Novartis Raises its Stake in the Fast-Growing Eye Care Business

By Stephen Daily, Contributing Editor

In a move to diversify its business and gain ground in the rapidly growing global eye-care business, Novartis AG (Basel, Switzerland) announced in January a deal to purchase a majority stake in Alcon, Inc. (Huenenberg, Switzerland).

Novartis said it would pay $28.1 billion for a majority stake in Alcon, with plans to acquire the rest of the shares for complete ownership. Novartis paid $10.4 billion to Nestle SA (Vevey, Switzerland) in 2008 for a 25% stake in Alcon and offered as much as $11.3 billion worth of its own shares to minority shareholders for the remaining stake. If the deal goes through as proposed, Novartis would pay Nestle $180 a share in cash, while offering Alcon minority holders $153 a share.

The differential has caused Alcon’s minority shareholders to fight the takeover effort by filing a class-action lawsuit against Alcon’s board of directors. On January 20, an independent director committee of Alcon wrote a letter to Daniel Vasella, MD, Novartis’ Chairman and Chief Executive Officer, claiming that, based on advice from its independent financial advisor, the deal is “grossly inadequate” and “fundamentally flawed.”

“The Novartis proposal would inequitably and unfairly distribute … value to its two largest shareholders, which is neither befitting a company of Novartis’ stature nor equitable to the Alcon shareholders, many of whom have been long-term investors since the initial public offering in 2002,” the committee said.

Novartis may end up sweetening the deal, but even if the deal goes through as proposed, the total acquisition price of $49.8 billion would make the move the biggest takeover in Swiss corporate history.

“It will allow us to strengthen innovation power by combining [research and development] efforts and grow our global market presence thanks to our complementary product portfolios,” said Dr. Vasella, who added that the combined company’s product range would span 70% of the eye-care market. Together, sales of Alcon and Novartis eye products in 2008 were $8.5 billion, approximately one-third of the $26 billion global market.

But analysts and industry watchers say the real motivation behind the deal is not only to strengthen its position in the growing eye-care market, but also to reduce risks in the unpredictable pharmaceutical business. Novartis’ prescription drugs business has faced setbacks in recent years. In July 2009, US health regulators asked for more information on Novartis’ experimental meningitis vaccine Menveo, and in 2007, the US Food and Drug Administration (FDA) delayed approval for its Galvus diabetes pill, and rejected its painkiller candidate Prexige, according to a report in BusinessWeek.¹ Novartis’ irritable bowel syndrome treatment Zelnorm was also voluntarily withdrawn from the market that same year, according to the FDA Web site. These setbacks led Dr. Vasella to replace the management of three business units in October 2008 and announce as many as 3,000 job cuts. Moving forward, Novartis will assume even more pricing pressure as patents on its bestselling drugs—hypertension drug Diovan and leukemia treatment Gleevec—start to expire in 2012.

Alcon, meanwhile, is less vulnerable to price regulation than Novartis’ prescription drug business because its customers pay out of pocket for over-the-counter products and procedures such as laser eye surgery, thus reducing risks and producing a more reliable form of income. In a conference call with investors, Dr. Vasella estimated that the global eye-care business could increase at 7% a year through 2015, vs a 5% growth forecast for prescription medicines.

BMO Capital Markets (Toronto) analyst Joanne Wuensch said in a research note that Novartis, by taking full ownership of Alcon, can capture an estimated $300 to $400 million per year in sales and expense synergies, primarily through the combined research and development pipelines and Ciba Vision (Atlanta), the consumer eye-care unit of Novartis.

In an interview with Retina Today, Ms. Wuensch said the strength of the deal for Novartis is in the Ciba Vision franchise, which had sales of $1.7 billion in 2008.

“I think, strategically, it’s an excellent deal for Novartis to be purchasing all of Alcon. It gives the Ciba franchise more legs to the degree that their sales people will have more products to sell, a broader sales force, and broader strategic reach,” Ms. Wuensch said.

“Right now, Ciba Vision has contact lenses and contact lens solutions. They also have in the pharmaceutical business, the Lucentis sales. … But they get access to the rest of Alcon’s product portfolio, including dry eye products that are sold to consumer, cataract products, and a whole host of other pharmaceutical products. It allows for a larger bundle to be sold into a broader distribution sales force,” Ms. Wuensch said.

Following completion of the merger, which is subject to shareholder and regulatory approval, Alcon would be established as a new Novartis division.

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Novartis Raises its Stake in the Fast-Growing Eye Care Business

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