Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated.
Reason for Report: Flash Update:ACL Shareholders Approve Merger with NVS
Prev. Ed.: November 5, 2010;3Q10 Earnings Update (broker material considered till October 27)
NOTE: Flash updates on “4Q10 Earnings Update” and “NVS to buy remaining stake in ACL” were done on January 26 and December 15, respectively.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in theValuation table.
Flash Update
Alcon Shareholders Approve Merger – April 7, 2011
Alcon Inc. announced that its shareholders have approved of the company’s merger with Novartis AG. Per the terms of the merger agreement, Alcon shareholders will receive 2.9228 Novartis shares or American Depositary Shares (ADS) along with a cash payment of $8.20 for each share that they hold.
The completion of the merger is subject to approval by the Novartis shareholders.
The Alcon board had approved the merger in December last year, following a favorable recommendation from the Independent Director Committee and a fairness opinion issued by Lazard Ltd. (LAZ), among other things.
Following the completion of the merger, Alcon will become the second largest division within Novartis. Moreover, Novartis’ CIBA Vision, select eye care medicines and an Alcon business wing will be integrated into Alcon, forming an organization, which will contribute more than $8.7 billion in sales (over 70%) to the eye care segment.
This acquisition will help Novartis diversify and make up for revenues lost to generic competition. Moreover, it will help the company bolster its position in the eye care market, which presents significant growth potential due to the unmet needs of an aging population.
Novartis had first announced its intention to gain full ownership of Alcon in early January 2010. At that time, the former had a 25% stake in the latter. In April 2010, Novartis acquired 156 million shares of Alcon from Swiss corporation Nestlé S.A. for $28.3 billion, raising its stake in the company to 77%. Novartis’ outlay for acquiring the entire 77% stake in Alcon was about $38.7 billion.
Details, other news update and broker comments will be provided in the next edition.
Portfolio Manager Executive Summary
Alcon Inc. (ACL) is one of the largest and most diversified players in the ophthalmology market. Alcon has a leading market share in products associated with cataract surgery (equipment and intraocular lenses), ocular allergies and infections, and lens care solution for soft contact lenses.
Novartis AG (NVS) acquiredNestlé’s stake (156 million shares) in Alcon in August 2010, for $28.3 billion ($181.00 per share), bringing its total stake in Alcon to 77%. The Swiss drug maker is also interested in acquiring the remaining 23% of Alcon.
Of the firms in the Digest group 72.7% are neutral and 27.3% are positive on the stock.None of the firmsprovideda negative rating.
Neutral or equivalent outlook (8/11 firms): Target prices range from $162.00 to 192.00. The neutral firms believe Alcon’s business model remains fundamentally strong despite the weak global economy. Continued international penetration, new product launches and market share gains will be the fuel for future revenue growth at Alcon. However, challenges exist in the form of patent expirations, EU pricing pressure, patent challenges, generic threats and softer pricing on certain products as a result of Medicare rebates. Further, these firms prefer to remain on the sidelines as they see near-term stock performance of the company being driven more by the expected outcome of Novartis' takeout of Alcon's minority shareholders than the company's fundamentals.
Positive or equivalent outlook (4/11firms): Target prices range from $180.00 to $192.00. The bullish firmsview Alcon as a leading global eye care company with a track record of internal growth, developing market-leading products in multiple ophthalmic sectors. The firms believe the macro fundamentals are improving and Alcon is reverting to historical rates of market growth. In addition, the company is realizing market share gains across key product categories. Besides, the company's conservative management team, leverageable business model, financial discipline, and diverse product/geographic distribution inherently reduce risk and provide a variety of levers to produce consistently solid, above-expectation bottomline growth.
November 5, 2010
Overview
The firms have identified the following factors for evaluating the investment merits of ACL:
Key Positive Arguments / Key Negative ArgumentsA broad business mix in diverse geographical markets imparts consistency to sales and earnings growth. / Alcon is currently facing patent challenges from several generic players for products like Patanol, Pataday, Vigamox, and Travatan. The entry of generic competition could lead to intense pricing pressure and a decline in sales
Alcon faces tough competition in the ophthalmic industry, which is highly crowded and subject to rapid technological change and evolving industry requirements and standards
Alcon Inc. (ACL) is a global ophthalmic products company, which operates under three business units: Surgical equipment, Pharmaceuticals, and Consumer Eye Care, each engaged in the discovery, development, manufacturing, and marketing of ophthalmic products. The pharmaceutical unit develops glaucoma products, ocular anti-infectives, and a combination of ocular anti-infective/anti-inflammatory products, ocular allergy products, ocular generics, and otic (ear) products. The Surgical unit caters to the cataract surgery market with Alcon’s Infiniti vision system and AcrySof intraocular lenses. Alcon also offers laser refractive surgical products and, in the third quarter of 2007, acquired WaveLight AG, a manufacturer of refractive laser and diagnostic systems. The Consumer Eye Care unit offers contact lens care products, artificial tears, and ocular vitamins. Alcon currently has operations in more than 75 countries. Its products are sold in more than 180 countries. The company is headquartered in Hunenberg, Switzerland.
