20-F 1 acl20f2010.htm 20-F acl20f2010.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F

 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                            For the fiscal year ended          DECEMBER 31, 2010
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number   001-31269
ALCON, INC.
(Exact name of Registrant as specified in its charter)
ALCON, INC.
 (Translation of Registrant's name into English)
Switzerland
(Jurisdiction of incorporation or organization)
Bösch 69,  P.O. Box 62,  Hünenberg, Switzerland
(Address of principal executive offices)
Elaine E. Whitbeck, General Counsel & Corporate Secretary, Alcon Inc., 6201 South Freeway, TA7-1, Fort Worth, Texas, USA 76134-2099; 817-293-0450; AlconSECContact@Alcon.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
Common Shares, par value CHF 0.20 per share
The New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.                                                                                                                                                    None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.                                                                                                                                 None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 302,390,266 Common Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
X
  Yes
   
  No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
  Yes
 
X
  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
X
  Yes
   
  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.
Large Accelerated Filer
X
 
Accelerated Filer
       
Non-accelerated Filer
   
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP
X
 
International Financial Reporting Standards as issued
     
Other    
 
     
by the International Accounting Standards Board
         
If ″Other″ has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
  Item 17
   
  Item 18
If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
  Yes
 
X
  No


 
 
 
 

TABLE OF CONTENTS


 

 
SEQUENTIAL
 
PAGE
INTRODUCTION AND USE OF CERTAIN TERMS
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
6
PART I
7
ITEM 1.                   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
7
ITEM 2.                   OFFER STATISTICS AND EXPECTED TIMETABLE
7
ITEM 3.                   KEY INFORMATION
8
ITEM 4.                   INFORMATION ON THE COMPANY
22
ITEM 4A.                UNRESOLVED STAFF COMMENTS
51
ITEM 5.                   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
52
ITEM 6.                   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
82
ITEM 7.                   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
103
ITEM 8.                   FINANCIAL INFORMATION
110
ITEM 9.                   THE OFFER AND LISTING
117
ITEM 10.                  ADDITIONAL INFORMATION
119
ITEM 11.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
135
ITEM 12.                  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
137
PART II
138
ITEM 13.                  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
138
    ITEM 14.                 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 
    138
ITEM 15.                  CONTROLS AND PROCEDURES
138
ITEM 16.                  [RESERVED]
138
ITEM 16A.              AUDIT COMMITTEE FINANCIAL EXPERT
138
ITEM 16B.               CODE OF ETHICS
138
ITEM 16C.               PRINCIPAL ACCOUNTANT FEES AND SERVICES
139
    ITEM 16D.              EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 140           
ITEM 16E.               PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
140
ITEM 16F.               CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
141
ITEM 16G.               CORPORATE GOVERNANCE
141
PART III
143
ITEM 17.                  FINANCIAL STATEMENTS
143
ITEM 18.                  FINANCIAL STATEMENTS
143
ITEM 19.                  EXHIBITS
144
SIGNATURES
146


 
2
 
 
INTRODUCTION AND USE OF CERTAIN TERMS

Trademarks used by Alcon, Inc. ("Alcon") appear in italic type in this report and are the property of or are licensed by one of our subsidiaries.

In this report, the trademark product brand names refer to the products noted below.

Product Brand Name
Referenced Product
A-OK®
A-OK® ophthalmic knives
Accurus®
Accurus® surgical system
AcrySof®
AcrySof® intraocular lens
AcrySof® CACHET
AcrySof® CACHETphakic lens
AcrySof® IQ
AcrySof® IQ intraocular lens
AcrySof® IQ ReSTOR®
AcrySof® IQ ReSTOR® intraocular lens
AcrySof® IQ ReSTOR® Multifocal Toric
AcrySof® IQ ReSTOR® Multifocal Toric intraocular lens
AcrySof® IQ ReSTOR® +3.0
AcrySof® IQ ReSTOR® +3.0 intraocular lens
AcrySof® IQ Toric
AcrySof® IQ Toric intraocular lens
AcrySof® Natural
AcrySof® Natural intraocular lens
AcrySof® ReSTOR®
AcrySof® ReSTOR® intraocular lens
AcrySof® ReSTOR® Toric
AcrySof® ReSTOR® Toric intraocular lens
AcrySof® Toric
AcrySof® Toric intraocular lens
ALCON®
ALCON® house trademark
ALLEGRETTO
ALLEGRETTO laser system
ALLEGRETTO EX-400
ALLEGRETTO EX-400 laser
ALLEGRETTO EX-500
ALLEGRETTO EX-500 laser
ALLEGRETTO WAVE® Eye-Q
ALLEGRETTO WAVE® Eye-Q 400 Hz laser
ALLEGRO ANALYZER®
ALLEGRO ANALYZER® wavefront system
ALLEGRO
ALLEGRObiometry system
ALLEGRO OCULYZER®
ALLEGRO OCULYZER® pentacam diagnostic device
ALLEGRO TOPOLYZER®
ALLEGRO TOPOLYZER® corneal topography system
AquaLase®
AquaLase® liquefaction device
AZARGA®
AZARGA® ophthalmic suspension
Azopt®
Azopt® ophthalmic suspension
Betoptic S®
Betoptic S® ophthalmic suspension
BSS Plus®
BSS Plus® irrigating solution
CiloDex®
CiloDex® otic solution
CIPRODEX®*
CIPRODEX® otic suspension
Cipro® HC*
Cipro® HC Otic
CONSTELLATION®
CONSTELLATION® vitreoretinal system
Custom Pak®
Custom Pak® surgical procedure packs
DisCoVisc®
DisCoVisc® viscosurgical device
DuoTrav® (EU)
DuoTrav® ophthalmic solution
DuoTrav®  APS (EU)
DuoTrav® APS ophthalmic solution
DuoVisc®
DuoVisc® viscoelastic system
DUREZOL®
DUREZOL® ophthalmic emulsion/steroid
EXPRESS®
EXPRESS® contact lens care solutions
EX-PRESS®
EX-PRESS® glaucoma filtration device
Grieshaber®
Grieshaber® surgical instruments
ICAPS®
ICAPS® dietary supplements
Infiniti®
Infiniti® vision system
Laureate®
Laureate® compact phacoemulsification system
LEGACY®
LEGACY® surgical system
LenSx®
LenSx® laser system
Maxitrol®
Maxitrol® ophthalmic suspension or ointment
Moxeza*
Moxeza 0.5% ophthalmic solution
 
 
 
3
 
 
 
Product Brand Name
Referenced Product
NEVANAC®
NEVANAC® ophthalmic suspension
Opatanol® (EU)
Opatanol® ophthalmic solution
OPTI-FREE®
OPTI-FREE® contact lens care solutions
OPTI-FREE® EVERMOIST
OPTI-FREE® EVERMOIST multi-purpose disinfecting solution
OPTI-FREE® EXPRESS® No-Rub®
OPTI-FREE® EXPRESS® No-Rub® contact lens care solution
OPTI-FREE® RepleniSH®
OPTI-FREE® RepleniSH® multi-purpose disinfecting solution
OZil®
OZil® torsional hand piece/technology
Pataday
Pataday ophthalmic solution
Patanase®
Patanase® nasal spray
Patanol®
Patanol® ophthalmic solution
Perfluoron®
Perfluoron® perfluoro-n-octane liquid
ProVisc®
ProVisc® ophthalmic viscosurgical device
Silikon®
Silikon® ophthalmic surgical oil
SOFZIA®
SOFZIA® preservative system
Systane®
Systane® lubricant eye drops
Systane® Balance
Systane® Balance lubricant eye drops
Systane® Ultra
Systane® Ultra lubricant eye drops
Tears Naturale®
Tears Naturale® lubricant eye drops
TobraDex®
TobraDex® ophthalmic suspension or ointment
TobraDex® ST
TobraDex® ST ophthalmic suspension
Tobrex®
Tobrex® ophthalmic solution or ointment
TRAVATAN®
TRAVATAN® ophthalmic solution
TRAVATAN® APS
TRAVATAN® APS ophthalmic solution
TRAVATAN Z®
TRAVATAN Z® ophthalmic solution
TRIESENCE®
TRIESENCE® injectable suspension
Vegamox®* (Japan)
Vegamox® ophthalmic solution
Vigadexa®
Vigadexa® ophthalmic solution
Vigamox®*
Vigamox® ophthalmic solution
VISCOAT®
VISCOAT® ophthalmic viscosurgical device
WaveLight®
WaveLight® refractive suite

*       Cipro® and CIPRODEX® are registered trademarks of Bayer AG, licensed to Alcon by Bayer Schering Pharma AG.  Moxifloxacin, the primary ingredient in Vigamox®, Vegamox® and Moxeza, is licensed to Alcon by Bayer Schering Pharma AG.

Avelox® is a trademark of Bayer Schering Pharma AG.  Zaditor® is a trademark of Novartis AG.  Timoptic-XE® is a trademark of Merck & Co., Inc.  Lucentis® is a trademark of Genentech, Inc.

In this report, references to "$", "U.S. $", "U.S. dollars" and "United States dollars" are to the lawful currency of the United States of America, references to "CHF" and "Swiss francs" are to the lawful currency of the Swiss Confederation, references to "euro" are to the lawful currency of the member states of the European Monetary Union that have adopted or that adopt the single currency in accordance with the Treaty establishing the European Community, as amended by the Treaty on European Union, and references to Japanese yen are to the lawful currency of Japan.  Unless otherwise stated, figures provided are under United States generally accepted accounting principles ("U.S. GAAP").  Unless we specify otherwise, all references in this report to "we," "our," "us," "the Company" and "our Company" refer to Alcon, Inc. and its subsidiaries.


 
4
 
 

This report uses certain terms defined below.

Term
Definition
Affordable Care Act
Health Care and Education Reconciliation Act of 2010
AMD
Age-related macular degeneration
ANDA
Abbreviated New Drug Application
ANDS
Abbreviated New Drug Submission
AOMT
Otitis media in the presence of tympanostomy tubes
AREDS
National Eye Institute's Age Related Eye Disease Study
ASC
Accounting Standards Codification
ASERP
Alcon Supplemental Executive Retirement Plan
BAC
Benzalkonium chloride
CEO
Chief Executive Officer
CMS
The Centers for Medicare and Medicaid Services
CP Program
Alcon's Commercial Paper Program
(the) Company
Alcon, Inc. and its subsidiaries
DCP
Alcon Executive Deferred Compensation Plan
DTC
Depository Trust Company
EPS
Earnings Per Share
ESCP
Alcon's Executive Salary Continuation Plan
EU
European Union
EUCMS
Concerned member state of the European Union
Evaluation Date
End of the period covered by this annual report
Exchange Act
U.S. Securities Exchange Act of 1934
External auditors
The primary Alcon Group external auditors and additional external auditors specific to the Company subsidiary
FASB
Financial Accounting Standards Board
FDA
United States Food and Drug Administration
FDAAA
Food and Drug Administration Amendments Act of 2007
FTC
U.S. Federal Trade Commission
IFRS
International Financial Reporting Standards
IPO
The initial public offering of approximately 69,750,000 of Alcon, Inc.'s common shares on March 20, 2002
IRB
Institutional Review Board
IRC
U.S. Internal Revenue Code
LASIK
Laser-Assisted In Situ Keratomileusis
MGD
Meibomian gland dysfunction
NDA
New Drug Application
Non-U.S. Holder
A holder that is not a U.S. Holder (see definition of U.S. Holder below)
NSAID
Non-steroidal anti-inflammatory drug
NYSE
New York Stock Exchange
OTC
Over-the-Counter drugs available without a prescription
PMA
Pre-Market Approval
Purchase and Option Agreement
Purchase and Option Agreement between Nestlé S.A. and Novartis AG dated as of April 6, 2008
REMS
Risk evaluation and mitigation strategies discussed in the FDAAA
RMS
Reference member state of the European Union
RSU(s)
Restricted share unit(s)
SAB
Staff Accounting Bulletin published by the SEC
SEC
United States Securities and Exchange Commission
Second Stage Closing
The purchase and sale of Nestlé's remaining Alcon shares to Novartis under the Purchase and Option Agreement
 
 
 
5
 
 
 
 
Term
Definition
Securities Act
U.S. Securities Act of 1933, as amended
Separation Agreement
Separation Agreement between Nestlé and Alcon described in Item 7.B.5
Services Agreement
Guarantee Fee and Commercial Paper Program Services Agreement, as described in Item 7.B, "Related Party Transactions."
Shareholders Agreement
Shareholders Agreement between Nestlé and Novartis dated as of April 6, 2008
SSAR(s)
Share-settled stock appreciation right(s)
Swiss Holder
Security holder as defined in Item 10.E.
TSR
Total shareholder return
U.S. GAAP
United States generally accepted accounting principles
U.S. Holder
Security holder as defined in Item 10.E.
VHCA
Veterans Health Care Act

References to the ophthalmic industry in this report do not include eyeglasses or contact lenses.  This report relies on and refers to statistics regarding the ophthalmic industry.  Where specified, these statistics reflect the Company's internal estimates. Otherwise, we obtained these statistics from various third-party sources that we believe are reliable, but we have not independently verified these third-party statistics.  Unless otherwise specified, all market share information was based on units sold.

Statements in this report regarding the Company's market share position are from the following sources:

·  
pharmaceutical products--IMS Research;
·  
surgical products--internal estimates prepared using industry data;
·  
consumer products--AC Nielsen, IMS Research, selected other third party data providers and company estimates.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, (the "Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, (the "Exchange Act") relating to our business and the sectors in which Alcon and its subsidiaries and interests operate.  These forward-looking statements are contained principally in the sections entitled "Key Information," "Information on the Company," "Operating and Financial Review and Prospects," "Financial Information," "Additional Information," and "Quantitative and Qualitative Disclosures about Market Risk."  These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by our forward-looking statements.  Forward-looking statements include, but are not limited to, statements about: the progress of our research and development programs; the receipt of regulatory approvals; competition in our industry; the impact of pending or future litigation; the impact of any future product recalls; changes in, or the failure or inability to comply with, governmental regulation; the opportunities for growth, whether through internal development or acquisitions; exchange rate fluctuations; general economic conditions; and trends affecting the ophthalmic industry, our financial condition or results of operations.

Words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "intend," "estimate," "project," "predict," "potential" and similar expressions are intended to identify forward-looking statements.  These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.  Given these uncertainties, you should not place undue reliance on these forward-looking statements.  We discuss many of these risks in this report in greater detail under the subheadings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."  These forward-looking statements represent our estimates and assumptions only as of the date of this report and are not intended to give any assurance as to future results.  Factors that might cause future results to differ include, but are not limited to, the following:
 
 
6
 
 
 
·  
failure to consummate the merger with Novartis AG may cause volatility in our share price;

·  
resources devoted to research and development may not yield new products that achieve commercial success;

·  
the production and launch of commercially viable products may take longer and cost more than expected;

·  
competition may lead to worse than expected financial condition and results of operations;

·  
changes in reimbursement procedures and/or amounts by third-party payors;

·  
changes caused by regulatory or market forces in the prices we receive for our products;

·  
changes in the global economic environment in which we operate, as well as changes in the economic conditions in our markets;

·  
currency exchange rate fluctuations may negatively affect our financial condition and results of operations;

·  
the impact of any future events with material unforeseen impacts, including, but not limited to, war, natural disasters, or acts of terrorism;

·  
supply and manufacturing disruptions could negatively impact our financial condition or results of operations;

·  
inability to attract qualified personnel, which could negatively impact our ability to grow our business;

·  
difficulty protecting our intellectual property rights;

·  
pending or future litigation may negatively impact our financial condition and results of operations;

·  
government regulation or legislation may negatively impact our financial condition or results of operations;

·  
product recalls or withdrawals may negatively impact our financial condition or results of operations;

·  
the occurrence of environmental liabilities arising from our operations; and

·  
the occurrence of any losses from property and casualty, general liability, business interruption and environmental liability risks could negatively affect our financial condition because we self-insure against those risks through our captive insurance subsidiaries.

You should read this report completely and with the understanding that Alcon's actual future results may be materially different from what we expect.  We qualify all of our forward-looking statements by these cautionary statements.  Except to the extent required under the federal securities laws and the rules and regulations promulgated by the United States Securities and Exchange Commission ("SEC"), we undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.

PART I
 
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 
Not Applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
 
Not Applicable.

 
7
 
 

 ITEM 3.
KEY INFORMATION
 
           A.
SELECTED FINANCIAL DATA

The following tables present our selected historical consolidated financial data in accordance with U.S. GAAP.  This information should be read along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 5 of this report and the consolidated financial statements, including the accompanying notes thereto, included in Item 18 of this report.
 
 
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(in millions, except per share data)
 
Statement of Earnings Data:
                             
Sales
$
7,179
 
$
6,499
 
$
6,294
 
$
5,599
 
$
4,897
 
Cost of goods sold
 
1,675
   
1,614
   
1,472
   
1,398
   
1,215
 
                               
Gross profit
 
5,504
   
4,885
   
4,822
   
4,201
   
3,682
 
Selling, general and administrative
 
2,070
   
1,935
   
1,961
   
1,694
   
1,399
 
Research and development
 
747
   
665
   
619
   
564
   
512
 
In process research and development
 
--
   
--
   
--
   
9
   
--
 
Amortization of intangibles
 
60
   
24
   
29
   
51
   
199
 
Other operating expenses
 
152
   
--
   
--
   
--
   
--
 
                               
Operating income
 
2,475
   
2,261
   
2,213
   
1,883
   
1,572
 
Interest income
 
29
   
46
   
76
   
69
   
74
 
Interest expense
 
(9
)
 
(16
)
 
(51
)
 
(50
)
 
(43
)
Other, net
 
32
   
22
   
(155)
   
27
   
14
 
                               
Earnings before income taxes
 
2,527
   
2,313
   
2,083
   
1,929
   
1,617
 
Income taxes
 
317
   
306
   
36
   
343
   
269
 
                               
Net earnings
$
2,210
 
$
2,007
 
$
2,047
 
$
1,586
 
$
1,348
 
                               
Basic weighted-average common shares
   outstanding
 
301
   
299
   
298
   
298
   
304
 
Diluted weighted-average common shares
   outstanding
 
304
   
301
   
301
   
302
   
309
 
Basic earnings per common share
$
7.34
 
$
6.72
 
$
6.86
 
$
5.32
 
$
4.43
 
Diluted earnings per common share
$
7.27
 
$
6.66
 
$
6.79
 
$
5.25
 
$
4.37
 
Dividends paid on common shares
$
1,037
 
$
1,048
 
$
750
 
$
613
 
$
417
 
Dividends paid per common share: U.S. $
$
3.44
 
$
3.50
 
$
2.50
 
$
2.04
 
$
1.38
 
Dividends paid per common share: Swiss CHF
CHF
3.95
 
CHF
3.95
 
CHF
2. 63
 
CHF
2.50
 
CHF
1.68
 
                               
Cash Flow Data:
                             
Cash provided by (used in):
                             
Operating activities
$
2,375
 
$
2,416
 
$
2,032
 
$
1,470
 
$
1,406
 
Investing activities
 
(1,705
)
 
(390
)
 
(365
)
 
(227
)
 
(166
)
Financing activities
 
(1,150
)
 
(1,481
)
 
(1,333
)
 
(607
)
 
(1,225
)
                               
 
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Balance Sheet Data:
(in millions)
   
Current assets
$
6,069
 
$
5,833
 
$
5,219
 
$
4,825
 
$
3,462
   
Working capital
 
4,278
   
3,858
   
3,029
   
1,963
   
1,461
   
Total assets
 
10,073
   
8,686
   
7,551
   
7,016
   
5,427
   
Long term debt, net of current maturities
 
--
   
56
   
61
   
52
   
49
   
Total shareholders' equity
 
7,252
   
5,905
   
4,691
   
3,375
   
2,914
   
 
 
8
 
 
Exchange Rates

Fluctuations in the exchange rate between the Swiss franc and the U.S. dollar will affect the conversions into U.S. dollars of any cash dividends paid in Swiss francs on our common shares.  In addition, these and other fluctuations in the exchange rates of the currencies of our various local operations affect our results of operations and financial condition as presented in our financial statements.

