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, 2008
Business Overview: Global leader in ophthalmic products, including pharmaceuticals, surgical equipment/devices, and consumer eye care. Operations are segmented into Alcon United States and Alcon International.
Key Financial Metrics
All figures in millions USD, except per share data.
| Metric | 3 Months Ended Sept 30, 2008 | 9 Months Ended Sept 30, 2008 |
|---|---|---|
| Sales (Revenue) | $1,524.6 | $4,796.2 |
| Gross Profit | $1,176.2 | $3,635.0 |
| Gross Margin | 77.1% | 75.8% |
| Operating Income | $494.3 | $1,640.0 |
| Net Earnings | $627.1 | $1,622.9 |
| Diluted EPS | $2.07 | $5.38 |
| Operating Cash Flow | N/A | $1,695.1 |
| Cash & Equivalents (Sept 30, 2008) | $2,491.0 | |
| Total Debt (Short + Long Term) | $1,367.7 |
Material Changes vs. Prior Period
- Revenue Growth: Global sales increased 14.1% (Q3) and 16.1% (YTD) compared to 2007. Organic growth (constant currency) was 10.3% for both periods, driven by volume growth and the acquisition of WaveLight AG (refractive products).
- Profitability: Net earnings surged 51.0% in Q3 and 34.1% YTD. This was significantly aided by a one-time income tax benefit of $239.5 million related to the liquidation of the former subsidiary, Summit Autonomous, Inc.
- Investment Losses: "Other, net" expenses included significant unrealized losses on trading securities ($31.1 million in Q3; $41.0 million YTD) due to market downturns.
- Segment Performance: International sales grew 23.8% (Q3) and 26.2% (YTD), outpacing U.S. growth (4.1% and 5.7% respectively). Surgical and pharmaceutical segments drove growth globally.
Guidance, Outlook, Risks, and Unusual Items
- Shareholder Structure: In July 2008, Nestlé sold ~74 million shares to Novartis AG. Novartis now holds ~25%, while Nestlé retains ~52%. Put and call options exist for the remaining Nestlé shares, exercisable between 2010 and 2011.
- Liquidity Constraint (Lehman Brothers): Approximately $707.0 million of cash equivalents held in a segregated account at Lehman Brothers International (Europe) is currently inaccessible due to Lehman's administration. No loss is expected, but timing of return is uncertain.
- Legal Contingencies:
- Patent Litigation: Active suits against generic manufacturers (Teva, Apotex, Barr) regarding Vigamox and Patanol. Outcomes could significantly impact future sales if patents are invalidated.
- Antitrust: Synergetics USA filed an antitrust lawsuit alleging monopoly power in vitreoretinal equipment; Alcon has filed a counterclaim for trade secret misappropriation.
- Product Development: Terminated development of anecortave acetate for age-related macular degeneration after interim analysis showed no effect. FDA approval for TobraDex ST is pending additional data.
- Share Repurchases: Open market repurchases were halted in April 2008 pending the Novartis transaction. In September 2008, the company announced intent to purchase up to 1 million shares by year-end solely to cover employee equity awards.
Investor Verification Checklist
- Lehman Brothers Exposure: Verify the status of the $707 million restricted cash and any updates on the administration process.
- Tax Benefit Sustainability: Confirm that the $239.5 million tax benefit from Summit Autonomous is a non-recurring item and adjust future earnings expectations accordingly.
- Patent Litigation Status: Monitor court rulings on Vigamox and Patanol patents, as generic entry could materially erode revenue.
- Novartis Transaction: Track the status of the put/call options (2010-2011) and potential change of control implications.
- Investment Portfolio: Review the impact of unrealized losses on trading securities ($41.0 million YTD) on future earnings volatility.