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ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None.
We have no unresolved written comments from the SEC staff regarding our periodic reports under the Exchange Act received more than 180 days before the end of the fiscal year to which this annual report relates.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YouThis operating and financial review should be read together with the following discussionsection captioned "Item 3. Key Information —3.A Selected Financial Data", "Item 4. Information on the Company—4.B. Business Overview" and analysis in conjunction with our financialConsolidated Financial Statements and the related notes to those statements and notes thereto included elsewhere in this report.Annual Report. Among other things, those financial statements include more detailed information regarding the basis of preparation for the following information. This Management's Discussiondiscussion contains forward-looking statements that involve risks and Analysisuncertainties. As a result of Financial Conditionmany factors, such as those set forth under "Item 3. Key Information —3.D Risk Factors" and Results of Operations containselsewhere in this Annual Report, Alcon actual results may differ materially from those anticipated in these forward-looking statements. Please see "Cautionary"Special Note RegardingAbout Forward-Looking Statements" for a discussionStatements" in this Annual Report. “Item 5. Operating and Financial Review and Prospects”, together with “Item 4.B Business Overview” and “Item 6.D. Employees”, constitute the Operating and Financial Review (“Rapport annuel”), as defined by the Swiss Code of the risks, uncertainties and assumptions relating to these statements.Obligations.
General
OVERVIEW
Alcon Inc. ("Alcon")researches, develops, manufactures, distributes and its subsidiaries (collectively, the "Company") develop, manufacture and market pharmaceuticals, surgical equipment and devices and consumersells a full suite of eye care products within two segments: Surgical and Vision Care. The Surgical segment is focused on ophthalmic products for cataract surgery, vitreoretinal surgery, refractive laser surgery and glaucoma surgery, and includes implantables, consumables and surgical equipment required for these procedures. The Vision Care segment comprises daily disposable, reusable and color-enhancing contact lenses and a comprehensive portfolio of ocular health products, including products for dry eye, contact lens care and ocular allergies, as well as ocular vitamins and redness relievers. Prior to April 9, 2019, Alcon was operated as a division of Novartis.
We are the largest eye care company in the world, based on 2019 net sales. We are dedicated to providing innovative products that treatenhance quality of life by helping people see better. Our strong foundation is based on our longstanding success as a trusted brand, our legacy of industry firsts and advancements, our leading positions in the markets in which we compete and our continued commitment to substantial investment in innovation. With over 70 years of history in the ophthalmic industry, we believe the Alcon brand name is synonymous with innovation, quality, service and leadership among eye diseases and disorders and promote the general health and function of the human eye. Founded in 1945, we have local operationscare professionals worldwide. We employ over 20,000 associates from more than 90 nationalities, operating in over 7574 countries and our products are soldserving consumers and patients in more than 180 countries around the world. In 1977,over 140 countries.
Between 2011, when we were acquired by Nestlé S.A. Since then,Novartis, and April 9, 2019, we operated as a division within Novartis. Novartis transferred to us substantially all of the assets and liabilities of its eye care devices business, consisting of our surgical and vision care businesses. Our financial statements include, in all periods presented, the assets, liabilities and results of operations of the ophthalmic over-the-counter products and a small portfolio of surgical diagnostics medications, which was transferred to Alcon from Novartis, effective as of January 1, 2018.
In 2019, Alcon achieved net sales to third parties of $7.4 billion. The United States accounted for $3.1 billion, or 41%, of total net sales, Japan accounted for $0.7 billion, or 9%, of total net sales, China accounted for $0.4 billion or 5%, of total net sales, Switzerland accounted for $56 million or 1%, of total net sales, and the rest of the world accounted for $3.2 billion, or the remaining 44%, of total net sales.
Basis of Preparation
The Consolidated Financial Statements included elsewhere in this Annual Report, which present our financial position, results of operations, comprehensive income/(loss), and cash flows have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
The preparation of the Consolidated Financial Statements requires management to make certain estimates and assumptions, either at the balance sheet date or during the year, that affect the reported amounts of assets and liabilities as well as revenues and expenses. Actual outcomes and results could differ from those estimates and assumptions.
The businesses of Alcon did not form a separate legal group of companies prior to the Spin-off. For periods prior to the Spin-off, the financial statements were prepared on a combined basis and are derived (carved-out) from the Novartis Consolidated Financial Statements and accounting records, as if Alcon was a stand-alone company for all periods presented. Our Consolidated Financial Statements include the assets and liabilities within Novartis subsidiaries in such historical periods
that are attributable to Alcon and exclude the assets and liabilities within Alcon subsidiaries in such historical periods not attributable to its businesses. For periods prior to the Spin-off, the Consolidated Financial Statements include charges and allocation of expenses related to certain Novartis business support functions across the following service domains: human resources operations, real estate and facility services, including site security and executive protection, procurement, information technology, commercial and medical support services and financial reporting and accounting operations. In addition, allocations were made for Novartis corporate general and administration functions in the areas of corporate governance, including board of directors, corporate responsibility and other corporate functions, such as tax, corporate governance and listed company compliance, investor relations, internal audit, treasury and communications functions.
Management believes that the allocation methodology used was reasonable and all allocations have been performed on a basis that reasonably reflects the services received by Alcon, the cost incurred on behalf of Alcon and the assets and liabilities of Alcon. Although the Consolidated Financial Statements reflect management's best estimate of all historical costs related to Alcon, this may however not necessarily reflect what the results of operations, financial position or cash flows of Alcon would have been had Alcon operated largely as an independent, publicly traded company for the periods prior to the Spin-off.
Agreements entered into between Alcon and Novartis in connection with the Spin-off govern the relationship between the parties following the Spin-off and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be provided on a temporary basis between the parties.
For further information on the basis of preparation of the Consolidated Financial Statements see Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report.
Items You Should Consider When Evaluating Our Consolidated Financial Statements
For periods prior to the Spin-off, our results of operations, financial position and cash flows could differ from those that would have resulted if we operated autonomously or as an entity independent of Novartis. As a result, you should consider the following facts when evaluating our historical results of operations:
For certain of the periods covered by our Consolidated Financial Statements, our business was operated within legal entities which hosted portions of other Novartis businesses. In addition, in all the periods presented, our Consolidated Financial Statements include the ophthalmic over-the-counter products and a small portfolio of surgical diagnostics medications, the management and reporting of which was transferred to Alcon from the Innovative Medicines Division of Novartis effective as of January 1, 2018.
For periods prior to the Spin-off, income taxes attributable to the Alcon Division were determined using the separate return approach, under which current and deferred income taxes were calculated as if a separate tax return had been prepared in each tax jurisdiction. In various tax jurisdictions, Alcon and Novartis businesses operated within the same legal entity and certain Alcon subsidiaries were part of a Novartis tax group. This required an assumption that the subsidiaries and operations of Alcon in those tax jurisdictions operated on a standalone basis and constitute separate taxable entities. Actual outcomes and results could differ from mostthese separate tax return estimates, including those estimates and assumptions related to realization of Nestlé's other businesses,tax benefits within these Novartis tax groups.
For periods prior to the Spin-off, our Consolidated Financial Statements also include an allocation and charges of expenses related to certain Novartis functions. However, the allocations and charges may not be indicative of the actual expense that would have grownbeen incurred had we operated as an independent, publicly traded company during those periods. For example, historically, our annual salesbusiness has been charged with a significant portion of appropriate administrative costs, such as those related to services Alcon has received from $82 millionNovartis across the following service domains: human resources operations, real estate and facility services, including site security and executive protection, procurement, information technology, commercial and medical support services and financial reporting and accounting operations, and these have been reflected in our Consolidated Financial Statements based on historical allocations and charges. Accordingly, these overhead costs were affected by the historical arrangements that existed between the historical reporting units of the Alcon Division and Novartis and typically did not include a profit margin.
For periods prior to more than $7 billion primarilythe Spin-off, our Consolidated Financial Statements also include an allocation from Novartis of certain corporate related general and administrative expenses that we would have incurred as a resultpublicly traded company. These include costs associated with corporate governance, including board of directors, corporate responsibility and other corporate functions, such as tax, corporate governance and listed company compliance, investor relations, internal developmentaudit, treasury and selected acquisitions.communications functions. The allocation of these additional expenses may not be indicative of the actual expense that would have been incurred had we operated as an independent, publicly traded company for those periods.
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• | On August 28, 2018, we announced our immediate, voluntary market withdrawal of our CyPass micro-stent surgical glaucoma product from the global market. Our Consolidated Financial Statements include the sales of CyPass micro-stent products from and after the launch of the product in 2016 until our withdrawal of the product from the market in August 2018. As a result, in the year ended December 31, 2018, we recognized a one-time pre-tax charge of $282 million (after tax $206 million). This consisted of $11 million for the costs associated with the market withdrawal and $337 million for the impairment of the CyPass intangible assets. These charges were partially offset by the $66 million gain for the reduction in the related contingent consideration liability. |
The preparation of financial statements requires management to make certain estimates and assumptions, either at the balance sheet date or during the period that affects the reported amounts of assets and liabilities as well as revenues and expenses. In March 2002, Nestlé sold slightly less than 25% of its ownership of Alcon through an initial public offering. In two transactions in 2008 and 2010, Nestlé sold all of its Alcon common shares to Novartis AG, a Swiss corporation that now owns the majority of Alcon's common shares. The remaining shares continue to be traded on the New York Stock Exchange. In December 2010, Alcon entered into an agreement to merge with and into Novartis, subjectparticular, due to the approvalfact that the presented Consolidated Financial Statements for periods prior to the Spin-off have been carved out from Novartis financial statements, actual outcomes and results could differ from those estimates and assumptions as indicated in the Critical accounting policies and estimates section of each company's shareholdersthis document. See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report and in the "Critical accounting policies and estimates" section within this Item 5.A.
Segment description
Alcon has two identified reporting segments: Surgical and Vision Care. Both segments are supported by Research and Development and Manufacturing and Technical Operations, whose results are incorporated into the respective segment contribution. Segment contribution excludes amortization and impairment costs for acquired product rights or other intangibles, general and administrative expenses for corporate activities, and certain other closing conditions.income and expense items such as spin readiness and separation costs, transformation program costs, and restructuring costs and legal settlements that are not attributable to a specific segment.
We conduct our global business through two business segments:In Surgical, Alcon United States and Alcon International. Alcon United States includes sales to unaffiliated customers located in the United States of America, excluding Puerto Rico. Alcon United States operating profit is derived from operating profits within the United States. Alcon International includes sales to all other unaffiliated customers.
Each business segment marketsresearches, develops, manufactures, distributes and sells ophthalmic products principally in three product categoriesfor cataract surgery, vitreoretinal surgery, refractive laser surgery and glaucoma surgery. The surgical portfolio also includes implantables, consumables and surgical equipment required for these procedures and supports the end-to-end procedure needs of the ophthalmic market: (i) pharmaceutical (prescription drugs); (ii)surgeon. Alcon also provides services, training, education and technical support for the Surgical business. In 2019, the Surgical segment accounted for $4.2 billion, or 57%, of Alcon net sales to third parties, and contributed $923 million, or 62%, of Alcon operating income (excluding unallocated income and expenses).
In Vision Care, Alcon researches, develops, manufactures, distributes and sells daily disposable, reusable, and color-enhancing contact lenses and a comprehensive portfolio of ocular health products, including products for dry eye, contact lens care and ocular allergies, as well as ocular vitamins and redness relievers. Alcon also provides services, training, education and technical support for the Vision Care business. In 2019, the Vision Care segment accounted for $3.2 billion, or 43%, of Alcon net sales to third parties, and contributed $563 million, or 38%, of Alcon operating income (excluding unallocated income and expenses).
OPPORTUNITY AND RISK SUMMARY
The surgical and vision care markets in which Alcon operates are large, dynamic and growing. As the world population grows and ages, the need for quality eye care is expanding and evolving. In addition, although it is estimated that 80% of all visual impairments are currently preventable, treatable or curable, we operate in markets that have substantial unmet medical and consumer needs. Our surgical and vision care products are targeted at addressing many of these unmet medical and consumer needs through products that are used in treating multiple ocular health conditions and offer leading eye care solutions for patients throughout their lives.
The surgical market in which we operate includes sales of implantables, consumables, and surgical equipment, including associated technical, clinical and devices (cataract,service support and training, and is projected to grow at approximately 4% per year from 2019 to 2024. Growth drivers in the surgical market include: global growth of cataract and vitreoretinal procedures, driven by an aging population; increased access to care; higher uptake of premium patient-pay technologies; increased adoption of advanced technologies; and refractive);eye disease as a comorbidity linked to the global prevalence of diabetes.
The vision care market in which we operate is comprised of products designed for ocular care and (iii) consumer use, and is projected to grow at approximately 5% per year from 2019 to 2024. Growth drivers in the vision care market include: continued modality shift to daily disposable lenses from reusable lenses and the resulting sales premium; advancements in specialty lenses combined with increasing demand for toric, multifocal and cosmetic lenses; a significant population of approximately 194 million undiagnosed dry eye patients, with an additional 42 million self-diagnosed dry eye patients using unsuitable products for treatment; growing access and consumption of vision care products in emerging markets; and increasing consumer access through the expansion of distribution models.
In each of our markets, we rely on our strong relationships with eye care (contact lens disinfectantsprofessionals and cleaning solutions, artificial tearsconsumers to attract and ocular vitamins). Business segment operations generally do not includeretain customers and expand the market. We have also made one of the largest commitments to research and development manufacturing, share-based compensationin the eye care market, which we expect to continue through internal innovation investments and identifying and executing on attractive acquisition, licensing and collaboration opportunities.
We are in the middle of executing a turnaround plan to return Alcon to sustainable, profitable growth and address existing challenges. Prior to 2016, Alcon, as a division of Novartis, had experienced stagnating growth driven by challenges in maximizing investments in its pipeline, the need for additional investment in promotional activities for existing Alcon products, an aging information technology infrastructure and difficulties in optimizing customer service, training, field service and inventory levels. The goal of the turnaround plan was to first fix the Alcon foundation, then to execute the growth plan and, in future periods, accelerate innovation, expand markets and adjacencies and develop new business models. Our growth acceleration plan consists of three phases:
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• | Fix the foundation (2016–2017): The initial phase of our growth plan in 2016 and 2017 focused on fixing the foundation of Alcon by investing in promotion, capital and systems, reinvigorating the innovation pipeline, and strengthening our customer relationships. Improving the culture at Alcon has also been a top priority, and the organization has responded with significant morale improvement. Strong results have followed, including sales returning to growth. |
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• | Execute the growth plan (2018–2020): We began the second phase of our growth plan in 2018, with a focus on superior execution, further investing in high-potential products and market segments and accelerating our product development cycle. We have begun to transform our company by cultivating a more nimble and agile culture. In our surgical business, we intend to continue to expand and grow the premium IOL market with our AT-IOL offerings and our PanOptix brand of presbyopia correcting IOLs ("PC-IOLs"). We also plan to expand our vitreoretinal business, in part through enhancing technology penetration in key markets and by accelerating conversion from optical to digital surgery. In our vision care business, we intend to grow our DAILIES TOTAL1 family of products and expand the presbyopia category through increased consumer awareness, lens comfort and quality. We also plan to continue the global roll-out of our Systane COMPLETE product and grow consumer demand with investments in direct-to-consumer marketing. |
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• | Deliver leading-edge solutions (2021 and beyond): Following the completion of the second phase of our growth plan, the third phase will focus on accelerating innovation, capturing opportunities to expand markets and pursue adjacencies and developing new business models to improve access to our leading product portfolio. |
Alcon future expectations are subject to various risks and uncertainties, including market dynamics in the surgical and vision care markets, general economic conditions and the pace of innovation in our industry, as well as successfully achieving our growth strategies and efficiency initiatives. These expectations were, in the view of management, prepared on a reasonable basis, reflect the best currently available estimates and judgments, and present, to the best of management's knowledge and belief, the expected future financial performance of Alcon. However, this information is not fact and should not be relied upon as necessarily indicative of future results, and you are cautioned not to place undue reliance on the prospective financial information. There will likely be differences between Alcon expectations and the actual results and those differences could be material. We can give no assurance that Alcon expectations will be achieved and we do not undertake any obligation to release publicly the results of any future revisions we may make to the expectations. When considering Alcon expectations, you should keep in mind the risk factors and other corporate functions.cautionary statements in "Item 3. Key Information —3.D Risk Factors" and "Special Note About Forward-Looking Statements" in this Annual Report.
Our financial results are affected to varying degrees by internal and external factors. For example, our ability to grow depends on the commercial success of our products and our ability to maintain our position in the highly competitive markets in which we operate. Even if we protect our intellectual property to the fullest extent permitted by applicable law, competitors may market products that compete with our products. Our ability to grow also depends on the success of our research and development efforts in bringing new products to market, as well as the commercial acceptance of our products. Increased pricing pressure in the healthcare industry in general could also impact our ability to generate returns and invest for the future. Additionally, our products are subject to competition from lower priced versions of our products, and our industry continues to be challenged by the vulnerability of distribution channels to counterfeiting. Product recalls or voluntary market withdrawals in connection with defects or unanticipated use of our products could also have a material adverse effect upon our business. We marketare also implementing new information technology systems and integrating those new systems into our legacy systems. All of our operations, including our information technology systems, can be vulnerable to a variety of business interruptions.
Further, our ability to grow may be impacted by the ongoing consolidation among distributors, retailers and healthcare provider organizations, which could increase both the purchasing leverage of key customers and the concentration of credit risk. We also may be adversely affected by changes in inventory levels or fluctuations in buying patterns by our large distributor and retail customers. If we overestimate demand and produce too much of a particular product, we face a risk of inventory
obsolescence. In addition, for certain materials, components and services, we rely on sole or limited sources of supply. Our customer relations could be negatively impacted by the loss of our significant suppliers or the inability of any such supplier to meet certain specifications or delivery schedules. Further, we have developed strong relationships with numerous healthcare providers, and rely on them to recommend our products to their patients and to other members of their organizations. Consumers in the eye care professionalshealth industry have a tendency not to switch products regularly and are repeat consumers, meaning that a physician's initial recommendation of our products, and a consumer's initial choice to use our products, have an impact on the success of our products. Therefore, it is important to our business and results of operations to retain and grow these relationships.
Given our global presence, our operations and business results are also influenced and affected by the global economic and financial environment, including unpredictable political conditions that currently exist in various parts of the world. Additionally, a portion of our operations are conducted in emerging markets and are subject to risks and potential costs such as economic, political and social uncertainty, as well as to the direct purchasers of our products, such as hospitals, surgery centers, managed care organizations, health maintenance organizations, government agencies/entities and individuals.
Change of Majority Ownership and Proposed Merger
On April 6, 2008, Nestlé and Novartis executed the Purchase and Option Agreement pursuant to which Nestlé agreed to sell approximately 74 million of its shares of Alcon common stock to Novartis in a cash transaction at a price of $143.18 per share. That sale was consummated on July 7, 2008, and Novartis acquired a minority stake in Alcon of slightly less than 25% of Alcon's outstanding shares, while Nestlé remained Alcon's majority shareholder with approximately 156 million Alcon shares comprising approximately 52% of the Company's outstanding shares.
The Purchase and Option Agreement between Nestlé and Novartis also contained put and call option rights on the balance of approximately 156 million Alcon shares owned by Nestlé. The option rights commenced on January 1, 2010. As outlined by the two parties, these rights granted (i) Novartis a call option to buy all but 4.1 million (or 2.5%) of Nestlé's remaining Alcon shares at a fixed price of $181 per share and the 4.1 million shares at the first stage price of $143.18 per share, and (ii) Nestlé a put option to sell to Novartis all but 4.1 million of its remaining Alcon shares to Novartis at the lower of Novartis's call price of $181 per share or a 20.5% premium above the then-market price of Alcon shares, calculated as the average market price of Alcon shares during the five trading days immediately preceding the exercise date of the put option, with the 4.1 million share balance to be sold at the first stage closing price of $143.18 per share.
On January 4, 2010, Novartis announced that it had exercised its option to purchase the remaining approximately 156 million Alcon shares owned by Nestlé at a weighted average price of $180 per share in cash, pursuant to the Purchase and Option Agreement. After consummation of the purchase on August 25, 2010, Novartis owned an approximate 77% interest in Alcon with the 23% balance being the publicly traded shares.
The consummation triggered certain change of control provisions in certain retirement plans for Company employees, the Company's share-based awards (including the vesting of certain outstanding share-based awards) and other agreements.
On January 4, 2010, Novartis also announced that it submitted to the Alcon board of directors a proposal for a merger of Alcon with and into Novartis to be effected under Swiss merger law. On December 15, 2010, after extensive negotiations between Novartis and the Alcon Independent Director Committee, Alcon announced that its board of directors approved a merger agreement with Novartis, whereby Novartis will pay a total merger consideration valued at $168 per share for the Alcon shares it does not currently own. Under the terms of the deal, the merger consideration will be comprised of a combination of Novartis shares (or American Depositary Shares in lieu thereof) and, if necessary, a cash contingent value amount to result in a total value of $168 per share. The exact exchange ratio and cash contingent value amount will be calculated based upon formulas set forth in the merger agreement.
For further details on the proposed merger, please refer to Item 7.B, "Related Party Transactions" and the Merger Agreement dated December 14, 2010 between Novartis AG and Alcon, Inc., included as Exhibit 4.13 to this report. Additional information concerning the proposed merger is included in the registration statement on Form F-4 filed by Novartis with the United States Securities and Exchange Commission on December 23, 2010 and subsequent amendments thereto.
Statements in the following discussion and analysis relating to our business strategies, operating plans, planned expenditures, expected capital requirements and other forward-looking statements regarding our business do not take into account potential future impacts of our proposed merger with Novartis.
LenSx Lasers Acquisition
On August 18, 2010, the Company acquired 100% of the outstanding common shares of LenSx Lasers, Inc. LenSx is a privately held company that has developed the first femtosecond laser to receive U.S. Food and Drug Administration clearance for use as a complementary technology in cataract surgery. LenSx's laser will enable surgeons to perform specific steps of the traditional cataract procedure with micron-level laser precision, including anterior capsulorhexis, phacofragmentation and creation of certain corneal incisions. Previously these steps were done manually with surgical instruments.
The Company paid approximately $367 million in cash at closing to LenSx shareholders for their shares and agreed to maximum contingent payments of approximately $383 million based upon the achievement and over-achievement of future femtosecond unit and procedure fee revenue milestones. The Company recorded, as part of the purchase price, $72 million for the estimated fair value of the contingent consideration and $12 million in cash paid to a LenSx shareholder for an intangible asset integral to the purchase.
Between the acquisition date and December 31, 2010, LenSx had no revenues and its costs and expenses were not significant. Note 18 to the consolidated financial statements provides more information on this acquisition.
ESBATech Acquisition
On September 15, 2009, the Company acquired ESBATech AG, a Swiss biotechnology company. The Company paid ESBATech shareholders $150 million in cash at closing and may pay possible contingent payments of up to $439 million based upon the achievement of future research and development milestones that would be expected to create value for Alcon. The Company recorded, as part of the purchase price, the estimated fair value of $71 million related to the contingent payments. This valuation was based on the Company's estimates of the probability and timing of these contingent payments.
ESBATech is a clinical-stage biotechnology company that has been developing a pipeline of proprietary single-chain antibody fragment therapeutics for topical and local delivery for safe and convenient therapy. ESBATech has advanced its antibody fragment technology to preclinical and clinical stages in the eye for various diseases. The company has several stable and soluble single-chain antibody fragments in development, with its most advanced product candidate progressed into Phase I and II studies relating to the treatment of inflammatory ocular diseases.
The acquisition included all rights to ESBATech's technology for therapeutic application to the eye, including age-related macular degeneration, diabetic macular edema, glaucoma, dry eye and uveitis. Substantially all of the employees of ESBATech joined Alcon. The ESBATech acquisition expanded Alcon's research capability outside of small molecules to the field of proteins, antibodies and other large molecules.
Note 18 to the consolidated financial statements provides more information on this acquisition.
U.S. Healthcare Reform
In March 2010, the United States government enacted legislation that is expected to have far reaching implications for the healthcare industry. The U.S. Department of Health and Human Services has broad discretion to interpret certain sections of these new laws, and numerous regulations are anticipated to follow. The more significant changes and their estimated effects on the Company for 2010 and future years are discussed below.
· | Beginning January 1, 2010, the legislation increases the Medicaid drug rebate minimum percentage for single source and innovator multiple source drugs from 15.1% to 23.1% of average manufacturer price and for non-innovator multiple source drugs from 11% to 13%. The legislation further extends this drug rebate to utilization made through risk-based, Medicaid managed care plans. This portion of the legislation was effective as of the date of enactment (March 23, 2010). The impact of this legislation has been to increase rebates paid by Alcon. It also may have an indirect impact on overall rebates paid to managed care organizations. |
· | Beginning January 1, 2011, pharmaceutical manufacturers must enter into agreements with the U.S. government to provide a 50% discount on covered brand name Medicare Part D drugs for eligible Part D enrollees in the coverage gap. The legislation required the U.S. government to establish a model agreement with pharmaceutical manufacturers. This has been completed and most manufacturers, including the Company, have signed the agreement. The discounts are excluded from "Best Price" for Medicaid rebate purposes. This will increase the Company's discounts beginning in 2011. To the extent patients were foregoing purchasing their medicines once they entered the Medicare Part D coverage gap, this provision could result in a modest increase in prescriptions, although at a lower price. |
· | The legislation also expands the section 340B drug discount program eligibility to the outpatient settings of qualified children's hospitals, free-standing cancer centers, critical access hospitals, rural referral facilities, and sole community hospitals with disproportionate share adjustment percentages equal to or greater than 8%. This will effectively increase volume to those facilities where we offer larger discounts. |
· | The legislation imposes a non-deductible pharmaceutical industry fee, requiring brand manufacturers to pay an annual fee in the aggregate of $2.5 billion in 2011, escalating to $4.1 billion in 2018. The fee is allocated to individual companies based on each manufacturer's proportion of total specified government program sales as a percentage of the entire brand manufacturing industry total of specified government program sales. There were no fees recognized in 2010. If the legislation had applied to 2010 and based on our 2009 sales and our assumptions about which sales will be subject to the fee, we estimate its effect on the Company would have been less than $10 million. |
· | The legislation imposes a 2.3% excise tax on the sale of medical devices (as defined in section 201(h) of the Federal Food, Drug and Cosmetic Act) intended for humans. This provision becomes effective for sales after December 31, 2012 and will likely be imposed on a majority of the Company's surgical revenue but will exclude sales of our over-the-counter products such as contact lens disinfectants, artificial tears, and ocular vitamins. If the legislation had applied to 2010 and based on our 2009 sales |
| and our assumptions about which products will be subject to the tax, we estimate its effect on the Company would have been less than $30 million. |
· | The legislation likely will increase the population that will have access to drugs by expanding Medicaid eligibility to 133% of the Federal Poverty Level. It also will create separate health benefit exchanges through which individuals and small businesses can purchase coverage. Quantifying this impact is not possible at this time. This portion of the legislation does not go into effect until January 1, 2014. |
| Finally, the legislation changes the taxation of subsidies received by employers as a result of funding prescription drug benefits for retirees under the Medicare Prescription Drug Improvement and Modernization Act of 2003. The elimination of this benefit resulted in an initial $25 million charge to income taxes in the first quarter of 2010 and is expected to add an annual income tax cost of approximately $4 million at today's tax rates. |
The provisions in the first and third bulleted paragraphs above decreased sales by approximately $20 million in 2010.
Market Environment
Demand for healthcare products and services is increasing in established markets as a result of aging populations and the emergence of new drug therapies and medical devices. Likewise, demand for healthcare products and services in emerging markets is increasing primarily due to the adoption of medically advanced technologies and improvements in living standards. As a result of these factors, healthcare costs are rising at a faster rate than macroeconomic growth in many countries. This faster rate of growth has led governments and other purchasers of healthcare products and services, either directly or through patient reimbursement, to exert pressure on the prices of healthcare products and services. These cost-containment efforts vary by market.
In the United States, Medicare reimbursement policies and the influence of managed care organizations continue to impact the pricing of healthcare products and services. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 continues to present opportunities and challenges for pharmaceutical companies. Many states also have implemented more aggressive price control programs and more liberal generic substitution rules that could result in price reductions. In addition, managed care organizations use formularies and their buying power to demand more effective treatments at lower prices. Both governments and managed care organizations support increased use of generic pharmaceuticals at the expense of branded pharmaceuticals. We are well-positioned to address this market opportunity with Falcon Pharmaceuticals, Ltd., our generic pharmaceutical business. We also use third-party data to demonstrate both the therapeutic and cost effectiveness of our branded pharmaceutical products. Moreover, to achieve and maintain attractive positions on formularies, we continue to introduce medically advanced products that differentiate us from our competitors.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 placed additional pressure on policy makers to offset the cost of the prescription drug benefit by controlling budgets for reimbursement to surgical facilities. This may affect our industry's ability to maintain current pricing levels. New technologies for surgical procedures are being challenged to substantiate that their higher costs are accompanied by clinical improvements for Medicare beneficiaries. We prepare for these challenges by gathering the scientific and clinical data that demonstrate to Medicare that the products in our pipeline are cost-effective when their higher costs are compared to their measurable benefits.
Outside the United States, third-party payor reimbursement of patients and healthcare providers and prices for healthcare products and services vary significantly and, in the case of pharmaceuticals, are generally lower than those in the United States. In Western Europe, where government reimbursement of healthcare costs is widespread, governments often require price reductions. The economic integration by European Union members and the introduction of the euro also have impacted pricing in these markets, as more affluent member countries are requesting prices for healthcare products and services comparable to those in less affluent member countries.
In most of the emerging markets in Latin America and Asia,relatively low average income levels are relatively low,and limited government reimbursement for the cost of healthcare products and servicesservices. Our operations and business results are also affected by the varying degrees of governmental regulation in the countries in which we operate, making the process of developing new products and obtaining necessary regulatory marketing authorization lengthy, expensive and uncertain. The manufacture of our products is limited and prices and demand are sensitivealso highly regulated. Any changes or new requirements related to general economic conditions. However, demand forthe regulatory approval process or postmarket requirements applicable to our products in many developing countriesany jurisdiction could be costly and onerous to comply with.
For more details on these trends and how they could impact our results, see "Item 3. Key Information—3.D. Risk Factors".
COMPONENTS OF RESULTS OF OPERATIONS
Net sales to third parties
Revenue on the sale of Alcon products and services, which is recorded as "Net sales to third parties" in the consolidated income statements, is recognized when a contractual promise to a customer (i.e., a performance obligation) has been rising.fulfilled by transferring control over the promised goods and services to the customer, substantially all of which is at the point in time of shipment to or receipt of the products by the customer or when the services are performed. If contracts contain customer acceptance provisions, revenue would be recognized upon the satisfaction of acceptance criteria. The amount of revenue to be recognized is based on the consideration Alcon expects to receive in exchange for its goods and services which may be fixed or variable. Variable consideration may include rebates, discounts including cash discounts, and sales returns. Variable consideration is only recognized when it is highly probable that a significant reversal of cumulative sales will not occur.
In Japan, longer regulatory approval times impact the timing of marketing our pharmaceutical products there in comparison toSurgical equipment may be sold together with other markets. In addition, the Japanese National Health Ministry reviews prices of individual pharmaceutical products and health services biannually. These reviews have resulted inunder a single contract. The total consideration is allocated to the separate performance obligations based on the relative standalone selling price decreases, including a 5.75% decline in overall drug reimbursement in 2010. Reductions in reimbursement levels put downward price pressure on products we supply.for each performance obligation. Revenue is recognized upon satisfaction of each performance obligation under the contract.
Other revenues
Currency Fluctuations
Our products are sold in over 180 countries and we sell products in a number of currencies in"Other revenues" mainly include revenue from contract manufacturing services provided to our Alcon International business segment. Our consolidated financial statements,Former Parent which are presentedrecognized over time as the service obligations are completed. Associated costs incurred are recognized in U.S. dollars, are impacted by currency exchange rate fluctuations through both translation risk"Cost of other revenues".
Inventories
Inventory is valued at acquisition or production cost determined on a first-in, first-out basis. This value is used for the "Cost of net sales" and transaction risk. Translation risk is the risk that our financial statements for a particular period are affected by changes"Cost of other revenues" in the prevailing exchange rates of the various currencies of our subsidiaries relative to the U.S. dollar. Transaction riskconsolidated income statements. Unsalable inventory is the risk that the currency structure of our costs and liabilities deviates to some extent from the currency structure of our sales proceeds and assets.
Our translation risk exposures are principally to the euro, Japanese yen, Brazilian real and Canadian dollar. With respect to transaction risk, because a significant percentage of our operating expenses are incurredfully written off in the currencyconsolidated income statements under "Cost of net sales" and "Cost of other revenues".
Research & development
Internal research and development ("R&D") costs are fully charged to "Research & development" in the consolidated income statements in the period in which sales proceedsthey are received, we do not have a significant net exposure. In addition, most of our assetsincurred. Alcon considers that are denominatedregulatory and other uncertainties inherent in currencies other than the U.S. dollar are supported by loans or other liabilities of similar amounts denominated in the same currency. From time to time, we purchase or sell currencies forward to hedge currency risk in obligations or receivables; these transactions are designed to address transaction risk, not translation risk. More recently, Venezuela has experienced an official currency devaluation and high inflation, but our exposure there is not significant to our consolidated financial condition.
Generally, a weakening of the U.S. dollar against other currencies has a positive effect on our overall sales and, to a lesser extent, profits, while a strengthening of the U.S. dollar against other currencies has a negative effect on our overall sales and, to a lesser extent, profits. We experienced positive currency impacts during 2010 and 2008. During these years the U.S. dollar weakened against most major currencies, positively impacting our sales and, to a lesser extent, profits. However, in 2009, as other major currencies weakened against the dollar, our sales and profits were negatively affected. We refer to the effects of currency fluctuations and exchange rate movements throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, which we have computed by applying translation rates from the prior comparative period to the more recent period amounts and comparing those results to the more recent period actual results.
Operating Revenues and Expenses
We generate revenues largely from sales of ophthalmic pharmaceutical products, ophthalmic surgical equipment and devices and consumer eye care products. Our operating revenues and operating income are affected by various factors, including unit volume, price, currency fluctuations, acquisitions, licensing and the mix between lower-margin and higher-margin products.
Sales of ophthalmic pharmaceutical products are primarily driven by the development of safe and effectivenew products that can be differentiatedpreclude the capitalization of internal development expenses as an intangible asset until marketing approval from competing productsa regulatory authority is obtained in the treatment of ophthalmic diseases and disorders and increased market acceptance of these new products. Inclusion of pharmaceutical products on managed care formularies covering the largest possible number of patients is another key competitive factor. We face significant competition in ophthalmic pharmaceuticals, including competition from other companies with an ophthalmic focus and from larger pharmaceutical companies. In general, sales of our pharmaceutical products are not affected by general economic conditions, although we face pressure from governments and from managed care organizations inrelevant major markets, such as the United States, the European Union, Switzerland or Japan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Selected accounting policies are set out in Note 3 to reduce prices.the Consolidated Financial Statements included elsewhere in this Annual Report, which are prepared in accordance with IFRS as issued by the IASB.
Given the uncertainties inherent in our business activities, we must make certain estimates and assumptions that require difficult, subjective and complex judgments. Because of uncertainties inherent in such judgments, actual outcomes and results may differ from our assumptions and estimates, which could materially affect our Consolidated Financial Statements. Application of the following accounting policies requires certain assumptions and estimates that have the potential for the most significant impact on the Consolidated Financial Statements.
Impairment of goodwill and intangible assets
We review long-lived intangible assets for impairment whenever events or changes in circumstance indicate that the asset's balance sheet carrying amount may not be recoverable. Goodwill, the Alcon has continued to increase market share in mostbrand name and intangible assets not yet ready for use are not amortized but are reviewed for impairment at least annually. Our annual impairment testing date is Alcon's year-end, December 31.
An asset is generally considered impaired when its balance sheet carrying amount exceeds its estimated recoverable amount, which is defined as the higher of its major specialties,fair value less costs of disposal and its value in use. Usually, Alcon uses the fair value less costs of disposal method for its impairment evaluation. In most cases, no directly observable market inputs are available to measure the fair value less costs of disposal. Therefore, an estimate of fair value less costs of disposal is derived indirectly and is based on net present value techniques utilizing post-tax cash flows and discount rates. In the limited cases where the value in use method is applied, net present value techniques are utilized using pre-tax cash flows and discount rates.
Fair value reflects estimates of assumptions that market participants would be expected to use when pricing the asset and for this purpose management considers the range of economic conditions that are expected to exist over the remaining useful life of the asset. The estimates used in calculating net present values are highly sensitive and depend on assumptions, which has provided some offsetincludes the following:
the amount and timing of projected cash flows;
the timing and probability of regulatory and commercial success;
the royalty rate for the Alcon brand name;
the terminal growth rate; and
the discount rate.
Due to the recent market softness. We experience seasonality in our ocular allergy medicines, with a large increase in salesabove factors and those further described in the spring"Opportunity and risk summary" section above, actual cash flows and values could vary significantly from forecasted future cash flows and related values derived using discounting techniques.
The recoverable amount of the grouping of cash generating units to which goodwill and indefinite life intangible assets are allocated is based on fair value less costs of disposal. For additional information on intangible assets, see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report.
Goodwill and other intangible assets represent a lesser increase during the fall and also insignificant part of our otic
products, which have significantly larger salesconsolidated balance sheet, primarily due to acquisitions. Although no significant additional impairments are currently anticipated, impairment evaluation could lead to material impairment charges in the summer months thanfuture.Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at other timestheir fair values at the acquisition date. The excess of the year. Costsconsideration transferred over the fair value of goods soldthe net identifiable assets acquired is recorded as goodwill, or directly in the income statement if it is a bargain purchase. Alcon primarily uses net present value techniques, utilizing post-tax cash flows and discount rates in calculating the fair value of net identifiable assets acquired when allocating the purchase consideration paid for our pharmaceutical productsthe acquisition. The estimates in calculating fair values are highly sensitive and depend on assumptions, which include materials, labor, overheadthe following:
the amount and royalties.
timing of projected cash flows;long-term sales forecasts;
Our surgical product category includes three product lines: cataract, vitreoretinalthe timing and refractive. Salesprobability of our productsregulatory and commercial success; and
the appropriate discount rate.
Contingent consideration
In a business combination, it is necessary to recognize contingent future payments to previous owners, representing contractually defined potential amounts as a liability. Usually for cataractAlcon these are linked to milestone or royalty payments related to certain assets and vitreoretinal surgery are driven by technological innovationrecognized as a financial liability at their fair value, which is then re-measured at each subsequent reporting date.
For the determination of the fair value of contingent consideration various unobservable inputs are used. A change in these inputs might result in a significantly higher or lower fair value measurement. The inputs used are, among others, the timing and aging demographic trends.probability of regulatory and commercial success, sales forecast and assumptions regarding the discount rate, timing and different scenarios of triggering events. The numbersignificance and usage of cataractthese inputs to each contingent consideration may vary due to differences in the timing and vitreoretinal surgical procedures is not generally affected by economic conditions; however, because cataract patients now havetriggering events for payments or in the abilitynature of the asset related to pay outthe contingent consideration. These estimations typically depend on factors such as technical milestones or market performance and are adjusted for the probability of their own pocketslikelihood of payment and, if material, are appropriately discounted to reflect the impact of time.
Changes in the fair value of contingent consideration liabilities in subsequent periods are recognized in the consolidated income statements in "Cost of net sales" for certain premium technologies, salescurrently marketed products and in "Research & development" for in-process research & development.
The effect of advanced technology intraocular lenses could be affectedunwinding the discount over time is recognized in "Interest expense" in the consolidated income statements.
Taxes
The estimated amounts for current and deferred tax assets or liabilities, including any amounts related to any uncertain tax positions, are based on currently known facts and circumstances. Tax returns are based on an interpretation of tax laws and regulations and reflect estimates based on these judgments and interpretations. The tax returns are subject to examination by economic conditions. We believethe competent taxing authorities which may result in an assessment being made requiring payments of additional tax, interest or penalties. Inherent uncertainties exist in the estimates of the tax positions.
Research & development
Internal research & development costs are fully charged to the income statement in the period in which they are incurred. Alcon considers that our innovative technology and our ability to provide customized (i.e., tailored to each surgeon's preference) surgical procedure packs with a broad range of proprietary products are important to our success in these product categories. Sales of our refractive surgical equipment and the related technology fees are driven by consumer demand for laser refractive surgery. We sell lasersregulatory and other surgical equipment used to perform laser refractive surgeries and,uncertainties inherent in the development of new products preclude the capitalization of internal development expenses as an intangible asset usually until marketing approval from the regulatory authority is obtained in a relevant major market, such as the United States, chargethe European Union, Switzerland or Japan.
FACTORS AFFECTING COMPARABILITY OF PERIOD TO PERIOD RESULTS OF OPERATIONS
The comparability of the period to period results of our operations can be significantly affected by our Spin-off from Novartis, issuance and refinancing of financial debts and acquisitions. The transactions of significance during 2019 include the acquisition of PowerVision, Inc., Spin-off from Novartis through a technology feedividend in kind distribution to Novartis shareholders, and refinancing of the bridge and term loans which had been issued in April 2019. Transactions of significance during 2018 and 2017 included the acquisitions of TrueVision Systems, Inc. and Tear Film Innovations, Inc. in 2018 and the acquisition of ClarVista Medical, Inc. in 2017. Refer to Note 4 to the Consolidated Financial Statements for details related to each surgery performed (one eye equals one surgery). Outsideof these significant transactions.
RESULTS OF OPERATIONS
In evaluating our performance, we consider not only the United States,IFRS results, but also certain non-IFRS measures, including various "core" results and constant currency ("cc") results. These measures assist us in evaluating our ongoing performance from period to period and we generally do not charge a technology fee. Because governments and private insurance companies generally do not coverbelieve this additional information is useful to investors in understanding the costsperformance of laser refractive surgery, sales of laser refractive surgical products and related technology fees are sensitiveour business. Refer to changes in general economic conditions and consumer confidence. There is no significant seasonality in our surgical business. Costs of goods sold for our surgical products include raw materials, labor, overhead, royalties and warranty costs."Item 5.A. Operating income from cataract and vitreoretinal products is drivenResults —Non-IFRS measures as defined by the numberCompany" section for additional information and reconciliation tables. These measures are not intended to be substitutes for the equivalent measures of proceduresfinancial performance prepared in which our products are usedaccordance with IFRS and the typesmay differ from similarly titled non-IFRS measures of products used. Operating income from laser refractive surgical equipment depends primarilyother companies.
Key figures
|
| | | | | | | | | | | | | | | | | | | |
| 2019 compared to 2018 | | 2018 compared to 2017 |
| | | | | Change % | | | | Change % |
($ millions unless indicated otherwise) | 2019 |
| | 2018 |
| | $ |
| | cc(1) |
| | 2017 |
| | $ | | cc(1) |
|
| | | | | | | | | | | | | |
Net sales to third parties | 7,362 |
| | 7,149 |
| | 3 |
| | 5 |
| | 6,785 |
| | 5 | | 5 |
|
Gross profit | 3,662 |
| | 3,192 |
| | 15 |
| | 19 |
| | 3,204 |
| | — | | (1 | ) |
Operating (loss) | (187 | ) | | (248 | ) | | 25 |
| | 54 |
| | (77 | ) | | nm | | nm |
|
Operating margin (%) | (2.5 | ) | | (3.5 | ) | | | | | | (1.1 | ) | | | | |
Net (loss)/income | (656 | ) | | (227 | ) | | (189 | ) | | (163 | ) | | 256 |
| | nm | | nm |
|
Basic and diluted (loss)/earnings per share ($)(2) | (1.34 | ) | | (0.46 | ) | | (191 | ) | | (163 | ) | | 0.52 |
| | nm | | nm |
|
| | | | | | | | | | | | | |
Core results(1) | | | | | | | | | | | | | |
Core operating income | 1,265 |
| | 1,212 |
| | 4 |
| | 11 |
| | 1,086 |
| | 12 | | 12 |
|
Core operating margin % | 17.2 |
| | 17.0 |
| | | | | | 16.0 |
| | | | |
Core net income | 925 |
| | 974 |
| | (5 | ) | | 1 |
| | 908 |
| | 7 | | 8 |
|
Core basic earnings per share ($)(2) | 1.89 |
| | 2.00 |
| | (6 | ) | | 1 |
| | 1.86 |
| | 8 | | 8 |
|
Core diluted earnings per share ($)(3) | 1.89 |
| | 2.00 |
| | (6 | ) | | 1 |
| | 1.86 |
| | 8 | | 8 |
|
nm = not meaningful
| |
(1) | Core results and constant currencies (cc) as presented in this table are non-IFRS measures. Alcon uses certain non-IFRS metrics when measuring performance, including when measuring current period results against prior periods. Refer to "Item 5.A. Operating Results —Non-IFRS measures as defined by the Company" section for additional information and reconciliation tables. |
| |
(2) | Calculated using 488.2 million shares for both current and prior year periods. |
| |
(3) | Calculated using 490.1 million weighted average diluted shares for the year ended December 31, 2019, and 488.2 million shares for the prior year periods. |
All comments below focus on the number of proceduresconstant currencies (cc) movements for which we are able to collect technology fees. In the weaker economy since 2008, the number of refractive procedures in the United States market declined. Our refractive sales increased as a result of sales of WaveLight® products and procedures following our acquisition of an initial majority interest in WaveLight in late 2007.
Sales of our consumer eye care products are influenced by ophthalmologist, optometrist and optician recommendations of lens care systems, our provision of starter kits to eye care professionals, advertising and consumer preferences for more convenient contact lens care solutions. Contact lens care products compete largely on product attributes, brand familiarity, professional recommendations and price. The use of less-advanced cleaning methods, especially outside the United States, also affects demand for our contact lens care products. There is no seasonality in sales of contact lens care products, but we have experienced some impact from general economic conditions to date, as in low-growth economic environments some consumers may switch to lower-priced brands. Costs of goods sold for contact lens care products include materials, labor, overhead and royalties. Operating income from contact lens care products is driven by market penetration and unit volumes.
During the year ended December 31, 2010, advancements in its sales reporting system permitted the Company2019 compared to better estimate allowable deductions from sales in the calculation of accrued royalties. This change in estimate resulted in a $24 million addition to U.S. operating income2018 unless otherwise noted. Commentary for the year.
On February 11, 2009, the Company announced that it initiated programsyear ended December 31, 2018 compared to align its operations with the evolving economic conditions and market environment. These programs included a staffing reduction of approximately 260 employee positions that resulted in a pre-tax charge of $19 million, primarily incurred in the first quarter of 2009. The staffing reduction is expected to deliver ongoing annualized savings of approximately $40 million, which began in the second quarter of 2009, with the full effect realized thereafter.
Our selling, general and administrative costs include the costs of selling, promoting and distributing our products and managing the organizational infrastructure of our business. The largest portion of these costs is salaries and commissions for sales and marketing staff.
The Company was self-insured through its captive insurance subsidiary for damages incurred prior to 2006 at one of its sales and distribution facilities and was involved in legal proceedings to seek recovery of its losses and other incremental operating costs from the third parties responsible for the damages. In December 2008, the captive insurance subsidiary settled its claim against the third parties involved. Since no recovery had been recorded previously, the Company recognized a gain in the fourth quarter of 2008 related to the settlement of $15 million ($3 million in cost of goods sold and $12 million in selling, general and administrative expenses).
Research and development costs include basic research, pre-clinical development of products, clinical trials, regulatory expenses and certain technology licensing costs. The largest portion of our research and development
expenses relates to the research, development and regulatory approval of pharmaceutical products. As part of the Company's commitment to develop treatments for diseases, disorders and other conditions of the eye, we normally plan to spend approximately 10% to 11% of sales for research and development. During each of the years 2010, 2009 and 2008, a greater proportion of our research and development expenses were incurred during the second half of the year than during the first half.
Our amortization costs relate to acquisitions and the licensing of intangible assets. Due to acquisitions and purchases in 2009 and early 2010, annual amortization expense on intangible assets with definite useful lives is estimated to increase to $78 million in 2011 and decrease to $65 million in 2015.
Our other operating expenses of $152 million in 2010 primarily represented costs related to the change of majority ownership arising from Novartis's purchase of its majority interest in Alcon from Nestlé on August 25, 2010, as discussed in note 16 to the consolidated financial statements, and legal and other costs to support Alcon's board of directors in its evaluation of Novartis's merger proposal. The change of control accelerated the recognition of certain compensation expenses, including pensions ($97 million) and share-based payments ($8 million).
During the third quarter of 2008, the Company reached agreement with the U.S. Internal Revenue Service on all issues surrounding the acquisition and liquidation of its investment in former Summit Autonomous, Inc., the Company's subsidiary responsible for the Company's refractive research and manufacturing activities prior to November 2007. As a result of this agreement, the Company recognized tax benefits in 2008 totaling $236 million related to losses on the value of this investment.
Material Opportunities, Challenges and Risks
The Company is focused on its ability to bring new products successfully to market in a competitive industry environment. The Company's long term profitability is dependent upon the ability of its research and development activities to provide a pipeline of new products that are successful in the marketplace. In general, we are able to generate higher margins from the sales of our products that are under patents or licenses restricting the production or sale of such products by others. Our goal is to consistently advance the state of our research and development so as to be in a position, as existing products approach the end of their patent or license protection periods, to introduce new products that provide greater efficacy, broader application or more convenience. Such products under new patents or licenses provide opportunities to maintain and grow our sales.
Part of our strategy is to devote significant resources to research and development efforts. Development of new products can be a long and expensive process. Over the past three years, we have invested approximately 10% of annual revenues into research and development. We strive to be the first to introduce new products in the marketplace or to provide greater efficacy in treatment of ophthalmic conditions. Being first to the marketplace with a product category can often result in a significant marketing advantage, particularly as larger pharmaceutical companies increase their focus on the ophthalmology field.
Our ability to maintain profit margins on our products2017 may be affected by a numberfound in Item 5 of regulatory activities throughout the world, from restrictive medical reimbursements for managed care to reduced regulation for imports of pharmaceutical products from other countries to the United States. We monitor these regulatory activities and the effects on product pricing in our major markets. Where appropriate, we share information with applicable regulatory bodies on the cost of developing new products and the importance of pricing and return of investment as an incentive to develop new and more effective therapeutic treatments. We also monitor regulatory activities to identify initiatives that could undercut consumer protections by the introduction of nonregulated products into the U.S. distribution chain.
We are aware of and are monitoring issues regarding climate change regulations but have not identified impacts on our operations of a material nature.
We also focus on cost management. In addition to a strict evaluation of general and administrative expenses, the Company seeks to reduce manufacturing costs through its continuous improvement program.
As indicated earlier, our industry is dependent on proprietary technology and we vigilantly strive to protect ours. From time to time, competitors challenge our intellectual property rights.
The Company, either alone or jointly with its commercial partners, has filed fourteen North American patent infringement actions against six different generic drug companies. With the exception of international generic challenges, all of these generic drug companies are seeking U.S. Food and Drug Administration ("FDA") approval to market generic versions of the Company's products, under what are known as Abbreviated New Drug Applications ("ANDAs").
Each infringement action was filed after the Company received notice that one or more of the generic drug companies had filed an ANDA seeking approval to sell a generic version of a Company product. As part of its ANDA, each generic drug company challenged one or more patents covering a Company product. Our products subject to generic challenges include Vigamox® antibiotic ophthalmic solution, Patanol® and Pataday™ anti-allergy ophthalmic solutions, and TRAVATAN® and TRAVATAN Z® ophthalmic solutions. In the United States, as a result of filing the lawsuits, the FDA must delay approval of the related ANDAs for 30 months unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. In Canada, filing of the lawsuits secured a 24-month delay in approval from the Minister of Health, which can be shortened if the litigation is earlier resolved or the court modifies the 24-month stay on such approval. Should any generic drug company succeed in overcoming all applicable patents and secure FDA approval, it would be entitled to sell a generic product that would compete with the Company's product in the United States or Canada. Such competition would be expected to impact significantly the Company's sales and profits. More information on these suits can be found at Item 8.A.7, "Legal Proceedings."
On December 18, 2008, James M. Nielsen, M.D. filed a patent infringement suit against Alcon, Inc. and Alcon Laboratories, Inc. in the U.S. District Court for the Northern District of Texas in Dallas. Dr. Nielsen is asserting that his U.S. PatentAmendment No. 5,158,572 entitled "Multifocal Intraocular Lens" is being infringed by the Company's AcrySof® ReSTOR® intraocular lens. The patent, which expired at the end of October 2009, was previously licensed to Advanced Medical Optics, Inc. The Company filed its Answer January 12, 2009. The Answer included a counterclaim for a declaratory judgment that the patent-in-suit is invalid and not infringed. The case had been set for trial in August 2010 but has been postponed. No new trial date has been set. Summary judgment motions were filed by both parties January 7, 2011. Alcon is seeking summary judgment on noninfringement, invalidity and laches, while Dr. Nielsen is seeking partial summary judgment on invalidity and laches/estoppels. On January 10, 2011, the court ordered that both parties' motions be stricken and refiled in a "cross-motion" format, the briefing for which was extended by the court until the end of March 2011. An adverse ruling by the court, while possible, would not be expected to impact significantly the Company's sales and profits.
On January 22, 2009, Elan Pharma International Ltd. sued two of the Company's subsidiaries, Alcon Laboratories, Inc. and Alcon Research, Ltd., in the U.S. District Court for the Eastern District of Texas in Sherman, alleging infringement of two Elan patents on nanoparticle technology (U.S. Patent Nos. 5,298,262 and 5,429,842). The complaint claims that the Company's Azopt® product and, potentially, other products infringe the two patents. The Company answered and counterclaimed on May 12, 2009. Elan then moved to dismiss certain of the Company's affirmative defenses and counterclaims. The Company has filed an amended answer and counterclaims providing greater detail with respect6 to the Company's inequitable conduct counterclaims. The case has been set for trialRegistration Statement on October 17, 2011. The Company believes that it has strong defenses and intends to defend itself vigorously. An adverse ruling by the court, however, could impact significantly the Company's sales and profits.
The Company and its subsidiaries are parties to a variety of other legal proceedings arising out of the ordinary course of business, including proceedings relating to product liability and patent infringement. The Company believes that it has valid defenses and is vigorously defending the litigation pending against it.
While the results of the aforementioned contingencies cannot be predicted with certainty, management believes that the ultimate liability, if any, will not have a material adverse effect on the Company's consolidated financial position or results of operations. Litigation contingencies are subject to change based on settlements and court decisions.
The Company may be subject to future litigation and infringement claims, which could cause the Company to incur significant expenses or prevent the Company from selling its products. The Company operates in an industry
susceptible to significant product liability claims. Product liability claims may be asserted against the Company in the future arising out of events not known to the Company at the present time.The Company self-insures through captive insurance subsidiaries almost all of its property and casualty, business interruption and liability risks.
On May 6, 2010, we commenced a voluntary corrective action on our CONSTELLATION® vision system that the U.S. Food and Drug Administration ("FDA") classified as a Class 1 recall. We submitted a 510(k) application to the FDA requesting approval of software and hardware modifications to the system. In November 2010, we received a clearance letter from the FDA on our application. This action did not have a material impact on our financial results.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon Alcon's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and costs, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates and judgments under different assumptions or conditions.
We believe that the following accounting policies involve the more significant estimates and judgments used in the preparation of our financial statements:
Sales Recognition: The Company recognizes sales in accordanceForm 20-F filed with the United States Securities and Exchange Commission ("SEC") Staff Accounting Bulletinon March 22, 2019, ("SAB"2018 Form 20-F") No. 104. Sales are recognized.
Net sales by segment
The following table provides an overview of net sales to third parties by segment:
|
| | | | | | | | | | | | | | | | |
| 2019 compared to 2018 | | 2018 compared to 2017 |
| | | | | Change % | | | | Change % |
($ millions unless indicated otherwise) | 2019 |
| | 2018 |
| | $ | | cc(1) | | 2017 |
| | $ | | cc(1) |
| | | | | | | | | | | | | |
Surgical | |
| | |
| | | | | | |
| | | | |
Implantables | 1,210 |
| | 1,136 |
| | 7 | | 9 | | 1,045 |
| | 9 | | 9 |
Consumables | 2,304 |
| | 2,227 |
| | 3 | | 6 | | 2,104 |
| | 6 | | 5 |
Equipment/other | 660 |
| | 636 |
| | 4 | | 6 | | 584 |
| | 9 | | 9 |
Total Surgical | 4,174 |
| | 3,999 |
| | 4 | | 7 | | 3,733 |
| | 7 | | 7 |
| | | | | | | | | | | | | |
Vision Care | | | | | | | | | | | | | |
Contact lenses | 1,969 |
| | 1,928 |
| | 2 | | 4 | | 1,836 |
| | 5 | | 4 |
Ocular health | 1,219 |
| | 1,222 |
| | — | | 2 | | 1,216 |
| | — | | 1 |
Total Vision Care | 3,188 |
| | 3,150 |
| | 1 | | 3 | | 3,052 |
| | 3 | | 3 |
Net sales to third parties | 7,362 |
| | 7,149 |
| | 3 | | 5 | | 6,785 |
| | 5 | | 5 |
| |
(1) | Constant currencies is a non-IFRS measure. Refer to "Item 5.A. Operating Results—Non-IFRS measures as defined by the Company" section for additional information. |
Surgical
Surgical net sales were $4.2 billion (+4%, +7% cc) in 2019 as all key categories grew. Implantables grew (+7%, +9% cc), driven by continued strong demand for Advanced Technology IOLs, including AcrySof IQPanOptix trifocal IOLs, particularly with the recent launches in the US and Japan. Consumables grew (+3%, +6% cc), driven by cataract and vitreoretinal consumables which continue to benefit from a strong global installed equipment base. Equipment/other grew (+4%, +6% cc), driven by growth in service revenue and procedural eye drops, while the base equipment sales remained broadly in line with prior year.
Vision Care
Vision Care net sales were $3.2 billion (+1%, +3% cc). Contact lenses grew (+2%, +4% cc), driven by continued double-digit growth of DAILIES TOTAL1 globally, including multifocal lenses to treat presbyopia, partially offset by a decline in other contact lenses. Ocular health grew (0%, +2% cc), driven by artificial tears, primarily Systane in the US and Europe following the 2018 launch of Systane COMPLETE, partially offset by declines in contact lens care as the global market continues to shift to daily lens modalities.
Operating (loss)/income
|
| | | | | | | | | | | | | | | | |
| | 2019 compared to 2018 | | 2018 compared to 2017 |
| | | Change % | | | Change % |
($ millions unless indicated otherwise) | | 2019 |
| 2018 |
| $ |
| cc(1) |
| | 2017 |
| $ |
| cc(1) |
|
| | | | | | | | | |
Gross profit | | 3,662 |
| 3,192 |
| 15 |
| 19 |
| | 3,204 |
| — |
| (1 | ) |
Selling, general & administration | | (2,847 | ) | (2,801 | ) | (2 | ) | (4 | ) | | (2,596 | ) | (8 | ) | (7 | ) |
Research & development | | (656 | ) | (587 | ) | (12 | ) | (12 | ) | | (584 | ) | (1 | ) | — |
|
Other income | | 55 |
| 47 |
| 17 |
| 19 |
| | 47 |
| — |
| 1 |
|
Other expense | | (401 | ) | (99 | ) | nm |
| nm |
| | (148 | ) | 33 |
| 33 |
|
Operating (loss) | | (187 | ) | (248 | ) | 25 |
| 54 |
| | (77 | ) | nm |
| nm |
|
Operating margin (%) | | (2.5 | ) | (3.5 | ) | | | | (1.1 | ) | | |
| | | | | | | | | |
Core results(1) | | | | | | | | | |
Core gross profit | | 4,663 |
| 4,541 |
| 3 |
| 6 |
| | 4,211 |
| 8 |
| 8 |
|
Core operating income | | 1,265 |
| 1,212 |
| 4 |
| 11 |
| | 1,086 |
| 12 |
| 12 |
|
Core operating margin (%) | | 17.2 |
| 17.0 |
| | | | 16.0 |
| | |
nm = not meaningful | |
(1) | Core results and constant currencies are non-IFRS measures. Refer to "Item 5.A. Operating Results—Non-IFRS measures as defined by the Company" section for additional information and reconciliation tables. |
Operating loss was $187 million, compared to $248 million in the prior year period. The prior year period included an unfavorable impact of $282 million from the CyPass voluntary market withdrawal, including a $337 million expense for impairment of the intangible asset and $11 million in other costs, partially offset by a $66 million reduction of the contingent consideration liability. The current year period includes higher sales and improved gross margin which were more than offset by spin readiness costs, separation costs, transformation program costs, and investments in research and development and IT, including SAP implementation. There was a negative 1.0% point impact on operating margin from currency in 2019.
