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Published on 18/04/08 at 04:45pm

Novartis eyes Alcon to drive diversification strategy

Novartis has agreed to acquire a controlling stake in ophthalmology specialist Alcon for around $39 billion, revealing a clear intention to drive diversification from its core prescription pharmaceutical business. Although Alcon will not come cheap, the acquisition represents a positive, long term strategy by Novartis which faces intensifying generic competition over the next five years.

Earlier this week, Swiss pharmaceutical manufacturer Novartis announced that it had entered an agreement to acquire a 77% stake in the eye care specialist Alcon Inc., currently owned by the Swiss food giant Nestle. The deal has a two-step structure whereby Novartis will initially acquire a 25% stake at a cost of approximately $11 billion, with this transaction expected to close in the second half of 2008. The second element of the deal provides rights for Novartis to acquire, and Nestle to sell, the remaining 52% Alcon stake held by Nestle between January 2010 and July 2011. The acquisition of this 52% stake will cost Novartis approximately $28 billion.

Alcon is a leading global player in the eye care market and generated global sales of $5.6 billion in 2007. This figure included sales of $2.5 billion (a year-on-year increase of 13%) from medical devices and products used in ophthalmic surgery and sales of $2.3 billion (a year-on-year increase of 15%) from pharmaceuticals used to treat eye diseases and conditions. A further $0.8 billion in sales was generated from Alcon's consumer eye care business.

Novartis already holds some interest in the ophthalmology market. Its Ciba Vision business unit develops and manufactures contact lenses and related products, and also co-developed the age-related macular degeneration (AMD) therapy Visudyne (verteporfin) in collaboration with QLT. Novartis also markets the product Lucentis (ranibizumab) in Europe under license from Genentech, with this product having rapidly become established as the leading AMD treatment since launch.

It would appear, however, that Novartis's strategic rationale in acquiring Alcon stretches beyond increased expertise in the ophthalmology pharmaceuticals market. Instead, a notable presence in the ophthalmology market as a whole further reinforces Novartis's aim of diversification across the healthcare sector and reduced reliance on the branded prescription pharmaceuticals market. Alcon is less likely to face the competitive pressures anticipated to hit the pharmaceutical segment (namely increased generic competition) in the future. This notion is reinforced by Alcon's performance since 2002; consistent year-on-year sales growth of 13%.

Novartis has further demonstrated that diversification will remain a key corporate strategy and among its peers the Swiss company has been the most pro-active in this respect. Prior to the Alcon acquisition, this outlook was best demonstrated by the company's concerted movement into the generics market via its Sandoz division, a highly unusual, but nonetheless profitable, move for a Big Pharma company. That Novartis faces generic pressures of its own in the near future, most notably the patent expiry for its blockbuster hypertension therapy Diovan (valsartan) in 2012, has clearly helped to drive the company's bold move for Alcon.

Related research:

Novartis AG: PharmaVitae Profile

Generics Series: Key trends and events in the 7 major markets

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