20-F 1 acl20f2008.htm acl20f2008.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, 2008
 
              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. ­298,648,353 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
    23  
ITEM 4A.           UNRESOLVED STAFF COMMENTS
    48  
ITEM 5.               OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    49  
ITEM 6.               DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    82  
ITEM 7.               MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    101  
ITEM 8.               FINANCIAL INFORMATION
    107  
ITEM 9.               THE OFFER AND LISTING
    111  
ITEM 10.             ADDITIONAL INFORMATION
    112  
ITEM 11.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    128  
ITEM 12.             DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    130  
PART II
    130  
ITEM 13.             DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    130  
ITEM 14.             MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    130  
ITEM 15.             CONTROLS AND PROCEDURES
    131  
ITEM 16.             [RESERVED]
    131  
ITEM 16A.         AUDIT COMMITTEE FINANCIAL EXPERT
    131  
ITEM 16B.          CODE OF ETHICS
    131  
ITEM 16C.          PRINCIPAL ACCOUNTANT FEES AND SERVICES
    132  
ITEM 16D.          EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    133  
ITEM 16E.          PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    133  
ITEM 16F.          CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
    134  
ITEM 16G.          CORPORATE GOVERNANCE
    134  
PART III
    136  
ITEM 17.            FINANCIAL STATEMENTS
    136  
ITEM 18.            FINANCIAL STATEMENTS
    136  
ITEM 19.            EXHIBITS
    137  
SIGNATURES
    138  


 
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® Aspheric Toric
AcrySof® Aspheric Toric intraocular lens
AcrySof® IQ
AcrySof® IQ intraocular lens
AcrySof® Natural
AcrySof® Natural intraocular lens
AcrySof® Phakic
AcrySof® Phakic intraocular lens
AcrySof® ReSTOR®
AcrySof® ReSTOR® intraocular lens
AcrySof® ReSTOR® Aspheric
AcrySof® ReSTOR® Aspheric intraocular lens
AcrySof® ReSTOR® Aspheric, +3.0 add
AcrySof® ReSTOR® Aspheric, +3.0 add intraocular lens
AcrySof® ReSTOR® Aspheric, +4.0 add
AcrySof® ReSTOR® Aspheric, +4.0 add 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 WAVE®
ALLEGRETTO WAVE® 200 Hz laser
ALLEGRETTO WAVE® Eye-Q
ALLEGRETTO WAVE® Eye-Q 400 Hz laser
ALLEGRO ANALYZER®
ALLEGRO ANALYZER® wavefront system
ALLEGRO OCULYZER®
ALLEGRO OCULYZER® pentacam system
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
CIPRODEX®*
CIPRODEX® otic suspension
Cipro® HC*
Cipro® HC Otic
CONSTELLATION®
CONSTELLATION® vitreoretinal system
CustomCornea®
CustomCornea® wavefront system
Custom Pak®
Custom Pak® surgical procedure packs
DisCoVisc®
DisCoVisc® viscoelastic system
DuoTrav™
DuoTrav™ ophthalmic solution
DuoVisc®
DuoVisc® viscoelastic system
EXPRESS®
EXPRESS® contact lens care solutions
EYELITE®
EYELITE® laser
Grieshaber®
Grieshaber® surgical instruments
ICAPS®
ICAPS® dietary supplements
Infiniti®
Infiniti® vision system
LADAR6000
LADAR6000 excimer laser/system
LADARVision® 4000
LADARVision® 4000 excimer laser/system
Laureate®
Laureate® compact phacoemulsification system
LEGACY®
LEGACY® surgical system
Maxitrol®
Maxitrol® ophthalmic suspension
NEVANAC®
NEVANAC® ophthalmic suspension

 
3
 
 


Product Brand Name
Referenced Product
Opatanol® (EU)
Opatanol® ophthalmic solution
OPTI-FREE®
OPTI-FREE® contact lens care solutions
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 surgical device
PUREPOINT®
PUREPOINT® vitreoretinal laser
RETAANE®
RETAANE® 15 mg anecortave acetate suspension
RONDO®
RONDO® microkeratome
Silikon®
Silikon® ophthalmic surgical oil
SOFZIA®
SOFZIA® preservative system
Systane®
Systane® 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 Z®
TRAVATAN Z® ophthalmic solution
TRAVATANZ® (Japan)
TRAVATANZ® ophthalmic solution
Triesence®
Triesence® injectable suspension
Vegamox®* (Japan)
Vegamox® ophthalmic solution
Vigamox®*
Vigamox® ophthalmic solution
VISCOAT®
VISCOAT® ophthalmic surgical device
   
*       Cipro® and CIPRODEX® are registered trademarks of Bayer AG, licensed to Alcon by Bayer Healthcare AG.  Moxifloxacin, the primary ingredient in Vigamox® and Vegamox®, is licensed to Alcon by Bayer Healthcare AG.

