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 months ended March 31, 2009
Filing Date: April 23, 2009
Alcon operates globally through two segments: Alcon United States and Alcon International. The company markets products in three categories: pharmaceuticals, surgical equipment/devices, and consumer eye care.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Sales | $1,493.3 | $1,536.4 |
| Gross Profit | $1,138.6 | $1,138.1 |
| Gross Margin | 76.2% | 74.1% |
| Operating Income | $513.6 | $500.1 |
| Net Earnings | $452.0 | $429.4 |
| Diluted EPS | $1.51 | $1.43 |
| Operating Cash Flow | $409.4 | $398.1 |
| Cash & Equivalents (End of Period) | $3,090.7 | $2,499.7 |
| Total Debt (Short + Long Term) | $1,188.3 | $1,121.2 |
Material Changes vs. Prior Period
- Sales Decline: Global sales decreased 2.8% to $1,493.3 million. This was driven by a 7.6% negative impact from foreign exchange rates. On a constant currency basis, sales grew 4.8% due to volume growth.
- Profitability Improvement: Despite lower sales, Net Earnings increased 5.3% to $452.0 million. Operating income rose 2.7% to $513.6 million, aided by a 2.5% reduction in Selling, General, and Administrative (SG&A) expenses and a lower effective tax rate (12.0% vs. 14.7%).
- Segment Performance:
- United States: Sales decreased 2.1% primarily due to generic competition for TobraDex and lower cataract equipment sales.
- International: Sales decreased 3.4% reported, but grew 10.2% on a constant currency basis, driven by pharmaceutical growth in Asia and emerging markets.
- Product Specifics:
- TobraDex: Sales dropped 39.7% globally following the launch of generic versions on January 1, 2009.
- Glaucoma: TRAVATAN family sales grew 19.1%.
- Refractive: Sales declined 19.5% due to economic conditions reducing procedure volumes.
- Cost Reductions: The company initiated a staffing reduction of approximately 260 positions, resulting in a pre-tax charge of $18.0 million included in general corporate expenses.
Guidance, Outlook, Risks, and Unusual Items
- Dividend Proposal: The Board proposed a dividend of CHF 3.95 per share (approx. $3.47), totaling an estimated $1,060.5 million, subject to shareholder approval on May 5, 2009.
- Share Repurchases: Open market share repurchases were halted in December 2008 following the Nestlé-Novartis agreement. The company continues to acquire shares only to cover taxes on employee share-based awards.
- Investment Portfolio: The company sold investments in real estate investment trusts and fixed income securities in Q1 2009, realizing losses of $36.0 million. These losses were largely recognized as unrealized losses in 2008. The company is liquidating hedge fund holdings to reduce volatility.
- Legal Contingencies (Patent Litigation):
- Vigamox: Litigation with Teva regarding generic moxifloxacin. A settlement resolved Bayer patents, but an Alcon patent trial concluded in March 2008 with judgment expected in H1 2009. Generic entry could occur in 2014.
- Patanol/Pataday: Multiple ANDA challenges filed by Apotex, Barr Laboratories, and Sandoz. Trials are scheduled for 2009 and 2010. Generic entry could occur as early as late 2010 or 2011 depending on litigation outcomes.
- TRAVATAN: Barr Laboratories filed a Paragraph IV certification challenging patents; suit filing deadline is May 1, 2009.
- Antitrust Litigation: Synergetics USA filed an antitrust lawsuit alleging monopoly power in vitreoretinal surgical equipment. The court previously dismissed the first amended complaint; a motion to dismiss the second amended complaint is pending.
- Lehman Brothers: The company reimbursed Nestlé $5.2 million in fees related to the release of short-term securities held in a Lehman Brothers custodial account.
Investor Verification Checklist
- Generic Competition Impact: Verify the long-term revenue erosion from the TobraDex generic launch and the status of pending patent litigation for Vigamox, Patanol, Pataday, and TRAVATAN.
- Dividend Approval: Confirm shareholder approval of the proposed $1,060.5 million dividend at the May 5, 2009 annual meeting.
- Investment Realization: Monitor the realization of losses on the liquidation of hedge funds and the reinvestment strategy into cash and fixed income.
- Constant Currency Growth: Assess the sustainability of the 4.8% constant currency sales growth amidst global economic conditions and currency volatility.
- Tax Position: Review the status of the IRS examination (2003-2005) and the bilateral Advance Pricing Agreements (APAs) with Switzerland and Japan, which could impact future tax reserves.