ALCON : Optimum visibility for the future

 

Alcon is the world leader in eye care products. The company became independent in 2019, the year of its demerger from the Novartis laboratory, barely 10 years after the latter bought it from Nestlé. The first two financial years as an independent company (2019 and 2020) proved rather complicated, given Covid, but the Swiss group has not failed to respond, with a record year in 2022 in terms of revenues.

Alcon is one of the world leaders in the ophthalmic industry, with five businesses in ophthalmic surgery and vision care: 

In surgery: 

* Implantation products account for 19% of sales. These are mainly artificial lenses implanted during surgery or devices used to treat illnesses such as glaucoma. 
* Consumables (28% of revenues) are mainly procedure kits that provide surgeons with the products - disposable or not, manufactured by Alcon or by other laboratories - needed for operations. 
* The company also produces equipment (9%) such as phacoemulsification devices - the gold standard method of extracapsular lens extraction - as well as lasers, microscopes and the like.

In eye care: 

* Disposable, reusable and coloured contact lenses account for 25% of sales 

* The company covers a wide range of eye health products (16%), including products for dry eyes, irritation and ocular hypertension, as well as disinfectant solutions, drops and more. 

The margin for surgical activities (essentially BtoB, aimed at professionals) is around 27%, compared with just 17% for eye care activities, which are more geared towards the general public. 

Alcon's five businesses (source: Alcon)

Alcon is the world leader in four of these activities. It is the world's second-largest contact lens manufacturer, although it faces fierce competition (particularly in this segment) from solid, profitable companies such as The Cooper Companies and Essilor-Luxottica. In all, the group is targeting a huge market of over $32 billion, with annual growth rates of between 3% and 6% depending on the business. 

A huge addressable market (source: Alcon)

Worldwide, more than 2.2 billion people suffer from visual impairment or blindness. The needs are far from being met, particularly in less developed or developing countries. The WHO states in a report that more than half of these cases could be avoided, or corrected fairly quickly. But the difficulty of adopting a profitable business model in these regions is currently holding back the company's ability to meet this excess demand. For the time being, 55% of the company's sales are generated outside France - mainly in Europe - and 45% in the United States. 

Demand exceeds supply (source: Alcon)

The company floated in mid-2019, which means it has only four full financial years under its belt, and its introduction to the market has been plagued by the Covid crisis. After a first financial year impacted by major write-downs and a lackluster 2020 marked by a sharp fall in sales, it posted positive results in the following two financial years. The net margin came in at a low 3.84% last year, but the prospects for improvement in this variable are colossal, with analysts predicting that it will double in the current financial year and reach 11% by 2025. It should be noted that the four financial years published have seen positive free cash flow, with a peak of $645m in 2021, which has enabled the company to pay a dividend, admittedly modest when we look at the yield, but a sign of positive signals. Finally, this year, debt should represent less than twice EBITDA according to analysts, a sign of a solid balance sheet and essential room for maneuver. Alcon aims to achieve a significant proportion of its growth through acquisitions, although these are not included in the company's financial targets. The company is targeting revenues of $12 billion by 2027, an operating margin of around 25% - up from 18% last year - and annual free cash flow of around $2.2 billion. 

These good results should not obscure the fact that the company is emerging from a major restructuring, inherited from an unsuccessful marriage with Novartis. For Alcon, the adage that it is better to be alone than poorly accompanied rings true. From now on, the company will have to prove that it can stand on its own two feet. The fundamentals are solid, the market is buoyant and the company's diversification into various businesses is a crucial argument, given that it is the world leader in four of its five activities. The company's financial position has become stable, with debt under control and cash earnings generation beginning to take interesting forms. However, the elements of strong earnings improvement are already included in the share price, so Alcon must not disappoint. 

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