Adjustments to arrive at core operating income were $1.5 billion, mainly due to $1.0 billion of amortization, $237 million of separation costs, $72 million of spin readiness costs and $52 million of transformation program costs.
Core operating income was $1.3 billion (+4%, +11% cc), compared to $1.2 billion in the prior year period. Higher sales were partially offset by investments in research & development and IT, including the SAP implementation. Core gross margin was broadly in line with prior year, as improved surgical sales mix and vision care manufacturing efficiencies were offset by SAP implementation costs, vision care production expansion costs and China tariffs. There was a negative 0.6% point impact on core operating margin from currency in 2019.
Segment contribution(1)
|
| | | | | | | | | | | | | | | | |
| | 2019 compared to 2018 | | 2018 compared to 2017 |
($ millions unless indicated otherwise) | | | Change % | | | Change % |
| 2019 |
| 2018 |
| $ |
| cc(2) |
| | 2017 |
| $ |
| cc(2) |
|
| | | | | | | | | |
Surgical segment contribution | | 923 |
| 813 |
| 14 |
| 19 |
| | 691 |
| 18 |
| 18 |
|
As % of net sales | | 22.1 |
| 20.3 |
|
|
|
|
| | 18.5 |
| | |
Vision Care segment contribution | | 563 |
| 594 |
| (5 | ) | (1 | ) | | 625 |
| (5 | ) | (5 | ) |
As % of net sales | | 17.7 |
| 18.9 |
|
|
|
|
| | 20.5 |
| | |
Not allocated to segments | | (1,673 | ) | (1,655 | ) | (1 | ) | (1 | ) | | (1,393 | ) | (19 | ) | (18 | ) |
Operating (loss) | | (187 | ) | (248 | ) | 25 |
| 54 |
| | (77 | ) | nm |
| nm |
|
| | | | | | | | | |
Core results(2) | | | | | | | | | |
Core Surgical segment contribution | | 957 |
| 846 |
| 13 |
| 19 |
| | 701 |
| 21 |
| 21 |
|
As % of net sales | | 22.9 |
| 21.2 |
|
|
|
|
| | 18.8 |
| | |
Core Vision Care segment contribution | | 580 |
| 600 |
| (3 | ) | 1 |
| | 625 |
| (4 | ) | (3 | ) |
As % of net sales | | 18.2 |
| 19.0 |
|
|
|
|
| | 20.5 |
| | |
Core not allocated to segments | | (272 | ) | (234 | ) | (16 | ) | (17 | ) | | (240 | ) | 3 |
| 3 |
|
Core operating income | | 1,265 |
| 1,212 |
| 4 |
| 11 |
| | 1,086 |
| 12 |
| 12 |
|
nm = not meaningful
| |
(1) | For additional informationregarding segment contribution please refer to Note 5 to the Consolidated Financial Statements. |
| |
(2) | Core results and constant currencies are non-IFRS measures. Refer to "Item 5.A. Operating Results —Non-IFRS measures as defined by the Company" section for additional information and reconciliation tables. |
Surgical
Surgical segment contribution was $923 million (+14%, +19% cc), compared to $813 million in the prior year period. Higher sales, improved gross margin, and improved selling, general & administrative expenses leverage, were partially offset by higher research & development investments.
Adjustments to arrive at core Surgical segment contribution were $34 million, primarily for business development charges and manufacturing sites consolidation activities partially offset by fair value adjustments to contingent consideration liabilities.
Core Surgical segment contribution was $957 million (+13%, +19% cc), compared to $846 million in the prior year period. Higher sales, improved gross margin, and improved selling, general & administrative expenses leverage, were partially offset by higher research & development investments. There was a negative 0.6% point impact on core Surgical segment contribution margin from currency.
Vision Care
Vision Care segment contribution was $563 million (-5%, -1% cc), compared to $594 million in the prior year period. Higher sales and lower marketing and selling costs were offset by lower gross margin from product mix, production expansion costs, higher research & development investments, and separation costs.
Adjustments to arrive at core Vision Care segment contribution were $17 million primarily due to spin readiness and separation costs partially offset by fair value adjustments to contingent consideration liabilities.
Core Vision Care segment contribution was $580 million (-3%, +1% cc), compared to $600 million in the prior year period. Higher sales and lower marketing and selling costs were partially offset by lower gross margin from product mix, production expansion costs, and higher research & development investments. There was a negative 0.5% point impact on core Vision Care segment contribution margin from currency.
Not allocated to segments
Operating loss not allocated to segments was $1.7 billion, broadly in line with the prior year period which was affected by the CyPass voluntary market withdrawal. The current year period included $214 million of separation costs, $62 million of spin readiness costs,$52 millionof transformation program costs, and higher corporate costs, consisting of legal items and IT costs.
Core operating income not allocated to segments amounted to net amountcore expense of $272 million, compared to be received after deducting estimated amounts for product returns and rebates. Product returns are estimated based on historical trends and current market developments. The Company participates$234 million in various sales rebatethe prior year period, driven primarily by higher IT costs.
Non-operating income & expense
|
| | | | | | | | | | | | | | | | |
| | 2019 compared to 2018 | | 2018 compared to 2017 |
| | | | Change % | | | Change % |
($ millions unless indicated otherwise) | | 2019 |
| 2018 |
| $ |
| cc(1) |
| | 2017 |
| $ |
| cc(1) |
|
| | | | | | | | | |
Operating (loss) | | (187 | ) | (248 | ) | 25 |
| 54 |
| | (77 | ) | nm |
| nm |
|
Interest expense | | (113 | ) | (24 | ) | nm |
| nm |
| | (27 | ) | 11 |
| (2 | ) |
Other financial income & expense | | (32 | ) | (28 | ) | (14 | ) | (15 | ) | | (23 | ) | (22 | ) | (29 | ) |
(Loss) before taxes | | (332 | ) | (300 | ) | (11 | ) | 13 |
| | (127 | ) | (136 | ) | (129 | ) |
Taxes | | (324 | ) | 73 |
| nm |
| nm |
| | 383 |
| (81 | ) | (81 | ) |
Net (Loss)/income | | (656 | ) | (227 | ) | (189 | ) | (163 | ) | | 256 |
| nm |
| nm |
|
Basic and diluted (loss)/earnings per share ($) | | (1.34 | ) | (0.46 | ) | (191 | ) | (163 | ) | | 0.52 |
| nm |
| nm |
|
| | | | | | | | | |
Core results(1) | | | | | | | | | |
Core taxes | | (195 | ) | (186 | ) | (5 | ) | (12 | ) | | (128 | ) | (45 | ) | (45 | ) |
Core net income | | 925 |
| 974 |
| (5 | ) | 1 |
| | 908 |
| 7 |
| 8 |
|
Core basic earnings per share ($) | | 1.89 |
| 2.00 |
| (6 | ) | 1 |
| | 1.86 |
| 8 |
| 8 |
|
Core diluted earnings per share ($) | | 1.89 |
| 2.00 |
| (6 | ) | 1 |
| | 1.86 |
| 8 |
| 8 |
|
nm = not meaningful
| |
(1) | Core results and constant currencies are non-IFRS measures. Refer to "Item 5.A. Operating Results—Non-IFRS measures as defined by the Company" section for additional information and reconciliation tables. |
Interest expense
Interest expense was $113 million, compared with $24 million in the prior year period, driven by financial debts, including the bridge and other incentive programs,term loans, notes and local bilateral facilities, and the largestadoption of which relatesIFRS 16, Leases.
Other financial income & expense
Other financial income & expense was a net expense of $32 million, compared to Medicaid$28 million in the prior year period, and Medicare Part D. Sales rebateconsisted primarily of hedging costs and foreign currency exchange gains and losses. The current year period also included a $4 million write-off of unamortized deferred financing costs at the time of refinancing.
Taxes
Tax expense was $324 million, compared to a tax benefit of $73 million in the prior year period. The prior year period included a $76 million tax benefit for the release of the deferred tax liability associated with the CyPass intangible asset. Taxes recognized in the current period include $304 million in non-cash tax expense related to the re-measurement of deferred tax assets and liabilities as a result of Swiss tax reform, tax expense related to rate changes in the US following legal entity reorganizations executed related to the Spin-off, non-cash tax expense related to the re-measurement of deferred tax assets and liabilities following a tax rate change in India, and net changes in uncertain tax positions.
Adjustments to arrive at core tax expense were $129 million, primarily related to Swiss tax reform, partially offset by tax associated with operating income core adjustments.
Core tax expense was $195 million, compared to $186 million in the prior year period. The average core tax rate increased to 17.4% from 16.0% in the prior year period. The increase in the core effective tax rate is primarily driven by a loss of certain tax benefits in the US due to the Spin-off and the mix of pre-tax income across geographical tax jurisdictions.
Net (loss)/income and (loss)/earnings per share
Net loss was $656 million, compared to a net loss of $227 million in the prior year period. The increase was mainly attributable to an operating loss driven mainly by spin readiness costs, separation costs, and transformation program costs, higher interest and tax expense. The associated basic and diluted (loss) per share were $(1.34), compared to $(0.46) in the prior year period.
Core net income was $925 million, compared to $974 million in the prior year period, as higher core operating income was offset by higher interest and tax expense. The associated core basic and diluted earnings per share were $1.89 compared to $2.00 in the prior year period.
EFFECTS OF CURRENCY FLUCTUATIONS
We prepare our Consolidated Financial Statements in US dollars. As a result, fluctuations in the exchange rates between the US dollar and other incentive programs also include chargebacks, which are discounts given primarily to wholesalers for their salescurrencies can have a significant effect on both our results of Alcon products at contractual prices to hospitals, federal government agencies, health maintenance organizations, pharmacy benefits managersoperations as well as on the reported value of our assets, liabilities and group purchasing organizations. Sales rebatescash flows. This in turn may significantly affect reported earnings (both positively and incentive accruals reduce revenue innegatively) and the same period that the related sale is recorded and are included in "Other current liabilities" incomparability of period-to-period results of operations.
For purposes of our consolidated balance sheets. Rebatessheets, we translate assets and liabilities denominated in other currencies into US dollars at the prevailing market exchange rates as of the relevant balance sheet date. For purposes of our consolidated income statements and statements of cash flows, revenue, expense and cash flow items in local currencies are estimatedtranslated into US dollars at average exchange rates prevailing during the relevant period. As a result, even if the amounts or values of these items remain unchanged in the respective local currency, changes in exchange rates have an impact on the amounts or values of these items in our Consolidated Financial Statements.
Alcon manages its global currency exposure by engaging in hedging transactions where management deems appropriate (forward contracts and swaps). Specifically, Alcon enters into various contracts that reflect the changes in the value of foreign currency exchange rates to preserve the value of assets.
There is also a risk that certain countries could devalue their currency. If this occurs, then it could impact the effective prices we would be able to charge for our products and also have an adverse impact on both our consolidated income statement and balance sheet. Alcon is exposed to a potential adverse devaluation risk on its intercompany funding and total investment in certain subsidiaries operating in countries with exchange controls.
The hyperinflationary economies in which we operate are Argentina and Venezuela. Venezuela was hyperinflationary for all years presented, and Argentina became hyperinflationary effective July 1, 2018, requiring implementation of hyperinflation accounting as of January 1, 2018. Refer to Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report for additional information.
Foreign exchange rates for foreign currency translation
The following tables set forth the foreign exchange rates of the US dollar against key currencies used for foreign currency translation when preparing the Consolidated Financial Statements:
|
| | | | | | | | | | | | | |
| Average for year | | As of December 31 |
($ per unit unless indicated otherwise) | 2019 | | 2018 | | Change % |
| | 2019 | | 2018 | | Change % |
|
AUD | 0.695 | | 0.748 | | (7 | ) | | 0.701 | | 0.707 | | (1 | ) |
BRL | 0.254 | | 0.275 | | (8 | ) | | 0.249 | | 0.258 | | (3 | ) |
CAD | 0.754 | | 0.772 | | (2 | ) | | 0.767 | | 0.735 | | 4 |
|
CHF | 1.006 | | 1.023 | | (2 | ) | | 1.032 | | 1.014 | | 2 |
|
CNY | 0.145 | | 0.151 | | (4 | ) | | 0.144 | | 0.145 | | (1 | ) |
EUR | 1.120 | | 1.181 | | (5 | ) | | 1.121 | | 1.144 | | (2 | ) |
GBP | 1.277 | | 1.336 | | (4 | ) | | 1.313 | | 1.274 | | 3 |
|
JPY (100) | 0.917 | | 0.906 | | 1 |
| | 0.920 | | 0.907 | | 1 |
|
RUB (100) | 1.546 | | 1.600 | | (3 | ) | | 1.613 | | 1.437 | | 12 |
|
|
| | | | | | | | | | | | | |
| Average for year | | As of December 31 |
($ per unit unless indicated otherwise) | 2018 | | 2017 | | Change % |
| | 2018 | | 2017 | | Change % |
|
AUD | 0.748 | | 0.766 | | (2 | ) | | 0.707 | | 0.779 | | (9 | ) |
BRL | 0.275 | | 0.313 | | (12 | ) | | 0.258 | | 0.302 | | (15 | ) |
CAD | 0.772 | | 0.771 | | — |
| | 0.735 | | 0.797 | | (8 | ) |
CHF | 1.023 | | 1.016 | | 1 |
| | 1.014 | | 1.024 | | (1 | ) |
CNY | 0.151 | | 0.148 | | 2 |
| | 0.145 | | 0.154 | | (6 | ) |
EUR | 1.181 | | 1.129 | | 5 |
| | 1.144 | | 1.195 | | (4 | ) |
GBP | 1.336 | | 1.288 | | 4 |
| | 1.274 | | 1.347 | | (5 | ) |
JPY (100) | 0.906 | | 0.892 | | 2 |
| | 0.907 | | 0.888 | | 2 |
|
RUB (100) | 1.600 | | 1.715 | | (7 | ) | | 1.437 | | 1.734 | | (17 | ) |
Currency impact on key figures
The following table provides a summary of the currency impact on key company figures due to their conversion into US dollars, Alcon's reporting currency, of the financial data from entities reporting in non-US dollars.
|
| | | | | | | | | | | | | | | | |
| 2019 compared to 2018 | | 2018 compared to 2017 |
| Change % | | Percentage point currency impact |
| | Change % | | Percentage point currency impact |
|
| $ |
| | cc(1) |
| | | $ |
| | cc(1) | |
| | | | | | | | | | | |
Net sales to third parties | 3 |
| | 5 |
| | (2 | ) | | 5 |
| | 5 | | — |
|
Gross profit | 15 |
| | 19 |
| | (4 | ) | | — |
| | (1) | | 1 |
|
Operating (loss) | 25 |
| | 54 |
| | (29 | ) | | nm |
| | nm | �� | nm |
|
Net (loss)/income | (189 | ) | | (163 | ) | | (26 | ) | | nm |
| | nm | | nm |
|
Basic and diluted (loss)/earnings per share | (191 | ) | | (163 | ) | | (28 | ) | | nm |
| | nm | | nm |
|
| | | | | | | | | | | |
Core results(1) | | | | | | | | | | | |
Core operating income | 4 |
| | 11 |
| | (7 | ) | | 12 |
| | 12 | | — |
|
Core net income | (5 | ) | | 1 |
| | (6 | ) | | 7 |
| | 8 | | (1 | ) |
Core basic earnings per share | (6 | ) | | 1 |
| | (7 | ) | | 8 |
| | 8 | | — |
|
Core diluted earnings per share | (6 | ) | | 1 |
| | (7 | ) | | 8 |
| | 8 | | — |
|
| |
(1) | Core results and constant currencies (cc) as presented in this table are non-IFRS measures. Alcon uses certain non-IFRS metrics when measuring performance, including when measuring current period results against prior periods. Refer to "Item 5.A. Operating Results—Non-IFRS measures as defined by the Company" section for additional information. |
A 1% movement in the USD versus our basket of currencies would result in a $40 million change in annual net sales and $15 million change in annual core operating income.
NON-IFRS MEASURES AS DEFINED BY THE COMPANY
Alcon uses certain non-IFRS metrics when measuring performance, including when measuring current period results against prior periods, including core results, percentage changes measured in constant currencies, EBITDA, free cash flow, and net liquidity/(debt).
Because of their non-standardized definitions, the non-IFRS measures (unlike IFRS measures) may not be comparable to the calculation of similar measures of other companies. These supplemental non-IFRS measures are presented solely to permit investors to more fully understand how Alcon management assesses underlying performance. These supplemental non-IFRS measures are not, and should not be viewed as, a substitute for IFRS measures.
Core results
Alcon core results, including core operating income and core net income, exclude all amortization and impairment charges of intangible assets, excluding software, net gains and losses on fund investments and equity securities valued at fair value through profit and loss ("FVPL"), fair value adjustments of financial assets in the form of options to acquire a company carried at FVPL, obligations related to product recalls, and certain acquisition related items. The following items that exceed a threshold of $10 million and are deemed exceptional are also excluded from core results: integration and divestment related income and expenses, divestment gains and losses, restructuring charges/releases and related items, legal related items, gains/losses on early extinguishment of debt or debt modifications, impairments of property, plant and equipment and software, as well as income and expense items that management deems exceptional and that are or are expected to accumulate within the year to be over a $10 million threshold.
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on historical analysisthe jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of trendsintangible assets and estimated complianceacquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions.
Alcon believes that investor understanding of its performance is enhanced by disclosing core measures of performance because, since they exclude items that can vary significantly from period to period, the core measures enable a helpful comparison of business performance across periods. For this same reason, Alcon uses these core measures in addition to IFRS and other measures as important factors in assessing its performance.
A limitation of the core measures is that they provide a view of Alcon operations without including all events during a period, such as the effects of an acquisition, divestment, or amortization/impairments of purchased intangible assets and restructurings.
Constant currencies
Changes in the relative values of non-US currencies to the US dollar can affect Alcon financial results and financial position. To provide additional information that may be useful to investors, including changes in sales volume, we present information about changes in our net sales and various values relating to operating and net income that are adjusted for such foreign currency effects.
Constant currency calculations have the goal of eliminating two exchange rate effects so that an estimate can be made of underlying changes in the consolidated income statement excluding:
the impact of translating the income statements of consolidated entities from their non-US dollar functional currencies to the US dollar; and
the impact of exchange rate movements on the major transactions of consolidated entities performed in currencies other than their functional currency.
Alcon calculates constant currency measures by translating the current year's foreign currency values for sales and other income statement items into US dollars, using the average exchange rates from the prior year and comparing them to the prior year values in US dollars.
For additional information on the effects of foreign currencies, refer to "Item 5.A. Operating Results- Effects of currency fluctuations" section.
EBITDA
Alcon defines earnings before interest, tax, depreciation and amortization ("EBITDA") as net (loss)/income excluding income taxes, depreciation of property, plant and equipment (including any related impairment charges), depreciation of right-of-use assets, amortization of intangible assets (including any related impairment charges), interest expense and other financial income and expense. Alcon management primarily uses EBITDA together with contractual agreements. The Company generally offersnet (debt)/liquidity to monitor leverage associated with financial debts. For a reconciliation of EBITDA to the most directly comparable measure presented in accordance with IFRS, see "Item 5.B. Liquidity and Capital Resources—EBITDA (non-IFRS measure)" section.
Free cash discountsflow
Alcon defines free cash flow as net cash flows from operating activities less cash flow associated with the purchase or sale of property, plant and equipment. Free cash flow is presented as additional information because Alcon management believes it is a useful supplemental indicator of Alcon's ability to certain classesoperate without reliance on additional borrowing or use of customersexisting cash. Free cash flow is not intended to be a substitute measure for net cash flows from operating activities as determined under IFRS. For a reconciliation of free cash flow to the early paymentmost directly comparable measure presented in accordance with IFRS, see "Item 5.B. Liquidity and Capital Resources—Free cash flow (non-IFRS measure)" section.
Net liquidity/(debt)
Alcon defines net liquidity/(debt) as current and non-current financial debt less cash and cash equivalents, current investments and derivative financial instruments. Net liquidity/(debt) is presented as additional information because management believes it is a useful supplemental indicator of receivables. Those discounts are recordedAlcon's ability to pay dividends, to meet financial commitments and to invest in new strategic opportunities, including strengthening its balance sheet. For a reconciliation of net liquidity/(debt) to the most directly comparable measure presented in accordance with IFRS, see "Item 5.B. Liquidity and Capital Resources—Net (debt)/liquidity (non-IFRS measure)" section.
Growth rate and margin calculations
For ease of understanding, Alcon uses a sign convention for its growth rates such that a reduction in operating expenses or losses compared to the prior year is shown as a reductionpositive growth.
Gross margins, operating income/(loss) margins and core operating income margins are calculated based upon net sales to third parties unless otherwise noted.
RECONCILIATION OF IFRS RESULTS TO CORE RESULTS
Segment contribution
2019
|
| | | | | | | | | | | | | | | | | | | | | |
($ millions) | | IFRS results |
| | Amortization of intangible assets(1) |
| | Separation costs(2) |
| | Transformation Costs(3) |
| | Legal items(4) |
| | Other items(5) |
| | Core results |
|
Surgical segment contribution | | 923 |
| | — |
| | 7 |
| | — |
| | — |
| | 27 |
| | 957 |
|
Vision Care segment contribution | | 563 |
| | — |
| | 16 |
| | — |
| | — |
| | 1 |
| | 580 |
|
Not allocated to segments | | (1,673 | ) | | 1,040 |
| | 214 |
| | 52 |
| | 32 |
| | 63 |
| | (272 | ) |
Total operating (loss)/income | | (187 | ) | | 1,040 |
| | 237 |
| | 52 |
| | 32 |
| | 91 |
| | 1,265 |
|
| |
(1) | Includes recurring amortization for all intangible assets other than software. |
| |
(2) | Separation costs are expected to be incurred over the two to three-year period following the completion of the Spin-off from Novartis and primarily include costs related to IT and third party consulting fees. |
| |
(3) | Transformation costs, primarily related to restructuring and third party consulting fees, for the multi-year transformation program. |
| |
(4) | Includes legal settlement costs and certain external legal fees. |
| |
(5) | Surgical segment contribution includes $85 million for the amortization of option rights, manufacturing sites consolidation activities, post marketing study following a product's voluntary market withdrawal expenses, integration of recent acquisitions, and spin readiness costs and other items, partially offset by $58 million in fair value adjustments to contingent consideration liabilities. Vision Care segment contribution includes $18 million in spin readiness costs and the integration of recent acquisitions, partially offset by $17 million in fair value adjustments to contingent consideration liabilities. Not allocated to segments primarily includes spin readiness costs and fair value adjustments of a financial asset. |
2018
|
| | | | | | | | | | | | | | | | | | | | |
($ millions) | IFRS results |
| | Amortization of intangible assets(1) |
| | Impairments(2) |
| | Restructuring items(3) |
| | Legal items(4) |
| | Other items(5) |
| | Core results |
|
Surgical segment contribution | 813 |
| | — |
| | — |
| | — |
| | — |
| | 33 |
| | 846 |
|
Vision Care segment contribution | 594 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | 600 |
|
Not allocated to segments | (1,655 | ) | | 1,007 |
| | 378 |
| | 9 |
| | 28 |
| | (1 | ) | | (234 | ) |
Total operating (loss)/income | (248 | ) | | 1,007 |
| | 378 |
| | 9 |
| | 28 |
| | 38 |
| | 1,212 |
|
| |
(1) | Includes recurring amortization for all intangible assets other than software. |
| |
(2) | Includes impairment charges related to intangible assets. |
| |
(3) | Includes restructuring income and charges and related items. Certain amounts previously reported under "restructuring items" in the 2018 Form 20-F have been reclassified to "other items" to conform with presentation in the current year. |
| |
(4) | Includes legal costs related to an investigation. |
| |
(5) | Surgical segment contribution includes $99 million for the amortization of option rights and charges and reversal of charges related to a product's voluntary market withdrawal, spin readiness costs, and other items, partially offset by a $66 million fair value adjustment to a contingent consideration liability due to a product's voluntary market withdrawal. Vision Care segment contribution includes spin readiness costs and other items. Not allocated to segments includes $21 million in fair value adjustments of a financial asset and other items, partially offset by $20 million spin readiness costs. Certain amounts previously reported under "restructuring items" in the 2018 Form 20-F have been reclassified to "other items" to conform with presentation in the current year. |
2017
|
| | | | | | | | | | | | | | | | | | | | |
($ millions) | IFRS results |
| | Amortization of intangible assets(1) |
| | Impairments(2) |
| | Restructuring items(3) |
| | Legal items(4) |
| | Other items(5) |
| | Core results |
|
Surgical segment contribution | 691 |
| | — |
| | 29 |
| | — |
| | — |
| | (19 | ) | | 701 |
|
Vision Care segment contribution | 625 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 625 |
|
Not allocated to segments | (1,393 | ) | | 1,017 |
| | 57 |
| | 30 |
| | 61 |
| | (12 | ) | | (240 | ) |
Total operating (loss)/income | (77 | ) | | 1,017 |
| | 86 |
| | 30 |
| | 61 |
| | (31 | ) | | 1,086 |
|
| |
(1) | Includes recurring amortization for all intangible assets other than software. |
| |
(2) | Includes impairment charges related to intangible and financial assets. |
| |
(3) | Includes restructuring income and charges and related items. |
| |
(4) | Includes an increase to a legal settlement provision and legal costs related to an investigation. |
| |
(5) | Includes fair value adjustments to contingent consideration liabilities, a gain from a Swiss pension plan amendment and the partial reversal of a prior period charge. |
RECONCILIATION OF IFRS RESULTS TO CORE RESULTS
Operating (loss)/income, net (loss)/income, and (loss)/earnings per share
2019
|
| | | | | | | | | | | | | | | |
($ millions except (loss)/earnings per share) | | IFRS Results |
| Amortization of certain intangible assets(1) |
| Separation costs(2) |
| Transformation Costs(3) |
| Legal items(4) |
| Other items(5) |
| Core Results |
|
Gross profit | | 3,662 |
| 1,007 |
| 10 |
| — |
| — |
| (16 | ) | 4,663 |
|
Operating (loss)/income | | (187 | ) | 1,040 |
| 237 |
| 52 |
| 32 |
| 91 |
| 1,265 |
|
(Loss)/income before taxes | | (332 | ) | 1,040 |
| 237 |
| 52 |
| 32 |
| 91 |
| 1,120 |
|
Taxes(6) | | (324 | ) | (140 | ) | (54 | ) | (7 | ) | (8 | ) | 338 |
| (195 | ) |
Net (loss)/income | | (656 | ) | 900 |
| 183 |
| 45 |
| 24 |
| 429 |
| 925 |
|
Basic (loss)/earnings per share | | (1.34 | ) |
|
|
|
|
|
|
|
|
|
| 1.89 |
|
Diluted (loss)/earnings per share | | (1.34 | ) |
|
|
|
|
|
|
|
|
|
| 1.89 |
|
Basic - weighted average shares outstanding(7) | | 488.2 |
|
|
|
|
|
| 488.2 |
|
Diluted - weighted average shares outstanding(7) | | 488.2 |
|
|
|
|
|
| 490.1 |
|
| | | | | | | | |
Adjustments to arrive at core operating income |
Selling, general & administration | | (2,847 | ) | — |
| 30 |
| — |
| — |
| 15 |
| (2,802 | ) |
Research & development | | (656 | ) | 33 |
| 4 |
| — |
| — |
| 35 |
| (584 | ) |
Other income | | 55 |
| — |
| — |
| — |
| — |
| (9 | ) | 46 |
|
Other expense | | (401 | ) | — |
| 193 |
| 52 |
| 32 |
| 66 |
| (58 | ) |
| |
(1) | Includes recurring amortization for all intangible assets other than software. |
| |
(2) | Separation costs are expected to be incurred over the two to three-year period following the completion of the Spin-off from Novartis and primarily include costs related to IT and third party consulting fees. |
| |
(3) | Transformation costs, primarily related to restructuring and third party consulting fees, for the multi-year transformation program. |
| |
(4) | Includes legal settlement costs and certain external legal fees. |
| |
(5) | Gross Profit includes $37 million in fair value adjustments of contingent consideration liabilities, partially offset by $21 million in spin readiness costs, manufacturing sites consolidation activities, and integration of recent acquisitions. Selling, general & administration primarily includes spin readiness costs and the integration of recent acquisitions. Research & development includes $73 million for the amortization of option rights, post-marketing study following a product's voluntary market withdrawal, and the integration of recent acquisitions, partially offset by $38 million in fair value adjustments for contingent consideration liabilities. Other income primarily includes a realized gain on a financial asset. Other expense primarily includes spin readiness costs, fair value adjustments of a financial asset and other items. |
| |
(6) | Total tax adjustments of $129 million include tax associated with operating income core adjustments and discrete tax items. Tax associated with operating income core adjustments of $1.5 billion totaled $215 million with an average tax rate of 14.8%. |
Core tax adjustments for discrete items totaled $344 million, primarily including $304 million in non-cash tax expense for re-measurement of revenue and accounts receivabledeferred tax balances as a result of Swiss tax reform, tax expense related to rate changes in the same period thatUS following legal entity reorganizations executed related to the Spin-off, non-cash tax expense related sale is recorded. While weto the re-measurement of deferred tax assets and liabilities following a tax rate change in India, and net changes in uncertain tax positions.
| |
(7) | Core basic earnings per share is calculated using the weighted-average shares of common stock outstanding during the period. Core diluted earnings per share also contemplate dilutive shares associated with unvested equity-based awards as described in Note 8 to the Consolidated Financial Statements. |
2018
|
| | | | | | | | | | | | | | |
($ millions except (loss)/earnings per share) | IFRS Results |
| Amortization of certain intangible assets(1) |
| Impairments(2) |
| Restructuring items(3) |
| Legal items(4) |
| Other items(5) |
| Core Results |
|
Gross profit | 3,192 |
| 996 |
| 376 |
| — |
| — |
| (23 | ) | 4,541 |
|
Operating (loss)/income | (248 | ) | 1,007 |
| 378 |
| 9 |
| 28 |
| 38 |
| 1,212 |
|
(Loss)/income before taxes | (300 | ) | 1,007 |
| 378 |
| 9 |
| 28 |
| 38 |
| 1,160 |
|
Taxes(6) | 73 |
|
|
|
|
|
|
|
|
|
|
| (186 | ) |
Net (loss)/income | (227 | ) |
|
|
|
|
|
|
|
|
|
| 974 |
|
Basic (loss)/earnings per share | (0.46 | ) |
|
|
|
|
|
|
|
|
|
| 2.00 |
|
Diluted (loss)/earnings per share | (0.46 | ) |
|
|
|
|
|
|
|
|
|
| 2.00 |
|
Basic - weighted average shares outstanding(7) | 488.2 |
|
|
|
|
|
|
|
|
|
|
| 488.2 |
|
Diluted - weighted average shares outstanding(7) | 488.2 |
|
|
|
|
|
|
|
|
|
|
| 488.2 |
|
| | | | | | | |
Adjustments to arrive at core operating income |
Selling, general & administration | (2,801 | ) | — |
| 2 |
| — |
| — |
| 13 |
| (2,786 | ) |
Research & development | (587 | ) | 11 |
| — |
| — |
| — |
| 47 |
| (529 | ) |
Other income | 47 |
| — |
| — |
| (4 | ) | — |
| (19 | ) | 24 |
|
Other expense | (99 | ) | — |
| — |
| 13 |
| 28 |
| 20 |
| (38 | ) |
| |
(1) | Includes recurring amortization for all intangible assets other than software. |
| |
(2) | Includes impairment charges related to intangible assets. |
| |
(3) | Includes restructuring income and charges and related items. Certain amounts previously reported under "restructuring items" in the 2018 Form 20-F have been reclassified to "other items" to conform with presentation in the current year. |
| |
(4) | Includes legal costs related to an investigation. |
| |
(5) | Gross profit, selling, general & administration and research & development include charges and reversal of charges related to a product’s voluntary market withdrawal. Research & development also includes amortization of option rights and a fair value adjustment of a contingent consideration liability. Other income includes fair value adjustments on a financial asset. Other expense includes spin-readiness costs and other items. Certain amounts previously reported under "restructuring items" in the 2018 Form 20-F have been reclassified to "other items" to conform with presentation in the current year. |
| |
(6) | Total tax adjustments of $259 million included tax associated with operating income adjustments and discrete tax items. Tax associated with operating income adjustments of $1.5 billion totaled $237 million with average tax rate of 16.2%. Core tax adjustments for discrete items totaled $22 million, including a net out of period income tax benefit of $55 million partially offset by net changes in uncertain tax positions of $33 million. |
| |
(7) | For periods prior to the Spin-off, the denominator for both core basic and diluted earnings per share was calculated using the shares of common stock distributed in the Spin-off. |
2017
|
| | | | | | | | | | | | | | |
($ millions except earnings per share) | IFRS Results |
| Amortization of certain intangible assets(1) |
| Impairments(2) |
| Restructuring items(3) |
| Legal items(4) |
| Other items(5) |
| Core Results |
|
Gross profit | 3,204 |
| 1,007 |
| — |
| — |
| — |
| — |
| 4,211 |
|
Operating (loss)/income | (77 | ) | 1,017 |
| 86 |
| 30 |
| 61 |
| (31 | ) | 1,086 |
|
(Loss)/income before taxes | (127 | ) | 1,017 |
| 86 |
| 30 |
| 61 |
| (31 | ) | 1,036 |
|
Taxes(6) | 383 |
| | | | | | (128 | ) |
Net income | 256 |
| | | | | | 908 |
|
Basic earnings per share | 0.52 |
| | | | | | 1.86 |
|
Diluted earnings per share | 0.52 |
| | | | | | 1.86 |
|
Basic - weighted average shares outstanding(7) | 488.2 |
| | | | | | 488.2 |
|
Diluted - weighted average shares outstanding(7) | 488.2 |
| | | | | | 488.2 |
|
| | | | | | | |
Adjustments to arrive at core operating income |
Research & development | (584 | ) | 10 |
| 86 |
| — |
| — |
| (18 | ) | (506 | ) |
Other income | 47 |
| — |
| — |
| (4 | ) | — |
| (13 | ) | 30 |
|
Other expense | (148 | ) | — |
| — |
| 34 |
| 61 |
| — |
| (53 | ) |
| |
(1) | Includes recurring amortization for all intangible assets other than software. |
| |
(2) | Includes impairment charges related to intangible and financial assets. |
| |
(3) | Includes restructuring income and charges and related items. |
| |
(4) | Includes an increase to a legal settlement provision and legal costs related to an investigation. |
| |
(5) | Research & development includes fair value adjustments to contingent consideration liabilities; other income includes a gain from a Swiss pension plan amendment and the partial reversal of a prior period charge. |
| |
(6) | The required revaluation of the deferred tax assets and liabilities and a portion of current tax payables to the newly enacted tax rate at the date of enactment of the US enacted tax reform legislation (Tax Cuts and Jobs Act), resulted in a net tax income of $413 million that has been adjusted out of core taxes. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of $1.2 billion to arrive at the core results before tax amounts to $98 million, excluding the tax income from US tax reform. The average tax rate on these adjustments is 8.4%. |
| |
(7) | For periods prior to the Spin-off, the denominator for both core basic and diluted earnings per share was calculated using the shares of common stock distributed in the Spin-off. |
| |
5.B. | LIQUIDITY AND CAPITAL RESOURCES |
Our sources of funds have consisted principally of cash flow from operations, bank debt, credit facilities with lenders, and other financial liabilities to our Former Parent. Our uses of those funds (other than for operations) have consisted principally of investments in our growth plan, capital expenditures, cash paid for acquisitions and associated expenses and other obligations.
We believe that we have adequate liquidity to meet our reserves for product returnsneeds. At December 31, 2019, we had cash and rebates and for cash discounts are adequate, if the actual results are significantly different than the estimated costs, our sales may be over- or understated.
Inventory Reserves: The Company provides reserves on its inventories for estimated obsolescence or unmarketable inventory equalequivalents of $822 million, compared to the difference between the cost of inventory and the estimated fair market value based upon assumptions about future demand and market conditions. If actual market conditions become less favorable than those projected by management, additional inventory reserves may be required.
Allowances for Doubtful Accounts: The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management regularly assesses the financial condition of the Company's customers and the markets in which these customers participate. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments on our receivables from them, additional allowances may be required.
Investments: The majority of the Company's investments are held in funds professionally managed by investment managers. The net asset values are furnished in statements received from fund custodians whose
statements reflect valuations conducted according to their respective fund pricing policies and asset types. The Company uses the net asset values from independent fund custodians as a starting point to value these funds. On an ongoing basis, management evaluates fund pricing procedures of the fund custodians, their internal controls and their financial statement reports and performs monitoring activities to obtain comfort that the net asset values appropriately represent fair value.
The Company recognizes an impairment charge when the decline in the fair value of our investments below their cost is judged to be other than temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near term prospects of the investment entity, and our intent and ability to hold the investment for a period of time to allow for any anticipated recovery in market value. Our ongoing consideration of these factors could result in impairment charges in the future, which could adversely affect our net earnings.
The Company determined that,$227 million at December 31, 2008, unrealized losses on certain available-for-sale equity securities2018. At December 31, 2019 we had current financial debt of $261 million, compared to $47 million at December 31, 2018, consisting of bank and other financial debt. At December 31, 2019 we had non-current financial debt of $3.2 billion consisting of bank debt and senior notes primarily as a senior secured bank loans fund were other-than-temporarily impaired due to deteriorating general market conditions, particularly during the fourth quarter of 2008, coupled with the unlikely near term prospects for achieving a sustainable recovery, uncertainty about future market conditions, and declines in certain quantitative or qualitative factors. The other-than-temporary impairment recognized for the senior secured bank loans fund also was deemed appropriate to bring a significant portionresult of the Spin-off.
To date, all of our sales are generated by our subsidiaries and not directly by us. Thus, we are dependent on dividends, other payments or loans from our subsidiaries to meet our liquidity needs. Some of our subsidiaries may be subject to legal requirements of their respective jurisdictions of organization that may restrict their paying dividends or other payments, or making loans, to us.
Potential future uses of our liquidity include capital expenditures, acquisitions, debt repayments, dividend payments, and other general corporate purposes.
We use the US Dollar as our reporting currency and are therefore exposed to foreign currency exchange movements, primarily in Euros, Japanese Yen, Chinese Renminbi, Swiss Francs, and emerging market currencies. We manage our global currency exposure by engaging in hedging transactions where management deems appropriate (forward contracts and swaps) to preserve the value of assets. As of December 31, 2019, unsettled derivative positions included $1 million in unrealized lossesgains and $16 million in line with current market conditions for credit default rates and loss recovery rates. The Company recognized losses for other-than-temporary impairment duringunrealized losses.
All comments in this section relate to the year ended December 31, 2008 of $37 million. At December 31, 2010 and 2009, the Company had available-for-sale investments recorded at total fair values of $1,281 million and $530 million with gross unrealized losses totaling $3 million and $2 million, respectively, that were determined2019 compared to be temporary and were included in accumulated other comprehensive income (loss) on the consolidated balance sheet.
Impairment of Goodwill and Intangible Assets: The Company assesses the recoverability of goodwill and intangible assets upon the occurrence of an event that might indicate conditions for an impairment could exist, or at least annually for goodwill.
Factors we consider important that could trigger an impairment review for intangible assets include the following:
· | significant underperformance relative to expected historical or projected future operating results; |
· | significant changes in the manner or extent of our use of the acquired assets or the strategy for our overall business; |
· | significant negative industry or economic trends; and |
· | significant decline in the market value of the intangible asset for a sustained period. |
When we determine the carrying value of intangible assets may not be recoverable from undiscounted cash flows based upon the existence of one or more of the above factors, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.
Management has determined that the reporting units for its annual testing for impairment of goodwill are the operating business segments used for segment reporting. Management performs its testing using both multiples of quoted market prices to operating profits and present value techniques. In the most recent testing, the fair values of the Company's reporting units substantially exceeded their respective carrying values.
To the extent that our management determines that goodwill or intangible assets cannot be recovered, such goodwill or intangible assets are considered impaired and the impairment is treated as an expense in the period in which it occurs.
Tax Liabilities: We are subject to income taxes in Switzerland, as well as the United States and most other foreign jurisdictions throughout the world, and are regularly audited in many of these jurisdictions. Tax laws throughout the world are complex and the application of these rules to the Company's global business operations can be uncertain. While we believe we take reasonable positions on the tax returns filed throughout the world, some of these positions may be challenged during income tax audits in Switzerland, the United States and other jurisdictions. Consequently, significant judgment is required in evaluating our tax positions to determine the Company's ultimate tax liability. Management records current tax liabilities based on U.S. GAAP, including the more-likely-than-not recognition and measurement standard and the assumption that all material tax risks will be identified in the relevant examination. Our management believes that the estimates reflected in the consolidated financial statements accurately reflect our tax liabilities under these standards. However, our actual tax liabilities ultimately may differ from those estimates if we were to prevail in matters for which accruals have been established or if taxing authorities were to successfully challenge the tax treatment upon which our management has based its estimates. Income tax expense includes the impact of tax reserve positions and changes to tax reserves that are considered appropriate, as well as any related interest.
Our annual effective tax rate will differ from the Swiss statutory rate, primarily because of higher tax rates in the United States and most other non-Swiss jurisdictions. Our effective tax rate may be subject to fluctuations during the fiscal year as new information is obtained which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of research and experimentation tax credits and changes in tax laws in jurisdictions where we conduct operations.
Litigation Liabilities: Alcon and its subsidiaries are parties to a variety of legal proceedings arising out of the ordinary course of business, including product liability and patent infringement litigation. By its nature, litigation is subject to many uncertainties. Management reviews litigation claims with counsel to assess the probable outcome of such claims. Management records current liabilities for litigation based on their best estimates of what the Company ultimately will incur to pursue such matters to final legal decisions or to settle them. Our management believes that the estimates reflected in the financial statements properly reflect our litigation liabilities. However, our actual litigation liabilities may ultimately differ from those estimates if we are unsuccessful in our efforts to defend or settle the claims being asserted. Legal costs for counsel are expensed during the period incurred.
Pension and Other Employee Benefits: We must make certain assumptions in the calculation of the actuarial valuation of the Company-sponsored defined benefit pension plans and postretirement benefits. These assumptions include the weighted average discount rates, rates of increase in compensation levels, expected long term rates of return on assets and increases or trends in healthcare costs. Furthermore, our actuarial consultants also use subjective factors such as withdrawal and mortality rates. If actual results are more or less favorable than those projected by management, future periods will reflect reduced or additional pension and postretirement medical expenses. Upon Novartis's acquisition of the majority of Alcon's common shares, change of control provisions accelerated our expense recognition under certain defined benefit pension plans. See note 15 to the accompanying consolidated financial statements for additional information regarding assumptions used by the Company.
Fair Values of Contingent Payments: In connection with the acquisition of businesses, we are required to record liabilities for the estimated fair values of related possible contingent payments. The possible payments are contingent upon the achievement of future research and development milestones that would be expected to create future value for Alcon.
We engaged a third-party valuation expert to assist us in determining the estimated fair values of contingent payments. Valuation was based on the Company's estimates of the probability and timing of these contingent payments. The fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement, as described in note 5 to the consolidated financial statements. Each milestone was assigned a probability based on its current status. The resultant probability-weighted cash flows were then discounted using discount rates between 4.5% and 6%, which the Company
believes is appropriate and representative of a market participant's assumptions. The probabilities assigned to payment streams ranged from 5% to 65%. An increase or decrease of 10 percentage points in the probability assumptions would result in an adjustment to the estimated value of approximately $40 million.
The fair values of these contingent payments will be reviewed on a periodic basis. Any future changes in this estimated value not associated with the original purchase price valuation will be recorded in the Company's results of operations.
Results of Operations
The following table sets forth, for the periods indicated, selected items from our consolidated financial statements.
| | | | | | | | | | | As a % of Total Sales | |
| | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
| | (in millions, except percentages) | |
Sales: | | | | | | | | | | | | | | | | | | |
United States | | $ | 3,177 | | | $ | 2,914 | | | $ | 2,807 | | | | 44.3 | % | | | 44.8 | % | | | 44.6 | % |
International | | | 4,002 | | | | 3,585 | | | | 3,487 | | | | 55.7 | | | | 55.2 | | | | 55.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total sales | | | 7,179 | | | | 6,499 | | | | 6,294 | | | | 100.0 | | | | 100.0 | | | | 100.0 | |
Costs of goods sold | | | 1,675 | | | | 1,614 | | | | 1,472 | | | | 23.3 | | | | 24.8 | | | | 23.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 5,504 | | | | 4,885 | | | | 4,822 | | | | 76.7 | | | | 75.2 | | | | 76.6 | |
Selling, general and administrative | | | 2,070 | | | | 1,935 | | | | 1,961 | | | | 28.8 | | | | 29.8 | | | | 31.1 | |
Research and development | | | 747 | | | | 665 | | | | 619 | | | | 10.4 | | | | 10.2 | | | | 9.8 | |
Amortization of intangibles | | | 60 | | | | 24 | | | | 29 | | | | 0.9 | | | | 0.4 | | | | 0.5 | |
Other operating expenses | | | 152 | | | | -- | | | | -- | | | | 2.1 | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 2,475 | | | | 2,261 | | | | 2,213 | | | | 34.5 | | | | 34.8 | | | | 35.2 | |
Gain (loss) from foreign currency, net | | | (3 | ) | | | (3 | ) | | | (21 | ) | | | -- | | | | -- | | | | (0.4 | ) |
Interest income | | | 29 | | | | 46 | | | | 76 | | | | 0.4 | | | | 0.7 | | | | 1.2 | |
Interest expense | | | (9 | ) | | | (16 | ) | | | (51 | ) | | | (0.1 | ) | | | (0.3 | ) | | | (0.8 | ) |
Other, net | | | 35 | | | | 25 | | | | (134 | ) | | | 0.4 | | | | 0.4 | | | | (2.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings before income taxes | | | 2,527 | | | | 2,313 | | | | 2,083 | | | | 35.2 | | | | 35.6 | | | | 33.1 | |
Income taxes | | | 317 | | | | 306 | | | | 36 | | | | 4.4 | | | | 4.7 | | | | 0.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 2,210 | | | $ | 2,007 | | | $ | 2,047 | | | | 30.8 | % | | | 30.9 | % | | | 32.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses several factors affecting the comparability of certain items in the above table.
The following table sets forth, for the periods indicated, our sales and operating income by business segment.
| | | | | | | | | | | As a % of Total Sales | |
| | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
| | (in millions, except percentages) | |
Alcon United States: | | | | | | | | | | | | | | | | | | |
Pharmaceutical | | $ | 1,555 | | | $ | 1,353 | | | $ | 1,321 | | | | 49.0 | % | | | 46.4 | % | | | 47.1 | % |
Surgical | | | 1,214 | | | | 1,167 | | | | 1,084 | | | | 38.2 | | | | 40.1 | | | | 38.6 | |
Consumer eye care | | | 408 | | | | 394 | | | | 402 | | | | 12.8 | | | | 13.5 | | | | 14.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total sales | | $ | 3,177 | | | $ | 2,914 | | | $ | 2,807 | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating income (1) | | $ | 1,896 | | | $ | 1,664 | | | $ | 1,554 | | | | 59.7 | % | | | 57.1 | % | | | 55.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Alcon International: | | | | | | | | | | | | | | | | | | | | | | | | |
Pharmaceutical | | $ | 1,511 | | | $ | 1,324 | | | $ | 1,240 | | | | 37.8 | % | | | 36.9 | % | | | 35.6 | % |
Surgical | | | 2,006 | | | | 1,830 | | | | 1,797 | | | | 50.1 | | | | 51.1 | | | | 51.5 | |
Consumer eye care | | | 485 | | | | 431 | | | | 450 | | | | 12.1 | | | | 12.0 | | | | 12.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total sales | | $ | 4,002 | | | $ | 3,585 | | | $ | 3,487 | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating income (1) | | $ | 1,728 | | | $ | 1,507 | | | $ | 1,472 | | | | 43.2 | % | | | 42.0 | % | | | 42.2 | % |
(1) | Certain manufacturing costs and manufacturing variances are not assigned to business segments because most manufacturing operations produce products for more than one business segment. Research and development costs, excluding regulatory costs which are included in the business segments, and share-based compensation are treated as general corporate costs and are not assigned to business segments. |
The following table sets forth, for the periods indicated, sales by product category for Alcon United States, Alcon International and our consolidated operations and includes the change in sales and change in sales in constant currency calculated by applying rates from the earlier period. All sales for Alcon United States are recorded in U.S. dollars and, therefore, this business segment does not experience any currency translation gains or losses.
| | | | | | | | | | | | | Change | | | | | | | | | | | | | Change | |
| | | | | | | | | | Foreign | | | in | | | | | | | | | | | Foreign | | in | |
| | | | | | | | | | Currency | | | Constant | | | | | | | | | | | Currency | | Constant | |
| | 2010 | | 2009 | | Change | | | Change | | | Currency | (a) | | | 2009 | | | 2008 | | Change | | Change | | Currency | (a) |
| | (in millions, except percentages) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Alcon United States: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pharmaceutical | $ | 1,555 | | $ | 1,353 | | 14.9 | % | | -- | % | | 14.9 | % | | $ | 1,353 | | $ | 1,321 | | 2.4 | % | -- | % | 2.4 | % |
Surgical | | 1,214 | | | 1,167 | | 4.0 | | | -- | | | 4.0 | | | | 1,167 | | | 1,084 | | 7.7 | | -- | | 7.7 | |
Consumer eye care | | 408 | | | 394 | | 3.6 | | | -- | | | 3.6 | | | | 394 | | | 402 | | (2.0 | ) | -- | | (2.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total sales | $ | 3,177 | | $ | 2,914 | | 9.0 | | | -- | | | 9.0 | | | $ | 2,914 | | $ | 2,807 | | 3.8 | | -- | | 3.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Alcon International: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pharmaceutical | $ | 1,511 | | $ | 1,324 | | 14.1 | | | 1.7 | | | 12.4 | | | $ | 1,324 | | $ | 1,240 | | 6.8 | | (6.3 | ) | 13.1 | |
Surgical | | 2,006 | | | 1,830 | | 9.6 | | | 2.4 | | | 7.2 | | | | 1,830 | | | 1,797 | | 1.8 | | (4.9 | ) | 6.7 | |
Consumer eye care | | 485 | | | 431 | | 12.5 | | | 3.7 | | | 8.8 | | | | 431 | | | 450 | | (4.2 | ) | (6.0 | ) | 1.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total sales | $ | 4,002 | | $ | 3,585 | | 11.6 | | | 2.3 | | | 9.3 | | | $ | 3,585 | | $ | 3,487 | | 2.8 | | (5.5 | ) | 8.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pharmaceutical | $ | 3,066 | | $ | 2,677 | | 14.5 | | | 0.8 | | | 13.7 | | | $ | 2,677 | | $ | 2,561 | | 4.5 | | (3.1 | ) | 7.6 | |
Surgical | | 3,220 | | | 2,997 | | 7.4 | | | 1.4 | | | 6.0 | | | | 2,997 | | | 2,881 | | 4.0 | | (3.1 | ) | 7.1 | |
Consumer eye care | | 893 | | | 825 | | 8.2 | | | 1.9 | | | 6.3 | | | | 825 | | | 852 | | (3.2 | ) | (3.2 | ) | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total sales | $ | 7,179 | | $ | 6,499 | | 10.5 | | | 1.3 | | | 9.2 | | | $ | 6,499 | | $ | 6,294 | | 3.3 | | (3.0 | ) | 6.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) | Change in constant currency (as referenced throughout this discussion) is determined by comparing adjusted 2010 reported amounts, calculated using 2009 monthly average exchange rates, to the actual 2009 reported amounts. The same process was used to compare 2009 to 2008. Change in constant currency in this table includes sales growth from acquisitions, as discussed later in this Item 5. Sales change in constant |
| currency is not a U.S. GAAP defined measure of revenue growth. Change in constant currency calculates sales growth without the impact of foreign exchange fluctuations. Management believes constant currency sales growth is an important measure of the Company's operations because it provides investors with a clearer picture of the core rate of sales growth due to changes in unit volumes and local currency prices. Sales change in constant currency, as defined and presented by the Company, may not be comparable to similar measures reported by other companies. |
Year ended December 31, 2010 Compared to Year ended December 31, 2009
Sales
The Company's global sales increased 10.5% to $7,179 million2018. Commentary for the year ended December 31, 20102018 compared to 2017 may be found in Item 5 of the 2018 Form 20-F.
Cash flow and net (debt)/liquidity
|
| | | | | |
($ millions) | 2019 |
| | 2018 |
|
| | | |
Net cash flows from operating activities | 920 |
| | 1,140 |
|
Net cash flows used in investing activities | (1,011 | ) | | (1,001 | ) |
Net cash flows from/(used in) financing activities | 659 |
| | (78 | ) |
Effect of exchange rate changes on cash and cash equivalents | 27 |
| | (6 | ) |
Net change in cash and cash equivalents | 595 |
| | 55 |
|
Change in derivative financial instrument assets | 1 |
| | — |
|
Change in current and non-current financial debts | (3,432 | ) | | 18 |
|
Change in other financial liabilities to former parent | 67 |
| | (21 | ) |
Change in other financial receivables from former parent | (39 | ) | | (26 | ) |
Change in net (debt)(1) | (2,808 | ) | | 26 |
|
Net liquidity at January 1 | 152 |
| | 126 |
|
Net (debt)/liquidity at December 31(1) | (2,656 | ) | | 152 |
|
| |
(1) | The balances previously reported in "Financial debts" for a finance lease obligation have been reclassified from "Financial debts" to "Non-current lease liabilities". This reclassification resulted in an increase in Net liquidity as of January 1, 2019 and January 1, 2018 of $89 million and $84 million, respectively. |
Net cash flows from 2009.operating activities amounted to $920 million in 2019, compared to $1.1 billion in the prior year period. The effect of favorable exchange ratesdecrease in operating cash flows was primarily attributable to spin readiness and separation costs, a legal settlement, and interest payments on our financial debts.
Changes in net working capital were primarily driven by an increase in Trade receivables in 2019 broadly in line with increased global sales 1.3%. Excludingsales. The current year period has contract manufacturing receivables from our Former Parent, which are included within Other current assets. Trade payables and other current liabilities increased during the effect of foreign exchange fluctuations, global sales would have grown 9.2%, including 0.6% combinedcurrent reporting period primarily due
to various transition agreements and separation costs incurred. Refer to Note 21 to the Consolidated Financial Statements for additional surgical sales subsequentdetails regarding changes within net working capital.
Net cash flows used in investing activities amounted to $1.0 billion in 2019, in line with 2018. The cash outflows in the current period were primarily driven by $553 million for the purchase of property, plant and equipment, $123 million for intangible assets, and $283 million for the acquisition of PowerVision, Inc. in March 2019.
Net cash flows from financing activities amounted to $659 million in 2019, compared to $78 million of net cash outflows in 2018. Cash inflows in the current period were attributable to proceeds from the issuance of non-current and current financial debts totaling $3.4 billion associated with borrowings from the bridge and other term loans and local bilateral facilities. This was partially offset by movements of financing provided to our Former Parent, which increased by $2.5 billion from the prior year period, due to $3.1 billion in cash payments made to our Former Parent and its affiliates prior to the January 2010 acquisitionSpin-off. The cash flows from financing activities also reflect the proceeds from the issuance of Optonol Ltd.$2.0 billion senior notes and pharmaceutical salesrepayments of DUREZOL® ophthalmic steroid subsequentthe $1.5 billion Bridge Facility and $0.5 billion Facility A in 2019. Refer to Notes 4 and 17 of the Consolidated Financial Statements for additional information.
Free cash flow (non-IFRS measure)
The following is a summary of Alcon free cash flow for 2019, 2018 and 2017, together with a reconciliation to net cash flows from operating activities, the most directly comparable IFRS measure.
|
| | | | | | | | |
($ millions) | 2019 |
| | 2018 |
| | 2017 |
|
Net cash flows from operating activities | 920 |
| | 1,140 |
| | 1,218 |
|
Purchase of property, plant & equipment | (553 | ) | | (524 | ) | | (415 | ) |
Proceeds from sales of property, plant & equipment | — |
| | — |
| | 1 |
|
Free cash flow | 367 |
| | 616 |
| | 804 |
|
Free cash flow amounted to $367 million in 2019, compared to $616 million in 2018, with the decrease mainly caused by lower cash flows from operating activities. For additional information refer to "Item 5.A. Operating Results—Non-IFRS measures as defined by the Company".
Balance sheet
Assets
Total non-current assets were $23.4 billion at December 31, 2019, a decrease of $244 million compared to $23.7 billion as of December 31, 2018. There was a decrease of $448 million in Intangible assets other than goodwill related to the March 2010 asset purchase. Sales reflected broad-basedamortization for the period offset by In-process research and development intangible assets acquired through the PowerVision acquisition, a decrease of $316 million in Deferred tax assets related to offsetting deferred tax liabilities within the same tax jurisdiction based on the legally enforceable right of offset following the Spin-off, and a decrease of $81 million in Financial assets primarily due to movement of balances to Other current assets as maturity has become less than twelve months and continued amortization of option rights. This was largely offset by increases of $313 million in Property, plant & equipment due to continued capital expenditures net of recurring depreciation and $245 million in Right-of-use assets from the adoption of IFRS 16, Leases as described in Note 16 to the Consolidated Financial Statements.
Total current assets were $4.2 billion as of December 31, 2019, an increase of $837 million when compared to December 31, 2018, mainly due to increases in Cash and cash equivalents of $595 million attributable to the net impact of operating, investing, and financing activities as described earlier in this section. Trade receivables of $1.4 billion increased $137 million broadly in line with sales, performance across alland Other current assets of $0.5 billion increased $115 million primarily due to movement of certain assets from non-current financial assets as maturity has become less than twelve months and contract manufacturing receivables. Inventories of $1.5 billion also increased $65 million in line with sales and new product lines and geographic areas with the United States, developed international and emerging international markets growing 9.0%, 7.0% (5.6% in constant currency) and 21.3% (17.1% in constant currency), respectively. This improvement primarily reflected volume growth and,launches.
We consider our doubtful debt provisions to a lesser extent, price increases during 2010.
Alcon United States sales increased 9.0% to $3,177 million for 2010, from $2,914 million for 2009.be adequate. The majority of the outstanding trade receivables from Greece, Italy, Portugal, Spain, Brazil, Russia, Turkey, Saudi Arabia, and Argentina are due directly from local governments or from government-funded entities except for Russia, Brazil, and Turkey. We evaluate trade receivables in these countries for potential collection risk. Should there be a substantial deterioration in our economic exposure with respect to those countries, we may increase our level of provisions by updating our expected loss provision or may change the terms of trade on which we operate.
The gross trade receivables from these countries at December 31, 2019 amount to $209 million ($216 million at December 31, 2018), of which $10 million are past due for more than one year ($14 million at December 31, 2018) and for which provisions
of $13 million have been recorded ($16 million at December 31, 2018). At December 31, 2019, amounts past due for more than one year are not significant in any of these countries.
The following table summarizes the aging of trade receivables as of December 31, 2019 and 2018:
|
| | | | |
($ millions) | 2019 |
| 2018 |
|
Not overdue | 1,135 |
| 1,018 |
|
Past due for not more than one month | 118 |
| 118 |
|
Past due for more than one month but less than three months | 81 |
| 70 |
|
Past due for more than three months but less than six months | 47 |
| 34 |
|
Past due for more than six months but less than one year | 21 |
| 20 |
|
Past due for more than one year | 36 |
| 47 |
|
Provisions for doubtful trade receivables | (48 | ) | (54 | ) |
Total trade receivables, net | 1,390 |
| 1,253 |
|
There is also a risk that certain countries could devalue their currency. Currency exposures are described in more detail in the "Item 5.A. Operating Results — Effects of currency fluctuations" section.
