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 that are prescribed principally by primary care physicians and certain specialists. Our drug research and development program, together with our corporate development and licensing activities, have yielded a portfolio of products and product candidates intended to treat a broad range of indications. We are currently concentrating our product development efforts in two therapeutic areas: respiratory diseases and CNS disorders.

Our currently marketed products in the United States are:

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º LUNESTA® (eszopiclone), a non-benzodiazepine sedative hypnotic, for the treatment of insomnia in adults;

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

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º XOPENEX HFA® (levalbuterol tartrate) Inhalation Aerosol, an MDI for the treatment or prevention of bronchospasm in adults, adolescents and children four years of age and older with reversible obstructive airway disease;

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º BROVANA® (arformoterol tartrate) Inhalation Solution, a long-acting, twice-daily (morning and evening), maintenance treatment of bronchoconstriction in patients with COPD, including chronic bronchitis and emphysema;

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º OMNARIS™ (ciclesonide) Nasal Spray, an intranasal formulation of ciclesonide for the treatment of nasal symptoms associated with seasonal allergic rhinitis in adults and children six years of age and older, and with perennial allergic rhinitis in adults and adolescents 12 years of age and older; and

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º ALVESCO® (ciclesonide) HFA Inhalation Aerosol, an inhaled corticosteroid in an HFA MDI formulation for the maintenance treatment of asthma as prophylactic therapy in adult and adolescent patients 12 years of age and older.

In January 2008, we obtained from Nycomed the exclusive United States distribution rights to OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol. We commercially introduced OMNARIS Nasal Spray in April 2008. In September 2008, we commercially introduced ALVESCO HFA Inhalation Aerosol through an extended, staged launch that initially was targeted primarily to specialists. In early 2009, we expanded our sales and marketing efforts to include a broader group of physicians. Because of the extended, staged launch for ALVESCO HFA Inhalation Aerosol, we expect 2009 revenues for this product to take place in the latter part of the year as we reduce launch phase inventory.

Our sales force markets our products in the United States to primary care physicians, allergists, pulmonologists, pediatricians, hospitals, psychiatrists and sleep specialists, as appropriate. We expect to commercialize any additional products that we may successfully develop or acquire through our own or a contract sales force, co-promotion agreements and/or out-licensing partnerships.

In January 2009, we announced a corporate restructuring and workforce reduction plan pursuant to which we intend to reduce our workforce by approximately 20%, or approximately 530 positions, of which approximately 180 are corporate positions and approximately 350 are field-based positions. We expect to substantially complete the workforce reduction by the end of the second quarter of 2009. In addition, we eliminated approximately 410 contract sales organization sales representative positions. These representatives marketed OMNARIS Nasal Spray, ALVESCO HFA Inhalation Aerosol and our XOPENEX products from September 2008 through January 2009. In total, our sales positions were reduced to approximately 1,325 (although the actual number of sales positions varies from time to time due to attrition in the ordinary course of business).

These reductions, together with other anticipated cost-saving initiatives across the organization, have resulted in a projected reduction in operating expenses of approximately $190 million in 2009, which is in addition to approximately $20 million of expense reductions realized during the fourth quarter of 2008. We are taking these actions in order to reduce costs, streamline operations and improve our cost structure. However, if we are unable to achieve the anticipated benefits, savings or improvements in our cost structure in the expected timeframe or other unforeseen events occur, our business and results of operations may be adversely affected. In addition, our restructuring plan may be disruptive to our business and could impair our ability to maintain sales levels and/or support potential sales growth and sales of additional products we may commercialize in the future.

As a result of the reduction in workforce, we expect to record restructuring charges and make future payments of between approximately $33.0 million and $37.0 million, a substantial portion of which we anticipate will be recorded in the first quarter of 2009. We currently expect these charges to consist of approximately $23.0 million to $24.0 million relating to employee termination benefits and approximately $10.0 million to $13.0 million relating to other charges, including contract sales organization termination fees and lease termination fees associated with office locations, equipment and automobiles. The increase in the estimate of our restructuring charge from our previously announced

range primarily relates to recent decisions to vacate two additional office locations and fees related to the termination of our contact sales organization earlier than previously anticipated. Our estimated restructuring charge is based on a number of assumptions. Actual results may differ materially and additional charges not currently expected may be incurred in connection with, or as a result of, these reductions.

In June 2008, in order to establish a Canadian commercial presence, we acquired the outstanding capital stock of Oryx Pharmaceuticals, Inc., or Oryx, a specialty pharmaceutical company that markets branded prescription pharmaceutical products to physician specialists and hospitals within Canada and is focused in the cardiovascular, CNS disorder, pain and infectious disease therapeutic areas. We subsequently changed Oryx's name to Sepracor Pharmaceuticals, Inc., or SPI. Following this acquisition, in accordance with SFAS 131, we began operating in two segments distinguished by strategic business units that offer different products: (1) Sepracor Inc., which consists of Sepracor and our subsidiaries other than SPI and currently engages in the discovery, research and development and commercialization of pharmaceutical products, and (2) SPI, which currently engages in the licensing and commercialization of pharmaceutical products in Canada. However, since there are no differences among our operating segments that are material to an understanding of our business as a whole, we present the discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis. The accounting policies of both segments are the same.

Factors that will be critical for us in achieving near-term success include our ability to:

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º increase our LUNESTA revenues, despite increasing competition;

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º grow XOPENEX Inhalation Solution revenues outside of the Medicare market by maintaining targeted sales and marketing efforts aimed at the retail and hospital market segments;

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º continue to increase our XOPENEX HFA revenues;

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º successfully market and sell BROVANA, particularly in the home health care market segment, which could be adversely affected by potential restrictions on Medicare Part B reimbursement or changes in the Medicare Part B reimbursement amount for BROVANA;

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º successfully commercialize OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol;

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º successfully implement our corporate restructuring and workforce reduction plan and manage the impact of the restructuring on our revenues;

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º reduce and manage expenses effectively to help preserve profitability and positive cash flow from operations; and

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º maintain patent protection for our products, including successful enforcement of our patents, particularly for XOPENEX Inhalation Solution and LUNESTA for which a number of ANDAs have been submitted to the FDA.

We believe that success in each of these areas should allow us to continue to be profitable in the near term and provide us the ability to repay our outstanding convertible debt of $530.5 million if and when it comes due. If not converted, repurchased at the holders' or our option, or otherwise refinanced earlier, the principal amount of this debt becomes due as follows:

             Principal Amount of Convertible Debt   Maturity Date
             $148,020,000                             October 2010
             $382,450,000(1)                                  2024 (2)


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             º (1)

0% notes due 2024. We paid a total of $106.9 million in cash to repurchase these notes. On February 17, 2009, we announced that we commenced a tender offer to purchase for cash up to all $382.5 million aggregate principal amount of our outstanding 0% notes due 2024.

º (2)
º These notes may be converted into cash, and if applicable, shares of our common stock under a conversion formula that becomes applicable, if and when, our common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to our common stock exceeding such price, the notes are convertible to cash at the option of the holders in October 2009, 2014, 2019 and 2024, as well as under certain other conditions.

Our long-term success depends in part on our ability to continue to sell our commercialized products, build upon our current business, successfully develop or acquire and commercialize new products and successfully implement our corporate restructuring and workforce reduction plan. Our long-term success also depends in part on our ability to maintain patent protection for our products, including successful enforcement of our patents, particularly for XOPENEX Inhalation Solution and LUNESTA for which a number of ANDAs have been submitted to the FDA.

We expect that sales of LUNESTA and XOPENEX Inhalation Solution will represent the majority of our total revenues in 2009. 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 our marketed products could adversely affect our operating results. If sales of our marketed products do not meet our expectations, we may not have sufficient revenues to achieve our business plan and our business will not be successful.

In 2009, we expect to be profitable for the year on an operating and net income basis. We expect research and development expenses, sales, marketing and distribution expenses and general and administrative expense to decrease compared to 2008 as a result of our corporate restructuring and workforce reduction plan, together with other anticipated cost savings initiatives. As part of our business strategy, we have and expect to continue considering and, as appropriate, consummating acquisitions of other technologies, product candidates, approved products and/or businesses. We can provide no assurance that we will be successful in completing any such future acquisitions.

