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One on One with Tim Sear
As analysts weighed in with opinions on Alcon’s strong outlook, Tim Sear took time to speak to Ocular Surgery News about Alcon’s IPO and the company’s future.
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In an industry that wears its pipeline on its sleeve, Alcon lived under the cloak of parent company of Nestlé SA. While clearly a leader in the ophthalmic industry, Alcon kept its short- and long-term plans, financial outlook and research and development efforts hidden from view.
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That was until March 21, when Nestlé SA (VX: NESZn) sold nearly $2.3 billion in shares, which was at the time the largest initial public offering (IPO) for 2002; 69.75 million shares were offered at $33 per share. In addition, as a result of the IPO’s success, Alcon’s underwriters exercised their overallotment option, resulting in a final Nestlé holding of 75% and gross IPO proceeds of $2.5 billion. Since then Alcon Inc. has been trading on the New York Stock Exchange under the symbol ACL.
According to its prospectus, Alcon has leading U.S. market share positions, based on sales, in many product categories. Alcon has a variety of products on the horizon, spanning all the major ophthalmic subspecialties, which it expects to bring to market in the next 5 years in the United States, the European Union and Japan, including anecortave acetate for the treatment of age-related macular degeneration and a prescription dry eye product.
Now interest in Alcon’s current products, market share, pipeline and research and development reaches beyond ophthalmology to world of investors and analysts.
In mid-April, after a 25-day quiet period, analysts began to levy opinions on ACL. Goldman Sachs issued Alcon Inc. a “market outperformer” rating and called the company a “one-stop shop” in ophthalmology. It set a 12-month target share price of $41. Credit Suisse First Boston, the global coordinator for this IPO, rated Alcon a “strong buy” and gave it a 12-month target share price of $46. Lehman Brothers and Merrill Lynch each gave the company a “strong buy” rating, citing long-term share prices of $41 and $40 respectively. Merrill Lynch noted that ACL is positioned to generate significant growth. Salomon Smith Barney, who gave Alcon an “outperform” rating noted that the stock offered investors a vehicle for stable growth.
As this issue of Ocular Surgery News went to press, the stock was trading at $36.50.
On May 2, Alcon Inc. released its earnings report. See the box on the following page for information on what it revealed.
To gain an insider’s perspective on the IPO, the earnings report and the future of Alcon, Ocular Surgery News spoke with Tim Sear, chairman, president and director of Alcon Inc., and chairman, president and chief executive officer of Alcon Laboratories Inc.
The interview with Mr. Sear revealed a company wishing to keep operations and research and development “status quo,” while at the same time noting that “there is no intention of being the quiet company anymore.”
Ocular Surgery News: Why the IPO? Why now?
Tim Sear: Alcon was acquired off the NYSE by Nestlé in 1978 and has grown significantly and quietly within the Nestlé group. In the intervening 24 years, Alcon has grown 40 times in sales; the $70 million business then, as of last year, was a $2.75 billion business.
The Nestlé board felt the value of Alcon was not fully recognized by the financial markets in Europe. (Editor’s note: Nestlé shares are traded on the following stock exchanges: Virt-x, London Stock Exchange, Euro next Paris and Frankfurt am Main Wertpapier-Kenn-Nummer.) And this pharmaceutical and medical device business would command a different valuation from a food business of the same size.
So by doing an IPO and divesting 25% of the company, the market value of Alcon as benchmarked by the NYSE would be demonstrated. This is what Peter Brabeck-Letmathe, director, vice chairman and chief executive officer of Nestlé SA, said in the October 19, 2001, statement. He wanted “to release shareholder value.” I think this IPO has effectively done that.
OSN: Has Nestlé announced whether it plans to release the remaining shares?
Mr. Sear: On the contrary, the leadership of Nestlé, and Mr. Brabeck himself, have repeatedly said that they have no plans to divest any further portion of Alcon. Never say “never,” but that is their stated position, and I am convinced of it.
OSN: The leadership of Alcon and Nestlé were invited to the NYSE on March 21.
Mr. Sear: It was an exciting, once-in-a-lifetime event. We did indeed stand there and cheer and clap and at 9:29 and 59 seconds Peter Brabeck and I pushed the button and the opening bell rang. It was a crowded floor, and the Alcon IPO generated a lot of excitement.
OSN: Can you discuss the future of Alcon on the NYSE?
Mr. Sear: We have said to investors that we expect our very consistent growth to continue.
First-quarter sales were $706.5 million, which represented a 7.9% increase in dollars and 10.9% in constant currency, in line with our expectations for the quarter. The constant currency growth is important because it reflects real internal growth, unit growth.
OSN: For many years, Alcon remained behind the cloak of Nestlé and was very much a mystery. Please comment.
Mr. Sear: We obviously had an obligation to keep our shareholders informed, but we had only one shareholder. As of now, we have many thousands of shareholders, and we must keep them informed. So there will be annual reports and quarterly earnings releases and phone conference calls in which we will be proud to talk about what we are doing. There is no intention of being the quiet company anymore. We will issue press releases for major events and major developments and obviously issue earnings reports. We will behave like any other responsible public company and show respect for our shareholders so they know how their business is evolving.
OSN: What have you heard in terms of reaction from others in the ophthalmic industry?
Mr. Sear: All I have heard is a very positive reaction. One of the things we noticed over the years was that ophthalmologists who may be investors in our competition have frequently asked, “How can we invest in Alcon?” and we had to say, “Well, you can’t.” Now they are free to make their own judgments and if they choose to they can also participate in Alcon’s future.