Liabilities
Total non-current liabilities were $6.1 billion as of December 31, 2019, an increase of $3.5 billion when compared to $2.5 billion as of December 31, 2018. There was an increase to Financial debts of $3.2 billion due to volume growthborrowings immediately prior to Spin-off which were partially refinanced in all major pharmaceutical product categories, in artificial tearsSeptember 2019. Provisions and in intraocular lenses, especially our advanced technology intraocular lenses, AcrySof®ReSTOR®other non-current liabilities increased $255 million primarily due to contingent consideration liabilities and AcrySof® Toric intraocular lenses. Sales employee benefit obligations. Lease liabilities also increased $191 million from the implementation of pharmaceutical productsIFRS 16, Leases. Refer to treat infectionsNotes 4, 16, and inflammation increased 20.7%, primarily attributable17 to the strong performance of Vigamox® ophthalmic solutionConsolidated Financial Statements for additional details related to contingent consideration, IFRS 16 adoption, and NEVANAC® ophthalmic suspension. Sales of surgical glaucoma products subsequentborrowings under the Notes and Facilities. Deferred tax liabilities decreased $142 million due to the January 2010 acquisition of Optonol Ltd. and pharmaceutical sales of DUREZOL® ophthalmic steroid subsequent to the March 2010 asset purchase added 1.3% to the growth. The overall improvement occurred against the backdrop of U.S. healthcare reform legislation, which reduced U.S. pharmaceutical sales by approximately $20 million. This reduction included the impact of healthcare reform legislation rebate increases on sales made during the fourth quarter of 2009 that were still in the wholesale and retail distribution channels at the beginning of 2010, as well as sales made during 2010.
Alcon International sales increased 11.6% to $4,002 million in 2010, from $3,585 million in 2009. The effect of favorable exchange rates increased Alcon International sales 2.3%. Excluding the effect of foreign exchange fluctuations, Alcon International sales would have grown 9.3%, primarily reflecting volume growth during 2010. International sales grew on a constant currency basis across all product lines and geographic areas. Solid pharmaceutical sales growth across all geographic areas, particularly from our infection/inflammation products and our glaucoma franchise, and the sales growth in emerging markets were the main contributors to this performance. Sales of surgical glaucoma products subsequent to the January 2010 acquisition of Optonol Ltd. were 0.1 percentage pointsnet of the growth.
re-measurement of deferred tax liabilities associated with the Swiss tax reform and deferred tax assets offsetting deferred tax liabilities within the same tax jurisdiction, as discussed above.
| | | | | | | | | | | | Foreign | | | Change in | | |
| | | | | | | | | | | | Currency | | | Constant | | |
GLOBAL PRODUCT SALES | | | 2010 | | | 2009 | | | Change | | | Change | | | Currency | (a) | |
| | | (in millions, except percentages) | | |
| | | | | | | | | | | | | | | | | |
Infection/inflammation | | $ | 980 | | $ | 829 | | | 18.2 | | % | 0.6 | | % | 17.6 | % | |
Glaucoma | | | 1,277 | | | 1,121 | | | 13.9 | | | 0.8 | | | 13.1 | | |
Allergy | | | 539 | | | 486 | | | 10.9 | | | 1.0 | | | 9.9 | | |
Otic/nasal | | | 409 | | | 355 | | | 15.2 | | | 0.3 | | | 14.9 | | |
Other pharmaceuticals/rebates | | | (139 | ) | | (114 | ) | | * | | | * | | | * | | |
| | | | | | | | | | | | | | | | | |
Total Pharmaceutical | | | 3,066 | | | 2,677 | | | 14.5 | | | 0.8 | | | 13.7 | | |
| | | | | | | | | | | | | | | | | |
Intraocular lenses | | | 1,208 | | | 1,133 | | | 6.6 | | | 1.7 | | | 4.9 | | |
Cataract/vitreoretinal/other | | | 1,895 | | | 1,759 | | | 7.7 | | | 1.4 | | | 6.3 | | |
Refractive | | | 117 | | | 105 | | | 11.4 | | | -- | | | 11.4 | | |
| | | | | | | | | | | | | | | | | |
Total Surgical | | | 3,220 | | | 2,997 | | | 7.4 | | | 1.4 | | | 6.0 | | |
| | | | | | | | | | | | | | | | | |
Contact lens disinfectants | | | 471 | | | 448 | | | 5.1 | | | 1.8 | | | 3.3 | | |
Artificial tears | | | 333 | | | 283 | | | 17.7 | | | 2.2 | | | 15.5 | | |
Other | | | 89 | | | 94 | | | (5.3 | ) | | 2.1 | | | (7.4 | ) | |
| | | | | | | | | | | | | | | | | |
Total Consumer Eye Care | | | 893 | | | 825 | | | 8.2 | | | 1.9 | | | 6.3 | | |
| | | | | | | | | | | | | | | | | |
Total Global Sales | | $ | 7,179 | | $ | 6,499 | | | 10.5 | | | 1.3 | | | 9.2 | | |
| See (a) on previous table. |
Pharmaceutical
Global salesTotal current liabilities were $2.3 billion as of our pharmaceutical products grew 14.5% during 2010. The effect of favorable exchange rates increased global sales of our pharmaceutical products 0.8%. Excluding the effect of foreign exchange fluctuations, our sales of pharmaceutical products would have grown 13.7%. Sales of key products in all major therapeutic categories reflected volume gains and share growth.
Our prostaglandin family of glaucoma products includes TRAVATAN® ophthalmic solution, TRAVATAN Z® ophthalmic solution and DuoTrav® ophthalmic solution. Combined sales of our family of TRAVATAN® products grew 12.2% for the year ended December 31, 2010, reflecting volume growth and price increases. During the year ended2019, an increase of $407 million when compared to $1.9 billion as of December 31, 2010, Azopt® ophthalmic suspension,2018. There were increases in Financial debts of $214 million related to local bilateral facilities entered in different countries, Trade payables of $170 million due to various transition agreements and higher spend for separation costs, Provisions and other current liabilities of $158 million primarily for taxes other than income taxes, restructuring, and interest on financial debts, and Lease liabilities of $61 million from the Company's topical anhydrase inhibitor,implementation of IFRS 16, Leases. These increases were partially offset by decreases in Payables to former parent of $85 million, and AZARGA® ophthalmic suspension, a combination formulationOther financial liabilities to former parent of brinzolamide and timolol, posted a 15.8% combined sales increase$67 million as a result of market share gains for Azopt® eliminating cash pooling arrangements with Novartis and increasing acceptanceCurrent income tax liabilities of AZARGA® by physicians.
Sales of Vigamox®ophthalmic solution, our leading fluoroquinolone anti-infective drug, increased 15.5% (14.6% excluding the 0.9% positive effect of foreign exchange fluctuations) compared to 2009, reflecting U.S. price increases and volume growth in the International business segment. (Moxifloxacin, the primary ingredient in Vigamox®, is licensed to Alcon by Bayer Schering Pharma AG.) NEVANAC® ophthalmic suspension is our non-steroidal anti-inflammatory drug ("NSAID") for the treatment of pain and inflammation associated with cataract surgery. Sales of NEVANAC® grew 41.2% in the year ended December 31, 2010 over the prior year,$44 million due to market share gains, price increases and new product registrations outside the United States. Salestiming of DUREZOL® ophthalmic steroid subsequent to the March 2010 asset acquisition provided 3.2 percentage points of the growth in sales of infection and inflammation products.
Pursuant to a prior legal settlement, a competitor to Alcon launched a generic version of Alcon's branded TobraDex® ophthalmic suspension in the United States on January 1, 2009. Falcon Pharmaceuticals, our generic pharmaceutical subsidiary, also launched a generic version of TobraDex® ophthalmic suspension on January 2, 2009. During the year ended December 31, 2010, combined sales of TobraDex® ophthalmic suspension and Falcon's generic version of TobraDex® increased 3.7% globally, including the 2010 rollout of TobraDex®ST ophthalmic suspension in the United States, over the same period of 2009.
Global sales of our leading allergy products, Patanol® and Pataday™ ophthalmic solutions, grew 11.8% in the year ended December 31, 2010. Sales of our allergy products benefited from severe spring and fall allergy seasons in the United States during the second and fourth quarters of 2010.
Sales of otic/nasal products increased 15.2% in the year ended December 31, 2010 over 2009. Sales of CIPRODEX® otic suspension were positively influenced by price increases and volume growth from increased demand due to a severe ear infection season. (CIPRODEX® payments. While there is a registered trademark of Bayer AG, licensed to Alcon by Bayer Schering Pharma AG.) Patanase® nasal spray continued to gain market share in 2010.
Pharmaceuticals rebates grew for the year ended December 31, 2010, compared to 2009, due to increased statutory rebate levels related to the U.S. healthcare reform legislation, increasing utilization of U.S. government programs and higher commercial rebates. As a result of healthcare reform legislation in the United States, we recognized provisions totaling approximately $20 million for additional rebates primarily related to Medicaid.
Surgical
Global sales of our surgical products grew 7.4% to $3,220 million in the year ended December 31, 2010, compared to 2009. The effect of favorable exchange rates increased global sales of our surgical products 1.4%. Excluding the effect of foreign exchange fluctuations, our sales of surgical products would have increased 6.0%. Higher sales of intraocular lenses and cataract and vitreoretinal products (which include surgical equipment, devices and disposable products) accounted for most of the constant currency growth.
Sales of intraocular lenses increased 6.6% in the year ended December 31, 2010 over 2009. Excluding the 1.7% positive effect of foreign exchange fluctuations, intraocular lens sales would have increased 4.9%. Global sales of our advanced technology lenses, such as the AcrySof®ReSTOR® and the AcrySof®Toric, increased 21.4% in the year ended December 31, 2010 and would have grown 19.7% without the 1.7% favorable effect of foreign exchange fluctuations. Sales of our advanced technology lenses rose with increased adoption by surgeons of the AcrySof®Toric intraocular lens that corrects pre-existing astigmatism and volume gains for the AcrySof®ReSTOR® multifocal intraocular lens that corrects presbyopia.
Alcon received the European CE Mark of approval for the AcrySof® IQ ReSTOR® Toric intraocular lens during the second quarter of 2010. This lens was introduced to ophthalmologists at the European Society of Cataract and Refractive Surgeons meeting in Paris, France, and became available insome uncertainty about the final quarter of 2010 in many major markets that recognize the CE Mark. The Company planstaxes to file a Pre-Market Application ("PMA") for this lens with the FDA in early 2012.
Solid constant currency sales growth came from most other major product categories within the cataract and vitreoretinal segments. Sales of these surgical products grew somewhat faster on a constant currency basis in the International business segment due to growth of phaco surgery in emerging markets, increased acceptance of advanced technology products and market share growth. Sales of surgical glaucoma products subsequent to the January 2010 acquisition of Optonol Ltd. provided 0.7 percentage points of the sales growth in this category.
The increase in refractive sales for the year ended December 31, 2010 reflected global share growth.
Consumer Eye Care
Our global consumer eye care sales, consisting of contact lens care, artificial tears and other general eye care products, rose 8.2% to $893 million in the year ended December 31, 2010, compared to $825 million in 2009. The effect of favorable exchange rates increased global sales of our consumer eye care products 1.9%. Excluding the effect of foreign exchange fluctuations, our sales of consumer eye care products would have grown 6.3% over the prior year.
Sales of our contact lens disinfectants climbed 5.1% in the year ended December 31, 2010 compared to 2009, mostly as a result of volume growth. The impact of foreign exchange fluctuations increased sales of contact lens disinfectants by 1.8%.
Sales of our artificial tears products grew 17.7% over 2009. Excluding the 2.2% effect of foreign exchange fluctuations, sales of our artificial tears products would have improved 15.5%, primarily from volume growth in both the United States and International business segments. Market share growth of the Systane® family of lubricant eye drops drove this performance.
Sales of our other consumer eye care products declined by 5.3% to $89 million in the year ended December 31, 2010 from $94 million in 2009. Excluding the 2.1% effect of foreign exchange fluctuations, sales of our other consumer eye care products would have decreased 7.4%. The constant currency decrease reflected growth in retailer and coupon discounts on consumer eye products.
Gross Profit
Gross profit increased 12.7% to $5,504 million in the year ended December 31, 2010 from $4,885 million in 2009. Gross profit increased as a percent of sales to 76.7% in the year ended December 31, 2010 from 75.2% in 2009.
During the year ended December 31, 2010, advancements in our sales reporting system permitted us to better estimate allowable deductions from sales in the calculation of accrued royalties. This change in estimate resulted in a $24 million addition to gross profit during the first quarter of 2010. The remaining gross profit margin reflected differences in foreign currency exchange rates, the effects of price increases in the United States, expiration of a royalty agreement lapping the $3 million of severance charges for the first quarter of 2009 and improvements in product sales mix, which were offset somewhat by increased rebates from the enactment of U.S. healthcare reform legislation.
Operating Expenses
Selling, general and administrative expenses increased 7.0% to $2,070 million in the year ended December 31, 2010 from $1,935 million in 2009, primarily due to foreign exchange impacts and bad debt provisions in Europe, which were partially offset by lapping the 2009 charges for a reduction in force. In 2009, we experienced in-period costs of $10 million for a reduction in workforce. Selling, general and administrative expenses decreased as a percentage of sales to 28.8% from 29.8% in 2009. Although these expenses rose in 2010, disciplined cost management controlled their increase to levels below sales growth.
Research and development expenses increased 12.3% to $747 million (or 10.4% of sales) in the year ended December 31, 2010 from $665 million (or 10.2% of sales) in 2009. The increase in research and development expenses represented a continued investment across pharmaceutical, surgical and consumer eye care product lines. The 2009 expense included $6 million of in-period costs for reductions in workforce. The increase in research and development expenses included operations of our ESBATech biotech laboratories, acquired in September 2009, and our LenSx® laser development, acquired in August 2010.
Amortization of intangibles increased to $60 million in the year ended December 31, 2010, from $24 million in 2009. The increase arose from amortization of licenses and technology related to ESBATech, acquired in September 2009, and other acquisitions and asset purchases in 2010.
Other operating expenses of $152 million for the year ended December 31, 2010 represented costs related to the change of majority ownership arising from Novartis's purchase of its majority interest in Alcon from Nestlé on August 25, 2010, as discussed in note 16 to the condensed consolidated financial statements, and legal and other costs to support Alcon's board of directors in its evaluation of Novartis's merger proposal. The change of control accelerated the recognition of certain compensation expenses, including pension ($97 million) and share-based payments ($8 million).
Operating Income
Operating income increased 9.5% to $2,475 million in the year ended December 31, 2010 from $2,261 million in 2009. The improvement in 2010 reflected the sales growth, the change in estimating royalties, lapping the 2009 charges for a reduction in force, disciplined cost management discussed above and foreign currency exchange fluctuations. These were offset somewhat by increases in amortization, effects of the U.S. healthcare reform legislation and the change of majority ownership costs mentioned above.
Alcon United States business segment operating income increased 13.9% to $1,896 million, or 59.7% of sales, in the year ended December 31, 2010 from $1,664 million, or 57.1% of sales, in 2009. Operating income as a percent of sales improved in 2010 as a result of sales volume growth, price increases, change in the estimating of royalties and disciplined cost management.
Alcon International business segment operating income increased 14.7% to $1,728 million, or 43.2% of sales, in the year ended December 31, 2010 from $1,507 million, or 42.0% of sales in 2009. In 2010, the operating income margin improved as a result of sales growth, foreign exchange fluctuations, and improved gross margin.
Operating income for the Alcon United States and Alcon International business segments does not include: (1) certain manufacturing costs (e.g., manufacturing operation period costs and manufacturing variances); (2) all research and development costs other than regulatory costs; (3) certain other general corporate expenses; and (4) share-based compensation. Other operating expenses related to the change in majority ownership and other costs to support Alcon's board of directors in its evaluation of Novartis's merger proposal were included in other general corporate expenses.
Interest and Other Income (Expenses)
Interest income fell 37.0% to $29 million in the year ended December 31, 2010 from $46 million in 2009, primarily as a result of lower short term interest rates, partially offset by higher average balances of cash and cash equivalents in 2010. Interest expense decreased 43.8% to $9 million in the year ended December 31, 2010 from $16 million in 2009, resulting from decreased borrowings and slightly lower interest rates.
Other, net, included gains (losses) on investments for the year ended December 31, 2010 and 2009 as follows:
| Years ended December 31, | |
| | 2010 | | | 2009 | |
| (in millions) | |
Realized gains (losses) on sale of investments | | $ | 30 | | | $ | (49 | ) |
Unrealized gains (losses) on investments classified as trading securities | | | 6 | | | | 76 | |
Other | | | (1 | ) | | | (2 | ) |
| | | | | | | | |
Total | | $ | 35 | | | $ | 25 | |
Alcon and its subsidiaries invest cash generated from operations to fund ongoing operating expenses, research and development and long term corporate liabilities. The majority of the funds needed to accommodate expenses and liabilities are invested in cash and cash equivalents, the income from which is recorded in interest income. Despite the significant weighting to cash, the Company does have material exposure to fixed income securities. Investment gains during the year ended December 31, 2010 reflected the liquidation of the Company's remaining positions in a bank loans fund, a mortgage-backed securities fund and equities.
The Company had material exposure during the first half of 2009 to the following investment markets: fixed income securities, hedge funds, senior secured bank loans funds, equities and real estate investment trusts. The Company sold its investments in real estate investment trusts, a portion of its fixed income securities and a portion of the senior secured bank loans funds portfolio in the first quarter of 2009. The realized losses on sale of investments in the year ended December 31, 2009 reflected the sale of these instruments, for which the majority of the losses were recognized as unrealized losses on trading securities during fiscal year 2008. The Company also requested redemption of its investments in hedge funds in 2009 and the balance in hedge funds has declined to $6 million at December 31, 2010.
Income Tax Expense
Income tax expense increased to $317 million in the year ended 2010 from $306 million in 2009. The effective tax rate was 12.5% in the year ended December 31, 2010, compared to 13.2% in 2009.
The lower effective tax rate for the year ended December 31, 2010 reflected differences in product and geographic earnings mix and period benefits related to change of majority ownership charges, progression on prior year audits and reserve releases from the expiration of statutes of limitations. These were offset by a $25 million tax charge from the newly enacted provisions of U.S. healthcare reform laws (discussed above).
Net Earnings
Net earnings increased 10.1% to $2,210 million in the year ended December 31, 2010 from $2,007 million in 2009. This increase resulted from 2010 sales growth, the change in estimating royalties, disciplined cost management, the costs recognized in 2009 for the reduction in workforce and improved financial investment returns. Together they exceeded the costs related to the U.S. healthcare reform legislation, the change of majority ownership and the Alcon board's evaluation of Novartis's merger proposal.
Year ended December 31, 2009 Compared to Year ended December 31, 2008
Sales
The Company's global sales increased 3.3% to $6,499 million in the year ended December 31, 2009 over $6,294 million in 2008. The effect of unfavorable exchange rates decreased global sales 3.0 %. Excluding the effect of foreign exchange fluctuations, global sales would have grown 6.3%, primarily reflecting volume growth during the year ended December 31, 2009.
Alcon United States sales increased 3.8% to $2,914 million in the year ended December 31, 2009 from $2,807 million in 2008. Our U.S. pharmaceutical sales reflected volume gains in glaucoma products and otic products, as well as growth subsequent to the launch of Patanase® nasal spray during the second quarter of 2008. These sales gains were partially offset by generic competition to TobraDex® suspension and lower market prescription volumes for some pharmaceutical products.
Surgical sales in the United States benefited from increased sales of intraocular lenses, especially our advanced technology intraocular lenses, AcrySof®ReSTOR® and AcrySof®Toric intraocular lenses, and sales of other cataract and vitreoretinal products. Despite growth in sales of artificial tears in 2009, our U.S. consumer eye care sales decreased from lower sales of contact lens care and other consumer products, reflecting competition from private label products and changes in retailer purchasing patterns.
Alcon International sales increased 2.8% to $3,585 million in the year ended December 31, 2009, from $3,487 million in 2008. Excluding the 5.5% unfavorable effect of foreign exchange fluctuations, Alcon International sales would have grown 8.3%, reflecting volume growth during the period. Solid sales performance in Japan, Brazil, France, Spain and Australia markets led the sales growth in constant currency.
Sales in less developed international markets increased by 1.0%. Excluding the 10.2% unfavorable effect of foreign currency fluctuation, sales in less developed international markets would have grown 11.2% as a result of
volume growth. Sales in the key markets of Brazil, Russia, India and China grew a combined 6.0% and would have grown 16.7% without the 10.7% unfavorable effect of foreign exchange rates.Pharmaceutical sales outside of the United States grew on a constant currency basis in all major therapeutic areas. Growth in Surgical sales outside the United States came primarily from advanced technology lenses, such as AcrySof®Toric and AcrySof®ReSTOR®, vitreoretinal equipment and disposable products associated with both cataract and vitreoretinal procedures. Alcon International sales of Consumer Eye Care products declined due to lower sales of contact lens care and other products, as a result of increased competition in the market. These declines were somewhat offset by increased sales of artificial tears products.
| | | | | | | | | | | | Foreign | | | Change in | | |
| | | | | | | | | | | | Currency | | | Constant | | |
GLOBAL PRODUCT SALES | | | 2009 | | | 2008 | | | Change | | | Change | | | Currency | (a) | |
| | | (in millions, except percentages) | | |
| | | | | | | | | | | | | | | | | |
Infection/inflammation | | $ | 829 | | $ | 874 | | | (5.1 | ) | % | (3.2 | ) | % | (1.9 | )% | |
Glaucoma | | | 1,121 | | | 955 | | | 17.4 | | | (3.3 | ) | | 20.7 | | |
Allergy | | | 486 | | | 463 | | | 5.0 | | | (0.6 | ) | | 5.6 | | |
Otic/nasal | | | 355 | | | 316 | | | 12.3 | | | (1.3 | ) | | 13.6 | | |
Other pharmaceuticals/rebates | | | (114 | ) | | (47 | ) | | * | | | * | | | * | | |
| | | | | | | | | | | | | | | | | |
Total Pharmaceutical | | | 2,677 | | | 2,561 | | | 4.5 | | | (3.1 | ) | | 7.6 | | |
| | | | | | | | | | | | | | | | | |
Intraocular lenses | | | 1,133 | | | 1,073 | | | 5.6 | | | (3.3 | ) | | 8.9 | | |
Cataract/vitreoretinal | | | 1,759 | | | 1,692 | | | 4.0 | | | (2.8 | ) | | 6.8 | | |
Refractive | | | 105 | | | 116 | | | (9.5 | ) | | (3.5 | ) | | (6.0 | ) | |
| | | | | | | | | | | | | | | | | |
Total Surgical | | | 2,997 | | | 2,881 | | | 4.0 | | | (3.1 | ) | | 7.1 | | |
| | | | | | | | | | | | | | | | | |
Contact lens disinfectants | | | 448 | | | 469 | | | (4.5 | ) | | (1.7 | ) | | (2.8 | ) | |
Artificial tears | | | 283 | | | 272 | | | 4.0 | | | (5.6 | ) | | 9.6 | | |
Other | | | 94 | | | 111 | | | (15.3 | ) | | (3.6 | ) | | (11.7 | ) | |
| | | | | | | | | | | | | | | | | |
Total Consumer Eye Care | | | 825 | | | 852 | | | (3.2 | ) | | (3.2 | ) | | -- | | |
| | | | | | | | | | | | | | | | | |
Total Global Sales | | $ | 6,499 | | $ | 6,294 | | | 3.3 | | | (3.0 | ) | | 6.3 | | |
| See (a) on previous sales table. |
Pharmaceutical
Global sales of our pharmaceutical products grew 4.5% in the year ended December 31, 2009 from sales in 2008. The effect of unfavorable exchange rates decreased global sales of our pharmaceutical products 3.1%. Excluding the effect of foreign exchange fluctuations, our sales of pharmaceutical products would have grown 7.6%. Sales of our pharmaceutical products grew faster outside the United States because of several recent product launches in Europe and Japan, as well as faster market growth in emerging markets. Market share and volume gains for our key productsbe assessed in the major therapeutic categories werecountries in which we operate, we believe that our estimated amounts for current income tax liabilities, including any amounts related to any uncertain tax positions, are appropriate based on currently known facts and circumstances. Refer to Notes 17 and 18 to the driving forces behind our global sales growth.Consolidated Financial Statements for additional details related to financial debts.
Equity
Sales growth for our glaucoma products came both from inside and outside the United States with a larger contribution from the international markets. Even including the negative effectsEquity was $19.3 billion as of foreign exchange, combined sales of our family of TRAVATAN® products grew 20.7% for the year ended December 31, 2009 over 2008. During the year ended2019, a decrease of $3.3 billion when compared to Invested capital of $22.6 billion as of December 31, 2009, Azopt® and AZARGA®, a combined formulation that2018. The decrease was introduced in Europe subsequent to its approval in late 2008, posted a 15.6% combined sales increase.
Despite some contraction in the U.S. market, global sales of Vigamox® increased 8.7%, reflecting volume growth and price increases. Sales of NEVANAC® grew 19.6% in 2009 due to increased use of NSAIDs after cataract surgery, price increases, market share gains and launches in additional countries.
Pursuant to a prior legal settlement, a competitor to Alcon launched a generic version of Alcon's branded TobraDex® ophthalmic suspension in the United States on January 1, 2009. Falcon Pharmaceuticals, our generic pharmaceutical subsidiary, also launched a generic version of TobraDex® ophthalmic suspension on January 2, 2009. A U.S. patent related to TobraDex® expired in September 2009. During the year ended December 31, 2009, the combined sales of TobraDex® ophthalmic suspension and Falcon's generic version of TobraDex® decreased 35.9% globally, primarily within the United States, from 2008.
Despite contraction in the U.S. allergy market, global sales of our leading allergy products, Patanol® and Pataday™ grew 5.5% for the year ended December 31, 2009 over 2008. Pataday™ continued to achieve market share gains in the U.S. ocular allergy market in 2009. The increase in sales reflected volume growth outside the United States, driven by market share gains and a strong allergy season in Japan, and price growth in the United States. A contraction in the U.S. allergy market during 2009 was partially offset by expanded market share.
Sales of otic/nasal products increased 12.3% in the year ended December 31, 2009 over 2008, despite contraction in the market for otic products. Market share gains and price increases positively influenced sales of CIPRODEX®. In addition, Patanase® gained market share in 2009 subsequent to its 2008 U.S. launch after FDA approval in April 2008. Patanase® is indicated for patients 6 years of age or older for the relief of seasonal allergic rhinitis.
The change in the other pharmaceuticals/rebates line for the year ended December 31, 2009, compared to 2008, primarily reflects growth in rebates under the U.S. Medicaid program, attributable to increasing utilization rates$3.1 billion paid to Novartis and higher statutory discounts, and higher commercial rebates attributable to U.S. Medicare Part D sales.
Surgical
Global sales of our surgical products grew 4.0% to $2,997 million in the year ended December 31, 2009, compared to 2008. The effect of unfavorable exchange rates decreased global sales of our surgical products 3.1%. Excluding the negative effect of foreign exchange fluctuations, our sales of surgical products would have increased 7.1%. Higher sales of advanced technology intraocular lenses and cataract and vitreoretinal products accounted for the constant currency growth.
Sales of intraocular lenses increased 5.6% in the year ended December 31, 2009 over theits affiliates immediately prior year. Excluding the 3.3% negative effect of foreign exchange fluctuations, intraocular lens sales would have increased 8.9%. Global sales of our advanced technology lenses, the AcrySof®ReSTOR® and the AcrySof®Toric, increased 29.3% in the year ended December 31, 2009 and would have grown 32.4% without the 3.1% negative effect of foreign exchange fluctuations.
Sales of other surgical products were adversely impacted by exchange rates but grew faster on a constant currency basis in the International business segment due to growth of phaco surgery in emerging markets, increased acceptance of advanced technology products and market share growth. The solid constant currency sales growth came from most major product categories within the cataract and vitreoretinal product lines. Our CONSTELLATION® surgical system continued to gain acceptance globally among vitreoretinal surgeons.
Refractive sales declined 9.5% to $105 million for the year ended December 31, 2009 compared to 2008. Refractive sales for the period decreased as a result of a weaker economy and a slower market.
Consumer Eye Care
Our global consumer eye care sales, consisting of contact lens care, artificial tears and other general eye care products, declined 3.2% to $825 million in the year ended December 31, 2009, compared to the prior year. The effect of unfavorable exchange rates caused the 3.2% decreaseSpin-off, as described in global sales of our consumer eye care products. Excluding the effect of foreign exchange fluctuations, our sales of consumer eye care products would have declined minimally from the prior year.
Sales of our contact lens disinfectants declined 4.5% in the year ended December 31, 2009 compared to 2008. Excluding the 1.7% negative impact of foreign exchange fluctuations, sales of contact lens disinfectants would have decreased 2.8%, due to changes in retailer purchasing patterns for our contact lens disinfectants in the United States, declines in the market for branded multi-purpose solutions and competitive pressures.
Sales of our artificial tears products grew 4.0% over 2008. Higher sales of our Systane® products accounted for most of the growth. More than half of the sales growth for Systane® and Systane®Ultra lubricant eye drops came from the United States reflecting market share gains. In July 2008, we launched Systane®Ultra in the United States.
Sales of our other consumer eye care products decreased 15.3% to $94 million in 2009 from 2008. Excluding the 3.6% negative effect of foreign exchange fluctuations, sales of our artificial tears products would have decreased 11.7%. The constant currency decrease reflected declines in sales of over-the-counter allergy and redness relief products.
Gross Profit
Gross profit increased 1.3% to $4,885 million in the year ended December 31, 2009 from $4,822 million in 2008. Gross profit decreased as a percent of sales to 75.2% in the year ended December 31, 2009 from 76.6% in 2008. Gross profit margin declined as a result of the loss of gross margin on sales of tobramycin/dexamethasone combination products from generic competition to TobraDex®, the effects of differences in foreign currency exchange rates and higher royalty expense, which were partially offset by manufacturing efficiencies and improvements in geographic/product sales mix.
Operating Expenses
Selling, general and administrative expenses decreased 1.3% to $1,935 million in the year ended December 31, 2009 from $1,961 million in 2008. Selling, general and administrative expense as a percentage of sales decreased to 29.8% in 2009 from 31.1% in 2008. In 2009, we experienced the costs of sales force additions in selected Asian and European countries, as well as lapping costs of prior year sales force additions that took place progressively after the first quarter of 2008 in the United States, Japan and emerging markets to support new product launches and/or increased direct selling share-of-voice competitiveness, and the in-period costs of $10 million for the 2009 reduction in other workforce. These costs were more than offset by the favorable effects of foreign currency fluctuations, cost management programs and lower share-based payments expense.
Research and development expenses increased 7.4% to $665 million (or 10.2% of sales) in the year ended December 31, 2009 from $619 million (or 9.8% of sales) in 2008. The increase in research and development expenses represented a continued investment across pharmaceutical, surgical and consumer eye care product lines. This investment included ESBATech operations, after the acquisition in September 2009, and new licensing agreements.
Amortization of intangibles decreased to $24 million in the year ended December 31, 2009, from $29 million in 2008. Certain paid-up licenses became fully amortized in 2009 and 2008, reducing amortization expense.
Operating Income
Operating income increased 2.2% to $2,261 million in the year ended December 31, 2009 from $2,213 million in 2008. The operating income in 2009 reflected the increase in gross profit (from sales growth and other factors discussed above), as well as reduced selling, general and administrative expenses discussed above.
Alcon United States business segment operating income increased 7.1% to $1,664 million, or 57.1% of sales, in the year ended December 31, 2009 from $1,554 million, or 55.4% of sales, in 2008. Operating income as a percent of sales improved in 2009 as a result of sales growth and lower operating expenses.
Alcon International business segment operating income increased 2.4% to $1,507 million, or 42.0% of sales, in the year ended December 31, 2009 from $1,472 million, or 42.2% of sales in 2008. In 2009, the operating income
margin declined primarily as a result of the effect of unfavorable differences in foreign currency exchange rates, higher royalty expense and lapping costs of sales force additions.
Operating income for the Alcon United States and Alcon International business segments does not include: (1) certain manufacturing costs (e.g., manufacturing operation period costs and manufacturing variances); (2) all research and development costs other than regulatory costs; (3) certain other general corporate expenses; and (4) share-based compensation.
Interest and Other Income (Expenses)
Interest income decreased 39.5% to $46 million in the year ended December 31, 2009 from $76 million in 2008, primarily as a result of declining short term interest rate yields in 2009. Interest expense declined 68.6% to $16 million in the year ended December 31, 2009 from $51 million in 2008, resulting from decreased borrowings and lower interest rates.
Other, net, included gains (losses) on investments for the year ended December 31, 2009 and 2008 as follows:
| | Years ended December 31, | |
| | 2009 | | | 2008 | |
| | (in millions) | |
Realized gains (losses) on sale of investments | | $ | (49 | ) | | $ | (12 | ) |
Unrealized gains (losses) on investments classified as trading securities | | | 76 | | | | (85 | ) |
Other-than-temporary impairment on available-for-sale investments | | | -- | | | | (37 | ) |
Other | | | (2 | ) | | | -- | |
| | | | | | | | |
Total | | $ | 25 | | | $ | (134 | ) |
Alcon and its subsidiaries invest cash flow generated from operations to fund ongoing operating expenses, research and development and long term corporate liabilities. The majority of the funds needed to accommodate expenses and liabilities are invested in cash and cash equivalents, the income from which is recorded in interest income. The Company's long term liabilities are evaluated with the help of outside consultants and are offset by a portfolio of investments with appropriate durations and expected returns. Despite the significant weighting to cash, the Company had material exposureNote 4 to the following investment markets: fixed income securities, a senior secured bank loans fund and equities. The realized and unrealized gains and losses on investments in the year ended December 31, 2009 reflected the volatility in the public markets in line with market indices.Consolidated Financial Statements.
Income Taxes
In the year ended December 31, 2009, the Company recognized net income tax expense totaling $306 million compared to income tax expense of $36 million in 2008. During the third quarter of 2008, the Company reached agreement with the U.S. Internal Revenue Service on all issues surrounding the acquisition and liquidation of its investment in former Summit Autonomous, Inc., the Company's subsidiary responsible for the Company's refractive research and manufacturing activities prior to November 2007. As a result of this agreement, the Company recognized tax benefits in 2008 totaling $236 million related to losses on the value of this investment.
In the year ended December 31, 2009, increased income tax expense included a net increase of $22 million for period items related to audit settlements, advance pricing agreement negotiations, recent case law, the elimination of net operating loss carryforwards, lapses of statutes of limitation and other minor items. The Company continued to recognize Swiss tax benefits associated with the expansion of the Company's global administration operations.
The net tax expense for the year ended December 31, 2008 reflected the combined effects of (i) a net reduction of $271 million for period items described below, (ii) product and geographic earnings mix and (iii) the Swiss tax benefits associated with the expansion of the Company's global administration operations. The reduction for period items includes (i) a reduction of $236 million for losses associated with the Company's Pre-Filing Agreement with the U.S. Internal Revenue Service related to losses associated with the Company's investment in Summit Autonomous, Inc. described above and (ii) reductions related to the progress on audit settlements, advance pricing agreement negotiations, the lapse of statutes of limitation and other minor items.
Net Earnings
Net earnings decreased 2.0% to $2,007 million in the year ended December 31, 2009 from $2,047 million in 2008. This decrease resulted from increased income taxes in 2009, compared to 2008 which included $271 million of period reductions of income taxes. This income tax increase was partially offset by 2009 sales growth, disciplined cost management programs and improved financial investment returns.
Sales by Quarter
(debt)/liquidity(1) (non-IFRS measure)
The following table sets forth our sales by quarter for the last three years.
| | Unaudited | |
| | 2010 | | | 2009 | | | 2008 | |
| | (in millions) | |
| | | | | | | | | |
First | | $ | 1,721 | | | $ | 1,493 | | | $ | 1,536 | |
Second | | | 1,886 | | | | 1,677 | | | | 1,736 | |
Third | | | 1,760 | | | | 1,614 | | | | 1,524 | |
Fourth | | | 1,812 | | | | 1,715 | | | | 1,498 | |
| | | | | | | | | | | | |
Total | | $ | 7,179 | | | $ | 6,499 | | | $ | 6,294 | |
| | | | | | | | | | | | |
Our quarterly sales trends reflect seasonality in several products, including ocular allergy and otic products, in the formis a summary of increased sales during the spring months, which occur during the second quarter in the northern hemisphere.
Liquidity and Capital Resources
Cash, Debt and Liquidity
Atnet (debt)/liquidity as of December 31, 2010,2019 and 2018, together with a reconciliation to total financial debt, the Company reported cash and cash equivalents of $2,525 million, total short term borrowings and debt of $399 million and consolidated shareholders' equity of $7,252 million. As part of our cash management strategy, the Company maintains large balances of cash and cash equivalents in Switzerland and Bermuda, while the Company's debt is borrowed in subsidiary operating companies located elsewhere.most directly comparable IFRS measure.
The Company continued |
| | | | | |
($ millions) | 2019 |
| | 2018 |
|
| | | |
Current financial debt | (261 | ) | | (47 | ) |
Other financial liabilities to former parent | — |
| | (67 | ) |
Other financial receivables from former parent | — |
| | 39 |
|
Non-current financial debt | (3,218 | ) | | — |
|
Total financial debt | (3,479 | ) | | (75 | ) |
| | | |
Less liquidity: | | | |
Cash and cash equivalents | 822 |
| | 227 |
|
Derivative financial instruments | 1 |
| | — |
|
Total liquidity | 823 |
| | 227 |
|
Net (debt)/liquidity | (2,656 | ) | | 152 |
|
| |
(1) | The balance previously reported in "Financial debts" for a finance lease obligation has been reclassified from "Financial debts" to "Non-current lease liabilities". This reclassification resulted in an increase in Net (debt)/liquidity of $89 million as of December 31, 2018. |
Alcon's liquidity amounted to generate significant cash flow from operations in 2010 and used $306 million to repay short term debt. In addition, the Company used $1,037 million to pay dividends on common shares and $33 million to purchase treasury shares, as discussed below. Acquisitions and financing activities led to a decrease of $482 million in cash and cash equivalents at December 31, 2010 from the prior year.
The Company maintains an irrevocable Rabbi trust to be held and invested in an unfunded arrangement for the payment of benefits to participants under certain defined benefit pension plans of the Company. The assets of the trust are restricted to the payment of pension benefits except under certain conditions, such as the Company's insolvency or termination of the trust. The Alcon Executive Retirement Plans Grantor Trust Agreement provides for the Company to fund the current actuarially determined present value of the aggregate accrued pension benefits of all participants upon the change of control (discussed in note 16 to the consolidated financial statements). Based on actuarially determined pension benefit projections and market conditions, the Company contributed $152 million during the third quarter of 2010 to satisfy this requirement. The assets of the trust were primarily the cash surrender value ($279$823 million as of December 31, 2010) of company owned life insurance policies purchased from a related captive insurance company subsidiary and cash equivalents ($1522019 compared to $227 million as of December 31, 2010).
Withholding taxes2018, while total financial debt increased to $3.5 billion as of approximately $107 million have not been provided on approximately $2,133 million of unremitted earnings of certain subsidiaries since such earnings are, or will be, reinvested in operations indefinitely. Taxes of approximately $17 million have not been provided on temporary differences of approximately $212 million for permanent investments in certain subsidiaries that will be taxable upon liquidation. Management believes that
investing indefinitely in these operations will not adversely affect the Company's ability to meet its current and long term working capital and liquidity needs.
In order to receive an expedited return in 2009 of assets held by Lehman Brothers International (Europe) (in administration) as discussed in note 14 to the consolidated financial statements, Alcon has agreed to return any assets which the Joint Administrators determine should not have been disbursed in settlement. The amount of funds to be returned, if any, would result from the determination by the Joint Administrators that the rights of another claimant in the proceeding have precedence over the Company's claim.
Cash Flows
During the year ended December 31, 2010, the Company generated operating cash flow of $2,375 million,2019, compared to $2,416 million in 2009. The decrease primarily reflected the Company's working capital requirements.
The operating cash flow was used for payment of dividends on common shares, the purchase of Alcon common shares, the repayment of short term borrowings, acquisitions and capital expenditures, including improvements and upgrades to our manufacturing plants and certain other facilities.
Financing Activities
During the year ended December 31, 2010, short term borrowings decreased by $270 million. Our short term borrowings are discussed more fully under "Credit Facilities and Debt" below.
Since 2002, the Company's board of directors has authorized the purchase on the open market of up to 27 million Alcon common shares, to, among other things, satisfy the exercise of equity awards granted to employees that became or are scheduled to become exercisable in 2007 through 2012. To the extent such share purchases are not required for employee awards, the board may present the shares for approval of cancellation at future shareholders' meetings. Through December 31, 2010, we cumulatively have purchased approximately 25.6 million Alcon common shares (including approximately 207,000 shares in 2010) for $2,740 million (including $33 million in 2010).
In December 2008, as a result of the agreement between Novartis and Nestlé discussed in note 16 to the consolidated financial statements, the Company discontinued the purchase of Alcon common shares in the open market under all share repurchase programs. However, the Company continues to acquire shares withheld from employees' exercises of share-based awards to cover their taxes.
We intend to issue new common shares from conditional capital for the exercise of stock options held by employees that became exercisable in 2006 and 2005, as well as for share-based awards granted after December 31, 2007. In February 2010, approximately 1.3 million share-settled stock appreciation rights and approximately 168,000 stock options granted to employees in 2007 became exercisable. In connection with the change in control, on August 25, 2010, almost 1.0 million employee share-settled stock appreciation rights and approximately 145,000 employee stock options became exercisable. In addition, over 1,000 restricted shares and approximately 234,000 restricted share units vested at that time. During 2010, approximately 2.4 million options were exercised, providing proceeds of $169 million to the Company, and more than 1.5 million share-settled stock appreciation rights were exercised.
In June 2010, we paid our shareholders cash dividends of $1,037 million (CHF 3.95 per common share, or approximately $3.44 per common share). The merger agreement with Novartis dated December 14, 2010 precludes the payment of dividends by Alcon.
Investing Activities
Net cash used in investing activities in the year ended December 31, 2010 and 2009 was $1,705 million and $390 million, respectively. The Company increased its investing activities in 2010 through two acquisitions, the purchase of intangible assets and adjustments to the investment portfolio. In 2010, more cash was used to acquire financial investments than in 2009, as certain adjustments were made in the investment portfolio. Capital expenditures decreased slightly in 2010, when compared to 2009, but the decrease was more than offset by purchases of intangible assets.
Our annual capital expenditures over the last three years were $309 million in 2010, $342 million in 2009 and $302 million in 2008, principally to expand and upgrade our manufacturing and research and development facilities and other infrastructure. In 2010, capital expenditures were made to add manufacturing capacity and upgrades to our Fort Worth, Texas, Puurs, Belgium, Huntington, West Virginia, Cork, Ireland, Kaysersberg, France, Houston, Texas, and Sinking Spring, Pennsylvania, manufacturing facilities and to continue construction of a new manufacturing plant in Singapore. In 2009, we broke ground to build the facility in Singapore that will manufacture pharmaceuticals to be distributed throughout most of Asia. We plan for the 331,000 square foot facility to be fully functional in 2012. Capital expenditures in 2010 were also made to upgrade and expand our research and development facilities and administrative facilities in Fort Worth and in Zurich, Switzerland (ESBATech).
We had capital expenditure commitments of $53 million at December 31, 2010. We expect to fund these capital projects through operating cash flow and, if necessary, short term borrowings.
In January 2010, we acquired Optonol, Ltd., a medical device company that develops, manufactures and markets novel miniature surgical implants used to lower intraocular pressure in patients with glaucoma. With this acquisition, Alcon acquired Optonol's EX-PRESS® glaucoma filtration device. This medical device will complement Alcon's pharmaceutical products that lower intraocular pressure in patients with glaucoma and ocular hypertension, and will be additive to the Company's growth opportunities.
The device is currently reimbursed in the U.S by Medicare and other payors, and it is also approved and currently marketed in Europe, Canada, Australia and several other countries. Because the product is already approved in the United States and other major markets, it began contributing commercially in the first quarter of 2010.
In the first quarter of 2010, we also purchased certain intangible assets. The intangible assets included the technology and licenses to manufacture, market and sell DUREZOL® ophthalmic steroid for post-surgical ocular pain and inflammation.
On August 18, 2010, the Company acquired 100% of the outstanding common shares of LenSx Lasers, Inc. LenSx is a privately held company that has developed the first femtosecond laser to receive U.S. Food and Drug Administration clearance for use as a complementary technology in cataract surgery. LenSx's laser enables surgeons to perform specific steps of the traditional cataract procedure with micron-level laser precision, including anterior capsulorhexis, phacofragmentation and the creation of certain corneal incisions. Without this technology, these steps must be performed manually with hand-held surgical instruments.
The Company paid $367 million in cash at closing to LenSx® shareholders for their shares. The acquisition also provides for maximum contingent payments of $383 million based upon the achievement and over-achievement of future femtosecond unit and procedure fee revenue milestones.
During 2010, although we sold portions of our investments receiving proceeds of $2,149 million, we added to our financial portfolio, investing $2,881 million. Total investments (short term and long term) were included in the consolidated balance sheets at a fair value of $1,287$75 million as of December 31, 2010,2018. Net debt increased to $2.7 billion as of December 31, 2019 compared with $552to net liquidity of $152 million as of December 31, 2009. These investments2018.
The increase in financial debts is attributable to borrowings immediately prior to the Spin-off, which were primarily denominatedpartially refinanced in U.S. dollars. The Company has invested in mostly debt investments primarilySeptember 2019. Refer to plan for obligations under certain deferred compensation arrangements and to generate additional returns within established risk parameters. More information on our investments is provided in notesNotes 4 and 517 to the consolidatedConsolidated Financial Statements for additional information. For additional information regarding net (debt)/liquidity, which is a non-IFRS measure, see the explanation of non-IFRS measures in "Item 5. Operating and Financial Review and Prospects— 5.A. Operating Results —Non-IFRS measures as defined by the Company".
EBITDA (non-IFRS measure)
|
| | | | | | | | |
($ millions) | 2019 |
| | 2018 |
| | 2017 |
|
Net (loss)/income | (656 | ) | | (227 | ) | | 256 |
|
Taxes | 324 |
| | (73 | ) | | (383 | ) |
Depreciation of property, plant & equipment | 267 |
| | 239 |
| | 215 |
|
Depreciation on right-of-use assets | 66 |
| | — |
| | — |
|
Amortization of intangible assets | 1,084 |
| | 1,019 |
| | 1,033 |
|
Impairments of property, plant & equipment, and intangible assets | 8 |
| | 380 |
| | 57 |
|
Interest expense | 113 |
| | 24 |
| | 27 |
|
Other financial income & expense | 32 |
| | 28 |
| | 23 |
|
EBITDA | 1,238 |
| | 1,390 |
| | 1,228 |
|
Liquidity and financial statements.
Contractual Obligations
| Payments Due by Period | |
| | | | | 1 Year | | | | 2-3 | | | | 4-5 | | | More than | |
| | Total | | | or Less | | | Years | | | Years | | | 5 Years | |
| (in millions) | |
Long term debt | | $ | 62 | | | $ | 62 | | | $ | -- | | | $ | -- | | | $ | -- | |
Operating leases | | | 280 | | | | 67 | | | | 87 | | | | 45 | | | | 81 | |
Purchase obligations | | | 76 | | | | 41 | | | | 30 | | | | 3 | | | | 2 | |
Income tax liabilities | | | 77 | | | | 1 | | | | 76 | | | | -- | | | | -- | |
Other long term liabilities | | | 920 | | | | 85 | | | | 189 | | | | 152 | | | | 494 | |
Total contractual obligations | | $ | 1,415 | | | $ | 256 | | | $ | 382 | | | $ | 200 | | | $ | 577 | |
During the year ended December 31, 2010, we increased net unrecognized tax benefitsdebt by $1 million, resulting in net unrecognized tax benefits of $77 million at December 31, 2010. Total unrecognized tax benefits for which payments were expected within one year were $1 million. A reasonably reliable estimate of the timing of future payments relating to noncurrent unrecognized tax benefits could not be determined.
Additional information about the amounts included in the above table was provided in notes 3, 5, 8, 9, 13, 15, 17 and 18 to the consolidated financial statements.
Off-Balance Sheet Arrangements
currency
The Company has obligations under certain guarantees, letters of credit, indemnifications and other contracts that contingently require the Company to make payments to guaranteed parties upon the occurrence of specified events. The Company believes that any payments required under these contingencies would not pose potential material risk to the Company's futurefollowing table summarizes liquidity capital resources and financial condition. See the notes to the consolidated financial statements for further descriptions and discussions regarding the Company's obligations.
We acquire assets still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to such third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval of the product for marketingdebts by the appropriate regulatory agency). If required by the arrangement, we may have to make royalty payments based upon a predetermined percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing such product is obtained. Because of the contingent nature of these payments, except for contingent payments recorded in business acquisitions, they are not included in the table of contractual obligations.
These arrangements are not individually material to the Company's future liquidity, capital resources and financial condition. However, if milestones for multiple products covered by such arrangements would happen to be reached in the same accounting period, the aggregate charge to expense could be material to the results of operations in any one period. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the potential product successfully achieves clinical testing objectives.
Capital Resources
We expect to meet our current working capital and liquidity needs principally through cash and cash equivalents, the liquidation of short term investments and, to the extent necessary, short term borrowings. We expect to meet future liquidity requirements through our operating cash flows, the liquidation of short term investments and, to the extent necessary, issuance of short term or long term debt. We believe this combination would be sufficient to meet our liquidity requirements, even if our sales were adversely affected as compared to expectations.
Credit Facilities and Debt
During 2010, the Company repaid and terminated its commercial paper facility. An Alcon subsidiary had an available commitment of $12 million under an unsecured line of credit with a subsidiary of Novartis; at December 31, 2010, $4 million was outstanding under this credit facility. Alcon's subsidiaries had third-party lines of credit, including bank overdraft facilities, totaling approximately $845 million under which there was an aggregate outstanding balance of $333 million at December 31, 2010. These third-party credit facilities are arranged or provided by a number of international financial institutions, the most significant of which had the following aggregate limits: Citibank ($395 million); Mitsui-Sumitomo Bank ($105 million); Mizuho Bank ($99 million); and Bank of Tokyo – Mitsubishi UFJ ($61 million). Most of the credit facilities have terms of less than one year and accrue interest at a rate consistent with local borrowing rates. In aggregate, these facilities had a weighted average interest rate of 2.5% at December 31, 2010.
As of December 31, 2010, the Company had a bank loan for Japanese yen 5.0 billion ($62 million) maturing in January 2011 arranged by ABN AMRO for our subsidiary in Japan. The balance of the loan was repaid in January 2011.
Valuation of Financial Instruments
The Fair Value Measurements and Disclosures Topic of the Accounting Standards Codification ("ASC") defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
The Company has hired investment managers to invest funds primarily in liquid, short term high-quality fixed income investments. The investments are held at a global custodian and priced using the custodian's pricing matrix, which primarily includes broker/dealer quotes in active markets. The pricing on these securities has not been adjusted by the Company. We have reviewed our global custodian's pricing source hierarchy, which details the preferred pricing source and method for each asset class. Due to the nature of the pricing sources, the Company has classified these investments as Level 2.
As indicated in note 5 to the consolidated financial statements, financial assets presented at fair value and categorized as Level 3 were corporate investments held in funds professionally managed by investment managers. These Level 3 financial assets were marked to net asset values furnished in statements received from fund custodians, whose statements reflect valuations conducted according to their respective fund pricing policies and asset types. The Company evaluated these pricing policies utilized by the investment advisors and validated certain fair value measurements.
As discussed in note 5 to the consolidated financial statements, in connection with certain acquisitions, the Company agreed to potential contingent payments, with estimated fair values totaling $160 million, upon the achievement of certain future research and development milestones and/or certain revenue objectives. These contingent liability payments were classified as Level 3 under the fair value hierarchy and were valued using discounted probability weighted cash flow models. The sensitivities of the estimates to the assumed probabilities are discussed in that same note.
The Company's financial assets and liabilities presented at fair value and categorized as Level 3currency as of December 31, 20102019 and 2009 were summarized2018.
|
| | | | | | | | | | | |
| Liquidity (%)(1) | | Financial debts (%)(2) |
| 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
USD | 63 |
| | 35 |
| | 80 |
| | 5 |
|
EUR | 6 |
| | 41 |
| | 11 |
| | 3 |
|
CHF | 1 |
| | 8 |
| | — |
| | — |
|
JPY | — |
| | — |
| | 5 |
| | — |
|
Other | 30 |
| | 16 |
| | 4 |
| | 92 |
|
Total | 100 |
| | 100 |
| | 100 |
| | 100 |
|
| |
(1) | Liquidity includes cash and cash equivalents and time deposits. |
| |
(2) | Financial debt includes non-current and current financial debts. The balances previously reported in "Financial debts" for a finance lease obligation have been reclassified from "Financial debts" to "Non-current lease liabilities". This reclassification has also been reflected in the computation of financial debts by currency. |
| |
5.C. | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. |
Alcon research & development spending totaled $656 million, $587 million and $584 million for the years 2019, 2018 and 2017, respectively. As described in the table presented below:
| | December 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (in millions) | |
| | | | | | |
Level 3 assets | | $ | 6 | | | $ | 22 | |
| | | | | | | | |
Total assets | | $ | 10,073 | | | $ | 8,686 | |
| | | | | | | | |
Total financial assets measured at fair value | | $ | 1,287 | | | $ | 559 | |
| | | | | | | | |
Level 3 assets as a percent of total assets | | Less than 1 % | | | Less than 1 % | |
Level 3 assets as a percent of total financial assets measured at | | | | | | | | |
fair value | | Less than 1 % | | | | 4 | % |
| | | | | | | | |
| | | | | | | | |
Level 3 liabilities | | $ | 160 | | | $ | 71 | |
| | | | | | | | |
Total liabilities | | $ | 2,821 | | | $ | 2,781 | |
| | | | | | | | |
Total financial liabilities measured at fair value (including short term | | | | | | | | |
borrowings) | | $ | 571 | | | $ | 736 | |
| | | | | | �� | | |
Level 3 liabilities as a percent of total liabilities | | | 6 | % | | | 3 | % |
Level 3 liabilities as a percent of total financial liabilities measured | | | | | | | | |
at fair value | | | 28 | % | | | 10 | % |
| | | | | | | | |
For a further discussion regarding the measurement"Risk Factors" section and elsewhere in this Annual Report, we are subject to varying degrees of financial instruments, see note 5 to the consolidated financial statements.
Market Risk
Interest Rate Risks
We are exposed to interest rate risks through short term floating rate investments that exceed our short term floating rate loans. Rising interest rates will increase net interest income, while falling rates will reduce it. We evaluate the use of interest rate swaps and periodically use such agreements to manage our interest rate risk on selected debt instruments.
Credit Risks
In the normal course of our business, we incur credit risk because we extend trade credit to our customers. We believe that these credit risks are well diversified, and our internal staff actively manages these risks. Our principal concentrations of trade credit are generally with large and financially sound corporations, such as large retailers and grocery chains, drug wholesalers and governmental agencies. It is not unusual for our five largest customersregulation in the United States to representcountries in which we operate, which makes the aggregate approximately 16%process of developing new products and obtaining necessary regulatory marketing authorization lengthy, expensive and uncertain. See "Item 3. Key Information—3.D. Risk Factors". For further information on Alcon research and development policies and additional product information, as well as a description of the outstanding balance of our gross accounts receivable; however, no single customer accountedregulatory approval process, see "Item 4. Information on the Company—4.B. Business Overview".
Please see "Item 5.A. Operating Results—Opportunity and risk summary" and "Item 4. Information on the Company—4.B. Business Overview" for more than 10% of the Company's consolidated sales in the year ended December 31, 2010.trend information.
In connection with our sales of surgical equipment, we frequently finance the purchase of our equipment and enter into leases and other financial transactions with our customers. In general, these loans and other transactions range in duration from one to five years and in principal amount range from $15,000 to $500,000. We conduct credit analyses of the customers to whom we extend credit and secure the loans and leases with the purchased surgical equipment. Over the last 24 years, we have offered financing programs for surgical equipment and losses have not been material to our operations. In countries that may be subject to high inflation, the credit risks to which we are exposed can be larger and less predictable.
We conduct some of our business through export operations and are exposed to country credit risk. This risk is mitigated by the use, where applicable, of letters of credit confirmed by large commercial banks in Switzerland and the United States.
In certain countries in the European Union, many of our government customers have significantly delayed payment of amounts owed to us for their purchase of our products. This has increased our exposure to credit risk in these countries. We regularly review these risks and take appropriate actions related to them.
| |
5.E. | OFF-BALANCE SHEET ARRANGEMENTS |
We have significant outstanding receivable balancesno unconsolidated special purpose financing or partnership entities or other off balance sheet arrangements that have or are dependent upon either directreasonably likely to have a current or indirect payment by various governmental entities across the world. The ultimate payment of these receivables is dependentfuture effect on the ability of these governments to maintain liquidity primarily through borrowing capacity, particularly in the European Union. If certain governments are not able to maintain access to liquidity through borrowing capacity, the ultimate payment of their respective portion of these outstanding receivables could be at risk and impact profits and cash flow.
Currency Risks
We are exposed to market risk fromour financial condition, changes in currency exchange rates that could impact ourfinancial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors. See also Note 26 to the Consolidated Financial Statements included elsewhere in this Annual Report and financial position. We managematters described in "Item 5.F. Aggregate Contractual Obligations".
| |
5.F. | AGGREGATE CONTRACTUAL OBLIGATIONS |
The following table summarizes Alcon's undiscounted contractual obligations and other commercial commitments at December 31, 2019, as well as the effect these obligations and commitments are expected to have on our exposure to these currency risks through our regular operatingliquidity and financing activities and, when appropriate, through the use of derivative financial instruments. We use foreign currency derivative financial instruments as risk management tools.cash flow in future periods.
We use foreign currency forward contracts and options to manage the volatility of non-functional currency cash flows resulting from changes in exchange rates. Foreign currency forward contracts are primarily used to hedge intercompany purchases and sales. The use of these derivative financial instruments allows us to reduce our overall exposure to exchange rate fluctuations, since the gains and losses on these derivative contracts substantially offset losses and gains |
| | | | | | | | | | | | | | |
| Payments due by period |
($ millions) | Total |
| | 1 year |
| | 2 - 3 years |
| | 4 - 5 years |
| | After 5 years |
|
Financial debt | 3,508 |
| | 261 |
| | 55 |
| | 1,192 |
| | 2,000 |
|
Interest on financial debt | 1,083 |
| | 94 |
| | 168 |
| | 168 |
| | 653 |
|
Leases | 449 |
| | 73 |
| | 109 |
| | 67 |
| | 200 |
|
Pensions and other post-employment benefit plans | 573 |
| | 62 |
| | 99 |
| | 110 |
| | 302 |
|
Property, plant & equipment purchase commitments | 212 |
| | 194 |
| | 18 |
| | — |
| | — |
|
Research & development potential milestone commitments | 181 |
| | 28 |
| | 45 |
| | 37 |
| | 71 |
|
Other purchase commitments | 169 |
| | 42 |
| | 68 |
| | 49 |
| | 10 |
|
Total contractual cash obligations | 6,175 |
| | 754 |
| | 562 |
| | 1,623 |
| | 3,236 |
|
For other contingencies, see "Item 4. Information on the assetsCompany—4.D. Property, Plants and liabilities being hedged.
New Accounting Standards
In October 2009, theEquipment" section, "Item 8. Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force." This update provides amendments to ASC Topic 605, "Revenue Recognition" to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not expect this update to have any impact on the Company's consolidated financial statements upon adoption on January 1, 2011.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, "Improving Disclosures about Fair Value Measurements." This update provides amendments to ASC Topic 820-10, "Fair Value MeasurementsInformation—8.A. Consolidated Statements and Disclosures" by requiring additional disclosures regarding financial instruments. The update is effective for interimOther Financial Information" section and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,Notes 19 and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company implemented the applicable portions of this update in 2010 and does not expect the remaining provisions of this update to have a significant impact on the Company's consolidated financial statements.
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, "Disclosures about the credit quality of Financing Receivables and the Allowance for Credit Losses." This update amends ASC Topic 825, "Accounting for Financial Instruments" by requiring additional disclosures regarding financing receivables. The update is effective for interim and annual reporting periods beginning after December 15, 2010. The Company does not expect this update to have any impact on the Company's consolidated financial statements upon adoption on January 1, 2011.
In December 2010, the FASB issued Accounting Standards Update No. 2010-27, "Fees Paid26 to the Federal Government by Pharmaceutical Manufacturers." This update responded to certain provisions in the "Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act". The update is
effective for calendar years beginning after December 31, 2010. There were no applicable fees incurred in 2010. In accordance with the guidance, applicable fees in 2011 will be recognized in operating expenses. See further discussion of these feesConsolidated Financial Statements included elsewhere in this Item 5, under "U.S. Healthcare Reform." Annual Report.A. | |
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| |
6.A. | DIRECTORS AND SENIOR MANAGEMENT |
The information set forth under “Item 6.C. Board Practices—Corporate Governance—Board of Directors—Composition” and “Item 6.C. Board Practices—Corporate Governance—Executive Committee—Composition of the Executive Committee” is incorporated by reference.
