Business Context and Reporting Period
Company: Alcon, Inc. (Swiss corporation, majority-owned subsidiary of Nestlé S.A.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three and six months ended June 30, 2010
Filing Date: July 27, 2010
Alcon operates in the ophthalmic market through two segments: Alcon United States and Alcon International. The company markets pharmaceuticals, surgical equipment/devices, and consumer eye care products. A significant corporate event during the period was the exercise of a call option by Novartis AG to purchase Nestlé's remaining shares in Alcon, triggering a proposed merger and change of control discussions.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended June 30, 2010 |
3 Months Ended June 30, 2009 |
6 Months Ended June 30, 2010 |
6 Months Ended June 30, 2009 |
|---|---|---|---|---|
| Sales | $1,886 | $1,677 | $3,607 | $3,170 |
| Gross Profit | $1,460 | $1,262 | $2,789 | $2,401 |
| Gross Margin % | 77.4% | 75.3% | 77.3% | 75.7% |
| Operating Income | $751 | $632 | $1,404 | $1,146 |
| Net Earnings | $670 | $582 | $1,243 | $1,034 |
| Diluted EPS | $2.21 | $1.94 | $4.09 | $3.44 |
| Operating Cash Flow | N/A | N/A | $1,310 | $1,115 |
Liquidity and Debt (as of June 30, 2010)
- Cash and Cash Equivalents: $2,295 million
- Short-term Investments: $603 million
- Short-term Borrowings: $291 million
- Long-term Debt: $0 (Current maturities of long-term debt: $57 million)
- Total Shareholders' Equity: $6,028 million
Material Changes vs. Prior Period
- Revenue Growth: Global sales increased 12.5% (Q3) and 13.8% (YTD) compared to the prior year. Constant currency growth was 11.7% (Q3) and 10.8% (YTD), driven by volume growth and price increases.
- Profitability: Net earnings rose 15.1% (Q3) and 20.2% (YTD). Operating income margins improved due to sales volume growth, price increases, and disciplined cost management.
- Acquisitions: Sales growth included contributions from the January 2010 acquisition of Optonol Ltd. (surgical glaucoma) and the March 2010 asset purchase of Durezol (ophthalmic steroid).
- Investment Portfolio: The company transitioned its portfolio toward conservative cash and high-quality fixed income securities, liquidating positions in bank loans funds and equities. Investment gains were $16 million (Q3) and $36 million (YTD).
- Healthcare Reform Impact: U.S. healthcare reform legislation resulted in a $5 million (Q3) and $10 million (YTD) reduction in pharmaceutical sales due to increased rebates, and a $25 million tax charge in Q1 2010.
Guidance, Outlook, Risks, and Contingencies
Change of Control and Merger Proposal
Novartis exercised its call option to purchase Nestlé's remaining Alcon shares. Novartis also proposed a merger of Alcon into Novartis. The Alcon Independent Director Committee rejected the merger proposal in January 2010, citing unacceptable terms. On July 8, 2010, the company funded a $50 million Litigation Trust to defend minority shareholder interests.
- Financial Impact of Change of Control: If consummated, the company estimates pension curtailment charges of $70–$90 million and a required pension trust contribution of $140–$160 million.
- Share-Based Compensation: Awards granted prior to Jan 1, 2009, would vest immediately upon a change of control.
Legal and Patent Contingencies
Alcon is involved in 14 North American patent infringement actions against generic drug companies regarding products such as Vigamox, Patanol, Pataday, and Travatan. While the company believes it has valid defenses, adverse rulings could significantly impact sales and profits. Additionally, minority shareholder class action lawsuits regarding the Novartis merger proposal are pending.
Market Risks
- Currency Risk: A 10% appreciation in foreign currencies against the U.S. dollar would decrease earnings before taxes by approximately $70 million.
- Interest Rate Risk: The majority of borrowings are short-term floating rate loans. A 100 basis point increase in rates would decrease annual pretax earnings by approximately $19 million.
Recent Acquisition
On July 6, 2010, Alcon agreed to acquire LenSx Lasers, Inc. for approximately $362 million in cash plus up to $383 million in contingent payments based on revenue milestones.
Investor Verification Checklist
- Merger Status: Monitor regulatory approvals and the outcome of the Novartis merger proposal and related litigation.
- Pension Obligations: Verify the potential $210–$250 million total liability (charges + contributions) if the change of control occurs.
- Patent Litigation: Track the status of generic challenges to key products (Vigamox, Patanol, Pataday, Travatan) and potential loss of exclusivity.
- Healthcare Reform: Assess the long-term impact of U.S. Medicaid rebate increases and the 2011 Medicare Part D discount requirements on margins.
- LenSx Acquisition: Confirm closing conditions and the timeline for regulatory approval of the LenSx femtosecond laser.