Novartis Sees Profits In Alcon… Why You Should Too
by Tony Daltorio, Investment U Research
Tuesday, January 12, 2010
Back in October, I wrote about how pharmaceutical companies captured the financial world’s attention with a myriad of lucrative mergers and acquisitions last year.
Some of the more memorable deals included Pfizer Inc. (NYSE: PFE) snatching up Wyeth Labs in January for $68 billion and Johnson & Johnson (NYSE: JNJ) purchasing Cougar Biotech in May for $1 billion.
Not to be left out, Novartis ADR (NYSE: NVS) announced its own intentions in April to purchase eye care company Alcon (NYSE: ACL) for $50 billion last year.
But Novartis apparently doesn’t want to be associated with its competitors, so it staunchly denies that the deal has anything to do with combating falling drug discovery rates or looming patent expirations. Chairman and CEO Daniel Vasella claims: “This is not a diversifications; it is a strengthening of our existing eye care business.”
Whatever Mr. Vasella wants to call it, this latest action still moves Novartis away from its original purpose, just like its past Chiron and Hexal purchases turned the company into the second largest generic drug maker in the world instead of focusing on its core drug business.
And it’s also beside the point. What investors really need to focus on now is whether it’s a smart move or not.
The Novartis – Alcon Deal
By combining Alcon with Ciba Vision – Novartis’ existing eye care subsidiary, which specializes in contact lenses and related products – the corporation stands to control a full third of the $26 billion global market.
Already the global leader in ophthalmic surgery products, Alcon produces medicine for eye diseases. That focus just happens to compliment Novartis’ development of drugs like Lucentis, a treatment for macular degeneration, which causes blindness in the elderly.
By itself, Ciba already has an estimated 125 million customers in more than 70 countries – including emerging markets, where it made a tidy $1 billion last year. But Novartis believes it can do more with Alcon onboard. Their combined research and development efforts will produce $200 – $300 million in annual, pre-tax cost savings, and joint products spanning 70% of the eye care market.
Overall, the deal looks solid for everybody involved, except for possibly Alcon’s minority shareholders, who could receive $153 a share… significantly less than the $181 majority shareholder Nestle ADR (OTC: NSRGY) is guaranteed.
If that sounds unfair, remember that many of those shareholders bought into the stock recently because they expected a takeover at some eye-opening price. And regardless, Novartis will probably raise the offer further before the deal is solidified.
Still, the controversy resulted in Novartis’ share prices falling somewhat, and it could affect them still… possibly even driving the stock down to attractive levels for a long-term buy.
Novartis Turns Focus On Growth And Profits
Novartis expects sales of its branded prescription drugs to grow 5% annually over the next five years, a healthy increase by all accounts. But it also sees demand for the larger eye care market growing up to 7% as the global population ages and therefore needs an increasing amount of eye-related medical attention.
Right now, 22% of people living in developed countries are at least 60 years old and by 2050, that number should rise to 33%. And while emerging nations have much younger populations – with only an average 9% aged 60 or older – in forty years, that number will more than double to 20%
In those growing countries especially, many citizens find themselves in a position to take advantage of medical treatments for the first time. In China, for example, an estimated 60 million people suffer from cataracts. And many of them have never had the financial resources to treat the condition before. But with the middle class growing by leaps and bounds, that’s all changing… fast.
Novartis probably summed up the acquisition best when it released a simple but direct statement saying:
“Alcon will strengthen the group’s portfolio focused on healthcare, and provide greater access to the fast growing global eye care sector, which is driven by an aging population, innovation and emerging markets.”
Good investing,
Tony Daltorio
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