The following table sets forth, for the periods indicated, information concerning the exchange rate between Swiss francs and U.S. dollars based upon the spot rate at the close of market, as published by Bloomberg Finance L.P.:

   
Exchange Rate for 1 U.S. Dollar
Fiscal Year
 
Period End (1)
 
Average (1) (2)
 
High
 
Low
                 
2006                                                           
 
1.2201
 
1.2529
 
1.3228
 
1.1923
2007                                                           
 
1.1335
 
1.2000
 
1.2535
 
1.0969
2008                                                           
 
1.0687
 
1.0824
 
1.2254
 
0.9844
2009                                                           
 
1.0352
 
1.0850
 
1.1852
 
0.9964
2010                                                           
 
0.9352
 
1.0423
 
1.1631
 
0.9352

(1)  
The closing spot rate at each period end and the average rate for each period differed from the exchange rates used in the preparation of our financial statements.
(2)  
Represents the average of the daily rates as published by Bloomberg Finance L.P. during the period.

The following table sets forth the high and low closing spot rate for the Swiss franc for each of the prior six months:

   
Exchange Rate for 1 U.S. Dollar
Month
 
Period End
 
Average
 
High
 
Low
                 
September 2010                                                          
 
0.9825
 
1.0011
 
1.0198
 
0.9758
October 2010                                                          
 
0.9824
 
0.9688
 
0.9904
 
0.9530
November 2010                                                          
 
1.0034
 
0.9852
 
1.0036
 
0.9584
December 2010                                                          
 
0.9352
 
0.9670
 
1.0023
 
0.9352
January 2011
 
0.9440
 
0.9566
 
0.9737
 
0.9334
February 2011
 
0.9289
 
0.9494
 
0.9732
 
0.9264
                 

Although we have translated selected Swiss franc amounts in this report into U.S. dollars for convenience, this does not mean that the Swiss franc amounts referred to could have been, or could be, converted into U.S. dollars at these rates or any other rate.

B.  
CAPITALIZATION AND INDEBTEDNESS

 
Not Applicable.

C.  
REASONS FOR THE OFFER AND USE OF THE PROCEEDS

 
Not Applicable.

D.  
RISK FACTORS
 
 
If the events discussed in these Risk Factors occur, our business, financial condition, results of operations or cash flows could be materially adversely affected.  In such a case, the market price of our common shares could decline.  The risks described below are not the only ones that may exist.  Additional risks not currently known by us or that we deem immaterial also may impair our business operations.

 
9
 
 

Risks Related to Our Business and Industry

Resources devoted to research and development may not yield new products that achieve commercial success.

We devote substantial resources to research and development.  The research and development process is expensive and prolonged, and it entails considerable risk.  Development of a new product, from discovery through testing and registration to initial product launch, typically takes between eight and fifteen years or more for a pharmaceutical product and between three and seven years or more for a medical device.  Each of these periods varies considerably depending on the product and the country where registration is sought.  Because of the risk associated with our research and development, products we are currently developing may not obtain the regulatory approvals required for us to market such products successfully or they may take longer than we expect to gain necessary governmental, regulatory or other approval.  They may cost more to develop and may be less successful than we currently anticipate, or than other therapies that are presently or soon may be on the market.  We can make no assurances that any of the projects currently in our development pipeline will result in commercially successful products.

If we fail to keep pace with advances in our industry or fail to persuade physicians to adopt new products we introduce, customers may not buy our products and our sales and profits may decline.

The pharmaceutical, medical device and over-the-counter industries are characterized by continual product development, constant innovation in products and techniques, frequent new product introductions and price competition.  Our future growth depends, in part, on our ability to develop products which are more effective in treating diseases and disorders of the eye or that incorporate the latest technologies.  In addition, we must be able to manufacture new products and effectively persuade a sufficient number of eye care professionals and/or consumers to use the new products we introduce.  Sales of our existing products may decline rapidly if a new competing product is introduced by one of our competitors or if we announce a new product that, in either case, represents a substantial improvement over our existing products.  Similarly, if we fail to make sufficient investments in research and development programs, our current and planned products could be surpassed by more effective or advanced products.

We may not successfully develop and launch replacements for our products that lose patent protection.

Most of our major products are covered by patents that give us a degree of market exclusivity during the term of the patent.  Upon patent expiration, our competitors may introduce products using the same technology.  As a result, our sales and profits could decline significantly due to increased competition.  In addition, we may not be able to develop and successfully launch more advanced replacement products before these and other patents expire.

For instance, our successful combination ocular anti-infective/anti-inflammatory product, TobraDex® ophthalmic suspension and ointment, lost its exclusive marketing position in the United States in January 2009.  Both a competitor and our Falcon Pharmaceuticals subsidiary launched generic versions of TobraDex® suspension in early January 2009.

We depend on proprietary technologies and may not be able to protect our intellectual property rights adequately.

We currently hold approximately 7,000 patents and have more than 4,000 pending patent applications.  We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology.  These legal measures afford limited protection and may not prevent our competitors from gaining access to our intellectual property and proprietary information.  Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable.  From time to time, we have faced challenges of our intellectual property rights and face current challenges to some of our key products.  Furthermore, we cannot ensure that any pending patent application held by us will result in an issued patent or that, if patents are issued to us, such patents will provide meaningful protection against competitors or competitive technologies.  Any litigation to protect our intellectual property rights could result in substantial expense, may reduce our profits and may not be successful.  In addition, we may be exposed to future litigation by third parties based on claims that our products infringe their intellectual property rights.  This risk is exacerbated by the fact that the validity and breadth of patents in our industry frequently involve complex legal issues that are not easily resolved.

 
10
 
 
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 regulatory 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. 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.

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.

 
11
 
 
Any litigation or claims against us, whether or not successful, could result in substantial costs and harm our reputation.  In addition, intellectual property litigation or claims could force us to do one or more of the following: cease selling or using any of our products that incorporate the asserted intellectual property, which would adversely affect our sales and profits; obtain a license from the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; and redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming even if it is possible to do so.

A portion of our sales comes from elective surgical procedures or elections to utilize advanced technology options in surgery.  Economic conditions and price competition may cause sales of our products used in these types of elective surgical procedures to decline and reduce our profitability.

Sales of products used in elective surgical procedures have been and may continue to be adversely impacted by economic conditions.  Generally, the costs of elective surgical procedures are borne by individuals with limited reimbursement from their medical insurance providers or government programs.  Accordingly, individuals may be less willing to incur the costs of these procedures in weak or uncertain economic conditions, there may be a decline in the number of these procedures, there may be a decline in the amount we realize for each procedure and the market for equipment used in such procedure may be negatively impacted.

Inability of users of our products to obtain adequate reimbursement or maintain the current level of reimbursement from third-party payors could limit market acceptance of our products or reduce the prices we receive for our products, which could impact adversely our sales and profits.

The initiatives of managed care organizations and governments to contain healthcare costs in the United States and in other countries are placing an increased emphasis on the delivery of more cost-effective medical therapies.  This emphasis has, and in the future could, adversely affect sales and prices of our products.  Patients, consumers, physicians, hospitals and other healthcare providers may be reluctant to purchase our products if they do not receive adequate reimbursement for the cost of our pharmaceutical and surgical products and for procedures performed using our products from both governmental and private third-party payors.  For example:

·  
Major third-party payors for hospital services, including government insurance plans, Medicare, Medicaid and private healthcare insurers, have substantially revised their payment methodologies during the last few years, resulting in stricter standards for and lower levels of reimbursement of hospital and outpatient charges for some medical procedures.

·  
Increased pressures to reduce government healthcare spending could lower our effective average selling price.  In the United States, the Centers for Medicare and Medicaid Services ("CMS") impose controls on the prices at which medical devices and physician-administered drugs used in ophthalmic surgery are reimbursed for Medicare patients.  Many private third-party payors use CMS guidelines in determining reimbursement levels.  In addition, recent government initiatives, such as the U.S. Medicare Part D outpatient prescription drug benefit and the Affordable Care Act, or future government initiatives may negatively impact the number of units we sell or the price we realize for our pharmaceutical products.

·  
Most European Union ("EU") member states impose controls on whether products are reimbursable by national or regional health service providers and on the prices at which medicines and medical devices are reimbursed under state-run healthcare schemes.  Some member states operate reference pricing systems in which they set national reimbursement prices by reference to those in other member states.  Increased pressures to reduce government healthcare spending and increased transparency of prices, following the adoption of the European euro, have meant that an increasing number of governments have adopted this approach.  Ever-tighter budgetary constraints also mean that many jurisdictions are increasingly focusing on health economics-based assessment to determine whether technologies represent an appropriate use of national healthcare budgets.  The major EU economies, such as France, Germany and the United Kingdom, have led the way with the development of sophisticated systems, but in almost every European country there is likely to be some form of health technology assessment before the government issues guidance or grants reimbursement or procurement approval for an expensive new technology.  Furthermore, with increased price transparency, parallel importation of pharmaceuticals from lower price level countries to higher priced markets has grown, and these parallel imports lower our effective average selling price.
 
 
12
 
 
 
·  
Japan also imposes controls on the prices at which medicines and medical devices are reimbursed under the national healthcare schemes.  Due to increased pressures to reduce government healthcare spending, the Japanese government continues to seek cuts where possible, and is actively promoting the use of generic products.

·  
Managed care organizations in the United States restrict the pharmaceutical products that doctors in those organizations can prescribe through the use of formularies, the lists of drugs that physicians are permitted to prescribe to patients in a managed care organization.  Exclusion of our pharmaceutical products from these formularies or additional price concessions necessary to be included on formularies could have an adverse effect on our revenues and profits.

·  
Competitors may introduce generic products that compete directly or indirectly with our products and such generic products may have preferential positions on formularies or reduce our unit sales and prices.

·  
There are proposed and existing laws and regulations governing product prices that may negatively affect the profitability of companies in the healthcare industry.

·  
There have been recent initiatives by third-party payors to challenge the prices charged for medical products, which could affect our profitability.

·  
Reductions in the prices for our products in response to these trends could reduce our profits.  Moreover, our products may not be covered in the future by third-party payors.  The failure of our products to be so covered could cause our profits to decline.

·  
In March 2010, the United States government enacted the Affordable Care Act legislation that is expected to have far reaching implications for the healthcare industry.  This legislation will increase rebates pharmaceutical manufacturers must pay to the Medicaid program, impose new discount obligations on pharmaceutical manufacturers with respect to Medicare Part D, potentially affect reimbursement for pharmaceutical and medical device products through a greater emphasis on comparative effectiveness, impose an annual fee on pharmaceutical manufacturers and an excise tax on medical device products, impose additional reporting requirements surrounding interactions with healthcare providers, and affect the manner in which insurers provide medical coverage.  We expect that these changes will reduce the reimbursement for our products and negatively impact selling prices, increase rebates and fees that we provide to the federal and various state governments, increase the cost of our insurance plans and increase administrative costs associated with compliance activities.  "Overview of Our Business – U.S. Healthcare Reform" in Item 5 provides more discussion of these changes.

The FDA and other regulators may authorize sales of competitive prescription pharmaceuticals on a non-prescription basis, which could reduce the demand for and profitability of our prescription products.

In October 2006 and at the request of the holder of both the patent and the New Drug Application ("NDA"), the FDA revised the status of the allergy drug Zaditor® (Novartis AG) from "prescription only" to "over-the-counter," or "OTC."  The approval by the FDA of the sale of this and other pharmaceutical products without a prescription may reduce demand for our competing prescription products and, accordingly, reduce our profits.  Medicines regulators in other jurisdictions have similar powers to authorize OTC switches, either on their own initiative or in response to an approval-holder's request.  Managed care organizations or other third-party payors may petition the FDA or other medicines regulators to permit sales of some of our pharmaceutical products on a non-prescription basis, which could reduce our profits.

Changes in inventory levels or fluctuations in buying patterns by our large wholesale and large retail customers may adversely affect our sales and earnings and add to their variability from quarter to quarter. We also face additional risks due to the concentration of certain sales with large retail and wholesale customers.

A significant portion of our pharmaceutical and eye care products are sold to major pharmaceutical and healthcare distributors and major retail chains in the United States.  Consequently, our sales and quarterly growth comparisons may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers.  These fluctuations may result from seasonality, pricing, large retailers' and wholesalers' buying decisions or other
 
 
13
 
 
factors.  We can provide no assurance that large retail and wholesale purchases will not decrease as a result of fluctuations in buying patterns.  Additionally, we are exposed to a concentration of credit risk to these customers that, if affected by financial difficulty, could materially and adversely affect our financial results.

The global nature of our business may result in fluctuations and declines in our sales and profits.

Our products are sold in more than 180 countries.  We have more than 75 local operations worldwide and more than half of our revenues in 2010 came from customers outside the United States.

The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In 2010, our most significant currency exposures were to the euro, the Japanese yen, the Brazilian real and the Canadian dollar versus the U.S. dollar.

The exchange rates between these and other foreign currencies and the U.S. dollar may fluctuate substantially.  In addition, we are exposed to transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received.  Fluctuations in the value of the U.S. dollar against other currencies have had in the past, and may have in the future, a material adverse effect on our operating margins and profitability.

Economic, social and political conditions, laws, practices and local customs vary widely among the countries in which we sell our products.  Our operations outside the United States are subject to a number of risks and potential costs, including lower profit margins, less stringent protection of intellectual property and economic, political and social uncertainty in countries in which we operate, especially in emerging markets.  These and other risks may have a material adverse effect on our operations in any particular country and on our business as a whole.  For example, many emerging markets have currencies that fluctuate substantially.  If currencies devalue and we cannot offset with price increases, our products may become less profitable.  Inflation in emerging markets also can make our products less profitable and increase our exposure to credit risks.  We have experienced currency fluctuations, social and political conditions, inflation and volatile economic conditions, which have impacted our profitability in the past in several markets and we may experience such impacts in the future.

The current economic and financial crisis appears to be affecting many of the markets in which we operate.  As a result, there is a risk that consumers may reduce their expenditures on prescription drugs, over-the-counter healthcare products and other healthcare spending to help cope with hard economic times.  In addition, governments may come under increasing pressure to reduce healthcare expenditures as a result of lower revenue and increased demand for other government services during this financial crisis.  Both of these items could have a negative impact on our sales and profits.

We have significant outstanding receivable balances that are dependent upon either direct or indirect payment by various governmental entities across the world.  The ultimate payment of these receivables is dependent 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 outstanding receivables could be at risk and impact profits and cash flow.

We single-source many of the active ingredients and components used in our products and interruptions in the supply of these raw materials could disrupt our manufacturing of specific products and cause our sales and profitability to decline.

We single-source active ingredients contained in a majority of our pharmaceutical and consumer eye care products, including ProVisc®, DisCoVisc® and VISCOAT® surgical viscoelastic devices, both Systane® and Systane® Ultra lubricant eye drops, both PatanolÒ and Pataday ophthalmic solutions and Vigamox® moxifloxacin ophthalmic solution.  In these cases, obtaining the required regulatory approvals, including from the FDA, to use alternative suppliers may be a lengthy process.  In many cases, we use single-source suppliers for other components and raw materials used in our products.  The loss of any of these or other significant suppliers or the inability of any such supplier to meet performance and quality specifications, requested quantities or delivery schedules could cause our sales and profitability to decline and have a negative impact on our customer relations.  In addition, a significant price increase from any of our single-source suppliers could cause our profitability to decline if we cannot increase our
 
 
14
 
 
prices to our customers.  In order to ensure sufficient supply, we may determine that we need to provide financing to some of our single-source suppliers, which could increase our financial exposure to such suppliers.

In many cases, we manufacture a product at a single-source facility, and an inability to produce a sufficient quantity of, or any disruption in the manufacturing of, a product at the relevant facility could impair our ability to fill customer orders and could reduce our sales.

In some cases, we manufacture a product, including some of our key products, at a single manufacturing facility.  In many cases, regulatory approvals of our products are limited to a specific approved manufacturing facility.  If we fail to produce enough of a product at a facility, or if our manufacturing process at that facility is disrupted, we may be unable to deliver that product to our customers on a timely basis.  A failure to deliver products on a timely basis could lead to customer dissatisfaction and damage our reputation.  Significant delays in the delivery of our products or a delay in the delivery of a key product also could negatively impact our sales and profitability.

Some of our products are manufactured or assembled by third parties under contract.  Business conditions and regulatory actions may lead to recalls of products assembled or manufactured by these companies, may result in delays in shipments of such products or may cause these contractors to abandon their contract manufacturing agreements.  Any of these occurrences could have a negative impact on sales and profitability.

Unauthorized or illegal importation of products from countries with lower prescription drug and medical device prices to countries with higher prescription drug and medical device prices may result in lowering the prices we receive for our products.

In the United States and elsewhere, our products are subject to competition from lower priced versions of our products and competing products from Canada, Mexico and other countries where there are government imposed price controls or other market dynamics that make the products lower priced.  The ability of patients and other customers to obtain these lower priced imports has grown significantly as a result of regulatory harmonization and common market or trade initiatives, such as those underpinning the European Union, and the internet.  Despite government regulations in some countries aimed at limiting low priced imports, the volume of imports may continue to rise due to the limited enforcement resources, as well as political pressure to permit the imports as a mechanism for expanding access to lower priced medicines.  In addition, legislative proposals are being considered in the United States at both the federal and state levels to relax U.S. import laws.

The importation of foreign products adversely affects our profitability in the United States and elsewhere.  This impact could become more significant in the future, and the impact could be even greater if there are further changes to the law or if state or local governments take further steps to import products from abroad.

We are subject to extensive government regulation related to (i) the review and market approval of drugs and medical devices, (ii) ongoing compliance and reporting obligations for products with post-approval review and (iii) ongoing pricing and reimbursement reviews for drugs and devices.  These government regulations require internal processes that increase our costs to secure and maintain market registration of our drug and device products.  Government regulation also could prevent us from selling our products.

The research, development, testing, manufacturing, sale and marketing of our products are subject to extensive governmental regulation.  Government regulation includes inspection of and controls over testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, marketing, promotion, record keeping, reporting, the sale and distribution of pharmaceutical products, import, export, samples and electronic records and electronic signatures.  We are also subject to government regulation with respect to the prices we charge and the rebates we offer or pay to customers, including rebates paid to certain governmental entities.  Government regulation substantially increases the cost of developing, manufacturing and selling our products.

In the United States, we must obtain FDA approval for each pharmaceutical product that we market and FDA approval or clearance for each medical device that we market, and additional approvals or clearances may be required for product changes.  The FDA approval process is typically lengthy and expensive, and approval is never certain.  Products distributed outside the United States are also subject to government regulation, which may be equally or more demanding. Our potential products could take a significantly longer time than we expect to gain regulatory approval or may never gain approval.  If a regulatory authority delays approval of a potentially significant
 
 
15
 
 
product, our market value and operating results may decline.  Even if the FDA or another regulatory agency approves a product, the approval may limit the indicated uses for a product, may otherwise limit our ability to promote, sell and distribute a product or may require post-marketing studies or impose other post-marketing obligations.  If we are unable to obtain regulatory approval of our products, we will not be able to market these products, which would result in a decrease in our sales.  Currently, we are actively pursuing approval for a number of our products from regulatory authorities and conducting other pre-market procedures in a number of countries, including, among others, the United States, countries in the European Union and Japan.  Continued growth in our sales and profits will depend, in part, on the timely and successful introduction and marketing of some or all of these products.

