Many companies dabble in eye care. Whether through partnerships with small biotechs or small internal research efforts, many of the large pharmaceutical companies boast a small ophthalmology business. For Alcon (NYSE: ACL), though, eye care is its business.
Alcon not only sells far more into the ophthalmology market than do its competitors, but it also invests considerably more research-and-development dollars. Not surprisingly, Alcon is the No. 1 player in most of its markets and is No. 2 or No. 3 in most of the rest.
As Alcon's fourth-quarter earnings release would suggest, there are some advantages to being big and being the best. Sales grew 11.9% (8.5% without foreign exchange), and net income was up nearly 40% on higher margins. Management could not provide cash flow information but suggests that cash flow from operations roughly tracked net income.
However, for a company with nearly $27 billion in market cap and with dominant market positions, the stock has been surprisingly volatile. Part of this volatility was no doubt due to Retaane, the company's prospective macular degeneration drug.
While Alcon previously announced disappointing results for Retaane, the disappointment wasn't exactly in that the drug doesn't work, but rather that it doesn't work better than Visudyne, manufactured by QLT (Nasdaq: QLTI) and marketed by Novartis (NYSE: NVS).
So although the drug may still be approvable -- and the company has submitted it to the Food and Drug Administration -- it will be hard-pressed to win out over Visudyne or Macugen, the drug from Pfizer (NYSE: PFE) and Eyetech Pharmaceuticals (Nasdaq: EYET).
One of the keys to Alcon's success is the degree to which its results are balanced and not especially dependent on any key product (or products). Pharmaceutical sales make up about 36% of total sales, and surgical products constitute nearly 50%, with the remainder in consumer eye care. Accordingly, while I think the disappointing news about Retaane may shave off some growth potential, it won't dramatically affect the business.
Investors can also take heart in a 22% net margin that's rising, as well as a return on assets above 20% and a return on equity above 40%, both of which are also rising.
If there's any major problem with Alcon, it's with -- what else? -- the valuation. The stock trades at over 33 times trailing earnings and, accepting that the free cash flow number is a bit of a guess, the enterprise value-to-free cash flow ratio is over 24. Still, when compared with the return on assets and return on equity, that doesn't seem so bad.
So although Alcon isn't bargain-bin material, the price doesn't seem entirely out of line for a growing health-care company that all but dominates its chosen markets.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
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