Alcon Inc., an eye device and drug maker with 750 workers in Irvine, is undergoing an ownership change from one of Switzerland’s biggest companies to another.
Drug maker Novartis AG last month took a $10.7 billion, 25% stake in Alcon from majority owner Nestl & #233; SA. Novartis is expected to buy Nestl & #233;’s remaining 52% stake for about $28 billion by 2011.
Kenneth Lickel, an Alcon vice president who runs the company’s Irvine Technology Center, likes the deal.
“I think it’s ideal, personally,” Lickel said. “Novartis is in the medical industry, whereas Nestl & #233; is not. I think Novartis will have a better appreciation of what our business is about and what our needs are.”
Alcon, which competes with Santa Ana’s Advanced Medical Optics Inc. and Irvine’s Allergan Inc., has been something of an odd fit within Nestl & #233;, better known for instant coffee, bottled water and baby formula.
In 2002, Nestl & #233; spun off 25% of Alcon in a public offering designed to put a little distance between the two. Alcon started in 1945 and was bought by Nestl & #233; in 1978. It’s operated largely independently since then.
Novartis “may have more to offer Alcon than did Nestl & #233;,” said Brian Marckx, an analyst with Chicago-based Zacks Investment Research Inc.
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Alcon worker in Irvine: 750 in all, 170 in R & D; |
Lickel said he expects his eye surgery device unit to have a “leadership role” in the transition to Novartis.
“We offer them something they don’t have,” he said.
Novartis makes contact lenses and eye drugs but not eye surgery devices like Alcon. The company is looking to eye products for growth as its brand name drug business slows.
Alcon has had annual sales growth of 13% every year since it went public in 2002. By contrast, Novartis expects sales in its branded drug unit, its largest, to grow in the low single digits this year.
The Irvine Technology Center houses Alcon’s eye surgery instrument business. Manufacturing of devices such as Infiniti and Laureate, used in cataract surgeries, and PurePoint, a retinal repair system, are done out of the 189,200-square-foot building on Alton Parkway. So is research and development.
“Any surgical instrumentation that Alcon has in its portfolio is developed, manufactured and serviced from this facility,” Lickel said.
It’s business as usual in Irvine, Lickel said. He’s yet to be visited by Novartis executives, he said.
“It’s a little bit awkward right now because they’re still a competitor” in eye drugs and contact lens solutions, Lickel said.
Wall Street generally likes the deal.
“Given the synergies (Novartis) should realize through the transaction, we believe the company will likely acquire the remainder of (Alcon),” analyst Peter Bye of Jefferies & Co. said.
At the time the deal was announced, Novartis Chief Executive Daniel Vasella said he expected Alcon to benefit from the aging population in the U.S. and overseas, as diseases such as glaucoma and cataracts are more common in the elderly.
Novartis is in eye care through its Ciba Vision unit, which competes with Alcon in contact lens solutions. Ciba also makes contact lenses, a market Alcon isn’t in.
Research & Development
Alcon officials credit a part of the company’s rise on Wall Street,it had a recent market value of about $50 billion,to what’s come out of Lickel’s operations, including research and development.
Surgical products account for some 45% of Alcon’s yearly sales of about $7 billion.
“It is a cornerstone,” said Robert Stevens, Alcon’s vice president of surgical products research and development. “The Irvine organization has been key in creating this importance associated with our surgical products.”
Some 170 of Alcon’s Irvine workers are in surgical research and development. Alcon spent $287 million, or about 9% of sales, on research and development in the first six months of 2008.
The Irvine Technology Center isn’t involved with Alcon’s intraocular (inside the eye) replacement cataract lenses,products that are well represented here through Advanced Medical Optics and Bausch & Lomb Inc., which earlier this year bought Aliso Viejo’s Eyeonics Inc.
Alcon makes its intraocular lenses in West Virgina and Ireland with research and development in Fort Worth, Texas, the company’s U.S. headquarters.
“There is a very close relationship” between his center and the intraocular lens unit, Lickel said, because his instruments are used to implant replacement lenses.
Alcon opened the Irvine center in 1990, a year after paying $325 million for the eye surgical unit of CooperVision Inc., which sold off most of its businesses in the late 1980s after lawsuits, a shareholder battle and insider trading charges against some of its executives.
(Cooper Cos., a contact lens maker that moved to Pleasanton from Lake Forest last year, is what’s left of the original company.)
Alcon also makes drugs such as Systane eye drops for dry eye and Travatan, a glaucoma treatment, along with contact lens solutions under the Opti-Free brand.
Alcon competes with Allergan in the eye drug market and with Advanced Medical Optics in eye surgery products and contact lens solutions.
In solutions, Alcon made gains after Bausch and Advanced Medical recalled their products in 2006 and 2007.
“When B & L; had their recall, we replaced them as the leader,” said Doug MacHatton, an Alcon spokesman who works in Fort Worth. “We went from about 25% to 35% in share. We got the bulk of their recalled share. After that, AMO had their recall and we went from about 35% to 40%.”
In Favor
Alcon, whose shares are up about 25% this year, is in favor with investors looking for companies that are resistant to the slowing economy.
The company recently came out with solid second-quarter results.
Profit rose 25% from a year earlier to $566.4 million, beating analysts’ expectations of $519 million. Sales were up 18% to $1.7 billion, with surgical sales growing about 22% to $767 million.
Alcon has “negligible consumer risk,” analyst Bye said. Only 2% of its revenue comes from laser vision correction surgery, which isn’t covered by health insurance and can be vulnerable in economic downturns.
Some analysts have fretted about the stocks of companies that are more closely tied to laser surgery, such as Advanced Medical, which derives some 40% of its sales from the laser vision correction market.
But Alcon has its challenges.
The company will have to deal with upcoming patent expirations for drugs along with some pipeline setbacks, analyst Marckx said.
Last month, Alcon dropped its efforts to develop Retaane, a drug to treat vision loss stemming from age-related macular nerve degeneration, after trials showed it had no effect on that condition. Alcon said it would still work on the drug for treating glaucoma.
