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April 7, 2011
Zacks Research Digest
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Alcon Inc.
111 N. Canal Street, Suite 1101 ● Chicago IL 60606
(ACL – NYSE)
$168.34
Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of
this report has been updated.
Reason for Report: Flash Update: ACL Shareholders Approve Merger with NVS
Prev. Ed.: November 5, 2010; 3Q10 Earnings Update (broker material considered till October 27)
NOTE: Flash updates on “4Q10 Earnings Update” and “NVS to buy remaining stake in ACL” were done on
January 26 and December 15, respectively.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than
in the Valuation table.
Flash Update
Alcon Shareholders Approve Merger – April 7, 2011
Alcon Inc. announced that its shareholders have approved of the company’s merger with Novartis AG.
Per the terms of the merger agreement, Alcon shareholders will receive 2.9228 Novartis shares or
American Depositary Shares (ADS) along with a cash payment of $8.20 for each share that they hold.
The completion of the merger is subject to approval by the Novartis shareholders.
The Alcon board had approved the merger in December last year, following a favorable recommendation
from the Independent Director Committee and a fairness opinion issued by Lazard Ltd. (LAZ), among
other things.
Following the completion of the merger, Alcon will become the second largest division within Novartis.
Moreover, Novartis’ CIBA Vision, select eye care medicines and an Alcon business wing will be
integrated into Alcon, forming an organization, which will contribute more than $8.7 billion in sales (over
70%) to the eye care segment.
This acquisition will help Novartis diversify and make up for revenues lost to generic competition.
Moreover, it will help the company bolster its position in the eye care market, which presents significant
growth potential due to the unmet needs of an aging population.
Novartis had first announced its intention to gain full ownership of Alcon in early January 2010. At that
time, the former had a 25% stake in the latter. In April 2010, Novartis acquired 156 million shares of
Alcon from Swiss corporation Nestlé S.A. for $28.3 billion, raising its stake in the company to 77%.
Novartis’ outlay for acquiring the entire 77% stake in Alcon was about $38.7 billion.
Details, other news update and broker comments will be provided in the next edition.
© Copyright 2011, Zacks Investment Research. All Rights Reserved.
Portfolio Manager Executive Summary
Alcon Inc. (ACL) is one of the largest and most diversified players in the ophthalmology market. Alcon
has a leading market share in products associated with cataract surgery (equipment and intraocular
lenses), ocular allergies and infections, and lens care solution for soft contact lenses.
Novartis AG (NVS) acquired Nestlé’s stake (156 million shares) in Alcon in August 2010, for $28.3 billion
($181.00 per share), bringing its total stake in Alcon to 77%. The Swiss drug maker is also interested in
acquiring the remaining 23% of Alcon.
Of the firms in the Digest group 72.7% are neutral and 27.3% are positive on the stock. None of the firms
provided a negative rating.
Neutral or equivalent outlook (8/11 firms): Target prices range from $162.00 to 192.00. The neutral
firms believe Alcon’s business model remains fundamentally strong despite the weak global economy.
Continued international penetration, new product launches and market share gains will be the fuel for
future revenue growth at Alcon. However, challenges exist in the form of patent expirations, EU pricing
pressure, patent challenges, generic threats and softer pricing on certain products as a result of Medicare
rebates. Further, these firms prefer to remain on the sidelines as they see near-term stock performance
of the company being driven more by the expected outcome of Novartis' takeout of Alcon's minority
shareholders than the company's fundamentals.
Positive or equivalent outlook (4/11 firms): Target prices range from $180.00 to $192.00. The bullish
firms view Alcon as a leading global eye care company with a track record of internal growth, developing
market-leading products in multiple ophthalmic sectors. The firms believe the macro fundamentals are
improving and Alcon is reverting to historical rates of market growth. In addition, the company is realizing
market share gains across key product categories. Besides, the company's conservative management
team, leverageable business model, financial discipline, and diverse product/geographic distribution
inherently reduce risk and provide a variety of levers to produce consistently solid, above-expectation
bottomline growth.