Novartis AG (NVS) acquired Nestlé’s stake (156 million shares) in Alcon in August 2010, for $28.3 billion ($181.00 per share), bringing its total stake in Alcon to 77% and thereby becoming a majority shareholder of the company. Novartis is now looking to acquire the balance 23% from Alcon’s minority shareholders. Earlier in 2010, Novartis had extended an offer to Alcon shareholders under which holders of each Alcon share will receive 2.8 shares of Novartis.
However, Alcon’s Independent Director Committee (IDC) referred to Novartis’ proposal as “grossly inadequate” and “fundamentally flawed”. The proposal was valued at $142 per Alcon share, well below the $181.71 in cash that was paid by Novartis to acquire its majority position. The Committee stated that it will evaluate and take appropriate action to ensure that the rights of the minority shareholders are protected. The firms of the Digest group believe that Novartis will increase the price of its offering to minority shareholders in order to completely take over Alcon.
The company’s website is
Note: The company’s financial year coincides with the calendar year.
November 5, 2010
Long-Term Growth
Overall, the firms believe Alcon will offer investors strong top- and bottom-line growth over the next few years from emerging markets and upside from its near- and mid-term pipeline. Additionally, Alcon’s strong cash flow provides opportunities to pursue more licensing agreements, complementary acquisitions, geographic expansion, or share buybacks that should help sustain mid-teen EPS growth over the next several years. Management believes that the fundamentals of the company are strong and expects continued growth in the eye care market supported by the development of global brands and new product introductions.
A large part of the company’s revenues is derived from international markets. Therefore, a strengthening US dollar can hurt the company’s top-line growth. Meanwhile, the company is witnessing EU pricing pressure mainly on the pharmaceutical side of the business. The surgical business has also been affected by price reductions in the EU.
Alcon supports the goal of expanding access to high quality healthcare. The healthcare reforms aim at broadening the insurance coverage to 32 million uninsured Americans, expected to be effective by 2014. However, during the near-term transition, before the number of insured rises, pharmaceutical companies in particular are being required to contribute to the effort now. In 2010, Medicaid discounts for branded drugs increase from 15.1% to 23.1% while these same discounts are now being offered to Medicaid managed care providers. Into 2011, Medicare discounts of 50% on branded pharmaceuticals will be offered to seniors as they enter Medicare Part D coverage. In FY10, Alcon expects healthcare reform to negatively impact total revenue by $20 million.
November 5, 2010
Target Price/Valuation
Rating DistributionPositive / 27.3%↓
Neutral / 72.7%↑
Negative / 0.0%
Avg. Target Price / $178.50 ↑
Digest High / $192.00
Digest Low / $162.00
No. of Analysts with Target Price/ Total / 10/11
Alcon’s IDC may fail to ensure a deal that provides minority holders with a value deemed adequate. Apart from that, while Novartis has shown a clear desire to own Alcon outright, Novartis may opt to withdraw any bid for the minority stake if it encounters resistance it considers to be insurmountable. These are the key risks to Alcon’s valuation at current levels .
Recent Events
Alcon’s Winning Streak Continues – January 26, 2011
Alcon Inc. reported fourth quarter 2010 earnings of $1.74 per share, beating the Zacks Consensus Estimate of $1.70 and 8.1% ahead of the year-ago figure. The fiscal year also saw the company beating the Zacks Consensus Estimate by 4 cents. Earnings in fiscal year 2010 came in at $7.71 per share, up 13.2%. Strong revenues helped boost earnings.
Revenues
Quarterly revenues at Alcon increased 5.7% to $1.81 billion, ahead of the Zacks Consensus Estimate of $1.78 billion. Fiscal year revenues amounted to $7.18 billion, reflecting a year-over-year increase of 10.5% and beating the Zacks Consensus Estimate of $7.14 billion.