The clinical trials required to obtain regulatory approvals are complex and expensive and their outcomes are uncertain.  We incur substantial expense for, and devote significant time to, clinical trials, yet we cannot be certain that the trials will result in the commercial sale of a product.  Positive results from preclinical studies and early clinical trials do not ensure positive results in later clinical trials that form the basis of an application for regulatory approval.  We may suffer significant setbacks in clinical trials, even after earlier clinical trials show promising results.  Any of our products may produce undesirable side effects that could cause us, regulatory authorities or research sites to interrupt, delay or halt clinical trials of a pharmaceutical or medical device candidate.  We, the FDA or another regulatory authority, an Institutional Review Board or a Safety Data Monitoring Committee charged with overseeing the research to protect study subjects may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks.

Noncompliance with applicable legal regulatory requirements can result in fines, injunctions, penalties, mandatory recalls or seizures, suspensions of production, denial or withdrawal of pre-marketing approvals and criminal prosecution.

The FDA and other regulatory bodies across the world also have authority to request repair, replacement or refund of the cost of any device we manufacture or distribute.

We may be subject to penalties if we fail to comply with post-approval legal and regulatory requirements and our products could be subject to restrictions or withdrawal from the market.

Our manufacturing, sales, promotion and other activities following product approval are subject to regulation by numerous regulatory and law enforcement authorities, including, in the United States, the FDA, the U.S. Federal Trade Commission, the Department of Justice, the CMS, other divisions of the Department of Health and Human Services and state and local governments.  Any product for which we currently have or may obtain marketing approval, or clearance, along with the associated manufacturing processes, any post-approval clinical data that we might be required to collect, any adverse events and malfunctions associated with the products, and any advertising and promotional activities for the product, are subject to continual recordkeeping and reporting requirements, review and periodic inspections by regulatory authorities.  Our advertising and promotional activities are subject to stringent regulatory rules and oversight.  In the past, we have had to change or discontinue promotional materials because of regulatory agency requests, and we are exposed to that possibility in the future and also to the possibility of new civil monetary penalties that have been established for violative promotion of drug products to consumers.

New requirements and industry guidelines have been adopted to require the posting of ongoing drug and device clinical trials on public registries, and the disclosure of designated clinical trial results.  We must continually review adverse event and other available safety information that we receive concerning our products and make expedited and periodic reports to regulatory authorities.  In any given situation, we may consider whether to implement a voluntary product recall.  We might be required to report to the FDA certain drug and medical device recalls, device malfunctions or product defects and failures to meet federal electronic product standards.  In the United States, any free samples we distribute to physicians must be carefully monitored and controlled, and must otherwise comply with the requirements of the Prescription Drug Marketing Act, as amended, and FDA regulations.  In addition, certain of our products must comply with child-resistant packaging requirements under the Poison Prevention Packaging Act and Consumer Product Safety Commission regulations.

Our sales, marketing, research and other scientific/educational programs also must comply with rules governing the promotion of medicines and devices, anti-bribery rules and related laws, such as the anti-kickback and fraud and abuse provisions of the Social Security Act, as amended, the Foreign Corrupt Practices Act, the False Claims Act, as
 
 
16
 
 
amended, the privacy provisions of the Health Insurance Portability and Accountability Act and similar state laws.  Pricing and rebate programs must comply with the Medicaid drug rebate requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, the Veterans Health Care Act of 1992, as amended, and the Deficit Reduction Act of 2005, as amended.  The statutes and regulations governing the various price reporting requirements are complex and have changed over time, and the U.S. government has not given clear guidance on many issues.  In addition, recent statutory and regulatory developments have not yet been applied by the government or courts to specific factual situations.  We believe that the Company is in compliance with all applicable government price reporting requirements, but there is the potential that the CMS, other regulatory and law enforcement agencies or a court could arrive at different interpretations, with adverse financial or other consequences for the Company.  If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply.  All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.  Some European Union bodies and most European Union member states and Japan impose controls and restrictions that are similar in nature or effect to those described above.

In recent years, several states in the United States, including California, Connecticut, Maine, Massachusetts, Minnesota, Nevada, New Hampshire, New Mexico, Texas, Vermont and West Virginia, as well as the District of Columbia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as prohibiting pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing.  Similar legislation is being considered in other states and at the federal level in the United States.  Many of these requirements are new and their breadth and application is uncertain, and most apply only to drugs; however, certain legislation (e.g., California, Connecticut, Massachusetts, Nevada and Vermont) also applies to devices.

Depending on the circumstances, failure to meet these applicable legal and regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private "qui tam" actions brought by individual whistleblowers in the name of the government or refusal to allow us to enter into supply contracts, including government contracts, any of which could have a material adverse effect on our financial condition.

We may be subject to governmental, regulatory and other legal proceedings that have a significant negative effect on our results of operations.

We 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.

As further discussed in Item 8.A.7, "Legal Proceedings," we are subject to various legal proceedings, including legal proceedings relating to Novartis's January 2010 merger proposal.  We 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, we may in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations or cash flows, and the price of our common shares may be affected by speculation concerning the potential outcome of legal proceedings.

We are 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, we have 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.

 
17
 
 
New legal and regulatory requirements could make it more difficult for us to obtain approvals for our product candidates and could limit or make more burdensome our ability to commercialize any approved products.

The Food and Drug Administration Amendments Act of 2007 ("FDAAA") contains significant regulatory requirements affecting pharmaceutical and medical device manufacturers.  These requirements share some of the broad themes in recently adopted legal requirements for drugs in the European Union.  For drugs, the FDAAA grants the FDA extensive new authority to impose post-approval clinical study and clinical trial requirements, require safety-related changes to product labeling, review advertising aimed at consumers and require the adoption of risk management plans, referred to in the legislation as risk evaluation and mitigation strategies ("REMS").  The REMS may include requirements for special labeling or medication guides for patients, special communication plans to healthcare professionals and restrictions on distribution and use.  For example, if the FDA makes the necessary findings, it might require that a new product be used only by physicians with certain specialized training, only in certain designated healthcare settings or only in conjunction with special patient testing and monitoring.

The legislation also includes requirements for drugs and devices for providing the public with information on ongoing clinical trials through a clinical trial registry and for disclosing clinical trial results to the public through a clinical trial database, renewed requirements for conducting trials to generate information on the use of products in pediatric patients, new requirements to pay the FDA a fee in order to obtain advisory review of certain drug consumer television advertisements and new penalties, for example, for false or misleading consumer drug advertisements.  Other proposals have been made to impose additional requirements on drug and device approvals, further expand post-approval requirements and restrict sales and promotional activities.

States require the registration of manufacturers and wholesale distributors of pharmaceutical and medical device products in that state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state.  New requirements also have been imposed in some states and certain markets outside the United States and proposed in other states, requiring us to provide paper or electronic pedigrees with the drugs that we distribute to help establish their authenticity and to track their movement from the manufacturer through the chain of distribution.

These new federal and state requirements and additional requirements that have been proposed, and might be adopted, may make the process more difficult or burdensome for us to obtain approval of our product candidates.  In addition, any approvals we receive may be more restrictive or come with onerous post-approval requirements, our ability to commercialize approved products successfully may be hindered and our business may be harmed as a result.

We may implement a product recall or voluntary market withdrawal and could be exposed to significant product liability claims; we may have to pay significant amounts to those harmed and may suffer from adverse publicity as a result.

The manufacturing and marketing of pharmaceuticals and medical devices, including surgical equipment and instruments, involve an inherent risk that our products may prove to be defective and cause a health risk.  In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority.  We have recalled products in the past and, based on this experience, believe that the occurrence of a recall could result in significant costs to us, potential disruptions in the supply of our products to our customers and adverse publicity, all of which could harm our ability to market our products.  A recall of one of our products or a product manufactured by another manufacturer could impair sales of other similar products we market as a result of confusion concerning the scope of the recall.  A product recall also could lead to a regulatory agency inspection or other regulatory action.

From time to time, we are named as a defendant in product liability lawsuits, and although we believe we are not currently subject to any material product liability proceedings, we may incur material liabilities relating to product liability claims in the future, including claims arising out of procedures performed using our surgical equipment.  Prior to 2005, we relied on a combination of self-insurance and third-party insurance to cover potential product liability claims.  Since January 1, 2005, we no longer purchase third party product liability insurance coverage for this risk.  The combination of insurance coverage (if any), cash flows and reserves may not be adequate to satisfy product liabilities that we may incur in the future.  Even meritless claims could subject us to adverse publicity, hinder us from
 
 
18
 
 
securing insurance coverage in the future and require us to incur significant legal fees.  Successful product liability claims brought against us could have a material adverse effect on our results of operations or our financial condition.

Our activities involve hazardous materials and may subject us to environmental liability.

Our manufacturing, research and development practices involve the controlled use of hazardous materials.  We are subject to federal, state and local laws and regulations in the various jurisdictions in which we have operations, governing the use, manufacture, storage, handling and disposal of these materials and certain waste products.  Although we believe that our safety and environmental procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials.  Remedial environmental actions or compliance with environmental laws could require us to incur substantial unexpected costs which would materially and adversely affect our results of operations or our financial position.  If we were involved in a major environmental accident or found to be in substantial non-compliance with applicable environmental laws, we could be held liable for damages or penalized with fines that could be material.

Prior to 2005, we relied on a combination of self-insurance and third-party insurance to cover potential environmental liability claims.  Since January 1, 2005, we no longer purchase insurance coverage for this risk.  The combination of insurance coverage (if any), cash flows and reserves may not be adequate to satisfy environmental liabilities that we may incur in the future.  Any environmental claims could subject us to adverse publicity, hinder us from securing insurance coverage in the future and require us to incur significant legal fees.  Successful environmental liability claims brought against the Company could have a material adverse effect on our results of operations or our financial condition.

We do not purchase third-party insurance to cover almost all of our property and casualty, business interruption and liability risks.  We continue to purchase insurance from third parties when required by law and for the personal side of directors' and officers' liability insurance.

The pharmaceutical and medical device business involves an inherent risk of product liability and any claims of this type could have an adverse impact on us.  Furthermore, we have all the risks of property and casualty, general liability, business interruption and environmental liability exposures that are typical of a public enterprise with manufacturing and marketing activities.  Prior to 2005, we relied on a combination of self-insurance through our captive insurance subsidiaries and third-party insurance to cover potential claims from these risks.  Since March 31, 2005, we no longer purchase any form of insurance from third parties except for insurance coverage required by law to be purchased from third parties, such as workers' compensation and automobile insurance.  Consequently, we are exposed to all self-insured risks.  However, we purchase the personal side of directors' and officers' liability insurance from a third party.

Although our Company assets, our internally generated cash flows and third-party insurance coverage have been adequate to provide for liability claims in the past, there can be no assurance that future liability claims and other losses from these risks can be covered by our insurance coverage limits for past activities, Company assets and future cash flows.  Any significant losses from these risks could have a material adverse effect on our results of operations or our financial condition.

We may not successfully complete and integrate strategic acquisitions to expand or complement our business.

As part of our growth strategy, we evaluate and pursue strategic business acquisitions to expand or complement our business.  Such ventures may bring new products, increased market share or new customers to Alcon's prominent position in the ophthalmic industry.  We cannot ensure that suitable acquisition candidates will be identified.  Acquisition activities can be thwarted by overtures from competitors for the targeted candidates, governmental regulation (including market concentration limitations) and replacement product developments in our industry.  Further, after an acquisition, successful integration of the venture can be complicated by corporate cultural differences, difficulties in retention of key personnel, customers and suppliers, and coordination with other products and processes.  Also, acquisitions could divert management's attention from our existing business and could result in liabilities being incurred that were not known at the time of acquisition or the creation of tax or accounting issues.  If we fail to timely recognize or address these matters or to devote adequate resources to them, we may fail to achieve our growth strategy or otherwise not realize the intended benefits of any acquisition.
 
 
19
 
 
We face risks arising from possible union legislation in the United States.

There is a possibility that the proposed Employee Free Choice Act may be enacted in the United States.  If passed, the Employee Free Choice Act would make it easier for unions to win elections and could result in more labor relations requirements and union activity in our business.  This legislation potentially could increase our costs and could have a material adverse effect on our overall competitive position.
 
The March 11, 2011 earthquake and tsunami in Japan may adversely affect our operations in Japan.

On March 11, 2011, a significant portion of Japan suffered damage from a major earthquake and accompanying tsunami.  Our office in Tokyo reported that all of our employees there were safe and that damage to the Company's physical assets was not significant to the Company on a consolidated basis.  However, damage to the country's energy supplies, infrastructure and distribution channels has been significant and may cause adverse consequences in the future.  As a result, we expect that our operations in Japan will be adversely affected in 2011 by factors that may include reduced sales, increased costs and expenses, and disruptions to the operations of our suppliers and business partners.  We are unable to determine the extent of the impact of this event on our operations and financial condition in the future with any level of precision at the date of this report.
 
Risks Related to Our Relationship with Novartis

We will be controlled by Novartis AG as long as it owns a majority of our common shares, and our other shareholders will be unable to affect the outcome of a shareholder vote during that time.

At December 31, 2010, Novartis AG, a Swiss corporation, owned approximately 77% of our outstanding common shares.  Because Novartis's interests may differ from those of our other shareholders, actions Novartis takes with respect to us may be unfavorable to our other shareholders.  Minority holders of common shares will not be able to affect the outcome of most shareholder votes so long as Novartis owns at least a majority of our outstanding common shares.  So long as it owns at least a majority of our common shares, Novartis will be able to control, among other things, the outcome of shareholder votes relating to the following:  the election and removal of all of our directors; amendments to our Articles of Association; payment of dividends; changes to our capital structure; and appointment and removal of our statutory and group auditors.

On December 14, 2010, Alcon's 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, 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 merger agreement precludes the payment of dividends by Alcon and contains limitations on our ability to take certain actions without the prior consent of Novartis.  Completion is conditional, among other things, on two-thirds approval by the shareholders of Alcon.  At December 31, 2010, Novartis owned more than the required two-thirds of the outstanding common shares of Alcon and has agreed, subject to certain conditions, to vote all of its Alcon shares to approve the merger.

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.

Because Novartis controls us, conflicts of interest between Novartis and us could be resolved in a manner unfavorable to us.

Various conflicts of interest between Alcon and Novartis could arise.  For example, ownership interests of directors or officers of Alcon in Novartis shares or service as a director or officer of both Alcon and Novartis could create, or appear to create, potential conflicts of interest when a director or officer is faced with decisions that could have different implications for the two companies, such as disagreement over the desirability of a potential acquisition opportunity, employee retention or recruiting or our dividend policy.
 
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We cannot assure you that all conditions to the merger will be completed and the merger consummated.

The merger is subject to the satisfaction of closing conditions, including the approval of our and Novartis's shareholders, and we cannot assure you that the merger will be completed.  In the event the merger is not completed, we may be subject to many risks, including the costs related to the proposed merger, such as legal, accounting, and advisory fees, which must be paid even if the merger is not completed.  If the merger is not completed, the market price of our common stock could decline.
 
Sales or distributions of our common shares by Novartis could depress the market price for our common shares.

Novartis may, at any time, sell all or part of our common shares that it owns or it may distribute those common shares to its shareholders.  There can be no assurance that any of our other shareholders will be included in any transaction in the event Novartis sells its interest in us to another party or that any of our shareholders will realize a premium with respect to their common shares as a result of such transaction or any other disposition of our common shares by Novartis.  In addition, sales or distributions by Novartis of substantial amounts of our common shares in the public market or to its shareholders could adversely affect prevailing market prices for our common shares.  Novartis is not subject to any contractual obligation to maintain its respective ownership positions in our shares.

Risks Related to the Securities Markets and Ownership of Our Common Shares

The price of our common shares may fluctuate.

The market price of our common shares may fluctuate significantly in response to factors, both within and outside our control, such as announcements of innovations and discoveries or new products by us or our competitors, developments concerning intellectual property rights and regulatory approvals, changes in estimates of our financial performance, changes in recommendations by securities analysts and developments with respect to the proposed merger with Novartis.  To the extent that there are sales of substantial amounts of common shares in the public market in connection with or immediately following exercise by the holders of employee stock options or share-settled stock appreciation rights, the market price of our common shares may decrease significantly.

The stock market in general sometimes experiences extreme price and volume fluctuations.  The market prices of securities of pharmaceutical and medical device companies have experienced fluctuations that often have been unrelated or disproportionate to the operating results of these companies.  These market fluctuations could result in extreme volatility in the price of our common shares, which could cause a decline in the value of our common shares.  You should be aware also that for the size of our company, Alcon has relatively fewer shares that trade on a daily basis than other similar companies in our industry.  As a result, price volatility of our shares may be greater when the trading volume of our common shares is low.

Risks Related to Our Jurisdiction of Incorporation

We are incorporated in Switzerland and Swiss law governs our internal corporate affairs.

We are a corporation incorporated under the laws of Switzerland.  The rights of holders of our common shares are governed by Swiss corporate law and by our Articles of Association.  In particular, Swiss corporate law limits the ability of a shareholder to challenge resolutions or actions of our board of directors in court.  Shareholders generally are not permitted to file a suit to reverse a decision or action by directors but are permitted to seek damages for breaches of fiduciary duty.  Shareholder claims against a director for breach of fiduciary duty would, as a matter of Swiss law, have to be brought at our place of incorporation in the Canton of Zug, Switzerland, or at the domicile of the involved director.  In addition, under Swiss law, any claims by shareholders against us must be brought exclusively at our place of incorporation.

Under Swiss corporate law, we are required to declare dividends in Swiss francs.  As a result, any currency fluctuations between the U.S. dollar and the Swiss franc will affect the dollar value of the dividends we pay.
 
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In addition, in several instances we follow Swiss corporate governance practices instead of the corporate governance practices applicable to a U.S. company under New York Stock Exchange ("NYSE") listing standards, as permitted by the NYSE.  A summary of the principal areas of difference is provided under Item 16G, "Corporate Governance."
 
 
 ITEM 4.
INFORMATION ON THE COMPANY
 
          A.
HISTORY AND DEVELOPMENT OF THE COMPANY
 

General Information

The entity that is now Alcon, Inc. was originally incorporated in Switzerland in 1971 as Société Fromagère Nestlé S.A., and, after a change of our name to Alcon Universal S.A. in 1978, was registered in the Commercial Register of the Canton of Zug on March 13, 1992.  Effective on December 21, 2001, we changed our name to Alcon, Inc.  We are subject to the laws of Switzerland.  Our principal executive offices are located at Bösch 69, P.O. Box 62, 6331, Hünenberg, Switzerland, and our telephone number is +41-41-785-8888.  Our principal United States offices are located at 6201 South Freeway, Fort Worth, Texas 76134-2099.  The telephone number at those offices is (817) 293-0450 and the fax number is (817) 568-7111.

In this document, "IPO" refers to the initial public offering of approximately 69,750,000 of Alcon's common shares on March 20, 2002.  Prior to the IPO, Alcon, Inc. was a wholly owned subsidiary of Nestlé.

Important Events in the History of the Company in 2010

Change of Control 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.  This 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 premium of approximately 20.5% 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.  Upon 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.
 
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The proposed merger would be contingent upon, among other things, approval by the Alcon board of directors.  Alcon's Independent Director Committee believes 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, we 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.
 
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 December 31, 2010, Novartis owned more than the required two-thirds of the outstanding common shares of Alcon and has indicated its intention, subject to certain conditions, to vote all of its Alcon shares to approve the merger.  The merger is expected to be completed during the first half of 2011.

Upon completion of the merger, Alcon will become the second largest division within Novartis.  Novartis has proposed that its CIBA VISION operations and select Novartis ophthalmic products will be integrated into Alcon.

