Novartis announced that it has entered into a definitive agreement with Alcon, Inc. to merge Alcon into Novartis for Novartis shares and a Contingent Value Amount (CVA). Under the terms of the agreement, the merger consideration will include up to 2.8 Novartis shares and a CVA to be settled in cash that will in aggregate equal USD 168. If the value of 2.8 Novartis shares is more than USD 168 the number of Novartis shares will be reduced accordingly.

"The full merger is the logical conclusion of our initial strategic investment in Alcon. With this step Novartis takes full ownership, becoming the global leader in eye care, a rapidly expanding, innovative platform based on the growing needs of an aging population" said Dr. Daniel Vasella, chairman of Novartis.

"The growth synergies here are significant, as Alcon will be the eye care development engine for our best in class research organization, and will leverage the Novartis market access capabilities outside the US," said Joseph Jimenez, CEO of Novartis. "I am very pleased that we were able to come to this agreement and will be able to provide Alcon employees the full benefits of being part of the Novartis Group."

The new Alcon division will be led by Kevin Buehler, current president and CEO of Alcon, Inc.

"This merger will create a stronger eye care business with broader commercial reach and enhanced capabilities to develop innovative eye care products that fulfill unmet clinical needs in eye care," said Kevin Buehler. "The combination of Alcon's deep understanding of the eye care specialty and the broad expertise and scale of Novartis will address virtually all key areas of eye care and position the Alcon business unit for faster growth."

Full ownership of Alcon provides Novartis with the opportunity to establish a fifth growth platform as part of its healthcare portfolio. The eye care sector offers further growth opportunities underpinned by the increasing unmet needs of emerging markets and an aging population. The Alcon and Novartis eye care portfolios address a broad range of these unmet needs. The companies have complementary pharmaceutical portfolios for diseases in the front and back areas of the eye as well as strong global brands in lens care. Alcon is a global leader in ophthalmic surgical products while Novartis has a broad contact lens portfolio and advanced eye care technologies and an early pipeline of innovative ophthalmic medicines.

Alcon, which is incorporated in Switzerland, is the world's largest and most profitable eye care company with more than 15,500 employees in 75 countries and 2009 annual sales of USD 6.5 billion, operating income of USD 2.3 billion and net income of USD 2.0 billion. Alcon offers a range of pharmaceutical, surgical and consumer eye care products to treat diseases, disorders and other conditions of the eye.

Novartis board of directors unanimously approves the merger. The merger is currently expected to be completed during the first half of 2011 and is conditional on clearance of a registration statement by the US Securities and Exchange Commission, two-thirds approval by the shareholders of each of Novartis and Alcon voting at their respective meetings and other customary closing conditions.

According to a press release, the date for the Novartis shareholders' meeting to approve the merger will be announced and corresponding materials will be provided as they become available.

Following completion of the merger, Alcon will become the new eye care division of Novartis, including CIBA Vision and ophthalmic medicines. Pro forma sales of the new division for 2009 amounted to USD 8.7 billion.

Alcon and Novartis have attractive global activities in eye care, each offering their own competitive positions in highly complementary segments that together cover more than 70 percent of the global vision care sector. Aligning these strengths will result in offering even more compelling products that make a difference for patients around the world. This new eye care division will have enhanced opportunities to accelerate expansion in high-growth regions, generate greater value from combined product portfolios and capitalize on strengthened R&D capabilities.

Planning on the formation of the new eye care division will commence immediately, with implementation following completion of the transaction in the first half of 2011. Implementation is expected to take approximately six months following the closing of the transaction. Annual cost synergies following completion of full ownership are currently expected to be USD 300 million - including the USD 200 million in synergies achievable from 77 per cent ownership.

The total merger consideration for the minority interest will be USD 12.9 billion, comprising of up to 215 million Novartis shares and a potential CVA to be settled in cash. The merger consideration is valued at USD 168 for each Alcon share. If the USD value of the 2.8 Novartis shares decreases, the value will be made up in cash via an increase in the value of the CVA. If the Novartis USD share value increases, the value of the CVA will decline until it reaches a value of zero; thereafter the exchange ratio will be reduced to deliver Novartis shares valued at USD 168. The Novartis Board of Directors received a fairness opinion from Credit Suisse prior to approving the merger.

Novartis intends to introduce cash into the transaction through a combination of the CVA and a share buyback. Novartis has authorization from the company's Annual General Meeting of 2008 to buy back shares up to a maximum amount of CHF 10 billion via a second trading line on the SIX Swiss Exchange. Under this authority approximately CHF 300 million has been utilized. The program was suspended in April 2008. This program will now be reactivated and, subject to applicable legal restrictions and market conditions, share buybacks may commence after today's announcement. The amount of shares to be repurchased will be consistent with maintaining a double-A credit rating.

Novartis will ask its shareholders to approve the issuance of approximately 108 million additional shares, which together with 107 million shares already held in treasury will be used for the merger. The combined total of 215 million shares represents the maximum number of shares that will be used for the transaction. Alcon shareholders have the choice of receiving either Novartis shares or Novartis American Depositary Shares (ADSs). Based on a Novartis share value of USD 56, the CVA would be settled for approximately USD 900 million in cash. The aggregate cash of the CVA and the share buyback will be financed mainly through internal sources.

The Novartis board of directors decided to use the combination of Novartis equity and cash as merger consideration to enable Novartis to balance shareholder dilution with maintenance of a double-A credit rating and flexibility for future growth.

On the assumption that the merger closes on April 1, 2011, the merger is expected to be approximately 5 per cent dilutive to fully diluted earnings per share, and approximately 3 per cent dilutive to core earnings per share based on Novartis' current share price. Assuming a CVA of approximately USD 900 million and a share buyback of USD 5 billion, the transaction is expected to be approximately 3 per cent dilutive to fully diluted earnings per share, and neutral to core earnings per share.

Acquisition of 100 per cent of Alcon at USD 168 per share is expected to result in an additional USD 130 million revaluation gain from fair valuing the initial 25 per cent interest at the time of change of majority ownership. The total revaluation gain is now expected to be USD 330 million and will be reported under income from associated companies. One-time expenses in 2010 are now estimated to consist of USD 470 million inventory revaluation and USD 100 million transaction costs. There are no additional one-time costs for the merger to be charged to the consolidated income statement, since these costs of approximately USD 80 million will be deducted from the Group's equity. The one-time costs associated with the realization of the synergy target will be evaluated as part of the integration planning.

The required purchase price allocation process is well advanced and will be finalized with the publication of the Group's 2010 consolidated financial statements. Novartis estimates that the additional pre-tax amortization charge for intangible assets as a result of the change of majority ownership in Alcon and resulting consolidation will be approximately USD 2.1 billion on a full year basis.

The acquisition, via the merger, of the outstanding non-controlling minority interests for an approximate consideration of USD 12.9 billion will result in a net reduction of the Group's consolidated equity by approximately USD 6.9 billion.

Novartis is committed to maintaining a double-A credit rating following the transaction. Moody's rates the Group as Aa2 for long-term maturities and P-1 for short-term maturities and Standard & Poor's has a rating of AA- and A-1+, for long-term and short-term maturities, respectively. Fitch has a long-term rating of AA and a short-term rating of F1+.