Novartis eyes Alcon stock purchase

May 1, 2008

Novartis plans to acquire a majority share of Alcon for $39 billion in a two-part deal. First, Novartis and Nestle have reached an agreement under which Nestle will sell 74 million of its shares of Alcon to Novartis for about $11 billion. Then, Novartis has an exclusive option to purchase the remaining 52% share from Nestl? for $28 billion between Jan. 1, 2010, and July 31, 2011.

Fort Worth, TX-Novartis AG plans to acquire a majority share of eye-care giant Alcon Inc. for $39 billion in a two-part deal over the next 2 years.

The deal signals a desire by the Swiss company to diversify its pharmaceutical portfolio and add a strong, new eye-care platform to its array of offerings.

Novartis stunned attendees of the American Society of Cataract and Refractive Surgery meeting in early April when it announced that it intends to purchase a 25% portion of Alcon's stock from Nestlé for about $11 billion. Novartis has an exclusive option to purchase the remaining 52% share from Nestlé for $28 billion between Jan. 1, 2010, and July 31, 2011.

For Alcon, life may largely remain the same-at least for now, said Doug MacHatton, Alcon's vice president, investor relations.

"Nothing is structured to change at all, at least until the 2010 timeframe, assuming Novartis exercises its options at that time," he told Ophthalmology Times. "We very much doubt there would be any changes the customers would recognize after that. We're very focused on continuing that trusted relationship with doctors around the world."

Company expansion

For Novartis, however, the stock acquisition demonstrates a desire to enhance its $2.5 billion franchise in ophthalmology, a market Alcon has dominated in the United States and abroad. As Novartis noted in its press release, Alcon is the world's largest and most profitable eye-care company, with 2007 annual sales of $5.6 billion, making it a relatively safe investment in a market that is expected to grow as baby boomers reach maturity.

An eye-care platform would expand Novartis' existing areas in prescription and generic drugs, vaccines, diagnostics, and consumer health.

Samir Shah, MD, global head, business franchise, neuroscience/ophthalmology, for Novartis, said the deal would give the company a solid foundation on which to expand its eye-care business. With its current platforms-cardiovascular and metabolic conditions, neuroscience, and oncology-expected to "grow out" in the next decade as health-care payers look for ways to reduce costs, Novartis was looking for an area that would provide solid growth for the future, he said.

"The eye-care and eye preparations area has been growing 10% to 11%, and up to 2010 growth will be in double digits; even beyond that, it will remain in the high single digits," he said. "In terms of a new growth platform, it's an attractive area to be in, especially with an aging population and increasing eye issues."

Although ophthalmology traditionally has been regarded as a surgical space, he said, new medical advances in pharmaceutical products provide opportunities and significant benefits to patients. "With the advances in innovation, I think it's likely to cause increases in terms of the eye-care area," Dr. Shah said.

Logical choice

After examining other eye-care companies, Novartis decided to hitch its wagon to Alcon because it is considered by most measures to be the number one eye-care company, he said. Alcon's relationships and solid reputation among key customers also made it a logical choice, he added. Assuming that the second stage of the deal moves forward, it would be Novartis' largest "event" since it was formed 11 years ago with the merger of Ciba-Geigy and Sandoz.

Through its Ciba Vision division, Novartis already has a $1.3 billion business in contact lenses, a $200 million business in lens solutions, and a $1 billion business in ophthalmic pharmaceuticals, including ketotifen ophthalmic solution (Zaditor) for ocular allergies, verteporfin for injection (Visudyne) for wet age-related macular degeneration (AMD), and ranibizumab injection (Lucentis) marketing rights outside the United States, according to JP Morgan analyst Michael Weinstein.

He and other investment analysts reacted favorably to the news-a "positive for Alcon's public shareholders," Weinstein wrote in an April 7 research report.

Weinstein and Joanne K. Wuensch of BMO Capital Markets, among others, had cautioned investors that Nestlé was indicating in recent months that it wanted to divest its 77% ownership of Alcon to refocus on its core businesses. That information left Alcon investors to worry that the shares might be sold on the open market; the Novartis deal removes that uncertainty and a possible associated price drop in favor of a "managed process," Wuensch wrote in her April 7 report.

Novartis will pay $143.18 per share in the first stage of the deal and $181 per share for the second batch, or a 20.5% premium above the market price, whichever is lower. Alcon's closing share price was $148.44 on April 4, the last trading day before the agreement was signed with Nestlé. Both transactions require regulatory approvals.

"This announcement makes strategic sense to us, as Novartis' CIBA Vision franchise (which houses contact lenses and solutions), as well as its back-of-eye pharmaceuticals, ultimately could be leveraged in the Alcon franchise; the co-promotion of products could begin at any time," Wuensch wrote.

Alcon stock rose 2.7% the day of the announcement (hovering around $153 in mid-April), whereas Novartis stock dropped 2.3%. Alcon stock hit a 52-week high of $156 on April 14, the same day that Novartis AG stock dropped to a 52-week low of $46.62.

Complete ownership?

Several analysts wondered whether Novartis might want to pursue complete ownership once the 2010 purchase is made.

"Ultimately, to own the company fully, we would anticipate a sale of the solutions business to pass regulatory hurdles," Wuensch added. Weinstein noted that Novartis is planning to spend about $39 billion to $42 billion in this two-stage deal-a "huge outlay"-and said he did not expect Novartis to buy the remainder of the public shares until possibly at a later date.

As part of the deal, Novartis Chairman and Chief Executive Officer Daniel Vasella, MD, who has a background in general medicine and psychology, immediately will join Alcon's board of directors. MacHatton said Alcon is pleased with the prospect of having an owner interested in the health-care space.

"Having a strategic owner, as opposed to a financial owner, if you will, we would view as a positive," he said, adding that Alcon would hope to share in the $6 billion to $7 billion the company spends each year on research and development.

Other synergies

Both companies said they would explore other areas of synergy once the deal's second stage was complete. Dr. Shah noted that although Alcon's products focus mainly on conditions related to the front of the eye-glaucoma, dry eye, infections, and inflammation-Novartis' products are geared for conditions related to the back of the eye, primarily AMD. He suggested that synergies could be found as a front-of-eye general ophthalmologist refers to a back-of-eye retina specialist, with Alcon/Novartis providing products for both.

As a physician trained in ophthalmology, Dr. Shah said he is pleased that Novartis is making this investment into the eye-care field. "That was my love, anyway," he told Ophthalmology Times. "It's good to be back there."OT