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.

Capital Expenditures, Acquisitions and Divestitures for the Last Three Years (January 1, 2008 through December 31, 2010):

The Company's capital expenditures for property, plants and equipment, to expand and upgrade manufacturing facilities, research and development facilities and other infrastructure, for the years ended December 31, 2010, 2009 and 2008 were $309 million, $342 million and $302 million, respectively.

In 2009, we broke ground to build a facility in Singapore that will manufacture pharmaceuticals to be distributed throughout most of Asia.  Initial construction has been completed, and we plan for the 331,000 square foot facility to be fully functional in 2012.
 
 
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LenSx 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.  The LenSx® 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 are done manually with 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.  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.

Note 18 to the consolidated financial statements provides more information on this acquisition.

Sirion Asset Purchase

In the first quarter of 2010, we also purchased certain intangible assets from Sirion Holdings, Inc.  The intangible assets included the technology and licenses to manufacture, market and sell DUREZOL® ophthalmic steroid for post-surgical ocular pain and inflammation.

Optonol Acquisition

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 complements Alcon's pharmaceutical products that lower intraocular pressure in patients with glaucoma and ocular hypertension and has been additive to the Company's growth.

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.

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.  This subsidiary has been converted and renamed, "ESBATech, an Alcon Biomedical Research Unit GmbH."
 
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Note 18 to the consolidated financial statements provides more information on this acquisition.
 
WaveLight Acquisition

On November 9, 2007, Alcon completed a voluntary tender offer for WaveLight AG, a German company, culminating in Alcon's acquisition of 77.4% of the issued shares of WaveLight.  In the fourth quarter of 2008, Alcon acquired additional shares of WaveLight.  WaveLight develops, manufactures and markets innovative refractive laser and diagnostic systems, including the ALLEGRETTO laser system for refractive eye surgery.

On March 4, 2009, a Domination Agreement was registered and became effective.  The Domination Agreement allowed Alcon to instruct WaveLight with regard to operational and financial matters, as well as the efficient integration of both companies.  Seventy-nine shareholders have filed applications for appraisal proceedings against the Company relative to the cash compensation and guarantee dividend offered in the Domination Agreement.  So far no court hearing has been scheduled.

In October 2009, the German requirements were met to complete the acquisition of the outstanding minority shares of WaveLight by way of a "squeeze-out."  As a result, WaveLight became wholly owned by the Company, and the listing of the shares of WaveLight was terminated.  One hundred shareholders have filed applications for appraisal proceedings against the Company relative to the cash compensation offered in the course of the "squeeze-out."  So far no court hearing has been scheduled.

Before the end of 2009, the Domination Agreement was terminated by way of a mutual agreement between Alcon, Inc. and WaveLight AG.  In addition the shares held in WaveLight were transferred to Alcon Refractive Horizons, LLC.  On April 15, 2010, the legal form of WaveLight AG, a stock corporation under German law (AG), was changed to a limited liability company under German Law (GmbH).

Capital Expenditures, Acquisitions and Divestitures Currently Underway:

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.  Capital expenditures 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.

The Company has not announced any other acquisitions or divestitures subsequent to December 31, 2010.

B.          BUSINESS OVERVIEW

Alcon is a research and development driven, global medical specialty company predominantly focused on eye care.  We develop, manufacture and market pharmaceuticals, surgical equipment and devices and consumer eye care products to treat primarily diseases and disorders of the eye.  Our broad range of products represents one of the strongest portfolios in the ophthalmic industry.  We believe we have the largest commitment to ophthalmic research and development of any company worldwide.  Currently, our products are sold in over 180 countries, and we are present in every significant market in the world where ophthalmology is practiced.  In 2010, we had sales of $7.2 billion, operating income of $2.5 billion and net earnings of $2.2 billion.

Our Products

Our broad range of products represents one of the strongest portfolios in the ophthalmic industry, with high-quality and technologically advanced products across all major product categories.  Our leadership position across most of our product categories enhances our ability to extend our product offerings, through the launch of new and innovative products, and to expand our geographic reach into ophthalmic markets worldwide.  We manage our business through two business segments: Alcon United States and Alcon International.  Our portfolio spans three key ophthalmic categories: pharmaceutical, surgical and consumer eye care products.  See notes 10 and 11 to the consolidated financial statements for a three-year history of our sales by segment and category.

 
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Our Pharmaceutical Products

We are a global leader in ophthalmic pharmaceuticals.  We develop, manufacture and market a broad offering of prescription ophthalmic pharmaceutical products.
 
The following table lists our principal pharmaceutical products:

   
Ocular Anti-Infectives/
               
Glaucoma
 
Anti-Inflammatories
 
Ocular Allergy
 
Generics
 
Otic/Nasal
   
TRAVATAN®
TRAVATAN Z®
TRAVATAN® APS
DuoTrav®
AZARGA®
Azopt®
Betoptic S®
 
Vigamox®/Vegamox® (1)
Moxeza(1)
TobraDex®
TobraDex® ST
Tobrex®
NEVANAC®
Maxitrol®
DUREZOL®
 
 
Patanol®/Opatanol®
Pataday
 
 
Timolol GFS
Pred Acetate
Dorzolamide
Dorzolamide/Timolol
Ciprofloxacin
Brimonidine
Trifluridine
Tobramycin/
    dexamethasone
 
Cipro® HC Otic (1)
CIPRODEX® (1)
Patanase®
   

(1)  
Cipro® and CIPRODEX® are registered trademarks of Bayer AG, licensed to Alcon by Bayer Schering Pharma AG.  Moxifloxacin, the primary ingredient in Vigamox®, Vegamox® and Moxeza, is licensed to Alcon by Bayer Schering Pharma AG.

Glaucoma Treatment

In 2010, sales of our glaucoma products were $1,277 million, or 41.7% of our total pharmaceutical sales.

TRAVATAN® ophthalmic solution competes in the prostaglandin analogue class of glaucoma treatments.  Prostaglandin analogues are the largest class of compounds currently available to reduce intraocular pressure, which is a primary characteristic of glaucoma.  In 2010, we converted in the United States to the exclusive distribution of a newer formulation of TRAVATAN® called TRAVATAN Z® ophthalmic solution.  TRAVATAN Z® replaces the preservative benzalkonium chloride ("BAC") with our proprietary SOFZIA® preservative system.  Outside the United States, we also market DuoTrav® ophthalmic solution, which combines the prostaglandin in TRAVATAN® with a beta blocker, timolol.  We received approval and commenced the launch of this product in Japan in 2010 to further expand our glaucoma franchise.  Brands containing our proprietary prostaglandin have been launched in more than 100 countries.  Introduction of TRAVATAN® APS ophthalmic solution, which replaces BAC with a commonly used ocular preservative, is planned in 2011 for Europe.

In late 2008, we received approval from the European Medicines Agency to launch AZARGA® ophthalmic suspension, a fixed combination for the treatment of glaucoma containing a topical carbonic anhydrase inhibitor and a beta blocker.  We have launched AZARGA® in most European markets and several other markets outside the United States.  In addition, we offer Azopt® and Betoptic S® ophthalmic suspensions, both of which utilize separate classes of compounds.  Azopt® is a topical carbonic anhydrase inhibitor that has shown to be an excellent adjunctive therapy when used with other glaucoma therapies, including prostaglandin analogues.

These products are important to our glaucoma franchise and currently make up a majority of our glaucoma products sales.  We expect our glaucoma products to continue to contribute to our sales growth.

Anti-Infectives, Anti-Inflammatories and Combination Therapies

We currently manufacture and market a broad range of drugs to treat bacterial, viral and fungal infections of the eye and to control ocular inflammation.  In 2010, combined sales of our ocular anti-infectives, ocular anti-inflammatories and combination therapies were $980 million, or 32.0% of our total pharmaceutical sales.

Our leading ocular anti-infective product is Vigamox® ophthalmic solution, utilizing moxifloxacin to treat bacterial conjunctivitis.  During 2006, we received approval and launched Vigamox® in Japan under the trade name Vegamox® ophthalmic solution.  In November 2010, the FDA approved Moxeza 0.5% ophthalmic solution, using
 
 
26
 
 
the same active ingredient as found in Vigamox®, moxifloxacin, to treat bacterial conjunctivitis.  Moxeza is a new formulation that improves bioavailability, provides an increased concentration of drug to the conjunctiva, thus allowing for twice-daily treatment.  Launch of Moxezain the United States is planned for early 2011.

During 2005, we launched a topical non-steroidal anti-inflammatory drug ("NSAID") in the U.S. market for the treatment of pain and inflammation associated with cataract surgery.  NEVANAC® ophthalmic suspension is unique because it is a prodrug where the drug is converted to the active ingredient only after it enters the eye.  NEVANAC® was approved in Japan during 2010.

Our combination ocular anti-infective/anti-inflammatory products, TobraDex® ophthalmic suspension and ointment, combine a broad-spectrum antibiotic with a proven anti-inflammatory.  Our exclusive rights to sell TobraDex® in the United States expired as of January 2009 and in most other countries in March 2009.  Both a competitor and our Falcon Pharmaceuticals subsidiary launched generic versions of TobraDex® suspension in early January 2009.  The generic competition for TobraDex® has resulted in a reduction in sales in the United States due to loss in market share and reduced price.  Sales of TobraDex® outside the United States have not been significantly impacted.

In September 2010, we launched TobraDex® ST suspension, a new formulation of tobramycin and dexamethasone that utilizes a new suspension technology incorporating pharmaceutical-grade xanthan gum and requires only half the amount of dexamethasone as our original TobraDex® suspension.  TobraDex® ST suspension offers dual therapy by providing rapid relief for patients who are suffering from inflammation and infection due to acute blepharitis and other conditions involving ocular inflammation and infection or risk of infection.

In 2010, we acquired the rights in the United States for DUREZOL® emulsion, a topical ophthalmic corticosteroid used to treat postoperative inflammation and pain associated with ocular surgery.  DUREZOL® emulsion received approval from the FDA in 2008 and was the first ophthalmic steroid to be approved for both postoperative inflammation and pain.

Ocular Allergy

We market and manufacture products for the treatment of ocular allergies.  In 2010, sales of our ocular allergy pharmaceutical products were $539 million, or 17.6% of our total pharmaceutical sales.  The allergy market is seasonal, peaking in the spring and again, but to a lesser extent, in the fall.

Patanol® ophthalmic solution was the first ocular allergy product with a dual-action active ingredient, which acts as both an antihistamine and a mast-cell stabilizer.  During 2006, we received approval and launched Patanol® in Japan, the second largest ophthalmic allergy market.  We have a co-marketing agreement in Japan with Kyowa Hakko Kirin Co., Ltd., a leading Japanese pharmaceutical company, whereby Kyowa promotes Patanol® to non-eye care physicians and we promote the product to eye care physicians.  In February 2007, we launched in the United States the first once-a-day ocular prescription allergy medicine, Pataday ophthalmic solution, which is a new formulation utilizing an increased concentration of olopatadine, the active ingredient in Patanol®.  According to Wolters Kluwer Health Source Prescription Audit, Patanol® and Pataday were the leading ophthalmic topical anti-allergy prescription products in the United States in 2010.  We currently sell Patanol® in more than 95 countries.

Otic/Nasal Products

We also market combination anti-infective/anti-inflammatory products for ear infections.  CIPRODEX® otic suspension, for the treatment of otitis media in the presence of tympanostomy tubes ("AOMT") and of otitis externa, commonly known as swimmer's ear, is marketed in the United States and a small number of countries outside the United States.  In addition, we market Cipro® HC Otic for the treatment of otitis externa in over 30 countries.  Sales of our otic products are seasonal, with a higher percentage of prescriptions written during the summer months.

Patanase® nasal spray was approved by the FDA in April 2008 and currently is marketed in the United States for the relief of the symptoms of allergic rhinitis in patients six years of age and older.

 
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Generic Pharmaceuticals

We established Falcon Pharmaceuticals in 1994 to manufacture and market generic ophthalmic and otic pharmaceutical products in the United States.  Falcon's sales in 2010 were $200 million, or 6.5% of our total global pharmaceutical sales.  Falcon currently manufactures and markets approximately 35 generic pharmaceutical products.

Falcon's largest product in 2010 was Brimonidine 0.15% for the treatment of glaucoma and accounted for 27% of Falcon's sales.  Alcon has exclusive rights to manufacture and sell this product, which is the sole generic form of Allergan's branded product, Alphagan® P, through January 2022.  Falcon's second largest product, Timolol GFS, was the sole generic pharmaceutical approved by the FDA as an AB therapeutically equivalent substitute for Merck's Timoptic-XE®.  Merck's patent covering Timoptic-XE® expired in September 2006, allowing other generic competitors to receive approval of a therapeutically equivalent version of Timoptic-XE®.  In December 2009, a competitor launched an authorized generic version of Merck's Timoptic-XE®, which negatively impacted our sales and profits in 2010.

In January 2009, Falcon launched a generic tobramycin/dexamethasone combination drug in response to other competitive generics that were introduced to compete with our TobraDex® branded product.  Our generic version comprised almost 16% of Falcon's sales in 2010.

Falcon's other principal generic products include Prednisolone Acetate (used for the treatment of inflammation of the eye), Timolol Solution (for the treatment of glaucoma), Trifluridine (used to treat viral infections of the eye), Dorzolamide and Dorzolamide/Timolol combination (for the treatment of glaucoma), Ketorolac (used to treat allergy and for the eye), Ciprofloxacin (used to treat infections of the eye) and Neomycin and Polymyxin B Sulfates and Hydrocortisone otic and ophthalmic suspension (sterile antibacterial and anti-inflammatory combination products for the treatment of bacterial infections in the ear and the eye, respectively).

Our Surgical Products

We are the global leader in ophthalmic surgical products and manufacture and market the most comprehensive product offering available today.

The following table lists our principal surgical products:

Cataract
 
Refractive
 
Vitreoretinal
 
General Surgical
   
Infiniti® vision system
Infiniti®, AquaLase® and
      OZil® surgical instruments
Infiniti® consumables
Laureate® compact
      phacoemulsification system
LenSx® laser
AcrySof ® intraocular lenses
    - AcrySof® Natural
    - AcrySof® IQ
    - AcrySof® ReSTOR®
    - AcrySof® IQ ReSTOR®
    - AcrySof® Toric
    - AcrySof® IQ Toric
    - AcrySof® IQ ReSTOR® Multifocal Toric
Viscoelastic devices
    - DuoVisc®
    - DisCoVisc®
    - VISCOAT®
    - ProVisc®
 
ALLEGRETTO WAVE®
    Eye-Q 400 Hz laser
ALLEGRO ANALYZER®
    wavefront system
ALLEGRO TOPOLYZER®
    corneal topography
    system
ALLEGRO OCULYZER®
    pentacam diagnostic device
ALLEGRO
    biometry system
AcrySof ® CACHET
    phakic lens
WaveLight® Refractive Suite    EX 500 Excimer 500 Hz laser
FS200 femtosecond laser
 
CONSTELLATION® surgical system
Accurus® surgical system
Accurus® cassettes and probes, including 23 gauge and  25 gauge vitreoretinal instrumentation
Grieshaber® microsurgical instruments
Perfluoron® liquid
Silikon® 1000 ophthalmic surgical oil
 
 
BSS Plus® surgical irrigating solution
Custom Pak® surgical procedure packs
A-OK® surgical knives
EX-PRESS® glaucoma filtration device
   
 
 
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Cataract Surgery

We support our global market leadership in cataract surgical products by providing a comprehensive offering of surgical equipment, single-use and disposable products.  Sales of our products for cataract surgery in 2010 were $2,604 million, or 80.9% of our total surgical sales.  We currently market products for cataract surgery in substantially all of our markets.

The Infiniti® vision system, our most advanced lens removal system, has been widely accepted by surgeons around the globe.  Continued customer interest in the Infiniti® vision systems will maintain or expand our position as the worldwide leader in lens removal systems.  The Infiniti® vision system has been advanced continually since its introduction in 2003, with the latest advancement being the addition of the OZil® torsional handpiece in 2006.  OZil® is a proprietary technology utilizing torsional oscillation and ultrasound to more efficiently emulsify the lens.  Many surgeons who have adopted OZil® torsional technology have reported a more efficient, more effective and safer lens removal procedure.  In addition, many customers with existing Infiniti® vision systems chose to upgrade their units with OZil® torsional technology.

Our portfolio of surgical products allows us to compete effectively in developing as well as developed markets.  In late 2007, we launched the Laureate® compact phacoemulsification system as a replacement for the LEGACY® surgical system in selected markets.  The Laureate® provides excellent fluidics and traditional longitudinal ultrasound capabilities and is designed to support surgical procedures and practices in developing markets.

Our comprehensive line of single-use products for cataract procedures includes the cassettes used in the Infiniti®, Laureate® and LEGACY® surgical systems, a full line of viscoelastics to protect delicate tissues of the eye during the procedure, surgical knives and surgical irrigating solutions.  The Company holds market-leading positions in each of these product lines.

In 2010, we acquired the LenSx® laser system with LenSx Lasers, Inc.  This laser is the first femtosecond laser to receive FDA clearance for use in cataract surgery.  The LenSx® system is indicated for anterior capsulotomy, phacofragmentation and the creation of single plane and multi-plane arc incisions in the cornea during cataract surgery, providing a precise laser alternative to certain manual steps within the traditional cataract procedure.  The innovative LenSx® laser platform enables surgeons to perform some of the most delicate manual steps of cataract surgery with image-guided visualization and micron level laser precision. The LenSx® laser enhances a surgeon's ability to predictably create a well-centered anterior capsulorhexis of exact diameter, and to effectively fragment the lens for removal with minimized phaco time and power.  In addition, certain corneal incisions can be made with the LenSx® laser system, reducing or eliminating the use of knives in the cataract procedure.

Our AcrySof® intraocular lenses are the most frequently implanted intraocular lenses in the world.  AcrySof® intraocular lenses are made of the first material specifically engineered for use in an intraocular lens.  More than 50 million AcrySof® intraocular lenses have been implanted since introduction.

Our AcrySof® IQ intraocular lens is the first intraocular lens to combine an aspheric design with ultraviolet and blue-light-filtering.  This unique combination of technology allows the AcrySof® IQ to provide improved contrast sensitivity and image quality.

In 2005, we introduced a new class of lens to correct presbyopia called the AcrySof® ReSTOR® +4.0 diopter add power intraocular lens.  This lens has a unique optical system that incorporates an apodized diffractive, refractive design that provides distance, near and intermediate vision for the patient following lens removal surgery, thereby significantly reducing the patient's need for or dependence on eyeglasses.  In 2007, we launched the next advancement in this technology with the AcrySof® IQ ReSTOR® aspheric intraocular lens.  This lens incorporates aspheric correction designed specifically for the AcrySof® ReSTOR® apodized diffractive, refractive design.  In 2009, we further enhanced this product with the launch of the AcrySof® IQ ReSTOR® +3.0 diopter add power intraocular lens, which provides an improved full range of vision for patients.

In late 2005 and early 2006, we received regulatory approvals for the AcrySof® Toric intraocular lens in several major markets, including the United States.  The AcrySof® Toric intraocular lens is a lens that corrects for various levels of pre-existing astigmatism in cataract patients and was launched globally in 2006.  In 2009, we received
 
 
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regulatory approvals and launched the AcrySof® IQ Toric, which incorporates the aspheric technology with a toric design.

In 2010, Alcon launched the AcrySof® IQ ReSTOR® Multifocal Toric intraocular lens outside the U.S.  The AcrySof® IQ ReSTOR® Multifocal Toric intraocular lens brings together the multifocal performance of the AcrySof® IQ ReSTOR® with the precise astigmatism correction of the AcrySof® Toric intraocular lens.  Alcon completed its CE Mark of the AcrySof® IQ ReSTOR® Toric intraocular lens during the second quarter of 2010, and this lens is now available in many major markets that recognize the CE Mark.  The Company plans to file a Pre-Market Application ("PMA") for the lens with the FDA in early 2012.