Strong contributions from the Systane family of products, continued gains in the glaucoma market and increased sales from a severe allergy season boosted US revenues by 3.4%. International revenues also saw a increase of 7.3%. Emerging markets recorded a 13.7% increase with the BRIC nations (Brazil, Russia, India and China) reporting a growth of 18.5%.
All the revenue segments at Alcon put in strong performances in the reported quarter. While pharmaceutical sales climbed 9.4% to $743 million, surgical sales increased 3.6% to $858 million. Consumer sales inched up 1.4% to $211 million.
Pharmaceutical revenue benefited from an increase in the sale of infection/inflammation products (up 18.6%) in the US complemented by strong performance by the glaucoma franchise, sales of which increased 2.4% to $336 million. Continued market penetration of Azarga outside the US and a rise in the sales of DuoTrav boosted the performance of the glaucoma franchise.
Robust performance of intraocular lenses (IOLs), especially Advanced Technology IOLs, helped drive surgical revenue during the fourth quarter. Global sales of intraocular lenses rose 8.5% mainly due to a broader use of AcrySof IQ ReSTOR +3.0 lens and AcrySof IQ Toric lens.
Strong global performance of the Systane family of products helped drive Consumer revenue during the quarter.
Margins
Alcon's fourth quarter gross margin increased 200 basis points (bps) to 76.0%, mainly due to fluctuation in foreign exchange rates and rise in price.
Quarterly operating margin was 32.4%, 110 basis points above the year-ago figure. The increase was primarily due to strong sales growth, positive price contribution as well as the favorable, albeit temporary, impact of foreign exchange on gross profit margin.
On December 15, 2010, Alcon Inc. announced that its board of directors gave a nod for the company to be merged with Novartis AG (NVS). Novartis plans to pay $168 per share to acquire the remaining 23% share of Alcon it does not already own. As per the terms of the agreement, the merger consideration will consist of Novartis shares and, if necessary, a cash contingent value amount, resulting in a total value of $168 per share.
Alcon’s board approved the merger following a favorable recommendation from the Independent Director Committee and a fairness opinion issued by Lazard Ltd. (LAZ), among other things.
Following the completion of the merger, which is expected in the first half of 2011, Alcon will become the second largest division within Novartis. Moreover, CIBA Vision, an Alcon business wing, and select eye care medicines will be integrated into Alcon, forming an organization, which will contribute more than $8.7 billion in sales (over 70%) to the eye care segment.
The acquisition of Alcon will help Novartis diversify and make up for revenues lost to generic competition. Moreover, it will help the company bolster its position in the eye care market, which presents significant growth potential due to the unmet needs of an ageing population.
Novartis had first announced its intention to gain full ownership of Alcon in early January. At that time Novartis had a 25% stake in Alcon. In April, Novartis acquired 156 million shares of Alcon from Swiss corporation Nestlé S.A. for $28.3 billion, bringing its stake in Alcon to 77%. Novartis’ outlay for acquiring the entire 77% stake in Alcon was about $38.7 billion.
On October 20, 2010, Alcon reported its 3Q10 financial results. Highlights are as follows:
Total revenue was $1.76 billion in 3Q10, up 9% y/y.
Adjusted earnings per diluted share in 3Q10 were $1.84, up 7.6% y/y compared with $1.71 in 3Q09.
For 2010, the company expects organic sales to grow in the high single digits, with earnings in the range of $7.58 to $7.68 per share.
Revenue
The company reported total sales of $1.76 billion in 3Q10, up 9% y/y (up 8.7% excluding impact of Fx and acquisitions) driven by strong sales in Pharma and Consumer Eye Care segments. The Zacks Digest average 3Q10 revenue was roughly in line with the company’s report.
In 3Q10,US sales increased 9.5% y/y to $803 milliondue to strong contributions from the Systane family of products, continued gains in the glaucoma market and increased sales attributable to a severe otic season. International sales increased8.6% y/y (9.3% on an organic basis)to $957 million due to strong sales growth in emerging markets and international pharmaceuticals. Emerging markets recorded a 20.2% increase (19.2% organically) with BRIC nations (Brazil, Russia, India and China) reporting a growth of 25.6% (20.5% organically).
The company is facing significant pricing pressure across the pharma business in EU markets based on austerity measures, particularly in Germany, Spain, and France. Alcon experienced less than 1% price decline across all international geographies in the quarter whereas, in the US, the company was able to drive prices higher. New products from the acquisitions of Optonol (January 2010) and Durezol acquired from Sirion Therapeutics, Inc. (March 2010) contributed 70 bps to sales growth. Healthcare reform negatively affected 3Q10 revenue by $5 million.