November 5, 2010
Overview
The firms have identified the following factors for evaluating the investment merits of ACL:
Key Positive Arguments
A broad business mix in diverse geographical markets
imparts consistency to sales and earnings growth.
Key Negative Arguments
Alcon is currently facing patent challenges from several
generic players for products like Patanol, Pataday,
Vigamox, and Travatan. The entry of generic
competition could lead to intense pricing pressure and a
decline in sales
Alcon faces tough competition in the ophthalmic
industry, which is highly crowded and subject to rapid
technological
change
and
evolving
industry
requirements and standards
Alcon Inc. (ACL) is a global ophthalmic products company, which operates under three business units:
Surgical equipment, Pharmaceuticals, and Consumer Eye Care, each engaged in the discovery,
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development, manufacturing, and marketing of ophthalmic products. The pharmaceutical unit develops
glaucoma products, ocular anti-infectives, and a combination of ocular anti-infective/anti-inflammatory
products, ocular allergy products, ocular generics, and otic (ear) products. The Surgical unit caters to the
cataract surgery market with Alcon’s Infiniti vision system and AcrySof intraocular lenses. Alcon also
offers laser refractive surgical products and, in the third quarter of 2007, acquired WaveLight AG, a
manufacturer of refractive laser and diagnostic systems. The Consumer Eye Care unit offers contact
lens care products, artificial tears, and ocular vitamins. Alcon currently has operations in more than 75
countries. Its products are sold in more than 180 countries. The company is headquartered in
Hunenberg, Switzerland.
Novartis AG (NVS) acquired Nestlé’s stake (156 million shares) in Alcon in August 2010, for $28.3 billion
($181.00 per share), bringing its total stake in Alcon to 77% and thereby becoming a majority shareholder
of the company. Novartis is now looking to acquire the balance 23% from Alcon’s minority shareholders.
Earlier in 2010, Novartis had extended an offer to Alcon shareholders under which holders of each Alcon
share will receive 2.8 shares of Novartis.
However, Alcon’s Independent Director Committee (IDC) referred to Novartis’ proposal as “grossly
inadequate” and “fundamentally flawed”. The proposal was valued at $142 per Alcon share, well below
the $181.71 in cash that was paid by Novartis to acquire its majority position. The Committee stated that
it will evaluate and take appropriate action to ensure that the rights of the minority shareholders are
protected. The firms of the Digest group believe that Novartis will increase the price of its offering to
minority shareholders in order to completely take over Alcon.
The company’s website is www.alconinc.com.
Note: The company’s financial year coincides with the calendar year.
November 5, 2010
Long-Term Growth
Overall, the firms believe Alcon will offer investors strong top- and bottom-line growth over the next few
years from emerging markets and upside from its near- and mid-term pipeline. Additionally, Alcon’s
strong cash flow provides opportunities to pursue more licensing agreements, complementary
acquisitions, geographic expansion, or share buybacks that should help sustain mid-teen EPS growth
over the next several years. Management believes that the fundamentals of the company are strong and
expects continued growth in the eye care market supported by the development of global brands and
new product introductions.
A large part of the company’s revenues is derived from international markets. Therefore, a strengthening
US dollar can hurt the company’s top-line growth. Meanwhile, the company is witnessing EU pricing
pressure mainly on the pharmaceutical side of the business. The surgical business has also been
affected by price reductions in the EU.
Alcon supports the goal of expanding access to high quality healthcare. The healthcare reforms aim at
broadening the insurance coverage to 32 million uninsured Americans, expected to be effective by 2014.