Our advanced technology intraocular lenses provide significant visual benefits to patients above standard monofocal intraocular lenses.  Our pricing strategy for advance technology intraocular lenses captures this additional value through higher pricing.  This approach impacts the market penetration of advanced technology intraocular lenses in the majority of countries, as patients must pay incremental charges above the cost of traditional cataract surgery to obtain an advanced technology intraocular lens and, in some markets, must pay out-of-pocket for the entire surgical procedure and the intraocular lens.

In May 2005, CMS issued a ruling that allows cataract patients in the United States to choose an intraocular lens that provides additional refractive benefits through the treatment of presbyopia such as the AcrySof® ReSTOR®.  Under this policy, Medicare will reimburse normal amounts under the covered benefit for cataract surgery, and patients may elect to pay for the non-covered charges.  In January 2007, CMS issued a similar ruling allowing Medicare beneficiaries to choose an intraocular lens with the added benefit of treating astigmatism, such as the AcrySof® Toric lens.  These CMS rulings, which allow for bifurcated payment, have increased the market acceptance of our advanced technology intraocular lenses in the United States.  Such bifurcated systems are not generally available in other countries at this time, but we are pursuing efforts to expand them.

Vitreoretinal Surgery

Our vitreoretinal surgical product offering is one of the most comprehensive in the industry for surgical procedures for the back of the eye.  In 2010, sales of our products for vitreoretinal surgery were $424 million, or 13.2% of our total surgical sales.  We are the global market leader in vitreoretinal products, and we currently market our vitreoretinal surgical products in substantially all of the countries in which we sell products.

The Accurus® surgical system integrates all automated, non-laser surgical functions used in vitreoretinal surgery.  Some Accurus® models also can be used for cataract removal.  In late 2008, we introduced the CONSTELLATION® surgical system in the United States and other global markets.  The CONSTELLATION® delivers a higher level of control to the physician and more efficiency through higher cutting rates.  The CONSTELLATION® is also available with embedded laser technology.  On May 6, 2010, we commenced a voluntary corrective action on our CONSTELLATION® vision system that the 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.

In addition to the CONSTELLATION® and Accurus®, we also sell a full line of vitreoretinal products, including surgical therapeutics, lasers, ultrasound diagnostics and hand-held microsurgical instruments.  In 2004, we launched a series of instruments for use in new small gauge (25 gauge) posterior segment surgical procedures.  We have continued our development in this area by expanding our micro-incision technology product offering in the fourth quarter of 2006 by launching a new 23 gauge system of consumable products for posterior segment procedures.  These new offerings enhanced our Accurus® and CONSTELLATION® consumable products portfolio.

Custom Pak® Surgical Procedure Packs

To provide convenience, efficiency and value for ophthalmic surgeons, we have developed the Custom Pak® surgical procedure pack.  We market our Custom Pak® for cataract, refractive and vitreoretinal surgical procedures.  Unlike conventional surgical procedure packs, the Custom Pak® allows ophthalmic surgeons and their staff to customize and sequence the products included in the surgical procedure pack.  For a single price, our Custom Pak®
 
 
30
 
 
includes our single-use products required for the procedure, combined with products not manufactured by Alcon.  We believe that our Custom Pak® allows ophthalmic surgeons to improve their efficiency in the operating room, and this gives us the opportunity to provide access to our single-use products in a value-added package.
 
Glaucoma Filtration Devices

In early 2010, Alcon finalized its acquisition of Optonol, Ltd., a medical device company that develops, manufactures and markets the EX-PRESS® glaucoma filtration device.  This technology is approved and marketed in the United States, Europe, Canada, Australia and several other markets.  The device is a novel miniature surgical implant designed to lower intraocular pressure in patients with open-angle glaucoma.  With an external diameter of 400 microns and an overall length of just 2.64 mm, the shunt is implanted under the scleral flap to enhance outflow of aqueous humor and reduce intraocular pressure.  The EX-PRESS® device creates consistent and predictable outcomes when used as part of trabeculectomy procedures.

Refractive Surgery

In 2010, sales of our laser refractive products and related technology fees were $117 million, or 3.6% of our total surgical sales.  Our refractive sales include all sales related to our ownership of WaveLight.

The WaveLight's ALLEGRETTO WAVE® Eye-Q 400 Hz laser has been widely accepted by surgeons around the globe because it is fast, reliable and precise while offering multiple treatment protocols.  Alcon continues to integrate the WaveLight operations within the global Alcon infrastructure and has established WaveLight as Alcon's Center of Excellence for refractive laser technologies.

In 2010, Alcon launched the WaveLight® Refractive Suite, which includes the new EX500 Excimer 500Hz excimer laser and the FS200 femtosecond laser.  The FS200 technology is designed to create a corneal flap as part of the Laser-Assisted In Situ Keratomileusis ("LASIK") refractive procedure.  This technology represents the next leap forward in exceptional flap customization and patient outcomes.

Our Consumer Eye Care Products

We currently market our contact lens care and artificial tears products in most of the countries where we sell products, and we market ocular vitamins in selected markets.

The following table lists our principal products in these areas:

Contact Lens Care
 
Artificial Tears
 
Ocular Vitamins
 
           
OPTI-FREE® RepleniSH® multi-purpose
 
Systane® lubricant eye drops
 
ICAPS® dietary supplements
 
disinfecting solution
 
(multiple formulations)
 
(multiple formulations)
 
OPTI-FREE® EXPRESS® No Rub® multi-
 
Systane® Ultra lubricant eye drops
     
purpose disinfecting solution
 
(multiple formulations)
     
OPTI-FREE® RepleniSH® rewetting drops
 
Systane® Balance lubricant eye drops
     
   
Tears Naturale® lubricant eye drops
     
   
(multiple formulations)
     
           
Contact Lens Care Products

The vast majority of our contact lens care products is comprised of disinfecting solutions to remove harmful micro-organisms on contact lenses, with a smaller amount of sales coming from cleaners to remove undesirable film and deposits from contact lenses and lens rewetting drops to improve wearing comfort for contact lenses.  Sales of our contact lens disinfectants in 2010 were $471 million, or 52.7% of our total consumer eye care sales.

In late 2005, we received approval in the United States to market OPTI-FREE® RepleniSH®, our fastest growing multi-purpose disinfecting solution, which is approved for silicone hydrogel and all other soft contact lenses.  This product utilizes a novel wetting and reconditioning technology to provide lasting comfort and is now our flagship brand in most key markets.  OPTI-FREE® EXPRESS® No Rub® multi-purpose disinfecting solution was the first
 
 
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multi-purpose disinfecting solution to obtain FDA approval to make a "no rub" claim.  OPTI-FREE® EXPRESS® No Rub® utilizes a multi-purpose disinfecting solution with high-capacity disinfection and superior protein cleaning benefits, without requiring rubbing of the contact lenses.  We currently market this product in most major markets throughout the world.
 
Other Vision Care Products

We manufacture and market artificial tears to treat dry eye syndrome and vitamins formulated to promote good ocular health.  We offer a complete line of products for the dry eye sufferer.  Systane® lubricating eye drops has been launched in more than 95 countries.  Systane® has an "in-the-eye" gelling formula that provides long-lasting relief of dry-eye symptoms.  In August 2008, we launched Systane® Ultra lubricating eye drops, which have a unique gel-like network designed to lubricate and protect the ocular surface.  Upon administration to the eye, the artificial tear spreads smoothly over the surface of the eye and provides lasting comfort of a more viscous drop but causes minimal blurring of vision.  In July 2010, we launched in the United States our Systane® Balance lubricant eye drops, designed specifically for dry eye patients with meibomian gland dysfunction ("MGD").  MGD is a significant cause of dry eye signs and symptoms for many patients; Systane® Balance restores the lipid layer and re-establishes the natural tear film helping to prevent tear film evaporation and to provide lubrication in dry eye patients with MGD.  Outside the United States, our second largest selling artificial tears brand is the Tears Naturale® line of products.

We market a variety of formulations of ICAPS® dietary supplements, including an Age Related Eye Disease Study ("AREDS") formula, one with extra Lutein and Zeaxanthin formula and an AREDS-based multi-vitamin that promotes eye health.  In June 2008, we launched an ICAPS® 2 x day, SoftGel with the same ingredients of our original AREDS formula, which is a 4 x day tablet.

Sales and Marketing

We are present in every significant market in the world where ophthalmology and optometry are practiced and currently our products are sold in over 180 countries.  We conduct our sales and marketing activities through more than 55 local operating entities and more than 25 representative/branch offices around the world.  We have a global sales force of approximately 4,000 sales representatives consisting of approximately 1,000 sales representatives in the United States, our largest market, and approximately 3,000 sales representatives outside the United States.  All of our surgical technical service in the United States and a high percentage of that service outside the United States are provided by service technicians employed directly by Alcon.  In countries where we do not have local operations or a scientific office, we use distributors to sell and handle the physical distribution of our products.  Outside the United States, our ten largest markets by sales are Japan, Brazil, France, Canada, Spain, Germany, Italy, Australia, China and the United Kingdom.

We organize our selling efforts around pharmaceutical, surgical and consumer eye care products and customize these efforts to the medical practice needs of each customer.  In addition to direct promotion of our products, our sales representatives provide customers with access to clinical education programs, data from clinical studies and technical service assistance.

In each of our markets, we rely on our strong relationships with eye care professionals to maintain and expand our market share.  Relationships between manufacturers of products paid for by federal and state healthcare programs and healthcare professionals are regulated by a series of federal and state laws and regulations, such as the Federal Anti-Kickback Statute, that restrict the types of financial relationships with referral sources that are permissible.  We engage healthcare professionals to serve as clinical consultants, to participate on advisory boards and to conduct presentations regarding our products.  In addition, we have established or sponsor several long-standing programs that provide training and education to eye care professionals.  We currently have permanent surgical training facilities in several countries around the world on six continents.  These facilities introduce ophthalmologists to our surgical equipment and cataract products through hands-on training in surgical techniques while exposing them to leading ophthalmologists.  If one or more of these activities were found to be in violation of the Federal Anti-Kickback Statute or comparable state laws, we could be subject to government criminal and/or civil enforcement proceedings, and exclusion from Medicare, Medicaid and other federal and state healthcare programs.  Imposition of any of these penalties could have a material adverse effect on our business, financial condition and results of operations.

 
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Most of our global marketing efforts are supported by advertising in trade publications and by marketing and sales representatives attending regional and national medical conferences.  We reinforce our marketing efforts with targeted and timely promotional materials that our sales force presents to both the eye care and other professionals in the office, hospital or surgery center setting.  We supplement these marketing efforts through direct mailings to eye care professionals and e-detailing.  To coordinate the totality of our sales efforts, including technical service after the sale, we use an integrated customer relationship management system in many markets.  Moreover, in the United States and Japan, we sometimes use direct-to-consumer advertising to promote selected products.

While we market all of our products by calling on medical professionals, our direct customers and distribution methods differ across business lines.  Although physicians write prescriptions, distributors, wholesalers, hospitals, government agencies and large retailers are the main direct customers for our pharmaceutical products.  We primarily sell our surgical products directly to hospitals and ambulatory surgical centers, although we sell through distributors in certain markets outside the United States.  In the United States, over 90% of our contact lens care products are sold to large grocery, drug, club and general (mass) merchandise retailers.  Outside the United States, we sell most of our consumer eye care products directly to retailers and optical chains, while a smaller amount is sold to distributors for resale directly to smaller retailers and eye care professionals.  No single customer accounted for more than 10% of our global sales in 2010.

As a result of changes in healthcare economics, managed care organizations have become the largest group of payors for healthcare services in the United States.  In an effort to control prescription drug costs, almost all managed care organizations use a formulary that lists specific drugs that can be prescribed and/or the amount of reimbursement for each drug.  We have a dedicated managed care sales team that actively seeks to optimize formulary positions for our products.

Research and Development

We have the largest research and development commitment to ophthalmology of any eye care company worldwide.  Our research and development organization consists of approximately 1,900 employees, including a significant number of individuals who are either M.D.s, doctors of optometry or Ph.D.s.  Our researchers have extensive experience in the field of ophthalmology and frequently have academic or practitioner backgrounds to complement their commercial experience.  We organize our research teams around our pharmaceutical, surgical and consumer eye care products.  Candidates for pharmaceutical, biopharmaceutical and contact lens care product development originate from our internal research, from our extensive relationships with academic institutions and from our licensing of molecules and other technologies from other companies.  Our surgical design concepts are internally developed by staff engineers and scientists who, in addition to their own research, gather ideas from ophthalmic surgeons and clinicians in the involved fields.  Our research and development organization has been designed to drive global registration of products through a central research facility in Fort Worth, Texas, combined with regionally based clinical and regulatory personnel in approximately 40 countries outside the United States.

We have invested more than $3 billion over the last five years and plan to increase our investment in research and development as a percent of sales over the next three years.  In 2010, we expanded our ability to conduct internal research and development of biologic molecules for treating ocular diseases by further investing in Alcon ESBATech, an Alcon Biomedical Research Unit GmbH.

We enter into license agreements in the ordinary course of our business for active pharmaceutical ingredients and development technologies.  We have a number of agreements with pharmaceutical and biotech companies that allow us to screen compounds for potential uses in the eye.  Based on compounds of interest from our screening activities, we have in place a number of contracts with companies for development of new molecular entities for ophthalmic products.

Our research and development department maintains an extensive network of relationships with scientists working in university laboratories and with leading ophthalmologists, inventors and investigators in the pharmaceutical and surgical products fields.  The principal purpose of these collaborative scientific interactions is to take advantage of leading-edge research from academic investigators and recognized surgeons to complement our internal technical capabilities.

 
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We also fund the Alcon Research Institute, which seeks to encourage, advance and support vision research.  It is the largest corporately funded research organization devoted to eye research in the world.  The institute's activities are planned and directed by a fully autonomous Scientific Advisory Committee that is comprised of distinguished ophthalmologists and vision scientists.  The institute has worldwide representation with the expectation that advances in the diagnosis and treatment of ocular diseases are dependent upon basic and clinical research carried out by independent investigators in institutions throughout the world.

Product Development

We are developing new products to treat diseases and conditions in all key ophthalmic categories: pharmaceutical, surgical and consumer eye care products.  We also have targeted development activities in the otic area specifically focused on leveraging compounds we use for ocular treatments into these areas.

The following table includes additional detail about a number of these products in development, including their expected regulatory submission dates in the European Union (EU), Japan (Jpn) and the United States (U.S.).  We also expect to file for approval of these products in most of the countries where we currently market our products.  We maintain a significant regulatory presence in major countries to support the filing process in those countries.
 
 
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Expected
 
Status at
Name
 
Condition
 
Submission Date
 
December 31, 2010 (1)
             
Pharmaceutical
           
Ophthalmology
           
DuoTrav® APS
 
Glaucoma
 
EU Filed
 
Filed
AZARGA®
New combination
 
Glaucoma
Glaucoma
 
Jpn 2012
U.S. 2012
EU 2013 or later
 
Phase III
Phase III
 
NEVANAC®, new indication
 
Anti-inflammatory
 
EU Filed
 
Filed
Nepafenac, new formulation
 
 
Anti-inflammatory
 
 
U.S. 2012
EU 2012
 
Phase III
 
DUREZOL®, new indication
 
Anti-inflammatory
 
U.S. 2011
 
Phase III
Pataday
 
Ocular allergy
 
Jpn Filed
 
Filed
AL-43,546
 
Dry eye
 
Jpn 2013 or later
 
Phase II
TRIESENCE® injectable suspension
 
Retinal surgery
 
EU Filed
 
Filed
Otic/Nasal
           
CiloDex® otic solution
 
Otic infections
 
EU Filed (2)
 
Withdrawn (3)
Moxifloxacin/dexamethasone
 
Otic infections
 
U.S. 2012 (4)
EU 2012 or later
 
Phase III
Surgical
           
AcrySof ® IQ Toric diopter range expansion
 
Cataract
 
U.S. Filed
Jpn Filed
 
Filed
AcrySof ® IQ Toric low diopter range expansion
 
Cataract
 
U.S. 2012
 
Advanced development
AcrySof ® IQ ReSTOR® Multifocal Toric lens
 
Cataract
 
U.S. 2012
Jpn 2011
 
Advanced development
AcrySof ® IQ ReSTOR® Toric diopter range expansion
 
Cataract
 
U.S. 2012 or later
 
Advanced development
AcrySof ® IQ ReSTOR® distant dominant
 
Cataract
 
U.S./EU 2012 or later
 
Advanced development
Infiniti® upgrade
 
Cataract
 
U.S./EU 2011
Jpn 2012
 
Advanced development
LenSx laser
 
Cataract
 
EU/Jpn 2011
 
Advanced development
AcrySof ® CACHET angle-supported phakic lens
 
Refractive
 
U.S. Filed
Jpn 2012
 
Filed
Advanced development
ALLEGRETTO EX-500 laser
ALLEGRETTO EX-400 laser
 
Refractive
Refractive
 
U.S. Filed
Jpn Filed
 
Filed
Filed
             
Consumer Eye Care
           
New formulation
 
Dry Eye
 
U.S./EU 2011
 
Advanced development
Lens comfort drop
 
Lens solution
 
U.S./EU 2012
 
Early development
OPTI-FREE® silicone hydrogel
 
Lens solution
 
U.S. Filed
 
Filed
New lens solution
 
Lens solution
 
U.S./EU 2011
 
Advanced development
ICAPS® R2
 
Ocular vitamin
 
EU 2011
 
Advanced development
ICAPS® AREDS2
 
Ocular vitamin
 
U.S./EU 2012 or later
 
Early development
 
(1)  For a description of the FDA approval process, see "­­– Government Regulation" below. 
(2)  This application was filed in Denmark, France, Germany, Italy, Spain and the United Kingdom. 
(3)  This application was withdrawn in November 2010 for administrative reasons and will be refiled early in 2011. 
(4)  The FDA issued a notice in the fall of 2007 advising companies that they were increasing the requirements for anti-infective clinical studies and that clinical programs previously agreed upon may not be sufficient to support approval.  Review of our NDA confirmed the need for an additional clinical study which was initiated in a timely manner. 
 
 
 
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Pharmaceutical Product Development

We are developing new products to treat ophthalmic diseases in three major therapeutic areas:  glaucoma, retina, and cornea (infection and inflammation, dry eye and allergy).  We also have ongoing development activities in the otic therapeutic area specifically focused on leveraging compounds we use for ocular treatments.

Glaucoma.  Our research into glaucoma seeks to improve patient care and address unmet medical needs in the management of glaucoma.  We continue to investigate novel compounds with new mechanisms of action that may provide new or increased clinical benefits for lowering intraocular pressure or treating glaucoma.  Additionally, we look to provide patient treatment options by (i) combining multiple intraocular pressure lowering medications into a single administration in order to facilitate patient compliance, and (ii) improving the ocular surface health relative to the chronic use of topical ocular medications.

Reformulations of our TRAVATAN® and DuoTrav® formulations to eliminate benzalkonium chloride, a commonly used ocular preservative, are examples of projects intended to provide additional clinical benefit for glaucoma patients by maintaining or improving their ocular surface health.  Both of these projects advanced during 2010 and, assuming regulatory approval, should enter the European markets in 2011.

We have also initiated development of a novel fixed combination glaucoma product designed to provide diurnal adjunctive intraocular pressure lowering benefit when used adjunctively to a prostaglandin.  This novel combination does not contain timolol and thereby improves the potential safety profile for patients with pulmonary or cardiovascular considerations who are in need of an ocular hypertensive medication.

