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 nine months ended September 30, 2009
Filing Date: October 28, 2009
Business Overview: Alcon operates globally in the ophthalmic market through two segments: Alcon United States and Alcon International. Product categories include pharmaceuticals, surgical equipment/devices, and consumer eye care.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sept 30, 2009 | 9 Months Ended Sept 30, 2009 | Balance Sheet (Sept 30, 2009) |
|---|---|---|---|
| Sales | $1,614 | $4,784 | N/A |
| Gross Profit | $1,215 | $3,616 | N/A |
| Gross Margin | 75.3% | 75.6% | N/A |
| Operating Income | $578 | $1,724 | N/A |
| Net Earnings | $515 | $1,549 | N/A |
| Diluted EPS | $1.71 | $5.15 | N/A |
| Cash & Equivalents | N/A | N/A | $2,519 |
| Short-term Borrowings | N/A | N/A | $664 |
| Long-term Debt | N/A | N/A | $60 |
| Shareholders' Equity | N/A | N/A | $5,400 |
| Operating Cash Flow (9mo) | N/A | $1,775 | N/A |
Material Changes vs. Prior Period
- Sales Performance:
- Q3 2009: Global sales increased 5.9% to $1,614 million. Excluding unfavorable foreign exchange (FX) impacts of 3.1%, constant currency sales grew 9.0%.
- YTD 2009: Global sales decreased 0.3% to $4,784 million. Excluding FX impacts of 5.9%, constant currency sales grew 5.6%.
- Profitability:
- Q3 Net Earnings: Decreased 17.9% to $515 million compared to $627 million in Q3 2008. The decline was primarily due to a $240 million tax benefit recognized in Q3 2008 related to the liquidation of a former subsidiary (Summit Autonomous), which did not recur in 2009.
- YTD Net Earnings: Decreased 4.6% to $1,549 million compared to $1,623 million in YTD 2008, also impacted by the prior year's tax benefit.
- Operating Income: Increased 17.0% in Q3 and 5.1% YTD, driven by disciplined cost management and workforce reductions offsetting lower gross margins.
- Product Specifics:
- TobraDex: Combined sales of branded and generic TobraDex decreased 42.6% in Q3 and 36.9% YTD due to generic competition following patent expiration.
- Glaucoma & Surgical: Strong growth in TRAVATAN family products (+23.6% Q3) and advanced technology intraocular lenses (+34.2% Q3).
- Acquisitions: Completed the acquisition of ESBATech AG in September 2009 for a total purchase price of $221 million (including $150 million cash and $71 million estimated contingent payments).
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary:
- Management expects R&D expenses to increase in Q4 2009 due to the ESBATech acquisition and timing of projects.
- Share repurchase programs were halted in December 2008 following the Nestlé-Novartis agreement; the company continues to acquire shares only to cover employee taxes on share-based awards.
- Dividends: A dividend of approximately $3.50 per share ($1,048 million total) was declared in May 2009.
- Key Risks & Contingencies:
- Patent Litigation: Alcon is involved in twelve patent infringement actions against generic drug companies (Teva, Apotex, Barr, Sandoz, Par) regarding products like Vigamox, Patanol, Pataday, and TRAVATAN. While Alcon has secured favorable rulings or stays on FDA approval in several cases, successful generic entry could significantly impact sales and profits.
- Antitrust Litigation: Synergetics USA, Inc. filed an antitrust lawsuit alleging monopoly power in vitreoretinal surgical equipment. The company believes it has strong defenses.
- Foreign Exchange: Significant exposure to currency fluctuations, which negatively impacted reported sales by 3.1% in Q3 and 5.9% YTD.
- Investment Portfolio: The company is liquidating hedge fund and real estate investment trust holdings to reduce volatility, with proceeds expected by end of 2009.
- Unusual Items:
- Tax Benefit (2008): The Q3 2008 results included a one-time $240 million tax benefit from the Summit Autonomous liquidation, making year-over-year tax rate comparisons not meaningful.
- Workforce Reduction: A staffing reduction of approximately 260 positions resulted in a $19 million pre-tax charge in the first nine months of 2009.
Investor Verification Checklist
- Generic Competition Impact: Verify the timeline and potential market share erosion for TobraDex, Patanol, Pataday, and TRAVATAN as generic competitors seek FDA approval.
- ESBATech Integration: Monitor the realization of R&D milestones for the ESBATech acquisition, which includes contingent payments up to $439 million.
- Constant Currency Growth: Distinguish between reported sales declines and underlying volume growth by reviewing constant currency metrics, as FX headwinds were significant.
- Tax Rate Volatility: Assess future effective tax rates without the benefit of the one-time 2008 tax windfall.
- Shareholder Structure: Note the pending put/call options between Nestlé and Novartis regarding the remaining Nestlé stake, exercisable between 2010 and 2011.