Abbott Shells Out $7 Billion for Solvay

GOOD MORNING. Stocks in Asia closed sharply lower today; U.S. futures are pointing to a higher open.

Drug companies face some big headaches these days, from a wave of patent expirations to cutbacks in spending on prescription drugs. So what’s a beleaguered Big Pharma firm to do? Make an acquisition, of course.

In another sign of consolidation in the industry, Abbott Laboratories (ABT) announced today that it plans to buy the drug business of the Belgian industrial firm Solvay (SVYSY) for around $7 billion. It’s the largest deal for Abbott since 2002 and gives the company full control of the cholesterol drugs TriLipix and TriCor that the firms sell jointly, along with a portfolio that includes drugs for hormone treatment, hypertension and Parkinson’s disease.

Solvay’s drug unit had revenues of 2.7 billion euros last year, and most of its sales come from outside the U.S., which should help Abbott expand into emerging markets such as Asia and Eastern Europe. It should also help Abbott cut its reliance on the blockbuster arthritis drug Humira, its top-selling medicine with $4.5 billion in sales last year, making up 15% of Abbott’s $29 billion in revenues. Americans have been cutting back on drugs like Humira during the recession and Abbott has been looking for new revenue growth to offset those declines.

The deal could be a sign of more mergers to come. Drug companies are flush with cash these days and need to put that money to work, says analyst Jeremy Batstone-Carr, head of research at brokerage firm Charles Stanley in London. Revenues are under “unprecedented pressure” from spending cutbacks, competition from generics manufacturers and weak pipelines. Shareholders want drug companies to use their cash for revenue growth instead of letting it sit on balance sheets as a low-yielding asset (though the cash does support high dividend yields). Industrial conglomerates like Solvay, which makes plastics and chemicals, may also be looking to sell their drug-units to focus on core businesses in this environment, he adds. And shareholders appear to like the idea. Solvay’s drug unit had been on the auction block since April and the company’s shares have surged 42% since then.

IN OTHER NEWS:

An old trading adage suggests to "Sell Rosh Hashanah, Buy Yom Kippur” in the belief that stocks often fall in the period between the two Jewish holy days—Rosh Hashana, the new year (which comes first on the calendar), and Yom Kippur, the holiday when Jews ask God for forgiveness for their sins. Presumably, investors can avoid some losses and buy at a discount, but only after properly atoning on Yom Kippur, which this year ends tonight at sundown.

Like other catchy sayings about the market, this one has a little bit of data to back it up. Following the Yom Kippur strategy between 1971 and 2009 would have worked out to an investor’s advantage in slightly more than half the years, according to data from the Stock Trader's Almanac. So far this year, the market has lost 1.21% since Rosh Hashanah, which ran September 18 to 20--although that might have more to do with disappointing data on the housing market and durable goods orders than with the Jewish calendar.

Trading axioms typically spring from a mix of psychological theories and actual data, says Paul Frank, a portfolio manager at the ETF Market Opportunity Fund. "Someone would spot the trend and maybe 7 out of 10 years it would work, and then people would jump on it, and it was kind of a self-fulfilling prophecy," Frank says.

Once word gets out, its effect will dissipate if too many people try it at once, says Frank—and the supposed wisdom may not have had much validity to it in the first place. "Patterns appear, but is there a reason behind those patterns, really?" Frank says.