Retina.  We remain committed to addressing the unmet medical needs in the treatment of retinal diseases, including developing treatments for "wet" age-related macular degeneration ("AMD"), "dry" AMD, geographic atrophy, diabetic retinopathy and diabetic macular edema.  In late 2009, we completed enrollment into our first clinical evaluation study of AL-8309b as a topical ocular treatment for geographic atrophy.  We also initiated in 2010 our Phase I/II clinical program for AL-39,324, a potential treatment for "wet" AMD and diabetic retinopathy.  AL-39,324 is a receptor tyrosine kinase inhibitor that acts to block the receptor to which VEGF binds.  Additionally, during 2009, we signed a licensing agreement with Potentia for a compound with a novel mechanism of action that has the potential to be effective in treating "wet" AMD, "dry" AMD and also in preventing the conversion from "dry" AMD to "wet" AMD.  We anticipate initiating a clinical evaluation of this compound during 2011.

Cornea (infection and inflammation, dry eye and allergy).  We initiated our confirmatory development program for a new formulation of nepafenac that is targeted to treat post-surgical ocular inflammation with twice-per-day dosing in 2010.  This development program is expected to be completed in 2011.  We completed in 2010 a clinical program supporting a new indication for NEVANAC® in Europe related to prevention of post-surgical macular edema.  Our clinical development program for AL-43,546 as a dry eye candidate in Japan is progressing.  We also filed during 2010 an NDA in Japan for Pataday, requesting an improved dosing regimen relative to other allergy products currently on the market in Japan.

Otic.  During 2010, we initiated our second confirmatory study of our moxifloxacin/dexamethasone fixed combination product as a potential treatment for otitis media.  This study is expected to complete during 2011.

Surgical Product Development

We currently have products in development in the three primary areas of our surgical markets: cataract, vitreoretinal and refractive surgery.

Cataract Surgery.  We continue to strengthen our AcrySof® intraocular lens and Infiniti® instrumentation franchises.  In 2009, the FDA approved the AcrySof® IQ Toric lens.  This new lens corrects not only for astigmatism, but also for spherical aberrations to provide improved contrast sensitivity and a higher quality of vision. Our research and development efforts are focused on creating new lens models of this design in order to permit a greater number of people to benefit from this new technology.  We also are working on projects that combine the multi-focal, aspheric and toric technologies to correct both pre-existing astigmatism and presbyopia following lens replacement.  We
 
 
36
 
 
introduced the AcrySof ® IQ ReSTOR® Multifocal Toric in Europe during 2010 and are presently conducting clinical studies to support a PMA filing in the United States early in 2012.

In addition to providing new lenses to the market for improving the quality of vision, we remain committed to working with cataract surgeons to help improve the effectiveness and efficiency of their surgical procedures.  As part of this effort, Alcon acquired LenSx® which has developed a femtosecond laser that can be used in cataract surgery for anterior capsulotomy, phacofragmentation and the creation of single plane and multi-plane arc incisions in the cornea.  This new instrument has received regulatory clearance in the United States.  Requests for regulatory clearance in the EU and Japan are expected to be filed in 2011.

We have also advanced the development of our next generation phacoemulsification system to support the surgical needs in the operating room of the future.  As we expect this process to take several years, we continue to introduce enhancements and features to our current surgical platforms and equipment used during cataract surgery.  Key areas of focus continue to be advancements in technology to facilitate lens removal and designing new methods to reduce the potential for the occurrence of posterior capsule opacification.

Vitreoretinal Surgery.  We continue to develop new micro-incision vitrectomy consumables, handheld accessories and illumination products designed to respond to the increased needs of ophthalmic surgeons for instrument performance.  Our efforts in this area will continue to focus on improving the surgical experience for both the patient and surgeon by the application of new technologies to facilitate the procedure and minimize trauma to the patient.

Refractive Surgery.  The Company filed a PMA for the approval of the AcrySof® CACHET angle-supported phakic intraocular lens in the United States during the second half of 2009.  This new lens is made from the biocompatible AcrySof® lens material and provides near-sighted patients with moderate to high degrees of myopia an intraocular lens treatment option that preserves the crystalline lens and has been shown to provide excellent visual results during clinical trials.

Alcon acquired majority control of WaveLight AG in 2007 and has been working to expand the surgical offerings from WaveLight's technology.  We presently are conducting clinical studies to expand the indications for use of WaveLight's ALLEGRETTO WAVE® Eye-Q 400 Hz laser in the United States.  The clinical studies are designed to demonstrate the safety and efficacy of topography-guided laser eye surgery.  Approval of this indication will allow physicians to conduct primary treatments utilizing the topography-guided algorithm or to re-treat patients who may be dissatisfied with their initial LASIK surgery.

Additionally, WaveLight has completed the development of an ALLEGRETTO WAVE® with a 500 Hz laser for refractive surgery, as well as a femtosecond laser (FS-200) for the creation of corneal flaps.  Regulatory clearances for marketing of both have been achieved in Europe and are presently in process in the United States.  Development of WaveLight's next generation excimer laser platform has already been initiated.  This next generation platform will have improved ergonomics and enhanced performance capabilities.

We also look for synergies between the refractive product development and the cataract surgery product development.  We are presently working with technology from the diagnostic group of WaveLight to assist with pre-operative biometry for cataract patients and the selection of intraocular lens power.

Consumer Eye Care Product Development

We currently are developing a variety of products in the areas of contact lens care, OTC dry eye and vitamins that promote ocular health.  Our focus in the contact lens care area is to build on the disinfecting capabilities of our existing solutions with new molecules that optimize disinfecting efficacy while maintaining comfort and convenience for patients.  This focus has resulted in the development of OPTI-FREE® EVERMOIST multi-purpose disinfecting solution, which is designed to provide optimum disinfection and prolonged comfortable lens wear time with new contact lens materials, especially the rapidly growing silicone hydrogel lens segment.  This new product was CE Marked and filed with the FDA in the last half of 2010.

Developing new active ingredients and compounds for over-the-counter products that treat dry eye remains a point of focus for addressing the consumer needs in this important area.  In addition to Systane® Balance ocular
 
 
37
 
 
emulsion, which was released to the market in 2010 to help provide ocular comfort to lipid deficient patients, we also have initiated development of a novel formulation to provide prolonged ocular surface protection for the more moderately-severe dry eye patient. These formulations are each designed to address a portion of the spectrum of needs of the various patient segments of the dry eye target population.

In the ocular health area, we continue to develop new formulations for addressing consumer requirements for promoting ocular health.  We plan to release a new omega-3-containing vitamin product in the EU during 2011.  We also continue to support the National Eye Institute's Age-Related Eye Disease Study 2 (AREDS2) study to determine if oral supplementation with omega-3 fatty acids and/or lutein and zeaxanthin reduces the progression to advanced AMD.  The results of this study will be used to guide the development of new formulations of our ICAPS® vitamins that may be more effective in reducing the risk of progression to advanced AMD.

Manufacturing and Supplies

Manufacturing

We generally organize our manufacturing facilities along product categories, with most plants being primarily dedicated to the manufacture of either surgical equipment and surgical medical devices or pharmaceutical and contact lens care products. Our functional division of plants reflects the unique differences in regulatory requirements governing the production of surgical medical devices and pharmaceuticals, as well as the different technical skills required of employees in these two manufacturing environments.  Except for our most recently acquired plants, all of our manufacturing plants in the United States and Europe are ISO 13485 and ISO 14001:2004 certified.  The inclusion into ISO 14001 of the plants from the recent acquisitions of WaveLight, Optonol, ESBATech and LenSx will be considered in 2011.

We employ cost-reduction programs, known as continuous improvement programs, involving activities such as cycle-time reductions, efficiency improvements, automation, plant consolidations and material negotiation programs as a means to reduce manufacturing and component costs.  To comply with good manufacturing practices and to improve the skills of our employees, we train our direct labor manufacturing staff throughout the year.  Our professional employees are trained in various aspects of management, regulatory and technical issues through a combination of in-house seminars, local university classes and trade meetings.

As of December 31, 2010, we employed approximately 2,100 people to manufacture our pharmaceutical and contact lens care products at seven facilities in the United States, Belgium, France, Spain, Brazil and Mexico.  Additionally, we are in the commissioning and validation phase for a new pharmaceutical plant in Singapore, which is targeted to start up in late 2012.  As of December 31, 2010, we employed approximately 3,300 people to manufacture surgical equipment and other surgical medical devices at ten facilities in the United States, Belgium, Switzerland, Ireland, Germany and Israel.  Currently, we manufacture substantially all of our pharmaceutical, contact lens care and surgical products internally and rely on third-party manufacturers for only a small number of products.

Due to the complexity of certain manufacturing technologies and the costs of constructing and maintaining duplicate facilities, a number of our key products are manufactured at only one of our facilities.  Some of these key products include:

Products
 
Facility
   
U.S. liquid ophthalmic products
 
Fort Worth, Texas
   
Intraocular lenses (l)
 
Huntington, West Virginia
   
ProVisc®, VISCOAT®, DuoVisc® and DisCoVisc®  viscoelastics
 
Puurs, Belgium
   
OPTI-FREE® EXPRESS® No Rub®, OPTI-FREE® RepleniSH® solutions (2)
 
Fort Worth, Texas
   
Accurus®, LEGACY®, Infiniti® CONSTELLATION® vision systems
 
Irvine, California
   
WaveLight® ALLEGRETTO WAVE® Eye-Q lasers
 
Pressath, Germany
   
Cipro® HC, Patanase® products
 
Barcelona, Spain
   
Vigadexa® ophthalmic solution
 
Sao Paulo, Brazil
   
 
 
 
38
 
 
 
(1)  
The Cork, Ireland, facility manufactures certain AcrySof® intraocular lenses for the European markets and certain Latin American markets; the remainder of the world markets continues to be sourced mainly from the Huntington, West Virginia facility.

(2)  
The Sao Paulo, Brazil, facility produces contact lens care products for Brazil and other South American markets.

Supplies

The active ingredients used in our pharmaceutical and consumer eye care products are sourced from facilities that meet the regulatory requirements of the FDA or other applicable health regulatory authorities.  Because of the proprietary nature and complexity of the production of these active ingredients, a number of them are only available from a single FDA-approved source.  The majority of active chemicals, biological raw materials and selected inactive chemicals are acquired pursuant to long term supply contracts.  The sourcing of components used in our surgical products differs widely due to the breadth and variety of products. A number of the components used in our medical device products are also single-sourced.  When supplies are single-sourced, we try to maintain a sufficient inventory consistent with prudent practice and production lead-times and to take other steps necessary to ensure our continued supply.  The prices of our supplies are generally not volatile.

Competition

The ophthalmic industry is highly competitive and subject to rapid technological change and evolving industry requirements and standards.  Companies within our industry compete on technological leadership and innovation, quality and efficacy of their products, relationships with eye care professionals and healthcare providers, breadth and depth of product offering and pricing.  The presence of these factors varies across our product offerings.  We provide a broad line of proprietary eye care products and compete in all major product categories in the ophthalmic market with the exception of contact lenses and eyeglasses.  Even if our principal competitors do not have a comparable range of products, they can, and often do, form strategic alliances and enter into co-marketing agreements to achieve comparable coverage of the ophthalmic market.  We face strong local competitors in some markets, especially in Japan.

Pharmaceutical

Competition in the ophthalmic pharmaceutical market is characterized by category leadership of products with superior technology, including increases in clinical effectiveness (e.g., new compounds, new drug delivery systems, formulations and combination products), the development of therapies for previously untreated conditions (e.g., AMD) and competition based on price from competing brands or generic pharmaceuticals.

Our main competitors in the pharmaceutical market are Allergan, Inc., Bausch & Lomb Incorporated, Pfizer, Inc., Merck & Co., Inc., Daiichi Pharmaceutical Co., Ltd., Inspire Pharmaceuticals Inc., ISTA Pharmaceuticals Inc., Vistakon Pharmaceuticals, LLC (a Johnson & Johnson company), Genentech Inc. and Santen Pharmaceutical Co., Ltd.

Surgical

Superior technology and product performance give rise to category leadership in the ophthalmic surgical market.  Service and long term relationships are also key factors in this competitive environment.  Surgeons rely on the quality, convenience, value and efficiency of a product and the availability and quality of technical service.  While we compete throughout the field of ophthalmic surgery, our principal competitors vary somewhat in each area.  We compete with Bausch & Lomb Incorporated and Abbott Medical Optics, Inc. across most of the ophthalmic surgical market, and with national or regional companies, such as Carl Zeiss Meditec AG and Hoya Corporation, in selected markets.

Consumer Eye Care Products

The consumer eye care business is characterized by competition for market share in a maturing market through the introduction of products that provide superior technology or effectiveness.  Recommendations from eye care
 
 
39
 
 
professionals and customer brand loyalty, as well as our product quality and price, are key factors in maintaining market share in these products. Our principal competitors in contact lens care products are Bausch & Lomb Incorporated, Abbott Medical Optics, Inc., CIBA VISION Corporation (a Novartis company) and, in Japan, Rohto Pharmaceutical Co., Ltd.  We compete with Allergan, Inc., Abbott Medical Optics, Inc., Bausch & Lomb Incorporated, Johnson & Johnson and Novartis in artificial tears products and Bausch & Lomb Incorporated in ocular vitamins.  All consumer eye care markets include significant competition from private label store brands, which generally are less costly to the consumer.

Intellectual Property

We strive to protect our investment in the research, development, manufacturing and marketing of our products through the use of patents, trademarks, copyrights, trade secrets and other intellectual property.  We own or have rights to a number of patents, trademarks, copyrights, trade secrets and other intellectual property directly related and important to our businesses. As of December 31, 2010, we owned more than 1,500 U.S. patents and pending U.S. patent applications and approximately 9,500 corresponding patents and patent applications outside the United States.

We believe that our patents are important to our business but that no single patent, or group of related patents, currently is of material importance in relation to our business as a whole.  Patents for individual products extend for varying periods of time according to the date a patent application is filed or a patent is granted and the term of patent protection available in the jurisdiction granting the patent.  The scope of protection provided by a patent can vary significantly from country to country.

Our strategy is to develop patent portfolios for our research and development projects in order to obtain market exclusivity for our products in our major markets.  Although the expiration of all patents for a product normally results in the loss of market exclusivity, we may continue to derive commercial benefits from these products.  We routinely monitor the activities of our competitors and other third parties with respect to their use of the Company's intellectual property.  When appropriate, we will enforce our intellectual property rights to ensure that we are receiving the market exclusivity they afford us.  Similarly, we will staunchly defend our right to develop and market products against unfounded claims of infringement by others.  We will aggressively pursue or defend our position in the appropriate courts if the dispute cannot otherwise be promptly resolved.

In addition to our patents and pending patent applications in the United States and selected non-U.S. markets, we use proprietary know-how and trade secrets in our businesses.  In some instances, we also obtain from third parties licenses of intellectual property rights, principally patents, which are important to our businesses.

Worldwide, all of our major products are sold under trademarks that we consider in the aggregate to be important to our businesses as a whole.  We consider trademark protection to be particularly important in the protection of our investment in the sales and marketing of our pharmaceutical and contact lens care and general eye care products.  The scope and duration of trademark protection varies widely throughout the world. In some countries, trademark protection continues only as long as the mark is used.  Other countries require registration of trademarks and the payment of registration fees.  Trademark registrations are generally for fixed, but renewable, terms.

We rely on copyright protection in various jurisdictions to protect the exclusivity of the code for the software used in our surgical equipment.  The scope of copyright protection for computer software varies throughout the world, although it is generally for a fixed term which begins on the date of copyright registration.

Government Regulation

Overview

We are subject to comprehensive government controls governing the research, design, clinical and non-clinical development, manufacturing, labeling, advertising, promotion, safety and other reporting, storage, distribution, import, export, sale and marketing of our products in essentially all countries of the world.  National health regulatory agencies generally require pre-approval of pharmaceuticals and medical devices prior to their entry into that country's marketplace.  In addition, European Union Notified Bodies audit and govern applicable Quality Management System requirements, including ISO 13485:2003 and assess devices for compliance with the Medical Device Directive 93/42/EEC and applicable European and international standards.  The certifications obtained are accepted by
 
 
40
 
 
Australia as well.  Japan also has requirements for quality management system regulations for medical device manufacturers.  State and local laws also apply to our activities.  This section summarizes the applicable regulations in the United States, European Union and Japan.  Please also refer to "Risk Factors – Risks Related to Our Business and Industry – We are subject to extensive government regulation …."

Pharmaceutical Development and Registration Process in the United States

The pharmaceutical research, development and registration process in the United States is typically intensive, uncertain, lengthy and rigorous and can generally take several years, or more, depending on the product under consideration.  During pre-clinical testing, studies are conducted to demonstrate the activity of the compound against the targeted disease in animal models and to evaluate the effects of the new drug candidate on other organ systems in order to assess its potential therapeutic effectiveness relative to its safety.  This testing includes studies on the chemical and physical stability of candidate formulations, as well as biological testing of the compound.  Pre-clinical testing is subject to good laboratory practice requirements.  Failure to follow these requirements can invalidate the data, among other things.

In order for human clinical studies of a new drug to commence in the United States, an Investigational New Drug Application, or "IND," must be filed with the FDA; similar notifications are required in other countries.  Informed consent also must be obtained from study participants. In general, studies may begin in the United States without specific approval by the FDA after a 30-day review period has passed.  However, the FDA may prevent studies from moving forward, and may suspend or terminate studies once initiated.  Studies are also subject to review by independent Institutional Review Boards ("IRB"), responsible for overseeing studies at particular sites and protecting human research study subjects.  An IRB may prevent a study from beginning or suspend or terminate a study once initiated.

Clinical testing generally follows a prescribed format that involves initial exposure to normal, non-diseased subjects in Phase I clinical trials, followed by exposure of patients with disease to the new drug candidate in larger Phase II and Phase III clinical trials.  United States law requires that studies conducted to support approval of a new drug be "adequate and well-controlled" as a way to control possible bias.  This generally means that a control, either a placebo or a drug already approved in the market for the same disease, is used as a reference.  Studies also must be conducted and monitored in accordance with good clinical practice and other requirements.

Following the completion of clinical trials, we thoroughly analyze the data to determine if the clinical trials successfully demonstrate safety and efficacy.  If they do, in the case of a drug product, a New Drug Application, or "NDA," is filed with the FDA along with proposed labeling for the product and information about the manufacturing processes and facilities that will be used to ensure product quality.  Each NDA submission requires a substantial user fee payment for which the FDA has committed generally to review and make a decision concerning approval within 10 months, and of a new "priority" drug within six months.  However, final FDA action on the NDA can take substantially longer and also may involve review and recommendations by an independent FDA advisory committee.  The FDA also can refuse to accept and review an NDA that it deems incomplete or not properly reviewable.

Before final action on a submission, the FDA may conduct a pre-approval inspection of our manufacturing facility to assess conformance to current good manufacturing practice requirements and also may inspect sites of clinical investigators involved in our clinical development program to ensure their conformance to good clinical practices.  The FDA may not approve an NDA, or may require revisions to the product labeling, require that additional studies be conducted prior to or as a condition of approval, or impose other limitations or conditions on product distribution, including, for example, adoption of a special risk management plan.  Following approval, if new information arises related to safety or other issues, the FDA may impose post-approval clinical study and clinical trial requirements, require safety-related changes to product labeling, require the review of advertising or impose a new or modified risk management plan.

A different but similar application is used for biological products, and generally equivalent FDA review, approval and post-approval procedures and requirements apply.