Recent Developments

In February 2009, the CHMP re-confirmed its initial opinion recommending the EC grant LUNIVIA marketing approval in Europe, but without a new active substance status designation that we believe would enable more favorable commercialization of the product in the EU. We intend to continue to pursue with the EC the circumstances surrounding LUNIVIA and our marketing application, and we anticipate the EC will be making a final decision in near future.

On February 17, 2009, we announced that we commenced a tender offer to purchase for cash up to all $382.5 million aggregate principal amount of our outstanding 0% notes due 2024. The terms and conditions of the offer are set forth in the Schedule TO, Offer to Purchase and the related Letter of Transmittal filed with the SEC on February 17, 2009. We are offering to purchase the notes at a price of $970 for each $1,000 of principal amount of notes tendered. The tender offer will expire at midnight, New York City time, at the end of March 16, 2009, unless extended or earlier terminated pursuant to the terms of the tender offer. The tender offer will not be contingent upon any minimum number of notes being tendered but is subject to certain conditions described in the Offer to Purchase.

Beginning February 9, 2009, we received notices from Teva, Cobalt Laboratories, Dr. Reddy's, Orchid, Glenmark Generics, Roxane, Lupin, Wockhardt and Sun Global, that each has filed an ANDA with the FDA for generic versions of eszopiclone tablets (1 mg, 2 mg and 3 mg). Each submission includes a Paragraph IV certification alleging that one or more of our patents listed in the Orange

Book for LUNESTA is invalid, unenforceable or not infringed by their respective proposed generic products. We anticipate receipt of additional notices that other ANDAs with Paragraph IV certifications have been filed by different generic pharmaceutical companies. We are currently contemplating commencing civil actions against these parties for patent infringement and will consider commencing patent infringement litigation against any other company that files an ANDA that includes a Paragraph IV certification with respect to eszopiclone.

Partnered Products and Revenue Related Agreements

As part of our business strategy, we have entered into collaboration, license and distribution agreements with other pharmaceutical companies for the development and commercialization of various products. These agreements sometimes include the receipt or payment of nonrefundable upfront payments, payments on achieving significant milestones, and royalty payments on sales if and when the underlying product or product candidate is commercialized in the relevant jurisdiction.

Out-Licensed Patents

Royalty revenues from our out-licensing agreements for certain patents we own were $70.3 million, $47.7 million and $33.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. Our royalty revenues currently come primarily from sales in the antihistamine market. The antihistamine products for which we receive royalties face intense competition from over-the-counter products, such as CLARITIN and ZYRTEC, and generic prescription antihistamine products. This competition has a direct impact on our ability to earn royalties in this market. Additionally, there is uncertainty relating to possible changes in the market with much discussion about other prescription allergy products possibly being sold without a prescription. Finally, there is a possibility that companies that produce generic drugs may succeed in their patent challenges relating to drugs for which we receive royalties and other branded drugs with large market share. This could result in the introduction of other generic equivalents, which may increase price competition among antihistamines and lower market share for the branded drugs.

sanofi-aventis for Fexofenadine HCl. In July 1993, we licensed to HMR, now sanofi-aventis (formerly Aventis), our U.S. patent rights covering fexofenadine HCl, which is marketed by sanofi-aventis as ALLEGRA. However, since the introduction of a generic version of ALLEGRA in the United States during the third quarter of 2005, we have ceased to earn royalties on sales in the United States of ALLEGRA. Since August 1999, we have been entitled to receive royalties on fexofenadine product sales in countries outside of the United States where we have patents related to fexofenadine. We are currently receiving royalties from sanofi-aventis for sales of ALLEGRA in Japan, Canada and Australia and in certain EU member states. We recorded approximately $26.6 million, $25.2 million and $16.6 million of royalty revenues under these agreements in 2008, 2007 and 2006, respectively.

Schering-Plough Corporation for Desloratadine. In December 1997, we licensed to Schering-Plough exclusive worldwide rights to our patents and patent applications relating to desloratadine, an active-metabolite of loratadine, which is marketed by Schering-Plough as CLARITIN. In January 2002, Schering-Plough commercially introduced CLARINEX brand desloratadine 5 mg tablets for the treatment of seasonal allergic rhinitis, in adults and children twelve years of age and older. In February 2002, Schering-Plough received FDA approval to market CLARINEX tablets for the treatment of chronic idiopathic urticaria, or CIU, in adults and children twelve years of age and older. Under the terms of our license agreement with Schering-Plough, we are currently receiving royalties on sales of CLARINEX in countries in which we hold patents. We recorded approximately $24.1 million, $16.5 million and $12.2 million of royalty revenue under this agreement in 2008, 2007 and 2006, respectively. Beginning in October 2007, the contractual royalty rate increased with respect to sales in the United States.