OSN: The prospectus makes mention that Alcon has first position in market share in many product categories. How do you plan to maintain that position against your competition?
Mr. Sear: The numbers are a matter of public record. We have consistently outgrown our competition in eye care, whom we primarily define as Allergan and Bausch & Lomb.
We divide the business into ophthalmic pharmaceutical, ophthalmic surgical and consumer eye care. Based on sales in 2001, we are the global leader in each of these three segments. Our greatest leadership margin has been in the surgical area where through 2001 we calculate we have 43% of the world’s market for ophthalmic surgical products, which is about five times the size of Allergan and three times the size of Bausch & Lomb in this segment.
Alcon and Allergan compete strongly in the ophthalmic pharmaceutical segment. With ophthalmic sales of more than $900 million last year, we did about $120 million more than Allergan on a global basis, and we both grew 10%. On the surgical front, with sales of $1.36 billion in 2001, we grew 7% in dollars, 12% in constant currency. We also gained 2% in our consumer business (6% in constant currency) for sales of approximately $460 million last year. From the best we can tell, we are the only company growing much in these two segments.
Regarding the Allergan spin-off of their surgical and consumer businesses, that is their choice and not for me to comment on. We believe that by keeping our three businesses under one roof, we gain a great deal of synergy. We are an ophthalmic company, we concentrate on all aspects of this one field. Ninety-seven percent of our business is in ophthalmology and we plan to maintain this specialization.
OSN: Please discuss Alcon’s position in the refractive arena.
Mr. Sear: We made an important strategic decision in 2000 when we acquired Summit Autonomous. It was a technology acquisition. We had for several years been looking for the ideal vehicle through which to enter this important segment. Now it is our job to carve share in that market. We are confident that we have the most advanced excimer laser for LASIK surgery today, and we are getting very good outcomes with our LADARVision. We are in late-stage development of our wavefront technology, which combined with this laser should give us technological leadership.
The market continued to surge through about March of last year. And then a couple of things happened to affect the market, including the weakening economy and September 11. At this point, our sense is that is the market has settled down. We foresee both the industry and our own growth rate improving from the fourth quarter of 2001. There are many potential patients who may have waited things out last year, and the technology and outcomes seem to only be getting better.
We are also doing our own research and development in the phakic IOL area. As the leader in the ophthalmic surgical area, we certainly pursue all technologies that can be demonstrated to be of value to surgeons and their patients. The phakic IOL is likely to be one of those areas. We have a very powerful IOL research and development team, and that is one of their projects.
OSN: Are there changes planned in operations at Alcon?
Mr. Sear: No changes are currently planned in that regard. At least 3 years ago , we looked at our product strategy on a more global basis. Operationally, of course, we manage on a territorial basis, but we do have a central group for marketing guidance comprised of some of our best people from the international market and the United States. The marketing approach will be the same. Our approach to the ophthalmic market is not going to change. It is tried and true. Basically we are driven by the needs expressed by vision care specialists.
OSN: Please discuss your research and development focus and pipeline.
Mr. Sear: We have a very exciting product pipeline in each of the three segments. Our task is to do two things: 1) to augment and replace existing products with newer molecules, drug delivery formulations or improved engineering in technology, and 2) to look for significant product opportunities now in our current line.
Let’s examine the pharmaceutical area. In the anti-infectives and combination markets we have moxifloxacin, which is in phase 3 trials now, and CiproDex (ciprofloxacin and dexamethasone) for both the eye and the ear, also in phase 3. In allergy we have a strong position with Patanol, and we expect to have further product enhancements. In glaucoma, we just launched Travatan, and we’re going to have our work cut out for us for building its position in the market for years to come. It is really an excellent product with some unique characteristics. This is the fundamental pharmaceutical pipeline.
We are also pursuing two important areas for novel products. One is a compound, anecortave acetate for age-related macular degeneration, which is in phase 2 and 3 clinical trials. We are extremely encouraged by this; it is a huge market and we are seeking to be a major player. The other is a prescription dry eye product. There are no prescription dry eye products at the moment. All the dry eye products are basically OTC preparations. We have some, and so do our competitors, and they are good, but they are not attacking the root cause of dry eye.
In the surgical arena, we have the widest array of products. Major pipeline products are in the cataract area. The AcrySof IOL is our leading product, and we have blue-blocker and a multifocal versions of the lens in development. In addition, we have a novel cataract system under active development and plan to launch it next year. In the vitreoretinal area, we will have a new platform to replace the Accurus machine. In the refractive area, we are working on the LADARWave Custom Cornea wavefront-guided ablation that we expect to be available globally at the end of this year, or possibly early 2003.
We are working on a novel disinfectant in the consumer eye care area. At the moment we are leading the pack with Opti-Free Express No-Rub. There will be a new product close behind.
OSN: Final comments?
Mr. Sear: Our key new products and pipeline are Travatan, anecortave acetate and a prescription dry eye product, all of which are home-grown —they have not been licensed in from general pharmaceutical companies. We believe these key products in large markets will increase our pharmaceuticals sales as a percentage of total sales. There are real breakout opportunities with those products.
The stock market can be pretty irrational in the short term, but in the longer term it rewards success derived from growing sales and earnings per share. Alcon has always had a long-term perspective. We are going to report quarterly but expect to continue to think and plan for the medium- to long-term because this is the nature of any research-based industry. I expect that all our investors will benefit from our corporate strength and future successes.