Novartis Looks For 20/20 Vision With Alcon

By Billy Fisher | January 03, 2010 AAA

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.

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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.)

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