Not seeing eye-to-eye

Novartis seeks to acquire eye giant Alcon, but is meeting resistance

Jeffrey Bouley
BASEL, Switzerland—Let's call Jérôme Berton the Nostradamusof ophthalmologic acquisitions, but let's not call Alcon Inc., the world'sbiggest eye-care company, happy with the prophesy coming true. Back in April2008, Novartis announced a deal with Nestlé SA to acquire that company's 25percent stake in Alcon for $10.4 billion, or $143 per share, financed frominternal cash reserves and external short-term financing. 
 
Novartis was clear that this was probably only a first stepin more buying, as Novartis also held the option to buy the remaining 52percent stake held by Nestlé, which would give it a majority ownership positionin Alcon. Berton, a pharmaceutical sector analyst at Aurel Securities in Parisat 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 "anacquisition in all but name."
 
 
Fast forward to January 2010, and the acquisition train isindeed gaining full steam, though Alcon is showing resistance to the statedplans for a merger of it into Novartis' fold. Novartis announced that itintends to gain full ownership of Alcon by first completing the April 2008agreement with Nestlé to acquire a 77 percent majority stake in Alcon for $28.1billion, or $180 per share, and then enter into an all-share direct merger withAlcon for the remaining 23 percent minority stake. The acquisition of theremaining Nestlé stake, which is subject to required regulatory approvals, isexpected to be completed in the second half of 2010.
 
 
One of the problems, though, is that Novartis is talkingabout "an implied price of $153 per Alcon share" for the subsequent purchase ofthe 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, toldanalysts that the difference reflects the fact that it's paying extra to Nestléfor control of the company, but that view isn't exactly winning it friends overat Alcon, the board of directors of which immediately established a standingcommittee of independent directors "whose stated purpose is to protect theminority shareholders in connection with a number of transactions, includingrelated party transactions between Alcon and major shareholders of Alcon."
 
 
According to Alcon, "Novartis appears to be attempting tocircumvent the minority protection principles embodied in the actions notedabove by claiming that the Alcon minority shareholders are neither accordedminority protections under the Swiss Takeover Code, nor the rules under theNYSE."
 
 
Although founded in 1945 by two pharmacists in Texas, andlisted on the New York Stock Exchange, Alcon is incorporated in Switzerland andbased in Hünenberg, and is thus bound by Swiss law. Alcon says that Swisscorporate law requires any merger proposal to be approved by a majority of theAlcon board of directors with "interested" directors abstaining. As Alconmaintains, "Assuming that the Novartis and Nestle board representatives alongwith the Alcon executive board representative abstain, approval by theindependent directors comprising the Independent Director Committee would berequired 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 requiredapproval of the Alcon board and committee, Novartis would simply wait until itowned 77 percent of Alcon to then unilaterally impose the terms of the proposedmerger 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 tenderoffer minority owners have no option but to approve the deal, since Novartiswill soon control Alcon's board."
 
"Such a unilateral action would clearly be inconsistent withthe minority protection principles upon which Alcon established itself andAlcon shareholders rely," Alcon notes.
 
Following Novartis' announcement, the minority shareholdersfiled a class-action lawsuit in the U.S. District Court in New York to preventNovartis 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 Novartismerger proposal is grossly inadequate" and also called the underlying itsmerger proposal "fundamentally flawed" and "not in the best interests of Alconand its minority shareholders."
 
 
Novartis, for its part, notes that it and Alcon have highlycomplementary product portfolios covering more than 70 percent of global visioncare sector in terms of pharmaceuticals, surgical products, contact lenses andover-the-counter brands. Vasella also acknowledges that eye care in general"offers dynamic growth opportunities underpinned by high unmet needs of anaging population."
 
 
"The addition of Alcon will strategically strengthen ourhealthcare portfolio and our position in eye care, a sector with dynamic growthdue to the increasing patient needs of an aging population," says Vasella."This is the right time to simplify Alcon's ownership to eliminateuncertainties for employees and shareholders. It will also allow us tostrengthen innovation power by combining R&D efforts and grow our globalmarket presence thanks to our complementary product portfolios." 
 
Zacks Equity Research notes that in addition tostrengthening the companies' complementary eye care product portfolios, "thisdeal should help Novartis compensate for the loss of revenues once several ofits products start facing generic competition." Zacks currently maintains a "neutral" recommendationon Alcon, saying, "We believe the company's business model remainsfundamentally strong. Alcon has also done an excellent job with cost control,which should continue to benefit operating margins. Meanwhile, continuedinternational penetration, new product launches and market share gains will bethe fuel for future revenue growth at Alcon."
 

 
Novartis acquiresCorthera and rights to heart failure drug
 
 
BASEL, Switzerland—Novartis also announced in late Decemberthat it has gained exclusive worldwide rights to relaxin, a recombinant versionof a naturally occurring human peptide, through its acquisition of theprivately held United States-based biopharmaceutical company Corthera Inc.Relaxin is currently in Phase III clinical trials as a potential treatmentoption for patients with acute decompensated heart failure (ADHF). 
 
Under the terms of the transaction, Novartis will acquireall of the outstanding shares of Corthera's stock for $120 million. Inaddition, Corthera's current shareholders will be eligible to receiveadditional payments of up to $500 million that are contingent upon clinicalmilestones, regulatory approval of relaxin and the achievement of commercializationtargets. 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 developmentand commercialization of relaxin, with regulatory submissions in the U.S. andEurope planned for 2013. The U.S. Food and Drug Administration (FDA) hasgranted fast-track designation to relaxin as part of its program to expeditethe review of new drugs intended to treat serious or life-threatening conditionsthat can potentially address unmet medical needs.
 
 
Relaxin, which is administered to hospitalized patients viaa 48-hour infusion, has been shown to cause an increase in cardiac output,systemic and renal vasodilation, which suggests potential benefits for patientswith ADHF. In its natural form, this peptide is responsible for relaxing thefemale reproductive tract as well as mediating the cardiovascular and renalchanges during pregnancy, leading to studies showing its potential applicationsin this cardiovascular disease.
 
Dr. Trevor Mundel, global head of development at Novartis,says relaxin will be an important addition to the company's expanding pipelineof novel development projects targeting cardiovascular disease.
 
 
"Despite a range of current treatment options, acutedecompensated heart failure is the leading cause of hospitalization in peopleover age 65 and remains a major clinical challenge with a high and increasingincidence and substantial morbidity and mortality," Mundel says.


Jeffrey Bouley

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