However, during the near-term transition, before the number of insured rises, pharmaceutical companies
in particular are being required to contribute to the effort now. In 2010, Medicaid discounts for branded
drugs increase from 15.1% to 23.1% while these same discounts are now being offered to Medicaid
managed care providers. Into 2011, Medicare discounts of 50% on branded pharmaceuticals will be
offered to seniors as they enter Medicare Part D coverage. In FY10, Alcon expects healthcare reform to
negatively impact total revenue by $20 million.
November 5, 2010
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Target Price/Valuation
Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
Digest High
Digest Low
No. of Analysts with Target Price/ Total
27.3%↓
72.7%↑
0.0%
$178.50 ↑
$192.00
$162.00
10/11
Alcon’s IDC may fail to ensure a deal that provides minority holders with a value deemed adequate.
Apart from that, while Novartis has shown a clear desire to own Alcon outright, Novartis may opt to
withdraw any bid for the minority stake if it encounters resistance it considers to be insurmountable.
These are the key risks to Alcon’s valuation at current levels .
Recent Events
Alcon’s Winning Streak Continues – January 26, 2011
Alcon Inc. reported fourth quarter 2010 earnings of $1.74 per share, beating the Zacks Consensus
Estimate of $1.70 and 8.1% ahead of the year-ago figure. The fiscal year also saw the company beating
the Zacks Consensus Estimate by 4 cents. Earnings in fiscal year 2010 came in at $7.71 per share, up
13.2%. Strong revenues helped boost earnings.
Revenues
Quarterly revenues at Alcon increased 5.7% to $1.81 billion, ahead of the Zacks Consensus Estimate of
$1.78 billion. Fiscal year revenues amounted to $7.18 billion, reflecting a year-over-year increase of
10.5% and beating the Zacks Consensus Estimate of $7.14 billion.
Strong contributions from the Systane family of products, continued gains in the glaucoma market and
increased sales from a severe allergy season boosted US revenues by 3.4%. International revenues also
saw a increase of 7.3%. Emerging markets recorded a 13.7% increase with the BRIC nations (Brazil,
Russia, India and China) reporting a growth of 18.5%.
All the revenue segments at Alcon put in strong performances in the reported quarter. While
pharmaceutical sales climbed 9.4% to $743 million, surgical sales increased 3.6% to $858 million.
Consumer sales inched up 1.4% to $211 million.
Pharmaceutical revenue benefited from an increase in the sale of infection/inflammation products (up
18.6%) in the US complemented by strong performance by the glaucoma franchise, sales of which
increased 2.4% to $336 million. Continued market penetration of Azarga outside the US and a rise in the
sales of DuoTrav boosted the performance of the glaucoma franchise.
Robust performance of intraocular lenses (IOLs), especially Advanced Technology IOLs, helped drive
surgical revenue during the fourth quarter. Global sales of intraocular lenses rose 8.5% mainly due to a
broader use of AcrySof IQ ReSTOR +3.0 lens and AcrySof IQ Toric lens.
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Strong global performance of the Systane family of products helped drive Consumer revenue during the
quarter.
Margins
Alcon's fourth quarter gross margin increased 200 basis points (bps) to 76.0%, mainly due to fluctuation
in foreign exchange rates and rise in price.
Quarterly operating margin was 32.4%, 110 basis points above the year-ago figure. The increase was
primarily due to strong sales growth, positive price contribution as well as the favorable, albeit temporary,
impact of foreign exchange on gross profit margin.
On December 15, 2010, Alcon Inc. announced that its board of directors gave a nod for the company to
be merged with Novartis AG (NVS). Novartis plans to pay $168 per share to acquire the remaining 23%
share of Alcon it does not already own. As per the terms of the agreement, the merger consideration will
consist of Novartis shares and, if necessary, a cash contingent value amount, resulting in a total value of
$168 per share.
Alcon’s board approved the merger following a favorable recommendation from the Independent Director
Committee and a fairness opinion issued by Lazard Ltd. (LAZ), among other things.