Avelox® is a trademark of Bayer Healthcare 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
AMD
Age-related macular degeneration
ANDA
Abbreviated New Drug Application
AOMT
Otitis media in the presence of tympanostomy tubes
AREDS
National Eye Institute's Age Related Eye Disease Study
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
EITF
FASB's Emerging Issues Task Force
ESCP
Alcon's Executive Salary Continuance 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
FIN
FASB Interpretation
FTC
U.S. Federal Trade Commission
IASB
International Accounting Standards Board
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
LTIP
Alcon's Long Term Incentive Plan
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
NTIOL
New Technology Intraocular Lenses, as defined by CMS
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
REITs
Real estate investment trusts
REMS
Risk evaluation and mitigation strategies discussed in the FDAAA
RMS
Reference member state of the European Union
SAB
Staff Accounting Bulletin published by the SEC
SEC
United States Securities and Exchange Commission
Secondary Stage Closing
The purchase and sale of Nestlé's remaining Alcon shares to Novartis under the Purchase and Option Agreement
Securities Act
U.S. Securities Act of 1933, as amended
Separation Agreement
Separation Agreement between Nestlé and Alcon described in Item 7.B.2

 
5
 
 


   
Term
Definition
Services Agreement
Guarantee Fee and Commercial Paper Program Services Agreement, as described in Item 7.B, "Related Party Transactions"
SFAS
Statement of Financial Accounting Standards
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.
U.S. GAAP
United States generally accepted accounting principles
U.S. Holder
Security holder as defined in Item 10.E.


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 in the United States for ophthalmic pharmaceuticals (including generics) are based on total retail prescriptions filled as independently reported by the Wolters Kluwer Health Source Prescription Audit for the year ended December 31, 2008.

Statements in this report regarding the Company's worldwide market share position for ophthalmic surgical products by sales are based on internal estimates prepared using industry data for the nine months ended September 30, 2008.

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:

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

 
6
 
 

·  
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,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(in millions, except per share data)
 
Statement of Earnings Data:
                             
Sales
  $ 6,294     $ 5,599     $ 4,897     $ 4,368     $ 3,914  
Cost of goods sold
    1,472       1,398       1,215       1,078       1,082  
                                         
Gross profit
    4,822       4,201       3,682       3,290       2,832  
Selling, general and administrative
    1,961       1,694       1,399       1,594       1,237  
Research and development
    619       564       512       422       390  
In process research and development
    --       9       --       --       --  
Amortization of intangibles
    29       51       199       86       73  
                                         
Operating income
    2,213       1,883       1,572       1,188       1,132  
Interest income
    76       69       74       49       23  
Interest expense
    (51 )     (50 )     (43 )     (39 )     (27 )
Other, net
    (156 )     27       14       5       (2 )
                                         
Earnings before income taxes
    2,082       1,929       1,617       1,203       1,126  
Income taxes
    36       343       269       272       254  
                                         
Net earnings
  $ 2,046     $ 1,586     $ 1,348     $ 931     $ 872  
                                         
Basic weighted-average common shares outstanding
    298       298       304       306       306  
Diluted weighted-average common shares
outstanding
    301       302       309       312       311  
Basic earnings per common share
  $ 6.86     $ 5.32     $ 4.43     $ 3.04     $ 2.85  
Diluted earnings per common share
  $ 6.79     $ 5.25     $ 4.37     $ 2.98     $ 2.80  
Dividends paid on common shares
  $ 750     $ 613     $ 417     $ 302     $ 169  
Dividends paid per common share: U.S. $
  $ 2.50     $ 2.04     $ 1.38     $ 0.99     $ 0.55  
Dividends paid per common share: Swiss CHF
   CHF 2.63      CHF 2.50      CHF 1.68      CHF 1.18      CHF 0.72  
                                         
