What Novartis Sees in Eye Care

Persistence may as well be Daniel Vasella's middle name. The CEO of drug giant Novartis (NVS) has tried for years to pry eye-care company Alcon (ACL) from Nestlé. Once he proposed a swap: Nestlé could have Novartis' medical nutrition and baby food business if it would part with Alcon, known for contact lens solutions and all manner of ophthalmic medicines.

The swap never happened. But Novartis has announced that it is finally taking control of Alcon in a deal worth nearly $50 billion, the biggest merger in Swiss history. The ground was set in 2008 when Novartis paid Nestlé $10.4 billion for a 25% stake in Alcon. On Jan. 4, Novartis exercised an option to buy the 52% stake that Nestlé still held in Alcon and agreed to purchase the remaining 23% held by minority shareholders, offering 2.8 shares of Novartis stock for each share of Alcon.

This arrangement isn't without controversy. Some Alcon shareholders are disgruntled because the price of their shares will vary while Nestlé is being paid in cash. If Vasella's plan works, however, the minority shareholders may not be grousing for long. He expects the global eye-care market to grow by as much as 7% annually through 2014 as glaucoma and cataracts become more widespread in countries with aging populations.

That's sturdier than the outlook for prescription drugs. Industry sales are expected to rise by 4% to 6% through 2013, according to research firm IMS Health (RX). The acquisition will also bolster Novartis' existing Ciba Vision lens unit and support its efforts to expand the market for Lucentis, the company's drug for age-related macular degeneration, a leading cause of blindness. Alcon "was always a business that fit well within ours, but it took time and some money to get it," says Vasella.

The deal is the latest in the CEO's 14-year quest to transform a traditional European chemicals company into a diversified global health-care player. Over the last five years, Novartis has spent $59 billion on acquisitions to expand its presence in fast-growing areas such as generic drugs and vaccines, according to Bloomberg data. "Vasella recognized relatively early the importance of moving away from a commodity-type pharmaceutical model where one white pill fits all," says Karl Heinz Koch, an analyst at Helvea in Zurich.

Combined sales of Alcon and Novartis eye products in 2008 were about $8.5 billion, one-third of the $26 billion global market for such offerings. Together, their businesses cover about 70% of the kinds of products and services people with impaired vision need.

The deal should help Novartis make up for sales that will be lost to generics. Beginning in 2012, patents on its two best-selling medicines, $5.7 billion hypertension drug Diovan and $3.7 billion cancer treatment Gleevec, will expire. "The Alcon deal is an insurance policy...that sales and profits remain at these levels," says Luis Correia, an analyst at Clariden Leu in Zurich. "Diovan is a high-margin product, so they had to buy a high-margin business to replace it."

Vasella expects much future growth to come from Asia, where demand for ophthalmic procedures is expected to grow as incomes rise. In China alone, an estimated 60 million people suffer from cataracts—and Alcon is the world's leader in cataract surgical supplies. In 2008, emerging markets made up about $1 billion of Alcon's sales.

The merger brings another benefit: Alcon is less vulnerable to price regulation than Novartis' prescription drug business. That's because a sizeable chunk of its customers pay out-of-pocket for over-the-counter products and procedures such as laser eye surgery. In contrast, sales of prescriptions drugs depend upon the willingness of cost-constrained governments and insurers to pay. "Strategically it makes sense to diversify into other health-care areas to stabilize earnings and reduce the risks," says Koch.

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