Following the completion of the merger, which is expected in the first half of 2011, Alcon will become the
second largest division within Novartis. Moreover, CIBA Vision, an Alcon business wing, and select eye
care medicines will be integrated into Alcon, forming an organization, which will contribute more than
$8.7 billion in sales (over 70%) to the eye care segment.
The acquisition of Alcon will help Novartis diversify and make up for revenues lost to generic competition.
Moreover, it will help the company bolster its position in the eye care market, which presents significant
growth potential due to the unmet needs of an ageing population.
Novartis had first announced its intention to gain full ownership of Alcon in early January. At that time
Novartis had a 25% stake in Alcon. In April, Novartis acquired 156 million shares of Alcon from Swiss
corporation Nestlé S.A. for $28.3 billion, bringing its stake in Alcon to 77%. Novartis’ outlay for acquiring
the entire 77% stake in Alcon was about $38.7 billion.
On October 20, 2010, Alcon reported its 3Q10 financial results. Highlights are as follows:
 Total revenue was $1.76 billion in 3Q10, up 9% y/y.
 Adjusted earnings per diluted share in 3Q10 were $1.84, up 7.6% y/y compared with $1.71 in
3Q09.
 For 2010, the company expects organic sales to grow in the high single digits, with earnings in the
range of $7.58 to $7.68 per share.
Revenue
The company reported total sales of $1.76 billion in 3Q10, up 9% y/y (up 8.7% excluding impact of Fx
and acquisitions) driven by strong sales in Pharma and Consumer Eye Care segments. The Zacks
Digest average 3Q10 revenue was roughly in line with the company’s report.
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In 3Q10, US sales increased 9.5% y/y to $803 million due to strong contributions from the Systane family
of products, continued gains in the glaucoma market and increased sales attributable to a severe otic
season. International sales increased 8.6% y/y (9.3% on an organic basis) to $957 million due to strong
sales growth in emerging markets and international pharmaceuticals. Emerging markets recorded a
20.2% increase (19.2% organically) with BRIC nations (Brazil, Russia, India and China) reporting a
growth of 25.6% (20.5% organically).
The company is facing significant pricing pressure across the pharma business in EU markets based on
austerity measures, particularly in Germany, Spain, and France. Alcon experienced less than 1% price
decline across all international geographies in the quarter whereas, in the US, the company was able to
drive prices higher. New products from the acquisitions of Optonol (January 2010) and Durezol acquired
from Sirion Therapeutics, Inc. (March 2010) contributed 70 bps to sales growth. Healthcare reform
negatively affected 3Q10 revenue by $5 million.
The company maintained its 2010 organic sales growth guidance of high single digits growth. Alcon,
however, expects healthcare reform to negatively impact 2010 total revenue by $20 million.
Revenue ($
in million)
Digest
Average
$1,614.1
$6,499.3
$1,721.0
Digest High
$1,614.9
$6,500.1
Digest low
$1,614.0
$6,499.0
3Q09A
2009A
1Q10A
2Q10A
3Q10A
4Q10E
2010E
2011E
2012E
$1,886.0
$1,760.0
$1,755.6
↑
$7,703.3
↑
$1,721.0
$1,886.0
$1,760.0
$1,721.0
$1,886.0
$1,760.0
$7,122.7
↑
$7,173.0
↑
$7,004.5
↓
$8,326.4
↑
$8,527.0
↑
$8,145.6
↑
$1,806.0
$1,637.0
↑
$7,827.8↑
$7,584.2↑
The following is a graphical representation of segment revenue:
2010E Key Drugs
2009A Key Drugs
Pharma Total
13%
Pharma Total
13%
41%
43%
Surgical Total
Surgical Total
44%
46%
Consumer
Total
Consumer
Total
2011E Key Drugs
2012E Key Drugs
Pharma Total
12%
43%
Pharma Total
44%
Surgical Total
Surgical Total
44%
45%
Consumer
Total
Zacks Investment Research
12%
Consumer
Total
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Specific Products
Note: All significant changes have been highlighted in bold.
