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Same-Day Analysis

Novartis Increases Stake in Alcon to 77%

Published: 04 January 2010
Novartis has announced it will pay Nestle an additional US$28.1 billion for its remaining 52% stake in Alcon, thereby increasing its share in the company to 77%.

IHS Global Insight Perspective

 

Significance

Novartis has entered 2010 with the announcement of a US$28.1-billion deal that will see it increase its share in Alcon from 25% to 77%, through the purchase of Nestle's remaining shares in the company. Novartis has also made a proposal for the full takeover of the company.

Implications

If Alcon's board of directors accept Novartis' takeover bid, the total Alcon deal could be worth up to US$50.1 billion. The magnitude of this deal reflects Novartis' level of interest in the eyecare business.

Outlook

Together, Novartis and Alcon control up to 70% of the global eyecare market, which generated revenues of US$25 billion in 2007. This is a relatively unconcentrated market, with the only major player being U.S. company Bausch & Lomb. Novartis can therefore be expected to become a powerhouse in the eyecare market. However, the full acquisition of Alcon could be subject to antitrust issues.

Swiss pharma major Novartis is set to increase its stake in eyecare specialist Alcon Inc. (U.S.) to 77%, after revealing plans to purchase the remaining 52% of shares currently held by fellow Swiss company Nestle. Novartis already has a 25% stake in Alcon, for which it paid US$11 billion in 2008, for 74 million shares, each costing US$143.18 (see Switzerland: 7 April 2008: Novartis to Pay Nestlé Up to US$39 bil. for Eyecare Specialist Alcon). Novartis will now pay Nestle US$180 for its remaining shares, in a US$28.1-billion cash transaction. Furthermore, Novartis has indicated that it is looking to engage in a complete takeover of Alcon in the future, and it has submitted a merger proposal for the remaining 23% at a price of US$153 per share, in a deal that could be worth an additional US$11.2 billion.

Creating the World's Largest Ophthalmology Franchise

Novartis and Alcon are currently two of the biggest players in the market for eyecare. Novartis' eyecare portfolio includes wet age-related macular degeneration treatment Lucentis (ranibizumab), and Ciba Vision, which specialises in contact lenses and lens-care products. Alcon's eyecare interests include surgical devices, pharmaceuticals, and consumer health. Alcon recently expanded its eyecare portfolio, entering the glaucoma surgical implant market through the acquisition of Israeli start-up company Optonol, which specialises in glaucoma-related surgical implants. It also recently acquired Swiss biotech ESBATech AG, giving it access to the latter's antibody fragment technology for use in the treatment of eye-related diseases. In the first nine months of 2009, the company reported a 5.9% year-on-year sales growth, with revenues of US$1.6 billion, and gross profits of US$1.2 billion.

Outlook and Implications

This deal comes as no surprise because Novartis had retained the option to acquire Nestle's entire stake in Alcon as part of the initial deal. This so-called second wave of the deal was expected to take place between January 2010 and January 2011, and the fact that Novartis has announced the complete purchase of Nestle's share in Alcon is an indication of its commitment to obtain a majority stake in the company. The price at which Novartis has acquired these shares can be described as striking, because Novartis is paying about 26% more per share than it did when it purchased the initial 25% stake in 2008. What is even more striking is that Novartis has now indicated that it is looking to completely take over the entire company by purchasing Alcon's 23% of outstanding shares for US$153 per share. The proposal is currently being reviewed by Alcon's board of directors.

Product diversification primarily through inorganic opportunities continues to emerge as a key strategy for growth in the pharmaceutical industry, of which this deal is another example. With Novartis' biggest sellers Diovan (valsartan) and Glivec/Gleevec (imatinib) due to lose patent protection in 2012 and 2015, respectively, the company is making strategic moves to diversify its growth sources, thereby potentially minimising risk. The eyecare market is set to become increasingly lucrative in the context of the ageing population in most Western countries. According to Novartis, the eyecare market generated sales of US$25 billion in 2007, and Novartis' chief executive officer Daniel Vasella has described this as an area of dynamic growth. Novartis has indicated that it expects to generate cost savings in the region of US$200 million with its 77% stake in Alcon, and this could increase to US$300 million if it engages in a full acquisition of the company. If the full acquisition deal goes through, Novartis will have shelled out a total of US$50.3 billion, which is a significant amount, making it one of the largest mergers in recent times, comparable to the US$46.8 billion Roche/Genentech (Switzerland/U.S.) acquisition deal in terms of its financial magnitude. However, given the current price per share that Novartis is paying for Alcon's shares, it is likely that the minority share holders will bargain for a higher price than the US$153 per share being offered for the remaining 23% stake in the company.
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