Below is information with respect to our current directors and officers and their ages as of February 1, 2011. Unless otherwise indicated, the business address of all of our directors and officers is c/o Alcon, Inc., Bösch 69, P.O. Box 62, 6331, Hünenberg, Switzerland.
Name | | Age | | Title | | |
6.B. | | | | | | |
Daniel Vasella, M.D. | | 57 | | Chairman and Director | | |
Cary R. Rayment | | 63 | | Vice Chairman and Director | | |
Kevin J. Buehler | | 53 | | President, Chief Executive Officer and Director | | |
Urs Bärlocher, Ph.D. | | 68 | | Director | | |
Paul Choffat, Ph.D. | | 61 | | Director | | |
Lodewijk J.R. de Vink | | 65 | | Director | | |
Joan W. Miller, M.D. | | 52 | | Director | | |
Thomas G. Plaskett | | 67 | | Director | | |
Jacques Seydoux, M.D. | | 59 | | Director | | |
Enrico Vanni, Ph.D. | | 59 | | Director | | |
Norman Walker | | 58 | | Director | | |
Patrick Bachmann | | 43 | | Attorney-in-Fact (Prokurist)
| | |
Stefan Basler | | 56 | | Attorney-in-Fact (Prokurist)
| | |
Joanne Beck | | 53 | | General Manager (Direktor)
| | |
Wes Brazell | | 44 | | Attorney-in-Fact (Prokurist)
| | |
Robert Karsunky | | 48 | | Senior Vice President, Finance, Chief Financial Officer and Corporate Strategy Officer | | |
Elaine E. Whitbeck | | 56 | | General Counsel and Corporate Secretary | | COMPENSATION |
Introduction
Effective with the change of majority ownership on August 25, 2010, Werner Bauer, Paul Bulcke, Francisco Castañer, James Singh and Herman Wirz resigned from our board of directors.Dear Shareholder
Effective November 1, 2010, Robert Karsunky was appointed as Senior Vice President, Finance, Chief Financial Officer, and Corporate Strategy Officer of Alcon, Inc. Mr. Karsunky succeeded Richard J. Croarkin who served in that role since August 2007.
Alcon entered into a service agreement with Cary Rayment commencing April 1, 2009 under which he served as a director and the non-executive chairman of the board. Effective October 24, 2010, Cary Rayment ceded his chairman position and the board appointed Daniel Vasella as chairman and Mr. Rayment as vice chairman of the board.
Directors
Daniel Vasella, M.D. Dr. Vasella is the chairman of the board for Alcon, Inc. He was appointed to this position on October 24, 2010. Dr. Vasella joined the Alcon, Inc. board in July 2008. He served 14 years as Chief Executive Officer and 11 years as Chairman and Chief Executive Officer of Novartis AG. The board of directors of Novartis accepted Dr. Vasella's proposal to complete the Chief Executive Officer succession process by appointing Joe Jimenez as Novartis's Chief Executive Officer as of February 1, 2010. Dr. Vasella continues in his role as ChairmanOn behalf of the Board of Novartis concentrating on strategic priorities. After holding a number of medical positions in Switzerland, he joined Sandoz Pharmaceuticals Corporation inDirectors and the United States in 1988. From 1993Compensation, Governance and Nomination Committee ("CGNC"), I am pleased to 1995, Dr. Vasella advanced from Head of Corporate Marketing to Senior Vice President and Head of Worldwide Development to Chief Operating Officer of Sandoz Pharma Ltd. In 1995 and 1996, Dr. Vasellaintroduce the 2019 Compensation Report. It was a member of the Sandoz Group Executive Committee and Chief Executive Officer of Sandoz Pharma Ltd. Dr. Vasella is a member of the board of directors of PepsiCo, Inc., United States.
Cary R. Rayment. Mr. Rayment has been the vice chairman of the boardan exciting year for Alcon Inc. since October 24, 2010. Following his retirement as President and Chief Executive Officerbecause on April 1, 2009, he served in the role9, 2019, Alcon was spun-off as non-executive chairman and director of Alcon, Inc. until October 24, 2010. He also served as Chairman, President and Chief Executive Officer of Alcon Laboratories, Inc. from October 1, 2004 to March 31, 2009. Prior to these promotions, Mr. Rayment served as Senior Vice President, Alcon United States from 2001 to 2004 (adding responsibility for Alcon Japan in 2004); Vice President and General Manager, Surgical, and Area Vice President Japan in 2000; Vice President, International Marketing & Area Vice President Japan from 1997-1999; Vice President and General Manager, Managed Care in 1996; Vice President and General Manager, U.S. Surgical Products from 1991-1995; and Vice President Marketing, Surgical Products from 1989-1990. Mr. Rayment joined Alcon in 1989, following the acquisition of CooperVision, Inc. where his position had been Vice President of Marketing.
Kevin J. Buehler. Mr. Buehler was appointed President and Chief Executive Officer of Alcon, Inc. effective April 1, 2009 and elected as a member of the board on May 5, 2009. He served as Senior Vice President, Global Markets and Chief Marketing Officer of Alcon Laboratories, Inc. from January 1, 2007 to March 31, 2009. He served as Senior Vice President, Alcon United States and Chief Marketing Officer from February 2006 through December 2006. From 2004 to 2006, he was Senior Vice President, Alcon United States. From 2002 to 2004, Mr. Buehler was International Area Vice President with responsibility for the Company's operations in Latin America, Canada, Australia and the Far East. In 1999, he led the U.S. Consumer Products Division as Vice President and General Manager and in 1998 was promoted to a Vice President position. In 1996, after holding a series of sales management positions with increasing responsibility in the U.S. Consumer Products Division, Mr. Buehler expanded his experience into the pharmaceutical and surgical business areas, leading the Company's U.S. Managed Care and Falcon Generic Pharmaceutical groups. Mr. Buehler joined the Company in 1984.
Urs Bärlocher, Ph.D. Dr. Bärlocher joined the Alcon, Inc. board in August 2010. He earned his J.D. from the University of Basel and was admitted to the bar in 1970. After working as a tax lawyer, he joined Sandoz Ltd., Basel, Switzerland, in 1973. After the formation of Novartis, Basel, Switzerland, in 1996, he was appointed Head of Legal, Tax and Insurance. From 1999 until 2005, he served as General Counsel and Head of General Affairs and thereafter, until his retirement in summer 2007, he served as Head of Legal and Tax Affairs of the Novartis Group. He is currently a member of the board of directors of Habasit AG, Habasit Holding AG and Victoria-Jungfrau Collection AG, as well as vice president of the Windler Foundation.
Paul Choffat, Ph.D. Dr. Choffat joined the Alcon, Inc. board in August 2010. He holds a J.D. from the University of Lausanne, Switzerland, and an M.B.A. from the International Institute for Management Development (IMD) in Lausanne, Switzerland. He started his professional career with Nestlé in Zurich, Switzerland, and London, UK. From 1981 to 1985, he was project manager at McKinsey & Company in Zurich. He held a number of senior positions at Landis & Gyr in Zug, Switzerland, before he moved to Von Roll in Gerlafingen as CEO. He joined Sandoz Ltd., Basel, Switzerland, in 1995. During the merger which created Novartis, he headed the Integration Office. In 1996, he returned to line management as CEO of Fotolabo SA, Montpreveyres-sur-Lausanne, Switzerland, where he remained for three years before becoming an entrepreneur and private investor in 1999. From 2002 to April 2007, Dr. Choffat served as Head of Novartis Consumer Health. He is currently a member of the board of directors of HSBC Private Bank (Suisse) SA and de Rham SA.
Lodewijk J.R. de Vink. Mr. de Vink joined the Alcon, Inc. board in March 2002. Mr. de Vink has served as Founding Partner of Blackstone Health Care Partners since April 2003. Prior to that, he was Chairman, International Health Care Partners from November 2002 to 2003, and Chairman, Global Health Care Partners, Credit Suisse First Boston, from November 2000 to September 2002. Mr. de Vink was formerly Chairman, President and CEO of Warner-Lambert Company. He joined Warner-Lambert as President of International Operations in 1988, was elected President in 1991, and then Chairman and CEO in May 1999. Before Warner-Lambert, Mr. de Vink spent twenty years at Schering-Plough where he held many international assignments, leaving there as President of Schering International. Mr. de Vink is a member of the board of directors of Roche Holding AG and Flamel Technologies S.A. Mr. de Vink is also a member of the European Advisory Council, Rothschild & Cie, as well as a member of Sotheby's International Advisory Board.
Joan W. Miller, M.D. Dr. Miller joined the Alcon, Inc. board in May 2009. Dr. Miller is Chief and Chair of Ophthalmology and Henry Willard Williams Professor of Ophthalmology at the Massachusetts Eye and Ear Infirmary, Massachusetts General Hospital and Harvard Medical School. Dr. Miller's research interests are focused on ocular neovascularization, particularly as it relates to macular degeneration and diabetic retinopathy, including the
role of growth factors, the development of antiangiogenic therapy, and photodynamic therapy. Dr. Miller has received numerous awards, including the Rosenthal Award, Don Gass Medal and the Henkind Lecture of the Macula Society, the Retina Research Award from the Club Jules Gonin, the Founders Award of ASRS (American Society of Retina Specialists), the Alcon Research Institute Award and the Suzanne Veronneau-Troutman Award. Dr. Miller's professional affiliations include American Academy of Ophthalmology, Association for Research in Vision and Ophthalmology, Inc. (ARVO) and the New England Ophthalmological Society (NEOS).Thomas G. Plaskett. Mr. Plaskett joined the Alcon, Inc. board in May 2003. In September 2003, the board affirmed Mr. Plaskett as the "audit committee financial expert." Since 1991, Mr. Plaskett has served as Chairman of Fox Run Capital Associates, a private consulting firm, focusing on financial advisory and consulting services for emerging companies. Previously, he was Chairman, President and Chief Executive Officer of Pan Am Corporation from 1988 to 1991, and President and Chief Executive Officer of Continental Airlines from 1986 to 1987. Also, during the period from 1974 to 1986, he held several senior management positions at American Airlines and AMR Corporation, including Senior Vice President of Marketing and Senior Vice President of Finance and Chief Financial Officer. He also was Vice-Chairman of Legend Airlines from 1996 to 2000. Mr. Plaskett is a director of RadioShack Corporation; director of Signet Jewelers, Ltd.; and a director of several privately held companies.
Jacques Seydoux, M.D. Dr. Seydoux joined the Alcon, Inc. board in August 2010. He graduated with an M.D. from the University of Berne, Switzerland, in 1979. After holding a number of medical positions, he was appointed medical director and chair of the department of Obstetrics and Gynecology of the Regional Hospital of Delémont, Switzerland, in 1998. After the merger of the regional hospitals of Delémont and Porrentruy that created the State Hospital of Jura in 2004, he was named medical director and chair of the department of Obstetrics and Gynecology Service. He is a member of numerous professional associations such as vice president of the Swiss National Obstetrics and Gynecology Society, president of the Groupment Romand de la Société Suisse Gyn/Ob, and member of the European Society for Gyn Endoscopy, the American Gynecological and Obstetrical Society, the Society of Obstetrics and Gynecology of Canada as well as of the North American Menopause Society.
Enrico Vanni, Ph.D. Dr. Vanni joined the Alcon, Inc. board in August 2010. He is a chemical engineer graduated from the Federal Polytechnic School of Lausanne, Switzerland and holds a Ph.D. (Doctorate in Science) from the University of Lausanne. His background also includes an MBA from INSEAD in Fontainebleau, France. He started his career in 1977 with IBM in San Jose, California, and after his MBA in 1980, joined McKinsey & Company in Zurich, Switzerland. He managed the Geneva Office from 1988 to 2004. His consulting activities mostly covered companies in the pharmaceutical, consumer and finance sectors. He was head of the European pharmaceutical practice and served as member of the Partner review committee of the firm over many years. He retired as Director of McKinsey at the end of 2007. Since 2008, he is an independent consultant and a member of several company boards of directors such as Eclosion (private equity for biotechs), Denzler & Partners (management resources) and MBCP (private banking).
Norman Walker. Mr. Walker joined the Alcon, Inc. board in August 2010. He earned a degree in Business Studies at the University of Brighton, UK, in 1975 and attended the Harvard International Senior Management Program in 1994. He started his professional career with Ford Motor Co in London, UK, in 1975. Over a period of 9 years he held a number of positions in human resources management before he joined GrandMet in London, UK, in 1984 where he assumed human resources responsibilities in several of its business units. Mr. Walker subsequently joined Kraft Foods in 1991 and held a number of leading human resources positions in Germany, the United States and Switzerland. From 1998 to 2003, he served as the Head of Corporate Human Resources of the Novartis Group. Mr. Walker is a senior advisor to TPG Capital LLP, Chair of Vita Cayman, advisor to CMi and a visiting professor at Bocconi.
Part C of this Item 6 includes information about the staggered terms of office for our board of directors and re-election limits for non-executive directors.
Alcon, Inc. is a holding company which operates principally through its operating subsidiaries. Our board of directors is responsible for the ultimate direction of Alcon, Inc., as a holding company, and will determine our business strategy and policies and those of our operating subsidiaries. The executive officers of Alcon, Inc. are responsible for certain administrative, regulatory and oversight matters, the exercise of shareholder rights with
respect to our subsidiaries, the funding of research and development projects, the administration and purchase of intellectual property rights and the collection of related license income.
Senior Management
Our principal subsidiary in the United States is Alcon Laboratories, Inc. Under the supervision of our board of directors, the executive officers of Alcon, Inc. and Alcon Laboratories, Inc. provide global management services with
respect to the ongoing business and operations of our operating subsidiaries, including research and development, manufacturing, sales and distribution, marketing, financing and treasury.
Below is information with respect to the current executive officers of Alcon Laboratories, Inc. and their ages as of February 1, 2011. Unless otherwise indicated, the business address of all of these officers is c/o Alcon Laboratories, Inc., 6201 South Freeway, Fort Worth, Texas 76134-2099.
Name | | Age | | Title |
| | | | |
Kevin J. Buehler
| | 53 | | Chairman, President and Chief Executive Officer |
Robert Karsunky
| | 48 | | Senior Vice President, Finance, Chief Financial Officer and Corporate Strategy Officer |
William K. Barton
| | 57 | | Senior Vice President, International Markets |
Sabri Markabi, M.D. | | 52 | | Senior Vice President, Research & Development and Chief Medical Officer |
Merrick McCracken
| | 48 | | Senior Vice President, Human Resources |
Ed McGough
| | 50 | | Senior Vice President, Global Manufacturing and Technical Operations |
Elaine E. Whitbeck
| | 56 | | Senior Vice President, Chief Legal Officer/General Counsel and Corporate Secretary |
Effective November 1, 2010, Robert Karsunky was appointed as Senior Vice President, Finance, Chief Financial Officer and Corporate Strategy Officer of Alcon Laboratories, Inc. Mr. Karsunky succeeded Richard J. Croarkin who served as Alcon's chief financial officer since August 2007.
Kevin J. Buehler. See "-Directors" above.
Robert Karsunky. Mr. Karsunky was named Senior Vice President, Finance, Chief Financial Officer and Corporate Strategy Officer of Alcon Laboratories, Inc. effective November 1, 2010. His global responsibilities include management of all financial functions for the Company as well as Information Technology, Investor Relations, Business Development and coordination of the development and execution of corporate strategy.
Mr. Karsunky joined Novartis in 2006 as chief financial officer in the Consumer Health Division of Novartis. In this role, he was responsible for the division's finance, information technologies, procurement and merger and acquisition activities. Prior to joining Novartis, he served for four years as the vice president of finance for the international division of Medtronic, Inc. He began his career with Eli Lilly in 1991 where he held a variety of increasingly responsible financial positions to become the executive director of finance for Intercontinental and Japan from 2000 to 2002.
William K. Barton. Mr. Barton was named Senior Vice President, International Markets of Alcon Laboratories, Inc., effective April 1, 2009. In this role, Mr. Barton is responsible for the management of International Markets and the Global Marketing Committee. Mr. Barton joined Alcon in 1989 (following the acquisition of CooperVision) as Group Product Director, Marketing, Surgical Products. Since that time, he has held positions of increasing responsibility in all divisions including Vice President of Marketing for Surgical from 1991 to 1995, Vice President of Marketing in Pharmaceutical from 1996 to 1998, and Vice President of Sales for Primary Care from 1999 to 2000. In 2001, he returned to the Surgical Division as Vice President and General Manager. He gained international experience from 2004 to 2007 as Vice President/Area President of Canada, Australia and Far East. Most recently he served as Vice President/Area President of U.S. and Global Marketing, a position he has held since 2007.
Mr. Barton began his career in ophthalmology in 1978 and worked for Allergan Pharmaceuticals, Syntex Ophthalmics and CooperVision, which was later acquired by Alcon.
Sabri Markabi, M.D.Dr. Markabi joined Alcon Laboratories, Inc. as Senior Vice President of Research and Developmentlistings on March 27, 2008 and was further appointed Chief Medical Officer of Alcon Laboratories, Inc. on July 1, 2008. He served as a staff neurologist on the faculty of the University Hospital in Tours, France. In 1991, he joined CIBA-GEIGY and assumed positions of increasing responsibilities in France, Switzerland, and most recently, New Jersey. In 2004 he was appointed Vice President, Global Head of Development for the Ophthalmic Business Unit of Novartis AG, where he oversaw the Development organization including research and development strategy, experimental medicine, clinical development and regulatory affairs.
Merrick McCracken. Mr. McCracken joined Alcon Laboratories, Inc. as Senior Vice President, Human Resources on January 18, 2010. Mr. McCracken leads Alcon's global Human Resources organization and is responsible for the development and implementation of human resources (″HR″) strategies, processes and solutions in support of the Alcon business. He plays a central role in advancing efforts and initiatives in alignment with Alcon's Global Strategic Priorities, with particular emphasis on Organizational Effectiveness and Development. Mr. McCracken joined Alcon from Wyeth where he held several senior-level HR leadership roles, most recently serving as VP HR, Global Manufacturing, overseeing HR for 18,000 employees across 30 sites in 16 countries. Other roles while with Wyeth include VP, Corporate HR, Talent Management & Leadership Development, VP HR North America, VP HR, Europe/Middle East/Africa and VP HR Intercontinental Region. Prior to Wyeth, he was with Bristol-Myers Squibb for 11 years, during which time he held various senior HR leadership roles in Research & Development and International Commercial Operations. He began his career in 1987 in the airline industry in Canada.
Ed McGough. Mr. McGough was appointed Senior Vice President, Global Manufacturing and Technical Operations of Alcon Laboratories, Inc. in January 2008. In this position, Mr. McGough has responsibility for global manufacturing operations, global quality assurance and compliance, various supply chain functions including U.S. Customer Service and Distribution, Corporate Engineering, Safety and Environmental Affairs and the Operational Excellence group. He joined Alcon in 1991 as Manager, Quality Assurance and Regulatory Affairs at Alcon's precision device facility in Sinking Spring, Pennsylvania. Since that time, Mr. McGough has gained leadership experience through positions of increasing responsibility across manufacturing, including senior managerial roles at our Puerto Rico, Houston and Fort Worth facilities. Additionally, Mr. McGough has had global responsibility for the Company's pharmaceutical manufacturing operations.
Elaine E. Whitbeck. Ms. Whitbeck has served as Corporate Secretary and General Counsel of Alcon, Inc. since February 18, 2003. Ms. Whitbeck is Senior Vice President, Chief Legal Officer/General Counsel and Corporate Secretary for Alcon Laboratories, Inc. and its affiliates. Ms. Whitbeck has been with the Company for over 24 years. Ms. Whitbeck is responsible for all legal matters of the Company. Prior to joining the Company, Ms. Whitbeck was the Director of Legal Operations and Shareholder Services for Mary Kay Cosmetics, Inc. Prior to joining Mary Kay Cosmetics, Inc., Ms. Whitbeck was a trial attorney with the Dallas law firm of Vial, Hamilton, Koch & Knox. Ms. Whitbeck was a board member of WaveLight AG, Prevent Blindness America-Texas Chapter and the Lena Pope Home (child protection and adoption) and currently serves on the board of ORBIS INTERNATIONAL (the "Flying Eye Hospital").
We provide our board of directors with compensation and benefits that will attract and retain qualified directors. In 2010, all members of our board of directors, except for our President and Chief Executive Officer, received an annual cash retainer of $100,000 with an additional $15,000 for the audit committee chairperson and an additional $10,000 each for the chairpersons of the compensation, nominating/corporate governance and independent director committees. We refer to a director who is not a full-time employee of Alcon as a non-employee director. The non-employee directors also receive a meeting fee of $2,000 per non-regularly scheduled meeting, not to exceed $50,000 in a board year. The additional meeting fee is in consideration of their attendance at meetings beyond the regularly scheduled board and committees meetings.
In accordance with the service contract discussed below, Mr. Rayment also received additional cash compensation for serving as non-executive chairman of our board from January 1, 2010 through October 24, 2010. At the December 2010 meeting, the board approved renewing Mr. Rayment's pay through the next annual general meeting of shareholders for his service as vice chairman of the board. The board also determined to pay Dr. Vasella
the same chairman retainer of $290,000 per year through the next annual general meeting of shareholders. For the year ended December 31, 2010, Mr. Rayment received $290,000 for fees as chairman and vice chairman, and Dr. Vasella received a lump sum of $169,166 in December 2010 for chairman fees from November 2010 through the next annual general meeting of shareholders.
At the February 2011 board meeting, additional payments of $100,000 each were awarded to Messrs. de Vink, Plaskett and Dr. Miller in recognition of their extraordinary service in their capacity as members of the Independent Director Committee to consider and evaluate the merger transaction.
In 2010, restricted share units ("RSUs") were awarded to non-employee directors in the amount of $125,000. The number of RSUs was determined using the value of one common share on the date of grant. Each of the non-employee directors on the board after the May 2010 Annual General Meeting was awarded 850 RSUs. In August 2010, Mr. Walker and Drs. Bärlocher, Choffat, Seydoux and Vanni were elected as non-employee directors. After Board approval at the September 2010 meeting, each of the new directors were granted 775 RSUs. In the fiscal years ended December 31, 2010, 2009 and 2008, our directors did not receive any other compensation or benefits-in-kind from Alcon, Inc. except as noted above and, with respect to Mr. Rayment and Mr. Buehler, as noted below.
We had service contracts with two of our directors. Alcon entered into a service agreement with Mr. Rayment that commenced April 1, 2009, after his retirement as President and Chief Executive Officer of Alcon, Inc. effective March 31, 2009, under which he served as a director and the non-executive chairman of the board. The service agreement automatically renews on an annual basis until termination. On October 24, 2010, the board approved extending the agreement with the same remuneration on a monthly basis for his service as vice chairman of the board. Mr. Buehler was named President and Chief Executive Officer of Alcon, Inc. and Alcon Laboratories, Inc. effective April 1, 2009 and has an employment agreement with Alcon Laboratories, Inc. Additional information pertaining to these agreements has been provided under Item 10.C, "Material Contracts," of this annual report. In addition, Timothy R.G. Sear, our former Chairman and Chief Executive Officer, was provided an office by the Company through May 2010. Mr. Sear vacated the office space on April 30, 2010.
During 2010, the executive officers received RSUs from Alcon, Inc. as indicated in this Compensation section. In 2011, we expect to grant our executive officers 100% RSUs for the equity portion of their compensation.
The following compensation table sets forth information regarding compensation and benefits-in-kind paid during the fiscal years ended December 31, 2010, 2009 and 2008 to the executive officers of Alcon Laboratories, Inc.
Summary Compensation Table
| | | | | | | | | | |
| | Annual Compensation | | Long Term Compensation Awards | | | |
| | | | | | | | | | | | | | Per- | | | |
| | | | | | | | | | Restricted | | Securities | | formance | | All | |
| | | | | | | | Other | | Share | | Under- | | Share | | Other | |
| | | | | | | | Compensa- | | Unit | | Lying | | Unit | | Compensa- | |
| | | | Salary | | Bonus | | tion | | Awards | | SSARs | | Awards | | ion | |
Name | | Year | | ($) | | ($) (1) | | ($) (2) | | ($) (3) | | (#) (4) | | (#) (5) | | ($) (6) | |
| | | | | | | | | | | | | | | | | |
Kevin J. Buehler(7) | | 2010 | | 1,027,500 | | 1,455,000 | | 32,074 | | 5,527,314 | | -- | | -- | | 689,914 | |
| | 2009 | | 866,250 | | 460,000 | | 30,500 | | 1,269,250 | | 131,857 | | 14,574 | | 328,170 | |
| | 2008 | | 570,833 | | 390,000 | | 31,580 | | 446,751 | | 22,191 | | 3,028 | | (123,447) | |
| | | | | | | | | | | | | | | | | |
Richard J. Croarkin (8) | | 2010 | | 563,333 | | 1,020,800 | | 21,436 | | 1,909,490 | | -- | | -- | | 1,412,825 | |
| | 2009 | | 585,000 | | 430,000 | | 20,641 | | 470,896 | | 48,919 | | 5,407 | | 144,044 | |
| | 2008 | | 550,000 | | 170,000 | | 21,580 | | 383,014 | | 19,021 | | 2,596 | | 64,822 | |
| | | | | | | | | | | | | | | | | |
Robert Karsunky (9) | | 2010 | | 95,833 | | -- | | 2,500 | | 3,468,497 | | -- | | -- | | 70,548 | |
| | | | | | | | | | | | | | | | | |
William K. Barton(10) | | 2010 | | 533,333 | | 438,000 | | 31,861 | | 1,507,492 | | -- | | -- | | 418,622 | |
| | 2009 | | 490,000 | | 245,000 | | 31,861 | | 355,414 | | 36,920 | | 4,081 | | 175,384 | |
| | 2008 | | 431,667 | | 235,000 | | 32,519 | | 210,687 | | 10,462 | | 1,428 | | 5,370 | |
| | | | | | | | | | | | | | | | | |
Sabri Markabi, M.D.(11) | | 2010 | | 591,667 | | 470,000 | | 20,824 | | 2,110,489 | | -- | | -- | | 151,246 | |
| | 2009 | | 541,667 | | 298,000 | | 19,250 | | 507,735 | | 52,743 | | 5,830 | | 124,528 | |
| | 2008 | | 380,769 | | -- | | 15,573 | | 668,865 | | 16,916 | | -- | | 42,562 | |
| | | | | | | | | | | | | | | | | |
Elaine E. Whitbeck | | 2010 | | 541,667 | | 380,000 | | 35,412 | | 1,457,164 | | -- | | -- | | 439,123 | |
| | 2009 | | 520,833 | | 335,000 | | 35,769 | | 365,517 | | 37,975 | | 4,197 | | 218,811 | |
| | 2008 | | 492,500 | | 300,000 | | 35,474 | | 357,489 | | 17,753 | | 2,423 | | 44,691 | |
| | | | | | | | | | | | | | | | | |
Ed McGough(12) | | 2010 | | 412,500 | | 305,000 | | 30,123 | | 1,004,995 | | -- | | -- | | 272,591 | |
| | 2009 | | 396,667 | | 255,000 | | 27,822 | | 253,867 | | 26,371 | | 2,915 | | 123,145 | |
| | 2008 | | 380,000 | | 190,000 | | 27,732 | | 204,195 | | 10,145 | | 1,384 | | 43,481 | |
| | | | | | | | | | | | | | | | | |
Merrick R. McCracken(13) | | 2010 | | 383,334 | | -- | | 65,781 | | 1,201,017 | | -- | | -- | | 95,603 | |
(1) | Bonus paid in 2010 was for 2009 performance. Bonus paid in 2009 was for 2008 performance. Bonus paid in 2008 was for performance in 2007. Mr. Croarkin's bonus for 2010 performance was also paid in 2010 in the pay period following his separation from employment with Alcon, Inc. and is included in the 2010 bonus section of the summary compensation table. |
(2) | Includes payments made for car allowance, financial consulting services, executive physicals and other allowances. Also included are additional payments related to relocation for Mr. McCracken in 2010. |
(3) | Restricted share units were granted in 2010, 2009 and 2008. The value shown is as of the grant date. Summarized below are the total restricted share units outstanding at December 31, 2010 and the value by vesting date. The value is based on the closing price of the shares on the NYSE on December 31, 2010. Due to change of control provisions in the 2008 restricted stock unit grant agreement, the vesting of 2008 restricted stock units was accelerated and vested at the change of control rather than the scheduled vesting in 2011. The holders of restricted share units do not have voting rights but have the right to receive a dividend equivalent thereon. |
The number of restricted share units and their value for Mr. Karsunky reflects two sign-on grants made to him on December 3, 2010. The grants were 100% restricted share units. The first sign-on grant had a grant date fair market value of $2,400,000 and will vest at the same rate as his forfeited equity from Novartis (40% after one year, 40% after the second year and 20% after the third year). The second sign-on grant had a grant date fair market value of $1,100,000 and will vest at the end of two years. This vesting aligns with the 2010 Novartis performance long term incentive grants that were forfeited when he terminated service with Novartis. Alcon has charged back 75% of this grant value to Novartis.
| | Total Restricted | | | Total Restricted | | | Value | | | Value | | | Value | |
| | Shares | | | Share Units | | | Vesting | | | Vesting | | | Vesting | |
Name | | at 12/31/10 (#) | | | at 12/31/10 (#) | | | in 2011 ($) | | | in 2012 ($) | | | in 2013 ($) | |
| | | | | | | | | | | | | | | |
Kevin J. Buehler | | | -- | | | | 49,608 | | | | -- | | | | 2,381,392 | | | | 5,724,556 | |
Richard J. Croarkin | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Robert Karsunky | | | -- | | | | 21,363 | | | | 957,459 | | | | 2,054,526 | | | | 478,729 | |
William K. Barton | | | -- | | | | 13,636 | | | | -- | | | | 666,835 | | | | 1,561,287 | |
Sabri Markabi, M.D. | | | -- | | | | 19,207 | | | | -- | | | | 952,622 | | | | 2,185,802 | |
Elaine E. Whitbeck | | | -- | | | | 13,433 | | | | -- | | | | 685,790 | | | | 1,509,162 | |
Ed McGough | | | -- | | | | 9,285 | | | | -- | | | | 476,311 | | | | 1,040,858 | |
Merrick R. McCracken | | | -- | | | | 7,551 | | | | -- | | | | -- | | | | 1,233,833 | |
(4) | Share-settled stock appreciation rights ("SSARs") were granted in 2009 and 2008. |
(5) | No performance share units were granted in 2010. The 2009 performance share unit awards have three consecutive performance targets during a three-year service period from 2009 through 2011. The 2008 performance share unit awards have a cumulative three-year performance period from 2008 through 2010. The awards represent 25% of each participant's total equity award value granted in 2009 and 2008, respectively. The table below represents the potential number of performance share units to be paid in Alcon shares at minimum, target and maximum. |
| | | | Estimated Future Performance Share Unit Payout |
Name | | Grant Date | | Minimum # | | Target # | | Maximum # |
| | | | | | | | |
Kevin J. Buehler | | 02/17/2009 | | -- | | 14,574 | | 29,148 |
| | 02/11/2008 | | -- | | 3,028 | | 6,056 |
Richard J. Croarkin | | 02/17/2009 | | -- | | -- | | -- |
| | 02/11/2008 | | -- | | -- | | -- |
William K. Barton | | 02/17/2009 | | -- | | 4,081 | | 8,162 |
| | 02/11/2008 | | -- | | 1,428 | | 2,856 |
Sabri Markabi, M.D. | | 02/17/2009 | | -- | | 5,830 | | 11,660 |
| | 02/11/2008 | | -- | | -- | | -- |
Elaine E. Whitbeck | | 02/17/2009 | | -- | | 4,197 | | 8,394 |
| | 02/11/2008 | | -- | | 2,423 | | 4,846 |
Ed McGough | | 02/17/2009 | | -- | | 2,915 | | 5,830 |
| | 02/11/2008 | | -- | | 1,384 | | 2,768 |
The 2008 performance share units vested on December 31, 2010 and became payable at 118.4% of target based on the 2008 through 2010 cumulative performance and final approval at theboard of directors meeting in February 2011. In addition, due to the pending merger of Alcon and Novartis, the 2009 performance share units were approved by the board to pay out at 178.5% in February 2012 based on two years' actual performance and one year at 100% of target performance level. Mr. Croarkin vested his 2009 and 2008 performance share units upon his separation from Alcon and received 8,003 Alcon common shares for them at 100% of target as approved by the board of directors.
(6) | Provides the aggregate amount of employer contributions to the Alcon 401(k) and Retirement Plans, including Company contributions and earnings on allocations made to the Excess 401(k) Plan, additional compensation for |
| premiums paid for Executive Universal Life Insurance and the Umbrella Liability Insurance, hire-on bonus (Mr. McCracken) and payout of grandfathered sick leave (Messrs Buehler, Barton, McGough and Ms. Whitbeck). Mr. Karsunky's other compensation includes payment of Swiss taxes on pension benefits made by the Company on his behalf due to his relocation to the United States. Mr. Croarkin's other compensation includes severance and accrued vacation time received upon his separation from Alcon and a deposit of golden parachute (IRC §280G) excise taxes that are not taxable, if at all, until 2011. |
(7) | On January 8, 2009, Mr. Buehler was named Chairman, President and Chief Executive Officer of Alcon Laboratories, Inc. effective April 1, 2009. |
(8) | Mr. Croarkin's compensation reflects his compensation for the time he served as Senior Vice President, Finance and Chief Financial Officer of Alcon, Inc. during 2010. Mr. Croarkin separated from service with Alcon, Inc. on November 30, 2010. |
(9) | Mr. Karsunky was named Senior Vice President, Finance and Chief Financial Officer of Alcon, Inc. on November 1, 2010. |
(10) | Mr. Barton was named Senior Vice President, International Markets of Alcon Laboratories, Inc., effective April 1, 2009. |
(11) | Dr. Markabi joined Alcon in March 2008 and was appointed Senior Vice President, Research and Development and Chief Medical Officer of Alcon Laboratories, Inc. in July 2008. |
(12) | Mr. McGough was appointed Senior Vice President, Global Manufacturing and Technical Operations of Alcon Laboratories, Inc. effective January 1, 2008. |
(13) | Mr. McCracken was named Senior Vice President, Global Human Resources of Alcon, Inc. in January 2010. |
No SSARs were granted during 2010.
Aggregated Option/SSAR Exercises in Last Fiscal Year and Fiscal Year End Option/SSAR Value Table
| | Shares | | | | | Number of Securities Underlying | | | Value of Unexercised In-the- | |
| | Acquired | | | Value | | Unexercised Options/SSARs | | | Money Options/SSARs | |
| | On | | | Realized | | at 12/31/10 (#) | | | at 12/31/10 ($) | |
Name | | Exercise | | | ($) | | Exercisable | | | Unexercisable | | | Exercisable | | | Unexercisable | |
| | | | | | | | | | | | | | | | | |
Kevin J. Buehler | | | -- | | | | -- | | | 122,801 | | | | 131,857 | | | | 6,902,894 | | | | 10,062,008 | |
Richard J. Croarkin | | | 77,912 | | | | 4,304,074 | | | -- | | | | -- | | | | -- | | | | -- | |
William K. Barton | | | 45,432 | | | | 1,852,280 | | | -- | | | | 36,920 | | | | -- | | | | 2,817,365 | |
Sabri Markabi, M.D. | | | -- | | | | -- | | | 16,916 | | | | 52,743 | | | | 313,453 | | | | 4,024,818 | |
Elaine E. Whitbeck | | | -- | | | | -- | | | 58,769 | | | | 37,975 | | | | 1,761,744 | | | | 2,897,872 | |
Ed McGough | | | 16,327 | | | | 1,538,399 | | | 18,883 | | | | 26,371 | | | | 473,165 | | | | 2,012,371 | |
Pension Plans
Messrs. Buehler, Barton and McGough and Ms. Whitbeck participate in the nonqualified Executive Salary Continuation Plan ("ESCP"). The ESCP is unfunded and non-contributory and provides for a retirement benefit based on the participant's years of participation service under the plan, using the average of the annual base compensation in effect in the year of separation from service and for the two years preceding such year of separation. Benefits are payable upon retirement after the accumulated participation of at least 10 years of service and upon reaching age 55 (with penalties) or at the normal retirement age of 62. Annual compensation includes the amount shown as annual base salary in the Summary Compensation Table.
The ESCP benefit formula is 3% of a participant's final three-year average annual base compensation times years of participation, up to a maximum of 20 years. A participant must attain at least 10 years of participation service in order to have a vested benefit.
In December 2003, the board of directors approved a new nonqualified Alcon Supplemental Executive Retirement Plan ("ASERP"). If certain conditions are met, the ASERP provides for a maximum benefit of up to 30% of the final three-years' average base salary and bonus at retirement, less an offset for Social Security benefits, payable for the remaining life of the participant. Effective January 1, 2004, all new participants began to participate in the ASERP instead of the ESCP. Existing ESCP participants continued to accrue benefits under the ESCP through December 31, 2008; thereafter, ESCP participants began to accrue benefits for future service under the provisions of the ASERP; however, the normal form of payment for benefits accrued under ASERP by current ESCP participants will be a single life annuity with a 50% surviving spouse's benefit. Mr. Croarkin and Dr. Markabi participate in the ASERP. At the September 2010 meeting, the board of directors approved one additional year of ASERP participation credit subject to an early retirement penalty post change of control for Mr. Croarkin as a part of his separation package. Messrs. Karsunky and McCracken will be eligible to participate in the ASERP beginning in 2011. ESCP participants with the maximum participation of 20 years service at December 31, 2008 were not eligible to participate in the ASERP. Participants are limited to 20 years participation service credit under the ESCP and the ASERP.
As previously stated, due to Alcon's change of control in 2010, the change of control provisions in the ESCP apply. All plan participants became immediately vested in their accumulated benefit (if the participant had 10 years of participation service or more) or at the minimum benefit percentage of 30% (10 years of participation service times 3%) and, in accordance with plan provisions, early retirement reductions were waived and payouts began in the second month following the month of the change of control. For those employees subject to section 409A of the IRC code, including the executive officers named above, payment is delayed for 6 months. Individuals in ASERP also became 100% vested at the change of control and early retirement reductions were waived for benefits accrued as of August 25, 2010. Future accruals will be subject to the early retirement reductions. However, ASERP benefit payments begin on the later of the first day of the month after the participant turns age 50 or the first day of the month after the termination of the participant's employment.
The Company maintains an irrevocable Rabbi trust to hold and invest amounts for the payment of benefits to participants under the ESCP and ASERP. The assets of the trust are restricted to the payment of ESCP and ASERP benefits except under certain conditions, such as the Company's insolvency. The Alcon Executive Retirement Plans Grantor Trust Agreement provided for the Company to fund the current actuarially determined present value of the aggregate accrued pension benefits of all participants in the ESCP and ASERP upon the change of control in the ownership of Alcon. Based on a range of actuarially determined pension benefit projections and current market conditions, management contributed $152 million to the trust during the third quarter of 2010 to satisfy this requirement.
| | | | Number of Years | | Present Value of | |
Name | | Plan Name | | Credited Service (#) | | Accumulated Benefit ($) | |
| | | | | | | |
Kevin J. Buehler | | ESCP/ASERP | | | 20 | | | 10,241,047 | |
Richard J. Croarkin | | ASERP | | | 8 | | | 2,055,156 | |
Robert Karsunky | | | -- | | | -- | | | -- | |
William K. Barton | | ESCP/ASERP | | | 19 | | | 5,197,204 | |
Sabri Markabi, M.D. | | ASERP | | | 2 | | | 201,368 | |
Elaine E. Whitbeck | | ESCP/ASERP | | | 20 | | | 6,040,705 | |
Ed McGough | | ESCP/ASERP | | | 15 | | | 3,712,259 | |
Merrick R. McCracken | | | -- | | | -- | | | -- | |
| | | | | | | | | | |
The plans have been operated in "good faith compliance" with Section 409A of the Code and the guidance thereunder from the period January 1, 2005 to January 1, 2008. The ESCP and ASERP were amended to comply with Section 409A of the Internal Revenue Code effective January 1, 2008.
The Company provides for all U.S. employees (i) the Alcon 401(k) Plan under which Alcon will match dollar-for-dollar the first 5% of base salary (including commissions) and bonus contributed by each employee, and (ii) the
Alcon Retirement Plan, into which Alcon automatically contributes an amount equal to 7% of each employee's compensation. Contributions to both plans are subject to the applicable legal limits.
Amended 2002 Alcon Incentive Plan
The Amended 2002 Alcon Incentive Plan is intended to help us retain and motivate our key employees. Through this plan, we are able to grant our employees' stock options, stock appreciation rights, restricted shares, restricted share units and other awards based on our common shares, in addition to performance-based annual and long term incentive awards. Through this share ownership, we are able to align employee and shareholder interests, by directly linking incentive awards to our profitability and increases in shareholder value.
Amendments
Pursuant to Swiss law, shareholder approval is not required to make material amendments to employee equity incentive plans. Our board of directors has the authority to amend the Amended 2002 Alcon Incentive Plan at any time. However, shareholder approval is required to increase conditional capital if the number of shares required to satisfy the Amended 2002 Alcon Incentive Plan exceeds the existing conditional capital and the treasury shares available.
In February 2005, our board of directors amended the Amended 2002 Alcon Incentive Plan effective as of January 1, 2005 to clarify that the board's compensation committee may accelerate the vesting, exercise or payment of an award upon a participant's termination of employment without cause (as determined in accordance with this plan's provision), and to allow for the award of restricted shares and restricted share units to non-employee directors. To effect the foregoing, Sections 3.2(9), 4.2 and 4.5 of the Amended 2002 Alcon Incentive Plan were amended.
In December 2005, our board of directors amended the Amended 2002 Alcon Incentive Plan effective as of January 1, 2006 to allow the award of Stock Appreciation Rights to non-employee directors. To effect the foregoing, Section 4.2 of the Amended 2002 Alcon Incentive Plan was amended.
In December 2006, our board of directors amended the Amended 2002 Alcon Incentive Plan to provide for mandatory equitable adjustments in the event of any equity restructuring. This amendment is effective as of January 2007 and applies to all outstanding awards.
In December 2008, our board of directors amended the Amended 2002 Alcon Incentive Plan to remove the requirement for board consent for retirements under this plan. This amendment is effective as of January 1, 2009. In addition, a provision was added stating that no change to the definition of "retirement," as provided under this plan, relative to an executive officer or director of the Company shall occur without prior approval of the board. The board amended the award agreements to provide for a "double trigger" upon a change-of-control. For awards after January 1, 2009, vesting will accelerate upon the occurrence of both a change-of-control and either involuntary termination, other than "for cause," or voluntary termination for "good reason" within six months preceding or during the two years following the change-of-control.
In September 2009, our board of directors amended the Amended 2002 Alcon Incentive Plan to increase the shares available for awards from 30 million to 40 million. In addition, the plan was amended to clarify share counting rules for SSARs that upon exercise only net shares are counted. These amendments were effective January 1, 2010.
In December 2010, our board of directors amended the Amended 2002 Alcon Incentive Plan to change the definition of the "Non-Employee Director" to account for the change of majority shareholder from Nestlé to Novartis. In addition, an administrative technical change was made to the definition of "Change of Control" to reflect the change in majority ownership. Lastly, the plan was modified to allow for remuneration to be paid to Alcon board members who are also employees of Novartis.
Eligibility and Award Limits
Our employees, non-employee directors and employees of our subsidiaries and affiliates are eligible to receive awards under the Amended 2002 Alcon Incentive Plan. Employees of Novartis and its subsidiaries other than Alcon entities are not eligible to receive awards under this plan.
Under the Amended 2002 Alcon Incentive Plan, limits are placed on the maximum award amounts that may be granted to any employee in any plan year. The maximum number of shares subject to stock options/stock appreciation rights that may be issued to any participant during any calendar year shall not exceed 750,000. The maximum number of shares that may be issued to any participant as restricted shares during any calendar year shall not exceed 200,000.
Administration
The Amended 2002 Alcon Incentive Plan is administered by the compensation committee of our board of directors, which has the authority to recommend and set the terms and conditions of the grant awards. Our board of directors is responsible for approving the recommendations of the compensation committee.
For our employees who are not considered executive officers, the compensation committee may delegate its authority under the Alcon Incentive Plan to our executive officers, subject to certain guidelines.
Shares Reserved for Awards
Under the Amended 2002 Alcon Incentive Plan, a total of up to 40 million common shares may be issued for awards. Through December 31, 2010, approximately 20.4 million of these common shares had been issued under this plan.
Of the total shares available to grant, the board of directors has allocated a small portion to the President and CEO to award at his discretion. These shares are to be used for awards beyond the annual long term incentive awards and may be awarded to recognize increased responsibilities or special contributions, to attract new hires, to retain executives or to recognize certain other special circumstances. The amounts of these awards are set to provide strong additional retention incentive. Generally, these share-based awards are subject to a three-year vesting schedule. Although the awards are at the discretion of the President and CEO, he must report any awards granted to the compensation committee at its quarterly meetings. As of December 31, 2010, there are 110,909 shares available for the President and CEO's discretionary awards under the plan.
Our board of directors has the authority to make appropriate adjustments to the limits described above, as well as to the terms of outstanding awards, in the event of any transaction that affects our common shares such as share splits, share dividends or other similar events.
Awards of stock options that expire unexercised, stock appreciation rights or restricted shares that are forfeited under the terms of this plan or stock appreciation rights that are exercised for cash are not included in applying the maximum limit for our common shares available for grant under this plan.
Annual and Long Term Incentive Awards
Annual and long term incentive awards may be granted under the Amended 2002 Alcon Incentive Plan. The awards are considered earned only if corporate, business segment or performance goals over the performance period satisfy the conditions established by the compensation committee and approved by our board of directors. The performance objectives, which may vary from employee to employee, are based on one or more financial measures and additional non-financial measures.
Our board of directors determines whether awards are paid in the form of cash, common shares or any combination of these items. Under the Amended 2002 Alcon Incentive Plan, selected executive officers may be awarded performance-based incentive awards, subject to a maximum limit.
Stock Options
Under the Amended 2002 Alcon Incentive Plan, we may grant to eligible employees stock options that are either incentive stock options or nonqualified stock options. To date, the stock options granted have been nonqualified stock options, which do not and will not qualify as incentive stock options for federal income tax purposes under Section 422 of the U.S. Internal Revenue Code of 1986.
The compensation committee will recommend to our board of directors for approval the number and type of stock options to grant, as well as the exercise price, applicable vesting schedule, option term and any applicable performance criteria. Unless otherwise decided by our board of directors, stock options will vest in full on the third anniversary of the date of grant, or on an option holder's death, permanent disability or retirement (as defined in the Amended 2002 Alcon Incentive Plan and/or award agreements). Beginning with awards granted in 2006, vesting of stock option awards will not be accelerated upon the option holder's retirement, but will vest according to the regular vesting schedule. Upon the involuntary termination of an option holder's employment with us, all vested options will be exercisable for 30 days; provided, however, that where the termination of employment is due to (i) retirement or (ii) death or disability, they may be exercisable for their remaining term, or for 60 months not to exceed the remaining term, respectively. Some vesting requirements have been modified in accordance with local laws and the approval of the board. Upon voluntary termination of employment, all options (vested and unvested) forfeit on the date of termination. The grant price for any stock option will be not less than the fair market value of our common shares on the grant date. Unless our board of directors provides for a different period, stock options will have a term of ten years.
Stock Appreciation Rights
We may grant stock appreciation rights, which will entitle the holder to receive an amount equal to the difference between the fair market value and the grant price. The compensation committee will recommend to our board of directors for approval the number of stock appreciation rights to grant, as well as the exercise price, applicable vesting schedule, term and any applicable performance criteria. The amount may be settled either in stock or in cash, as designated by the award agreement.
Unless determined otherwise by our board of directors, stock appreciation rights will vest in full on the third anniversary of the date of grant or on a holder's death, permanent disability or retirement (as defined in the Amended 2002 Alcon Incentive Plan and/or award agreements). Beginning with awards granted in 2006, vesting of stock appreciation rights will not be accelerated upon the holder's retirement, but will vest according to the regular vesting schedule. Upon the involuntary termination of a holder's employment with us, all vested stock appreciation rights will be exercisable for 30 days; provided, however, that where the termination is due to (i) retirement or (ii) death or disability, they may be exercisable for the remaining term, or for 60 months not to exceed the remaining term, respectively. Some vesting requirements have been modified in accordance with local laws and the approval of the board. Upon voluntary termination of employment, all stock appreciation rights (vested and unvested) forfeit on the date of termination. Stock appreciation rights granted in tandem with stock options can be exercised only if the related stock option is exercisable at that time. Unless our board of directors provides for a different period, stock appreciation rights will have a term of ten years.
Restricted Shares/Restricted Share Units
The Company may grant restricted shares/restricted share units. Restricted shares are common shares granted to a participant subject to restrictions determined by the board of directors. Restricted share units entitle the recipient to receive a specified number of common shares or the cash equivalent equal to the fair market value of such shares on the date of vesting. A restricted share or restricted share unit will vest and become transferable upon satisfaction of the conditions set forth in the restricted share/restricted share unit award agreements. Restricted share/restricted share unit awards will be forfeited if a recipient's employment terminates prior to vesting of the award. The compensation committee will recommend to our board of directors for approval the number of restricted share/restricted share unit awards to grant, applicable vesting schedule, term and any applicable performance criteria.
Unless otherwise specified in the restricted share/restricted share unit award agreements, restricted share/restricted share unit awards will vest upon a holder's death or permanent disability or retirement at or after age 62. Restricted share awards/restricted share unit awards granted in 2009 do not vest automatically upon a holder's retirement after
age 55 with 10 years of service and prior to age 62. For each year of service, 33% of the award will become non-forfeitable and will continue to vest as if there had been no termination of service. Restricted share unit awards granted in 2010 do not vest automatically upon a holder's retirement after age 55 with 10 years of service and prior to age 62. In the first twenty-three months following the grant, the individual will forfeit 100% of the award upon termination. In the twenty-fourth month until the normal vesting date, 33% of the award will forfeit upon termination. The non-forfeited, unvested portion of the award will continue to vest as if there had been no termination of service. Upon three full years of service after the date of the award, the grant will become 100% vested. Holders of restricted shares will have voting rights and receive dividend equivalents prior to vesting. Holders of restricted share units have no voting rights and receive dividend equivalents prior to vesting.
During 2010, the Company made a special retention grant of restricted share units to 201 individuals for a total accounting value of $30 million. This special retention grant was made at the date of the change of majority ownership to enhance the retention of employees with key talent and/or in business critical positions. The actual provisions for this award were modified from the annual award guidelines to remove retirement vesting. In order to receive the full award amount, the recipients must stay with the Company for three years. However, if the employee is terminated due to position elimination or the employee resigns for "good reason," then the award may vest on a pro-rata basis.
Performance Share Units
Performance share units vest upon a service requirement and achievement of specific Alcon business objectives as selected by the compensation committee in its discretion and approved by Alcon's board of directors.
The metrics for the 2009 grant consist of three one-year earnings per share ("EPS") growth targets during a three-year service period with a cumulative three-year relative total shareholder return ("TSR") as a modifier. At the beginning of the performance period, the compensation committee establishes a total equity award value for each participant. The performance share unit portion reflects 25% of the established total value for 2009 recipients. The actual values of the units awarded to the employee have been adjusted based on Alcon's three one-year EPS targets and cumulative TSR during the three-year service period. The adjustment was accomplished by multiplying the target award by the applicable EPS award percentage for 2009 and 2010, by 100% for the year 2011 and the maximum TSR multiplier, which was 200% based on the Company's historical performance. On that basis, in February 2011, Alcon's board of directors approved a final settlement of 178.5% of the original units that will be paid in February 2012 to participants that meet the service requirements.
The metrics for the 2008 grant consist of a cumulative three-year EPS growth target for the three-year service period with a cumulative three-year relative TSR as a modifier. At the beginning of the performance period, the compensation committee establishes a total equity award value for each participant. The performance share unit portion reflects 25% of the established total value for 2008 recipients. The actual value of the units awarded to the employee was adjusted based on Alcon's cumulative three-year EPS target and cumulative TSR during the three-year service period. The adjustment was accomplished by multiplying the target award by the applicable EPS award percentage and the TSR multiplier, which resulted in board approval of a final settlement of 118.4% of the original units.
The compensation committee will recommend to our board of directors for approval the number of performance share units to grant, applicable vesting schedule, term and any applicable performance criteria. Unless otherwise specified in the award agreement, the performance share unit awards will vest upon a holder's death or permanent disability. Vesting of performance share unit awards upon a holder's retirement after age 62 will continue as if there was no termination of employment. If the employee's termination of employment is voluntary and after age 55 with not less than 10 years of service but prior to retirement, the employee will forfeit unvested performance share units (have his/her target award reduced) by 33% for each year remaining in the vesting schedule of the award. If an employee's termination is a result of a change of control due to position elimination or for "good reason" as defined in the award agreements, the employee will vest 100% in the award and will be paid out with an EPS award percentage of 100% and a TSR multiple of 1.0. Unvested non-forfeited performance share units will continue to vest according to the award agreement as if there had been no termination of employment. Holders of performance share units have no voting rights and do not receive dividend equivalents prior to vesting.
Other Share-Based Awards
The Amended 2002 Alcon Incentive Plan also allows us to provide awards that are denominated in or valued by reference to our common shares. The grant price for the award will not be less than the fair market value of our common shares on the grant date. The compensation committee will recommend to our board of directors for approval the number and type of award to grant, applicable vesting schedule, term and any applicable performance criteria.
Change-of-Control Provisions
Upon the change-of-control (as defined under the Amended 2002 Alcon Incentive Plan) in August 2010, the following events occurred for annual share-based awards granted prior to December 31, 2008, if the agreement covering the award so provided:
· | all stock options and stock appreciation rights became fully vested and exercisable; |
· | all restrictions on outstanding restricted shares and restricted share units lapsed; |
· | all outstanding cash incentive awards vested and will be paid out on a prorated basis; and |
· | all performance share unit awards will continue to vest under their original terms unless achievement of performance goals can no longer be measured, in which case 100% of each employee's awards vest upon completion of the individual service requirements. |
For share-based awards granted on or after January 1, 2009, the board approved modifications to the change-of-control provisions. Vesting of future awards will accelerate upon the occurrence of both a change-of-control and either involuntary termination, other than "for cause," or voluntary termination for "good reason" within six months preceding or during the two years following the change-of-control. Therefore, awards made in 2010 and 2009 did not vest on the change-of-control.
Upon the completion of the merger with Novartis, management expects that Novartis common shares would be substituted for Alcon common shares under the outstanding share-based awards at the merger date. The substitution ratio would be based on the price of a Novartis share in the merger relative to $168 for an Alcon share, but no cash would be paid.
Corporate Transactions
In the event of certain corporate transactions described in the Amended 2002 Alcon Incentive Plan, our board of directors may:
· | require the exercise of all outstanding awards during a specified time period, after which the awards shall be terminated; |
· | cancel all outstanding awards in exchange for a cash payment equal to the value of the awards; or |
· | immediately vest all outstanding stock options and stock appreciation rights, remove all restrictions on restricted share awards, performance-based awards and other share-based awards, and vest and pay pro rata (based on when the corporate transaction occurs in the applicable performance cycle) all outstanding incentive awards. |
Transferability and Other Terms
Options or awards granted to an employee under the Amended 2002 Alcon Incentive Plan may not be transferred except by will or the laws of descent and distribution. In addition, only the employee may exercise options or awards during his or her lifetime.
In the case of nonqualified stock options, however, the board has the authority to permit all or any part of a nonqualified stock option to be transferred to members of the employee's immediate family and certain family trusts or partnerships, subject to prior written consent of the compensation committee.
Alcon Executive Deferred Compensation Plan
The Company adopted the Alcon Executive Deferred Compensation Plan (the "DCP") effective October 25, 2002. The DCP allows certain U.S. employees the opportunity to defer the receipt of salary, bonus and restricted shares. The DCP further provides that restricted shares deferred by eligible executives can only be invested in Alcon common shares and distributed as Alcon common shares at the end of the deferral period.
The DCP was amended in 2005 for compliance with IRC Section 409A, which was created as part of The American Jobs Creation Act of 2004. The DCP has been operated in "good faith compliance" with Section 409A of the Code and the guidance thereunder from the period January 1, 2005 to January 1, 2008. The DCP was further amended to comply with Section 409A of the Internal Revenue Code effective January 1, 2008.
Alcon Excess 401(k) Plan
The Company adopted the Alcon Excess 401(k) Plan effective January 1, 2004. This plan provides deferral of excess employer contributions that cannot be made to the Alcon 401(k) and Alcon Retirement Plans because of limitations under the U.S. Internal Revenue Code of 1986.
The Alcon Excess 401(k) Plan has been operated in "good faith compliance" with Section 409A of the Code and the guidance thereunder from the period January 1, 2005 to January 1, 2008. The Alcon Excess 401(k) Plan was amended to comply with Section 409A of the Internal Revenue Code effective January 1, 2008.
Alcon Directors
The share-based awards to non-employee directors under the Amended 2002 Alcon Incentive Plan will promote greater alignment of interests between our non-employee directors, our shareholders and Alcon. It will assist us in attracting and retaining highly qualified non-employee directors, by giving them an opportunity to share in our future success. Non-employee directors are eligible to receive awards under the Amended 2002 Alcon Incentive Plan.
Shares Reserved for Awards
Approximately 60,000 of the 40 million common shares under the Amended 2002 Alcon Incentive Plan were allocated for awards to non-employee directors.
Annual Awards
Every year, each non-employee director will receive share-based awards with a current value of $125,000.
Board Composition
Our board of directors currently consists of eleven members including three independent directors; six directors that were designated by Novartis; the vice chairman of the board of directors; and the chief executive officer of Alcon Laboratories, Inc.
On April 6, 2008, Nestlé S.A. and Novartis AG entered into a Purchase and Option Agreement and a Shareholders' Agreement. Under the terms of the Shareholders Agreement, the parties agreed to use their reasonable best efforts to cause the number of our board of directors to be ten; subject to election and the due qualification of such individuals as directors, our board of directors should be comprised of (A) one individual designated by Novartis, (B) five individuals designated by Nestlé, (C) three individuals nominated by the Nominating/Corporate Governance Committee that qualify as independent directors and who are not Novartis or Nestlé designees and (D) the Chief Executive Officer of Alcon, Inc. Upon consummation of the purchase by Novartis of the remaining
approximately 52% of Alcon, Inc. common shares, the parties agreed to use their reasonable best efforts to cause the five individuals designated by Nestlé to resign from office and to have five replacement directors nominated by Novartis elected at an extraordinary or an annual general meeting of shareholders of the Company.At the annual general meeting held on May 5, 2009, the shareholders elected Kevin Buehler to the board of directors. With Mr. Buehler's election, our board of directors expanded from ten to eleven members.
On August 16, 2010, an extraordinary general meeting of shareholders was held to conditionally elect the Novartis designated directors to replace the five Nestlé designated directors upon the consummation of the acquisition by Novartis of all common shares of Alcon, Inc. that were beneficially owned by Nestlé as of such time, pursuant to the Purchase and Option Agreement. On August 25, 2010, Novartis and Nestlé completed the purchase and sale of approximately 156 million shares of Alcon, Inc. With the completion of this transaction, Novartis became Alcon's majority shareholder with approximately 77 percent of Alcon's outstanding shares. Effective August 25, 2010, the five Nestlé-designated members of the Alcon board of directors tendered their resignations and the August 16, 2010 election of the five Novartis-designated directors became effective.
Members of our board of directors generally are elected to serve three-year terms. Members of our board of directors whose terms of office have expired shall be eligible for re-election. Non-executive directors may only be appointed for up to four terms of office. Our board of directors is divided into three classes serving staggered terms. As a result, some of our directors will serve terms that are less than three years. As their terms of office expire, the directors of one class will stand for election each year as follows:
· | Class I directors have terms of office expiring at the annual general meeting of shareholders in 2012. These directors are Kevin Buehler (director since 2009), Paul Choffat, Ph.D. (director since 2010) and Joan W. Miller, M.D. (director since 2009). |
· | Class II directors have terms of office expiring at the annual general meeting of shareholders in 2013. These directors are Urs Bärlocher, Ph.D. (director since 2010), Lodewijk J.R. de Vink (director since 2002), and Jacques Seydoux, M.D. (director since 2010); and |
· | Class III directors have terms of office expiring at the annual general meeting of shareholders in 2011. These directors are Thomas G. Plaskett (director since 2003), Cary R. Rayment (director since 2005), Enrico Vanni, Ph.D. (director since 2010), Daniel Vasella, M.D. (director since 2008) and Norman Walker (director since 2010). |
Our Organizational Regulations provide that directors will retire from office no later than the annual general meeting after their 72nd birthday.
