Novartis Picks Up eye care business Alcon from Nestle

Novartis Picks Up eye care business Alcon from Nestle

Novartis Picks Up eye care business Alcon from Nestle

Novartis AG agreed to buy a controlling stake in eye-care company Alcon Inc. from Nestlé SA for about $39 billion, in one of the most aggressive steps yet by a pharmaceutical company to diversify beyond its main business -- selling prescription drugs -- into faster-growing areas of health care.

Alcon is best-known to consumers for its contact-lens solutions, but most of its $5.6 billion in sales for 2007 came from devices used in eye surgery and from medicines for eye diseases such as glaucoma. The agreement marks what will be one of the biggest-ever takeovers in Switzerland, home to Novartis and Nestlé, which bought Alcon when the food giant was a diversified conglomerate. Novartis plans to buy Nestle's 77% stake in Alcon in two parts, and leave the remaining 23% publicly traded.

Global prescription drug sales have flagged in recent years as insurers and state health-care systems attempt to cut costs and increasingly demand that patients take cheaper generic drugs instead of brand-names. Adding to the problems: Drug companies have had a hard time discovering new drugs and bringing them to market amid heightened regulatory scrutiny.

Novartis argues that Alcon's business is less vulnerable to the problems facing the prescription-drug industry. Surgical equipment can command high prices because it has no generic competition, Novartis says. And consumers often pay for procedures such as laser eye surgery out of their own pockets, which cuts frugal insurers and state health systems out of the equation.

Opthamologists are also typically less likely than other doctors to prescribe generic drugs, says Myron Winkelman, a consultant in West Bloomfield, Mich., who advises employers on how to manage their health-care costs.

Novartis Chief Executive Daniel Vasella said he expects Alcon's business to benefit from the aging of the world's population because eye troubles such as cataracts and glaucoma are more common in the elderly. "We anticipate and hope [Alcon sales] continue to grow dynamically. And the margins are very attractive," he said in an interview Monday. Alcon has had annual sales growth of 13% every year since 2002, Novartis said. By contrast, Novartis expects sales in its branded prescription-drug unit to grow in the low-single-digit range this year.

Dr. Vasella, a psychoanalyst and physician by training, is now one of the industry's longest-serving CEOs. He worked on the 1996 merger of Ciba-Geigy AG and Sandoz AG that created Novartis, and has been CEO ever since.

Novartis has been stung by the changing industry landscape and is trying to adjust its course. Its prescription-drug unit stumbled in recent quarters after heavy competition from generic drugs. Novartis also failed to get an important new diabetes drug, Galvus, approved by the U.S. Food and Drug Administration, and had to remove a drug for irritable bowel syndrome, Zelnorm, from the market due to safety concerns. Attempting to fix the problems, Dr. Vasella appointed a new head of prescription drugs late last year and laid out plans to cut 2,500 jobs world-wide to reduce bureaucracy and cut costs.

Novartis, the world's fourth-biggest drug maker, with total sales of $39.8 billion last year, counts among its best-selling products Diovan for blood pressure, Gleevec for various types of cancer, and Trileptal for epilepsy. Based in Basel, Switzerland, it is already active in eye care through its Ciba Vision contact-lens brand. It also sells Lucentis, a drug that treats a severe eye disease that can lead to blindness.

Novartis has made previous moves to push into faster-growing areas of health care. In 2006 it expanded its vaccine business by spending $5.4 billion to buy full control of Chiron Corp. In 2005, Novartis spent $8.4 billion to acquire two generic-drug makers. Novartis also has a unit that sells nonprescription medicines.

Despite these moves, branded prescription drugs made up about 60% of Novartis' total sales last year and remain the company's core business.

Other big pharmaceutical companies have also taken steps to diversify away from prescription drugs. GlaxoSmithKline PLC of the U.K. and Spnofi-Aventis SA of France have invested heavily in vaccines, and Roche Holding AG of Switzerland said this year it would spend $3.4 billion to buy Ventana Medical Systems Inc., a U.S. maker of diagnostic tools.

"Are they diversifying because basically they are having trouble in their core business, or are they diversifying for well-thought-out reasons? Unfortunately in many cases I think it's because they have no choice," says Denise Anderson, a pharmaceutical analyst at Landsbanki Kepler in Zurich. Ms. Anderson was lukewarm on Novartis' decision to buy Alcon.

The mechanics of the deal with Nestlé for Alcon are intricate. Novartis said it expects to buy an initial 25% stake in Alcon in the second half of 2008 for about $11 billion, and to acquire Nestlé's remaining 52% stake for about $28 billion between January 2010 and July 2011. Nestlé wanted a staggered purchase, he said. A Nestlé spokesman declined to comment on that.

Averaging the price it is paying for both pieces of Alcon, Novartis is paying a premium of 13% over Alcon's Friday closing price of $148.44 a share on the New York Stock Exchange.

On Monday, Alcon shares ended trading up 2.19% at $150.63. Novartis shares fell 1.43% to 51.65 Swiss francs, or $51.35, while Nestlé's shares were up 0.98% at 516.50 Swiss francs. Dr. Vasella said he didn't expect any anti-trust hurdles to the deal.

Novartis plans to finance the two-part purchase through internal cash reserves and external borrowing. The company said it will put its ongoing share-buyback program on hold.

Among Swiss acquisitions, the agreement for Alcon surpasses Nestlé's 2001 purchase of U.S. pet food company Ralston Purina for $13 billion. In 2000, Zurich-based UBS AG bought U.S. brokerage Paine Webber for close to $12 billion, while Credit Suisse acquired U.S. securities firm Donaldson Lufkin & Jenrette for a similar price.

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