PHARMACEUTICAL DIVISION
Alcon’s Pharmaceutical division develops glaucoma products, ocular anti-infectives, combination ocular
anti-infective/anti-inflammatory products, ocular allergy products, ocular generics, and otic (ear) products.
Worldwide pharmaceutical sales in 3Q10 were $758 million, up 15.0% y/y (up 14.2% excluding Fx),
driven by strong infection/inflammation revenues, increased market share in the glaucoma
franchise and a severe otic season in the US. Pharmaceutical sales in the US were up a strong
19% y/y. Internationally, pharmaceutical sales were also up 11% y/y (13% excluding Fx).
The Zacks Digest average pharmaceutical division sales in 3Q10 were in line with the company’s
report.
$ in million
Pharmaceutical Sales
2009A
2010E
2011E
2012E
2013E
Est. Growth (‘09-’12)
$2,677.1
$3,029.3 ↑
$3,337.2↑
$3,629.9↑
$3,916.1↑
10.7%↑
Anti-infection and Anti-inflammation Products
Total revenue from anti-infective and anti-inflammatory products increased 21.1% y/y to $241
million in 3Q10. Sales benefited from easier comparisons for TobraDex, where the company has
made progress building out a generic franchise, as well as modest stocking behind the launch of
TobraDex ST in the quarter. Durezol, an ophthalmic corticosteroid marketed for the treatment of
postoperative inflammation and pain acquired from Sirion Therapeutics, Inc. in March 2010 also
contributed to growth. According to the Zacks Digest report, sales in 3Q10 were in line with the
company’s report.
TobraDex (ST)
Indication: Ocular anti-infective product
Product Life Cycle Position: Generics available
Sales: According to the Zacks Digest report, TobraDex sales in 3Q10 were $40 million, reflecting
an increase of 5.3% y/y.
New Version of the Drug: TobraDex ST, launched in the US in September 2010, is Alcon’s follow-on
product to TobraDex. TobraDex ST is a combination of tobramycin (antibiotic) and dexamethasone
(steroid), and is used to treat eye inflammation, where infection or risk of infection is present.
Glaucoma Franchise
Total glaucoma sales were $316 million in 3Q10, up 10.5% y/y. Global sales of glaucoma products
rose 11.5% organically as Azarga and DuoTrav, both performed well outside the US (OUS). The
company is in the process of transitioning Travatan sales to Travatan Z. Consequently, total
Travatan sales in 3Q10 saw the negative impact of some inventory reduction.
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The company has filed for approval of the alternative preservative system version of DuoTrav in
the EU.
According to the Zacks Digest report, sales in 3Q10 were in line with the company’s report.
Travatan Family (Travatan, Travatan Z, and DuoTrav)
Indication: Travatan is an eye drop that reduces excessive pressure in the eye (often a result of the
condition called open-angle glaucoma). Travatan Z is a benzalkonium chloride (BAC) free version of
Travatan.
Product Life Cycle Position: Travatan is marketed worldwide; Travatan Z is marketed in the US and
filed in the EU; DuoTrav is marketed outside the US.
Patents/Generics: Alcon has a patent litigation lawsuit ongoing against Teva Pharmaceuticals (TEVA),
which has filed an Abbreviated New Drug Application (ANDA) with the FDA to market a generic version
of Travatan and Travatan Z.
The company also has patent infringement lawsuits ongoing against Par Pharmaceuticals (PRX) and
Apotex Inc. These companies have also filed for generic versions of Travatan and Travatan Z. The trial
date for the lawsuits is set for March 7, 2011.
If the generic companies win this lawsuit, they can launch their generic products from September 2011,
pending FDA approval. Teva is the first-to-file and should enjoy 180-day exclusivity.
Allergy Products
Total sales of allergy products decreased 5.2% y/y to $92 million in 3Q10.
