Global Insight Perspective | |
Significance | Novartis has agreed to pay up to US$39 billion to acquire Nestlé's majority stake in eyecare specialist Alcon. |
Implications | Novartis is on the way to acquiring a majority stake in one of its main competitors in the segment. The size of the deal reflects the importance of the business to Novartis. |
Outlook | The deal is relatively low risk for Novartis as the two companies' ophthalmology portfolio and R&D efforts show great synergy. The acquisition strengthens Novartis's position in the field and moves it towards partially concentrating the segment in its hands. |
Swiss giant Novartis announced it has made an agreement with compatriot firm Nestlé S.A. that could ultimately leave it with a 77% majority stake in eyecare specialist Alcon Inc. (U.S.). The acquisition will take place in two consecutive steps. Novartis will first gain control of a 25% stake in Alcon Inc. by purchasing around 74 million of its shares from Nestlé at a price of US$143.18 per share, for a total of about US$11 billion. The Swiss pharma major will then have the option to acquire another 52% stake by purchasing Nestlé's outstanding stock at a price tag of US$181 per share. The food specialist can require Novartis to buy its remaining 52% stake in Alcon, however "at a 20.5% premium to Alcon's share price at the time of the exercise, but not exceeding US$181 per share". The first wave of the deal is expected to be completed by the second half of 2008, while the second wave, if it takes place, should occur between January 2010 and the July 2011. Novartis estimates that it will have to borrow about US$5.5 billion to finance the first part of the deal. Novartis has no obligation to buy minority holders' shares, which represent 23% of Alcon's outstanding stock. Completion of the deal is subject to regulatory approval, although Novartis's chief executive, Daniel Vasella, is confident that it will clear antitrust laws, reports Dow Jones.
Alcon, a Snapshot
Alcon is the world leader in its business area. The company is positioned in three segments of the eyecare market, namely surgical devices, pharmaceuticals and consumer healthcare. Half of Alcon's revenues are made in the United States. The company generated global sales of US$5.6 billion in 2007, of which US$2.5 billion came from its surgical franchise, US$2.3 billion from its pharmaceutical franchise and US$0.8 billion from its consumer healthcare department. Sales have been growing at mid double-digit rates in all three segments, and the company is outperforming its competitors. Net income stood at US$1.6 billion in 2007. The company has a plethora of products, which are mostly focused on eyecare. Areas of expertise include the treatment of cataracts, glaucoma, detached retina, eye infection, inflammation and allergy. The key products in the pharmaceutical franchise are glaucoma drug Travatan (travopost ophthalmic solution), antibiotic Vigamox (moxifloxacin HCL) and eye allergy treatment Patanol (olopatadine). Its leading consumer healthcare products are contact lens care solutions belonging to the Opti-Free line. Last year, Alcon invested US$564 million in its research and development (R&D) operations, while the company has a physical presence in 75 countries. It was bought by Nestlé in 1978.
Outlook and Implications
Should Novartis and Nestlé complete the two waves of the agreement, it would be one of the largest in the pharmaceutical sector in the last couple of years. Novartis' move to get a stake in Alcon is not surprising as the latter is one of the main competitors for its ophthalmology franchise. However, the price tag of US$39 billion is striking and reflects the growth potential that Novartis sees in the eyecare segment, which is expected to keep growing as age-related eye diseases take their toll on the Western world's ageing population. Novartis revealed that the eyecare market generated sales of US$25 billion in 2007. If Alcon were to become a majority-owned subsidiary of Novartis, it would induce a greater concentration of the eyecare business into its hands. The three main players in the market have historically been Novartis, Alcon and U.S. company Bausch & Lomb.
As Alcon and Novartis are competitors in the segment, there is obviously synergy between their two portfolios and R&D efforts, which will produce cost saving opportunities at a later stage. Novartis was already well-positioned in ophthalmology with products such as wet age-related macular degeneration treatment Lucentis (ranibizumab) and its Ciba Vision contact lens line. It has now strengthened its position, notably in the intra-ocular lens segment.
The deal is relatively low risk for Novartis as Alcon has a wide portfolio of products and a well-stoked pipeline that is likely to prove lucrative in the future. Highly specialised players such as Bausch & Lomb face increased competition, while remaining more vulnerable to any downturn in the eyecare market.