Abbott to Buy Kos Pharmaceuticals for $3.7 Billion

Abbott to Buy Kos Pharmaceuticals for $3.7 Billion

Abbott to Buy Kos Pharmaceuticals for $3.7 Billion

Abbott Laboratories, the maker of heart drugs, stents and nutritional supplements, agreed to buy Kos Pharmaceuticals Inc. for $3.7 billion, adding to its cholesterol treatments.

Abbott will pay $78 for each Kos share, 56 percent more than the Nov. 3 closing price, the Abbott Park, Illinois-based company said today in a statement. Billionaire founder Michael Jaharis and his family control Cranbury, New Jersey-based Kos, and a majority of holders agreed to the buyout, Abbott said.

The deal will give Abbott the most powerful drug available for elevating good, or HDL, cholesterol and expand its presence in the $20 billion-a-year market for cholesterol pills. Good cholesterol helps ferry bad out of the body. Kos's Niaspan, a version of the vitamin niacin, is part of what some doctors and investors say is the next wave of heart drugs.

``It gains Abbott critical mass'' in the cholesterol market, said Bruce Cranna, an analyst with Leerink Swann & Co. in Boston, in a telephone interview. ``They already have a small toehold with a drug called Tricor, to reduce triglycerides. This allows them to compete to a greater extent.''

Shares of Kos jumped $26.97, or 54 percent, to $77.06 at 4 p.m. New York time in Nasdaq Stock Market composite trading. The stock had lost 18 percent in the 12 months through Nov. 3. Abbott shares fell 17 cents to $47.47 in New York Stock Exchange composite trading.

Debt Ratings                                                                            

Standard & Poor's affirmed its AA investment grade rating on Abbott's debt. Fitch Ratings placed Abbott on ``rating watch negative,'' anticipating a one-notch downgrade when the transaction is completed. Fitch said Abbott's capital structure is already stretched by the debt it took on to buy the vascular business of Guidant Corp. for $4.1 billion in April. It rates Abbott debt AA-.

At 3.7 times estimated 2007 revenues and 30 times estimated 2007 earnings per share, ``the deal is not exactly cheap,'' said Michael Weinstein, a JPMorgan Securities analyst, in a note to investors. ``The longer-term merits of the transaction hinge on Abbott's ability to extend Kos's Niaspan business.''

Pharmaceutical Salesman

Chairman Emeritus Jaharis and his family held 24.5 million shares, or 52 percent, of Kos, according the company's March 2006 proxy statement. Jaharis was 77, the filing said.

A former pharmaceutical salesman, Jaharis and a partner acquired Key Pharmaceuticals Inc. in the early 1970s and sold it to Schering-Plough Corp. in 1986 for $836 million. Jaharis and his management team started Kos two years later. Jaharis ranked 207 on Forbes Magazine's list of the 400 richest Americans in 2005 with a net worth of $1.5 billion.

Kos has a ``growing presence'' in the market for drugs to manage cholesterol, Abbott said. CEO Miles White's purchase of Guidant's heart-stent business got the company into the $6 billion-a-year market for devices to prop open diseased blood vessels.

Heart disease is the leading cause of death worldwide and in the U.S., where it kills 654,000 people a year, according to the Centers for Disease Control and Prevention.

The purchase will give a ``significant'' boost to Abbott earnings after 2008 and will reduce profit by 2 to 3 cents a share in fiscal 2007, Abbott said.

Humira Acquisition

Kos is Abbott's largest purchase of a drugmaker since the $7.8 billion acquisition in 2001 of Knoll Pharmaceuticals from BASF AG, the German chemical company. The Knoll transaction brought Abbott the anti-inflammatory drug Humira, its largest- selling product, with almost $2 billion in sales this year.

Niaspan is an extended-release version of niacin, a B vitamin that is necessary for growth and health. While the naturally occurring substance elevates good cholesterol, taking it in therapeutic amounts for that purposes raises the risk of liver damage, ulcers and skin rashes.

Even Kos's special formulation can cause facial flushing, an uncomfortable and prominent reaction that leads many patients to stop taking it. The company is developing another version designed to limit the flushing side effect.

Sales of Niaspan have benefited from recent studies showing that raising good cholesterol can reduce heart risk. Revenue from Niaspan rose 24 percent to $131 million in the second quarter. Merck & Co. and Pfizer Inc. have suffered recent setbacks on experimental competing products.

Kos is developing a combination of Niaspan with simvastatin, a generic version of Merck's Zocor, that may prove even more potent. It plans to submit the pill, called Simcor, for U.S. regulatory approval early next year, said Abbott spokeswoman Melissa Brotz in a telephone interview.

AIDS, Infections

The U.S. National Institutes of Health is funding a study to see whether Niaspan with simvastatin is better than simvastatin alone in preventing heart attacks and strokes. The results of the study aren't expected until 2010.

Most of Abbott's drugs treat diseases such as AIDS, epilepsy, rheumatoid arthritis and severe infections. Its Tricor medicine cuts levels of bad and total cholesterol while increasing good cholesterol. The drug isn't as potent as treatments such as Niaspan or Pfizer's Lipitor and Zocor, and studies presented last year raised questions about how well it prevented heart attacks and deaths.

Abbott sold $722 million of Tricor in the U.S. in the first nine months this year, making it the company's fourth-largest- selling drug. Abbott licenses U.S. rights to Tricor from Solvay SA, the Belgian pharmaceutical maker.