Service Contracts
Cary Rayment and Kevin Buehler are the only directors on our board that have a service contract with the Company or any of its subsidiaries. The contract with Mr. Rayment does not provide for benefits upon termination. On October 24, 2010, Mr. Rayment ceded his position of chairman of the board of Alcon, Inc. and was appointed as vice chairman. At the December 2010 meeting, the board approved extending Mr. Rayment's agreement with the same remuneration on a monthly basis for his service as vice chairman of the board until the next annual general meeting of the shareholders. The board also determined to pay Dr. Vasella the same chairman retainer of $290,000 per year through the next annual general meeting of the shareholders.
A discussion of the material terms of Mr. Buehler's employment agreements with the Company and certain benefits upon termination is set forth in Item 10.C, "Material Contracts," of this annual report.
Board Committees
Our board of directors has appointed an audit committee, a nominating/corporate governance committee, a compensation committee and an independent director committee.
Audit Committee
The audit committee consists of six directors of which three directors are not otherwise affiliated with Novartis or Alcon. Our board of directors has determined that all members of the audit committee are independent as defined by the rules of the SEC and the listing standards of the NYSE. The audit committee is currently comprised of Thomas G. Plaskett (Chairman), Urs Bärlocher, Ph.D., Paul Choffat, Ph.D., Lodewijk J.R. de Vink, Joan W. Miller, M.D. and Enrico Vanni, Ph.D. In September 2003, the board affirmed that Mr. Plaskett was the "audit committee financial expert" within the meaning of applicable SEC regulations. The functions of this committee include ensuring proper implementation of the financial strategy as approved by the board of directors, reviewing periodically the financial results as achieved, overseeing that the financial performance of the group is properly measured, controlled and reported, and recommending any share repurchase program for approval by our board of directors, as well as:
· | review of the adequacy of our system of internal accounting procedures; |
· | recommendations to the board of directors as to the selection of independent auditors, subject to shareholder approval; |
· | discussion with our independent auditors regarding their audit procedures, including the proposed scope of the audit, the audit results and the related management letters; |
· | review of the audit results and related management letters; |
· | review of the services performed by our independent auditors in connection with determining their independence; |
· | review of the reports of our internal and outside auditors and the discussion of the contents of those reports with the auditors and our executive management; |
· | oversight of the selection and the terms of reference of our internal and outside auditors; |
· | review and discussion of our quarterly financial statements with our management and our outside auditors; and |
· | ensure our ongoing compliance with legal requirements, accounting standards and the provisions of the NYSE. |
Nominating/Corporate Governance Committee
The nominating/corporate governance committee shall consist of at least two directors who are not otherwise affiliated with Novartis or Alcon, at least one director designated by Novartis as long as Novartis remains as Alcon, Inc.'s majority shareholder. The nominating/corporate governance committee is currently comprised of Daniel Vasella, M.D. (Chairman), Urs Bärlocher, Ph.D., Lodewijk J. R. de Vink, Joan W. Miller, M.D, Thomas G. Plaskett, Jacques Seydoux, M.D. and Enrico Vanni, Ph.D. The functions of this committee include:
· | subject to certain nomination rights of Novartis as provided in our Organizational Regulations, identifying individuals qualified to become members of our board of directors and recommending such individuals to the board for nomination for election by the shareholders; |
· | making recommendations to the board concerning committee appointments; |
· | developing, recommending and annually reviewing corporate governance guidelines for Alcon; |
· | reviewing proposals of the chief executive officer for appointment of members of our executive management, to the extent such members are appointed by the board, and making recommendations to the board regarding such appointments; |
· | overseeing corporate governance matters; and |
· | coordinating an annual evaluation of Alcon's board. |
Compensation Committee
The compensation committee shall consist of at least two members of our board of directors who are not otherwise affiliated with Novartis or Alcon, at least one member of our board of directors nominated by Novartis as long as Novartis remains as Alcon's majority shareholder. The compensation committee is currently comprised of Lodewijk J.R. de Vink (Chairman), Thomas G. Plaskett, Daniel Vasella, M.D. and Norman Walker. The functions of this committee include:
· | review of our general compensation strategy; |
· | recommendations for approval by our board of directors of compensation and benefits programs for our executive officers; |
· | review of the terms of employment between Alcon and any executive officer or key employee; |
· | administration of our long term incentive plan and recommendations to our board of directors for approval of individual grants under this plan; and |
· | decisions with respect to the compensation of members of our board of directors.
|
Independent Director Committee
In accordance with our Organizational Regulations, the Alcon board of directors established an Independent Director Committee of the Alcon board of directors in 2008 in connection with Novartis's initial purchase of slightly less than 25% of the Alcon shares from Nestlé, in order to protect the interests of the minority holders of publicly held Alcon shares in certain transactions. The Independent Director Committee is currently comprised of Thomas G. Plaskett (Chairman), Lodewijk J.R. de Vink and Joan W. Miller, M.D. The Independent Director Committee shall be responsible for protecting the interests of our minority shareholders and shall make recommendations to the board of directors with respect to:
· | a proposed merger, takeover, business combination or related party transaction of Alcon, Inc. with the majority shareholder or any group company of the majority shareholder; |
· | a proposed bid for the shares of Alcon, Inc. by any entity owning a majority of our outstanding voting rights; |
· | a proposed repurchase by us of all our shares not owned by an entity owning a majority of the outstanding voting rights of Alcon; or |
· | any change to the powers and duties of the Independent Director Committee. |
The Independent Director Committee believes that our board of directors may only approve a decision with respect to any of these matters if a majority of the members of the Independent Director Committee so recommends; however, we cannot predict the outcome of any proceeding that might be initiated to interpret or challenge this position.
Executive Sessions of Non-Management Directors
The vice chairman presides at the regularly scheduled executive sessions of the non-management directors. Interested parties may communicate directly with the presiding director or with the non-management directors as a group by writing to the following address: Alcon, Inc., Attention: Non-Management Directors, P.O. Box 1821, Radio City Station, New York, New York 10101-1821.
As of December 31, 2010, we employed approximately 16,700 full-time employees, including approximately 1,900 research and development employees, approximately 5,400 manufacturing employees and approximately 6,500 marketing, sales and customer support employees. Currently, we believe that approximately 700 of our workers in Belgium are represented by a union. In other European countries, our workers are represented by works councils. We believe that our employee relations are good.
The following table indicates the approximate number of employees by location:
December 31, | | Total | | United States | | International |
| | | | | | |
2010 | | 16,700 | | 7,300 | | 9,400 |
2009 | | 15,700 | | 7,100 | | 8,600 |
2008 | | 15,400 | | 7,300 | | 8,100 |
As of December 31, 2010, all of the officers and directors listed below had direct or beneficial ownership of less than 1% of the outstanding shares. The following tables set forth the total number of vested and unvested shares and share options and share-settled stock appreciation rights owned by officers, directors and persons closely linked to them as of December 31, 2010.
| | | | | | Total Number of | |
| | Restricted | | Beneficially Owned | | Shares Owned | |
Name | | Shares Units (1) | | Shares | | Direct or Indirectly | |
| | | | | | | |
Daniel Vasella, M.D. | | 1,550 | | 375 | | 1,925 | |
Cary R. Rayment | | 15,281 | | 52,989 | | 68,270 | |
Kevin J. Buehler | | 67,210 | | 8,753 | | 75,963 | |
Urs Bärlocher, Ph.D. | | 775 | | 25 | | 800 | |
Paul J. Choffat, Ph.D. . | | 775 | | 10 | | 785 | |
Lodewijk J.R. de Vink | | 1,550 | | 5,000 | | 6,550 | |
Joan W. Miller, M.D. | | 1,550 | | - | | 1,550 | |
Thomas G. Plaskett | | 1,550 | | 2,485 | | 4,035 | |
Jacques Seydoux, M.D. | | 775 | | 10 | | 785 | |
Enrico Vanni, Ph.D. | | 775 | | 1 | | 776 | |
Norman Walker | | 775 | | 100 | | 875 | |
Patrick Bachmann | | 1,599 | | 236 | | 1,835 | |
Joanne Beck | | 2,164 | | 200 | | 2,364 | |
Wes Brazell | | 2,726 | | - | | 2,726 | |
Robert Karsunky | | 21,363 | | - | | 21,363 | |
Elaine E. Whitbeck | | 20,053 | | - | | 20,053 | |
William K. Barton | | 19,145 | | - | | 19,145 | |
Sabri Markabi, M.D. | | 25,037 | | 3,375 | | 28,412 | |
Merrick R. McCracken | | 7,551 | | - | | 7,551 | |
Ed McGough | | 13,584 | | 1,978 | | 15,562 | |
| | | | | | | |
(1) | Restricted share units include restricted share units and performance share units, both settleable solely in shares. |
Options and Share-Settled Stock Appreciation Rights Held by Officers and Directors
| | | | Outstanding | | Grant | | Vesting | | Term |
Name | | Year (2) | | (#) | | Price ($) | | Year | | (Years) |
| | | | | | | | | | |
Daniel Vasella, M.D. | | 2009 | | 3,150 | | 96.02 | | 2012 | | 10 |
| | 2008 | | 1,350 | | 167.95 | | 2010 | | 10 |
| | | | | | | | | | |
Cary R. Rayment | | 2009 | | 3,150 | | 96.02 | | 2012 | | 10 |
| | 2008 | | 100,621 | | 147.54 | | 2010 | | 10 |
| | 2007 | | 125,211 | | 130.56 | | 2010 | | 10 |
| | 2006 | | 95,652 | | 122.90 | | 2009 | | 10 |
| | 2005 | | 152,400 | | 79.00 | | 2008 | | 10 |
| | 2004 | | 22,000 | | 63.32 | | 2007 | | 10 |
| | 2004 | | 25,000 | | 80.20 | | 2007 | | 10 |
Kevin J. Buehler | | 2009 | | 131,857 | | 87.09 | | 2012 | | 10 |
| | 2008 | | 22,191 | | 147.54 | | 2010 | | 10 |
| | 2007 | | 28,350 | | 130.56 | | 2010 | | 10 |
| | 2006 | | 14,783 | | 122.90 | | 2009 | | 10 |
| | 2005 | | 30,477 | | 79.00 | | 2008 | | 10 |
| | 2004 | | 12,000 | | 63.32 | | 2007 | | 10 |
| | 2004 | | 15,000 | | 80.20 | | 2007 | | 10 |
| | | | | | | | | | |
Lodewijk J. de Vink | | 2009 | | 3,150 | | 96.02 | | 2012 | | 10 |
| | 2008 | | 1,500 | | 154.65 | | 2010 | | 10 |
| | 2007 | | 2,000 | | 132.91 | | 2010 | | 10 |
| | 2006 | | 2,200 | | 100.00 | | 2009 | | 10 |
| | 2005 | | 3,000 | | 97.89 | | 2008 | | 10 |
| | 2004 | | 4,000 | | 75.30 | | 2007 | | 10 |
| | 2003 | | 4,500 | | 41.71 | | 2006 | | 10 |
| | 2002 | | 6,000 | | 33.00 | | 2005 | | 10 |
| | | | | | | | | | |
Joan W. Miller, M.D. | | 2009 | | 3,150 | | 96.02 | | 2012 | | 10 |
| | | | | | | | | | |
Thomas G. Plaskett | | 2009 | | 3,150 | | 96.02 | | 2012 | | 10 |
| | | | | | | | | | |
Patrick Bachmann | | 2009 | | 791 | | 87.09 | | 2012 | | 10 |
| | 2008 | | 533 | | 147.54 | | 2010 | | 10 |
| | | | | | | | | | |
Stefan Basler(1) | | 2007 | | 1,063 | | 130.56 | | 2010 | | 10 |
| | 2006 | | 704 | | 122.90 | | 2009 | | 10 |
| | 2005 | | 1,751 | | 79.00 | | 2008 | | 10 |
| | 2004 | | 2,420 | | 63.32 | | 2007 | | 10 |
| | 2003 | | 3,000 | | 36.39 | | 2006 | | 10 |
| | 2002 | | 2,550 | | 33.00 | | 2005 | | 10 |
| | | | | | | | | | |
Joanne Beck | | 2009 | | 4,615 | | 87.09 | | 2012 | | 10 |
| | | | | | | | | | |
Wes Brazell | | 2009 | | 5,158 | | 87.09 | | 2012 | | 10 |
| | | | | | | | | | |
| | | | Outstanding | | Grant | | Vesting | | Term |
Name | | Year (2) | | (#) | | Price ($) | | Year | | (Years) |
Elaine E. Whitbeck | | 2009 | | 37,975 | | 87.09 | | 2012 | | 10 |
| | 2008 | | 17,753 | | 147.54 | | 2010 | | 10 |
| | 2007 | | 23,625 | | 130.56 | | 2010 | | 10 |
| | 2006 | | 17,391 | | 122.90 | | 2009 | | 10 |
William K. Barton. | | 2009 | | 36,920 | | 87.09 | | 2012 | | 10 |
| | | | | | | | | | |
Sabri Markabi, M.D., | | 2009 | | 52,743 | | 87.09 | | 2012 | | 10 |
| | 2008 | | 5,667 | | 144.87 | | 2010 | | 10 |
| | 2008 | | 5,667 | | 144.87 | | 2010 | | 10 |
| | 2008 | | 5,582 | | 144.87 | | 2009 | | 10 |
Ed McGough | | 2009 | | 26,371 | | 87.09 | | 2012 | | 10 |
| | 2008 | | 10,145 | | 147.54 | | 2010 | | 10 |
| | 2007 | | 5,434 | | 130.56 | | 2010 | | 10 |
| | 2006 | | 3,304 | | 122.90 | | 2009 | | 10 |
| | | | | | | | | | |
(1) | Mr. Basler's 2002 and 2003 outstanding stock appreciation rights will be settled in cash. |
(2) | Outstanding stock appreciation rights for shares granted in 2008 became vested upon the change of control in August 2010. |
Information on common shares, stock options and share-settled stock appreciation rights granted to officers and directors and on incentive compensation plans is included in Item 6.B "Compensation."
ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Alcon is currently a majority owned subsidiary of Novartis AG. During July 2008, Nestlé S.A. sold approximately 74 million, or almost 25%, of the outstanding Alcon common shares to Novartis. At December 31, 2009 and 2008, Nestlé owned 156,076,263, or approximately 52%, of the outstanding common shares of Alcon. In January 2010, Novartis exercised its call option under the Purchase and Option Agreement for Nestlé's remaining Alcon common shares and proposed a merger of Alcon with and into Novartis. In August 2010, Novartis acquired Nestlé's remaining Alcon shares. As of December 31, 2010, Novartis had purchased cumulatively 231,352,279, or approximately 77%, of the outstanding shares of Alcon.
The common shares owned by Novartis carry the same voting rights as other outstanding Alcon common shares. Novartis is not subject to any contractual obligation to retain its interest in us. However, pursuant to a merger agreement dated December 14, 2010, Novartis and Alcon have agreed, subject to certain conditions, to merge Alcon with and into Novartis.
See additional discussion of Novartis's purchase of its controlling interest from Nestlé, agreements between Novartis and Nestlé and the proposed merger under "Risk Factors-Risks Related to Our Relationship with Novartis."
Other than Novartis, no shareholder reported beneficial ownership of 5% or more of Alcon's outstanding common shares at December 31, 2010.
At December 31, 2010, excluding treasury shares held by Alcon, three shareholders of record in Switzerland, including Novartis, held 231,352,419, or approximately 77%, of the outstanding common shares of Alcon.
B. | RELATED PARTY TRANSACTIONS |
1. | Purchase and Option Agreement between Nestlé and Novartis |
On April 6, 2008, Nestlé and Novartis executed the Purchase and Option Agreement pursuant to which Nestlé agreed to sell approximately 74 million of its shares of Alcon common stock to Novartis in a cash transaction at a price of $143.18 per share. This sale was consummated on July 7, 2008, and Novartis acquired an ownership stake in Alcon of slightly less than 25% of Alcon's outstanding shares, while Nestlé remained Alcon's majority shareholder with approximately 156 million Alcon shares comprising approximately 52% of the Company's outstanding shares.
The Purchase and Option Agreement between Nestlé and Novartis also contained put and call option rights on the balance of approximately 156 million Alcon shares owned by Nestlé. These option rights commenced on January 1, 2010. As outlined by the two parties, these rights granted (i) Novartis a call option to buy all but 4.1 million (or 2.5%) of Nestlé's remaining Alcon shares at a fixed price of $181 per share and the 4.1 million shares at the first stage price of $143.18 per share, and (ii) Nestlé a put option to sell to Novartis all but 4.1 million of its remaining Alcon shares to Novartis at the lower of Novartis's call price of $181 per share or a 20.5% premium above the then-market price of Alcon shares, calculated as the average market price of Alcon shares during the five trading days immediately preceding the exercise date of the put option, with the 4.1 million share balance to be sold at the first stage closing price of $143.18 per share.
For further details on the Purchase and Option Agreement, please refer to the following link at the SEC's web site: http://www.sec.gov/Archives/edgar/data/1114448/000110465908045488/a08-18409_1ex2d1.htm.
On January 4, 2010, Novartis announced that it had exercised its option to purchase the remaining approximately 156 million Alcon shares owned by Nestlé at a weighted average price of $180 per share in cash, pursuant to the Purchase and Option Agreement. After consummation of the purchase on August 25, 2010, Novartis owned an approximate 77% interest in Alcon, with the 23% balance being the publicly traded shares.
The consummation triggered certain change of control provisions in certain retirement plans for Company employees, the Company's share-based awards plan (including the vesting of certain outstanding share-based awards) and other agreements.
On January 4, 2010, Novartis also announced that it submitted to the Alcon board of directors a proposal for a merger of Alcon with and into Novartis to be effected under Swiss merger law. Under the terms of the merger proposal, holders of the Alcon shares that are publicly traded would receive 2.8 Novartis shares for each Alcon share. The proposed merger would be contingent upon, among other things, approval by the Alcon board of directors. As more fully discussed in Item 6.C, "Board Practices," the Company believes that Alcon's Organizational Regulations provide that the Alcon board of directors may only approve the proposed merger if a majority of the Independent Director Committee so recommends; however, management cannot predict the outcome of any proceeding that might be initiated to interpret or challenge this position.
The Independent Director Committee was formed in 2008 in connection with Novartis's initial purchase of slightly less than 25% of the Alcon shares from Nestlé to evaluate transactions such as the merger proposed by Novartis. The Independent Director Committee engaged independent financial and legal advisors in connection with its evaluation of the proposed merger. On January 20, 2010, the Independent Director Committee issued its formal response rejecting the Novartis merger proposal. The committee rejected the merger proposal based on its assessment that the price offered and other terms were not acceptable and that Novartis's merger proposal was not in the best interests of Alcon and its minority shareholders.
2. | Merger Agreement of December 14, 2010 |
On December 15, 2010, Alcon announced that its board of directors approved a merger agreement with Novartis, whereby Novartis will pay a total merger consideration valued at $168 per share for the Alcon shares it does not currently own. Under the terms of the deal, the merger consideration will be comprised of a combination of Novartis shares (or American Depositary Shares in lieu thereof) and, if necessary, a cash contingent value amount to result in a
total value of $168 per share. The exact exchange ratio and cash contingent value amount will be calculated based upon formulas set forth in the merger agreement.
In accordance with Alcon's Organizational Regulations and after receiving a fairness opinion from its independent financial adviser, Greenhill & Co., the Independent Director Committee unanimously recommended approval of the merger agreement to the Alcon board. The board also received a separate fairness opinion rendered by Lazard Frères & Co. LLC in connection with the transaction. After considering these items and other appropriate information and factors, the Alcon board approved the merger proposal.
The merger will be effected under Swiss merger law. Completion is conditional, among other things, on two-thirds approval by the shareholders of both Novartis and Alcon voting at their respective meetings, and the registration and listing of Novartis shares and American Depositary Shares to be issued as merger consideration on the SIX Swiss Exchange and the New York Stock Exchange respectively. At("NYSE"). This inaugural report outlines Alcon’s overall 2019 compensation framework and philosophy for the members of the Board of Directors as well as for the members of the Executive Committee of Alcon ("ECA").
The Compensation Report covers the financial year 2019 from January to December, including compensation prior to the Spin-off date of April 9, 2019.
Activities of the CGNC in 2019
We believe in a strong pay-for-performance compensation philosophy that motivates our senior executives to create value for the Company and its shareholders. During 2019, we evaluated our overall compensation structure, selected a peer group for executive compensation benchmarking and engaged in an active dialogue with shareholders.
Compensation Structure Review
For ECA compensation in 2019, we leveraged, with only slight modifications, the Novartis executive compensation framework, which remained broadly unchanged from the structure in place when Alcon was a division of Novartis. Following the Spin-off, we focused our efforts on creating a compensation framework and philosophy that considers Alcon's position as a newly-independent company with ambitious growth and business objectives and the realities of the competitive global market for executive talent. The compensation philosophy we developed serves as the foundation in establishing our pay for performance framework and guides us in our decision-making process. Key elements of our new compensation framework include:
Attracting exceptional executive talent to lead the Company, and retaining and motivating them over the long term through a mix of fixed and variable compensation elements;
Designing and structuring programs that appropriately incentivize executives to achieve short and long-term strategic business objectives established by our Board of Directors ("Board"); and
Aligning the interests of Alcon executives with those of shareholders.
By establishing our own compensation philosophy and framework early after our Spin-off, we set a strong course going forward for the Company and our shareholders.
Peer Group
The CGNC followed a comprehensive approach in selecting the companies to include in Alcon’s peer group for external compensation benchmarking. The peer group companies selected are a blend of European and North American companies and provide a good balance of industries, companies and geographies from which executive talent is sourced. The CGNC believes that benchmarking against a consistent and relevant set of peer companies that are similar to Alcon in size and scope will assist the Company in maintaining appropriate pay levels and benefits that will attract and retain the talent that has the experience and deep expertise needed to lead the Company.
Engagement with Shareholders on Compensation
Shareholder engagement and feedback is important to us as a newly established company and we undertook a formal outreach to engage shareholders beginning in the fall of 2019.
During that formal outreach initiative, we appreciated the opportunity to meet with shareholders who collectively hold over 40% of our shares. During these meetings we discussed our pay-for-performance orientation, sought feedback on our
compensation programs, and explained our approach to performance measurement. The 2019 Compensation Report provides additional insights into our 2020 compensation plans. We intend to continue this dialogue and evaluate and consider the feedback received to align our compensation structure with shareholder interests.
2020 Annual General Meeting
In line with the Articles of Incorporation, we will ask our shareholders to cast a binding vote on the maximum aggregate amount of compensation for members of the Board of Directors for their term of office from the 2020 AGM to the 2021 AGM. We will also ask our shareholders to cast a binding vote on the maximum aggregate amount of compensation for members of the ECA for the 2021 financial year. In addition, we will ask our shareholders to endorse this 2019 Compensation Report in an advisory vote.
On behalf of the Board of Directors and the members of the Compensation, Governance and Nomination Committee, we thank you for your trust in Alcon and for your feedback.
Sincerely,
Karen May
Chair of the Compensation, Governance and Nomination Committee
Compensation at a Glance
2019 ECA Compensation—Summary
Last year represented a transition year for Alcon as we became an independent, stand-alone company following the Spin-off from Novartis on April 9, 2019. We leveraged, with only slight modifications, the executive compensation program of our former parent company.
The compensation program consisted of a balanced set of fixed and variable elements rewarding short-term and long-term performance through the delivery of cash payments and equity awards. Performance goals were aligned to the strategic plan in a mix of absolute and relative measures including financial and non-financial metrics.
Exhibit 1
|
| | | | |
| Annual Base Salary | Short-Term Incentive (annual incentive) | Long-Term Incentive | Benefits |
Purpose | In line with global pay practices, reflects responsibilities, experience and skills | Rewards annual performance against key objectives | Rewards long-term value creation in line with Alcon’s strategy and business priorities | Retirement savings and insurances in line with local market practices and benefits associated with global mobility and international relocation |
Payment | Cash | Cash and equity | Equity (Performance Stock Units) | Cash or in-kind, contributions to retirement savings and insurance policies |
Performance period | — | One year | Three year cliff vesting | — |
Performance measures | — | Three financial performance measures and individual performance rating | Four equally weighted performance measures including financial, external and innovation metrics | — |
Payout range | | 0%-200% of the individual target award | 0%-200% of the number of Performance Stock Units granted | |
Basis | Fixed | Variable | Variable | Fixed and variable |
Total Compensation for 2019
From January 1, 2019 to December 31, 2010,2019, we awarded the ECA members the amounts set out below. The amounts include payments made to the ECA members while they were employees of Novartis ownedfrom January 1, 2019 through April 8, 2019. For more thandetailed information, see section "ECA Compensation 2019" in this 2019 Compensation Report.
Exhibit 2
|
| | | | | | | | | | | | |
Compensation | Fixed compensation | | Variable compensation | | Additional compensation | | Totals |
From January 1, 2019 to December 31, 2019 | Annual base salary | | Pension and insurance benefits | | 2019 short-term incentive | | 2019-2021 long-term incentive awards | | Other benefits | | Total compensation |
USD | Amount in cash | | Total amount | | Cash amount | RSU1 value at grant | | PSU2 target value at grant | | Amount | | Amount |
David J. Endicott, CEO | 1,134,358 | | 279,851 | | 745,380 | 745,380 | | 2,738,036 | | 1,177,487 | | 6,820,492 |
Other ECA members | 3,541,122 | | 960,531 | | 2,459,312 | 1,053,990 | | 7,821,030 | | 3,396,392 | | 19,232,377 |
Totals in USD3 | 4,675,480 | | 1,240,382 | | 3,204,692 | 1,799,370 | | 10,559,066 | | 4,573,879 | | 26,052,869 |
Totals in CHF4 | 4,647,132 | | 1,232,862 | | 3,185,262 | 1,788,460 | | 10,495,046 | | 4,546,148 | | 25,894,910 |
| |
3 | Includes the CEO and six other ECA members post Spin-off date, and the CEO and five other ECA members pre Spin-off date. |
| |
4 | The amounts were converted at the rate of 1.0 CHF : 1.0061 USD. |
2019 Board of Directors Compensation—Summary
We paid our Directors a fixed fee for services covering the required two-thirdsterm of their office from the date of Spin-off on April 9, 2019 to the 2020 Annual General Meeting ("2020 AGM").
The fixed compensation consists of a base fee for Board membership and additional fees for service on Board committees. Board members and the Board Chair receive fifty percent of their compensation in cash and fifty percent in unrestricted Alcon shares. On a voluntary basis, a Board member may opt to receive all or part of the cash portion in additional shares. Alcon does not provide any performance-based components of pay to the members of the Board.
Exhibit 3
|
| | |
| Fee for the period from April 9, 2019 to the 2020 AGM |
Board function | USD1 | CHF |
Annual base fee: | | |
Board Chair | 955,795 | 950 000 |
Board member base fee (Board retainer fee) | 201,220 | 200 000 |
Additional fees: | | |
Vice Chair | 40,244 | 40 000 |
Chair of the Audit and Risk Committee | 70,427 | 70 000 |
Chair of the Compensation, Governance and Nomination Committee | 50,305 | 50 000 |
Chair of the Innovation Committee | 50,305 | 50 000 |
Member of the Audit and Risk Committee | 35,214 | 35 000 |
Member of the Compensation, Governance and Nomination Committee | 25,153 | 25 000 |
Member of the Innovation Committee | 25,153 | 25 000 |
| |
1 | The Board fees are paid in Swiss Francs, converted at the rate of 1.0 CHF : 1.0061 USD. |
Alcon Board Fee Payments in 2019
In 2019, Alcon paid the members of the Board the following total amounts.
Exhibit 4
|
| | | | | |
| Payment in cash | Payment in shares | Number of shares | Other payments | Total fees |
Total fees paid in 20191 in USD | 953,725 | 866,688 | 14,512 | 102,440 | 1,922,853 |
Total fees paid in 2019 in CHF2 | 947,943 | 861,433 | 14,512 | 101,819 | 1,911,195 |
| |
1 | Represents compensation for nine out of ten members of the Board as David J. Endicott does not receive additional compensation for his service as a member of the Board. |
| |
2 | The payments in cash were made in Swiss Francs (CHF) for consistency they are reported in USD as all compensation in this report. The amounts were converted at the rate of 1.0 CHF : 1.0061 USD. All amounts are before deduction of the social security contributions and income tax due by the Board member. |
For more details regarding the compensation paid to the individual members of the Board, see section "Board of Directors 2019".
2020 Compensation Outlook
ECA compensation
The CGNC is committed to a pay-for-performance framework to align executive performance with shareholder interests. Following a thorough review of Alcon's compensation structures during 2019, we have made refinements to our overall compensation structures to better reflect Alcon's status as an independent, stand-alone company.
Headquartered in Switzerland, Alcon operates on a truly global basis. Our main business competitors are found in both Europe and North America, which is where we compete for talent. Consequently, our new executive compensation framework has been benchmarked against a carefully selected peer group, consisting of European and North American companies with a blend of similar size, industry and geographic characteristics to Alcon. The inclusion of European and North American companies reflects our global footprint and business mix. Based on Alcon’s strategic plan and our peer group analysis, we adopted the following key features of ECA compensation for 2020:
Substantially the same overall structure of ECA compensation as compared to 2019 (base pay, STI, LTI and benefits);
STI to be delivered in cash;
An additional profitability funding mechanism added to the 2019 STI metrics;
LTI metrics unchanged compared to 2019;
An increase to the CEO’s LTI award at target to align total compensation closer to the median of the blended peer group;
Broadly no significant change to the other ECA member’s compensation except slight adjustments;
Continuation of robust share ownership requirements; and
No material changes to benefits provisions.
Board compensation
The Board compensation framework will remain broadly unchanged for the upcoming term of office from the 2020 AGM to the 2021 AGM with the exception of the split of the CGNC described below, including:
Board Chair fee unchanged compared to 2019;
Same mix of fees payable in cash and shares as in 2019, including the option for a higher percentage of shares; and
Establishing fees for the new Governance and Nomination Committee’s Chair and members.
Effective as of the date of our 2020 AGM, the Board has split the current responsibilities of the Compensation, Governance and Nomination Committee (CGNC) into two separate committees: the Compensation Committee and the Governance and Nomination Committee. The Board recognized the heavy workload assigned to the CGNC since the Spin-off from Novartis; this split enables the two newly created committees to better focus on their respective key responsibilities. For the Governance and Nomination Committee, this includes a focus on leading governance practices and ESG topics in general. And for the Compensation Committee, this includes a focus on human resource strategy and executive compensation. Finally, this reorganization is line with best corporate governance standards. The annual fee for the Chair of the Governance and Nomination Committee will be USD 50,305 (CHF 50,000) and each member will receive USD 25,153 (CHF 25,000). The fees for the Compensation Committee will remain the same as the CGNC. These additional fees will increase the Board compensation budget subject to approval by vote at the 2020 AGM.
Corporate Governance
The Board makes decisions regarding Board compensation upon proposals from the CGNC. These proposals are based on analysis and review of board compensation practices, policies and benchmarking information. Similarly, the Board makes decisions regarding CEO compensation upon proposals from the CGNC. The CGNC makes decisions with regard to compensation of the other ECA members based upon the analysis of relevant executive compensation practices, policies and benchmarking information.
The Board is responsible for approving the Compensation Report and for the proposal of the aggregate budget of Board compensation and ECA compensation to the shareholders at the AGM. The Corporate Governance Report contained in Item 6.C. Board Practices of the 2019 Annual Report provides further details regarding the responsibilities of the CGNC.
Adherence to Strong Governance Practices
The CGNC evaluates many governance factors when designing and establishing compensation for members of the ECA. It uses these mechanisms to help guide its decisions to ensure that the Company is rewarding long-term success, discouraging excessive risk-taking and aligning executive and shareholder interests.
Exhibit 5
|
| |
What we do | What we don’t do |
•Provide a majority of executive pay in variable, rather than fixed, compensation in order to ensure pay for performance | •No severance agreements |
•Tie 100% of Short-Term and Long-Term Incentive awards to appropriately ambitious performance metrics | •No single-trigger change in control payments |
•Follow best practices in executive compensation design | •No change in control related excise tax gross ups |
•Prohibit hedging, pledging, and short sales of Company stock by executive officers and Directors | •No termination notice period in excess of twelve months |
•Have robust share ownership requirements to reinforce alignment between executives and shareholders | •No stock option awards |
•Include forfeiture and claw-back provisions for all variable compensation payments | •No active defined benefit pension plans |
•Ensure that STI and LTI plans have target and maximum payout limits | •No compensation guarantees |
•Award all equity grants at market value | |
•Conduct ongoing investor outreach | |
ECA Compensation 2019
Compensation Program
As an independent company, we leveraged Novartis’ compensation framework for the ECA. That framework includes the strategic objectives of:
Paying for performance and the execution of the Alcon strategy;
Pursuing value for shareholders over the long-term;
Creating alignment in the interests of executives and shareholders; and
Motivating and retaining executives for the long-term.
The general principles for ECA compensation are defined in Articles 31 and 32 of our Articles of Incorporation (http://investor.alcon.com/governance//default.aspx). ECA compensation comprises fixed and variable elements. Fixed elements include an annual base salary and benefits. Variable compensation consists of elements from short-term and long-term incentive plans, which are subject to performance measures and caps.
Pay for Performance
Variable compensation represents a majority of total compensation and affirms our pay for performance philosophy (see more information in exhibits 10 and 17). Actual payout is contingent on the achievement of Company and individual performance goals. Performance metrics and goals are aligned with the Company’s business strategy and compensation philosophy as well as long-term value creation for shareholders.
Forfeiture and Claw-back Rules
Any variable compensation paid or payable to ECA members is subject to forfeiture and claw-back rules under our short-term incentive ("STI") and long-term incentive ("LTI") plans, which allow the Company to retain unpaid or unvested compensation (forfeiture) or even recover compensation already paid in cash or shares (claw-back). Such rules apply in cases where the action or behavior of an executive violates internal codes, guidelines or policies, or conflicts with management standards, including Company and accounting rules and regulations or violates laws. These forfeiture or claw-back rules apply to payments under both the STI and LTI plans. The action to retain or recover variable compensation is subject to applicable law of the jurisdiction involved.
Share Ownership Requirements for ECA Members
The Board has established share ownership requirements for members of the ECA in order to align executives’ interests with those of shareholders. The ownership requirement is expressed as a multiple of the executive’s annual base salary and is in line with the practices of our peer group. The following exhibit illustrates those requirements.
Exhibit 6
|
| |
Leadership level | Share ownership requirement |
David J. Endicott, CEO | 5 times annual base salary |
Other members of the ECA | 3 times annual base salary |
Members of the ELT (Executive Leadership Team) | 2 times annual base salary |
All members of the ECA and ELT must meet these requirements within five years of service from the later of the Spin-off or commencement of employment. If any of the ECA or ELT members fail to meet the requirement, or if they are not on track with the requirements, they will be prevented from selling Alcon shares until such time the requirement is met. At the end of 2019, each member of the ECA and ELT is on track to meet the applicable ownership requirement.
Compensation Governance
Authority for ECA Compensation Decisions
All decisions regarding CEO compensation and performance are made by the Board as a whole, excluding the CEO who is recused from such matters. The Board has delegated the authority to make compensation decisions for ECA members, excluding the CEO, to the CGNC.
The CEO makes recommendations to the CGNC regarding the executive compensation policy and principles and incentive plan design and makes proposals to the CGNC regarding the compensation and performance targets of members of the ECA. The CEO also makes proposals regarding the assessment of performance achievements of members of the ECA. The CEO does not make proposals regarding his own compensation or performance.
Exhibit 7
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| | | | |
Authority levels in ECA compensation | CEO | CGNC | Board | AGM |
ECA compensation policy and principles | R | A | | |
CEO compensation and benefits | | R | A | |
Other ECA member compensation and benefits | R | A | | |
CEO performance targets and assessment of achievements | | R | A | |
Other ECA members' performance targets and assessment of achievements | R | A | | |
Share ownership requirements for the CEO and other members of the ECA | | R | A | |
Maximum aggregate ECA compensation | | R | P | A1 |
Incentive plan design and rules | R | P | A | |
Compensation report of the Company | | R | P | A2 |
R Recommend P Propose A Approve
Compensation Elements
Alcon’s compensation program has three broad components: annual base salary, variable compensation elements and employment benefits. Variable compensation elements are geared towards encouraging executives to deliver outstanding commonresults and create sustainable shareholder value. They are also designed to prevent executives from taking excessive risks. The compensation program balances:
fixed and variable compensation elements;
short-term and long-term incentive compensation; and
Company and individual performance.
Exhibit 8
Annual Base Salary
|
| |
Annual Base Salary | Annual base salary is set and reviewed considering: • Market value of the role • Benchmark information of peer companies • Market median within the peer companies • Executive’s role, performance, experience and potential • Increases in line with inflation and market • Business performance and the external environment |
Exhibit 9
Variable Compensation
|
| |
Short-Term Incentive | The Short-Term Incentive (STI) is designed and delivers awards based on: Target value • Annual base salary ("ABS") x STI target (% of ABS) = STI target value in USD/CHF Performance measurement • Measurement of financial performance (Business Performance Factor “BPF”) and individual performance (Individual Performance Factor “IPF”) (see the description of the STI below for more information) Payout • Performance period: 1 year • Range 0%-200% of the target value • Payout formula: STI target value x IPF x BPF = STI payout • Paid in the first quarter of the following year • Delivered in cash and in Restricted Stock Units ("RSUs"), RSUs vest after 3 years |
Long-Term Incentive | The Long-Term Incentive (LTI) is designed and delivers awards based on: Target value • Annual Base Salary (ABS) x LTI target (% of ABS) = Target value in USD/CHF Target award • Target value divided by the Alcon share price at grant date = number of Performance Stock Units ("PSUs") at target • Granted at the onset of the performance period Performance measurement • Measurement of metrics (see the description of the LTI below for more information) Payout • Performance period: 3 years • Range 0%-200% of the target number of PSUs • Payout formula: Target number of PSUs x LTI payout factor = number of PSUs vested • Cliff vesting of PSUs (e.g., all PSUs vest at the end of the performance period, subject to performance conditions) • Conversion of vested PSUs to Alcon shares • Payout delivered in unrestricted Alcon shares • Paid in the first quarter of the year following the performance period • PSUs carry dividend equivalents payable in shares at the end of the performance period based on the number of PSU vested |
Variable compensation represents a majority of total direct compensation for ECA members. At target opportunity, the variable compensation represents 80% of the CEO’s total direct compensation. The average variable compensation of the other ECA members represents 72% of total direct compensation.
Exhibit 10
Mix of Fixed and Variable Compensation at Target
|
| | |
CEO | | Other ECA members (excl. CEO) |
| | |
Abbreviations: ABS, Annual Base Salary; STI, Short Term Incentive; LTI, Long-Term Incentive
CEO ratios and average ratios of other ECA members are based on values 2019 of ABS, target STI and target 2019-2021 LTI (annualized)
Graphics exclude retirement savings and insurance benefits as well as any other benefits
Short-Term Incentive
The short-term incentive compensation element is designed to reward the ECA members for their contribution towards achieving annual Company results and for their individual annual performance. The metrics used for the Business Performance Factor are the same for all ECA members. The Individual Performance Factor varies by individual. Based on this design, each member of the ECA participates in the overall Company’s success while also being rewarded for their individual contributions. The annual STI award value at target is based on a percentage of the ECA member’s annual base salary.
Exhibit 11
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| | | | |
STI payout opportunity as a % of annual base salary | at target* |
| at maximum* |
|
David J. Endicott, CEO | 120 | % | 240 | % |
Other members of the ECA (average) | 80 | % | 160 | % |
* Effective post-spin
The financial metrics for short-term performance in 2019 are set out in the exhibit below. The payout of STI is calculated by multiplying the target award by the BPF and IPF.
Exhibit 12
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| | | | | | | | | | | | | | |
| Financial metrics1 | Non-financial metric |
Metric | Group Net Sales | Core Operating Income | Free Cash Flow | Individual performance |
Definition | Measures the Company's top line performance | Measures the Company’s operating income | Measures the Company’s capacity to realize cash | Measures the achievement of individual objectives and individual values and behaviors |
Rationale | Fosters the Company’s top line performance | Recognizes the primary indicator of Company performance and profitability | Indicates the cash realized from operating activities | Considers individual contribution to the Company’s results |
Weighting | 40% | 40% | 20% | 100% |
Performance factors | BPF (total weightings of financial metrics 100%) | IPF |
Payout formula | |
| ABS | X | STI Target | X | BPF | X | IPF | = | STI Payout | |
|
BPF maximum 150% x IPF maximum 150% = maximum 225% (capped at 200%) |
Payout range | 0-200% |
Note
| |
1 | Financial achievements are measured in constant currencies to reflect operational performance. |
Performance, thresholds, targets and maximum values for the financial performance metrics are determined at the onset of the one-year performance period. In line with good governance practice, the Board and the CGNC set targets that are appropriately ambitious and in support of the Company’s business strategy and the Board’s strategic plan without encouraging the ECA member to take undue risks.
At the end of the performance period, the Board and the CGNC determine the financial performance achievements against the targets originally set and determine the BPF. In addition, they consider the Individual Performance Factor (IPF) of the ECA members. The IPF is determined by the achievement of individual objectives and the demonstration of values and behaviors. The performance rating is the basis for setting the IPF between 0% and 150%. The CEO and other ECA members are not present when their IPF are discussed and determined.
The Board and the CGNC may apply discretion in determining the final outcome of the STI payout. At the end of the performance period of each STI award, we intend to disclose in the applicable compensation report details of the outcome of the final STI payout.
Long-Term Incentive
The long-term incentive program is designed to make a significant portion of compensation of ECA members contingent on long-term Company performance and to ensure alignment with shareholders’ interests. LTI awards consist of PSUs, which convert to shares at vesting, contingent on the achievement of the performance measures. The annual LTI grant value at target is based on a percentage of the ECA member’s annual base salary.
Exhibit 13
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LTI payout opportunity as a % of annual base salary | Below threshold |
| at target |
| at maximum1 |
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David J. Endicott, CEO | 0 | % | 280 | % | 560 | % |
Other members of the ECA (average) | 0 | % | 167 | % | 334 | % |
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1 | The maximum number of units that may be awarded is limited to 200% of the target number of units granted. |
The financial metrics for the measurement of long-term performance are set out in the exhibit below. The payout is calculated by adding the weighted achievements of the individual financial targets in a range from 0-200% and multiplying the number
of PSUs granted by the resulting performance factor. At the end of the performance period of each LTI award, we intend to disclose in the applicable compensation report details of the outcome of the final LTI payout.
Exhibit 14
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| | | | | | | | | | | | | | | | | | |
| Performance metrics |
Metric | Group Net Sales CAGR1,2 | Core EPS CAGR2 | Share of Peers3 | Innovation scorecard4 |
Definition | Measures the Company's top Line performance | Measure of the profitability by the earnings per share | A set of measures to compare the Company to the market shares of competitors | Measure of key product pipeline and achievement of milestones |
Rationale | Fosters the Company’s top line performance | Aligns ECA with shareholders by measuring earnings per share | Indicates relative competitive position against peers in terms of market share | Delivery of future products and key future growth drivers |
Weighting | 25% | 25% | 25% | 25% |
Payout formula | | | | | | | | | | | | | | | |
| | | | | | Metric 1 25% | + | Metric 2 25% | + | Metric 3 25% | + | Metric 4 25% | | |
| | | | | | | | | | | | | | |
| ABS | X | LTI Target | X | Addition of weighted metrics = Performance Factor | = | Payout/Number of PSUs |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Weighted achievements of metrics = additive payout factor maximum 200% (cap) |
Payout range | | 0-200% |
Notes
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1 | CAGR means Compound Annual Growth Rate |
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2 | Financial achievements are measured in constant currencies to reflect operational performance. |
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3 | Metric “Share of peers” measures Alcon’s market share of key products in the Surgical and Vision Care segments against a peer group of competitors. |
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4 | The innovation scorecard for 2019-2021 includes 10 milestones: one sales-related; one related to the cost of a development program; and eight related to the timeline of achievements. Each milestone is tied to a key internal development project. The LTI payout for the innovation metric will depend upon the number of milestones achieved within the relevant performance period. The milestones established are approved by the Board’s Innovation Committee. |
Similar to the performance target-setting and measurement of the STI award, the thresholds, targets and maximum values for the LTI performance metrics are determined at the onset of the three-year performance period. In line with good governance practice, the Board and the CGNC set targets and ensure they are appropriately ambitious and in support of the strategic plan but do not encourage the ECA member to take undue risks.
At the end of the three-year performance period of each LTI award, the Board and the CGNC determine the performance achievements of each metric against the targets originally set, as well as assess the achievements and results of the innovation scorecard. The Board and the CGNC may apply discretion in determining the final outcome of the performance results used for the vesting of LTI awards. At the end of the performance period of each LTI award, we intend to disclose in the applicable compensation report details of the outcome of the final LTI payout.
Benefits
ECA members are enrolled in local benefit plans providing for retirement income savings and insurance for disability and loss of life. These plans are in line with local market practices and legislation, and are subject to the Company's plan rules and policies. The ECA members and the Company pay statutory contributions. The sole ECA member with an employment contract governed by US law is enrolled in a Company-provided health insurance plan.
Exhibit 15
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Retirement savings and insurance contributions | Retirement and insurance benefits plan contributions provided in line with local market practice (most governed by legal provisions) Employer-paid • Contributions to retirement savings plan • Insurance premiums for disability and survivor benefits • Health insurance (only in the US) • Contributions to mandatory social security systems |
Other benefits | • Expense and representation allowance in line with Swiss market practice (covering small expenses) • Mandatory allowances for children and education (only in Switzerland) • Car allowance • Employer-paid international benefits (e.g. relocation cost, cost of living adjustments, settling in allowance, international health insurance, housing, schooling/education fees) in line with Alcon’s global mobility policies |
Alcon is a global company headquartered in Switzerland with multinational operations and international business strategies. As a result, from time to time, executives are relocated to Switzerland or will be relocated from their home country in the future. Relocated executives receive relocation support and are provided with international benefits in line with Alcon’s global mobility and relocation policies (e.g. relocation support, tax and social security equalization, benefit equalization, and other international benefits as appropriate).
Compensation Payments to the ECA Members in 2019
The following exhibit 16 sets forth the total compensation received by the CEO (highest paid member of the ECA) and the aggregate total compensation received by all of the other ECA members for the period from January 1, 2019 to December 31, 2019. The disclosed compensation includes payments made to six ECA members while they were executives of Alcon and has agreed, subjectprior to certain conditions,the Spin-off on April 9, 2019. A seventh ECA member was appointed as of the Spin-off. In addition, the aggregate total of other ECA members includes the prorated compensation Alcon paid to vote all of itsthe seventh ECA member.
The compensation Alcon sharespaid to approve the merger. The merger is expected to be completed duringECA members in 2019 remained within the first half of 2011.2019 budget.
Upon completion
Exhibit 16
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| | | | | | | | | | | | | |
Compensation | | Fixed compensation | | Variable compensation | | Additional compensation | | Totals |
From January 1, 2019 to December 31, 2019 | | Annual base salary1 | | Pension and insurance2 | | 2019 short-term incentive3, 4 | | 2019-2021 long-term incentive5-9 | | Other benefits10 | | Total compensation11 |
| | Amount in cash | | Amount/ value | | Amount in cash | RSU value at grant | | PSU target value FMV at grant | | Amount/ value | | Total amount |
David J. Endicott, CEO12 | | 1,134,358 | | 279,851 | | 745,380 | 745,380 | | 2,738,036 | | 1,177,487 | | 6,820,492 |
Aggregate amount of 6 other ECA members13 | | 3,541,122 | | 960,531 | | 2,459,312 | 1,053,990 | | 7,821,030 | | 3,396,392 | | 19,232,377 |
Totals in USD14 | | 4,675,480 | | 1,240,382 | | 3,204,692 | 1,799,370 | | 10,559,066 | | 4,573,879 | | 26,052,869 |
Totals in CHF14 | | 4,647,132 | | 1,232,862 | | 3,185,262 | 1,788,460 | | 10,495,046 | | 4,546,148 | | 25,894,910 |
Notes
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1 | The Annual Base Salaries of the six designated ECA members pre Spin-off date (including the CEO) and the seven active ECA members post Spin-off date (including the CEO) are based on their individual compensation arrangements pre and post Spin-off. |
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2 | The retirement pension and insurance benefits are the actual contributions paid to benefit plans for the period from January 1 to December 31, 2019. It also includes the amount of USD 71,994 for mandatory contributions paid by Alcon to governmental social security systems for all ECA members, which provide the ECA members with the right to the maximum future insured government pension benefit. The aforementioned amount is a portion of a total amount of contributions of USD 622,142 paid by Alcon to the social security systems. |
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3 | The STI award disclosed is the amount earned for the performance year 2019. It will be paid in March 2020. Fifty percent of the value of the STI award of the CEO will be paid in cash, and fifty percent in RSUs. For other ECA members, seventy percent of the value of the STI award will be paid in cash, and thirty percent in RSUs. RSUs are subject to a vesting period of 3 years. The deferred portions are shown at the value that will be delivered in RSUs based on the underlying Alcon share at the closing price on the future grant date in March 2020. |
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4 | The aggregate Short-Term Incentive awards in cash disclosed for this period includes the STI award at target value of Alcon's former CFO who stepped down from the function when Alcon was still a division of Novartis on April 8, 2019. This individual did not join Alcon as an independent company and remained with the Novartis organization. |
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5 | The amounts of the 2019-2021 LTI awards represent the total value of the target number of PSUs granted to the then designated members of the future ECA on January 22, 2019. The value of the PSUs is based on the closing price of the underlying Novartis share on the date of grant of USD 88.32 or CHF 88.14 respectively. The amount of the LTI awards disclosed includes also the award made to Alcon's former CFO who stepped down from the function when Alcon was still a division of Novartis on April 8, 2019, prorated for the period from the onset of the performance period 2019 through to April 8, 2019. |
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6 | The amount includes the value of the target number of PSUs of the 2019-2021 LTI award granted to the seventh ECA member on January 22, 2019, pro-rated for the period from April 9, 2019 to the end of the performance period in 2021. The value of the PSUs is based on the underlying Novartis share price as described above. |
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7 | The amount includes the value of the target number of PSUs of the 2019-2021 LTI award granted to the new incumbent of the CFO role on April 10, 2019, prorated to his period of service as acting member of the ECA within the performance period 2019-2021. The value of the PSUs is based on the closing price of the underlying Alcon share on the date of grant of CHF 58.05. |
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8 | The amount includes the total value of the target PSUs of additional 2019-2021 LTI awards granted to the members of the ECA (excluding the CFO) on April 10, 2019 for increasing their pre Spin-off LTI awards to the new target LTI award levels effective from Spin-off date. The value of the PSUs is based on the closing price of the underlying Alcon share on the date of grant of USD 58.04 and CHF 58.05 respectively. |
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9 | The amount includes further the value of the target number of PSUs of the special LTI award granted to the new incumbent of the CFO role on April 10, 2019, subject to the same performance conditions as the 2019-2021 LTI awards. The value of the PSUs is based on the closing price of the underlying Alcon share on the date of grant of CHF 58.05. |
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10 | The amounts of other benefits include the Company-paid benefits, values of benefits in kind, payments made, and payments or values promised to ECA members for the relevant period in 2019. They include mostly benefits for relocation to the new Alcon headquarters in Switzerland (e.g. relocation support, housing, schooling, tax and social security equalization, benefit equalization, other international relocation benefits). The amounts of other benefits also includes cost to the Company for transferring the relevant ECA members to Switzerland such as immigration cost, search of housing, pre-visit to the location and other costs related to relocation. |
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11 | The vesting and forfeiture of Novartis shares and their replacement by Alcon shares under the equity restoration plan did not provide additional values earned, paid or granted and therefore no value is included in the total compensation. The restoration of equity awards is outlined below in section "Alcon Equity Restoration Plan." |
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12 | The total compensation of the CEO from January 1, 2019 to December 31, 2019 includes his compensation as designated CEO from January 1, 2019 to April 8, 2019 under the Novartis compensation structure and terms. |
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13 | The compensation of the six other members of the ECA from January 1, 2019 to December 31, 2019 includes (i) the compensation of five designated members of the ECA from January 1, 2019 to April 8, 2019 under the Novartis compensation structure and terms, and (ii) the compensation of six active ECA members from April 9, 2019 to December 31, 2019 under Alcon's compensation terms. |
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14 | Payments to ECA members were made in CHF and/or USD. The amounts were converted at the rate of 1.0 CHF : 1.0061 USD. |
Alcon reports the 2019-2021 Long-Term Incentive Awards at the value at grant in accordance with Swiss market practice. The basis for disclosure is the target value of the merger, AlconPSU at grant, reflecting the assumption that the awards will becomevest at 100% achievement, excluding any share price movement that may occur over the second largest division within Novartis. Novartis has proposed that its CIBA VISION operations and select Novartis ophthalmic productsperformance period. The future payout will be integrateddetermined only after the conclusion of the performance period in three years (i.e. at the end of 2021) and the awards will vest in January 2022. The payout range is between 0% and 200% of the target number of PSUs.
Outcome of Performance Awards 2019
2019 Short-Term Incentive
The Company generally achieved the financial targets for the 2019 STI payout. It slightly exceeded the targets for third party sales and core operating income and significantly exceeded the target for free cash flow. However, the CGNC and the Board recognized that evaluating performance against STI metrics over less than one year, including significant uncertainty and variability in the business due to the Spin-off from Novartis, was uniquely challenging.
The CGNC and the Board decided to apply discretion, as foreseen in the plan rules, and reduced the total Business Performance Factor to the target level (100%). This is seen as an appropriate reflection of the Company’s overall financial performance for the year. The 2019 STI award payouts made to the CEO and the ECA members averaged 122% of their target award. The value of the 2019 STI award for the CEO and the aggregate value of the 2019 STI awards for the other members of the ECA are disclosed in exhibit 16 above. The payment of the 2019 STI will be made in March 2020.
The values of financial targets and their achievements are not disclosed as they are commercially sensitive information and would give insights into Alcon.confidential business strategies. This could result in a competitive disadvantage to the Company and its shareholders.
2017-2019 Long-Term Incentive
The LTI awards of the CEO and the other ECA members for the performance period 2017-2019 will vest in 2020. As a result of Alcon being spun-out from Novartis during the final year of this three-year LTI performance cycle, payouts under the program have been split into two periods. For the first twenty-seven months period when Alcon was still a division of Novartis, ECA payouts will be determined based upon Novartis performance. For the truncated nine-month period from Spin-off to the end of the performance period in December 2019 (Refill Awards), PSUs will be subject to Alcon performance. The performance factor for the post Spin-off period is based on Alcon's underlying financial measures and has resulted in a 100% of the target award vesting. The prorated award for twenty-seven months of service to Novartis prior to Spin-off is subject to achieved Novartis performance measures, which are not disclosed in Alcon’s 2019 Compensation Report.
The value of financial targets and their achievement used for the vesting of LTI awards are not disclosed for the same reason as the short-term incentive targets and achievements.
Fixed and Variable Compensation
Based on the compensation disclosed in exhibit 16 that ECA members received over the period from January 1, 2019 to December 31, 2019, the mix of fixed and variable compensation is as follows:
Exhibit 17
Mix of Fixed and Variable Compensation at Actual 2019 STI Payout and 2019-2021 LTI at Grant
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| | |
CEO | | Other ECA members (excl. CEO) |
| | |
Abbreviations: ABS, Annual Base Salary; STI, Short Term Incentive; LTI, Long-Term Incentive.
Average ratios are based on, ABS, payout of 2019 STI (in March 2020), and grants of 2019-2021 LTI awards at grant value. Mix excludes retirement savings and insurance benefits as well as any other benefits.
Compensation Payments to the ECA Members in 2018
During 2018, Alcon was a division of Novartis. The merger agreement has been incorporatedcompensation received by reference as Exhibit 4.13designated members of the then future ECA is unrelated to this Form 20-F. Additional information concerning the proposed merger is includedcurrent compensation of active members of the ECA. The compensation received in 2018 by the registration statementthen designated members of the ECA was reported in Amendment No. 6 to the Company's Registration Statement on Form F-420-F filed by Novartis with the United StatesUS Securities and Exchange Commission on December 23, 2010March 22, 2019 ("2018 Form 20-F").
Alcon Equity Restoration Plan
Effective as of Spin-off, the Alcon equity restoration plan governed the transition of incentive awards denominated in Novartis share-based instruments into Alcon share-based instruments. Under this plan, the Novartis share-based awards were replaced and subsequent amendments thereto.restored with Alcon share-based awards. These equity restoration awards did not provide any additional value to the ECA members. These awards only compensated for (i) the lost value of the original Novartis award resulting from holders not receiving the Spin-off dividend, and (ii) for the forfeiture of the awards for time of service to Alcon after Spin-off.
Keep Whole Awards
At the Alcon Spin-off from Novartis on April 9, 2019, all Alcon associates, including the ECA members, holding vested Novartis shares or unvested awards in the form of restricted Novartis shares received the dividend in kind resulting from the Spin-off. This dividend in kind was provided in a ratio of one Alcon share distributed for every five Novartis shares held.
On July 8, 2010,ECA members who held unvested Restricted Stock Units and Performance Stock Units awarded under the Independent Director Committee announcedNovartis Deferred Share Plan and/or the creation and fundingNovartis Long-Term Incentive Plans did not receive the dividend in kind resulting from the Spin-off. Because the value of the underlying Novartis share decreased due to the Alcon Spin-off, ECA members would have experienced a devaluation of the award value equal to their pro-rata share of the value of the Alcon Litigation Trust, an irrevocable trust establishedbusiness.
As a result, immediately following the Spin-off, Alcon granted equity awards to its associates, including ECA members, to compensate for the devaluation of their unvested awards in RSUs or PSUs. These awards were called “Keep Whole Awards”. Awards were granted in the same equity instrument as the underlying award and had a value equivalent to the dividend in kind that each PSU or RSU would have received had the unit been a Novartis share.
The “Keep Whole Award” value was determined by Novartis.
Refill Awards
The unvested Novartis PSU awards held by Alcon associates, including ECA members, granted under New York law pursuantthe LTI Plans were pro-rated for time of service to a resolutionNovartis between the beginning of the performance period and the Spin-off date. The prorated amounts of Novartis PSUs for time of service to Alcon after Spin-off up to the end of the performance period forfeited under so called “good leaver” rules. The values of the forfeited Novartis PSU awards were replaced by Alcon PSU awards. The latter were called “Refill Awards”. The performance conditions of the Alcon boardPSUs for the period of directors.service to Alcon following the Spin-off were defined by the Alcon Board. The pro-rated amounts of units for time of service to Novartis were retained in Novartis PSUs and remain subject to Novartis performance conditions and terms for the remainder of their performance period.
Unvested RSUs of Alcon associates, including ECA members, were subject to the same treatment as PSUs. The RSUs were replaced through Refill Awards in RSUs. The only differences between the treatment of RSU awards and PSU awards are that the pro-rated amounts of RSU awards for time of service to Novartis are calculated from the grant date, the vesting of the RSUs is not subject to Novartis performance conditions, and the “Refill Award” in Alcon RSU awards are not subject to Alcon performance conditions.
The value used for granting these “Refill Awards” was determined by Novartis.
The number of Alcon shares that ECA members received as Keep Whole Awards to replace the dividend in kind and as Refill Awards to replace the forfeited portion of the original Novartis PSU award are set out in the following section.
Equity Instruments Granted to the ECA Members in 2019
In the transition year 2019, the number of share-based units granted to the designated and active members of the Independent Director CommitteeECA include grants in Novartis shares and grants in Alcon shares. The exhibits below set out the number of units granted.
Equity Grants in Novartis Shares
The LTI awards for the performance period 2019-2021 were granted on January 22, 2019 to the trusteesthen designated members of the trust. The trust was created and funded on July 7, 2010 with $50 million. The trust was created to provide the financial means to commence, defend or maintain litigation relating to any transaction between Alcon and a majority shareholder, including the transaction contemplated by the merger proposal announced by Novartis on January 4, 2010, and ensure the protection of the interests of Alcon and its minority shareholders in connection with any such transaction.
In connection with the merger agreement of December 14, 2010, the trust was terminated and the trust property was returned to Alcon in December 2010. The trust agreement has been filed as Exhibit 4.12 to this Form 20-F.