According to the Zacks Digest report, sales in 3Q10 were in line with the company’s report.
Patanol/Pataday
Indication: Anti-allergy
Product Life Cycle Position: Marketed; the company has filed for approval of Pataday in Japan.
Patents/Generics: Alcon has a patent infringement lawsuit ongoing against Apotex Inc., which has filed
an ANDA seeking approval to market a generic version of Patanol. If Apotex wins this lawsuit, it can
bring its generic product to the market after June 18, 2011, pending FDA approval.
Otic/Nasal Products
Total revenues from Otic product sales amounted to $137.0 million in 3Q10, reflecting a y/y
increase of 29.2% benefiting from warmer weather and strong seasonal demand, which was
evident from strong Ciprodex sales. According to the Zacks Digest report, sales in 3Q10 were in
line with the company’s reports.
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Patanase
Indication: Patanase is a nasal spray for the relief of the symptoms of allergic rhinitis in patients of all
age groups.
Product Life Cycle Position: Marketed
Additional Indication: The drug is currently under regulatory review in the US for the treatment of
ocular allergy.
CONSUMER DIVISION
Alcon’s Consumer division consists of three product categories: contact lens disinfectant, artificial tears
products, and other consumer.
Worldwide Consumer revenues were $235 million in 3Q10, reflecting an increase of 8.8% y/y. The
growth was driven by strong sales of Systane. US revenues grew 6% y/y while international
revenues increased 12% y/y (up 12% excluding Fx). The Zacks Digest average sales in 3Q10 were
in line with the company’s report.
During 3Q10, the company reported contact lens disinfectant sales of $129.0 million, reflecting an
increase of 8.4% y/y. Contact lens care was particularly strong OUS, where Opti-Free Replenish
is driving growth, while in the US, contact lens care experienced strong unit sales growth, offset
by promotion pricing and competitive launches. Back-to-school promotions, while impacting
price, appear to have retained Alcon lens care users. The company has filed for approval of a
new formulation of Opti-Free for silicone hydrogel lenses in the US.
Artificial tears sales amounted to $86 million, up 17.8% y/y driven by the strong performance of
Systane Balance, which was launched in the US in October 2010.
Other consumer care product sales decreased 16.7% y/y to $20 million in 3Q10.
$ in million
Consumer Sales
2009A
2010E
2011E
2012E
2013E
Est. Growth (‘09-’12)
$824.6
$895.5↑
$950.7↑
$1004.7↑
$1,052.7↑
6.8%↑
SURGICAL DIVISION
The surgical unit caters to the cataract surgery market with Alcon’s Infiniti vision system and AcrySof
intraocular lenses.
Worldwide Surgical sales in 3Q10 were $767 million, reflecting an increase of just 3.8% y/y (up
3.7% excluding Fx) due to weak IOL performance and a slowdown in US cataract procedure
volumes. The Zacks Digest average sales in 3Q10 were in line with the company’s report.
$ in million
Surgical Sales
2009A
2010E
2011E
2012E
2013E
Est. Growth (‘09-’12)
$2,997.8
$3,191.8↓
$3,420.4↓
$3,642.9↓
$3,876.6↓
6.7%↑
Intraocular Lenses (IOL)
Total revenues from IOL were $285 million in 3Q10, up 2.5% y/y. IOL volumes were down on a y/y
basis, as US cataract procedure growth slowed to about 1.5% versus 4–6% growth in 2H09. The
higher growth in 2H09 was a function of catch up surgeries that were delayed in late 2008/early
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2009. One firm (J.P. Morgan) expects IOL growth rates to normalize in 2011 and beyond. The
Zacks Digest average sales in 3Q10 were in line with the company’s report.
Premium IOLs/Advanced IOLs sales were once again a strong point in the quarter with 13.5%
growth (up 13.6% y/y organically) driven by the continued performance of AcrySof ReSTOR +3.0
and AcrySof Toric. However, these products faced increased competitive pressures from new
market entrants, such as Abbott’s Tecnis Multifocal.
