In 2009, we saw a fair amount of M&A activity by big pharma as it looked to diversify its product lines and seek out new revenue streams that could combat sales lost due to increasing competition from generics. It already looks likely that this trend is going to continue for the foreseeable future.

IN PICTURES: Biggest Stock Scams

Making Deals

On January 4, the Swiss drug maker Novartis (NYSE:NVS) said that it plans to take full ownership of Alcon (NYSE:ACL) by purchasing a 52% stake in the U.S. eye-care company from Nestle SA and by buying out minority shareholders.

Novartis bought 25% of Alcon two years ago and is looking to pay Nestle $28.1 billion in cash to bring its Alcon holding up to 77%. The planned deal would be paid for by the issuance of up to $16 billion in debt and from the company's existing liquidity. Novartis is hoping to complete the deal in the second-half of the year.

The company is then looking to acquire the remaining 23% of Alcon that is held by minority shareholders through a stock-for-stock transaction. The direct merger, which would fall under the provisions of the Swiss Merger Act, would give Alcon shareholders 2.8 shares of Novartis for each Alcon share owned.

Building a Global Reach

This deal represents an intriguing effort by Novartis to continue to diversify its product portfolio and expand its international presence. Approximately 86% of Alcon's sales are derived from its pharmaceutical and surgical business segments. This acquisition will open the door for Novartis in terms of gaining particular access to Alcon's TRAVATAN pharmaceutical line of products for glaucoma and its line of products for cataract surgeries.

This merger would also serve as a pre-emptive move to replace revenue streams that are vulnerable to generic competition. According to UBS, 26% of the revenue that Novartis generated in 2008 will be pressured by patent expiration prior to 2015. The new venture into the eye-care market will not be a walk in the park for Novartis, however. The company is bound to face formidable competition from Allergan (NYSE:AGN) and The Cooper Companies (NYSE:COO).

The Bottom Line

At first glance, this deal appears to make sense for Novartis, although Alcon minority shareholders are probably not that enthused at this point. We could see more drama before this deal is completed and I am sure we will see additional M&A activity by big pharma as 2010 rolls on. (Learn more about mergers and acqusitions, see: The Merger - What To Do When Companies Converge.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  2. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center