4. | Minority Shareholder Class Action Lawsuits |
As further discussed in Item 8.A.7, "Legal Proceedings," certain Alcon minority shareholders filed several class action lawsuits related to Novartis's January 2010 merger proposal to acquire the remaining publicly held minority interest. The claims varied among the cases, but include allegations of: (i) breach of contract against Alcon; (ii) tortious interference with contract against Novartis and Nestlé; (iii) breach of fiduciary duties against the Alcon board of directors, Nestlé and Novartis; (iv) aiding and abetting breaches of fiduciary duties against the Alcon board of directors, Nestlé and Novartis; (v) breach of Section 13(d) of the Exchange Act against Novartis and Nestlé for an alleged failure to disclose that they were acting as a "group;" and (vi) breach of Section 14(d) of the Exchange Act against Novartis and Nestlé for an alleged failure to file with the U.S. Securities and Exchange Commission the materials required in connection with a "tender offer."
Eight cases filed in the U.S. District Courts for the Southern District of New York and the Northern District of Texas were consolidated into one class action case in the Southern District of New York. A ninth case, which did not name Alcon, Inc. and its board of directors as parties, was filed in the Eastern District of New York but was voluntarily dismissed by the plaintiffs on March 18, 2010.
On April 14, 2010, plaintiffs in the consolidated action dismissed their claims against Nestlé and the five Alcon directors designated by Nestlé. On May 24, 2010, the court granted a motion by Novartis and dismissed the action in its entirety on the ground of the Forum Non Conveniens doctrine. On July 14, 2010, the plaintiffs appealed the district court's dismissal to the U.S. Court of Appeals for the Second Circuit. Plaintiffs moved to dismiss the appeal on January 5, 2011, and the Second Circuit granted their motion the next day.
Two cases filed in District Court, Tarrant County, Texas and two cases filed in the County Court at Law, Dallas County, Texas were consolidated for pre-trial purposes by the Texas Multidistrict Litigation Panel in the Texas District Court, Dallas County. In November 2010, the court granted Novartis's motion seeking dismissal of these actions on the ground of the Forum Non Conveniens doctrine. The plaintiffs appealed the court's dismissal, and the appeal is pending.
5. | Separation Agreement with Nestlé |
Alcon, Inc. entered into a Separation Agreement with Nestlé (the "Separation Agreement")ECA prior to the initialAlcon Spin-off. The value of the award is based on the closing price of the underlying Novartis share on the date of grant and disclosed in section "Compensation Payments to the ECA Members in 2019."
Exhibit 18
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Number of units granted to | PSUs (target number) |
David J. Endicott, CEO | 24,740 |
Other ECA members1 | 32,086 |
Total | 56,826 |
Note
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1 | Includes the number of PSUs granted to the Alcon's former CFO who stepped down from the function when Alcon was still a division of Novartis, prorated from January 1 to April 8, 2019, and the number of PSUs granted to the seventh ECA member, prorated from April 9, 2019 to the end of the performance period in 2021. |
Equity Grants in Alcon Shares Post Spin-Off
(excluding the Number of Refill and Keep Whole Awards)
The ECA members’ LTI target value as a percentage of annual base salary increased effective from the Spin-off date to reflect their new responsibilities as executives of an independent public offeringcompany. On April 10, 2019, each received a prorated additional LTI award in March 2002. This Separation Agreement governs certain pre-offering transactions, as wellPSUs based on the underlying Alcon share at market value on the day of grant for the performance period 2019-2021. The additional Alcon PSUs increased their 2019-2021 LTI award to the new target levels.
The new CFO received a prorated 2019-2021 LTI award in PSUs based on the underlying Alcon share price on April 10, 2019. In addition, he received a special LTI award in PSUs subject to the same performance conditions as the relationship between2019-2021 LTI award, based on the underlying Alcon share price on April 10, 2019.
Exhibit 19
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Number of units granted to | Deferred Share Plan RSUs based on the 2019 STI1 | PSUs based on the 2019-2021 LTI target Award2, 3 |
David J. Endicott, CEO | na | 9,317 |
Other ECA members | na | 85,086 |
Total | na | 94,403 |
Notes
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1 | Number of RSUs that will be granted in 2020 based on a percentage of the 2019 STI delivered in Alcon equity is not available at the time of editing this 2019 Compensation Report (na) as the number of shares is dependent on the stock price when the STI award is paid in March 2020. The value that will be granted is set out in exhibit 16. |
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2 | Number of PSUs granted to the new CFO of a prorated LTI award for the performance period 2019-2021, and of a special LTI award subject to the same the performance period and conditions. |
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3 | Number of PSU granted to the ECA members (excluding the CFO) for increasing their pre Spin-off target LTI award to the new target award level effective from Spin-off. |
Equity Restoration, Keep Whole and NestléRefill Awards in Alcon Shares
The following this offering. The Separation Agreement was filed as an exhibit sets out the number of Alcon share-based instruments granted to ECA members pursuant to the initial registration statement.Alcon equity restoration plan.
Exhibit 20
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Number of units granted to | Alcon equity units granted as Refill awards1 | Alcon equity units granted as Keep Whole awards2 |
David, J. Endicott, CEO | 124,062 | 23,639 |
Other ECA members | 222,966 | 39,764 |
Total | 347,028 | 63,403 |
Notes
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1 | Number of Alcon shares granted to replace the forfeited value of Novartis share-based instruments. |
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2 | Number of Alcon shares granted to compensate for the dividend in kind based on Novartis unvested PSUs and RSUs. |
Equity Instruments Granted to the ECA Members in 2018
During 2018, Alcon was a division of Novartis. The Separation Agreementnumbers of Novartis equity instruments received by designated members of the future ECA were reported in Alcon’s 2018 Form 20-F.
Share Ownership of the ECA Members as of December 31, 2019
The number of Alcon shares or share-based units held by ECA members and “persons closely linked” (as defined below) to them as of December 31, 2019 is set out in the exhibit below. As of this same date, no ECA members, either individually or together with “persons closely linked”, owned 1% or more of the outstanding shares of Alcon.
Exhibit 21
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Number of units | Vested shares | Unvested RSUs | Unvested target PSUs | Total |
David J. Endicott | 25,346 | 69,798 | 82,187 | 177,331 |
Laurent Attias | 0 | 24,855 | 22,435 | 47,290 |
Ian Bell | 0 | 36,432 | 27,836 | 64,268 |
Leon Sergio Duplan Fraustro | 4,183 | 29,393 | 26,595 | 60,171 |
Rajkumar Narayanan | 0 | 21,293 | 19,380 | 40,673 |
Michael Onuscheck | 6,424 | 36,524 | 35,877 | 78,825 |
Tim C. Stonesifer | 0 | 0 | 61,672 | 61,672 |
Total | 35,953 | 218,295 | 275,982 | 530,230 |
Additional Disclosures
Employment Agreements
The Company and the members of the ECA entered into employment agreements for an indefinite period of time. Six of seven ECA members’ employment agreements are governed by Swiss law. The seventh ECA member’s employment agree-ment is governed by and will be construedUS law.
All employment contracts with ECA members provide that termination of employment requires a 12-months advance notice in accordance with the lawsour Articles of Switzerland. The Separation Agreement with Nestlé governs the business and legal relationship between Nestlé and Alcon.
In accordance with Section 6.2Incorporation. None of the Shareholders Agreement between Nestlé and Novartis, uponemployment agreements with the closing of Novartis's purchase ofECA members provide for any severance payment.
Such employment agreements also prohibit the remainingECA member from competing against Alcon shares held by Nestlé pursuant to the Purchase and Option Agreement ("Second Stage Closing"), the Separation Agreement was terminated on August 25, 2010. However, certain provisions of the Separation Agreement shall survive for a period up to 12 months after termination in accordance with our Articles of time thereafter.Incorporation.
Payments to Current or Former Members of the ECA
For further details aboutDuring 2019, no payments (or waivers of claims) other than those set out in the Shareholders Agreement andexhibit 16 (including the Purchase and Option Agreement, please referrelated notes) under section "Compensation payments to the following link at the SEC's web site: http://www.sec.gov/Archives/edgar/data/1167379/000110465908045488/0001104659-08-045488-index.htm.
IncludedECA members in this Section 7.B.5 is a summary of certain material provisions that are included in the Shareholders Agreement and the Purchase and Option Agreement. Also included in this section are references2019" were made to the Separation Agreement between Alcon and Nestlé, which was terminated as of August 25, 2010, subject to the survival of certain sections, which are not material from Alcon's perspective.
The Shareholders Agreement between Nestlé and Novartis provided for the expansioncurrent or former members of the Alcon board of directors from eightECA or to ten members, with one“persons closely linked” to them.
Loans to Members of the additionalECA
Alcon’s Articles of Incorporation and corporate policies do not permit loans to current or former members designated by Nestlé and one designated by Novartis. Alcon's shareholders voted to expand the Alcon board and elected two new directors at Alcon's annual general meeting held on May 6, 2008 in Zug, Switzerland. James Singh, Nestlé's Executive Vice President and Chief Financial Officer and Nestlé's designee, and Daniel Vasella, M.D., chairman of Novartis and Novartis's designee, were elected to these two director positions and joined Alcon's board upon the closing of the 74 million share sale transaction on July 7, 2008.
On January 8, 2009, Kevin Buehler was named PresidentECA or to “persons closely linked” to them. As a result, no loans were granted in 2019, and Chief Executive Officer of Alcon, Inc. effective April 1, 2009. At the annual general meeting on May 5, 2009, the shareholders elected Mr. Buehler to the board of directors. With Mr. Buehler's election, our board of directors expanded from ten to eleven members.
Pursuant to provisions of the Purchase and Option Agreement and the Shareholders Agreement, on August 16, 2010, Novartis AG conditionally designated five directors to replace directors designated by Nestlé, which designation became effective upon the Second Stage Closing. Accordingly, Enrico Vanni, Ph.D., Mr. Norman Walker, Paul Choffat, Ph.D., Urs Bäerlocher, Ph.D., and Jacques Seydoux, M.D.,none were designated by Novartis and subsequently elected to director positions by the shareholders. The Nestlé directors who resigned from the Board as of the Second Stage Closing include Francisco Castañer, Dr. Werner J. Bauer, Paul Bulcke, James Singh and Hermann A. Wirz.
For further details about corporate governance issues, please refer to Section 6.B of this report and to the Shareholders Agreement at:
http://www.sec.gov/Archives/edgar/data/1167379/000110465908045488/0001104659-08-045488-index.htm.
(b) Dividend Policy
Under the terms of the Separation Agreement, which terminated as of the Second Stage Closing, if our board of directors proposed to pay a dividend to shareholders, Nestlé agreed to vote all of its shares in favor of such proposal so long as Nestlé held at least a majority of our outstanding common shares. Under the merger agreement with Novartis dated December 14, 2010, Alcon has agreed not to pay dividends pending completion of the merger.
(c) | | Intercompany Debt and Future Financings |
The Separation Agreement contained provisions governing the refinancing of intercompany debt prior to the initial public offering in March 2002. During 2002, Nestlé's role in our debt structure changed from being the largest direct lender to providing primarily indirect support of our third-party debts. In connection with the change of majority ownership, all direct borrowings from Nestlé were repaid in 2010.
In 2002, we entered into a $2.0 billion U.S. commercial paper program (the "CP Program"), which had $286 million outstanding as of December 31, 2009. Nestlé served as the guarantor2019.
Persons Closely Linked
Persons closely linked to members of the CP Program, for whichECA are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they received a feeown or otherwise control, and (iv) any legal or natural person who is acting as discussed in note 8 to the consolidated financial statements. In October 2005, the parties executed a Guarantee Fee and Commercial Paper Program Services Agreement (the "Services Agreement"), effective as of October 28, 2002. Through this Services Agreement, the parties more formally documented the pre-existing CP Program. The Services Agreement stated that Nestlé will: (i) provide a guarantee in favor of the holders of notes issued by Alcon Capital Corporation, Alcon, Inc.'s indirect wholly owned subsidiary, as part of the CP Program and (ii) manage the CP Program. Pursuant to the Shareholders Agreement, the Guarantee Fee and Commercial Paper Program Services Agreement was terminated on August 13, 2010, and all commercial paper borrowings were repaid.their fiduciary or agent.
Compensation Expense 2019
The Company participated with certain Nestlé affiliates in specific cash pooling accounts under which overdraft lines of credit were available and were jointly and severally guaranteed by all participants, including the Company. At December 31, 2009, the total maximum permitted under these lines of credit was approximately $305 million. The Company no longer participates in these accounts or lines of credit.
Under the terms of the Shareholders Agreement between Nestlé S.A. and Novartis, the parties agreed upon the Second Stage Closing to (a) terminate the Separation Agreement subject to the survival of certain provisions; (b) use reasonable best efforts to cause Alcon to terminate the Commercial Paper Program Services Agreement and ensure that no new commercial paper notes that benefit from the Commercial Paper Guarantee would be issued following the Second Stage Closing; (c) cause Alcon to repay any Indebtedness owed to Nestlé; (d) cause Alcon to use its reasonable best efforts to cause any Guarantees issued by Nestlé on behalf of Alcon to be extinguished as soon as reasonably practicable after the Second Stage Closing with no further liability to Nestlé; and (e) cause Alcon to (i) terminate the cash pooling arrangements (the "Cash Pooling Arrangements") between Alcon and Nestlé and (ii) cause any Guarantees issued by Alcon on behalf of Nestlé relating to the lines of credit associated with the Cash Pooling Arrangements to be extinguished as soon as reasonably practicable after the Second Stage Closing with no further liability to Alcon. Nestlé and Novartis also agreed that they shall, and shall use their reasonable efforts to cause Alcon to, terminate the Services Agreement (as defined in the Shareholders Agreement as the "Investment Services Agreement"), provided that certain sections shall survive such termination for a period of 18 months after the Second Stage Closing Date. Nestlé S.A. and Novartis also agreed that they shall, and shall use their reasonable efforts to cause their Affiliates (including Alcon), to terminate all other Shared Arrangements (other than the Remaining Shared Agreements), with certain provisions surviving such termination for a period of 18 months after the Second Stage Closing Date. Alcon and Nestlé have complied with the obligations referenced in this paragraph. As discussed above, the Separation Agreement terminated as of the Second Stage Closing.
For further details about these terms and the definitions of the defined terms used above, please refer to Section 6.2 of the Shareholders Agreement at:
http://www.sec.gov/Archives/edgar/data/1167379/000110465908045488/0001104659-08-045488-index.htm.
(d) | | Cash Management, Investment and Treasury Services |
The Separation Agreement provided that Nestlé would continue to perform the cash management and treasury functions that it performed for us on the date of the Separation Agreement. Since January 1, 2004, under a Services Agreement, Nestec S.A., an affiliate of Nestlé, provided certain additional treasury and investment servicesexpense for the Companyyear 2019 for a fee that is comparablecompensation awarded to fees that would be paid in an arm's length transaction. The Services Agreement could be terminated with 60 days' written notice. This Services Agreement replaced a prior agreement with Nestlé to provide similar treasury and investment services during 2003. Total fees paid for these services to Nestec S.A. for the years ended December 31, 2010, 2009 and 2008 were $1 million or less annually.
During 2008, Lehman Brothers International (Europe) London filed for administration in England. At that time the Company's cash and cash equivalents included $707 million of short term securities held in a segregated custodial account of Lehman Brothers International (Europe) London pursuant to a Custody Agreement. Nestlé invoiced the Company in December 2008, and in 2009 the Company reimbursed Nestlé, for a total of $5 million in fees paid by Nestlé to the Joint Administrators of Lehman Brothers International (Europe) (in administration) related to the release of the short-term securities held in the custodial account. This amount of fees is subject to adjustment depending on the final costs incurred to settle the administration of Lehman Brothers International (Europe).
As discussed above, the Separation Agreement terminated as of the Second Stage Closing, subject to the survival of certain sections.
(e) | | Accounting and Reporting |
Our consolidated financial statements are prepared in accordance with U.S. GAAP; Nestlé's consolidated accounts, consistent with past practice, continue to be prepared in accordance withECA members, using International Financial Reporting Standards ("IFRS").(IFRS) measurement rules, is presented in Note 25 to the Company’s audited consolidated financial statements. The Separation Agreement provided that we establish adequate procedures allowingnumbers of compensation expense in the Note 25 may differ from the numbers reported in this 2019 Compensation Report due to the accounting and disclosure standards applied.
Alcon Share-based Units Awarded to Alcon Associates in 2019
In the financial year 2019, the total of approximately 5 million restricted shares, RSUs and target PSUs (all unvested) were granted, and approximately 0.1 million Alcon shares vested and were delivered to Alcon associates under the various equity-based incentive or participation plans. Current unvested equity instruments (restricted shares, RSUs and target PSUs) represent approximately 1% of issued shares. Alcon delivers treasury shares to associates to fulfill these obligations.
Board of Directors Compensation 2019
Compensation Framework
Novartis, as our sole shareholder prior to the Spin-off, established the compensation of the Alcon non-executive members of the Board for the timely conversionterm of our financial statementsoffice from the Spin-off to IFRS for inclusion in Nestlé's financial statements. Alcon has complied with this obligation.
Since the Separation Agreement2020 AGM. The Board compensation was terminated upon the Second Stage Closing, Alcon is no longer obligated to convert our financial statements to IFRS for inclusion in Nestlé's financial statements. However, Novartis reports its results of operations in accordance with IFRS and Alcon will continue to convert its financial statements to IFRS for Novartis.
(f) | | Allocation of Liabilities |
The Separation Agreement providedset at a level that allowed for the allocationattraction and appointment of liabilities between ushigh-caliber talent for Board roles with the relevant background and Nestlé, particularly with respectskills, including global experience in the medical devices and ophthalmology industry. The Board is comprised of both Swiss and international members.
Non-executive Board members are awarded a base fee. Further, they are entitled to product liability and environmental, health and safety matters. Generally, we assumed responsibilityadditional fees for all claims arisingtheir roles of Chair and/or member on the Board committees. The Vice Chair also receives an additional fee. The Board Chair does not receive such additional fees for work in connection with our business, including, without limitation, product liability claims and claims relating to environmental, health and safety matters, and we agreed to indemnify Nestlécommittees. David J. Endicott, the CEO of Alcon, does not receive any additional fees for all costs and expenses incurred in connection with any such claims.
We also assumed liability for all employment mattershis Board membership. He is compensated as a member of the employees engagedECA and his compensation is disclosed in our business at the time of the IPO. In this connection, we entered into special arrangements with local Nestlé companies on the allocation of pension fund obligations between Nestlé and us. In certain countries, our employees participated in Nestlé's existing pension funds and we did not establish independent pension funds for our employees. section "ECA Compensation 2019."
Prior to the changeSpin-off date, the then designated non-executive members of controlthe future Alcon Board invested a significant amount of ownershiptime by Novartis,attending a number of planning meetings. Each director, other than the CompanyBoard Chair, received a one-time fee of CHF 10,000 (USD 10,061) for their on-boarding activities.
The following table sets out the compensation for the non-executive members of the Board from the Spin-off date to the 2020 AGM:
Exhibit 22
|
| | |
| Fee for the period from April 9, 2019 to the 2020 AGM |
Board function | USD1 | CHF |
Annual base fee: | | |
Board Chair | 955,795 | 950 000 |
Board member base fee (Board retainer fee) | 201,220 | 200 000 |
Additional fees: | | |
Vice Chair | 40,244 | 40 000 |
Chair of the Audit and Risk Committee | 70,427 | 70 000 |
Chair of the Compensation, Governance and Nomination Committee | 50,305 | 50 000 |
Chair of the Innovation Committee | 50,305 | 50 000 |
Member of the Audit and Risk Committee | 35,214 | 35 000 |
Member of the Compensation, Governance and Nomination Committee | 25,153 | 25 000 |
Member of the Innovation Committee | 25,153 | 25 000 |
One-off fee (on-boarding fee)2 | 10,061 | 10 000 |
Notes:
| |
1 | Converted into USD at a rate of CHF 1.0 = USD 1.0061 |
| |
2 | Fee for services to prepare the Spin-off (on-boarding fee) |
In 2019, the following framework applied to the compensation of non-executive Board members:
Fifty percent of the total fees is paid in shares on a mandatory basis in two installments: September 2019 and Nestlé entered into an agreement outliningMarch 2020
Fifty percent of the termstotal fees is paid in cash in four installments: June, September, and December 2019 and March 2020
Each board member may elect to segregate Alcon employees from Nestlé pension plans. receive up to one hundred percent of their fees in shares
The agreement provides that, except for certain circumstances, all current Alcon pension participants will be migrated from Nestlé pension plans to other, not yet determined Alcon pension plans by January 1, 2011.fees are paid in Swiss Francs
The shares delivered are unrestricted (free shares) listed at the SIX Swiss Exchange
Under
The members of the Shareholders Agreement, Alcon's obligationBoard are subject to indemnify Nestléshare ownership requirements (see below)
Board members bear the full cost of their own social security contributions
Board members do not receive variable compensation, in line with their focus on corporate strategy, supervision and governance. Their payment in shares is in unrestricted shares. They do not receive share options or other share-based instruments.
The general principles of compensation of the members of the Board are defined in our Articles of Incorporation. According to our Articles of Incorporation, Alcon may enter into agreements with members of the Board relating to their compensation for certain liabilities will continuea fixed term of up to one year.
Share Ownership Requirements for 18 months followingMembers of the Second Stage Closing DateBoard
Board members are committed to align their interests with those of August 25, 2010.shareholders. The Board has set forth share ownership requirements which apply to the non-executive members of the Board.
Each member of the Board, including the Board Chair, is required to own Alcon shares that represent the value of his or her annual base fee. This requirement needs to be met within four years in office.
Exhibit 23
108 |
| |
Board level | Share ownership requirement |
Board Chair | 1 times annual base fee, within 4 years |
Other Board members | 1 times annual base fee, within 4 years |
In addition, we wereEach member of the Board is on track to meet the ownership requirement. Board members are prohibited from hedging or pledging their ownership positions in Alcon shares that are part of the Nestlé Swiss Value-Added Tax Group until October 2010, whenshare ownership requirement.
Compensation Governance
Authority for Board Compensation Decisions
Decisions regarding Board compensation are taken by the Board upon proposals from the CGNC. The CGNC's proposals are based on analysis and review of compensation practices, policies and benchmarking information.
The Board is responsible for approving the Compensation Report and for proposing the aggregate budget of Board compensation subject to a new Swiss Alcon Value-Added Tax Group was formed. Alcon is jointly and severally liable for any Swiss value-added tax liabilitiesshareholders’ vote at the applicable AGM.
Exhibit 24
|
| | | |
Authority levels in Board compensation | CGNC | Board | AGM |
Board compensation policy and principles | P | A | |
Board Chair compensation | P | A | |
Other Board member compensation | P | A | |
Share ownership requirements for Board members | P | A | |
Maximum aggregate compensation of the Board members | R | P | A1 |
Compensation Report of the company | R | P | A2 |
R Recommend P Propose A Approve
The Corporate Governance Report in Item 6.C. Board Practices of all other Swiss Alcon Group participants effective October 2010.this Annual Report provides further details to the authorities of the CGNC.
(g) Contracts
Independence of Members of the Compensation, Governance and Nomination Committee
Each of the members of the CGNC meets the independence criteria set forth in our Board Regulations. From Spin-off, the CGNC has been comprised of the following four members: Karen J. May (Chair), Thomas H. Glanzmann, D. Keith Grossman, and Ines Pöschel. At the AGM, the shareholders elect the CGNC Chair and its members individually for a term of office of one year. Our Articles of Incorporation permit re-election. The 2019 Corporate Governance Report in Item 6.B. of the Alcon 2019 Annual Report provides details regarding the members of the Board and the independence criteria for Board members. The Board Chair, the CEO and the Secretary of the Board attend the CGNC meetings by invitation. None is present when decisions relating to their own interest are taken.
The Separation Agreement contained provisions governingCompensation, Governance and Nomination Committee’s External Advisors
Commencing in April 2019, the continuationCGNC retained Willis Towers Watson as its external compensation advisor. The CGNC also retained HCM International (Switzerland) for advice with regard to Swiss compensation matters. The CGNC appointed each of them following a thorough process of evaluating proposals from various consulting firms.
At the end of 2019, the CGNC conducted a review of the support received from the retained external advisors and terminationis satisfied with the result of contracts between the Companyfirst nine months of work. At least annually, the CGNC will evaluate the quality of the consulting services received and Nestlé (and its affiliates).the need to use an additional advisor for specific matters.
DependingCompensation of the Members of the Board of Directors in 2019
The following exhibit 25 sets out the total compensation received by non-executive members of the Board during 2019. The compensation disclosed in this exhibit was received for their service on the natureBoard from April 9, 2019 to December 31, 2019, and includes the one-time fee of the contract, under the Shareholders Agreement, each contract either was or will be terminatedUSD 10,061 (CHF 10,000) paid in accordance with Legal Requirements on or following the Second Stage Closing Date, or continue through the remainder of its term and thereafter not be renewed.
Three sites relating to the administration of our business continued to be shared with Nestlé in 2010. These offices were located in Brazil, Norway and South Africa.
Pursuant to the terms of the Shareholders Agreement, these Shared Site Agreements will continue in effectMarch 2019 for the remainder of their terms and may or may not be renewed.
The Separation Agreement allowed the Company and Nestlé to share certain internal services so long as the cost of the arrangements were based on arm's length prices and on terms no less favorable than would be available from a third party. Nestlé continued to provide us with certain services during 2010, including but not limited to information technology and certain insurance arrangements. To the extent that we were covered under Nestlé's insurance arrangementsactivities prior to the initial public offering, we continuedSpin-off date. Board members participated in multi-day on-boarding sessions with management in the months prior to be covered under those arrangements throughSpin-off in order to prepare for their service on the Second Stage Closing. Nestlé charged us ourBoard.
The disclosed compensation in the blue-shaded portion of the costtable in exhibit 25 represents only a part of these arrangements basedtheir total fees they will receive for their service on arm's length prices.the Board for the term of office from April 9, 2019 to the 2020 AGM. In accordance with our normal payout schedule, a further payment of fees in cash and shares will be made in March 2020, which is reflected in the unshaded columns of the table in exhibit 25.
In certain markets,
The CEO of Alcon, David J. Endicott, is not included in this exhibit as he is not compensated for his Board membership. His compensation is disclosed as CEO and member of the Company provided an affiliateECA in section "ECA Compensation 2019."
Exhibit 25
|
| | | | | | | | |
Board members, functions9 | Payment in cash1,2 | Payment in shares3 | Number of shares4 | Other payments5 |
| Total fees 2019 | Fee payable March 20206 | Total fees for term7 |
F. Michael Ball Board Chair | 418,206 | 179,166 | 3,000 | — |
| 597,372 | 358,423 | 955,795 |
Lynn D. Bleil Member ARC and IC | 83,685 | 73,518 | 1,231 | — |
| 157,203 | 114,444 | 271,647 |
Arthur B. Cummings Member IC | 112,486 | 39,058 | 654 | 89,243 |
| 240,787 | 84,890 | 325,677 |
Thomas H. Glanzmann Chair IC, member CGNC | 16,474 | 131,926 | 2,209 | 4,399 |
| 152,799 | 138,339 | 291,138 |
D. Keith Grossman Vice Chair, member CGNC, IC | 137,711 | 54,706 | 916 | — |
| 192,417 | 109,413 | 301,830 |
Scott H. Maw Chair ARC | 44,058 | 101,826 | 1,705 | — |
| 145,884 | 135,824 | 281,708 |
Karen J. May Chair CGNC, member ARC | 45,930 | 107,500 | 1,800 | — |
| 153,430 | 143,369 | 296,799 |
Ines Pöschel Member CGNC | 77,980 | 67,904 | 1,137 | 4,399 |
| 150,283 | 90,549 | 240,832 |
Dieter P. Spälti Member ARC | 17,195 | 111,084 | 1,860 | 4,399 |
| 132,678 | 118,217 | 250,895 |
Total fees paid in 2019 in USD | 953,725 | 866,688 | 14,512 | 102,440 |
| 1,922,853 | 1,293,468 | 3,216,321 |
Total fees paid in 2019 in CHF8 | 947,943 | 861,433 | 14,512 | 101,819 |
| 1,911,195 | 1,285,626 | 3,196,820 |
Notes
| |
1 | The amounts include the USD 10,061 (CHF 10,000) on-boarding fee paid in March 2019. |
| |
2 | The amounts represent the fees paid in cash or the value of tax and, if applicable, social security withheld upon the allocation of shares to be paid in cash to the applicable authorities. |
| |
3 | The amounts in USD represent the converted value in CHF based on the Alcon shares granted on September 11, 2019 at the closing price of CHF 59.36 per share on the date of grant. The shares granted are listed at the SIX Swiss Exchange. |
| |
4 | The number of shares reported were delivered to each Board member in the first installment of shares in September 2019. The second and final installment in shares for the services from the Spin-off date April 9, 2019 to the 2020 AGM will be delivered in March 2020. |
| |
5 | Includes (i) an amount of USD 17,596 for mandatory employer contributions for all Board members paid by Alcon to governmental social security systems, which provides a right to the maximum future insured government pension benefit for the relevant Board members (this amount is a part out of total employer contributions of USD 47,826 to the governmental social security systems) and (ii) USD 84,844 paid to Dr. Cummings (or his related entities) for consulting services, including assistance with clinical trials that Dr. Cummings, as an ophthalmologist, provided to Alcon (these services were unrelated to Dr. Cummings' board service). |
| |
6 | Fees payable in March 2020, the final installment of the total fees payable for service from the Spin-off to the 2020 AGM, which includes both shares and cash portions. |
| |
7 | Total fees that will be paid for the Board members' term of office from the Spin-off to the 2020 AGM. |
| |
8 | The payments in cash were made in Swiss Francs (CHF). For consistency they are reported in USD as all compensation in this 2019 Compensation Report. The amounts in CHF were converted to USD at the exchange rate of 1.0 CHF : 1.0061 USD. All amounts are before deductions of social security contributions and income tax paid by the Board members. |
| |
9 | Board Committees: “ARC” Audit and Risk Committee; “CGNC” Compensation, Governance and Nomination Committee; “IC” Innovation Committee. |
Compensation of Nestlé with certain servicesthe Members of the Board of Directors in 2018
Information on compensation of the Board as a company of the Novartis Group in 2018 is not available. Individuals who served as directors of Alcon Inc. from its incorporation in 2018 until the Spin-off date in 2019, during 2010, including butwhich time it was a company of the Novartis Group, did not limitedreceive compensation for their service on the Board.
All members of the current Board of Alcon have taken their office from the Spin-off date of April 9, 2019. No payments (or waivers of claims) were made to administrative, distribution, fleet management, warehousing and other services. These services were provided to Nestlé's affiliate on terms no less favorable than would be available to a third party. The fees received bythem in 2018.
Share Ownership of the Company for these services were not material.Board Members
A limitedThe number of shared services may continue during 2011.
Pursuant to the Separation Agreement, on March 20, 2002, we granted registration rights under the Securities Act to Nestlé with respect to sales of our commonAlcon shares held by Nestlé.
Under the termsmembers of the PurchaseBoard and Option Agreement, Nestlé agreed“persons closely linked” to cause Alcon to enter into a registration rights agreement with Novartis with an effective datethem as of the earlier of (i) the Second Stage Closing Date (as defined in the Purchase and Option Agreement) and (ii) the date on which the Purchase and Option Agreement is terminated, providing Novartis with registration rights with respect to the shares initially purchased by Novartis and shares subject to the Second Stage Closing thatDecember 31, 2019 are no less favorable to Novartis than the registration rights granted to Nestlé under the Separation Agreement.
On December 10, 2009, Alcon entered into two substantially identical registration rights agreements with Novartis and Nestlé. Both of these agreements are substantially identical to the original registration rights provided to Nestlé, with minor modifications to reflect subsequent changes to applicable U.S. securities laws. Also on December 10, 2009, Novartis, Nestlé and Alcon entered into a shareholder coordination letter to avoid a duplication of Alcon's registration and related obligations and to regulate the exercise of registration rights under the two registration rights agreements, which could otherwise possibly occur simultaneously. Under the terms of the Purchase and Option Agreement, neither Novartis nor Nestlé were permitted to buy or sell any additional Alcon shares until completion of
the Second Stage Closing and the shareholder coordination letter was to become effective only if the Purchase and Option Agreement was terminated prior to the Second Stage Closing such that Nestlé would continue to hold Alcon shares. Given that the Second Stage Closing occurred and Novartis acquired the balance of Nestlé's Alcon shares, the registration rights agreements with Novartis became effective and the registration rights agreement with Nestlé ceased to have any effect.
(k) | | Covenants Not to Compete and Not to Solicit |
Nestlé had undertaken, for so long as it held at least a majority of our common shares, not to compete with our business except in certain limited areas as set out in the Separation Agreement. The Separation Agreement also governed the allocationexhibit below. As of business opportunities which could be taken by both Nestlé and us. Under the Shareholders Agreement, subject to certain exceptions, Nestlé has covenanted to Novartis that it would not competethis same date, no Board member, either individually or together with our business for two years following the Second Stage Closing Date“persons closely linked”, owned 1% or hire or solicit certain key employees for one year following Second Stage Closing Date.
6. Services Agreement
We entered into a services agreement with Cary R. Rayment, whereby Alcon retained Mr. Rayment as the non-executive chairman of its board of directors, as of April 1, 2009. The termmore of the service agreement renews automatically on an annual basis thereafter unless or until terminated by either party upon thirty days written notice. On October 24, 2010, Mr. Rayment cededoutstanding shares of Alcon. The CEO of Alcon and Board member, David J. Endicott, is not included in this exhibit as his position as chairman of the board and was appointed vice chairman. At the December 2010 meeting, the board approved extending Mr. Rayment's agreement with the same remuneration on a monthly basis for his service as vice chairman of the board until the next annual general meeting of the shareholders. Additional information pertaining to this agreement has been provided under Item 10.C, "Material Contracts," of this annual report.share ownership is disclosed in exhibit 21.
7.Co-Marketing Agreement for Japan between Novartis Pharma AG and Alcon Pharmaceuticals Ltd.
On January 9, 2009, Alcon Pharmaceuticals Ltd. entered into an agreement with Novartis Pharma AG (an affiliate of Novartis) providing for the co-promotion under their license of the Lucentis® product in Japan. This agreement has a three-year term ending on December 31, 2011. During the years ended December 31, 2010 and 2009, the Company recognized approximately $10 million and $3 million, respectively, in co-promotion fees from this agreement, which were more than sufficient to recover the Company's costs under the agreement.
8.Line of Credit
During 2010, the Company entered into an unsecured line of credit agreement denominated in Venezuelan bolivars with a subsidiary of Novartis. These short term borrowings were $4 million at December 31, 2010 and become due October 15, 2011. The weighted average interest rate at December 31, 2010 was 10.0%. The unused portion under the line of credit agreements was $8 million at December 31, 2010.
C. | INTEREST OF EXPERTS AND COUNSEL |
Not Applicable.
ITEM 8. | FINANCIAL INFORMATION |
A. | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
1. | AUDITED CONSOLIDATED FINANCIAL STATEMENTS |
See Item 18.
2. | THREE YEARS COMPARATIVE FINANCIAL STATEMENTS |
See Item 18.
See Report of Independent Auditors at page F-3.
Exhibit 26
4. |
| LATEST AUDITED FINANCIAL STATEMENTS MAY BE NO OLDER THAN 15 MONTHS |
Board member | Total shares |
F. Michael Ball | 13,202 |
D. Keith Grossman | 916 |
Lynn D. Bleil | 1,231 |
Arthur B. Cummings | 787 |
Thomas H. Glanzmann | 2,473 |
Scott H. Maw | 1,705 |
Karen J. May | 1,800 |
Ines Pöschel | 1,679 |
Dieter P. Spälti | 8,860 |
Total | 32,653 |
Alcon has complied with this requirement.
5. | INTERIM FINANCIAL STATEMENTS IF DOCUMENT IS MORE THAN NINE MONTHS SINCE LAST AUDITED FINANCIAL YEAR |
Additional DisclosuresNot Applicable.Loans to Board Members
Alcon’s Articles of Incorporation and corporate policies do not permit loans to current or former members of the Board or to persons closely linked to them. No loans were granted in 2019, and none were outstanding as of December 31, 2019.
6. | EXPORT SALES IF SIGNIFICANT |
Other Payments to Board MembersSee Item 18.No payments (or waivers of claims) other than those set out in exhibit 25 (including the related notes) under section "Compensation of the Members of the Board of Directors in 2019" were made to current Board members or to persons closely linked to them.
Persons Closely Linked
Persons closely linked to members of the Board are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary or agent.
Payments to Former Board Members
Minority Shareholder Class Action Lawsuits
On January 4, 2010, Novartis announced that it submitted toThe current members of the AlconBoard have served in such capacity since the date of Spin-off, April 9, 2019. The individuals serving as board of directors a proposal for a mergermembers of Alcon withInc. from the Company's incorporation in 2018 until April 8, 2019 included F. Michael Ball our current Board Chair and into Novartisthree individuals employed by Novartis. None of these individuals received any additional compensation for service in such capacity.
The payments made to be effected under Swiss merger law. Under the termsF. Michael Ball as former member of the merger proposal, holdersExecutive Committee of the Alcon shares thatNovartis are publicly traded would receive 2.8 Novartis shares for each Alcon share.
The Independent Director Committee was formed in 2008 in connection with Novartis's initial purchase of slightly less than 25% of the Alcon shares from Nestlé to evaluate transactions such as the merger proposed by Novartis. The Independent Director Committee engaged independent financial and legal advisors in connection with its evaluation of the proposed merger. On January 20, 2010, the Independent Director Committee issued its formal response rejecting the Novartis merger proposal. The committee rejected the merger proposal based on its assessment that the price offered and other terms were not acceptable and that Novartis's merger proposal was notdisclosed in the best interests2018 and 2019 compensation reports of Novartis AG. His compensation received prior to his term of office as Board Chair of Alcon and its minority shareholders. Further information on Novartis's merger proposal can be found in Item 7.B, "Related Party Transactions."
Certain Alcon minority shareholders filed several class action lawsuitsis not related to Novartis's merger proposal concerning the acquisition of the remaining publicly held minority interest. The claims varied among cases, but include allegations of: (i) breach of contract against Alcon; (ii) tortious interference with contract against Novartis and Nestlé; (iii) breach of fiduciary duties against the Alcon board of directors, Nestlé and Novartis; (iv) aiding and abetting breaches of fiduciary duties against the Alcon board of directors, Nestlé and Novartis; (v) breach of Section 13(d) of the Exchange Act against Novartis and Nestlé foras an alleged failure to disclose that they were acting as a "group;" and (vi) breach of Section 14(d) of the Exchange Act against Novartis and Nestlé for an alleged failure to file with the U.S. Securities and Exchange Commission the materials requiredindependent company. It is therefore not disclosed in connection with a "tender offer."
Eight cases filed in the U.S. District Courts for the Southern District of New York and the Northern District of Texas were consolidated into one class action case in the Southern District of New York. A ninth case, whichthis 2019 Compensation Report. He did not namereceive any compensation for his role as designated Board Chair of Alcon Inc.prior to April 9, 2019.
Outlook for 2020
Compensation Philosophy and its board of directors as parties, had been filed in the Eastern District of New York but was voluntarily dismissed by the plaintiffs on March 18, 2010.
On April 14, 2010, plaintiffs in the consolidated action dismissed their claims against Nestlé and the five Alcon directors designated by Nestlé in exchange for Nestlé's and its directors' agreement that, without impairing the directors' ability to exercise their fiduciary obligations to Alcon, among other things, during the pendency of the action, they will take no action to (1) amend the Alcon Organizational Regulations, (2) remove or replace the Alcon independent directors or (3) facilitate Novartis's proposal to take Alcon private other than pursuant to a recommendation of the Independent Director Committee. On May 24, 2010, the court granted a motion by Novartis and dismissed the action in its entirety on the ground of the Forum Non Conveniens doctrine. The court denied motions filed by plaintiffs seeking reconsideration of this dismissal order and requesting leave to file an amended complaint. On July 14, 2010, the plaintiffs appealed the district court's dismissal to the U.S. Court of Appeals for the Second Circuit. Plaintiffs moved to dismiss the appeal on January 5, 2011, and the Second Circuit granted their motion the next day.
Two cases filed in District Court, Tarrant County, Texas and two cases filed in the County Court at Law, Dallas County, Texas were consolidated for pre-trial purposes by the Texas Multidistrict Litigation Panel in the Texas
District Court, Dallas County. Novartis filed a motion seeking dismissal of these actions on the ground of the Forum Non Conveniens doctrine. In November 2010, these four cases also were dismissed by the court. The plaintiffs appealed the court's dismissal, and the appeal is pending.
Other Litigation
From time to time we are involved in legal proceedings arising in the ordinary course of business. We may be subject to litigation or other proceedings, which could cause us to incur significant expenses or prevent us from selling certain products. With the exception of the following matters, we believe that there is no litigation pending that will likely have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows:
Principles
The Company either alone or jointlyhas developed a compensation philosophy which:
Ensures a broadly competitive level of remuneration appropriate to each executives’ scale of responsibility and individual performance
Attracts, retains and motivates a world-class executive team to drive performance
Supports long-term value creation for shareholders
Considers the geographic and industry-specific nature of our talent pool and the medical device industry
Aligns the compensation program for the senior executives with its commercial partners, has filed fourteenthe broader management and employee population
Fully embraces Swiss governance expectations and follows principles of simplicity and transparency
Exhibit 27
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Pay for performance | •Programs are designed to compensate short-term performance and long-term success •Rewards are achieved if financial and non-financial performance metrics are met |
Alignment with shareholders | •A significant part of compensation is delivered in Alcon equity •Executives are expected to hold a meaningful level of Alcon shares |
Market competitiveness | •Overall compensation is competitive with other companies in the medical device and other industries in which Alcon competes for talent •Total opportunity is targeted at market median |
Motivation and retention | •Compensation is designed to attract, retain and motivate executives to achieve Company objectives •Compensation is reviewed periodically to ensure competitiveness and alignment to key strategic objectives |
Peer Group
External peer compensation is an important reference point for consideration of market competitive compensation for the members of the ECA, including our CEO. The CGNC adopted a comprehensive approach to peer group construction and, at the onset of Alcon as an independent company, identified a global peer group for executive compensation benchmarking. It provides a good balance of industries, companies and geographies from which executive talent is drawn. The global peer group consists of a blend of both European and North American patent infringement actions against six different generic drug companies. Withcompanies, which are similar in size and scope and compete with Alcon for talent.
The CGNC believes that a consistent and relevant set of peer companies that are similar in size and scope enables shareholders to assess the exceptionappropriate levels and practices of international generic challenges, all of these generic drug companies are seeking U.S. Foodcompensation and Drug Administration ("FDA") approval toallows for pay-for-performance comparisons. Alcon’s revenue and market generic versionscapitalization place it at approximately the median of the Company's products, under what are known as Abbreviated New Drug Applications ("ANDAs").peer group companies.
Exhibit 28
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Global Peer Group | |
•Agilent Technologies Inc. •Align Technology Inc. •Allergan plc •Bausch Health Companies Inc. •Baxter International Inc. •Becton Dickinson & Company •Biogen Inc. •Boston Scientific Corporation •Dentsply Sirona Inc. •Edwards Lifesciences Corporation | •EssilorLuxottica •Fresenius Medical Care •Givaudan •Lonza Group •Merck KGaA •Smith & Nephew •Stryker Corporation •The Cooper Companies Inc. •UCB •Zimmer Biomet Holding Inc. |
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The first infringement action was filed afterCGNC considers compensation practices, structures, and levels based on benchmarking information and advice provided by the Company received notice that Teva Pharmaceuticals USA, Inc. had filed an ANDA seeking approvalcommittee’s independent external advisors (see more information under the section "Compensation Governance"). The annual total compensation of ECA members is targeted to sell a generic versionthe market median of benchmarks for comparable roles within this group.
The CGNC and the Board will review the compensation of the Company's Vigamox® antibiotic ophthalmic solution. Moxifloxacin,CEO and the primary ingredientother ECA members periodically and consider relevant benchmark information. The CGNC will also review periodically the peer group and make adjustments to its composition as appropriate.
ECA Compensation
Based on the Company’s business strategy, the compensation philosophy and framework and the analysis of peer group compensation practices, the Board has adopted the following key features of ECA compensation in Vigamox®, is licensed2020:
The overall structure of ECA compensation including annual base salary, variable compensation elements STI and LTI, and benefits will remain unchanged in 2020;
Slight adjustments will be made to Alcon by Bayer Schering Pharma AG. As part of its ANDA, Teva challenged three patents covering the Company's innovator product Vigamox®. Twosome ECA member’s total target compensation but overall it will broadly remain unchanged;
The 2020 STI payouts will be delivered in cash to align it with peer group compensation practices;
The LTI award target percent of the patents are owned byCEO will be increased, to align his total compensation with the Company's licensor, Bayer Schering Pharma AG, and the third, which expires in 2020 (including a six month pediatric extension), is owned by the Company. The two Bayer Schering Pharma patents were also the subject of another Teva ANDA seeking approval to sell a generic version of Bayer Schering Pharma's systemic moxifloxacin product, Avelox®. Suit was filed by Alcon and Bayer Schering Pharma as co-plaintiffs against Teva relative to the ANDA challenging Vigamox® on April 5, 2006 in the U.S. District Court in Delaware. Bayer Schering Pharma subsequently filed suit in the same court relative to the Avelox® ANDA, and the two suits were merged. Trial was scheduled to begin February 26, 2008, but the dispute between Bayer Schering Pharma and Teva relative to the two Bayer Schering Pharma patents was resolved by settlement on the eve of trial. Under the termsmedian of the settlement, Teva acknowledged the validity and enforceability of both Bayer Schering Pharma patents, and further acknowledged that its proposed generic ophthalmic product would infringe both patents. Teva has therefore relinquished any claim that it is entitled to market the generic ophthalmic product prior to September 4, 2014. The Company remains the exclusive ophthalmic licensee under the Bayer Schering Pharma patents. The trial relative to the Company's patent began on February 28, 2008 and concluded on March 6, 2008. Since then, the Company has received issuance of a related patent with claims thatpeer group;
An additional profitability funding mechanism will cover the Vigamox® product and Teva's proposed generic product. U.S. Patent No. 7,761,010 issued on March 2, 2010, and has beenbe added to the FDA Orange Book relativecurrent STI metrics to align the measurements better with company performance;
The performance metrics of the 2019-2021 LTI cycle will also be used for the performance measurement of the 2020-2022 LTI cycle (group net sales CAGR; Core EPS CAGR; Share of Peers; and Innovation);
The robust share ownership requirements will continue to apply; and
There will be no material change to benefit provisions.
Board Compensation
The Board compensation framework will remain broadly unchanged for the upcoming term of office from the 2020 AGM to the Company's Vigamox® product. On October 19, 2009,2021 AGM, including:
The overall framework of Board compensation from Spin-off date in 2019 to the court ruled in the Company's favor on all counts, finding the Company's patent to be valid and infringed by the proposed generic product. Teva has appealed the trial court ruling, but the appeal was suspended because the trial court had not formally entered an amended form of judgment. It is expected that the appeal2020 AGM will be reinstated after the lower court amends its form of judgment. However, even if Teva were to succeed in having the district court decision reversed on appeal, it would still have to address the Company's recently issued second patent before competing with the Company's Vigamox® product in September 2014 when the underlying Bayer patent expires. If Teva were to win on appeal and overcome the Company's second patent, the resulting generic competition would be expected to impact significantly the Company's sales and profits. On a related note, the Company's European counterpart patentcarried forward to the patent-in-suit was determinedterm from the 2020 AGM to be invalid2021 AGM;
The Board Chair fee will remain unchanged;
The payment of fifty percent in shares (mandatory) and a European Patent Office Opposition Proceeding. That invalidity decision was upheld by an Enlarged Board of Appeal on October 22, 2009. Divisional patent applications on the Company's Vigamox® product remain pending in the European Patent Office. In December 2010, one of those pending applications was allowed with claims that cover the Vigamox® product, but the patent has not yet formally issued.
The second patent infringement action was filed after the Company received notice that Apotex, a Canadian-based generic drug company, had filed an ANDA challenging one of the patents covering the Company's Patanol® anti-allergy eye product. The Company's raw material supplier, Kyowa Hakko Kirin Co., Ltd., holds another U.S. patent, which, with the benefitvoluntary election of a six-month pediatric extension, expires on June 18, 2011. Thus, this generic challenge poses no threat to the Patanol® product market prior to June 2011. The patent that Apotex has challenged, which ishigher percentage in shares will continue; and
co-owned by the Company and Kyowa, will expire in 2015. The Company and Kyowa, as co-plaintiffs, filed suit against Apotex Inc. and Apotex Corp. on November 15, 2006 in the U.S. District Court in Indianapolis, Indiana. As a result of the lawsuit filing, the FDA was required to delay any approvalsplit of the Apotex ANDACGNC into two separate committees, fees for 30 months until April 2009, unlessan additional Board committee Chair and members will be added to the litigation were earlier resolved orBoard compensation framework.During 2020, the court wereBoard intends to modify the 30-month stay on FDA approval. Becauseundertake a comprehensive review of the protection until June 2011 providedcompensation of its members, including the Board Chair, based on an assessment of the benchmark data of a peer group and on advice regarding compensation practices prepared by its external advisors.
Effective as of the date of our 2020 AGM, the Board has split the current responsibilities of the Compensation, Governance and Nomination Committee (CGNC) into two separate committees. The Board recognized the heavy workload assigned to the CGNC since the Spin-off from Novartis; this split will enable the two newly created committees to better focus on their respective key responsibilities. For the Governance and Nomination Committee, this includes a focus on leading governance practices and ESG topics in general. And for the new Compensation Committee, this includes a focus on human resource strategy and executive compensation. Finally, this reorganization is in line with best corporate governance standards. The annual fee for the Chair of the Governance and Nomination Committee will be USD 50,305 (CHF 50,000), and each member will receive USD 25,153 (CHF 25,000). The Compensation Committee will retain the current levels of Chair and member fees of USD 50,305 (CHF 50,000) and USD 25,153 (CHF 25,000) respectively. These committee fees will be included in the budget of Board compensation from the 2020 AGM to the 2021 AGM, subject to approval by the unchallenged Kyowa patent,binding vote of shareholders at the expiration2020 AGM.
Shareholder Vote at the 2020 AGM
In accordance with Article 29 of the 30-month period was inconsequential. Trial had been scheduledArticles of Incorporation (http://investor.alcon.com/governance//default.aspx), the Board will ask shareholders at the 2020 AGM meeting to cast a binding vote on:
The aggregate amount of compensation payable to non-executive members of the Board for July 27, 2009, but was postponed until April 26, 2010. Trial testimony was completed May 7, 2010, but closing arguments were postponed until August 3, 2010. A ruling has not been issued. Should Apotex succeed in overcomingtheir term of office from the challenged patent and secure FDA approval, it would not be entitled2020 AGM to begin selling a generic olopatadine product that would compete with the Company's Patanol® product2021 AGM;
The aggregate amount of compensation payable to ECA members in the United States until June 18, 2011. Such competition wouldfinancial year 2021.
In addition, the Board will ask shareholders to cast an advisory vote on the 2019 Compensation Report.
The procedures of voting on the compensation of ECA members and the Board are defined in our Articles of Incorporation. Our Articles allow for an additional amount of compensation to be expectedused when promoting or adding new members to impact significantly the Company's sales and profits.
ECA.
The third patent infringement action was filed afterexhibit below depicts the voting at the 2020 AGM and the respective period of the compensation affected by the vote.
Exhibit 29
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Corporate Governance
Group Structure and Shareholders
Operational Group Structure
The Company, with its registered office at Rue Louis-d’Affry 6, 1701 Fribourg, Switzerland, is a corporation organized under Swiss law and is the ultimate parent company of Alcon. As of December 31, 2019, the market capitalization of the Company received noticewas $27.622 billion (CHF 26.758 billion).
Alcon is the largest eye care company in the world, with $7.4 billion in net sales during the year ended December 31, 2019. We research, develop, manufacture, distribute and sell a full suite of eye care products within two key businesses: Surgical and Vision Care. Our Surgical business is focused on October 1, 2007 that Barr Laboratories, Inc. had filed an ANDA challengingophthalmic products for cataract surgery, vitreoretinal surgery, refractive laser surgery and glaucoma surgery. Our Vision Care business comprises various contact lenses and a comprehensive portfolio of ocular health products, including devices and over-the-counter products for dry eye, contact lens care and ocular allergies, as well as ocular vitamins and redness relievers. Further information is available under "Item 4. Information on the patents underlyingCompany".
Listed and Non-listed Companies Belonging to the Company's Patanol® product. UnlikeAlcon Group
The registered shares of the Apotex ANDA described above, which is challenging onlyCompany are listed on the patent jointly owned by KyowaSIX Swiss Exchange (Valor 43249246 / ISIN code CH0432492467) and the Company, the Barr ANDA was also challenging Kyowa's composition patent on olopatadine, the active agent in Patanol®New York Stock Exchange (CUSIP code H01301128). The Company and Kyowa filed suit in the Federal District Court in Indianapolis (where the Apotex case is pending) on October 23, 2007. As a result of the lawsuit filing, the FDA was required to delay any approval of the Barr ANDA for 30 months unless the litigation were earlier resolvedowns directly or the court modified the 30-month stay on FDA approval. The 30-month period after which the FDA could approve Barr's generic product would have expired at the end of March 2010, nine months before the Kyowa composition patent expires. Aindirectly all consolidated trial (with Apotex described above) was scheduled for late April 2010. However, in September 2009, Barr withdrew its ANDA and subsequently was dismissed from the suit.
The fourth patent infringement action was filed after the Company received notice in late November 2008 that Barr Laboratories, Inc. had filed an ANDA challenging the patents underlying Alcon's Pataday™ once daily olopatadine product. The Barr ANDA is challenging the patent jointly owned by Kyowa and the Company (described above), as well as two later issued patents owned by the Company that cover the Pataday™ formulation. Of the two Company patents, the latest expiry date is November 2023 (effectively extended until May 2024 by a pediatric extension). Barr is not challenging the Kyowa patent on olopatadine that expires in December 2010 (effectively extended until June 2011 by a pediatric extension). The Company and Kyowa filed suit in the Federal District Court in Indianapolis on January 8, 2009. As a result of the lawsuit filing, the FDA must delay any approval of the Barr ANDA for 30 months unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. The 30-month period after which the FDA could approve Barr's generic product will expire in May 2011. This case has been consolidated with the Apotex case (Pataday™) described below. Trial has not yet been scheduled in this case, but it will not occur before the June 2011 expiration of the Kyowa patent. In the absence of preliminary injunctive relief from the court, Barr could launch its generic version of Pataday™ "at risk" upon expiration of the Kyowa patent on June 18, 2011. If Barr succeeds in overcoming all of the challenged patents and secures FDA approval, it would be entitled to begin or continue selling a generic olopatadine product that would compete with the Company's Pataday™ product in the United States. Such competition would be expected to impact significantly the Company's sales and profits.
The fifth and sixth ANDA patent suits were filed February 2, 2009 in the U.S. District Court in Indianapolis against Apotex and Sandoz, respectively.
The Company received notice January 12, 2009, that Apotex has followed Barr in filing an ANDA challenging the patents underlying the Company's Pataday™ once daily olopatadine product. Like Barr's ANDA, the Apotex ANDA is challenging the patent jointly owned by Kyowa and the Company (described above), as well as two later issued patents owned by the Company that cover the Pataday™ formulation. Apotex is not challenging the Kyowa patent on olopatadine that expires in December 2010 (June 2011 with the pediatric extension). Because the suit was filed within the statutory 45-day period, the FDA must delay any approval of the Apotex ANDA for 30 months (until June 2011), unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. In addition, because Apotex is the second filer, it is also subject to the first filer's 180-day exclusivity period, which could further delay its FDA approval. This case has been consolidated with the Barr case (Pataday™) described above. Trial has not yet been scheduled in this case. If Apotex succeeds in overcoming both of the challenged patents and secures FDA approval, then after the expiration of Barr's potential 180-day "first filer" exclusivity period,
it would be entitled to begin selling a generic olopatadine product that would compete with the Company's Pataday™ product in the United States. Such competition would be expected to impact significantly the Company's sales and profits.
The Company received notice on January 15, 2009 that Sandoz Inc. (an affiliate of Novartis) has filed an ANDA challenging one of the patents underlying the Company's Patanol® product. Similar to the Apotex ANDA on Patanol®, the Sandoz ANDA is challenging only the patent jointly owned by Kyowa and the Company, but not the Kyowa-owned patent on olopatadine, which expires December 2010 (June 2011 with the pediatric extension). Because the suit was filed within the statutory 45-day period, the FDA must delay any approval of the Sandoz ANDA for 30 months (until June 2011) unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. However, Sandoz would not be entitled to receive FDA approval until the expiration or forfeiture of a 180-day exclusivity period that would be granted to Apotex (the first ANDA filer) if it were successful in its patent challenge. Trial had been scheduled for April 26, 2010, and consolidation with the above-described Apotex suit (Patanol®) had been ordered by the court. Apotex, however, advised the court of public statements of intent by Novartis to acquire all outstanding sharesentities of Alcon, stock, and filed a motion to sever Sandoz from the trial. On February 22, 2010, the court granted the motion, ordering the suit against Sandoz to proceed separately and confirming the April 26, 2010 trial date with Apotex. A new trial date for the Sandoz casenone of which has not yet been set, and further proceedings in the case were stayed until November 2010. Sandoz requested a six-month extension of that stay, which was granted. Subject to the possibility of the 180-day exclusivity period that could accrue to Apotex, if Sandoz succeeds in overcoming the challenged patent and secures FDA approval, it would be entitled to begin selling a generic olopatadine product that would compete with the Company's Patanol® product in the United States. Such competition would be expected to impact significantly the Company's sales and profits.
The seventh ANDA patent suit was filed after the Company received notice by letter dated March 17, 2009, that Barr Laboratories, Inc. had filed a Paragraph IV certification with its ANDA for a generic version of the Company's TRAVATAN® product containing 0.004% travoprost. Barr is challenging the following patents listed in the Orange Book for TRAVATAN®: U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; and 6,011,062. With the exception of the '383 patent, which expires in 2013, all of the patents will expire in December 2014. The Company filed suit against Barr in the U.S. District Court in Delaware on April 30, 2009 and thereby secured the statutory 30-month stay on FDA approval of the generic product. The FDA must delay any approval of the Barr ANDA until September 2011, unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. This case has been consolidated with the Par and Apotex cases on TRAVATAN® described below. Trial originally had been scheduled to commence March 7, 2011. It was rescheduled to commence May 2, 2011, but recently was delayed again with no set trial date from the court. In June 2010, the Company announced plans to discontinue TRAVATAN® in the United States. That same month, Apotex withdrew its ANDA and, as noted below, subsequently has been dismissed from the lawsuit. In November 2010, Barr advised that it was withdrawing its ANDA on TRAVATAN ® and is seeking dismissal from the lawsuit with respect to the TRAVATAN ® product. The withdrawal leaves Par (described below) as the effective first filer on the TRAVATAN ® product.
The eighth patent suit was filed after Sandoz Canada Inc. (an affiliate of Novartis) notified Alcon Canada by letter dated April 9, 2009, that Sandoz had filed an Abbreviated New Drug Submission ("ANDS") seeking approval from the Canadian Minister of Health to market a generic version of the Company's Patanol® product. The Sandoz ANDS is challenging only one of the two patents listed in the Canadian Patent Register for the Patanol® product. The challenged patent (Canadian Patent No. 2,195,094) is jointly owned by Kyowa and the Company and expires in May 2016. The Company and Kyowa filed suit on May 25, 2009 in the Federal Court in Toronto, thereby securing a 24-month delay (until May 25, 2011) in the regulatory approval from the Minister of Health, which can only be shortened if the litigation is earlier resolved or the court modifies the 24-month stay on such approval. Trial had been scheduled to commence March 7, 2011, but the court has released that date and will, if necessary, reschedule trial at a later date. Should Sandoz succeed in overcoming the challenged patent and secure Minister of Health approval, it would be entitled to begin selling a generic olopatadine product that would compete with the Company's Patanol® product in Canada well before the patent expiration in 2016, but not before expiration of the unchallenged patent in November 2012. Such competition would be expected to impact the Company's sales and profits.
