Dainippon Sumitomo Pharma Co Ltd <4506.T> agreed on Thursday to buy U.S. drugmaker Sepracor Inc for $2.6 billion, giving the Japanese firm a big, local sales force in the world's largest drugs market.

The deal is the latest in a string of overseas acquisitions by Japanese drugmakers keen to grow outside a mature home market and build product pipelines before key drug patents expire.

Dainippon, Japan's No.7 drugmaker by revenues, will gain a sales force of 1,200 familiar with central nervous disorders as it looks to promote its experimental schizophrenia drug lurasidone, which has performed well in late-stage trials.

It will also gain Sepracor's insomnia drug Lunesta, asthma drug Xopenex and an experimental epilepsy drug.

We anticipate our business will shrink if we focus only on Japan, where medical prices are under pressure, Dainippon Sumitomo President Masayo Tada told a news conference.

Even if the U.S. carries out healthcare reform it's not as if the market is going to halve. It will remain the world's biggest drug market.

The deal is the fourth-largest overseas acquisition by a Japanese drugmaker, and the second-biggest this year by any Japanese company.

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Dainippon's shares climbed 1.2 percent in a weaker Tokyo market <.T>, with volume at six times the daily average this year. Some analysts said the purchase was the easiest route into the U.S. market, others said it looked pricey and risky.

Dainippon will pay $23 cash for each share, a premium of 27.6 percent on Tuesday's close before media reports of the deal sent Sepracor's stock surging to $22.8 on Wednesday. The acquisition cost is roughly equal to Dainippon's annual sales.

It's a very expensive deal for a company of Dainippon Sumitomo's size and also very risky, given the series of patent expirations on Sepracor's mainstay drugs in the next few years, said Credit Suisse analyst Fumiyoshi Sakai.

Dainippon must be extremely confident in lurasidone, although I have some doubts, he said, adding the deal would not have been possible without the backing of the Sumitomo Group, which includes Sumitomo Mitsui Financial Group <8316.T>, Japan's third-biggest bank. Dainippon is majority-owned by Sumitomo Chemical <4005.T>.

Aaron Gal, an analyst at Sanford Bernstein, said that based on projections for 2013, the deal values Sepracor at 3.5 times sales, compared with 3.1 times for the average of other specialty pharmaceutical and generic drug industry acquisitions.

It also values Sepracor at 19.4 times EBITDA (earnings before interest, taxes, depreciation and amortization) compared with an average of 15.1 times for other deals, he said.

Arguably, Dainippon is buying a U.S. sales force it can leverage to promote its current and pipeline products, said Gal.

We are unconvinced that this is the most sensible option for the company given the alternatives of building a sales team internally or acquiring a higher-performing sales team at a more rational price.

Dainippon said it would raise 200 billion yen ($2.17 billion) in bridge loans and use 50 billion yen in cash on hand for the acquisition.

NEW DRUG CLASS

Dainippon, which sells the hypertension drugs Amlodin and Prorenal, said last month that lurasidone worked significantly better than a placebo in a late-stage clinical trial. It will apply for U.S. approval next year and aims for launch in 2011.

The U.S. market for schizophrenia drugs is worth about 1.3 trillion yen a year, or 10 times the Japanese market, Dainippon's Tada said.

With annual sales of 264 billion yen, Dainippon has been overshadowed by bigger rivals such as Takeda Pharmaceutical Co <4502.T> and Daiichi Sankyo Co <4568.T>, both of which have made large acquisitions to expand overseas.

Buying Sepracor will allow Dainippon to generate 40 percent of its sales outside Japan, which it now counts on for more than 90 percent of its business. At the same time, its research and development budget will increase by 45 percent to 80 billion yen.

Dainippon's four mainstay products have patents that have either expired or will expire shortly. But its shares gained 21 percent in the year to Wednesday, bolstered by hopes that lurasidone will do well overseas.

Top-selling schizophrenia drugs such as AstraZeneca's Seroquel and Eli Lilly and Co's Zyprexa garner annual sales of around $4.5 billion. Other competitors include Johnson & Johnson's Risperdal and Bristol-Myers Squibb's Abilify.

Lurasidone belongs to a new generation of schizophrenia drugs known as atypical antipsychotics.

Rival products are Fanapt from Vanda Pharmaceuticals , Schering Plough's Saphris and Serdolect from Danish pharmaceutical firm Lundbeck .

Sepracor has long been the subject of takeover speculation, and could face generic competition to Lunesta as early as 2012 if a generic drugmaker successfully challenges its patent, which expires in 2014. Xopenex is set to face generic competition in 2012.

Sepracor, based in Marlborough, Massachusetts, had 2008 sales of $1.3 billion.

Financial advisers to Dainippon Sumitomo were Nomura Securities and Thomas Weisel Partners LLC, while JP Morgan Securities Inc and Jeffries & Co advised Sepracor.

($1=92.30 Yen)

(Additional reporting by Mayumi Negishi; Writing by Edwina Gibbs, Editing by Ian Geoghegan)

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