ALC

Business Context and Reporting Period

This Form 6-K filing by Alcon, Inc. (a Swiss corporation and majority-owned subsidiary of Nestlé S.A.) covers the three-month period ended March 31, 2010. The filing includes unaudited condensed consolidated financial statements and management's discussion and analysis. A significant corporate development occurred in January 2010 when Novartis AG exercised its call option to purchase Nestlé's remaining Alcon shares, proposing a merger of Alcon into Novartis. The Alcon Independent Director Committee rejected this merger proposal in January 2010, citing unacceptable terms.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Global sales increased 15.3% year-over-year. Excluding favorable foreign exchange effects (5.5%), constant currency sales grew 9.8%, driven by volume growth and price increases.
• Profitability: Operating income rose 27.0% to $653 million. Net earnings increased 26.8% to $573 million. Gross margin improved to 77.2% due to price increases, manufacturing efficiencies, and a $24 million favorable adjustment to accrued royalties.
• Segment Performance:
  • United States: Sales up 10.3% to $726 million; Operating income up 22.1% to $431 million.
  • International: Sales up 19.2% to $995 million; Operating income up 22.2% to $463 million.
• Product Categories: Pharmaceutical sales grew 16.3% (11.7% constant currency). Surgical sales grew 14.7% (8.8% constant currency), led by a 49.8% increase in advanced technology intraocular lenses. Consumer Eye Care sales grew 13.9% (7.7% constant currency).
• Acquisitions: The January 2010 acquisition of Optonol Ltd. contributed to surgical sales growth. The company also purchased intangible assets related to Durezol.

Guidance, Outlook, Risks, and Unusual Items

• Change of Control: Novartis exercised its option to buy Nestlé's shares. While the merger proposal was rejected by the Independent Director Committee, the transaction remains subject to regulatory approval. A change of control would trigger immediate vesting of certain share-based awards and significant pension curtailment charges.
• U.S. Healthcare Reform: New legislation enacted in March 2010 resulted in a $25 million tax charge in Q1 2010 due to the elimination of tax subsidies for retiree drug benefits. The legislation is also expected to increase Medicaid rebates and impose future fees and excise taxes on medical devices.
• Patent Litigation: Alcon is engaged 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 future sales and profits.
• Dividend Proposal: The Board proposed a dividend of CHF 3.95 per share (approx. $3.70), totaling an estimated $1,112 million, subject to shareholder approval in May 2010.
• Investment Portfolio: The company continues to liquidate hedge fund and real estate investment trust holdings to reduce volatility, with hedge fund balances declining to $8 million.

Investor Verification Checklist

• Verify the status of the Novartis merger proposal and the outcome of the Independent Director Committee's evaluation.
• Monitor the impact of U.S. healthcare reform legislation on Medicaid rebates and future tax liabilities.
• Track the progress of ongoing patent litigation, particularly regarding Vigamox, Patanol, and Travatan, and potential generic entry dates.
• Assess the financial impact of the proposed $1,112 million dividend payment on liquidity.
• Review the company's ability to maintain sales growth in the face of generic competition and reimbursement pressures.