The ninth ANDA patent suit was filed after the Company received notice by letter dated June 1, 2009, that Par Pharmaceutical, Inc. had filed a Paragraph IV certification with its two ANDAs for generic versions of the Company's TRAVATAN® and TRAVATAN Z® products. Par is challenging the following patents listed in the Orange
Book for TRAVATAN® and TRAVATAN Z®: U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497; and 6,849,253. All of these patents will expire by the end of 2014. On July 1, 2009, the Company filed suit in the U.S. District Court in Delaware, thereby securing a statutory stay under which the FDA must delay any approval of the Par ANDAs until December 2011, unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. All of the ANDA cases concerning TRAVATAN® and TRAVATAN Z® (Barr, Par and Apotex) were consolidated. Trial originally had been scheduled for March 7, 2011. It was rescheduled to commence May 2, 2011, but recently was delayed again with no set trial date from the court. In June 2010, the Company announced plans to discontinue TRAVATAN ® in the United States. That same month, Apotex withdrew its ANDA and, as noted below, subsequently has been dismissed from the lawsuit. In November 2010, Barr advised that it was withdrawing its ANDA on TRAVATAN ® and is seeking dismissal from the lawsuit (as noted above). The withdrawal leaves Par as the effective first filer on the TRAVATAN ® product. If Par succeeds in overcoming all of the challenged patents and secures FDA approval, it would be entitled to begin selling generic travoprost products that would compete with the Company's TRAVATAN ® and TRAVATAN Z® products in the United States in December 2011. Such competition would be expected to impact significantly the Company's sales and profits.
The tenth ANDA patent suit was filed after the Company received notice by letter dated June 24, 2009, that Barr Laboratories, Inc. had filed a Paragraph IV certification with its ANDA for a generic version of the Company's TRAVATAN Z® product. Barr is challenging the following patents listed in the Orange Book for TRAVATAN Z®: U.S. Patent Nos. 5,510,383; 5,889,052; 6,503,497; and 6,849,253. All of the patents will expire by the end of 2014. On July 13, 2009, Alcon filed suit in the U.S. District Court in Delaware, thereby securing a statutory stay under which the FDA must delay any approval of the Barr ANDA until December 2011, unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. Trial originally had been scheduled for March 7, 2011. It was rescheduled to commence May 2, 2011, but was recently delayed again with no set trial date from the court. This case was consolidated with the above-described Barr suit (TRAVATAN®) and Par suit (TRAVATAN® and TRAVATAN Z®) and consolidated further to include the Apotex suit (TRAVATAN®) described below (Note: in June 2010, Apotex withdrew its ANDA and subsequently has been dismissed from the suit). Subject to the possibility of the 180-day exclusivity period that could accrue to Par (as first filer) relative to the TRAVATAN Z® product, if Barr succeeds in overcoming all of the challenged patents and secures FDA approval, it would be entitled to begin selling a generic travoprost product that would compete with the Company's TRAVATAN Z® product in the United States. Such competition would be expected to impact significantly the Company's sales and profits.
The eleventh ANDA patent suit was filed after the Company received notice by letter dated September 11, 2009, that Apotex Corp. and Apotex Inc. had filed an ANDA for a generic version of Alcon's TRAVATAN® product. Apotex was challenging all five of the Orange Book listed patents for TRAVATAN®: 5,510,383; 5,631,287; 5,849,792; 5,889,052; and 6,011,062. The Company filed suit in the U.S. District Court in Delaware, thereby securing a statutory stay under which the FDA would be required to delay any approval of the Barr ANDA until March 2012, unless the litigation were earlier resolved or the court modified the 30-month stay on FDA approval. This case was consolidated with the Barr and Par cases (TRAVATAN® and TRAVATAN Z®) described above. Trial originally was scheduled for March 7, 2011. It was rescheduled to commence May 2, 2011, but recently was delayed again with no set trial date from the court. However, in June 2010 Apotex withdrew its ANDA and subsequently has been dismissed from the suit.
The twelfth ANDA patent suit was filed after the Company received notice on December 15, 2009 that Sandoz Inc. (an affiliate of Novartis) had filed an ANDA with a Paragraph IV certification directed to the Company and Kyowa patents on Pataday™. The Sandoz ANDA is challenging the patent jointly owned by Kyowa and The Company (described above), as well as two later issued patents owned by the Company that cover the Pataday™ formulation. Of the two Company patents, the latest expiry date is November 2023 (effectively extended until May 2024 by a pediatric extension). Sandoz is not challenging the Kyowa patent on olopatadine that expires in December 2010 (effectively extended until June 2011 by a pediatric extension). On January 27, 2010, the Company and Kyowa filed suit in the Federal District Court in Indianapolis. Because the suit was filed within the statutory 45-day period, the FDA must delay any approval of the Sandoz ANDA for 30 months (until June 2012) unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. However, because Sandoz is the third filer (behind both Barr and Apotex) and subject to a potential 180-day exclusivity period of the first filer, the 30-month stay is of no practical consequence. At the request of Sandoz, the court has stayed proceedings until November 2010. Sandoz has requested a six-month extension of that stay. Subject to the possibility of the 180-day exclusivity period
that potentially could accrue to Barr (as first filer) relative to the Pataday™ product, if Sandoz were to succeed in overcoming all the challenged patents and to secure FDA approval, it would be entitled to begin selling a generic product that would compete with the Company's Pataday™ product in the United States. Such competition would be expected to impact significantly the Company's sales and profits.
The thirteenth ANDA patent suit was filed after the Company received notice that Wockhardt Limited (headquartered in India) has filed an ANDA with a Paragraph IV certification for a generic version of the Company's Patanol® product. Wockhardt is challenging U.S. Patent No. 5,641,805, which is jointly owned by the Company and its raw material supplier, Kyowa Hakko Kirin Co., Ltd. The challenged patent will expire in 2015. Wockhardt is not challenging, however, another Kyowa-owned U.S. patent covering Patanol®, which expires on December 18, 2010 (effectively extended until June 2011 by a pediatric extension). The Company and Kyowa filed suit against Wockhardt in the Federal District Court in Indianapolis on February 12, 2010, to avail themselves of the statutory 30-month stay on FDA approval of the proposed generic product. That 30-month period will expire August 2, 2012, unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. However, as a third ANDA filer (behind both Apotex and Sandoz), Wockhardt would not be entitled to receive FDA approval until the expiration or forfeiture of a 180-day exclusivity period that would be granted to Apotex (the first filer) if it were successful in its patent challenge. Subject to the 30-month stay and the possibility of the 180-day exclusivity period that potentially could accrue to Apotex (as first filer) relative to the Patanol® product, if Wockhardt were to succeed in overcoming the challenged patent and to secure FDA approval, it would be entitled to begin selling a generic product that would compete with the Company's Patanol® product in the United States. Such competition would be expected to impact significantly the Company's sales and profits.
The fourteenth patent suit was initiated after receipt of a letter dated February 24, 2010, notifying Alcon Canada that Apotex, Inc. had filed an ANDS seeking approval from the Canadian Minister of Health to market a generic version of the Company's Patanol® product. The Apotex ANDS is challenging only one of the two patents listed in the Canadian Patent Register for the Patanol® product. The challenged patent (Canadian Patent No. 2,195,094) is jointly owned by Kyowa and the Company and expires in May 2016. The Company and Kyowa filed suit April 13, 2010 in the Federal Court in Toronto, Ontario, to secure a 24-month delay (until April 2012) in the regulatory approval from the Minister of Health, which can only be shortened if the litigation is earlier resolved or the court modifies the 24-month stay on such approval. Should Apotex succeed in overcoming the challenged patent and secure Minister of Health approval, it would be entitled to begin selling a generic olopatadine product that would compete with the Company's Patanol® product in Canada well before the patent expiration in 2016, but not before expiration of the unchallenged patent in November 2012. Such competition would be expected to impact the Company's sales and profits.
The Company is also enforcing patents against generic challengers in China (Patanol®), Chile (Vigamox®) and Korea (Patanol®).
On April 16, 2008, Synergetics USA, Inc., a microsurgical device company, filed a civil antitrust lawsuit in the U.S. District Court for the Southern District of New York against the Company and its subsidiary, Alcon Laboratories, Inc. Synergetics asserted damages that it claimed could exceed $100 million. In 2008 and 2009, subsidiaries of the Company filed two suits against Synergetics for patent infringement in the U.S. District Court for the Northern District of Texas in Fort Worth. Synergetics answered the complaints. A series of counterclaims and motions followed. On April 23, 2010, the parties entered a Confidential Settlement and License Agreement together with a Supply Agreement. Under the agreements, Alcon paid $32 million in exchange for worldwide rights to sell Synergetics patented vitreoretinal products. The products will be manufactured by Synergetics and supplied to Alcon. The agreements also settled all pending litigation between Alcon and Synergetics, including both the antitrust and the patent litigation, and provide a process for future dispute resolution.
On December 18, 2008, James M. Nielsen, M.D. filed a patent infringement suit against Alcon, Inc. and Alcon Laboratories, Inc. in the U.S. District Court for the Northern District of Texas in Dallas. Dr. Nielsen is asserting that his U.S. Patent No. 5,158,572 entitled "Multifocal Intraocular Lens" is being infringed by the Company's AcrySof® ReSTOR® intraocular lens. The patent, which expired at the end of October 2009, was previously licensed to Advanced Medical Optics, Inc. The Company filed its Answer January 12, 2009. The Answer included a counterclaim for a declaratory judgment that the patent-in-suit is invalid and not infringed. The case had been set for trial in August 2010 but has been postponed. No new trial date has been set. Summary judgment motions were filed
by both parties January 7, 2011. Alcon is seeking summary judgment on noninfringement, invalidity and laches, while Dr. Nielsen is seeking partial summary judgment on invalidity and laches/estoppels. On January 10, 2011, the court ordered that both parties' motions be stricken and refiled in a "cross-motion" format, the briefing for which was extended by the court until the end of March 2011. An adverse ruling by the court, while possible, would not be expected to impact significantly the Company's sales and profits.
On January 22, 2009, Elan Pharma International Ltd. sued two of the Company's subsidiaries, Alcon Laboratories, Inc. and Alcon Research, Ltd., in the U.S. District Court for the Eastern District of Texas in Sherman, alleging infringement of two Elan patents on nanoparticle technology (U.S. Patent Nos. 5,298,262 and 5,429,842). The complaint claims that the Company's Azopt® product and, potentially, other products infringe the two patents. The Company answered and counterclaimed on May 12, 2009. Elan then moved to dismiss certain of the Company's affirmative defenses and counterclaims. The Company has filed an amended answer and counterclaims providing greater detail with respect to the Company's inequitable conduct counterclaims. The case has been set for trial on October 17, 2011. The Company believes that it has strong defenses and intends to defend itself vigorously. An adverse ruling by the court, however, could impact significantly the Company's sales and profits.
Alcon and its subsidiaries are parties to a variety of other legal proceedings arising out of the ordinary course of business, including proceedings relating to product liability and patent infringement. The Company believes that it has valid defenses and is vigorously defending the litigation pending against it.
Alcon and its subsidiaries are obligated to comply with the laws of each of the many countries in which we operate, covering a broad range of activities. Despite our efforts, any failure to comply with law could lead to substantial liabilities that may not be covered by insurance, and could affect our business and reputation.
The Company is subject to various legal proceedings, including legal proceedings relating to Novartis's January 2010 merger proposal. The Company may also be subject to additional legal proceedings in the future. Such proceedings could relate to, among other things, product liability, commercial disputes, employment and wrongful discharge, antitrust, securities, sales and marketing practices, health and safety, environmental, tax, privacy, intellectual property matters and the proposed merger with Novartis. Such proceedings are inherently unpredictable, and large verdicts sometimes occur. As a consequence, the Company may in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations or cash flows, and the price of Alcon's common shares may be affected by speculation concerning the potential outcome of legal proceedings.
The Company is subject to governmental oversight and associated civil and criminal enforcement relating to drug and medical device advertising, promotion and marketing, and such enforcement is evolving and intensifying. Other parties, including private plaintiffs, also are commonly bringing suit against pharmaceutical and medical device companies, alleging off-label marketing and other violations. Given the significant risks associated with such enforcement and suits, the Company has adopted enhanced compliance controls over our advertising, marketing and promotional activities, among other areas. However, there remains substantial risk in this area given evolving enforcement theories and increasing claims brought by governmental and private parties.
While the results of the aforementioned contingencies cannot be predicted with certainty, management believes that the ultimate liability, if any, will not have a material adverse effect on the Company's consolidated financial position or results of operations. Litigation contingencies are subject to change based on settlements and court decisions.
The Company may be subject to future litigation and infringement claims, which could cause the Company to incur significant expenses or prevent the Company from selling its products. The Company operates in an industry susceptible to significant product liability claims. Product liability claims may be asserted against the Company in the future arising out of events not known to the Company at the present time.
While the results of the aforementioned contingencies cannot be predicted with certainty, management believes that the ultimate liability, if any, will not have a material adverse effect on the Company's consolidated financial position or results of operations. Litigation contingencies are subject to change based on settlements and court decisions.
Under the merger agreement with Novartis dated December 14, 2010, Alcon has agreed not to pay dividends pending completion of the merger.
None.
ITEM 9. | THE OFFER AND LISTING |
A. | OFFER AND LISTING DETAILS |
Not Applicable.
2. | METHOD TO DETERMINE EXPECTED PRICE |
Not Applicable.
3. | PRE-EMPTIVE EXERCISE RIGHTS |
Not Applicable.
The following table lists the highmost significant subsidiaries of the Company, being those entities with total assets or net sales to third parties in excess of 5% of the Company’s consolidated total assets or net sales to third parties, as applicable, at December 31, 2019. The referenced share capital may not reflect the taxable share capital and low closing market prices for Alcon's common shares fordoes not include any paid in surplus. Further information regarding the periods indicated as reported:
| High | | Low | |
Year ended December 31, | | | | |
2006 | $ | 138.12 | | $ | 93.24 | |
2007 | | 153.91 | | | 109.80 | |
2008 | | 175.47 | | | 67.98 | |
2009 | | 166.00 | | | 76.34 | |
2010 | | 170.18 | | | 135.00 | |
| | | | | | |
Year ended December 31, | | | | | | |
2009: First quarter | | 95.14 | | | 76.34 | |
Second quarter | | 117.74 | | | 86.28 | |
Third quarter | | 143.53 | | | 112.50 | |
Fourth quarter | | 166.00 | | | 136.23 | |
| | | | | | |
2010: First quarter | | 163.27 | | | 152.51 | |
Second quarter | | 161.38 | | | 135.00 | |
Third quarter | | 168.21 | | | 148.54 | |
Fourth quarter | | 170.18 | | | 157.25 | |
| | | | | | |
Month of: | | | | | | |
September 2010 | | 168.21 | | | 162.98 | |
October 2010 | | 170.18 | | | 166.60 | |
November 2010 | | 168.00 | | | 157.25 | |
December 2010 | | 164.10 | | | 160.38 | |
January 2011 | | 163.70 | | | 162.28 | |
February 2011 | | 165.43 | | | 163.82 | |
| | | | | | |
Company’s subsidiaries is disclosed in Note 28 of the Consolidated Financial Statements. The combination of the Company’s subsidiaries disclosed in the table below and in Note 28 of the Consolidated Financial Statements does not cover all subsidiaries of the Company.
5. |
| TYPE AND CLASS OF SECURITIES | | |
Not Applicable.Country of Organization/ Entity Name | Equity Interest | Principal Place of Business | Share Capital |
Japan | | | |
Alcon Japan Ltd. | 100% | Tokyo | JPY 500,000,000 |
Switzerland | | | |
Alcon Pharmaceuticals Ltd. | 100% | Fribourg | CHF 200,000 |
United States | | | |
Alcon Finance Corporation | 100% | Fort Worth, TX | USD 1 |
Alcon Laboratories, Inc. | 100% | Fort Worth, TX | USD 1 |
Alcon Research, LLC | 100% | Fort Worth, TX | USD 12.5 |
Alcon Vision, LLC | 100% | Fort Worth, TX | USD 1,000 |
6. | LIMITATIONS OF SECURITIES |
Not Applicable.Significant Shareholders7. | RIGHTS CONVEYED BY SECURITIES ISSUED |
Not Applicable.According to the Alcon share register, the following nominee shareholders held more than 3% of the share capital of Alcon Inc. as of December 31, 2019: |
| | | |
Holder | Number of Shares | Percentage |
Chase Nominee Ltd., London (UK) | 84,771,429 | 17.24% |
Cede & Co (DTC nominee), New York, NY (USA) | 82,425,818 | 16.76% |
In addition, according solely to disclosure of shareholdings notifications filed with Alcon and the SIX Swiss Exchange ("SIX Threshold Notifications") pursuant to the obligations set forth in the Swiss Federal Act on Financial Market Infrastructure and
Not Applicable.
Alcon's commonMarket Conduct in Securities and Derivatives Trading ("FMIA") and the rules and regulations promulgated thereunder, there are three shareholders that held shares representing at least 3% of the Company’s total share capital as of December 31, 2019, but were not registered with the Alcon share register. Those three shareholders are listed for trading on the NYSE and are traded under the symbol "ACL".
Not Applicable.
E. | DILUTION FROM OFFERING |
Not Applicable.
Not Applicable.
ITEM 10. | ADDITIONAL INFORMATION |
Not Applicable.
B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
General
Alcon, Inc. is registeredidentified in the table below.
The information required to be included in the SIX Threshold Notifications regarding these shareholders varies from the information required to be included in beneficial ownership statements filed with the SEC (“SEC Notifications”).
Interested persons can access the relevant SIX Threshold Notifications online at the SIX Swiss Exchange:https://www.six-exchange-regulation.com/en/home/publications/significant-shareholders.html.
The below table shows the information available to the Company, based on both notification regimes, with respect to shareholders reported to have significant positions in Alcon’s share capital as of December 31, 2019:
|
| | | | | |
Holder | Number of shares and voting rights as per SIX Threshold Notification | Percentage as per SIX Threshold Notification1 | Number of shares beneficially owned as per SEC Notification2 | Percentage as per SEC Notification3 |
T. Rowe Price Associates, Inc. 100 East Pratt Street, Baltimore, MD 21202 | 26,641,2064 | 5.45 % | 49,485,4115 | 10.1 % |
The Capital Group Companies, Inc. 333 South Hope Street, Los Angeles, CA 90071 | 25,357,3466 | 5.19 % | 31,824,5427 | 6.5 % |
BlackRock, Inc. c/o BlackRock Investment Management (UK) Limited 12 Throgmorton Ave, London, EC2N 2DL, UK | 24,679,2318 | 5.06 % | -- | -- |
| |
1 | Percentages indicated in this column have been established based on the share capital of the Company registered with the commercial register of the Canton of Fribourg on the date on which the respective disclosure obligation pursuant to the FMIA was triggered. Furthermore, according to the FMIA, these shareholders are required to notify Alcon and the SIX Swiss Exchange only at the time they reach, exceed or fall below any of the thresholds set forth in the FMIA; therefore, their shareholding as of December 31, 2019 may differ from the figures indicated as per the contents of the relevant SIX Threshold Notifications. |
| |
2 | In general, under SEC rules, "beneficial ownership", for the purposes of this column, refers to shares that an entity had the power to vote or the power to dispose of, and shares that such entity or individual had the right to acquire within 60 days after December 31, 2019. |
| |
3 | Percentage ownership is calculated by dividing the number of shares reported as beneficially owned by such entity by the 488,349,066 shares of our common stock outstanding as of January 31, 2020. |
| |
4 | Based solely on a SIX Threshold Notification dated May 1, 2019. |
| |
5 | Based solely on a Statement on Schedule 13G filed on January 10, 2020. Such filing indicates that T. Rowe Price Associates, Inc. has sole voting power with respect to 17,419,268 shares and sole dispositive power with respect to 49,485,111 shares. |
| |
6 | Based solely on a SIX Threshold Notification dated October 25, 2019. |
| |
7 | Based solely on a Statement on Schedule 13G filed on February 14, 2020. Such filing indicates that The Capital Group Companies, Inc. has sole voting power with respect to 31,808,983 shares and sole dispositive power with respect to 31,824,542 shares. |
| |
8 | Based solely on a SIX Threshold Notification dated November 9, 2019. This figure does not include its derivative position. |
Cross-Shareholdings
Neither the Company nor any of its consolidated entities has any shareholdings exceeding 5% of the Cantonholdings of Zug, Switzerland under number CH-170.3.017.372-9.capital or voting rights in any entity that also has shareholdings exceeding 5% of the holdings of the capital or voting rights in the Company or any of its consolidated entities.
Capital Structure
Share Capital
As of December 31, 2010, our issued2019, the share capital of Alcon Inc. was CHF 61,008,996.60 on 305,044,983 common19,668,000, fully paid-in and divided into 491,700,000 registered shares, ateach with a nominal value of CHF 0.20 par value per common share.0.04.
Set out below is information concerning our
Authorized and Conditional Share Capital
On January 29, 2019, the Company’s annual general meeting approved the creation of an authorized share capital. According to this shareholder resolution, the Board was authorized, at any time until January 29, 2021, to increase the Company’s share capital by a maximum of CHF 977,400 through the issue of up to 24,435,000 fully paid up new shares and a brief summary of someCHF 0.04 nominal value each for the purpose of any share-based incentive or other participation plans, schemes or arrangements for directors, associates or advisors of the significant provisionsCompany or its consolidated subsidiaries (“Employees Participation Plans”). Additional terms and conditions of the Swiss Federal Codethis authorized share capital are set forth in Article 4a of Obligations (Schweizerisches Obligationenrecht), of our Articles of Association (Statuten), and of the written regulations of our board of directors, known as Organizational Regulations (Organisationsreglement), the Articles of Association and the Organizational Regulations having been filed previously with the SEC. This description does not purportIncorporation (http://investor.alcon.com/governance//default.aspx).
The Board resolved on November 19, 2019 to be complete and is qualified by reference to our Articles of Association, our Organizational Regulations and the Swiss Federal Code of Obligations.
Common Shares
All common shares are registered common shares which are fully paid, validly issued and non-assessable. There is no limitation under our Articles of Association on the right of non-Swiss residents or nationals to own or vote our common shares.
Share Register
Our share register is kept by BNY Mellon Shareowner Services in New York, New York, which acts as transfer agent and registrar. The share register reflects only record owners of our shares; beneficial owners of common shares holding their shares through The Depository Trust Company, which we refer to as "DTC," are not recorded in our share register. Shares held through DTC are registered in our share register in the name of DTC's nominee. We are entitled to accept only those persons as shareholders, usufructuaries or nominees who have been recorded in our share register, and to perform dividend payment and other obligations only to our shareholders of record, including DTC. A shareholder of record must notify BNY Mellon Shareowner Services of any change in address. Until notice of a change in address has been given, all of our written communication to our shareholders of record shall be deemed to have validly been made if sent to the address recorded inincrease the share register.
Share Certificates
We issue certificates evidencing our common shares to our shareholders of record, unless shares are held in uncertificated positioncapital by CHF 120,000 through the DTC's book-entry Direct Registration System.
Transfersissuance of Common Shares
Beneficial owners of our common3,000,000 new registered shares as well as registered owners with uncertificated positions, may transfer their shares throughunder the DTC's book-entry Direct Registration System. Common shares held of record represented byauthorized share certificates may be transferred only by delivery of the share certificates representing those common shares duly endorsed or accompanied by an executed stock power. A transferee who wishes to become a shareholder of record must deliver the duly executed certificate in a form proper for transfer to our transfer agent and registrar, BNY Mellon Shareowner Services,capital in order to be registered in our share register (Aktienregister).
Voting Rights
Each common share carries one vote at a shareholders' meeting. Voting rights may be exercised by our registered shareholders or by a duly appointed proxy of a shareholder, which proxy need not be a shareholder. This provision will allow forcomply with Alcon’s obligations under the exercise of voting rights by beneficial owners of our common shares. Our Articles of Association do not limit the number ofrelevant Employees Participation Plans. These new shares that may be represented by a single shareholder. See "-Transfers of Common Shares" above and "Certain Provisions of Our Articles of Association, Organizational Regulations and Swiss Law-Shareholders' Meetings" below.
Treasury shares, i.e., shares held by us or our majority-owned subsidiaries, will not be entitled to vote at our shareholders' meetings.
Preemptive Rights
Shareholders have preemptive rights to subscribe for newly issued common shares and other equity instruments, stock options and convertible bonds in proportion to the nominal amount of our common shares they own. The vote of a supermajority of two-thirds of the common shares represented at a shareholders' meeting may, however, limit or suspend preemptive rights in certain limited circumstances.
Informational Rights
At a shareholders' meeting, each shareholder is entitled to request certain information from our board of directors concerning our affairs and to request information from our auditors concerning their audit and its results. Such information must be provided to the extent that it is necessary to exercise shareholder rights (for example, voting rights) and does not jeopardize business secrets or other legitimate interests of Alcon. Additionally, our books and correspondence may be inspected by our shareholders if such an inspection is expressly authorized by our shareholders or our board of directors, subject to the protection of business secrets. If information is withheld or a request to inspect refused, a court in our place of incorporation (Zug, Switzerland) may be petitioned to order access to information or to permit the inspection.
The right to inspect our share register is limited to the right to inspect that shareholder's own entrywere listed on our share register.
Preferred Shares
December 4, 2019.
As of December 31, 2010, no Alcon preferred shares were2019, the Board remained authorized, issued or outstanding.
Future Share Issuances
Under Swiss law, all decisions with respectat any time until January 29, 2021, to capital increases, whether of common or nonvoting preferred shares and whether for cash, non-cash or no consideration, are subject tofurther increase the approval or authorization by shareholders.
Creation of Conditional Share Capital for the Amended 2002 Alcon Incentive Plan
As of December 31, 2010, ourCompany’s share capital may be increased by a maximum aggregate amount of CHF 3,041,843.40857,400 through the issuanceissue of a maximum of 15,209,217up to 21,435,000 fully paid commonup new shares subject to adjustments to reflect share splits, uponof CHF 0.04 nominal value each for the exercisepurpose of options to purchase common shares. New common shares will be issued upon the exercise of options which our management, employees and directors may be granted pursuant to the Amended 2002 Alcon Incentive Plan. any Employees Participation Plans.
The grant of these options and the issuance of the underlying common shares upon option exercises willCompany did not entitle our shareholders to preemptive rights. The exercise price of the stock options shall be no less than the market price of common shares upon the date of grant of the options. See "Management-Amended 2002 Alcon Incentive Plan."
At December 31, 2010, 12,625,084 common shares, including 1,028,693 common shares during 2010, had been issued cumulatively fromhave any conditional share capital pursuant to the exercise of stock options and restricted share units granted under the Amended 2002 Alcon Incentive Plan. Another 2,165,699 shares of conditional capital were issuedavailable on December 31, 2019.
Changes in 2002 as contingent restricted shares; for which the last condition for vesting expired January 1, 2006.Capital
The restricted common shares and the common shares issued pursuant to the exercise of stock options and restricted share units reduced the conditionalCompany was formed on September 21, 2018 with a share capital from the 30 million common shares originally authorized in 2002.
Certain Provisions of Our Articles of Association, Organizational Regulations and Swiss Law
Business Purpose and Duration
Article 2 of our Articles of Association provides that our business purpose is to purchase, administer and transfer patents, trademarks and technical and industrial know-how; to provide technical and administrative consultancy services; and to hold participations in other industrial or commercial companies. In addition, we may conduct all transactions to which our business purpose may relate.
Our Articles of Association do not limit our duration.
Notices
Article 31 of our Articles of Association requires us to publish notices, including notice of shareholders' meetings, to our shareholders in the Swiss Official Gazette of Commerce (Schweizerisches Handelsamtsblatt). Our board of directors may, but is not generally required by Swiss law to, designate additional means of providing notice to shareholders. We also may communicate with our shareholders through the addressesCHF 100,000 divided into 2,500,000 registered in our share register.
Shareholders' Meetings
Annual General Meetings
Under Swiss corporate law, we must hold an annual general meeting of shareholders within six months after the end of our financial year, which is the calendar year. Our board of directors has the authority to convene annual general meetings. Holders of common shares with a nominal value equal to at leastof CHF 1 million have0.04 each. In view of the right to request that a specific proposal be discussed and voted upon at a shareholders' meeting. Under Swiss corporate law, notice of a shareholders' meeting must be given at least 20 days prior tocontemplated Spin-off from the date of that meeting.
The 2011 annual general meeting of shareholders is scheduled for April 7, 2011 in Zug, Switzerland.
Extraordinary General Meetings
Our board of directors is required to convene an extraordinary general meeting of shareholders, for among other reasons, if a shareholders' meeting adopts a resolution to that effect or if holders of common shares representing an
aggregate of at least 10% of our nominalNovartis group, the Company’s share capital request in writing that it do so. An extraordinary general meeting is convened by publicationwas increased on January 29, 2019 to amount to CHF 19,548,000 divided into 488,700,000 registered shares with a par value of a noticeCHF 0.04 each. Following the increase through the authorized share capital, as set forthdescribed above under "– Notices."
Powers“Authorized and Duties
Pursuant to Swiss corporate law, our shareholders haveconditional share capital”, the exclusive right to decide onshare capital of the following matters:
· | adoption and amendment of our Articles of Association; |
· | election of members of our board of directors, statutory auditors and the special auditors; |
· | approval of our annual report, our statutory financial statements and our consolidated financial statements; |
· | payments of dividends and any other distributions to shareholders; |
· | discharge of the members of our board of directors from liability for previous business conduct to the extent such conduct is known to the shareholders; and |
· | any other resolutions which are submitted to a shareholders' meeting pursuant to law, our Articles of Association or by voluntary submission by our board of directors. |
Proxies
Shareholders can choose to be represented at a shareholders' meeting by a proxy who is not required to be a shareholder. Shares held in collective custody through DTC will be able to participate in shareholders' meetings regardlessCompany was, as of record ownership. See "- Record Date" below.
Quorum
December 31, 2019, CHF 19,668,000 divided into 491,700,000 registered shares.
No quorum for shareholders' meetingsother historical data is specifiedavailable regarding changes in our Articlescapital during the last three financial years.
Shares, Participation Certificates and Profit-sharing Certificates
The Company has a single class of Association.
Action by Shareholders
At a shareholders' meeting, all voting takes place by a showshares, being registered shares in the form of hands, unless voting by ballot is resolved by a majority vote of shareholders present or ordered byuncertificated securities (in the chairmansense of the meeting or unless votingSwiss Code of Obligations). A portion of these uncertificated shares is done by electronic formissued as ordered byintermediated securities (titres intermédiés) within the chairmanmeaning of the meeting. Resolutions of shareholders generally require the approval of a majority of the common shares represented at a shareholders' meeting, with abstentions having the effect of votes against the resolution. Shareholders' resolutions requiring the affirmative vote of a majority of the common shares represented at a shareholders' meeting include:
· | amendments to our Articles of Association, unless the amendment is subject to the requirement that it be approved by holders of two-thirds of our common shares represented at a shareholders' meeting; |
· | elections of directors and auditors; |
· | approval of our annual report, statutory financial statements and consolidated financial statements; |
· | decisions to discharge the directors and management from liability for matters disclosed to the shareholders' meeting; and |
· | ordering of an independent investigation into specific matters proposed to the shareholders' meeting (Sonderprüfung).
|
Pursuant to Swiss corporate law, the affirmative vote of two-thirds of the common shares represented at a shareholders' meeting is required to approve:
· | changes in our business purpose; |
· | the creation of shares having different par values, each of which is entitled to one vote (i.e., dual-class common shares); |
· | the creation of restrictions on the transferability of common shares; |
· | the creation of authorized share capital or conditional share capital; |
· | an increase in our share capital by way of capitalization of reserves (Kapitalerhöhung aus Reserven), against contribution in kind (Sacheinlage), for the acquisition of assets (Sachübernahme), as well as involving the grant of preferences;
|
· | a restriction or elimination of preemptive rights of shareholders in connection with a share capital increase; |
· | a relocation of our place of incorporation; |
· | the dissolution of the Company; and |
· | a merger, a demerger or a conversion according to the Swiss Merger Act. |
In addition, our Articles of Association require the approval of a supermajority of at least two-thirds of the common shares represented at a shareholders' meeting to:
· | create or abolish any restrictions on the exercise of voting rights; |
· | abolish any applicable restrictions on the transferability of shares; |
· | convert registered shares into bearer shares and vice versa; and |
· | modify any provisions in our Articles of Association requiring actions to be approved by a supermajority of the common shares represented at a shareholders' meeting. |
Under Swiss corporate law, shareholders are not permitted to act by written consent in lieu of a shareholders' meeting.
Record Date
We intend to announce the dates of forthcoming shareholders' meetings not less than 30 days prior to the date of the shareholders' meeting in question and to set a date for eligibility to vote at the shareholders' meeting, which we refer to as the date of the closing of the books, not more than 20 days prior to the date of the shareholders' meeting in question.
We intend to mail shareholders' meeting materials to record owners and to beneficial owners of shares holding their shares through DTC through customary banking and brokerage channels within eight business days after the date of the closing of the books.
Shareholders of record and beneficial owners of shares holding their shares through DTC will have the opportunity to appoint proxies, in the case of shareholders of record, or give voting instructions, in the case of beneficial owners of shares holding their shares through DTC, or to request attendance at shareholders' meetings. Any request must be made through the same banking and brokerage channels as we originally used to send the shareholders' materials.
Net Profits and Dividends
Swiss corporate law requires us to retain at least 5% of our annual net profits as general reserves for so long as these reserves amount to less than 20% of our nominal share capital. All other net profits may be paid as dividends if approved by our shareholders.
Under Swiss corporate law, we may only pay dividends if we have sufficient distributable profits from prior business years, or if the reserves on our holding company-only balance sheet prepared in accordance with Swiss statutory accounting rules are sufficient to allow the distribution of a dividend. In either event, dividends may be distributed only following approval by our shareholders based on our statutory holding company-only accounts. Our board of directors may propose that a dividend be distributed, but our shareholders retain the final authority to determine whether a dividend is paid. Our statutory auditors also must confirm that the dividend proposal of the board of directors conforms to statutory law and our Articles of Association. Subject to the foregoing, we intend to pay dividends on our common shares. See "Dividend Policy."
We are required under Swiss corporate law to declare dividends on our shares in Swiss francs. Holders of our common shares will receive payments in U.S. dollars, unless they provide notice to our transfer agent, BNY Mellon Shareowner Services, that they wish to receive dividend payments in Swiss francs. BNY Mellon Shareowner Services will be responsible for paying the U.S. dollars or Swiss francs to registered holders of common shares, less amounts subject to withholding for taxes.
Dividends usually become due and payable promptly after our shareholders approve their payment. Dividends which remain unclaimed for five years after the due date become barred by the statute of limitations under Swiss law and are allocated to our general reserves.
Dividends on our common shares are subject to Swiss withholding taxes as described under the heading "Taxation."
Borrowing Powers
Neither Swiss law nor our Articles of Association restrict in any way our power to borrow and raise funds. The decision to borrow funds is made by or under the direction of our board of directors, and no approval by our shareholders is required.
Conflicts of Interest
Swiss law does not have a general provision regarding conflicts of interest. However, the Swiss Federal CodeIntermediated Securities Act via the settlement system operated by SIX SIS, with the remaining shares directly held through Computershare Trust Company, N.A. in the U.S. (including shares held through Computershare Trust Company, N.A. at DTC). All Alcon shares have equal voting rights and carry equal entitlements to dividends. No participation certificates (bons de participations) or profit-sharing certificates (bons de jouissance) have been issued.
Based solely upon shares registered in the Alcon share registry, as of Obligations requires directors and officers to safeguard the interestsDecember 31, 2019, approximately 16.7% of the companyCompany's total share capital was held in Switzerland by 95,198 registered shareholders.
Limitations on Transferability and in this connection, imposes dutiesNominees Registrations
The Articles of care and loyalty. This rule is generally understood as disqualifying directors and officers from participating in decisions directly affecting them. A breach of these provisions results in the breaching director or officer incurring personal liability to us. Our Organizational Regulations and Corporate Governance Guidelines provide special provisions addressing conflicts of interest of directors and requiring that interested directors abstain from voting on matters involving such a conflict of interest. In addition, under Swiss law, payments made to a shareholder or a director or any persons associated therewith, other than on arm's length terms, must be repaid to us if the recipientIncorporation of the payment was acting in bad faith.
Repurchases of Shares
Swiss law limits the amount of our shares that we may hold or repurchase. We, together with our subsidiaries, may only repurchase shares if (i) we have sufficient freely distributable reserves to pay the purchase price and (ii) the aggregate par value of the repurchased shares doesCompany do not exceed 10% of the nominal share capital of our Company. Furthermore, we must create a reserveprovide for any limitation on our statutory balance sheet in the amount of the purchase price of the repurchased shares. Rights to vote are suspended on shares we or our subsidiaries repurchase, but these shares are entitled to the economic benefits applicable to our shares generally.
Dissolution; Merger
We may be dissolved at any time with the approval of two-thirds of the common shares represented at a shareholders' meeting. Swiss law also requires the approval of two-thirds of the common shares represented at a shareholders' meeting in case of (i) a merger, (ii) a demerger or (iii) a conversion. Furthermore, our Independent Director Committee believes our Organizational Regulations provide that our board of directors may only approve a decision with respect to a merger, takeover, other business combination or related party transaction of Alcon with its majority shareholder if a majority of the Independent Director Committee so recommends; however, we cannot predict the outcome of any proceeding that might be initiated to interpret or challenge this position. Dissolution by court order is possible if we become bankrupt, or for cause at the request of shareholders holding at least 10% of our share capital. Under Swiss law, any surplus arising out of a liquidation, after the settlement of all claims of all creditors, is distributed to shareholders in proportion to the paid-up par valuetransferability of shares held, subjector nominees registration.
Convertible Bonds and Options
As of December 31, 2019, Alcon did not have any convertible bonds, warrants, options or other securities granting rights to a Swiss withholding tax of 35% on the amount exceeding the paid-up par value. See "Taxation-Swiss Tax Considerations-Swiss Withholding Tax on Dividends and Similar Distributions."Alcon shares.
Board of Directors
Composition
Number, Removal, Vacancies and Term
OurThe Board consists of eight to 13 members according to the Articles of Association provide that we will have at least seven directors at all times. AllIncorporation. As of our directors are elected byDecember 31, 2019, the votesize of the holders of a majorityBoard was 10 members and the Board was comprised of the common shares represented at a shareholders' meeting, and directors may be removed at any time with or without cause by the holders of a majority of the common shares represented at a shareholders' meeting. All vacancies on our board of directors must be filled by a vote of our shareholders. Each member of our board of directors must have nominal ownership of at least one common share, other than members of our board of directors who are representatives of a legal entity that owns common shares.
Our Articles of Association provide that the term of office for each director is three years, with the interval between two annual general meetings being deemed a year for this purpose. The initial term of office for each director will be fixed in such a way as to assure that about one-third of all the members must be newly elected or re-elected every year. Swiss law permits staggered terms for directors. Non-executive directors currently may only be appointed for up to four terms of office. Our Organizational Regulations provide that directors will retire from office no later than the annual general meeting after their 72nd birthday.
Powers and Duties
Pursuant to Swiss statutory law, our Articles of Association and Organizational Regulations, our board of directors is the corporate body responsible for our business strategy, financial planning and control, and supervision of executive management. Our Organizational Regulations contemplate that our board of directors is responsible for our business operations. Among other things, our board of directors as a whole has ultimate responsibility for: (i) the ultimate direction of Alcon and the issuance of the necessary guidelines; (ii) the determination of our organizational structure, including the enactment and amendment of the Organizational Regulations; (iii) the determination of our accounting principles, financial controls and financial planning; (iv) the appointment and removal of the secretary of the board of directors, members of board committees and our executive management, as well as the termination of their signatory power; (v) the ultimate supervision of our executive management; (vi) the preparation of our business report and financial statements, the preparation of shareholders' meetings and the implementation of resolutions adopted by our shareholders; (vii) the examination of the professional qualifications of our auditors; (viii) the
following members:
notification of the court if our liabilities exceed our assets (art. 725 CO); (ix) the approval of certain significant transactions, details of which are set out in our Organizational Regulations; (x) the exercise of shareholder rights in our subsidiaries, as well as the ultimate control of the business activities of our subsidiaries; (xi) the establishment of our dividend policy; (xii) the review and approval of the recommendations of the board committees; and (xiii) the response to any approach regarding a takeover offer.
Our Organizational Regulations set forth that they may be amended with the approval of two-thirds of the members of our board of directors attending a meeting, except as otherwise provided in our Organizational Regulations with respect to the Independent Director Committee.
Certain Anti-Takeover Provisions
Business Combinations
Pursuant to our Organizational Regulations, certain mergers, takeovers or other business combinations involving us must be approved by a majority of the Independent Director Committee, which is charged with protecting the interests of minority shareholders, as well as by the full board of directors.
The Independent Director Committee is charged with protecting the interests of minority shareholders. It has to evaluate and decide upon (i) a proposed merger, takeover, business combination or related party transaction of Alcon with its majority shareholder or any group company of the majority shareholder, (ii) a proposed bid for the minority shareholdings of Alcon by any entity owning a majority of our outstanding voting rights or (iii) a proposed repurchase by us of all of our shares not owned by an entity owning a majority of the outstanding voting rights of Alcon. The Independent Director Committee believes our board of directors may only approve a decision with respect to any of these matters if a majority of the Independent Director Committee so recommends; however, we cannot predict the outcome of any proceeding that might be initiated to interpret or challenge this position.
Since our common shares are not listed on any Swiss stock exchange, the restrictions on implementing a poison pill set forth in the Swiss Act on Stock Exchanges and Securities Trading, which we refer to as the "Swiss Stock Exchange Act," are not applicable to us. Anti-takeover measures implemented by our board of directors would be restricted by the principle of equal treatment of shareholders and the general rule that new shares may only be issued based on a shareholders' resolution; this rule generally bars a board of directors from issuing shares or options to all shareholders other than a hostile bidder. Shareholders may, however, implement certain anti-takeover measures through a shareholders' resolution.
Mandatory Bid Rules
Since our common shares are not listed on any Swiss exchange, the mandatory bid rules specified in the Swiss Stock Exchange Act will not apply to us.
Notification and Disclosure of Substantial Share Interests
The disclosure obligations generally applicable to shareholders of Swiss corporations under the Swiss Stock Exchange Act do not apply to us, since our common shares are not listed on a Swiss exchange. Since our common shares are listed on the NYSE, the provisions of the United States Securities Exchange Act of 1934, as amended, requiring disclosure of certain beneficial interests will apply to our common shares.
Transfer and Paying Agents
Our transfer agent and paying agent for dividends and all other similar payments on our common shares is BNY Mellon Shareowner Services.
Auditors and Special Auditors
In May 2010, the shareholders re-elected KPMG AG as Auditors for a one-year term of office. KPMG AG meets the requirements of the Swiss Federal Code of Obligations for auditing Swiss public companies. To the extent necessary for a review of the U.S. GAAP financial statements of Alcon, Inc., KPMG AG will draw on the expertise
and the resources of KPMG LLP, Fort Worth, Texas (USA). KPMG LLP also was retained for the filings to be made by Alcon, Inc. with the U.S. regulatory authorities. The shareholders re-elected OBT AG, Zurich, as special auditors for a one-year term of office. OBT AG meets the requirements of the Swiss Federal Code of Obligations for auditing Swiss public companies. The auditors and the special auditors are elected for a term ending at our next annual general shareholders' meeting.
Shares Eligible for Future Sale
Our common shares held by Novartis are deemed "restricted securities" as defined in Rule 144, and may not be sold other than through registration under the Securities Act or under an exemption from registration, such as the one provided by Rule 144.
C. |
| MATERIAL CONTRACTS |
| F. Michael Ball, Chairman F. Michael Ball held the position of Chief Executive Officer of the Alcon Division and served as a member of the Novartis Executive Committee from February 1, 2016 until June 30, 2018. He previously served as Chief Executive Officer of Hospira, Inc. from 2011 to 2015. Prior to that, Mr. Ball held a number of senior leadership positions at Allergan, Inc., including President from 2006 to 2011. Before joining Allergan, Inc. in 1995, he held roles of increasing responsibility in marketing and sales at Syntex Corporation and Eli Lilly & Co. He has served on the board of the ICO Foundation since January 2016. Mr. Ball served on the board of directors of several organizations, including Kythera Biopharmaceuticals Inc., Hospira, Inc., IntraLase Corp., AdvaMed and sTec, Inc. He began his career in the healthcare industry in 1981. He holds a Bachelor of Science and a Master of Business Administration from Queen’s University in Canada.
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Age: 64 Nationality: American Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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| Lynn D. Bleil Lynn D. Bleil has been a member of the boards of directors of Stericycle, Inc. since 2015 (where she chairs the Nominating & Governance Committee), Sonova Holding AG since 2016, and Amicus Therapeutics, Inc. since 2018. Ms. Bleil has also served on the advisory boards of private healthcare companies, including Navigen Pharmaceuticals and Halo Neuroscience since 2016. She is a former member of the board of directors of DST Systems Inc and Auspex Pharmaceuticals (until their sale to SS&C Technologies) and Teva Pharmaceuticals. She also has served as vice chair of the governing board of Intermountain’s Park City Hospital since 2014. From 1985 through 2013, Ms. Bleil was a Senior Partner at McKinsey & Company where she led the West Coast healthcare practice and advised CEOs and boards of directors in the healthcare and life sciences industry. Ms. Bleil holds a Bachelor of Science in Chemical Engineering from Princeton University, U.S., and a Master of Business Administration from the Stanford Graduate School of Business, U.S.
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Age: 56 Nationality: American Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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Except as noted below, we are not party to any material contracts other than those entered into in the ordinary course of business.
1. |
| The Company's $2.0 billion Commercial Paper Program (the "CP Program" |
| Arthur Cummings, M.D. Arthur Cummings, M.D., has been Consultant Ophthalmologist at Beacon Hospital, since 2007, and Owner and Medical Director at Wellington Eye Clinic, since 1998, both in Dublin, Ireland. Also, he has been Owner of Arthur Cummings Eye Clinic Ltd. since 2014 and a member of the board of directors of Beacon Audiology Ltd. since 2015. Dr. Cummings holds a Bachelor of Science in Medicine and Surgery (MB. ChB.), and a Master of Medicine in Ophthalmology (M. Med) from the University of Pretoria, South Africa. Dr. Cummings is a Fellow of the College of Surgeons in South Africa (FCS SA) in Ophthalmology, and a Fellow of the Royal College of Surgeons of Edinburgh (FRCSEd) in Ophthalmology. |
Age: 57 Nationality: Irish and South African Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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| David J. Endicott David J. Endicott is the Chief Executive Officer of the Alcon Group. He joined the Alcon Division, when still operating under which Nestlé guaranteed the commercial paper issuedNovartis group, in July 2016 as President, Commercial and assistedInnovation, and Chief Operating Officer. Prior to joining the Alcon Division in its management,2016, Mr. Endicott was terminated prior toPresident of Hospira Infusion Systems, a Pfizer company. Before joining Hospira, Mr. Endicott served as an officer and executive committee member of Allergan, Inc. where he spent more than 25 years of his career in leadership roles across Europe, Asia and Latin America, as well as the change of majority ownership. We paid Nestlé an annual fee basedU.S. Mr. Endicott served on the average outstanding commercial paper balances. We believe that fees paid by us to Nestlé for their guaranteeboard of any indebtedness or fordirectors of Zeltiq, Inc. and Orexigen Therapeutics, Inc. He currently serves on the managementboard of AdvaMed. He holds an undergraduate degree in Chemistry from Whitman College and a Master’s degree in Business Administration from the CP Program were comparable toUniversity of Southern California, both in the fees that would be paid in an arm's length transaction. Total fees paid to Nestlé for the years ended December 31, 2010, 2009 and 2008 were less than $1 million in each year.United States.
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Age: 54 Nationality: American Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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In October 2005, the parties executed a Guarantee Fee and Commercial Paper Program Services Agreement (the "Services Agreement"), effective as of October 28, 2002, which is incorporated by reference as an exhibit to this annual report. Through this Services Agreement, the parties more formally documented the pre-existing CP Program. The Services Agreement stated that Nestlé would: (i) provide a guarantee in favor of the holders of notes issued by Alcon Capital Corporation, Alcon, Inc.'s indirect wholly owned subsidiary, as part of the CP Program and (ii) manage the CP Program. This agreement also was terminated prior to the change of majority ownership.
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| All prior lending commitments under unsecured demand notes payable to various Nestlé affiliates were terminated prior to |
| Thomas Glanzmann Thomas Glanzmann is the changeFounder and has been a Partner at Medtech Ventures Partners since 2016. He has been a member of majority ownership. |
3. | On January 1, 2004, the Company entered into an agreement whereby Nestecboard of directors of Grifols S.A., an affiliate since 2006, including serving as Vice Chairman since 2017, and a member of Nestlé, provided certain treasury and investment services for the Company for a fee thathealthcare advisory board of Madison Dearborn Partners, LLC since 2011. He is also Chairman of Glanzmann Enterprises AG. He was comparable to fees that would be paid in an arm's length transaction. The agreement was terminated prior to the change of majority ownership. Total fees paid to Nestec S.A. for the years ended December 31, 2010, 2009 and 2008 were $1 million or less annually. |
4. | On January 12, 2009, Alcon Laboratories, Inc. entered into an employment contract under which it is to employ Kevin J. Buehler as President and Chief Executive Officer of Alcon Laboratories,Gambro AB from 2006 to 2011, and Chief Executive Officer and Managing Director of HemoCue AB from 2005 to 2006. Mr. Glanzmann was Senior Advisor to the Executive Chairman and Acting Managing Director of the World Economic Forum from 2004 to 2005. From 1988 to 2004, Mr. Glanzmann worked in various positions at Baxter International Inc., including President of Baxter Bioscience, Chief Executive Officer of Immuno International Co., Ltd. and Alcon,President of Europe Biotech Group. In 2004, he was a Senior Vice President and Corporate Officer of Baxter AG.He holds a Bachelor of Science in Political Science from Dartmouth College, U.S., a Master of Business Administration from the IMD Business School, Switzerland and a Board of Directors Certification from the UCLA Anderson School of Management, U.S.
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Age: 61 Nationality: Swiss Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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| D. Keith Grossman D. Keith Grossman has been the Chairman, Chief Executive Officer, and President of Nevro, Inc. since March 2019. He has also been Chairman of the board of directors of Outset Medical, Inc. since 2014 and subjecta member of the board of directors of ViewRay, Inc. since 2018. He was President and Chief Executive Officer of Thoratec Corporation from 1996 to shareholder approval,2006 and from 2014 to 2015, and was a member of the board of directors from 1996 to 2015. Mr. Grossman was Chief Executive Officer and a member of the board of directors at Conceptus, Inc. from 2011 to 2013. He was Managing Director and Senior Advisor at TPG Capital, L.P. from 2007 to 2011. Mr. Grossman also served as a member of the Alcon, Inc. board of directors of Zeltiq, Inc., as Lead Director, from 2013 to 2017, of Intuitive Surgical, Inc. from 2004 to 2010 and of Kyphon Inc. in 2007, and served on a number of private boards of directors. Mr. Grossman holds a Bachelor of Science in Animal Sciences from The agreement contains terms providing that Mr. Buehler will receive an annual base salary plus a performance bonus, assuming specified performance objectives are achieved. The agreement also provides that Mr. Buehler will be entitled to a lump sum payment if Alcon elects to terminate the agreement without cause or declines to renew the agreement. In addition, under the agreement, Mr. Buehler is entitled to receive anOhio State University, U.S., and Master of Business Administration in Finance from Pepperdine Graziadio Business School at Pepperdine University, U.S.
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Age: 59 Nationality: American Year of initial long appointment: 2019 Expiration of current term incentive grant.of office: 2020 |
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5. |
| On January 15, 2009, Alcon, Inc. entered into |
| Scott Maw Scott Maw has been managing director of WestRiver Group since September 2019. Previously, he was Executive Vice President and Chief Financial Officer at Starbucks Corporation from 2014 until the end of 2018. He was also Senior Vice President in Corporate Finance at Starbucks Corporation from 2012 to 2013, and Senior Vice President and Global Controller from 2011 to 2012. Since 2016, he has been a services agreement with Cary R. Rayment in which Alcon agreed to appoint Mr. Rayment asmember of the non-executive chairman of its board of directors commencing on April 1, 2009, following his retirement asof Avista Corporation, and since 2019, a member of the Company'sboard of directors of Chipotle Mexican Grill Inc. Mr. Maw is also member of the board of trustees of Gonzaga University. From 2010 to 2011, he was Senior Vice President and Chief Executive Officer. The Financial Officer of SeaBright Holdings, Inc. From 2008 to 2010, he was Senior Vice President and Chief Financial Officer of the Consumer Bank at JP Morgan Chase and Company. Prior to this, Mr. Maw held leadership positions in finance at Washington Mutual, Inc. from 2003 to 2008, and GE Capital from 1994 to 2004. Mr. Maw holds a Bachelor of Business Administration in Accounting from Gonzaga University, |
Age: 52 Nationality: American Year of initial appointment: 2019 Expiration of current term of the agreement commenced on April 1, 2009 and renews automatically on an annual basis thereafter unless or until terminated by either party upon thirty days written notice. Mr. Rayment was paid the customary Alcon, Inc. director compensation plus an additional amount relating to his duties as non-executive chairmanoffice: 2020 |
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| Karen May Karen May has been a member of the board.board of directors of Ace Hardware Corporation, where she is Chair of the Audit Committee, since 2017. Previously, Ms. May was on the board of directors of MB Financial, Inc., where she served as Chair of the Compensation Committee until 2019. From 2012 to 2018, she was Executive Vice President and Chief Human Resources Officer at Mondelez International, Inc. (name changed from Kraft Foods, Inc. after the spin-off of selected Kraft North American businesses in 2012). From 2005 to 2012, Ms. May was the Executive Vice President and Chief Human Resources Officer of Kraft Foods, Inc. Between 1990 and 2005, she held various positions in Human Resources and Finance at Baxter International Inc., including Corporate Vice President and Chief Human Resources Officer and Vice President, International Finance. Prior to Baxter International Inc., Ms. May was a Certified Public Accountant in the audit practice of Price Waterhouse. Ms. May holds a Bachelor of Science in Accounting from the University of Illinois, U.S., and was a licensed Certified Public Accountant in the U.S. from 1980 to 1990. |
Age: 61 Nationality: American Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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| On October 24, 2010, Mr. Rayment ceded his position as chairman |
| Ines Pöschel Ines Pöschel has been a Partner at Kellerhals Carrard Zurich KIG since 2007. She has been a member of the board of directors of Implenia AG since 2016 and was appointed vice chairman. At the December 2010 meeting,Graubündner Kantonalbank since 2018, and serves on the board approved extending Mr. Rayment's agreement withof directors of the same remuneration onnon-listed Swiss companies of Reichle Holding, Wirz Partner Holding and Bioengineering Holding. Ms. Pöschel is also a monthly basismember of the Swiss Federal expert commission for his service as vice chairmancommercial register. From 2002 to 2007, Ms. Pöschel was a Senior Associate at Bär & Karrer AG. She was a Senior Manager at Andersen Legal LLC from 1999 to 2002. Ms. Pöschel has a Master in Law from the University of Zurich, Switzerland, and passed the Swiss Bar Exam in 1996. |
Age: 51 Nationality: Swiss Year of initial appointment: 2019 Expiration of current term of office: 2020 |
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| Dieter Spälti, Ph.D. Dieter Spälti has been Chief Executive Officer and a member of the board until the next annual general meetingof directors at Spectrum Value Management Ltd., Switzerland since 2006. He was Managing Partner from 2002 to 2006. He has been a member of the shareholders. |
6. | On February 27, 2008, Alcon entered intoboard of directors at LafargeHolcim Ltd. since 2003. He has also been a letter agreement with Sabri Markabi, M.D. for the position of Senior Vice President, Research and Development. Pursuant to the termsmember of the agreement, Alcon will payboard of directors at SCI (Schweizerische Cement Industrie AG) since 2003. Dr. MarkabiSpälti has been Chairman of the board of directors at Dorsay Development Corporation, Canada, since 2003. He has also served as Vice Chairman of the board of directors at Grand Resort Bad Ragaz AG, Switzerland, since 2005 and Vice Chairman of the board of directors at IHAG Holding AG, Switzerland, since 2002. Dr. Spälti served, or continues to serve, on the board of directors of various non-listed Swiss and international companies that are controlled by the same beneficial owner. Dr. Spälti was a monthly base salaryPartner at McKinsey and he will be eligible for an annual performance bonus based uponCompany from 1993 to 2001.He holds a Ph.D. in Law from the achievementUniversity of mutually agreed upon performance objectives. If Alcon, Inc. undergoes a changeZurich, Switzerland. |
Age: 58 Nationality: Swiss Year of control and Dr. Markabi's employment with Alcon or the successor entity is terminated without cause or there is a material reduction in his responsibilities or a change in geographic location for his performance six months preceding or one year following such a changeinitial appointment: 2019 Expiration of control, Alcon or the successor entity will pay Dr. Markabi a lump sum payment. The agreement provides that Dr. Markabi is eligible to participate in and receive various benefits under the programs generally available to memberscurrent term of Alcon's senior management.office: 2020 |
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Independence and Executive Function
Independence of Board members is a key element of Alcon’s corporate governance framework. Therefore, Alcon has developed a strong set of independence criteria for its board members based on international best practice standards, including the Swiss Code of Best Practices for Corporate Governance and the NYSE standards, which can be found in the Alcon Board Regulations, available under the investor relations portion of the Alcon website (https://investor.alcon.com/governance/governance/default.aspx).
The Board assesses the independence of its Board members on a regular basis, at least annually. As of December 31, 2019, all Board members qualified as independent, except for F. Michael Ball, David J. Endicott and Dr. Arthur Cummings.
Other than (i) F. Michael Ball, who previously served as Chief Executive Officer of the Alcon Division of Novartis and as a member of the Novartis Executive Committee from February 1, 2016 until June 30, 2018 and (ii) David J. Endicott, who currently serves as Alcon’s Chief Executive Officer, no Board member was a member of the management of the Company or any other Alcon consolidated subsidiary in the last three financial years up to December 31, 2019.
Other than Dr. Arthur Cummings, who, in his capacity as an ophthalmologist, provides certain consulting services, including assistance with various clinical trials, to Alcon, no Board member has a significant business relationship with the Company or with any other Alcon consolidated subsidiary.
David J. Endicott is an executive member of the Board of Directors by reason of his function as Chief Executive Officer of Alcon. All other members of the Board are non-executive directors since none of them carries out operational management tasks within Alcon.
Limitations of Number of Mandates
No member of the Board may hold more than 10 additional mandates in other companies, of which no more than four shall be in other listed companies. Chairs of the board of directors of other listed companies count as two mandates. Mandates in different legal entities which are under joint control are deemed one mandate. Further details can be found in Article 34 of the Articles of Incorporation, available under https://investor.alcon.com/governance/governance/default.aspx.
Elections and Terms of Office
The Board members, the Chair of the Board of Directors and the members of the Compensation Committee shall be elected individually by the General Meeting of Shareholders for a term of office lasting until completion of the next Annual General Meeting of Shareholders.
There is no mandatory term limit for Board members.
Internal Organizational Structure
General Principles and Areas of Responsibilities
The Board constitutes itself in compliance with legal requirements and taking into consideration the resolutions of the General Meeting of Shareholders. It shall elect one or two Vice-Chairs. It shall appoint a secretary, who need not be a member of the Board of Directors.
The Board is the ultimate governance body of the Company, under the leadership of the Chairman. F. Michael Ball has been the Chairman of the Board since the Spin-off from Novartis. In this role, Mr. Ball leads the Board to represent the interests of all stakeholders. The Vice Chair has been held by D. Keith Grossman, also acting in this role as the Senior Independent Director. The duties of Mr. Ball and Mr. Grossman in their respective functions are laid out in Articles 20 and 21, respectively, of the Alcon Board Regulations.
The Board is responsible for the duties assigned to it by the Articles of Incorporation and the Alcon Board Regulations, which include the overall direction and supervision of management. It holds the ultimate decision-making authority for Alcon, with the exception of any decisions reserved to the shareholders. In performing its tasks, the Board follows the highest standards of ethics, integrity and governance. It undertakes annually a self-assessment process to evaluate its performance, the performance of its committees and the individual performance of its members.
Within the limits of the law and the Articles of Incorporation, the Alcon Board has delegated certain of its duties to the Executive Committee and the Board’s Committees.