Alcon announced the ex-US launch of AcrySof IQ ReSTOR Multifocal Toric intraocular lens in September
2010. The company plans to file a Pre-Market Application (PMA) for the lens with the FDA in early
2012. The company has expanded the diopter range for the Toric lenses in the EU and expects to
launch the IQ Toric IOL with full dioper range in the EU during 4Q10. Given the lens’ dual property
of presbyopic and astigmatism correction, management believes that the lens should help
increase penetration of advanced IOL technology
Cataract/Vitreoretinal
Total revenues were $454 million in 3Q10, reflecting an increase of 4.1% y/y. According to the
Zacks Digest report, sales in 3Q10 were in line with the company’s report.
Alcon acquired LenSx Lasers, Inc. for $367 million in cash in August 2010. The company expects
to introduce its femtosecond laser for cataract surgery in the near term.
Refractive
Refractive surgery is performed to correct vision impairments, such as myopia, hyperopia, and
astigmatism, to reduce dependency on eye glasses and contact lenses. Presently, laser surgery is the
most common form of refractive surgery.
Alcon’s refractive revenue was $28 million in 3Q10, up 12% y/y. According to the Zacks Digest
report, sales in 3Q10 were in line with the company’s reports.
The company introduced the WaveLight Refractive Suite in 3Q10, which combines the EX500
excimer laser and the FS200 femtosecond laser to create the fastest platform for refractive
surgery.
Pipeline Drugs
The company announced on the 3Q10 conference call that it has filed for four products and
received approval for two since 2Q10 and is still expecting nine key product approvals and
regulatory submissions by the end of 2010.
Moxifloxacin/dexamethasone: Alcon’s combination, moxifloxacin and dexamethasone, is being
developed for the treatment of general infections and inflammation. Moxifloxacin is a broad spectrum
antibacterial agent, originally developed by Bayer, while dexamethasone is a synthetic cortisol analogue
that is used as an anti-inflammatory agent. The product is in phase III clinical trials for ear disorders,
inflammation, and general infections. The US filing for a new formulation of moxifloxacin for various
indications is expected in 2012.
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Aganocide (NVC-422): Aganocide is being studied in both eye and ear infections under a licensing
and research collaboration agreement with NovaBay Pharmaceuticals for use of aganocide compounds
to develop new therapeutics to treat eye, ear and sinus infections, as well as new contact lens solutions.
Alcon currently has a 250-patient phase II trial of aganocide in progress for viral conjunctivitis (pink
eye). The product is effective against both viral and bacterial forms of conjunctivitis. A filing is expected
in 2012.
Other Collaborations
Alcon has a licensing deal with GlaxoSmithKline plc (GSK), whereby Alcon received global ophthalmic
rights to cilomilast, a phosphodiesterase IV inhibitor. Cilomilast is being investigated for use as a
treatment for asthma and chronic obstructive pulmonary disease (COPD). Glaxo and Alcon’s
agreement will focus on developing cilomilast to treat dry eye and potentially other ophthalmic conditions.
Earlier in 2010, Alcon purchased the rights to two topical eye care products from Sirion Therapeutics, Inc.
In January 2010, the company acquired Optonol, Ltd., a privately held medical device company. In late
October 2009, Alcon entered into an in-licensing agreement with Potentia Pharmaceuticals for the
development of medicines for the treatment of age-related macular degeneration (AMD). In September
2009, Alcon acquired Swiss biotech company, ESBATech AG.
In July 2009, Alcon entered into a five-year collaborative research agreement with AstraZeneca for the
exclusive ophthalmic discovery and potential development rights to AstraZeneca’s compound library.
