When Novartis said in June that it would spin off its long-struggling eye-care unit, Alcon, CEO Vas Narasimhan declined to estimate what the valuation on such a transaction might be. But his predecessor, Joe Jimenez, said last year that he thought Alcon could be worth as much as $35 billion—and now Novartis is laying out a strong case to investors that they should place a high value on the unit as a separate entity.
Alcon filed a 20-F registration statement with the Securities and Exchange Commission for the spinoff, which is expected to be completed in the first half of next year, pending shareholder approval. The company said it would discuss the plans in more detail at events for analysts and investors in New York and London in a few weeks.
The registration statement positions Alcon as a company that’s well-equipped to handle the inherent risks of operating in an ultra-competitive market. "We believe our market leading position and global footprint allow us to benefit from economies of scale, maximize the potential of our commercialized products and pipeline and will permit us to effectively grow the market and expand into new product categories," the statement says.
Alcon brought in $6.8 billion in sales last year, almost evenly split between two main businesses: surgical, which sells implants and equipment for procedures to treat cataracts and other disorders, and a vision-care unit that markets contact lenses and related products. Alcon predicts that the total market for surgical and vision-care products is worth $23 billion a year and that it will grow 4% annually for the next 5 years, according to the statement.
The company is banking on a few key trends to drive its growth. The aging population, combined with an increasing access to eye care—particularly in developing countries—presents major opportunities, Alcon argues. For example, the cataract surgery rate in the U.S. is 12.7 procedures per 1,000 people, vs. just 3.2 surgeries per 1,000 people overseas, the company said. And an increasing number of contact-lens wearers are shifting to daily disposable lenses, resulting in a boost in sales of two to three times per patient, the company estimated.
Alcon laid out a strategy to expand its market footprint around the world by launching new products and improving its marketing efforts in under-penetrated countries, while at the same time improving efficiency to boost margins. Alcon’s core operating margin was 18% in the first nine months of the year. Novartis had previously set a goal for the unit’s margins to hit the low- to mid-20s by 2023.
Still, the standalone Alcon is facing plenty of risks, not the least of which is competition. Novartis invested heavily in direct-to-consumer advertising a few years back to try to boost its contact lens business, which was struggling to stand out in a market dominated by rivals like Bausch & Lomb, CooperVision and Johnson & Johnson’s Vision Care. Alcon is expecting the competitive environment to heat up even more as contact lens manufacturers in Asia jump into the market, it said in the registration statement.
And Alcon has faced its share of product challenges. In August, the company voluntarily recalledCyPass, an implanted device used in cataract surgery, due to long-term safety concerns. During Novartis’ recent third-quarter earnings conference call, one analyst worried the recall would have a negative long-term impact on Alcon’s relationship with eye surgeons. "I think surgeons appreciated our proactive assertive response to the signals we saw," David Endicott, Alcon’s CEO, said, adding that the surgical side of the eye business grew 7% during the quarter.
Novartis expects the Alcon spinoff to "support our transformation to become a more focused innovative medicines company," Narasimhan said in a statement. That effort involves much more than the Alcon spinoff. In September, Novartis revealed that it’s planning a major restructuring that includes cutting 700 jobs from its business services unit—a division that was initially formed in 2014 to help the company reduce its back-office costs.
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