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Not seeing eye-to-eye
February 2010
by Jeffrey Bouley  |  Email the author


BASEL, Switzerland—Let's call Jérôme Berton the Nostradamus of ophthalmologic acquisitions, but let's not call Alcon Inc., the world's biggest eye-care company, happy with the prophesy coming true. Back in April 2008, Novartis announced a deal with Nestlé SA to acquire that company's 25 percent stake in Alcon for $10.4 billion, or $143 per share, financed from internal cash reserves and external short-term financing. 
Novartis was clear that this was probably only a first step in more buying, as Novartis also held the option to buy the remaining 52 percent stake held by Nestlé, which would give it a majority ownership position in Alcon. Berton, a pharmaceutical sector analyst at Aurel Securities in Paris at the time, noted that it was "quite a smart move for Novartis," giving it the "emerging-market exposure that it lacks currently," and called the deal "an acquisition in all but name."  
Fast forward to January 2010, and the acquisition train is indeed gaining full steam, though Alcon is showing resistance to the stated plans for a merger of it into Novartis' fold. Novartis announced that it intends to gain full ownership of Alcon by first completing the April 2008 agreement with Nestlé to acquire a 77 percent majority stake in Alcon for $28.1 billion, or $180 per share, and then enter into an all-share direct merger with Alcon for the remaining 23 percent minority stake. The acquisition of the remaining Nestlé stake, which is subject to required regulatory approvals, is expected to be completed in the second half of 2010.  
One of the problems, though, is that Novartis is talking about "an implied price of $153 per Alcon share" for the subsequent purchase of the 23 percent minority stake, an amount that Alcon doesn't find adequate. Throughout most of January, Alcon shares have traded between $152.51 and $156.46, but they traded as high as $166 as recently as December.  
Dr. Daniel Vasella, chairman and CEO of Novartis, told analysts that the difference reflects the fact that it's paying extra to Nestlé for control of the company, but that view isn't exactly winning it friends over at Alcon, the board of directors of which immediately established a standing committee of independent directors "whose stated purpose is to protect the minority shareholders in connection with a number of transactions, including related party transactions between Alcon and major shareholders of Alcon."  
According to Alcon, "Novartis appears to be attempting to circumvent the minority protection principles embodied in the actions noted above by claiming that the Alcon minority shareholders are neither accorded minority protections under the Swiss Takeover Code, nor the rules under the NYSE. "  
Although founded in 1945 by two pharmacists in Texas, and listed on the New York Stock Exchange, Alcon is incorporated in Switzerland and based in Hünenberg, and is thus bound by Swiss law. Alcon says that Swiss corporate law requires any merger proposal to be approved by a majority of the Alcon board of directors with "interested" directors abstaining. As Alcon maintains, "Assuming that the Novartis and Nestle board representatives along with the Alcon executive board representative abstain, approval by the independent directors comprising the Independent Director Committee would be required to approve a merger with Novartis."  
Alcon has complained that in an investor conference call, Novartis expressed a view that, if it were unable to obtain the required approval of the Alcon board and committee, Novartis would simply wait until it owned 77 percent of Alcon to then unilaterally impose the terms of the proposed merger on the minority shareholders.  
As Kepler Capital Markets analyst Tero Weckroth puts it: "Novartis has taken the gloves off and claims that since this is not a tender offer minority owners have no option but to approve the deal, since Novartis will soon control Alcon's board."
"Such a unilateral action would clearly be inconsistent with the minority protection principles upon which Alcon established itself and Alcon shareholders rely," Alcon notes.   Following Novartis' announcement, the minority shareholders filed a class-action lawsuit in the U.S. District Court in New York to prevent Novartis from completing the takeover. On Jan. 20, Alcon officially rejected Novartis' plans and, in a letter to Vasella, wrote, "The committee has determined that the Novartis merger proposal is grossly inadequate" and also called the underlying its merger proposal "fundamentally flawed" and "not in the best interests of Alcon and its minority shareholders."  
Novartis, for its part, notes that it and Alcon have highly complementary product portfolios covering more than 70 percent of global vision care sector in terms of pharmaceuticals, surgical products, contact lenses and over-the-counter brands. Vasella also acknowledges that eye care in general "offers dynamic growth opportunities underpinned by high unmet needs of an aging population."  
"The addition of Alcon will strategically strengthen our healthcare portfolio and our position in eye care, a sector with dynamic growth due to the increasing patient needs of an aging population," says Vasella. "This is the right time to simplify Alcon's ownership to eliminate uncertainties for employees and shareholders. It will also allow us to strengthen innovation power by combining R&D efforts and grow our global market presence thanks to our complementary product portfolios."
Zacks Equity Research notes that in addition to strengthening the companies' complementary eye care product portfolios, "this deal should help Novartis compensate for the loss of revenues once several of its products start facing generic competition." Zacks currently maintains a "neutral" recommendation on Alcon, saying, "We believe the company's business model remains fundamentally strong. Alcon has also done an excellent job with cost control, which should continue to benefit operating margins. Meanwhile, continued international penetration, new product launches and market share gains will be the fuel for future revenue growth at Alcon."

Novartis acquires Corthera and rights to heart failure drug  
BASEL, Switzerland—Novartis also announced in late December that it has gained exclusive worldwide rights to relaxin, a recombinant version of a naturally occurring human peptide, through its acquisition of the privately held United States-based biopharmaceutical company Corthera Inc. Relaxin is currently in Phase III clinical trials as a potential treatment option for patients with acute decompensated heart failure (ADHF). 
Under the terms of the transaction, Novartis will acquire all of the outstanding shares of Corthera's stock for $120 million. In addition, Corthera's current shareholders will be eligible to receive additional payments of up to $500 million that are contingent upon clinical milestones, regulatory approval of relaxin and the achievement of commercialization targets. The transaction, which is subject to customary regulatory approvals, is expected to be completed in the first quarter of 2010.  
Novartis will assume full responsibility for the development and commercialization of relaxin, with regulatory submissions in the U.S. and Europe planned for 2013. The U.S. Food and Drug Administration (FDA) has granted fast-track designation to relaxin as part of its program to expedite the review of new drugs intended to treat serious or life-threatening conditions that can potentially address unmet medical needs.  
Relaxin, which is administered to hospitalized patients via a 48- hour infusion, has been shown to cause an increase in cardiac output, systemic and renal vasodilation, which suggests potential benefits for patients with ADHF. In its natural form, this peptide is responsible for relaxing the female reproductive tract as well as mediating the cardiovascular and renal changes during pregnancy, leading to studies showing its potential applications in this cardiovascular disease.
Dr. Trevor Mundel, global head of development at Novartis, says relaxin will be an important addition to the company's expanding pipeline of novel development projects targeting cardiovascular disease.  
"Despite a range of current treatment options, acute decompensated heart failure is the leading cause of hospitalization in people over age 65 and remains a major clinical challenge with a high and increasing incidence and substantial morbidity and mortality," Mundel says.

Code: E021001



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