Kos' Swan Song

Acquisitions, whether of whole companies or of individual drug candidates, are a very important aspect of the pharmaceutical sector. Other than years of expensive internal research and development, they are the only way that the mature large-cap pharmas can replenish their drug pipelines.

Kos Pharmaceuticals (Nasdaq: KOSP  ) is the latest beneficiary of the big-pharma acquisition craze. Abbott Labs (NYSE: ABT  ) has agreed to buy it out for $3.7 billion, or $78 per share, more than a 50% premium to its closing price the previous day. Assuming no competing offers come in, this deal will most assuredly be completed, considering that the company's executives and directors own more than two-thirds of its shares according to the latest proxy statement.

So what exactly is Abbott getting? On Thursday, Kos gave what will probably be its final quarterly earnings announcement after agreeing to be bought out. Sales were up 17% year over year to $241 million, mostly as a result of 22% growth in Kos' cholesterol franchise, which accounted for most of its sales. Gross margins were a very healthy 88% and operating margins came in at 21%.

Abbott expects the transaction to be slightly dilutive to earnings next year but "neutral to accretive" to earnings in 2008. There should be some substantial synergies that Abbott will be able to wring out of Kos' operations, though, as SG&A expenses accounted for a whopping 59% of revenues for Kos thus far this year. As a comparison, at Abbott, SG&A expenses came out to only 29% of year-to-date sales.

At $78 per share, the acquisition values shares of Kos at roughly 52 times trailing-12-months earnings. That may sound expensive to those used to investing outside the pharmaceutical sector, but Kos does have several drug candidates, including products to complement its lead cholesterol and heart-disease treatment, Niaspan, and a late-stage follow-on candidate for asthma in phase 3 trials.

Abbott will assuredly be able to reduce the SG&A costs associated with Kos' operations, as well as expand the sales growth of all of Kos' marketed drugs with its much larger and more mature sales and marketing operations. Being able to commercialize any of Kos' products in development would just be icing on the cake, so it looks like Abbott made a great move by buying Kos.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .