Novartis sets its sights on Alcon

May 1, 2008

Novartis acquires a stake in Alcon

Novartis AG is to acquire a majority share of eyecare giant Alcon Inc. for $39 billion in a two-part deal over the next two years. The deal signals a desire by the Swiss company to diversify its pharmaceutical portfolio and add a strong, new eyecare platform to its array of offerings.

Novartis stunned attendees of the American Society of Cataract and Refractive Surgery (ASCRS) meeting in early April when it announced that it intends to purchase 25% of Alcon’s stock from Nestle for about $11 billion (€6.9 billion). Novartis has an exclusive option to purchase the remaining 52% share from Nestle for $28 billion (€17.6 billion) between January 1, 2010, and July 31, 2011.

For Alcon, life may largely remain the same - at least for now, claims 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,” MacHatton 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.”

For Novartis, however, the stock acquisition demonstrates a desire to enhance its $2.5 billion (€1.6 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 eyecare company, with 2007 annual sales of $5.6 billion (€3.5 billion), making it a relatively safe investment in a market that is expected to grow as baby boomers reach maturity.

An eyecare platform would expand Novartis’s existing areas in prescription and generic drugs, vaccines, diagnostics, and consumer health.

Benefits and synergies
Samir Shah, MD, global head business franchise neuroscience/ophthalmology for Novartis, said that, with its current platforms - cardiovascular and metabolic conditions, neuroscience and oncology - expected to “grow out” in the next decade as healthcare payers look for ways to reduce costs, Novartis was looking for an area that would provide solid growth for the future.

“The eyecare 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 has traditionally 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 eyecare area,” Dr Shah said.

After examining other eyecare companies, Novartis decided to hitch its wagon to Alcon, since it is considered by most measures to be the No. 1 eyecare company, he said. Alcon’s relationships and solid reputation among key customers also made it a logical choice, he added. Assuming the second stage of the deal moves forward, it would be Novartis’s 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 Zatidor for ocular allergies, Visudyne for wet age-related macular degeneration, and Lucentis marketing rights outside the United States, according to JP Morgan analyst Michael Weinstein.

He and other investment analysts reacted favourably to the news; it is “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 Nestle was indicating in recent months that it wanted to divest its 77% ownership of Alcon in order to refocus on its core businesses. That 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 favour of a “managed process,” Wuensch wrote in her April 7 report.

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

Looking to the future
Several analysts wondered whether Novartis might want to pursue complete ownership once the 2010 purchase is made. “Ultimately, to fully own the company, 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 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 - will immediately join Alcon’s board of directors. MacHatton said Alcon is pleased with the prospect of having an owner interested in the healthcare 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.

Both companies said they would explore other areas of synergy once the deal’s second stage was complete. Dr Shah noted that while Alcon’s products focus mainly on the front of the eye - glaucoma, dry eye, infections, and inflammation - Novartis’s products are geared for the back of the eye - primarily age-related macular degeneration. He suggested 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 eyecare field.

“That was my love anyway,” he told Ophthalmology Times. “It’s good to be back there.”