Delegation to the Executive Committee
The Alcon Board has delegated to the Executive Committee the management of the business in accordance with the terms set forth in the Alcon Board Regulations. Such delegation has been formalized in Article 12 of the Alcon Board Regulations and further regulated in a set of internal regulations. Under the lead of the Chief Executive Officer, the Executive Committee is responsible for the management of the business and functions as a coordination committee, independent of any legal entity of the Alcon Group. A non-exhaustive list of the duties assigned to the Executive Committee can be found in Article 23 of the Alcon Board Regulations.
Delegation to the Board’s Committees
The Board’s Committees enable the Alcon Board to work in an efficient and effective manner, ensuring a thorough review and discussion of issues, while giving the Alcon Board more time for deliberation and decision-making. For this purpose, the Alcon Board has delegated certain of its duties to each of its three permanent committees, i.e. the Audit and Risk Committee, the Compensation, Governance and Nomination Committee and the Innovation Committee.Details of the duties and responsibilities of each committee can be found in the respective committee’s charter, contained in the Alcon Board Regulations, available under https://investor.alcon.com/governance/governance/default.aspx.
In 2019, the composition of the respective Board’s Committees was as follows:
7. |
| On December 21, 2009, | | |
Name | Audit and Risk Committee | Compensation, Governance and Nomination Committee | Innovation Committee |
F. Michael Ball | | | |
Lynn D. Bleil | Member | | Member |
Arthur Cummings | | | Member |
David J. Endicott | | | |
Thomas Glanzmann | | Member | Chair |
D. Keith Grossman | | Member | Member |
Scott Maw | Chair | | |
Karen May | Member | Chair | |
Ines Pöschel | | Member | |
Dieter Spälti | Member | | |
On February 18, 2020, the Board approved the split of the Compensation, Governance and Nomination Committee (“CGNC”) into two distinct committees, a Compensation Committee (“CC”) and a Governance and Nomination Committee (“GNC”). The Board recognized the heavy workload assigned to the CGNC since the Spin-off from Novartis; this split will enable the two newly created committees to better focus on their respective key responsibilities. For the Governance and Nomination Committee, this includes a focus on leading governance practices and ESG topics in general. And for the new Compensation Committee, this includes a focus on human resource strategy and executive compensation. Finally, this reorganization is line with best corporate governance standards. The split will be effective as of the date of our 2020 AGM.
Audit and Risk Committee
The Audit and Risk Committee consisted of four members in 2019, all of whom were determined by the Board of Directors as being independent and in possession of the financial literacy and accounting or related financial management expertise, as defined in the NYSE standards. The Audit and Risk Committee meets and consults regularly with the management, the Alcon Internal Audit function, the independent external auditors and external consultants. The Audit and Risk Committee regularly reports to the full Board on its decisions and deliberations.
The primary responsibilities of this committee include:
Supervising external auditors, and selecting and nominating external auditors for election at the Annual General Meeting of shareholders
Overseeing internal auditors
Overseeing accounting policies, financial controls, and compliance with accounting and internal control standards
Approving quarterly financial statements and financial results releases
Overseeing internal control and compliance processes and procedures
Overseeing compliance with laws, and external and internal regulations
Ensuring that Alcon has implemented an appropriate and effective risk management system and process
Ensuring that all necessary steps are taken to foster a culture of risk-adjusted decision-making without constraining reasonable risk-taking and innovation
Approving guidelines and reviewing policies and processes
Reviewing with management, internal auditors and external auditors the identification, prioritization and management of risks; the accountabilities and roles of the functions involved in risk management; the risk portfolio; and the related actions implemented by management.
Compensation, Governance and Nomination Committee
The Compensation, Governance and Nomination Committee consisted of four members in 2019, all of whom were determined by the Board of Directors as being independent. The Compensation, Governance and Nomination Committee meets and consults regularly with management and external consultants. The Compensation, Governance and Nomination Committee regularly reports to the full Board on its decisions and deliberations.
The primary responsibilities of this committee include:
Designing, reviewing and recommending corporate governance principles to the Alcon Board
Identifying candidates for election as Directors
Assessing existing Directors and recommending to the Alcon Board whether they should stand for re-election
Preparing and reviewing the succession plan for the Chief Executive Officer of Alcon
Developing and reviewing an onboarding program for new Directors, and an ongoing education plan for existing Directors
Reviewing on a regular basis the Articles of Incorporation with a view to reinforcing shareholder rights
Reviewing on a regular basis the composition and size of the Alcon Board and its committees
Reviewing annually the independence status of each Director
Reviewing directorships and agreements of Directors for conflicts of interest, and dealing with conflicts of interest
Overseeing Alcon strategy and governance on corporate responsibility
Designing, reviewing and recommending to the Alcon Board compensation policies and programs
Advising the Alcon Board on the compensation of Directors and the Chief Executive Officer of Alcon
Determining the compensation of ECA members
Preparing the annual compensation report and submitting it to the Alcon Board for approval.
Innovation Committee
The Innovation Committee consisted of four members in 2019. The Innovation Committee meets and consults regularly with management. The Innovation Committee regularly reports to the full Board on its decisions and deliberations.
The primary responsibilities of this committee include:
Providing counsel and know-how to the Alcon Board and management in the area of technology, application of technology and new business models
Assisting the Alcon Board with oversight and evaluation of management’s development and implementation of Alcon technology and innovation strategies and its alignment with Alcon overall strategy and objectives
Informing the Alcon Board on a periodic basis about emerging scientific trends, research and development programs and opportunities and activities critical to the success of the Alcon product development pipeline
Advising the Alcon Board on scientific, technological and research development matters
Reviewing and discussing significant emerging science and technology issues and trends
Reviewing such other matters in relation to Alcon research and development, technology and innovation programs as the committee may, in its own discretion, deem desirable in connection with its responsibilities
Frequency, duration and attendance of the meetings of the Board of Directors and its Committees
The Board of Directors and its Committees are convened as often as the conduct of the business may require. The Charters of the respective committees set forth the minimum number of meetings required for a full calendar year.
In 2019, the Board of Directors and its Committees met as follows:
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| Board of Directors | Audit and Risk Committee | Compensation, Governance and Nomination Committee | Innovation Committee |
Number of meetings1 | 6 | 6 | 6 | 3 |
Approximate average duration2 | 6 hrs 35 min | 2 hrs 20 min | 1 h 50 min | 2 hrs |
Overall attendance | 98% | 96% | 100% | 100% |
The members of the Board of Directors and its Committees attended the respective meetings as follows:
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| | | | |
Meeting attendance | Board of Directors | Audit and Risk Committee | Compensation, Governance and Nomination Committee | Innovation Committee |
| Number of Meetings 6 | Number of Meetings 6 | Number of Meetings 6 | Number of Meetings 3 |
F. Michael Ball | 6 | | | |
Lynn D. Bleil | 5 | 6 | | 3 |
Arthur Cummings | 6 | | | 3 |
David J. Endicott | 6 | | | |
Thomas Glanzmann | 6 | | 6 | 3 |
D. Keith Grossman | 6 | | 6 | 3 |
Scott Maw | 6 | 6 | | |
Karen May | 6 | 6 | 6 | |
Ines Pöschel | 6 | | 6 | |
Dieter Spälti | 6 | 5 | | |
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1 | Thenumber of meetings includes physical meetings as well as meetings held through videoconference or conference call, but excludes any meetings prior to April 9, 2019, the effective date of the current Board of Directors' appointment. |
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2 | The approximate average duration does not include dinners, lunches and breaks. Meetings held through videoconference or conference calls had in principle a shorter duration than physically held meetings. |
Information and Control System of the Board vis-à-vis the Management
The Alcon Board ensures that it receives through several channels sufficient information from the Executive Committee to perform its supervisory duties and to make the decisions that are reserved to it by law, i.e. its non-delegable decisions.
Information to the Board of Directors
Prior to Alcon’s Spin-off from Novartis in April of 2019, the designated Directors for the new company met with Alcon management for a series of multi-day onboarding sessions. These sessions served to introduce the designated Directors to the ECA and key management personnel; provided information about the company’s products in a hands-on fashion; and provided in-depth presentations on the company’s strategy, control mechanisms, risks and opportunities. Among other matters, the designated Directors received in-depth briefings on: financial controls and internal audit; manufacturing footprint and strategies; compliance programs; quality systems; research and development programs and product pipeline and IT systems and controls.
The Alcon Board Regulations confer to the members of the Alcon Board the right to have full and unrestricted access to management and employees of the Company and its subsidiaries in the execution of their duties. Also, the Chief Executive Officer regularly informs the Alcon Board on business developments, including significant transactions and risk issues. The Alcon Board and its Committees meet as often as required with the Chief Executive Officer and members of the Executive Committee or other members of the senior management. Further, the Alcon Board may invite, in accordance with the Alcon Board Regulations, external advisors to attend board or committee meetings in order to obtain a third party independent perspective on certain topics. Information is further communicated to the Alcon Board through regular reports (please refer to the section below “Alcon Management Information System”).
Alcon Management Information System
The Alcon Board receives monthly reports on the financial performance of the Company, including the performance of the Surgical and Vision Care franchises. On a quarterly basis, prior to the release of each quarter’s results, the Board receives the consolidated financial statement information and an outlook of the full-year results in accordance with IFRS and “core” results together with related commentary.
On an annual basis, the Board receives and approves the financial targets for the following year. Mid-year, the Board met for a strategic review of the business and approved the strategic plan for the next five years.
Additionally, throughout the year, the Board directly or through its Committees also received reports on, among other things:
The Enterprise Risk Management program and risk assessment reports
The Compliance Program
The Internal Audit function
Manufacturing and Technical Operations
Research & Development and product pipeline
Commercial strategies and product launches
In matters of significance, the Board receives direct, immediate information.
Internal Audit
The purpose of the internal audit function is to review the financial, operational, IT and compliance activities of Alcon. Internal audit is led by the Chief Audit Executive (“CAE”), who functionally reports to the Audit and Risk Committee. The CAE is responsible for the development, review and modification to the audit policies and procedures for such audits’ conduct. The CAE shall ensure effectiveness and efficiency of the internal control framework with existing policies and regulations and propose remediation actions where deficiencies were identified. The CAE periodically submits to the Audit and Risk Committee reports on the activities of the internal audit function. In 2019, since the Spin-off from Novartis on April 9, they have carried out audits, all of which have been reported to the Audit and Risk Committee.
Internal Control System
Alcon's internal control system is designed to provide reasonable assurance to the Board and management regarding the reliability of financial reporting and accounting policies and the preparation and the presentation of the Company’s financial statements. In 2019, Alcon designed an internal control system that is in process of being fully tested for effectiveness. The Audit and Risk Committee has ultimate responsibility to oversee the adequacy and effectiveness of internal control over financial reporting.
Risk Management
The Audit and Risk Committee has the responsibility to ensure the implementation of an appropriate and effective risk management system and process and to foster a culture of risk-adjusted decision-making without constraining reasonable risk taking and innovation. It shall approve guidelines and review policies and processes. Also, the Audit and Risk Committee shall review with management, internal auditors and external auditors, the identification, prioritization and management of the risks, the accountabilities and roles of the functions involved with risk management, the risk portfolio and the related actions implemented by management. The Executive Committee and the Board shall be informed by the Audit and Risk Committee on a periodic basis on the risk management system and on the most significant risks and how these are managed. The CAE shall support the Audit and Risk Committee and perform appropriate reviews of Alcon's risk management strategy.
Alcon’s key risk management tool is the Enterprise Risk Management ("ERM") program, the purpose of which is to help execute on Alcon’s strategy within the boundaries of regulations and improve the probability for achieving Alcon’s strategic and financial objectives. Alcon’s vision is to design a simple, sustainable and appropriately scaled ERM program to proactively manage existing and emerging threats and opportunities to the business. The ERM program aims in particular to provide the business with (i) operation discipline and rigor to enable business continuity, creation and preservation of value, (ii) forums for frequent risk discussions and escalation of relevant items with leadership, and (iii) guidance, techniques and support to identify, assess, manage, monitor and report on major risks.
Compliance Function
As part of its global control system, Alcon has also established a comprehensive global integrity and compliance program, under the supervision of the Audit and Risk Committee. The program is led by the Global Head, Integrity and Compliance under the functional leadership of Alcon’s General Counsel and is intended to prevent, detect and mitigate compliance risk across the organization. The program is built on a culture and expectation of compliance at all levels. The fundamental elements of the program include dedicated resources to address compliance globally, formal compliance governance, a global intake process to receive questions and concerns, written standards, communications, training, multiple levels of risk-based auditing and monitoring, review of alleged misconduct and corrective/disciplinary actions for violations. The Audit and Risk Committee of the Board receives periodic updates on the performance of the Integrity and Compliance program and compliance related matters. The program also includes compliance committees, which have been established at the corporate, regional and country-levels and include participation by the Executive Committee and other senior leadership to provide strategic direction and oversight relating to the management of compliance risks for Alcon. Policies are reviewed and updated on a regular basis to address changes in laws and regulations and to strengthen compliance.
Executive Committee
Composition of the Executive Committee
As of December 31, 2019, the Executive Committee of Alcon was composed of the following members:
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| David J. Endicott, Chief Executive Officer Please refer to the biography set forth under "Board of Directors". |
Age: 54 Nationality: American |
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| Tim C. Stonesifer, Chief Financial Officer Mr. Stonesifer has been the Chief Financial Officer of Alcon entered into a letter agreement with Merrick R. McCracken for the position ofsince April 2019. Prior to joining Alcon, he served as Executive Vice President and Chief Financial Officer at Hewlett Packard Enterprise. He had served in that role from November 2015 through September 2018. Prior to that role, Mr. Stonesifer acted as Senior Vice President Global Human Resources. Pursuantand Chief Financial Officer, Enterprise Group at HP Co. from February 2014 to the termsNovember 2015. Before joining HP Co., he served as Chief Financial Officer of the agreement, Alcon will pay Mr. McCracken an annual base salary andGeneral Motors’ International Operations from May 2011 to January 2014. Previously, he will be eligible for an annual performance bonus based upon the achievementserved as Chief Financial Officer of mutually agreed upon performance objectives. If Alcon, Inc. undergoesAlegco Scotsman, a change of control and Mr. McCracken's employment with Alcon or the successor entity is terminated without cause or there is a material reduction in his responsibilities or a change in geographic location for his performance six months preceding or one year following such a change of control, Alcon or the successor entity will pay Mr. McCracken a lump sum payment. The agreement providesstorage company, from June 2010 to May 2011. Prior to that, Mr. McCracken is eligibleStonesifer served as Chief Financial Officer of Sabic Innovative Plastics (formerly GE Plastics) from August 2007 to participateJune 2010 after having served in and receive various benefits underother positions at General Electric since joining the programs generally available to memberscompany in 1989. Mr. Stonesifer holds a Bachelor of Alcon's senior management.Arts in Economics from the University of Michigan in the U.S.
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Age: 52 Nationality: American |
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8. |
| On July 6, |
| Laurent Attias, Head Corporate Development, Strategy, Business Development and Licensing (BD&L) and Mergers and Acquisitions (M&A) Laurent Attias is Head of Corporate Development, Strategy, BD&L and M&A of Alcon. In this role, Mr. Attias leads the development of long-term strategic plans for the Surgical and Vision Care franchises of Alcon. He is also responsible for the Alcon’s BD&L, M&A, partnerships and alliance activities. Mr. Attias joined Alcon in March 1994. During his more than 25 years with Alcon, Mr. Attias progressed through the Sales and Marketing organizations by defining key strategic directions for Surgical and Pharmaceutical flagship brands. Starting in 2002, Mr. Attias held the position of Vice President, Refractive Sales and Marketing, where he helped define Alcon’s participation in the laser refractive market. Mr. Attias moved to Europe in 2009 to assume the role of Vice President, Central & Eastern Europe, Italy and Greece. In 2010, Mr. Attias was promoted to President, EMEA. Previously, Mr. Attias served as Vice President/General Manager of Alcon entered intoCanada, an agreementinternational relocation role he assumed in 2007. Mr. Attias holds both a Bachelor of Business Administration in Marketing and a Master of Business Administration from Texas Christian University in the U.S. |
Age: 52 Nationality: American and French |
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| Ian Bell, President International Ian Bell is the President-International of Alcon, overseeing the Europe, Russia, Middle East and Africa, Asia Pacific, Japan and Latin America and Caribbean markets. He joined Alcon in March 2016 as President of Europe, Middle East and Africa (“EMEA”). Mr. Bell brings more than 20 years of experience in the medical device and pharmaceutical industries. Mr. Bell joined Alcon from Hospira, where he served as Corporate Vice President and President of the EMEA region. Prior to acquire privatelyhis work at Hospira, Mr. Bell was Corporate Vice President and President of Allergan, Inc.’s Asia Pacific region, based in Singapore, from 2008 to 2014. Mr. Bell joined Allergan, Inc. in 2005 as Vice President and Managing Director of its neurosciences division for the EMEA region. Mr. Bell began his career at GlaxoSmithKline, where he held LenSx Lasers, Inc., a surgical device company locatedroles of increasing responsibility and scope in Aliso Viejo, CA. LenSx has developedsales, marketing and is nearing commercializationstrategy for more than 10 years. Mr. Bell was awarded the degree of a femtosecond laser system for useBachelor of Arts with honors in cataract surgery. Alcon paid LenSx stockholders $367 millionEconomics from the University of York in cash at closing and agreed to contingent payments of up to $383 million based on achievement and over-achievement of annual revenue targets over the next 5 years. Following regulatory approval, the transaction closed on August 18, 2010.United Kingdom. |
Age: 49 Nationality: British |
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9. |
| On July 7, 2010, |
| Leon Sergio Duplan Fraustro, President North America Sergio Duplan is President-North America of Alcon, overseeing the United States and Canada markets. He leads about 3,000 associates across these two unique markets and the Surgical and Vision Care franchises of Alcon. He is a board member of The Alcon Foundation. Mr. Duplan began his career with Novartis in 2004, as grantor, entered intoVice President of Sales in General Medicines, in Mexico. In 2006, he was promoted to Head of Marketing and Sales for Latin America, General Medicines, Pharma. In 2008, he became Country Pharma Organization Head and Country President of Novartis Mexico. Mr. Duplan joined Alcon in August 2012. Prior to his current role, Mr. Duplan was President of Latin America and Canada for Alcon for three years. He was appointed to his current role in August 2015. Prior to joining Novartis, Mr. Duplan held several positions of increasing responsibility in Sales, Finance and Country Management at Procter & Gamble and Eli Lilly & Co. Mr. Duplan holds a Bachelor degree in Industrial Engineering from Universidad Iberoamericana in Mexico and a Master of Business Administration from The Wharton School at the University of Pennsylvania in the U.S. |
Age: 52 Nationality: American and Mexican |
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| Michael Onuscheck, President Global Businesses and Innovation Michael Onuscheck is the President-Global Businesses and Innovation of Alcon. Mr. Onuscheck joined Alcon Litigation Trust Agreement with Thomas G. Plaskett, Joan W. Millerin January 2015, as President and Lodewijk J.R. De Vink, as trustees. The irrevocable Trust was established under New York law pursuant to a resolutionGeneral Manager of the Global Surgical franchise. He joined Alcon boardfrom Boston Scientific, where he spent 10 years in leadership positions of directors. The Trust, which was fundedincreasing responsibility. Prior to joining Alcon, Mr. Onuscheck most recently held the position of President of Boston Scientific, overseeing the company’s business operations in Europe and Russia. He previously served as Senior Vice President and President of Boston Scientific’s Neuromodulation division, with $50 million, is intendedresponsibility for research and development, manufacturing, marketing, sales, clinical research and customer service. Prior to providejoining Boston Scientific, Mr. Onuscheck held a variety of management positions at Medtronic in spinal reconstructive surgery and stereotactic image guided surgery, and various sales and marketing positions for Pfizer. Mr. Onuscheck earned his degree in Business Administration and Psychology from Washington and Jefferson College in the financial means to commence, defend or maintain litigation relating to any transaction between Alcon and a majority shareholder, including the transaction contemplated by the merger proposal announced by Novartis on January 4, 2010. The Trust was dissolved and its property was returned to Alcon in December 2010 in connection with entry into the merger agreement below.U.S. |
Age: 53 Nationality: American |
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10. |
| On December 14, 2010, |
| Rajkumar Narayanan, Operational Strategy and Chief Transformation Officer Mr. Narayanan is the Senior Vice President Operational Strategy and Chief Transformation Officer of Alcon and is responsible for leading the development and implementation of Alcon’s Transformation program. He has over 25 years’ experience in pharmaceutical / medical devices businesses. He joined Alcon in June 2017 as President Asia Pacific Region and moved into his current role in April 2019. Mr. Narayanan joined Alcon from Allergan Inc., where he worked for 22 years in roles of increasing responsibility, initially in the Finance function and subsequently in the commercial organization. He was Senior Vice President Asia Pacific Region between 2015-2017. Prior to this role, he was Vice President and Managing Director of the Medical Aesthetic Franchise for Europe Africa and Middle East from 2011-2014. He served as Vice-President, Greater China & Japan between 2008-2011. Between 1995 and 2007, Mr. Narayanan was a part of Allergan’s Finance function in a number of Country, Region and Corporate Finance roles. Mr. Narayanan started his career with Hindustan Unilever India in 1987 and worked in a number of roles in the Finance function. Mr. Narayanan holds a Bachelor of Science degree in Accounting and Finance from Mumbai University. He is also Chartered Accountant and Cost and Works Accountant from India. |
Age: 55 Nationality: American |
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Role of the Executive Committee
The members of the Executive Committee are appointed by the Alcon Board. In accordance with the Articles of Incorporation and the Alcon Board Regulations, the Alcon Board delegated the responsibility for the management of the business to the Executive Committee, under the lead of the Chief Executive Officer.
The Executive Committee shall in particular (i) develop strategies and policies and implement those upon approval by the Alcon Board, (ii) coordinate and monitor the group’s functions to achieve the business targets, (iii) ensure the efficient operation of the group, (iv) manage the proper provision and use of capacity and financial and other resources within the group and (v) ensure the development and succession of the senior management.
Alcon has not entered into any management agreements with any third parties pursuant to which Alcon would delegate any business management responsibilities to any such third parties.
Limitations of Number of Mandates
No member of the Executive Committee may hold more than 6 additional mandates in other companies, of which no more than 2 additional mandates shall be in other listed companies. Each of these mandates shall be subject to approval by the Board of Directors. Members of the Executive Committee are not allowed to hold chairs of the board of directors of other listed companies. Further details can be found in Article 34 of the Articles of Incorporation, available under https://investor.alcon.com/governance/governance/default.aspx.
Compensation, Shareholdings and Loans
Please refer to "Item 6.B - Compensation".
Shareholders’ Participations Rights
Voting-right Restrictions and Representation
Alcon has not imposed any restriction regarding share ownership or voting rights. Nominees shareholdings are not subject to any limitations. The right to vote at Alcon general meetings may only be exercised by a shareholder, usufructuary or nominee who is duly registered in Alcon share register on the record date for the applicable general meeting. Shareholders can be represented at general meetings by the independent proxy or by a third person authorized by written proxy who does not need to be a shareholder. As required by law, shareholders will also be given the opportunity to issue their voting instructions to the independent proxy electronically through an online voting platform.
Each Alcon share has the right to one vote. Shares held by the Company or any of its consolidated subsidiaries are not entitled to vote. Votes are taken either by a show of hands or by electronic voting, unless the General Meeting of Shareholders resolves to have a ballot or where a ballot is ordered by the chairman of the meeting.
Statutory Quorums
Unless otherwise required by law, the general meeting passes resolutions and elections with the absolute majority of the votes duly represented. As a result, abstentions have the effect of votes against such resolutions.
According to Article 704 of the Swiss Code of Obligation, the following shareholders’ resolutions require the approval of at least two thirds of the votes represented at a General Meeting of Shareholders: (1) an alteration of Alcon’s corporate purpose; (2) the creation of shares with increased voting powers; (3) an implementation of restrictions on the transfer of registered shares and the removal of such restrictions; (4) an authorized or conditional increase of the share capital; (5) an increase of the share capital by conversion of equity, by contribution in kind, or for the purpose of an acquisition of property or the grant of special rights; (6) a restriction or an exclusion of shareholders’ pre-emptive rights; (7) a change of Alcon’s registered office; (8) Alcon’s dissolution; or (9) any amendment to the Articles of Incorporation which would create or eliminate a supermajority requirement.
Swiss law further provides for a qualified majority for certain special resolutions, such as in case of merger or demerger.
Convocation of General Meetings
The Annual General Meeting shall be held within six months after the close of the financial year of the Company. Extraordinary General Meetings may be convened upon request of the Alcon Board, the auditors or one or more shareholders representing in aggregate not less than 10% of the Company’s share capital. At least 20 days before the general meeting, the invitation including the agenda is published in the Swiss Gazette of Commerce and mailed to the registered shareholders.
Agenda
One or more Alcon shareholders whose combined shareholdings represent an aggregate nominal value of at least CHF 1 million may demand that an item be included in the agenda of a General Meeting of Shareholders. Such a demand must be made in writing at the latest 45 days before the meeting and shall specify the items and the proposals of such a shareholder.
Registration in the Share Register
The share register of the Company is a non-public register, subject to confidentiality and privacy and data protections imposed on Alcon to protect registered shareholders. Alcon shares can be voted only if their relevant holder is registered in the Alcon share register by the record date determined by the Alcon Board. The Articles of Incorporation do not provide for any specific rule regarding the closure of the share register.
Changes of Control and Defense Measures
Duty to Make an Offer
Under the Swiss Financial Market Infrastructure Act, shareholders and groups of shareholders acting in concert who acquire more than 33.3% of Alcon shares would be under an obligation to make an offer to acquire all remaining Alcon shares. Alcon has neither opted out from the mandatory takeover offer obligation nor opted to increase the threshold for mandatory takeover offers in the Articles of Incorporation.
Clauses on Change of Control
In accordance with the rules of the Ordinance against Excessive Compensation in Listed Companies, Alcon does not provide severance payments upon a change of control or “golden parachute” provisions in its agreements with its Directors, Executive Committee members or other members of senior management. Alcon’s Long Term Incentive Plan and Deferred Bonus Stock Plan, each applicable to all employee participants including Executive Committee members, provide for double trigger accelerated vesting of outstanding stock awards in the event a participant leaves the company for “good reason” or Alcon terminates the employee without “cause,” as such terms are defined in the plans, within two years following a change of control. If such a double trigger event occurs, the participant’s outstanding unvested awards would vest in full. In the case of Performance Share Units, awards less than 50% vested would vest at target and awards more than 50% vested would vest in accordance with Alcon’s actual performance, as determined by the CGNC.
Auditors
Duration of the Mandate and Terms of Office of the Auditors
PricewaterhouseCoopers SA, Switzerland (“PwC Switzerland”), is the statutory auditor of the Company and shall conduct the audit activities required by Swiss law and the related SIX regulations. It was elected on January 29, 2019 for a term of one year until the 2020 Company’s Annual General Meeting. Mike Foley has been the auditor in charge of the statutory audit since 2019. Alcon has a policy to rotate the lead audit partner of the statutory auditor at least every five years.
Separately, on April 29, 2019, the Company appointed PricewaterhouseCoopers LLP, United States (“PwC US”), for a term of one year, as its independent registered accounting firm to conduct the audit activities required by US law and the related NYSE regulations. The appointment of PwC US does not require approval of the Company’s shareholders.
Auditing Fees and Additional Fees
The following table sets forth the amount of audit fees, audit-related fees, tax fees and all other fees billed or expected to be billed in aggregate by PwC Switzerland, PwC US and any other member firm of PricewaterhouseCoopers International Limited that rendered audit and relates services to any member of Alcon, for the fiscal years ended December 31, 2019 and December 31, 2018:
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($ millions) | Year ended December 31, 2019 | Year ended December 31, 2018 |
Audit fees | 11.7 | 7.0 |
Audit related fees | 0.2 | 0.5 |
Tax fees | – | – |
All other fees | – | – |
Total | 11.9 | 7.5 |
Audit fees include fees billed for professional services rendered for audits of our annual consolidated and standalone financial statements, reviews of consolidated quarterly financial information and statutory audits of the Company (including in particular the Compensation Report) and our subsidiaries.
Audit-related fees include fees billed for assurance and related services such as due diligence, accounting consultations and audits in connection with mergers and acquisitions, employee benefit plan audits, internal control reviews, and consultations concerning financial accounting and reporting standards.
Tax fees include fees billed for professional services for tax compliance, tax advice, and tax planning.
All other fees include fees billed for products and services other than as reported above.
Control Measures over the Activities of the Auditors
The Alcon Board has delegated to the Audit and Risk Committee ("ARC") the oversight of the activities of the external auditors. The ARC shall in particular evaluate on an annual basis the qualifications and performance of our auditors and determine whether PwC Switzerland should be proposed to the general meeting to stand for re-election. The criteria applicable of the performance assessment of our auditors include professional competence, sufficiency of resources to complete the audit mandate, independence and objectivity, capability to provide effective and pragmatic recommendations and coordination with the ARC and other functions of the Alcon group, including internal audit.
Upon recommendation of the ARC, the Alcon Board proposed to the shareholders the acceptance of the audited consolidated financial statements of the Alcon group and the financial statements of the Company.
The ARC is further responsible for the compensation of our auditors and pre-approve all auditing services, internal control-related services and non-audit services permitted under applicable statutory law, regulations and listing requirements.
In 2019, our auditors participated in four meetings of the ARC in order to discuss auditing matters and present the 2019 audit strategy and audit results. Our auditors shall render to the ARC at least once a year a report regarding (i) the external auditor’s internal quality-control procedures, (ii) any material issues raised by quality-control reviews or any inquiry or investigation by governmental or professional authorities, (iii) any step taken to deal with such issues and (iv) all relationships between the external auditor and the Alcon group.
Information Policy
Alcon is committed to pursuing an open and transparent communication with shareholders, suppliers, customers and other stakeholders. It publishes information in a professional manner in accordance with best practices and legal requirements.
Investor Relations
Effective communication with shareholders is an important part of Alcon's governance framework. The Chairman and the CEO, supported by the Investor Relations team, are responsible for actively engaging with shareholders and keeping them informed about Alcon's business, governance, strategy and performance, in accordance with applicable laws and regulations. The Company believes good engagement and dialogue with the financial community is critical in securing support and confidence in management's leadership and Board's governance of Alcon. The Investor Relations team regularly organizes opportunities to learn about the Company through in-person and virtual meetings and product showcases throughout the year, subject to its quiet period policy.
Communications
Financial information is published in the form of annual and quarterly financial results, in accordance with internationally recognized accounting standards. Related material, including annual reports, Form 20-Fs, quarterly results releases, presentations and conference call webcasts are available on the Alcon website. From time to time, Alcon issues press releases regarding business developments. Investors may subscribe to receive via email distributions providing news and notification about Alcon. The dissemination of material information about business developments is made in accordance with the rules of the SIX and the NYSE.
Information contained in reports and releases may only be deemed accurate in any material respect at the time of the publication. Past releases are not updated to reflect subsequent events.
Alcon's website provides regular information and updates about the Company at www.alcon.com. Detailed information regarding certain topics may be found as follows:
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Topic | Website |
Investor relations | https://www.alcon.com/about-us#investors |
Media releases | https://www.alcon.com/about-us#media-releases |
Leadership | https://www.alcon.com/about-us#leadership |
Governance | https://investor.alcon.com/governance/governance/default.aspx |
Financials | https://investor.alcon.com/financials/quarterly-results/default.aspx |
Differences from Corporate Governance Standards Relevant to US-listed Companies
According to the NYSE listing standards on corporate governance, listed foreign private issuers are required to disclose any significant ways in which their corporate governance practices differ from those governance practices that must be followed by NYSE-listed U.S. domestic companies. We briefly summarize those differences in the following paragraphs.
Responsibility of the Audit Committee with regard to Independent Auditors
Our Audit and Risk Committee is responsible for the compensation, retention and oversight of our independent statutory auditors. It assesses the performance and qualification of our statutory auditors and submits its proposal for appointment, reappointment or removal of our statutory auditors to the full Board. As required by the Swiss Code of Obligations, our Board then submits its proposal to the shareholders for their vote at the Annual General Meeting (AGM). In contrast, under NYSE listing standards, the audit committee for U.S. domestic companies is also responsible for the appointment of the independent auditors.
Supervision of the Internal Audit Function
The CFO and the Audit and Risk Committee share the supervisory responsibility with respect to the internal audit function. In contrast, under NYSE standards, only the audit committee supervises the internal audit function.
Responsibility of the Compensation Committee for Performance Evaluations of Senior Management
In line with Swiss law, our Compensation, Governance and Nomination Committee, together with the Board, proposes for shareholder approval at the AGM the maximum aggregate amount of compensation for the Board and the maximum aggregate amount of fixed and variable compensation for the Executive Committee of Alcon. Our shareholders elect each of the members of the Compensation, Governance and Nomination Committee at the Annual General Meeting. In contrast, under NYSE standards, it is the responsibility of the compensation committee to evaluate senior management performance and to determine and approve, as a committee or together with the other independent directors, the compensation for senior officers and the board. U.S. domestic companies listed on NYSE are only required to provide shareholders a periodic advisory non-binding vote on a company’s executive compensation practices.
Shareholders’ Votes on Equity Compensation Plans
Swiss law authorizes the Board to approve equity-based compensation plans. Shareholder approval is only mandatory if equity-based compensation plans require an increase in capital. No shareholder approval is required if shares for issuance under such plans are purchased by the issuer in the open market. In contrast, the NYSE standards require shareholder approval for the establishment of and material revisions to all equity compensation plans.
The table below sets forth the breakdown of the total year-end number of our full-time equivalent employees by main category of activity for the past three years.
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| For the year ended December 31, |
| 2019 |
| | 2018(1) |
| | 2017(1) |
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Marketing & Sales | 7,301 |
| | 7,162 |
| | 6,595 |
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Production & Supply | 11,026 |
| | 10,655 |
| | 10,218 |
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Research & Development | 1,695 |
| | 1,431 |
| | 1,356 |
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General & Administration | 2,120 |
| | 1,133 |
| | 961 |
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Total full-time equivalent employees | 22,142 |
| | 20,381 |
| | 19,130 |
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(1) | Alcon historically received certain services from NBS, the shared service organization of Novartis. The corresponding full time equivalents providing such services were part of NBS and have therefore not been included in the table above for 2018 and 2017. |
Unions or works councils represent a significant number of our associates. We have not experienced any material work stoppages in recent years, and we consider our employee relations to be good.
The information set forth under “Item 6.B. Compensation” is incorporated by reference. Also, refer to Note 24 to the Consolidated Financial Statements for a discussion of our equity-based compensation programs.
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ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
The information set forth under “Item 6. Directors, Senior Management and Employees—6.C. Board Practices—Corporate Governance” is incorporated by reference.
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7.B. | RELATED PARTY TRANSACTIONS |
Dr. Arthur Cummings, an Alcon director, in his capacity as an ophthalmologist, provides certain consulting services, including assistance with various clinical trials to Alcon. In 2019, Alcon paid to Dr. Cummings (or his related entities) approximately $84,844.
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7.C. | INTERESTS OF EXPERTS AND COUNSEL |
Not Applicable.
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ITEM 8. | FINANCIAL INFORMATION |
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8.A. | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
Please refer to the financial statements beginning on page F-1 of this Annual Report.
Legal Proceedings
From time to time, we may become involved in litigation or may receive inquiries from regulatory authorities, including antitrust and competition authorities in various jurisdictions relating to matters arising from the ordinary course of business. In addition, we are from time to time and may in the future be subject to audit or investigation by tax authorities in the ordinary course of business in the various jurisdictions in which we operate. Our management believes that, except as described below, there are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our results of operations, financial condition or cash flows. In addition, under the Separation and Distribution Agreement we entered into with Novartis, we and Novartis have agreed, subject to certain conditions and except to the extent otherwise described below with respect to any matter, to indemnify the other party and its directors, officers, employees and other representatives against any pending or future liabilities or claims that constitute either a Novartis liability, in the case of Novartis, or an Alcon liability, in the case of Alcon, under the terms of the Separation and Distribution Agreement, based on whether such claim or liability relates to the Novartis business and products or our business and products. For more information, see "Item 10. Additional Information—10.C. Material Contracts—Our Agreements with Novartis".
Southern District of New York / Western District of New York Healthcare Fraud Investigation. In 2011, Alcon received a subpoena from the United States Department of Health & Human Services relating to an investigation into allegations of healthcare fraud and potential off-label promotion of certain products. The subpoena requested the production of documents relating to marketing practices and the remuneration of healthcare providers in connection with surgical equipment and certain Novartis products (Vigamox®, Nevanac®, Omnipred®, Econopred®). Alcon has cooperated with this investigation.
Asia / Russia Investigation. In 2017 and 2018, Alcon and Novartis, as well as certain present and former executives and associates of Alcon and Novartis, received document requests and subpoenas from the DoJ and the SEC requesting information concerning Alcon accounting, internal controls and business practices in Asia and Russia, including revenue recognition for surgical equipment and related products and services and relationships with third-party distributors, both before and after Alcon was acquired by Novartis. Alcon is cooperating with this investigation. Under the Separation and Distribution Agreement, Novartis must indemnify Alcon in respect of defined direct monetary liabilities relating to the current scope of the ongoing investigation by the DoJ and the SEC relating to certain business practices in Asia and Russia and related accounting treatment.
Contact Lenses Class Actions Since the first quarter of 2015, more than 50 class action complaints have been filed in several courts across the US naming as defendants contact lens manufacturers, including Alcon, and alleging violations of federal antitrust law, as well as the antitrust, consumer protection and unfair competition laws of various states, in connection with the implementation of unilateral price policies by the defendants in the sale of contact lenses. The cases have been consolidated in the Middle District of Florida by the Judicial Panel on Multidistrict Litigation and the claims are being vigorously contested.
Dividend Policy
Alcon expects that it will recommend to shareholders the payment of a regular annual cash dividend based on the prior year’s core net income; however, the declaration, timing, and amount, including potential increases, of any dividends will be subject to the approval of our shareholders at a General Meeting. The determination of the Board as to whether to recommend a dividend and the approval of any such proposed dividend by our shareholders will depend upon many factors, including our financial condition, earnings, corporate strategy, capital requirements of our operating subsidiaries, covenants, legal requirements and other factors deemed relevant by the Board and shareholders. For additional information, see "Item 3. Key Information—3.D. Risk Factors—Risks related to the Ownership of our Shares—We may not pay or declare dividends".
For information about deduction of the withholding tax or other duties from dividend payments, see "Item 10. Additional Information—10.E. Taxation—Swiss Taxation—Swiss Residents—Withholding Tax on Dividends" and "Item 10. Additional Information—10.E. Taxation—US Federal Income Taxation—Distributions on the Shares".
Past Dividends
Since the formation of Alcon, which became effective as of the date of the registration of Alcon in the Swiss Register of Commerce on September 21, 2018, Alcon has not paid any dividends.
A discussion of significant changes in our business can be found under "Item 4. Information on the Company —4.A. History and Development of the Company", "Item 4. Information on the Company — 4.B. Business Overview" and "Item 5. Operating and Financial Review and Prospects — 5.A. Operating Results".
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ITEM 9. | THE OFFER AND LISTING |
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9.A. | OFFER AND LISTING DETAILS |
Alcon Inc. shares are listed on the SIX and the NYSE as global registered shares under the trading ticker “ALC”. As such, they can be traded and transferred across applicable borders, without the need for conversion, with identical shares traded on different stock exchanges in different currencies. During 2019, the average daily trading volume of Alcon Inc. shares was approximately 2.0 million shares on the SIX and approximately 1.3 million shares on the NYSE.
As of the date of this Annual Report, our shares are included in a number of indices, including the “Swiss Market Index”, or SMI, the principal Swiss index published by the SIX. This index contains 20 of the largest and most liquid stocks based on market capitalization and the most active stocks listed on the SIX. The SMI indicates trends in the Swiss stock market as a whole and is one of the most widely followed stock price indices in Switzerland.
Not applicable.
See “Item 9.A. Offer and listing Details.”
Not applicable.
Not applicable.
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9.F. | EXPENSES OF THE ISSUE |
Not applicable.
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ITEM 10. | ADDITIONAL INFORMATION |
Not Applicable.
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10.B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
Our Agreements with Novartis
Following the separation and the Spin‑off, we and Novartis operate separately, each as an independent public company. Prior to the completion of the Spin‑off, we entered into a Separation and Distribution Agreement and several other agreements with Novartis to effect the separation and provide a framework for our relationship with Novartis after the Spin‑off. These agreements govern the relationships between Novartis and and are attributable to periods prior to, at and after the separation. In addition to the Separation and Distribution Agreement (which contains many of the key provisions related to our separation from Novartis and the distribution of the Alcon shares to holders of Novartis shares and ADRs), these agreements include:
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▪ | employee matters agreement; |
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▪ | manufacturing and supply agreements; |
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▪ | transitional services agreement; and |
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▪ | certain IP arrangements. |
The material agreements described below have been filed as exhibits to this Form 20‑F and the summaries below set forth the terms of the agreements that we believe are material. These summaries are qualified in their entireties by reference to the full text of the applicable agreements, which are incorporated by reference into this Form 20‑F.
In addition, we entered into other agreements with Novartis prior to the completion of the Spin‑off that are not material to our business. These agreements include agreements relating to information sharing and access rights, data transfer, confidentiality and systems access, transfer of marketing authorizations, certain manufacturing quality control and pharmacovigilance matters, certain leases to Novartis and certain transitional distribution and other services matters, including shared premises services, as well as a third party claims and investigations management agreement.
Separation and Distribution Agreement
The Separation and Distribution Agreement sets forth our agreements with Novartis regarding the principal actions taken in connection with the separation and the Spin‑off.
Transfer of Assets and Assumption of Liabilities. The Separation and Distribution Agreement identified the assets to be transferred, liabilities to be assumed and contracts to be assigned to each of Novartis and Alcon as part of the internal transactions effected prior to the distribution, the purpose of which was to ensure that, at the time of the distribution, each of Alcon and Novartis held the assets required to operate their respective businesses and retained or assumed (as applicable) liabilities, including pending and future claims, which relate to such business (whether arising prior to, at or after the date of execution of the Separation and Distribution Agreement), subject to certain limited exceptions set out under the heading “Asia/Russia Investigation” below.
The Distribution. The Separation and Distribution Agreement governed the rights and obligations of the parties with respect to the distribution.
Intercompany Arrangements. All agreements, arrangements, commitments and understandings, including most intercompany accounts payable or accounts receivable, between us, on the one hand, and Novartis, on the other hand, terminated effective
as of completion of the separation, except specified agreements and arrangements that survived completion of the separation that were either transactional in nature or at arms’ length terms.
Representations and Warranties. We and Novartis each provided customary warranties as to our respective capacity to enter into the Separation and Distribution Agreement. Except as expressly set forth in the Separation and Distribution Agreement or any ancillary agreement, neither we nor Novartis made any representation or warranty as to the assets, business or liabilities transferred or assumed as part of the separation, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset or thing of value transferred in connection with the separation. Except as expressly set forth in the Separation and Distribution Agreement and certain other ancillary agreements, all assets were transferred on an “as is”, “where is” basis.
Indemnification. We and Novartis each agreed to indemnify the other and each of the other’s directors, officers, managers, members, agents and employees against certain liabilities incurred in connection with the Spin‑off and our and Novartis respective businesses. The amount of either Novartis or our indemnification obligations will be reduced by any insurance proceeds the party being indemnified receives.
Asia/Russia Investigation. Novartis indemnified Alcon in respect of defined direct monetary liabilities relating to the current scope of the ongoing investigation by the DoJ and the SEC relating to certain business practices in Asia and Russia and related accounting treatment. See the section entitled “Asia Investigation” in the Separation and Distribution Agreement attached as Exhibit 4.1 to this Form 20‑F.
Release of Claims. We and Novartis each agreed to release the other and its affiliates, successors and assigns, and all persons that, prior to completion of the Spin‑off, were the other’s shareholders, directors, officers, managers, members, agents or employees, and their respective heirs, executors, administrators, successors and assigns, from any claims against any of them that arise out of or relate to our respective businesses. These releases are subject to limited exceptions set forth in the Separation and Distribution Agreement (including in respect of fraud and criminal conduct).
Term / Termination. Neither we nor Novartis may rescind the Separation and Distribution Agreement in any circumstances whatsoever following the completion of the distribution.
Switch Rights. Novartis granted us the right, from the date of separation, to switch certain specified olopatadine products from prescription products to over‑the‑counter products and to develop, manufacture and commercialize such products as over‑the‑counter products going forward. This right is exercisable on notice and, for jurisdictions outside US, subject to Novartis consent. We have provided notice to Novartis to exercise our right to develop, manufacture and commercialize certain of those products in the US. The FDA approved Pataday Twice Daily Relief (0.1%) and Pataday Once Daily Relief (0.2%) in February 2020.
Brazil and Belgian Sites. Novartis and we each granted each other a right of last look in respect of any third party disposal of our portion of the Puurs site and Novartis granted us a right of last look in respect of any third party disposal by Novartis of its portion of the Brazilian manufacturing facility.
Other matters governed by the Separation and Distribution Agreement. Other matters governed by the Separation and Distribution Agreement include, without limitation, insurance arrangements, confidentiality, mutual assistance and information sharing after completion of the distribution, treatment and replacement of credit support, and transfer of and post‑separation access to certain books and records.
Tax Matters Agreement
We entered into a Tax Matters Agreement with Novartis prior to completion of the Spin‑off. The Tax Matters Agreement imposed certain restrictions on us (including restrictions on share issuances, business combinations, sales of assets and similar transactions) designed to preserve the tax‑neutral nature of the Spin‑off for Swiss tax and US federal income tax purposes. Nonetheless, we are able to engage in an otherwise restricted action if we obtain appropriate advice from counsel or a ruling from a competent taxing authority. However, our indemnification obligation to Novartis, as discussed below, is still applicable in circumstances in which we are permitted to engage in an otherwise restricted action.
The Tax Matters Agreement provides that we will indemnify Novartis if our breach of a representation or covenant that serves as the basis for the Tax Opinion or the Tax Rulings or our taking, or failure to take, certain actions results in the failure of the Spin‑off or certain internal restructuring steps to qualify for tax‑neutral treatment under Swiss tax or US federal income tax laws, as applicable. The Tax Matters Agreement also provides that we will generally indemnify Novartis for any taxes of Novartis and its subsidiaries to the extent such taxes are attributable to the Alcon Division, and Novartis will generally indemnify us for any of our or our subsidiaries’ taxes to the extent such taxes are attributable to the Novartis retained businesses, in each case whether accruing before, on or after the date of the Spin‑off.
Employee Matters Agreement
We entered into an Employee Matters Agreement with Novartis prior to completion of the Spin‑off. The Employee Matters Agreement sets forth our agreements with Novartis regarding the identification of the employees transferred to and retained by each of Novartis and Alcon as part of the operational separation prior to the Spin‑off, as well as the allocation of liabilities and responsibilities with respect to certain employee matters.
Allocation of employment liabilities. Subject to certain exceptions, the general principle for the allocation of employment and service‑related liabilities is that (i) Alcon assumes all such liabilities relating to Alcon employees and former employees of the Novartis Group who worked wholly or substantially in the Alcon Division as of the date immediately prior to the termination of their employment (“former Alcon employees”) and (ii) Novartis retains all such liabilities relating to all other current and former employees of the Novartis Group (including employees who are identified as Alcon employees, but did not in fact transfer to Alcon), in each case, regardless of when such liabilities arise.
Terms and conditions of Alcon employees. Until January 1, 2021, Alcon will provide each current Alcon employee with the same basic salary and contractual benefits that are substantially comparable, taken as a whole, to the contractual benefits received prior to the date of his or her transfer to Alcon (excluding share‑based incentive schemes and long‑term incentive plans). If the employment of any Alcon employee is terminated by reason of redundancy within 24 months following the date of his or her transfer, Alcon will provide severance benefits that are no less favorable than those that would have been provided prior to the date of his or her transfer.
Employee benefit and cash bonus plans. Alcon employees were generally, as of the date of the Spin‑off, eligible to participate in Alcon employee benefit plans and cash bonus plans that are the same as, or comparable to, those that apply to them prior to the date of the Spin‑off.
Share‑based incentive schemes. Awards granted under share‑based incentive schemes were treated as follows:
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▪ | Holders of unvested awards in the form of restricted Novartis shares received the dividend in‑kind resulting from the Spin‑off. |
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▪ | Holders of unvested RSUs and PSUs did not receive the dividend in‑kind resulting from the Spin‑off, and such awards were treated as described in the section entitled “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Section 3—ECA Compensation 2019—Section 3.6—Alcon entered into a merger agreement whereby the parties agree that, subjectEquity Restoration Plan”. |
In addition, Alcon was required to establish, and employees were eligible to participate in, new Alcon equity plans in relation to Alcon shares following the Spin‑off.
Restrictions on post‑Spin‑off employee employment and engagement.
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▪ | Subject to certain conditions,exceptions, Novartis andagreed that each member of the Novartis Group will not, for a period of two years following the Spin‑off, directly or indirectly: (i) solicit or induce certain senior Alcon shall merge pursuantemployees to Swiss law and in accordance withbecome employed or engaged by any member of the merger agreement. Novartis shallGroup; or (ii) knowingly induce or encourage such employees to no longer be the acquiring company which shall continue to operate, and Alcon shall be the transferring company which shall be dissolved upon completion. By operation of law, Alcon's assets, liabilities and contracts shall be transferred to Novartis in their entirety.employed or engaged by Alcon. |
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▪ | Subject to certain exceptions, Novartis agreed that it would not, and would undertake to procure that each member of the Novartis Group would not, for a period of two years following the Spin‑off, employ or engage certain senior Alcon employees. |
Long‑term employee benefits. As of the date of the Spin‑off, Alcon generally assumed sponsorship of and responsibility for any standalone long‑term employee benefit arrangements relating to Alcon employees and former Alcon employees. Further, subject to certain exceptions, the accrued (past service) liabilities relating to the Alcon employees and former Alcon employees under Novartis Group‑wide plans providing retirement, disability or death, old‑age part‑time retirements or jubilee benefits, transfered to Alcon. In the UK, Novartis paid to Alcon a sum equal to the liabilities and expenses incurred, sustained or paid by Alcon, after the date of the Spin‑off, arising pursuant to section 75 of the UK Pensions Act 1995 in respect of Alcon or of any Alcon subsidiary’s cessation of participation in the Novartis UK Pension Scheme.
Manufacturing and Supply Agreements
We entered into manufacturing and supply agreements with Novartis prior to the completion of the Spin‑off. The manufacturing and supply agreements set forth our agreements with Novartis pursuant to which we and Novartis each manufacture, label, package and supply products for the other and conduct relevant quality control, assurance and testing activities for the other in relation to the manufacture and supply of applicable products (the “Forward and Reverse MSAs”). The terms of the manufacturing and supply agreements, including terms relating to pricing, were determined at arm’s length and are based on the prevailing cost of manufacturing with mutually agreed mark‑ups and adjustment mechanisms.
The terms of the Forward and Reverse MSAs are equivalent, except where specific provision is required to address a manufacturing site or product specific issue. The Forward and Reverse MSAs each include a transfer plan specifically addressing the relocation and transfer of certain products between the parties and manufacturing sites, key milestones in relation to product technical transfer and the anticipated date of expiration of the relevant Forward and Reverse MSA for those products, as required to achieve separation of the relevant Novartis and Alcon Division following the distribution. The Forward and Reverse MSAs additionally contain customary provisions for the transfer of manufacturing technology and processes to the other party (or other manufacturers where applicable) for all products for the benefit of the relevant purchasing party. For products not included in the transfer plan the Forward and Reverse MSAs have an initial term of three years, with automatic renewal subject to rights of termination on three years’ notice from the relevant purchaser party and five years’ notice from the relevant supplier party. The Forward and Reverse MSAs contain customary fault based termination triggers (such as an insolvency related event or a material breach (which if curable is uncured)) and customary liability provisions.
The Forward and Reverse MSAs also contain certain capacity reservation and minimum volume off‑take obligations on each party that reflect the movement of products in the transfer plan and the agreed use of existing capacities at the related sites. Failure to meet volume forecasts and minimum off‑take obligations will result in price adjustment and take or pay obligations in respect of certain products.
The manufacturing and supply obligations will generally be performed under the Forward and Reverse MSAs on the basis of total product cost plus a margin with certain adjustments where volume, inflation and materials cost criteria are met. Certain products are to be supplied from Novartis to Alcon through toll manufacturing.
Transitional Services Agreement
We entered into a Transitional Services Agreement with Novartis prior to completion of the Spin‑off pursuant to which we and Novartis, to the extent that shared business functions have not been separated prior to the Spin‑off, each provide to the other various services and support on an interim transitional basis until such time as we (or Novartis in the case of services we will provide to Novartis) have developed the capability to provide the relevant services and support ourselves or have appointed a third party provider to provide those services and support.
The Transitional Services Agreement sets forth the agreement with Novartis regarding the provision of these transitional services and support. The Transitional Services Agreement is two‑way and reciprocal. Services and support are provided on substantially the same basis as prior to the Spin‑off. The charges for the services are on a costs‑plus basis (with a mark‑up to reflect the management and administrative cost of providing the services). The services generally commenced on the date of the Spin‑off and are intended to terminate within 24 months of the date of the Spin‑off. The recipient of the services will generally have the ability to: (i) extend the term that a service is provided for, subject to a maximum aggregate service term of 24 months; and (ii) terminate a service early in whole or, with the service provider’s agreement, in part, in each case subject to a specified notice period. Each party has standard termination rights for unremedied material breach or insolvency.
Subject to standard limitations and exceptions, the liability of each of Alcon and Novartis as service provider under the Transitional Services Agreement is capped, for all claims in each 12 month period of the agreement, at the level of service charges payable to the service provider in that 12 month period.
The services and support provided by Novartis to us includes: information technology, human resources, real estate and facilities, non‑strategic corporate services and financial reporting and accounting services. The services to be provided by us to Novartis include information technology and real estate and facilities support.
IP Arrangements
Assignment of Alcon intellectual property rights. We entered into assignment agreements with Novartis prior to, or with effect from, completion of the Spin‑off, under which:
Novartis transferred to us: (i) all intellectual property rights owned by the Novartis Group and used exclusively within the Alcon Division; and (ii) certain intellectual property rights owned by the Novartis Group used within both the Alcon Division and the other businesses of Novartis including, but not limited to, the Alcon brand; and
We transferred to Novartis: (i) all intellectual property rights owned by Alcon and used exclusively within the Novartis businesses; and (ii) certain intellectual property rights owned by the Alcon group used within both the Alcon Division and the other businesses of Novartis.
Perpetual shared intellectual property rights license agreements. In connection with any intellectual property rights owned by Alcon or Novartis and which are used by both Alcon and Novartis in our respective businesses following the completion of the Spin‑off, we entered into reciprocal licenses with Novartis under which we and Novartis were each granted the right to
continue to use those shared intellectual property rights in connection with our respective businesses. The intellectual property rights covered by these licenses will include trade‑marks, patents, know‑how and other forms of intellectual property rights. The licenses are on a perpetual, worldwide, and royalty‑free basis. The licenses contain standard termination rights for material breach or insolvency.
Transitional trademark license agreements. We agreed with Novartis that we will each phase out our respective use of a limited number of corporate and product marks which are owned by the other party following completion of the Spin‑off. We entered into reciprocal transitional trademark license agreements with Novartis under which each party grants the other a royalty‑free, worldwide non‑exclusive license to use certain corporate and product trademarks following the Spin‑off on substantially the same basis as currently used. Each license permits the licensee to continue using the licensed trademarks for a transitional period to provide the licensee with sufficient time to rebrand or phase out its use of the licensed trademarks, subject in most cases to a longstop date of three years. The licenses contain standard termination rights for material breach or insolvency.
Trademark co‑existence agreement. In addition, we entered into a perpetual co‑existence agreement with Novartis regulating our respective use of the Alcon CIBA VISION and Novartis CIBA brands with the objective of mitigating any potential customer confusion in connection with our respective use of those brands and addressing certain related trade mark formalities, including in connection with the registration of new trade mark applications.
2019 Bond Offering
On September 23, 2019, Alcon Finance Corporation (the “Issuer”), an indirect, wholly owned subsidiary of Alcon, completed an offering of $500,000,000 aggregate principal amount of its 2026 Notes, $1,000,000,000 aggregate principal amount of its 2029 Notes, and $500,000,000 aggregate principal amount its 2049 Notes. The Notes were issued under an Indenture, dated September 23, 2019 (the “Indenture”), by and among the Issuer, Alcon Inc. and Citibank, N.A., as trustee (the “Trustee”). The Notes are senior unsecured obligations of the Issuer and are fully and unconditionally guaranteed on a senior basis by Alcon.
Interest is payable on the Notes on March 23 and September 23 of each year, beginning on March 23, 2020. The 2026 Notes will mature on September 23, 2026, the 2029 Notes will mature on September 23, 2029 and the 2049 Notes will mature on September 23, 2049.
The Issuer may redeem the 2026 Notes prior to July 23, 2026 (the date that is two months prior to their maturity date), the 2029 Notes prior to June 23, 2029 (the date that is three months prior to their maturity date) or the 2049 Notes prior to March 23, 2049 (the date that is six months prior to their maturity date) at a redemption price equal to 100% of the principal amount of the applicable series of Notes plus a “make-whole premium” and accrued and unpaid interest, if any, up to, but excluding, the redemption date. The Issuer may also redeem the 2026 Notes on or after the date that is two months prior to their maturity date, the 2029 Notes on or after the date that is three months prior to their maturity date or the 2049 Notes on or after the date that is six months prior to their maturity date at a redemption price equal to 100% of their principal amount plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
In addition, the Issuer may redeem any series of the Notes at its option, in whole, but not in part, for cash, at any time prior to their respective maturities at a price equal to 100% of the outstanding principal amount of such Notes, plus accrued and unpaid interest, to, but excluding, the redemption date, if certain tax events occur that would obligate the Issuer to pay additional amounts as described in the Indenture.
Subject to certain limitations, in the event of a change of control triggering event, the Issuer will be required to make an offer to purchase each series of the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
The Indenture also contains certain limitations on the Issuer’s ability to incur liens, as well as customary events of default.
Bridge Loan, Term Loan and Revolving Credit Facilities
In connection with the Spin‑off, we entered into a $1.5 billion unsecured 364‑day bridge loan facility with two extension options, each for a period of 180 days (the “Bridge Facility”), a $0.5 billion unsecured three‑year term loan facility (“Facility A”), a $0.8 billion unsecured five‑year term loan facility (“Facility B”), a $0.4 billion (or the equivalent in EUR) unsecured five‑year term loan facility (“Facility C”) and a $1.0 billion unsecured five‑year committed multicurrency revolving credit facility (the “Revolving Facility” and, together with the Bridge Facility, Facility A, Facility B and Facility C, the “Facilities” and the related agreement, the “Group Facilities Agreement”).
We and certain of our subsidiaries are borrowers under the Facilities. We guarantee the borrowings of such subsidiaries under the Facilities. In addition, the Revolving Facility includes a mechanism through which certain of our subsidiaries, as approved by the lenders, can accede as a borrower.
Prior to the Spin‑off, we borrowed an aggregate of approximately $3.2 billion under the Facilities and paid to Novartis approximately $3.0 billion of the net proceeds of the Bridge Facility, Facility A, Facility B and Facility C, including in satisfaction of certain intercompany indebtedness owed by Alcon and its subsidiaries to Novartis and its affiliates. We retained the remaining net proceeds of such Facilities for general corporate and working capital purposes. In September 2019, we used the proceeds of our Notes Offering to pay off in full the Bridge Facility and Facility A. The Bridge Facility and Facility A are no longer available to us for borrowings.
We are permitted to voluntarily prepay loans under the Facilities, in whole or in part, without penalty or premium subject to certain minimum prepayment amounts and the payment of accrued interest on the amount prepaid and customary breakage costs.
The terms of the Facilities include certain events of default and covenants customary for investment grade credit facilities, including restrictive covenants that limit, among other things, the grant or incurrence of security interests over any of our assets, the incurrence of certain indebtedness and entry into certain fundamental change transactions. The Facilities do not contain any financial covenants.
The Facilities bear interest at a rate equal to the interest rate benchmark (EURIBOR in the case of loans denominated in EUR, USD LIBOR in the case of loans denominated in USD and CHF LIBOR in the case of loans denominated in CHF), plus an applicable margin.
As of December 31, 2019, $1.2 billion of borrowings was outstanding under the Facilities. Such indebtedness requires us to dedicate a portion of our future cash flows to payments on our debt, reducing our ability to use our cash flows to pay dividends, fund capital expenditures, BD&L or other strategic transactions, working capital and other general operational requirements.
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10.D. | EXCHANGE CONTROLS |