The company maintained its 2010organic sales growth guidance of high single digits growth. Alcon, however,expects healthcare reform to negatively impact 2010 total revenue by $20 million.
Revenue ($ in million) / 3Q09A / 2009A / 1Q10A / 2Q10A / 3Q10A / 4Q10E / 2010E / 2011E / 2012EDigest Average / $1,614.1 / $6,499.3 / $1,721.0 / $1,886.0 / $1,760.0 / $1,755.6 ↑ / $7,122.7 ↑ / $7,703.3 ↑ / $8,326.4 ↑
Digest High / $1,614.9 / $6,500.1 / $1,721.0 / $1,886.0 / $1,760.0 / $1,806.0 / $7,173.0 ↑ / $7,827.8↑ / $8,527.0↑
Digest low / $1,614.0 / $6,499.0 / $1,721.0 / $1,886.0 / $1,760.0 / $1,637.0↑ / $7,004.5↓ / $7,584.2↑ / $8,145.6↑
The following is a graphicalrepresentation of segment revenue:
Specific Products
Note: All significant changes have been highlighted in bold.
PHARMACEUTICAL DIVISION
Alcon’s Pharmaceutical division develops glaucoma products, ocular anti-infectives, combination ocular anti-infective/anti-inflammatory products, ocular allergy products, ocular generics, and otic (ear) products.
Worldwide pharmaceutical sales in 3Q10 were $758 million, up 15.0% y/y (up 14.2% excluding Fx), driven by strong infection/inflammation revenues, increased market sharein the glaucoma franchise and a severe otic season in the US. Pharmaceutical sales in the USwere up a strong19% y/y. Internationally, pharmaceutical sales were also up11% y/y (13% excluding Fx).
The Zacks Digest average pharmaceutical division sales in 3Q10 were in line with the company’s report.
$ in million / 2009A / 2010E / 2011E / 2012E / 2013E / Est. Growth (‘09-’12)Pharmaceutical Sales / $2,677.1 / $3,029.3 ↑ / $3,337.2↑ / $3,629.9↑ / $3,916.1↑ / 10.7%↑
Anti-infection and Anti-inflammation Products
Totalrevenuefrom anti-infective and anti-inflammatory productsincreased21.1% y/yto $241 million in 3Q10. Sales benefited from easier comparisons for TobraDex, where the company has made progress building out a generic franchise, as well as modest stocking behind the launch of TobraDex ST in the quarter. Durezol, an ophthalmic corticosteroid marketed for the treatment of postoperative inflammation and pain acquired fromSirion Therapeutics, Inc. in March 2010 also contributed to growth. According to the Zacks Digest report, sales in 3Q10 were in line with the company’s report.
TobraDex (ST)
Indication: Ocular anti-infective product
Product Life Cycle Position: Generics available
Sales: According to the Zacks Digest report, TobraDex sales in 3Q10 were $40million, reflecting an increase of 5.3% y/y.
New Version of the Drug: TobraDex ST, launched in the US in September 2010, is Alcon’s follow-on product to TobraDex. TobraDex ST is a combination of tobramycin (antibiotic) and dexamethasone (steroid), and is used to treat eye inflammation, where infection or risk of infection is present.
Glaucoma Franchise
Total glaucoma sales were $316 million in 3Q10, up 10.5% y/y. Global sales of glaucoma products rose 11.5% organically as Azarga and DuoTrav, both performed well outside the US (OUS).The company is in the process of transitioning Travatan sales to Travatan Z. Consequently, total Travatan sales in 3Q10 saw the negative impact of some inventory reduction.
The company has filed for approval of the alternative preservative system version of DuoTrav in the EU.
According to the Zacks Digest report, sales in 3Q10 were in line with the company’s report.
Travatan Family (Travatan, Travatan Z, and DuoTrav)
Indication: Travatan is an eye drop that reduces excessive pressure in the eye (often a result of the condition called open-angle glaucoma). Travatan Z is a benzalkonium chloride (BAC) free version of Travatan.
Product Life Cycle Position: Travatan is marketed worldwide;Travatan Z ismarketed in the US and filed in the EU;DuoTrav ismarketed outside theUS.
Patents/Generics: Alcon has a patent litigation lawsuit ongoing against Teva Pharmaceuticals (TEVA), which has filed an Abbreviated New Drug Application (ANDA) with the FDA to market a generic version of Travatan and Travatan Z.