NOVARTIS AG has agreed to buy a 25-percent stake in Nestle SA's Alcon Inc for US$11 billion and said it may acquire the rest to become the world's biggest maker of eye-care products.
Novartis, Switzerland's second-largest drug company, will pay US$143.18 a share for each share of Alcon and has an option to buy a further 52 percent from Nestle for US$28 billion. The price is 3.5 percent less than Alcon's closing price on Friday, Bloomberg News reported.
Generic fallout
Alcon and Nestle are also based in Switzerland.
Buying Alcon would add US$5.6 billion in sales and give Novartis the Opti-Free contact lens treatment and the Travatan glaucoma medicine. Novartis, which owns the Visudyne eye-medicine brand, has suffered delays to new medicines and has lost sales of its heart treatment Lotrel and the Lamisil nail- fungus product to generic competition. Nestle said it will use proceeds from the sale to reduce debt and expand the nutritional foods division.
"The proportion of the aging population is expanding and the need for eye care both in terms of optical correction but also general care is increasing," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London. Pope raised his rating on Novartis stock to a "buy" yesterday on what he called "an example of pro-active business model management."
Novartis is cutting 2,500 jobs in the next two years after diabetes treatment Galvus was delayed, irritable bowel treatment Zelnorm was withdrawn, and the Prexige painkiller failed to win approval. Those medicines were meant to replace income from heart drug Diovan and cancer treatment Gleevec.
Novartis shares, which have lost 16 percent this year, fell 40 centimes, or 0.8 percent, to 52 Swiss francs (US51.54)as of 10:29am in Zurich trading yesterday. Nestle rose 12.5 francs, or 2.4 percent, to 524 francs.
"Novartis will be able to count on cash flow long term, and that makes it attractive," said Karl Heinz Koch, an analyst at Bank Vontobel AG in Zurich. "It fits into the strategy of further diversification. This is an attractive deal at attractive conditions."
Credit Suisse Group advised Nestle on the sale. Goldman Sachs Group advised Novartis.
The purchase comes on top of the US$13 billion Novartis spent on acquisitions including generic drug makers Hexal AG and Eon Labs Inc in 2005 and the US$5.7 billion acquisition of vaccine maker Chiron Corp in 2006.
Strategic fit
"This acquisition furthers our strategy of accessing high-growth segments of the health-care market while balancing inherent risks," Novartis Chief Executive Daniel Vasella said in the statement. "The strategic fit of Alcon and Novartis is excellent. Eye care will continue to grow dynamically as there is a growing unmet medical need driven primarily by the world's aging population."
It's the biggest transaction in health care this year, and the fourth-biggest since the start of 2007.
"Novartis always told us they would focus on the pharma business and generics so it's a bit surprising," said Christian Gattiker, head of equity markets at Bank Julius Baer & Co in an interview. "It's rather surprising what they chose to invest in."
Alcon, the biggest company in the US$25 billion eye-care market, gets most of its income from devices and products for surgery. It also sells contact lens products, eye drops and vitamins. Novartis aims to profit from the firm's expansion in growing regions like Asia.