Schering-Plough has entered into settlement agreements with several ANDA filers involved in litigation with Schering-Plough that permit generic entry of CLARINEX-D-12 Hour, CLARINEX-D-24 Hour and CLARINEX REDITABS on January 1, 2012 and CLARINEX 5 mg tablet on July 1, 2012. Upon generic entry of each product by a party to any such settlement agreement, our right to receive royalties on sales of such product will be significantly reduced.

UCB for Levocetirizine. In February 2006, we entered into a license agreement with UCB S.A. relating to levocetirizine. Under this agreement, we have exclusively licensed to UCB S.A. all of our patents and patent applications in the United States regarding levocetirizine and royalties are payable to us on United States sales of levocetirizine products. Pursuant to our agreement with UCB Farchim S.A., we also earn royalties on sales of levocetirizine outside of the United States. Levocetirizine is currently marketed by UCB Farchim S.A. under the brand names XYZAL and XUSAL in the EU for treatment of symptoms of seasonal and perennial allergic rhinitis, persistent allergic rhinitis and CIU in adults and children six years of age and older. We recorded approximately $19.6 million, $6.0 million and $5.0 million of royalty revenue under the agreements with the UCB entities in 2008, 2007 and 2006, respectively.

Out-Licensed Products

Eisai for Eszopiclone. In July 2007, we entered into an agreement with Eisai for the development and commercialization of our eszopiclone product in Japan. Under this agreement, Eisai will be responsible for completing remaining clinical trials necessary for obtaining marketing approval from the Japanese regulatory authorities and, contingent on obtaining regulatory approval, commercialization of the product in Japan. We received an initial milestone payment and will be entitled to receive subsequent payments upon accomplishment of various development, regulatory and pricing milestones, as well as royalties on product sales. We will also be responsible for, and will receive compensation in connection with, the manufacture and supply of bulk tablets and/or active ingredient.

GSK for Eszopiclone. In September 2007, we entered into an agreement with GSK for the development and commercialization of our eszopiclone product for all markets worldwide excluding the United States, Canada, Mexico and Japan. Our eszopiclone product will be marketed by GSK in its territories primarily as LUNIVIA brand eszopiclone for the treatment of insomnia, contingent upon receipt of applicable regulatory approvals. Under this agreement, we received an initial payment of $20.0 million and are entitled to receive additional payments upon accomplishment of various milestones. If all milestones are met, GSK will be obligated to pay us $155.0 million in aggregate license and milestone payments. We are also entitled to receive double-digit royalties, which escalate up to an agreed upon amount, upon increased product sales, and compensation for supplying the product to GSK pursuant to a supply agreement entered into by the parties.

In-Licenses and Exclusive Distributor Agreement

sanofi-aventis for Eszopiclone. In September 1999, we entered into an agreement with sanofi-aventis' predecessor, Rhone-Poulenc Rorer SA, under which we exclusively licensed preclinical, clinical and post-marketing surveillance data package relating to zopiclone, its isomers and metabolites, to develop, make, use and sell eszopiclone in the United States. Zopiclone is marketed by sanofi-aventis in approximately 80 countries worldwide under the brand names of IMOVANE® and AMOBAN®. Under this agreement, Rhone-Poulenc Rorer assigned all U.S. patent applications relating to (S)-zopiclone to us. Under an amended agreement, we have the right to read and reference sanofi-aventis' regulatory filings related to zopiclone outside of the United States for the purpose of development and regulatory registration of eszopiclone outside of the United States, and sanofi-aventis has assigned to us the foreign counterparts to the U.S. patent covering eszopiclone and its therapeutic use. Also as part of the amendment, we permitted sanofi-aventis to assign our obligation to pay a royalty on sales of LUNESTA in the United States to a third party.