Alcon also entered into a research and licensing agreement with PhiloGene Inc. for rights to a vascular
endothelial growth factor (VEGF) protein, which will be developed for the treatment of wet AMD and
diabetic macular edema. All these transactions should allow Alcon to strengthen its ophthalmic product
pipeline.
Please refer to the Zacks Research Digest spreadsheet on ACL for more details on revenue estimates.
Margins
The company reported gross margin of 76.0% in 3Q10, up 70 bps y/y, mainly due to foreign exchange
rates fluctuation and strong US pharma sales. Operating margin expanded to 35.7% in 3Q10, up 870
bps y/y, primarily due to strong sales growth, positive price contribution as well as the favorable, though
temporary, impact of foreign exchange on gross profit margin.
The Zacks Digest average gross margin and operating margin were in line with the company’s report.
Research and development (R&D) expenses increased 16.5% y/y to $184.0 million, while selling,
general and administrative (SG&A) expenses amounted to $516.6 million, reflecting an increase of
8.6% y/y.
Margins
Gross
3Q09A
2009A
1Q10A
2Q10A
3Q10A
4Q10E
2010E
2011E
2012E
75.3%
75.2%
75.8%
77.4%
76.0%
74.5%↓
76.0%↓
76.2%
76.2%↓
36.4%↓
37.4%↓
37.7%↓
Operating
35.8%
35.1%
36.9%
40.0%
35.7%
32.9%↓
Pre-Tax
36.8%
35.9%
38.3%
40.9%
36.1%
33.2%↓
37.2%↓
37.9%↓
38.3%↓
31.8%
29.5%↓
32.7%↓
33.3%↓
34.0%↓
Net
31.9%
31.5%
33.8%
35.7%
In 4Q10, the company expects gross margins of approximately 74%. Both SG&A and R&D expenses are
expected to be higher in 4Q10 than in 3Q10. The spend on R&D is expected to be higher to continue to
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build the pipeline, absorb LenSx acquisition expenses, and fund new business development activity,
which includes the potential for small tuck-in acquisitions.
Note: According to the Zacks Digest model, total revenue is expected to increase 9.6% in FY10 and
8.2% in FY11. In comparison, COGS is expected to increase 6.1% in FY10 and 7.2% in FY11; SG&A
expense is expected to increase 6.1% in FY10 and 6.2% in FY11; and R&D expense is expected to
increase 11.1% in FY10 and 6.7% in FY11.
Please refer to the Zacks Research Digest spreadsheet on ACL for further details on margins.
Earnings per Share
The company reported adjusted EPS of $1.84 in 3Q10, up 7.6% y/y. Higher revenues led to an increase
in earnings.
The Zacks Digest pro forma EPS figures in 3Q10 were in line with the company’s report.
EPS
3Q09A
2009A
1Q10A
2Q10A
3Q10A
4Q10E
2010E
2011E
2012E
Digest High
$1.71
$6.81
$1.91
$2.22
$1.84
Digest Low
Digest
Average
$1.71
$6.80
$1.91
$2.22
$1.84
$1.78 ↓
$7.75↑
$8.50 ↑
$9.40↓
$1.61 ↑
$7.58 ↑
$8.33↑
$9.10↓
$1.71
$6.81
$1.91
$2.22
$1.84
$1.70↓
$7.68 ↑
$8.43 ↑
$9.28 ↓
Alcon raised its guidance for fiscal 2010 and now expects earnings per share in the range of $7.58 to
$7.68, up from a range of $7.45 to $7.62. This guidance takes into account a $0.06 per share healthcare
reform expense. The guidance excludes the impact of the costs the company expects to incur due to a
change in the majority ownership to Novartis. Further, management expects the impact of currency to be
neutral in 4Q10 and the acquisition of LenSx to add $15 million to overall expenses.
One firm (Wells Fargo Securities) finds the FY10 guidance conservative considering the strength of the
company’s business.
Please refer to the Zacks Research Digest spreadsheet on ACL for further details on EPS.
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Lead Analyst
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