Alcon's Winning Streak Continues - Analyst Blog

Alcon Inc. (ACL) reported fourth quarter 2010 earnings of $1.74 per share, beating the Zacks Consensus Estimate of $1.70 and 8.1% ahead of the year-ago figure. The fiscal year also saw the company beating the Zacks Consensus Estimate by 4 cents. Earnings in fiscal year 2010 came in at $7.71 per share, up 13.2%. Strong revenues helped boost earnings.

Revenues

Quarterly revenues at Alcon increased 5.7% to $1.81 billion, ahead of the Zacks Consensus Estimate of $1.78 billion. Fiscal year revenues amounted to $7.18 billion, reflecting a year-over-year increase of 10.5% and beating the Zacks Consensus Estimate of $7.14 billion.

Strong contributions from the Systane family of products, continued gains in the glaucoma market and increased sales from a severe allergy season boosted US revenues by 3.4%. International revenues also saw a increase of 7.3%. Emerging markets recorded a 13.7% increase with the BRIC nations (Brazil, Russia, India and China) reporting a growth of 18.5%.

We were pleased to see that all the revenue segments at Alcon put in strong performances in the reported quarter. While pharmaceutical sales climbed 9.4% to $743 million, surgical sales increased 3.6% to $858 million. Consumer sales inched up 1.4% to $211 million.

Pharmaceutical revenue benefited from an increase in the sale of infection/inflammation products (up 18.6%) in the US complemented by strong performance by the glaucoma franchise, sales of which increased 2.4% to $336 million. Continued market penetration of Azarga outside the US and a rise in the sales of DuoTrav boosted the performance of the glaucoma franchise.

Robust performance of intraocular lenses (IOLs), especially Advanced Technology IOLs, helped drive surgical revenue during the fourth quarter. Global sales of intraocular lenses rose 8.5% mainly due to a broader use of AcrySof IQ ReSTOR +3.0 lens and AcrySof IQ Toric lens.

Strong global performance of the Systane family of products helped drive Consumer revenue during the quarter.

Margins

Alcon's fourth quarter gross margin increased 200 basis points (bps) to 76.0%, mainly due to fluctuation in foreign exchange rates and rise in price.

Quarterly operating margin was 32.4%, 110 basis points above the year-ago figure. The increase was primarily due to strong sales growth, positive price contribution as well as the favorable, albeit temporary, impact of foreign exchange on gross profit margin.

Our View

We note that Alcon's board of directors approved the company's merger with Novartis AG (NVS) in December 2010. Novartis will pay $168.00 per share to acquire the remaining 23% share of Alcon it does not already own. Per the terms of the agreement, the merger consideration will consist of Novartis shares and, if necessary, a cash contingent value amount, resulting in a total value of $168.00 per share.

Alcon's board approved the merger following a favorable recommendation from the Independent Director Committee and a fairness opinion issued by Lazard Ltd. (LAZ), among other things.

Following the completion of the merger in the first half of 2011, Alcon will become the second largest division within Novartis.

We currently have a Neutral recommendation on Alcon.

 
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