Bial for STEDESA. In December 2007, we entered into a license agreement with Bial for the development and commercialization in the United States and Canada of Bial's anti-epileptic compound, BIA 2-093, which we plan to market and sell under the brand name STEDESA, if and when approved. Pursuant to the agreement, we paid Bial an upfront payment of $75.0 million and are required to make subsequent payments upon accomplishment of various development and regulatory milestones, including $10.0 million we paid to Bial in May 2008 upon achievement of one such milestone, a $20 million milestone payment we expect to pay Bial in 2009 upon acceptance of the NDA for STEDESA by the FDA and which could include up to an additional $70.0 million if all milestones are met. We will also compensate Bial for providing finished product pursuant to a supply agreement that is expected to be entered into by the parties, which will be calculated as a percentage of the average net selling price for finished tablets, and milestone payments upon FDA approval of additional indications, if any.

Nycomed for Ciclesonide Compound. In January 2008, we entered into an agreement with Nycomed for the exclusive distribution, development and commercialization in the United States, its territories and possessions of Nycomed's ciclesonide compound, and products incorporating such compound, including ALVESCO HFA Inhalation Aerosol, for use in the treatment of asthma, and OMNARIS Nasal Spray for use in the treatment of allergic rhinitis. Under the agreement, we paid Nycomed an upfront payment of $150.0 million in February 2008 and may be required to make subsequent payments of up to $280.0 million over the life of the agreement upon accomplishment of various development and sales milestones. We also compensate Nycomed for supplying finished product pursuant to the agreement, including a supply price for the products, which will be based on Nycomed's manufacturing costs plus a percentage of such costs, and make quarterly royalty payments based on our net sales of the products.

Arrow for Levalbuterol/ipratropium Product. In April 2008, we entered into a license and development agreement with Arrow for the development, commercialization, marketing, sale and distribution of Arrow's Levalbuterol/ipratropium Product in current and all future formulations and delivery modes, throughout the world. We paid Arrow an upfront payment of $500,000 upon execution of the agreement. We are also required to pay Arrow $25.0 million on December 15, 2009 and $25.0 million on December 15, 2010 as further consideration for the transfer of know-how and the grants of rights and licenses to the Arrow technology, provided Arrow is not in material breach of certain of its obligations under the agreement, as well as a milestone payment of $20.0 million upon receipt of marketing approval for the Levalbuterol/ipratropium Product in the United States. We will also pay single-digit royalties that escalate up to an agreed upon amount based on product sales, subject to Arrow's one-time option in the fourth quarter of 2009 to receive a lump sum discounted amount of $23.5 million in lieu of ongoing royalty payments, which if incurred will result in an IPR&D charge in the fourth quarter of 2009. Arrow has the right to manufacture and supply us with our requirements of the Levalbuterol/ipratropium Product. If Arrow elects not to manufacture and supply the Levalbuterol/ipratropium Product to us, we will have the right to manufacture or arrange for the manufacture of the Levalbuterol/ipratropium Product.

Arrow for Ciclesonide Enabling Technology. In April 2008, we also entered into a license and development agreement with Arrow for know-how and intellectual property rights related to stable sterile suspension formulations, for use in the development, commercialization, marketing, sale and distribution of an inhalation pharmaceutical product containing ciclesonide as its only active ingredient and an inhalation pharmaceutical product containing both ciclesonide and arformoterol as its active ingredients, throughout the world, collectively referred to as the Ciclesonide Products. The agreement also includes rights to Arrow's "U-Bend" packaging technology, which allows increased accuracy in dosing through a novel U-Bend ampule design. We paid Arrow an upfront payment of $500,000 upon execution of the agreement. We are also required to pay Arrow $10.0 million on December 15, 2009 and $10.0 million on December 15, 2010, as further consideration for the transfer of know-how and the

grants of rights and licenses to the Arrow technology, provided Arrow is not in material breach of certain of its obligations under the agreement, as well as milestone payments of up to an aggregate of $27.5 million upon the achievement of certain regulatory milestones relating to both of the Ciclesonside Products. We will also pay single-digit royalties on sales of the Ciclesonide Products, subject to Arrow's one-time options in the fourth quarter of 2009 to receive an aggregate lump sum discounted amount of up to $37.9 million in lieu of ongoing royalty payments, which if incurred will result in an IPR&D charge in the fourth quarter of 2009.

Prior to our acquisition of SPI in June 2008, its primary business strategy . . .