Generic drugs are approved through a different, abbreviated process.  Generally an Abbreviated New Drug Application, or "ANDA", is filed with the FDA.  The ANDA must seek approval of a drug product that has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use (labeling) as a so-called "reference listed drug" approved under an NDA with full supporting data to establish safety and effectiveness.  Only
 
 
41
 
 
limited exceptions exist to this ANDA sameness requirement, including certain limited variations approved by the FDA through a special petition process.  The ANDA also generally contains limited clinical data to demonstrate that the product covered by the ANDA is absorbed in the body at the same rate and to the same extent as the reference listed drug.  This is known as bioequivalence.  In addition, the ANDA must contain information regarding the manufacturing processes and facilities that will be used to ensure product quality, and must contain certifications to patents listed with the FDA for the reference listed drug.

Special procedures apply when an ANDA contains certifications stating that a listed patent is invalid or not infringed, and if the owner of the patent or the NDA for the reference listed drug brings a patent infringement suit within a specified time, an automatic stay bars FDA approval of the ANDA for a specified period of time pending resolution of the suit or other action by the court.  The first complete ANDA filed with the FDA that contains a certification challenging the patents listed with the FDA for a reference listed drug is also eligible to receive 180 days of exclusivity during which the FDA is prohibited from approving subsequent ANDAs.  This period of 180-day exclusivity is subject to certain forfeiture events.

As a general matter, the amount of testing and effort that is required to prepare and submit an ANDA is substantially less than that required for an NDA.  Conducting the necessary formulation development work, performing the bioequivalence testing and preparing the ANDA typically takes one to three years, although the time can be shorter or longer.  FDA review and approval can take from less than one year to two years or longer.

In addition to the NDA and ANDA procedures, there is an additional approval mechanism known as a 505(b)(2) application.  A 505(b)(2) application is a form of an NDA where the applicant does not have a right to reference all or some of the data being relied upon for approval.  Under current regulations and FDA policies, 505(b)(2) applications can be used where the applicant is relying in part on published literature or on findings of safety or effectiveness in another company's NDA.  This might be done, for example, where the applicant is seeking approval for a new use for a drug that has already been approved for a different use or for a different formulation of the same drug that is already approved for the same use.  The use of 505(b)(2) applications is the subject of ongoing legal controversy, and it is thus not clear what the permitted use of a 505(b)(2) application might be in the future.

For biologics licensed under the Public Health Service Act, Congress in March 2010 enacted a new abbreviated approval pathway under which a so-called biosimilar product may be approved based in part on a reference to a previously approved highly similar product of another applicant.  A similar approval pathway has existed in Europe for a number of years.  In the U.S., there are a number of issues of implementation that remain to be developed by the FDA, and it is not clear at this time how the new law will operate or what effects it will have on the biologics market.

Medical Device Development and Registration Process in the United States

Medical devices, including intraocular lenses and surgical equipment used in cataract procedures, vitreoretinal procedures and laser refractive surgery, are also subject to regulation in the United States by the FDA.  Approval to market new device products is, in general, achieved by a process not unlike that for new pharmaceuticals, requiring submission of extensive pre-clinical and clinical evaluations in a new product application.  The process of developing data sufficient to support a regulatory filing on a new device is costly and generally requires at least several years for completion.

In the United States, medical devices are classified by the FDA as Class I, Class II or Class III based upon the level of risk presented by the device.  Class I devices present the least risk and are generally exempt from the requirement of pre-market review.  Certain Class II devices are also exempt from pre-market review.  Most Class II devices and certain Class III devices are marketed after submission of a pre-market notification under a process which is known as a 510(k) notification procedure. The pre-market notification must demonstrate that the proposed device is "substantially equivalent" to a legally marketed "predicate device" which requires a showing that the device has the same intended use as the predicate device, and either has the same technological characteristics or has different technological characteristics that do not raise different questions of safety and effectiveness than the predicate device.  Clinical study data are sometimes necessary to demonstrate substantial equivalence.  A 510(k) submission is subject to a user fee payment.  Most Class III devices and devices not substantially equivalent to a predicate device are subject to the most stringent regulatory review and cannot be marketed for commercial sale in the United States until the FDA grants approval of a Pre-Market Approval ("PMA") application for the device.  The
 
 
42
 
 
PMA filing is subject to a substantial user fee payment, and PMA supplement applications are also subject to user fees.  Modifications of the device or its intended use after 510(k) clearance might require the submission of a new 510(k), and in some cases a change in intended use might require a PMA.

A PMA must contain proposed directions for use of the device, information about the manufacturing processes and facilities, technical information and reports of nonclinical laboratory studies of the device, clinical data demonstrating that the device is safe and effective for its intended use, certain information regarding pediatric subpopulations and other information required by the FDA.  The FDA may refer a PMA for review by an advisory panel of outside experts for a recommendation regarding approval of the application.  Clinical trials for a medical device must be conducted in accordance with FDA requirements, including informed consent from study participants, and review and approval by an IRB, and, additionally, FDA authorization of an Investigational Device Exemption application must be obtained for significant risk devices.  The FDA may prevent studies from moving forward, and may suspend or terminate studies once initiated.  The FDA may conduct a pre-approval inspection of our manufacturing facility, and also may inspect clinical investigators and clinical sites involved in our clinical trials program.

If the FDA's evaluation of a PMA is favorable, the FDA typically issues an "approvable letter" requiring the applicant to agree to comply with specific conditions, to supply specific additional data or information or to finalize the labeling, in order to secure final approval of the PMA application.  Once the conditions contained in the approvable letter are satisfied, the FDA will issue a PMA order for the approved indications, which can be more limited than those originally sought by the manufacturer.  The PMA order can include post-approval conditions that the FDA believes are necessary to ensure the safety and effectiveness of the device including, among other things, post-market studies or restrictions on labeling, promotion, sale, distribution and use.  Products manufactured and distributed pursuant to a PMA are subject to extensive, ongoing regulation by the FDA.  The FDA review of a PMA application generally takes one to two years from the date the application is accepted for filing but may take significantly longer.  Supplemental PMA filings may be required prior to implementing product changes or manufacturing changes.

Pharmaceutical and Medical Device Registration Outside the United States

European Union

In the European Union, our products are subject to extensive regulatory requirements, such as the CE marking requirement for medical devices which, beyond the European Union, is recognized by markets such as Australia.  As in the United States, the marketing of medicinal products has for many years been subject to the granting of marketing authorizations by regulatory agencies.  Particular emphasis is also being placed on more sophisticated and faster procedures for reporting of adverse events to the competent authorities and on proactive management of risks associated with products.

Pharmaceutical Development and Registration Process in the European Union

In common with the United States, the various phases of pre-clinical and clinical research are subject to significant regulatory controls.  The regulatory controls on clinical trials of medicines in the European Union are now largely harmonized following the implementation of the Clinical Trials Directives 2001/20/EC and 2005/28/EC.  Compliance with the national implementations of Directive 2001/20/EC and Directive 2005/28/EC has been mandatory from May 1, 2004 and January 29, 2006, respectively.  However, variations in the member state regimes continue to exist.

All member states currently require regulatory and institutional or other central or regional ethics review board approval of interventional clinical trials for medicines.  Both regulators and ethics committees also require the submission of adverse event reports during a study and a copy of the final study report.

In the European Union, approval of new medicinal products can be obtained only through one of two processes:
 
·  
Mutal recognition or decentralized procedure.  These procedures allow an applicant to submit applications in European Union member states of its choosing.  Companies whose products are ineligible for the centralized
 
 
43
 
 
 
 
procedure may choose to use either the mutual recognition procedure or the decentralized procedure.  Unlike the centralized procedure (see below), which results in a single EU-wide approval, these procedures result in individual, national marketing authorizations in each member state that participates.
 
 
The mutual recognition procedure and the decentralized procedure are similar in many respects.  The applicant selects a member state that takes primary responsibility for the review and approval of the application: the so-called reference member state ("RMS").  Other states of the applicant's choosing, each a concerned member state ("EUCMS"), are expected to recognize the RMS decision to approve the product and must do so unless they identify a major public health concern.  The procedures differ only in the timing of this EUCMS phase.  In the mutual recognition procedure, it occurs after the RMS has granted a marketing authorization, while in the decentralized procedure it occurs after the RMS has prepared a positive assessment report and drafts of the summary of product characteristics, product labeling and packaging.

In both cases, an EUCMS can only object if it can identify a potential serious risk to public health.  The EUCMS and RMS then have 90 days within which to raise and resolve such issues with the assistance of the Co-ordination Group for the Mutual Recognition and Decentralized Procedures - Human ("CMDH") within the European Medicines Agency.  If any disagreement remains after 90 days, the issue is referred to the Committee for Medicinal Products for Human Use (CHMP) within the European Medicines Agency for an opinion and ultimately a binding European Commission decision.  The mutual recognition/decentralized processes result in separate national marketing authorizations in the RMS and each EUCMS.

·  
Centralized procedure.  This procedure is mandatory for products developed by means of a biotechnological process, for orphan drugs and for new chemical entities for which the therapeutic indication is the treatment of acquired immune deficiency syndrome, cancer, neurodegenerative disorder, diabetes, auto-immune diseases or other immune dysfunctions or viral diseases.  The procedure is also optional for other new active substances and other products that constitute "a significant therapeutic, scientific or technical innovation."  Under this procedure, an application is submitted to the European Medicines Agency.  Two European Union member states are appointed to conduct an initial evaluation of each application.  These countries each prepare an assessment report; the reports are then used as the basis of a scientific opinion of the Committee for Medicinal Products for Human Use.  If this opinion is favorable, it is sent to the European Commission, which drafts a decision.  After consulting with the member states, the European Commission adopts a decision and grants a marketing authorization, which is valid throughout the European Union and confers the same rights and obligations in each of the member states as a marketing authorization granted by that member state.

The European Union expanded its membership by ten in May 2004 and two more countries joined on January 1, 2007, bringing the total to 27 EU member states.  Several other European countries outside the European Union, particularly the non-European Union members of the European Economic Area, i.e., Norway, Iceland and Liechtenstein, accept European Union review and approval as a basis for their own national approval.

Medical Device Development and Registration Process in the European Union

The European Union regulatory regime for most medical devices became mandatory in June 1998.  Under this regime, a medical device may be placed on the market within the European Economic Area if it conforms to certain "essential requirements."  The most fundamental essential requirement is that a medical device must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others.  Other requirements include that the device must achieve the performances intended by the manufacturer and be designed, manufactured and packaged in a suitable manner.  To assist manufacturers in satisfying the essential requirements, the European Commission has requested the preparation of standards applicable to medical devices.  These include standards governing common requirements, such as sterilization and safety of medical electrical equipment, and product standards for certain types of medical devices.  There are also harmonized standards relating to design and manufacture.  While not mandatory, compliance with these standards is viewed as the easiest way to satisfy the essential requirements as a practical matter.  Compliance with a standard developed to implement an essential requirement also creates a rebuttable presumption that the device satisfies that essential requirement.

 
44
 
 
In order to demonstrate safety and efficacy for their medical devices, manufacturers must conduct clinical investigations in accordance with the requirements of Annex X to the Medical Device Directive 93/42/EEC and applicable European and ISO Standards, as implemented or adopted in the European Union member states.  The resulting data are introduced into the product development cycle for next-generation or new products and considered as a part of design controls and risk management practices in place.  Clinical trials for medical devices usually require the approval of an ethics review board and the prior notification of the study to European regulators.  Both regulators and ethics committees also require the submission of adverse event reports during a study and may request a copy of the final study report.

Manufacturers must demonstrate that their devices conform to the relevant essential requirements through a conformity assessment procedure.  The nature of the assessment depends upon the classification of the device.  The classification rules are mainly based on three criteria: the length of time the device is in contact with the body, the degree of invasiveness and the extent to which the device affects the anatomy.  Medical devices in all but the lowest risk classification are also subject to a notified body conformity assessment.  Notified bodies are often private entities and are authorized or licensed to perform such assessments by government authorities.  Manufacturers usually have some flexibility to select conformity assessment procedures for a particular class of device and to reflect their circumstances, e.g., the likelihood that the manufacturer will make frequent modifications to its products.  Conformity assessment procedures require an assessment of available clinical evidence, literature data for the product and post-market experience in respect of similar products already marketed.  Notified bodies also may review the manufacturer's quality systems.  If satisfied that the product conforms with the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity and application of the CE mark.

Manufacturers must comply with requirements for reporting incidents and field safety corrective actions associated with medical devices.  In addition, a process for reporting certain events has been established between the Company and its primary Notified Body (TUV PS, Germany, ID # 0123).

Japan

In Japan, our largest market outside the United States, the regulatory process is also quite complex.  Pre-marketing approval and clinical studies are required, as is governmental reimbursement approval for most medical devices and pharmaceuticals.  These requirements are comparable to those in the United States or in Europe.  The introduction of major amendments to the pharmaceutical regulations in 2005 is notable in this respect.  First, they expanded the Japanese regulatory focus to the manufacturing processes of medical devices and pharmaceuticals, both in Japan and overseas.  As a result, demonstration of good manufacturing practice or quality management systems, and disclosure of the manufacturing process are part of the requirements for marketing approval.  Each of the foreign manufacturers is required to be accredited by the Japanese authorities.

Historically, Japan required that all clinical data submitted in support of a new drug application be performed on Japanese patients.  Since 1998, Japan has accepted overseas patient data when submitted along with a "bridging" study, which demonstrates that Japanese and non-Japanese subjects react comparably to the product.  This approach enables companies like ours to reduce the time to approval and introduction of new drugs into the Japanese market, and we are currently employing these approaches to petition for approval of new ocular drugs in Japan.  More recently, the authorities are intensifying the efforts to speed up the approval process and recommend active use of an "international joint trial" which may enable approval with a limited number of Japanese subjects.

Medical devices are similarly classified into three categories, corresponding to the level of potential risks to the human life and health.  The category with the lowest risk (Class I) may be marketed without product-specific approval or other regulatory action.  The highest risk category products, including most implant devices, are required to file for marketing approval, whereas devices in the middle category can be marketed subject to third-party certification of compliance with applicable Japan Industrial Specifications.  The clinical trial requirement remains ambiguous and the authorities' response varies from time to time.  Generally, devices representing a new technology are required to demonstrate clinical safety and efficacy for approval.

In 2005, Japan introduced the Drug Master File, which enables compound developers to protect their confidential data.  The Japanese Drug Master File allows manufacturers of active pharmaceutical ingredients to file in confidence
 
 
45
 
 
manufacturing process and other sensitive information with the authorities to which Japanese licensees may refer in their new drug application.

In a recent development, the Japanese government extended the "exclusivity" period of active pharmaceutical ingredients, which is separate from patent protection, from six to eight years.  No abbreviated generic application will be accepted during this period.  In 2009, the Japanese authorities announced a guideline for approval of "biosimilar" drugs, and approval for these drugs can be granted under a less onerous data requirement.

Other Regulation

Ongoing Reporting and Recordkeeping

Following approval, a pharmaceutical or device company generally must engage in various monitoring activities and continue to submit periodic and other reports to the applicable regulatory agencies, including reporting cases of adverse events and device malfunctions, and maintaining appropriate design control and quality control records.  Some medical devices also may be subject to tracking requirements.  The FDA is in the process of implementing or considering a number of changes to its postmarket requirements for medical devices, including developing a proposed rule for a unique device identification ("UDI") system and other changes to enhance postmarket surveillance for medical devices.  In addition, there are requirements and industry guidelines to require the posting of ongoing drug and device clinical trials on public registries, and the disclosure of designated clinical trial results.

Advertising and Promotion

Drug and medical device advertising and promotion are subject to federal and state regulations.  In the United States, the FDA regulates company and product promotion, including direct-to-consumer advertising.  Violative materials may lead to FDA enforcement action, including, for drugs, the imposition of civil monetary penalties utilizing new authority the FDA has been granted.  The U.S. Federal Trade Commission ("FTC") also has certain authority over medical device advertising.  In the European Union, the promotion of prescription medicines is subject to intense regulation and control, including a prohibition on direct-to-consumer advertising.  Some European Union member states also restrict the advertising of medical devices.  The restrictions vary from state to state.  Some subject only those medical devices that are reimbursed under state healthcare systems and/or that are intended for professional use to specific advertising and promotion restrictions.  Others restrict the advertising and promotion of devices for the treatment or diagnosis of certain listed conditions.  In Japan, advertising and marketing of medical devices are subject to a government recommendation and industry self-regulations.  Advertising of unapproved or uncertified medical devices, for which pre-marketing approval/certification is mandatory, is subject to criminal penalty.

Manufacturing

In the United States, the European Union and Japan, the manufacturing of our products is subject to comprehensive and continuing regulation.  These regulations require us to manufacture our products in specific approved facilities and in accordance with their quality system rules and/or current Good Manufacturing Practices, and to list or notify our products and register or authorize our manufacturing establishments with the government agencies, such as the FDA.  These regulations also impose certain organizational, procedural and documentation requirements upon us with respect to manufacturing and quality assurance activities.  Our manufacturing facilities are subject to comprehensive, periodic inspections by the FDA and/or other regulatory agencies.

Lasers

In the United States, our lasers are subject to the Electronic Product Radiation Control provisions of the Federal Food, Drug, and Cosmetic Act, previously codified as the Radiation Control for Health and Safety Act, which are administered by the Center for Devices and Radiological Health of the FDA.  This law requires laser manufacturers to file new product and annual reports, comply with performance standards and maintain quality control, product testing and sales records.  In addition, lasers sold to end users must comply with labeling and certification requirements.  Various warning labels must be affixed to the laser depending on the class of the product under the performance standard.

 
46
 
 
The FDA undertook various initiatives in 2009 with respect to ophthalmic laser devices used for Laser-Assisted In Situ Keratomileusis ("LASIK"), a surgical procedure that uses an excimer laser to permanently change the shape of the cornea.  These initiatives have included FDA letters to eye care professionals with information about advertising and promotion, and letters to ambulatory surgical centers regarding adverse event reporting requirements for device user facilities.  In March 2009, the FDA officially recognized the new LASIK standard from the American National Standards Institute (ANSI) entitled "Laser Systems for Corneal Reshaping."  On October 15, 2009, the FDA announced the launch of a collaborative study with the National Eye Institute and the Department of Defense to examine the potential impact on quality of life from LASIK.  The goal of the LASIK Quality of Life Collaboration Project is to determine the percentage of patients with significant quality of life problems after LASIK surgery and identify predictors of these problems.  One phase of this project is a national, multi-center clinical trial, including evaluation of subpopulations who may be vulnerable to adverse effects from the procedure, expected to end in 2012. The FDA opened a public docket for LASIK so that any interested person can pose comments or concerns regarding LASIK.  In addition, in January 2011, a citizen petition was filed seeking to have the FDA withdraw the PMA approvals for LASIK devices and take certain other regulatory actions with respect to these devices.

 In the European Union, medical device rules regulate lasers intended for medical purposes.  Depending on the class and purpose of each laser, member states also may impose additional restrictions and controls, such as limitations on those entitled to use the products and the facilities where their use is permitted.  Similarly, Japan's medical device regulations cover laser products for medical treatment purposes, and the authorities do not allow the use of lasers for aesthetic purposes by non-doctors.

Other

Our manufacturing, sales, promotion and other activities following product approval are subject to regulation by numerous regulatory and law enforcement authorities, including, in the United States, the FDA, the FTC, the Department of Justice, CMS, other divisions of the Department of Health and Human Services, the Consumer Product Safety Commission and state and local governments.  Among other laws and requirements, our post-approval manufacturing and promotion activities must comply with the Federal Food, Drug, and Cosmetic Act and the implementing regulations of the FDA, and we must submit post-approval reports required by these laws.  We must file marketing authorization variations or supplemental applications with the FDA or other regulators and obtain their approval for labeling, manufacturing and other product changes, depending on the nature of the changes.  Our distribution of pharmaceutical samples to physicians must comply with applicable rules, including the Prescription Drug Marketing Act.  We must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical and medical device products in that state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state.  Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain.  Certain of our products must comply with child-resistant packaging requirements under the Poison Prevention Packaging Act and Consumer Product Safety Commission regulations.
 
