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FT Novartis/Alcon article

http://www.ft.com/cms/s/2/d44d926c-f776-11dd-81f7-000077b07658,dwp_uuid=e8477cc4-c820-11db-b0dc-000b5df10621.html

Novartis/Nestle may see cycle of negotiations over Alcon option rights in 4Q 2009
By Sasha Damouni, James Avallone and Nadia Damouni

Published: February 10 2009 13:35 | Last updated: February 10 2009 13:35


This article is provided to FT.com readers by Pharmawire—a news service focused on providing insight into the most price sensitive issues in the global pharmaceutical market. www.pharmawire.com
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Negotiations between Novartis (NYSE:NVS) and Nestle (VTX:NESN) over their option rights – allowing Novartis to acquire the remaining stake Nestle owns in Alcon (NYSE:ACL) – may see another cycle of negotiations in the fourth quarter, two industry attorneys speculated.

Last April, Nestle, the world’s largest foods producer, sold 24.85% of Alcon’s issued and outstanding capital for USD 143.18 each share, Pharmawire reported. Nestle and Novartis have a put and call option rights agreement in place for the remaining 52% of Alcon shares Nestle owns from January 2010 to July 2011. The Basel pharma giant’s call option is at a fixed price of USD 181 per share. During this time, Nestle has the option to sell its remaining Alcon stake at a 20% premium of the average share price during the week before the sale, not exceeding USD 181 per share.

The first attorney said the probability of another cycle of negotiations would be closer to the fourth quarter of this year or beginning of 2010, when the markets may have stabilized. ”Certainly from Novartis’s perspective it makes no financial sense to pay USD 181 a share for a stock that is trading at USD 85 to 90 right now,” the first attorney said. The second attorney, who is familiar with situation, commented that ”a lot can happen” between now and fourth quarter and at the end of the year the USD 181 price tag may again look attractive to Alcon. The company closed at USD 82.89 on 5 February.

Despite some industry banker conjecture that Novartis would counter Pfizer’s (NYSE:PFE) USD 68bn deal with Wyeth (NYSE:WYE) or bid for Netherlands-based Crucell (NASDAQ:CRXL), an industry banker in Europe said he was aware that Novartis was keeping its dry powder open for an Alcon M&A purchase. The banker believed the put and call agreement would not hinder a deal happening before 2010.

In addition, Novartis announced this month that it launched a USD 5bn two-tranche bond offering in the US. The first tranche consists of a USD 2bn five-year bond with a coupon of 4.125%; the second includes a USD 3bn 10-year bond with a coupon of 5.125%. The company stated that the offering ”enhances the financial flexibility of Novartis through this access to new sources of funding.” It said the proceeds would be used for general corporate purposes. The second industry attorney said in order for Novartis to proceed with an acquisition of Alcon, the parties would have to waive the restrictions in the agreement that prevent Novartis from acquiring shares outside of that agreement. A spokesperson for Novartis said the company’s strategy for 2009 has not changed from 2008, with bolt-on acquisitions as its core focus. He would not comment on the company’s powder for acquisitions or upcoming debt maturities.

Last year, Novartis made a number of bolt-on acquisitions, including Protez Pharmaceuticals, Nektar Therapeutics and the remaining stake in Speedel Holding. In a recent SEC filing, Novartis reported that as of 31 December 2008 it had cash, short-term deposits and marketable securities of USD 6.12bn.

Cary Rayment, president and CEO of Alcon, told this news service he had no insight on the deal structure. He was willing to comment on the company’s potential to make acquisitions, which included products or companies that make strategic sense. When asked, Rayment declined to discuss specifics about whether Alcon would look at filling its pipeline with companies or products involved in wet age-Related macular degeneration (AMD), a leading cause of blindness in the elderly, or uveitis (an inflammation of the uvea).

Alcon terminated a 2500-patient Anecortave Acetate Phase III trial for AMD in July 2008. Anecortave Acetate is still in development for open-angle glaucoma, however, according to an Alcon press release.

When considering the medical device market, ophthalmology is ranked high in the eyes of companies with cash. Within medical device M&A, the other two areas of active consolidation have historically been in the cardiovascular and orthopedics spaces, a managing director at a prominent private equity firm said. Ophthalmology was the one area where he forecasted ”tremendous activity.” Other firms have already realized and acted on the importance of this market, with diversified healthcare company Abbott Laboratories (NYSE:ABT) paying a sizeable premium for Advanced Medical Optics (NYSE:EYE) in January of USD 2.8bn.

Most diseases of ophthalmology are age-related and as a result of a demographic shift, there is also an explosive amount of innovation in venture capital portfolios, the managing director added. He stated that considering that Alcon is sitting on USD 2.7bn in cash, the company could be seeking to make its own acquisitions. ”They are most likely going to acquire private companies with interesting technologies and fast-growing revenue,” he said, citing privately-held Lux Biosciences and EyeGate Pharma as potential targets.

Lux, with a Phase III uveitis drug Luveniq, is open to different types of transactions, CEO Dr Ulrich Grau told this news service. He emphasized that the company is not putting up a ”for sale” sign up, but is currently in discussions with various potential parties over ”the technicalities of our assets.”

Grau said Alcon is considered a premiere ophthalmology company with a stronghold in both devices and drugs. Despite this, he believed Alcon would not exclude itself from looking to innovate and said it would be worthwhile for the company to make acquisitions.

EyeGate CEO Stephen From said ophthalmology is one of the last areas in the life sciences where there is a substantial unmet medical need and is a market that could produce further potential blockbusters. He specifically commented on dry-AMD, which comprises most of the AMD market, and spoke about the fact that there is no therapeutic approved for diabetic macular edema.

EyeGate, a company developing a platform of medicine to treat diseases of the eye using its non-invasive, iontophoretic drug-delivery system, would be very attractive to any of those firms in the ophthalmology space, From said. Still, he noted the company is not at the stage yet for a takeout, and is currently in partnership discussions.

Yet the managing director at the private equity firm said Alcon’s cash on its balance sheet could also be an attractive feature to Novartis, and as a result would not stop the Swiss-giant from pulling the trigger on making a play for Alcon sooner rather than later.

Even though Grau admitted he is not privy to the Novartis/Nestle put and call option rights, he said it was his thinking that both firms are working at how they can, in the interim, arrive at a collaboration within the confines of their agreement.

Alcon develops prescription drugs for eye diseases such as glaucoma as well as allergy and non-steroid anti-inflammatory drugs, over-the-counter contact lens solutions, medical devices and products for ophthalmic surgery. Novartis currently has its own contact lens business, and along with Genentech, sells Lucentis for age-related macular degeneration.

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