidate. On April 11, 2003, two consolidated amended complaints were filed, one on behalf of the purchasers of our common stock, the other on behalf of the purchasers of our debt securities. The consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. We filed a motion to dismiss both consolidated amended complaints on May 27, 2003, the plaintiffs opposed the motion and a hearing has been scheduled on the matter for November 24, 2003.

        As permitted under Delaware Law, our Restated Certificate of Incorporation, as amended, provides that we will indemnify our officers and directors for certain claims asserted against them in connection with their service as an officer or director of Sepracor. The indemnification does not apply if the person is adjudicated not to have acted in good faith in the reasonable belief that his or her actions were in our best interests. The indemnification obligation survives termination of the indemnified persons' role as an officer or director. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance policies that, in most cases, would limit our exposure and enable us to recover a portion of any future amounts paid. As a result of the insurance coverage, the estimated fair value of these indemnification agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2003.

        We enter into indemnification provisions under our agreements with other companies in our ordinary course of business, typically with business partners, contractors, clinical sites and customers. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited. We have no history of any claims or losses related to these agreements and therefore have no liabilities recorded for these agreements as of September 30, 2003.

10. Subsequent Event

        On November 12, 2003, we received notification from the United States Food and Drug Administration that the agency now anticipates completing its review of the ESTORRA