Our sales, marketing and scientific/educational programs must comply with the medicines advertising and anti-bribery rules and related laws, such as anti-kickback provisions of the Social Security Act, the Foreign Corrupt Practices Act, the False Claims Act, the Veterans Health Care Act ("VHCA") and similar state laws.  Our pricing and rebate programs must comply with pricing and reimbursement rules, including the Medicaid drug rebate requirements of the Omnibus Budget Reconciliation Act of 1990.  If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply.  Under the VHCA, we are required to offer certain drugs at reduced prices established by statutory formulas to a number of federal agencies, including the Veterans Administration and the Department of Defense, the Public Health Service and certain private Public Health Service designated entities in order to participate in other federal funding programs, including Medicare and Medicaid.  Participation under VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations.  In addition, legislative changes purport to require that discounted prices be offered for certain Department of Defense funded purchases through its TRICARE retail pharmacy program via a rebate system.

 
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Several states have enacted legislation requiring pharmaceutical and medical device companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit certain other sales and marketing practices.  All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.  Finally, certain jurisdictions have other trade and export regulations from time to time to which our business is subject, such as technology or environmental export controls and political trade embargoes.  Most European Union member states and Japan impose controls and restrictions that are similar in nature or effect.

Depending on the circumstances, failure to meet these applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private "qui tam" actions brought by individual whistleblowers in the name of the government or refusal to allow us to enter into supply contracts, including government contracts.  In addition, even if we comply with FDA and other requirements, new information regarding the safety or effectiveness of a product could lead the FDA to modify or withdraw a product approval.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ("Affordable Care Act") was signed into law.  The Affordable Care Act will substantially change the way that health care is financed by both governmental and private insurers and significantly affect the pharmaceutical industry.  The Affordable Care Act contains a number of provisions, including provisions governing enrollment in federal health care programs, reimbursement changes, the increased use of comparative effectiveness research in health care decision-making, and enhancements to fraud and abuse requirements and enforcement, that will affect existing government health care programs and will result in the development of new programs.

A number of provisions contained in the new law may adversely affect our net revenue for our marketed products and any future products.  In 2010, the new law, among other things, increases the minimum basic Medicaid rebate for branded prescription drugs from 15.1% to 23.1% and requires pharmaceutical manufacturers to pay states rebates on prescription drugs dispensed to Medicaid managed care enrollees.  In addition, the Affordable Care Act increases the additional Medicaid rebate on "line extensions" (such as extended release formulations) of solid oral dosage forms of branded products, revises the definition of average manufacturer price by changing the classes of purchasers included in the calculation, and expands the entities eligible for discounted 340B pricing.

Beginning in 2011, the new law will require drug manufacturers to provide a 50% discount on prescriptions for branded products filled while the beneficiary is in the Medicare Part D coverage gap, also known as the "donut hole."  In addition, the Affordable Care Act will impose a significant annual fee on companies that manufacture or import branded prescription drug products.  The fee (which is not deductible for federal income tax purposes) will be based on the manufacturer's market share of sales of branded drugs and biologics (excluding orphan drugs) to, or pursuant to coverage under, specified U.S. government programs.  The new law will also impose an excise tax on medical devices starting in 2013.

The Affordable Care Act also includes substantial new provisions affecting compliance, including reporting provisions that relate to transfers of value to health care providers and to the distribution of product samples to health care providers.  In addition, the federal government has been given additional enforcement authority.

We are unable to predict the future course of federal or state health care legislation and regulations, including regulations that will be issued to implement provisions of the Affordable Care Act.  The Affordable Care Act and further changes in the law or regulatory framework that reduce our revenues or increase our costs could also have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Environmental, Health and Safety
We are subject to a wide range of laws and regulations relating to protection of the environment and employee health and safety, both in the United States and elsewhere.  In addition, internal corporate policies and procedures provide a common format for managing these aspects of our business.  Our manufacturing facilities, research and development and other support operations undergo regular internal audits relating to environmental, health and safety requirements.  Our facilities in the United States are required to comply with applicable Environmental Protection
 
 
48
 
 
Agency and Occupational Safety and Health Administration regulations, as well as state laws and regulations.  Our facilities outside the United States are required to comply with locally mandated regulations that vary by country.  In an effort to ensure ongoing compliance with applicable environmental laws and regulations, we have a program to monitor regulations affecting our products, packaging and operations, as well as ongoing rates of waste, water, air emissions, ozone depletion components and energy consumption.  We also are aware and monitoring issues regarding climate change regulations but have not identified impacts on our operations of a material nature.

Currently we have seven ISO 14001 certifications inclusive of twelve locations.  These include our European pharmaceutical and surgical manufacturing facilities in Puurs, Belgium, Cork, Ireland, and Kaysersberg, France, and our manufacturing and research and development operations in Barcelona, Spain, and Schaffhausen, Switzerland.  North American operations certified under a Corporate Certificate include our manufacturing facilities in Sinking Spring, Pennsylvania, Irvine, California, Houston, Texas, Huntington, West Virginia, and Fort Worth, Texas.  Our manufacturing facilities in Mexico City, Mexico, and Sao Paulo, Brazil, are also ISO 14001 certified.  Certification possibilities for the recent acquisitions of WaveLight, AG, ESBATech AG, Optonol, Ltd. and LenSx Lasers, Inc. will be discussed in 2011.  Based upon our reviews and the outcome of local, state and federal inspections, we believe that our manufacturing facilities are in substantial compliance with all applicable environmental, health and safety requirements.

We are not aware of any pending environmental, health or safety litigation or significant financial obligations arising from current or past operations that are likely to have a material adverse impact on our financial position.  There can be no assurance, however, that environmental health or safety liabilities relating to properties owned or operated by us or waste generated by us will not develop in the future, and we cannot predict whether any such problems, if they were to develop, could require significant expenditures on our part.  In addition, we are unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental health and safety protection.

Price Controls

In many of the markets where we operate, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms.

In the United States, debate over the reform of the healthcare system has resulted in an increased focus on pricing.  Although there are currently no government price controls over private sector purchases in the United States, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under certain public healthcare programs, and proposals have been made to increase the rebate levels.  Various states have adopted mechanisms under Medicaid and otherwise that seek to control drug prices, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers.  In the absence of new government regulation, managed care has become a potent force in the market place that increases downward pressure on the prices of pharmaceutical products.  The Medicare Part D outpatient prescription drug benefit is provided primarily through private entities, which attempt to negotiate price concessions from pharmaceutical manufacturers.  The United States government is prohibited by law from interfering in price negotiations between manufacturers and Medicare drug plan sponsors, but some members of Congress are pursuing legislation that would permit the United States government to use its purchasing power to negotiate discounts from pharmaceutical companies, which would likely have a negative impact on the pricing of prescription drugs.  In addition, the law contains triggers for Congressional consideration of cost containment measures for Medicare in the event Medicare cost increases exceed a certain level.  These cost containment measures could include certain limitations on prescription drug prices.

This focus on pricing is evidenced in the provisions of the Affordable Care Act, the comprehensive health care reform legislation that was enacted in 2010.  Among other things, the new law imposes greater Medicaid rebates on manufacturers, requires manufacturers to offer a 50% discount to Medicare Part D beneficiaries in the program's coverage gap, expands the entities eligible for discounted 340B pricing, imposes a new annual fee on branded pharmaceutical manufacturers, and lays the foundation for the use of comparative effectiveness research in health care decision-making.  We expect that pressures on pricing and operating results will continue through implementation of the Affordable Care Act and other legislative and administrative developments.

 
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In the European Union, governments influence the price of pharmaceutical products and medical devices through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost of such products to consumers.  The approach taken varies from member state to member state.  Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed.  Other member states allow companies to fix their own prices for medicines, but monitor and control company profits.  The downward pressure on healthcare costs in general, particularly prescription drugs, has become very intense.  As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the National Institute for Health and Clinical Excellence in the United Kingdom, which evaluates the health economics data supporting new medicines and passes reimbursement recommendations to the government.  In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert a commercial pressure on pricing within a country.

In Japan, reimbursement prices of drug products and medical devices are determined by the National Health Ministry biannually, under the national health insurance.  The Ministry reviews the reimbursement prices of individual products biannually.  In 2010, the Japanese government raised the overall reimbursement of medical service fees by 0.2% for the first time in over 10 years.  However, it reduced the drug reimbursement rates by 5.75% and introduced a new additional rate reduction for the innovative products when generic products are approved.  The downward pressure is likely to remain because of persistent budget deficits.  Compensation for medical devices often takes the form of doctors' fees, which can be modified from time to time with additions of technologies using new medical devices.

C.  
ORGANIZATIONAL STRUCTURE

Alcon, Inc. is the parent holding company of the worldwide group of Alcon companies.  Alcon, Inc. owns 100% of the common voting stock in Alcon Holdings Inc., the holding company for our U.S. operations.  The U.S. operations include a diverse group of subsidiaries that perform manufacturing, selling, marketing, distribution and research functions.  Our larger U.S. subsidiaries are:

·  
Alcon Laboratories, Inc., which performs selling, marketing and distribution activities in the United States, with physical locations in Texas, California, Maryland and Hawaii; and
·  
Alcon Research, Ltd., which is responsible for Alcon's U.S. manufacturing and research and development operations with physical locations in Texas, California, West Virginia and Pennsylvania.

Alcon, Inc. also directly or indirectly owns numerous operating subsidiaries located outside the United States, with substantial presence in Europe, Japan, South America, Canada and Australia.  These international subsidiaries are primarily engaged in selling, marketing and distribution activities; however, several international subsidiaries conduct manufacturing operations and a few maintain small research facilities.  Our larger international subsidiaries, all of which are wholly owned by Alcon, Inc., are:

·  
Alcon Pharmaceuticals Ltd. (Switzerland), which operates as our international trading company and European Shared Services Center;
·  
S.A. Alcon Couvreur-N.V., our international financing entity, which also operates as a distribution and manufacturing company;
·  
Trinity River International Investments (Bermuda) Ltd., which manages Alcon's international portfolio of investments; and
·  
Trinity River Insurance Co. Ltd., which provides a wide range of insurance coverage for Alcon affiliates worldwide.

Exhibit 8.1 provides a shorter list of significant subsidiaries, as defined by the SEC.

D.  
PROPERTY, PLANTS AND EQUIPMENT

Our principal executive offices and registered office are located at Bösch 69, P.O. Box 62, 6331 Hünenberg, Canton of Zug, Switzerland.  The principal offices for our United States operations are located at 6201 South Freeway, Fort Worth, Texas 76134.

We believe that our current manufacturing and production facilities have adequate capacity for our medium-term needs.  To ensure that we have sufficient manufacturing capacity to meet future production needs, we regularly review the capacity and utilization of our manufacturing facilities.  The FDA and other regulatory agencies regulate
 
 
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the approval for use of manufacturing facilities for pharmaceuticals and medical devices, and compliance with these regulations requires a substantial amount of validation time prior to start-up and approval.  Accordingly, it is important to our business that we ensure we have sufficient manufacturing capacity to meet our future production needs.  We presently anticipate expanding the capacity of ten of our manufacturing facilities over the next two years.  The "History and Development of the Company" at the beginning of this Item 4 provides additional discussion of capital expenditures underway.

The following table sets forth, by location, approximate size and principal use of our main manufacturing and other facilities at December 31, 2010:

 
Location
 
Approximate Size
 
 
Principal Use(s)
 
Owned/ Leased
     
United States:
 
(sq. feet)
             
Fort Worth, Texas
 
1,668,000
 
Research and development, administrative buildings, warehouse
 
Owned
     
Fort Worth, Texas
 
118,000
 
Warehouse
 
Leased
     
Fort Worth, Texas
 
346,000
 
Pharmaceutical, contact lens care and surgical solutions
 
Owned
     
Fort Worth, Texas
 
344,000
 
Pharmaceutical and small volume consumer products
 
Owned
     
Houston, Texas
 
391,000
 
Surgical (Custom Pak® and consumables)
 
Owned
     
Irvine, California
 
210,000
 
Surgical (electronic instruments and consumables),
 
Leased
     
       
research and development, warehouse
         
Huntington, West Virginia
 
151,000
 
Surgical (intraocular lenses)
 
Owned
     
Huntington, West Virginia
 
114,000
 
Surgical (advanced optical devices)
 
Owned
     
Sinking Spring, Pennsylvania
 
165,000
 
Surgical (hand-held instruments and consumables)
 
Owned
     
Elkridge, Maryland
 
142,000
 
Distribution warehouse
 
Leased
     
Aliso Viejo, California
 
30,000
 
Surgical (LenSx® laser equipment)
 
Leased
     
                   
Outside the United States:
                 
Barcelona, Spain
 
444,000
 
Pharmaceutical, contact lens care, research and development
 
Owned
     
Puurs, Belgium
 
594,000
 
Pharmaceutical, contact lens care, surgical
 
Owned
     
       
(viscoelastics and Custom Pak®) and administrative
         
Kaysersberg, France
 
160,000
 
Pharmaceutical and contact lens care
 
Owned
     
Sao Paulo, Brazil
 
90,000
 
Pharmaceutical and contact lens care
 
Owned
     
Sao Paulo, Brazil
 
89,000
 
Administrative and warehouse
 
Leased
     
Cork, Ireland
 
147,000
 
Surgical (intraocular lenses)
 
Owned
     
Schaffhausen, Switzerland
 
18,000
 
Surgical (microsurgical instruments)
 
Owned
     
Schaffhausen, Switzerland
 
26,000
 
Surgical (microsurgical instruments)
 
Leased
     
Mexico City, Mexico
 
31,000
 
Pharmaceutical and contact lens care
 
Owned
     
Mexico City, Mexico
 
60,000
 
Administrative building and warehouse
 
Owned
     
Erlangen, Germany
 
71,000
 
WaveLight administrative, research and development
 
Leased
     
Pressath, Germany
 
28,000
 
Surgical (WaveLight® refractive equipment)
 
Leased
     
Neve Llan, Israel
 
11,000
 
Surgical (glaucoma filtration devices)
 
Leased
     
Singapore
 
331,000
 
Pharmaceutical plant under construction
 
Owned
     

In addition to these principal facilities, we have office facilities worldwide.  These facilities are generally leased. In three countries, we lease or sublease facilities from Nestlé.  These offices are located in Brazil, Norway and South Africa.  Pursuant to the terms of the Shareholders Agreement, these Shared Site Agreements will continue in effect for the remainder of their terms and may or may not be renewed.


We believe that all of our facilities and our equipment in those facilities are in good condition and are well maintained.
 
 
 ITEM 4A.
UNRESOLVED STAFF COMMENTS

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.

 
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ITEM 5.                      OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our financial statements and notes thereto included elsewhere in this report.  This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements.  Please see "Cautionary Note Regarding Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions relating to these statements.

Overview of Our Business

General

Alcon, Inc. ("Alcon") and its subsidiaries (collectively, the "Company") develop, manufacture and market pharmaceuticals, surgical equipment and devices and consumer eye care products that treat eye diseases and disorders and promote the general health and function of the human eye.  Founded in 1945, we have local operations in over 75 countries and our products are sold in more than 180 countries around the world.  In 1977, we were acquired by Nestlé S.A.  Since then, we have operated largely as an independent company, separate from most of Nestlé's other businesses, and have grown our annual sales from $82 million to more than $7 billion primarily as a result of internal development and selected acquisitions.  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, subject to the approval of each company's shareholders and certain other closing conditions.

We conduct our global business through two business segments: 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 markets and sells products principally in three product categories of the ophthalmic market: (i) pharmaceutical (prescription drugs); (ii) surgical equipment and devices (cataract, vitreoretinal and refractive); and (iii) consumer eye care (contact lens disinfectants and cleaning solutions, artificial tears and ocular vitamins).  Business segment operations generally do not include research and development, manufacturing, share-based compensation and other corporate functions.  We market our products to eye care professionals 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.
 
 
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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.

 
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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.

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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.

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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.

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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
 
 
 
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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.

 
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In most of the emerging markets in Latin America and Asia, average income levels are relatively low, government reimbursement for the cost of healthcare products and services is limited and prices and demand are sensitive to general economic conditions.  However, demand for our products in many developing countries has been rising.

In Japan, longer regulatory approval times impact the timing of marketing our pharmaceutical products there in comparison to other markets.  In addition, the Japanese National Health Ministry reviews prices of individual pharmaceutical products and health services biannually.  These reviews have resulted in 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.

Currency Fluctuations

Our products are sold in over 180 countries and we sell products in a number of currencies in our Alcon International business segment.  Our consolidated financial statements, which are presented in U.S. dollars, are impacted by currency exchange rate fluctuations through both translation risk and transaction risk.  Translation risk is the risk that our financial statements for a particular period are affected by changes in the prevailing exchange rates of the various currencies of our subsidiaries relative to the U.S. dollar.  Transaction risk 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 incurred in the currency in which sales proceeds are received, we do not have a significant net exposure.  In addition, most of our assets that are denominated 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 effective products that can be differentiated from competing products 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 in the United States to reduce prices.  Alcon has continued to increase market share in most of its major specialties, which has provided some offset to the recent market softness.  We experience seasonality in our ocular allergy medicines, with a large increase in sales in the spring and a lesser increase during the fall and also in our otic
 
 
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products, which have significantly larger sales in the summer months than at other times of the year.  Costs of goods sold for our pharmaceutical products include materials, labor, overhead and royalties.
 
Our surgical product category includes three product lines: cataract, vitreoretinal and refractive.  Sales of our products for cataract and vitreoretinal surgery are driven by technological innovation and aging demographic trends.  The number of cataract and vitreoretinal surgical procedures is not generally affected by economic conditions; however, because cataract patients now have the ability to pay out of their own pockets for certain premium technologies, sales of advanced technology intraocular lenses could be affected by economic conditions.  We believe 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 lasers and other surgical equipment used to perform laser refractive surgeries and, in the United States, charge a technology fee for each surgery performed (one eye equals one surgery).  Outside the United States, we generally do not charge a technology fee.  Because governments and private insurance companies generally do not cover the costs of laser refractive surgery, sales of laser refractive surgical products and related technology fees are sensitive 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.  Operating income from cataract and vitreoretinal products is driven by the number of procedures in which our products are used and the types of products used.  Operating income from laser refractive surgical equipment depends primarily on the number of procedures 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 Company 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 income for the year.

On February 11, 2009, the Company announced that it initiated programs 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
 
 
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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 products may be affected by a number 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.

 
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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. 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.

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
 
 
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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 accordance with the United States Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104.  Sales are recognized as the net amount 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 in various sales rebate and other incentive programs, the largest of which relates to Medicaid and Medicare Part D.  Sales rebate and other incentive programs also include chargebacks, which are discounts given primarily to wholesalers for their sales of Alcon products at contractual prices to hospitals, federal government agencies, health maintenance organizations, pharmacy benefits managers and group purchasing organizations.  Sales rebates and incentive accruals reduce revenue in the same period that the related sale is recorded and are included in "Other current liabilities" in our consolidated balance sheets.  Rebates are estimated based on historical analysis of trends and estimated compliance with contractual agreements.  The Company generally offers cash discounts to certain classes of customers for the early payment of receivables.  Those discounts are recorded as a reduction of revenue and accounts receivable in the same period that the related sale is recorded.  While we believe that our reserves for product returns 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 equal 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
 
 
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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, at December 31, 2008, unrealized losses on certain available-for-sale equity securities and 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 portion of the unrealized losses in line with current market conditions for credit default rates and loss recovery rates.  The Company recognized losses for other-than-temporary impairment during 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 determined 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.

 
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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
 
 
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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