Alcon, Once Gem Worth Over $50 Billion, Weighs on Novartis

  • Drugmaker to consider options like spinoff, IPO for Alcon
  • Profit at the eye-care business dropped 31 percent last year

Novartis AG, which spent several years and more than $50 billion acquiring the Alcon eye-care company, signaled it’s ready to give up on most of the business.

After more than a year of efforts to turn around Alcon, Europe’s second-largest drugmaker on Wednesday said it was considering all options for the embattled division, including a spinoff or initial public offering. Novartis stripped eye drugs from the unit last year, leaving it with surgical equipment and contact lens operations that are valued at about $20.5 billion on its balance sheet. Despite the steps to improve operations, Alcon’s profit plummeted 31 percent in 2016.

In recent months, Novartis had considered selling parts of Alcon, including the division that made devices for eye surgery, people familiar with the matter said, asking not to be identified because the plans were private. A spinoff or IPO of the business may now be the best option as finding buyers has proven to be challenging, the people said. The company weighed selling its contact lens operations in 2015, people with knowledge of the discussions had said previously.

“Now is the time for us to take a look at what’s in the best interests of Novartis shareholders for that unit,’’ Chief Executive Officer Joe Jimenez said in an interview with Bloomberg Television’s Anna Edwards and Manus Cranny. “This is going to include all options, including retaining the business to exiting the business.’’

New Funds

Jimenez signaled in a conference call that the business could command a valuation in the range of $25 billion to $35 billion, making it an “attractive” asset for investors at a time when there’s a scarcity of healthcare companies with that level of market capitalization. Novartis expects to provide an update on its review of the options for Alcon by the end of the year, Basel, Switzerland-based Novartis said Wednesday in a statement.

The Swiss company had made improving operations at Alcon one of its five priorities last year. It appointed a new manager last year and injected funds to bolster the division’s customer service and make small acquisitions as it sought to rekindle sales.

Other steps included moving Alcon’s drugs to the pharmaceuticals division a year ago. Those medicines accounted “for a very large percentage” of Alcon, Jimenez told reporters on Wednesday.

No Loss

“We’re starting to see a turn on that business,” Jimenez said. “As long as Alcon returns to growth, the average growth rates and average margins in the industry, we don’t anticipate at this time when we do the impairment testing, we don’t anticipate a loss.”

Shares of Novartis climbed 2.1 percent to 71.05 Swiss francs as of 1:54 p.m. in Zurich trading. The stock declined about 15 percent last year.

Under the stewardship of Jimenez’s predecessor Daniel Vasella -- who oversaw a string of acquisitions including the purchase of a stake in crosstown rival Roche Holding AG -- Novartis in 2008 acquired a 25 percent stake in Alcon for $11 billion from Nestle SA as a first step in taking over the business. The investment was aimed at reducing Novartis’s reliance on pharmaceuticals as new drugs faced delays and sales of other medicines were being eroded by cheaper versions.

Jimenez, who took the helm in February 2010 while Vasella stayed on as chairman, acquired a majority stake in the eye-care company from Nestle for $28.3 billion a few months later, and then paid another $12.9 billion in April 2011 for the remainder.

Things began souring in 2015, with Alcon’s performance impaired by a decline in surgical equipment sales in the U.S. and in emerging markets, as well as increased competition from generics for some eye treatments.

‘Decent’ Growth

Jimenez told investors in October 2015 that Novartis was doing a “deep analysis” of Alcon’s businesses, and that he hoped to come up with a plan “to get this business back to a decent growth rate.”

But the turnaround, which Jimenez had hoped to see in 2016, has “taken a bit longer,” the CEO told investors at a conference in San Francisco earlier this month.

Sales at Alcon declined 3 percent to $5.81 billion last year as revenue from surgical equipment fell. This year, the sales may remain mostly flat or grow by a “low single digit” percent, Novartis said on Wednesday. Core operating income, a measure of profit, plummeted to $850 million.

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