Alcon Inc. — 2010 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing; quarterly information is summarized where reported. Financial statements are prepared under U.S. GAAP and audited by KPMG, which issued unqualified opinions on the financial statements and internal controls.
Business context
Alcon develops, manufactures and sells ophthalmic pharmaceuticals, surgical equipment and devices, and consumer eye-care products in more than 180 countries. It reports U.S. and International segments. Novartis acquired Nestlé’s remaining Alcon shares in August 2010 and held approximately 77% at year-end. Alcon’s board approved a merger with Novartis in December 2010.
Key financial metrics
Amounts below are U.S. dollars in millions, except per-share data and percentages.
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Sales | $7,179 | $6,499 | Up 10.5%; up 9.2% in constant currency |
| Gross profit | $5,504 | $4,885 | Up 12.7% |
| Gross margin | 76.7% | 75.2% | Improved 1.5 percentage points |
| Operating income | $2,475 | $2,261 | Up 9.5%; operating margin 34.5% vs. 34.8% |
| Net earnings | $2,210 | $2,007 | Up 10.1%; net margin 30.8% vs. 30.9% |
| Diluted EPS | $7.27 | $6.66 | Up from $6.66 |
| Operating cash flow | $2,375 | $2,416 | Down $41 |
| Capital expenditures | $309 | $342 | Manufacturing, R&D and infrastructure |
| Cash and cash equivalents | $2,525 | $3,007 | Down $482 |
| Short-term borrowings and current debt | $399 | $607 | Short-term borrowings $337; current debt maturities $62 |
| Working capital | $4,278 | $3,858 | Current assets were $6,069; current liabilities $1,791 |
| Shareholders’ equity | $7,252 | $5,905 | Increased $1,347 |
| Dividends paid | $1,037 | $1,048 | $3.44 per share in 2010 |
Investing activities used $1,705 million, including $529 million for business acquisitions, $137 million for intangible assets and substantial investment-portfolio purchases. Financing activities used $1,150 million, including dividends and debt repayment. Available-for-sale investments totaled $1,281 million; total investments at fair value were $1,287 million.
Material changes and operating performance
- Growth was broad-based. Pharmaceutical sales rose 14.5% to $3,066 million; surgical sales rose 7.4% to $3,220 million; consumer eye-care sales rose 8.2% to $893 million.
- By segment, U.S. sales increased 9.0% to $3,177 million and International sales increased 11.6% to $4,002 million. International growth was 9.3% in constant currency; favorable exchange rates added 2.3%.
- Pharmaceutical growth reflected glaucoma, infection/inflammation, allergy and otic/nasal products. Surgical growth included 21.4% growth in advanced-technology intraocular lenses. Artificial-tear sales grew 17.7%; other consumer eye-care sales fell 5.3%.
- Gross margin improved with product mix, pricing, currency and manufacturing factors, and a $24 million benefit from a change in royalty-estimate methodology. Operating expenses included higher R&D and amortization, as well as $152 million of other operating expenses associated primarily with the ownership change and merger evaluation.
- Novartis’s acquisition triggered pension and share-award provisions. Change-of-control pension costs included $97 million of accelerated expense; share-based payment acceleration added $8 million.
- 2010 acquisitions included Optonol, which added the EX-PRESS glaucoma device; DUREZOL assets; and LenSx, acquired for $367 million cash plus contingent payments of up to $383 million. LenSx had no revenue and insignificant expenses through year-end. The estimated acquisition-related contingent-payment liability was $160 million.
Outlook, commentary and risks
- Management stated that it planned to increase R&D investment as a percentage of sales over the next three years; its usual target was approximately 10%–11% of sales. The filing does not provide specific 2011 revenue or earnings guidance.
- The merger was expected to close in the first half of 2011, subject to shareholder and other conditions. Consideration was valued at $168 per Alcon share, comprising Novartis shares or ADSs and, if necessary, a contingent cash amount. The agreement prohibits Alcon from paying dividends pending completion.
- U.S. healthcare reform increased pharmaceutical rebates and introduced future fees and taxes. The company estimated that specified rebate changes reduced 2010 sales by approximately $20 million; a $25 million tax charge was recorded in 2010. A 2.3% medical-device excise tax was scheduled to begin in 2013.
- Management expected Alcon’s Japan operations to be adversely affected in 2011 by the March 2011 earthquake and tsunami, potentially through lower sales, higher costs and supplier or distribution disruption; the effect could not yet be quantified.
- Key risks include generic competition and patent litigation, product development and regulatory approval uncertainty, pricing and reimbursement pressure, foreign-exchange exposure, delayed government receivables, dependence on single-source suppliers and manufacturing facilities, and product liability and environmental exposures. Alcon self-insures most property, casualty, business-interruption and liability risks.
- Notable proceedings include generic challenges involving Vigamox, Patanol/Pataday and TRAVATAN products, and an Elan patent case concerning Azopt that management said could significantly affect sales and profits if adverse. Management generally believed litigation would not materially affect consolidated financial position or results, but outcomes were uncertain.
- Alcon reported effective disclosure controls and internal control over financial reporting as of year-end. Management and the auditor noted no material weakness.
Most important facts for investors to verify
- Whether and when the Novartis merger closed, the final exchange ratio and cash contingent value, and the resulting treatment of Alcon shares and outstanding awards.
- Whether sales growth and margin performance continued after 2010, separating underlying constant-currency growth from acquisition and foreign-exchange effects.
- The cash-flow impact of acquisitions, dividends suspended under the merger agreement, pension funding and the investment portfolio; also confirm debt maturities and available liquidity.
- Progress and outcomes in key patent cases and generic launches, particularly those affecting major pharmaceutical products.
- The realized impact of healthcare reform, reimbursement and pricing changes, and the 2011 Japan disruption on sales, costs and receivables.
- Whether LenSx and other acquired assets achieve commercial milestones, and how contingent consideration and amortization affect future earnings.