By Kerry Capell and Dermot Doherty
(Bloomberg) — Novartis AG Chief Executive Officer Daniel Vasella spent years persuading fellow Swiss company Nestle SA to part with Alcon Inc. for the eye-care business's higher growth rate. His persistence has paid off.
Novartis (NVS) this week announced a plan to acquire the 75 percent of Alcon (ACL) that it doesn't own for $38.3 billion. The drugmaker will purchase Nestle's 52 percent stake, and offered to buy out the minority shareholders who own the rest. Vasella said in a Jan. 4 telephone interview that he persevered "off and on for several years" before Nestle Chairman Peter Brabeck- Letmathe agreed to the deal.
Acquiring Alcon gives Novartis a third of the $26 billion global eye-care market as Vasella seeks to replace revenue that will be lost when patents on hypertension drug Diovan and the Gleevec leukemia treatment, the company's best sellers, start to expire in 2012. He estimates that the global eye-care business will increase at 7 percent a year through 2015, more than the 5 percent growth forecast for prescription medicines, as the world's aging population suffers from glaucoma and cataracts.
"Vasella has developed a reputation for prescience," said Karl Heinz Koch, a Helvea SA analyst in Zurich. "Vasella recognized relatively early the importance of moving away from commodity-type pharmaceutical model where one white pill fits all."
The move beyond prescription medicines will help Vasella temper setbacks in the company's drug development. U.S. health regulators in July asked for more information on experimental meningitis vaccine Menveo, delaying a product that Merrill Lynch analysts once estimated would generate $1 billion in annual sales. In 2007, the U.S. Food and Drug Administration delayed approval for the Galvus diabetes pill, pulled the irritable bowel treatment Zelnorm and rejected the Prexige painkiller.
The setbacks led Vasella to replace the management of three of four business units in October 2008, and announce as many as 3,000 job cuts.
Alcon, which generates about half of its sales from devices and products used in eye surgery, also sells over-the-counter contact lens products, eye drops and vitamins. That will allow Novartis to "diversify risk," Vasella has said.
As recently as May, Vasella said in an interview with Bloomberg News that he was uncertain whether Basel, Switzerland-based Novartis would exercise the option because Alcon's stock plunged since he struck the original deal in April 2008. Back then, Novartis paid $143.18 a share for the initial 25 percent stake, and agreed to pay as much as $181 for the rest starting Jan. 1. Alcon soared above $175 on the New York Stock Exchange within four months of the deal being announced.
In October 2008, Huenenberg, Switzerland-based Alcon lowered its sales forecast, citing the strength of the dollar and slower-than-expected drug sales in the U.S. The stock lost almost a third of its value and fell below $68 the next month.
Alcon shares surged 40 percent in the second half of 2009 as investors speculated that Novartis would acquire the stake owned by Nestle (NSRGY), the world's largest food company, and offer to buy out the public shares, according to FTN Equity Capital Markets Corp.
While Novartis had until July 2011 to exercise the option, Vasella said in the Jan. 4 interview that the decision to move ahead was made last month at a strategy meeting of the company's board.
"We always knew we would exercise the call before it lapsed but we decided to move quickly," Vasella said. "Alcon was a perfect fit for our portfolio but it took time, and money, to convince them to divest."
Under the terms of the call option that Novartis exercised Jan. 4, Novartis will buy Vevey, Switzerland-based Nestle's stake for an average of $180 a share, or a total of $28.1 billion. Novartis also offered to pay 2.8 of its own shares for each remaining Alcon share held by the public. Based on today's closing price, the offer values Alcon's public shares at $146.80 each, or $10.2 billion.
Vasella is taking a hard stance with the minority shareholders, saying Nestle deserved a higher price because that stake gave Novartis control of the company. Alcon investors say Vasella is short-changing them by offering 18 percent less than what the drugmaker is paying Nestle.
"It really took me by surprise," James O'Leary, manager of the $37 million Touchstone International Growth Fund. "I always thought Novartis was a classier company than that." O'Leary, whose fund owns Alcon, Novartis and Nestle shares, said he expects Novartis to raise the offer to at least $164 a share.
Alcon's independent directors are seeking an opinion from merger adviser Greenhill & Co. on whether the price is fair. Minority shareholders can challenge the deal in Swiss court once the merger closes, Larry Biegelsen, an analyst at Wells Fargo Advisors LLC in New York, wrote in a Jan. 4 report investors.
Even so, Denise Anderson, an analyst for Sit Investment Associates Inc. in Minneapolis, praised the deal put together by Vasella and Novartis' 64-year-old chief financial officer, Raymund Breu.
"Vasella and Breu have been a team for quite some time and both are innovative in the way they structure deals," she said. "That they might somehow pay less for a substantial part of the company is quite innovative."
For the 56-year-old Vasella, buying Alcon is the latest move in his 14-year quest to transform Novartis from a maker of chemical dyes and agricultural products into a wide-ranging health-care business.
Vasella worked as a doctor for eight years before joining Sandoz AG, which merged with Ciba-Geigy to form Novartis. He became president of the new company and became chairman in 1999.
When he took over, the company generated only 45 percent of revenue from health care. He shed the agrichemicals business, sold Novartis' medical nutrition and Gerber baby food businesses to Nestle for $8 billion, and spent about $59 billion on acquisitions over the last five years to create a company that encompasses prescription drugs, vaccines, over-the-counter products and generic medicines.
The model has already been proven by New Brunswick, New Jersey-based Johnson & Johnson, which sells prescription drugs, medical devices, and consumer products such as the Tylenol painkiller and Listerine mouthwash.
"He has a very clear strategy," said James Shannon, CEO and president of San Francisco-based biotechnology company Cerimon Pharmaceuticals Inc. who was the head of global development at Novartis until 2008. "It is not for today or tomorrow but for five to 10 years from now."
Vasella was one of the first CEOs of a global drugmaker to invest in generic medicines, building the company's Sandoz unit into the second-largest maker of copycat drugs in the world. In 2005, Novartis spent $13 billion to add generic-drugmakers Hexal AG and Eon Labs Inc. to solidify its business, which generated $3.5 billion in sales for the first half of 2009.
"Novartis was earlier than most in recognizing the interest of generics and it stuck to consumer health-care when others" didn't, said Luis Correia, an analyst at Clariden Leu in Zurich.
Alcon bolsters Novartis' existing Ciba Vision contact lens unit and Lucentis, the company's drug for age-related macular degeneration, a leading cause of blindness in the elderly. Novartis also gains a stronger foothold in emerging markets where Alcon reported $1 billion in 2008 sales. Vasella said an estimated 60 million people in China suffering from cataracts, so emerging markets are a major opportunity for future growth.
Together, the company's product range will span 70 percent of the eye-care market, Vasella said. And unlike Novartis' prescription drugs business, which faces pricing pressures as insurers and governments worldwide seek to rein in costs, he said many of Alcon's customers pay out of pocket for over-the- counter products and procedures including laser eye surgery.
"Strategically it makes sense to diversify into other health-care areas to stabilize earnings and reduce the risks," said Helvea's Koch.
The Novartis CEO said in the interview that he expects any acquisitions he does over the next three years will be smaller than Alcon and aimed at accelerating the company's growth.
"Whether Vasella has been farsighted or not, time will tell, but he certainly sticks to what he sees as correct," said Romain Pasche, a fund manager at Vontobel Asset Management in Zurich who owns Novartis shares.
To contact the reporters on this story: Kerry Capell in London at firstname.lastname@example.org; Dermot Doherty in Geneva at email@example.com.
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