Cash Flow Data:
                                       
Cash provided by (used in):
                                       
Operating activities
  $ 2,032     $ 1,470     $ 1,406     $ 1,235     $ 1,048  
Investing activities
    (365 )     (227 )     (166 )     (382 )     (256 )
Financing activities
    (1,333 )     (607 )     (1,225 )     (433 )     (823 )
                                         
   
At December 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Balance Sheet Data:
                                       
Current assets
  $ 5,219     $ 4,825     $ 3,462     $ 3,268     $ 2,644  
Working capital
    3,029       1,963       1,461       990       767  
Total assets
    7,551       7,016       5,427       5,228       4,468  
Long term debt, net of current maturities
    61       52       49       56       72  
Total shareholders' equity
    4,691       3,375       2,914       2,556       2,188  

 
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
 
                         
2004                                                           
    1.1403       1.2421       1.3148       1.1310  
2005                                                           
    1.3134       1.2463       1.3256       1.1481  
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  

(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 2008                                                          
    1.1221       1.1092       1.1381       1.0743  
October 2008                                                          
    1.1578       1.1427       1.1674       1.1255  
November 2008                                                          
    1.2136       1.1925       1.2254       1.1580  
December 2008                                                          
    1.0687       1.1366       1.2203       1.0602  
January 2009                                                          
    1.1619       1.1253       1.1619       1.0617  
February 2009                                                          
    1.1702       1.1633       1.1782       1.1426  
                                 

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.

 
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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 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 expect that the new competitive generic products will result in a decline of our sales and profits for TobraDex®.

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

We currently hold approximately 5,350 patents and have approximately 3,650 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

 
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the fact that the validity and breadth of patents in our industry frequently involve complex legal issues that are not easily resolved.

Alcon has joined with its commercial partners in filing six patent infringement actions against four different generic drug companies.  All of these generic drug companies are seeking United States Food and Drug Administration ("FDA") approval to market generic versions of Alcon products under what is known as an Abbreviated New Drug Application ("ANDA").

The first infringement action was filed after Alcon received notice that Teva Pharmaceuticals USA, Inc. had filed an ANDA seeking approval to sell a generic version of Alcon's Vigamox® antibiotic ophthalmic solution.  Moxifloxacin, the primary ingredient in Vigamox®, is licensed to Alcon by Bayer HealthCare AG.  As part of its ANDA, Teva challenged three patents covering Alcon's innovator product Vigamox®.  Two of the patents are owned by Alcon's licensor, Bayer HealthCare AG, and the third, which expires in 2020, is owned by Alcon.  The two Bayer HealthCare patents were also the subject of another Teva ANDA seeking approval to sell a generic version of Bayer HealthCare's systemic moxifloxacin product, Avelox®.  Suit was filed by Alcon and Bayer HealthCare as co-plaintiffs against Teva relative to the Vigamox® ANDA on April 5, 2006 in the U.S. District Court in Delaware.  Bayer HealthCare subsequently filed suit in the same court relative to the Avelox® ANDA, and the two suits were merged.  Trial was scheduled to begin February 26, 2008, but the dispute between Bayer HealthCare and Teva relative to the two Bayer HealthCare patents was resolved by settlement on the eve of trial.  Under the terms of the settlement, Teva acknowledged the validity and enforceability of both Bayer HealthCare patents, and further acknowledged that its proposed generic ophthalmic product would infringe both patents.  Teva has therefore relinquished any claim that it is entitled to market the generic ophthalmic product prior to September 4, 2014.  Alcon remains the exclusive ophthalmic licensee under the Bayer HealthCare patents.  The trial relative to the Alcon patent began on February 28, 2008 and concluded on March 6, 2008.  Judgment is not expected until the first half of 2009.  Should Teva succeed in overcoming the Alcon patent and secure FDA approval, it would be entitled to sell a generic moxifloxacin product that would compete with Alcon's Vigamox® product in the United States well before the 2020 expiration of the Alcon patent.  Such competition would be expected to impact significantly the Company's sales and profits.

The second patent infringement action was filed after Alcon received notice that Apotex, a Canadian-based generic drug company, had filed an ANDA challenging one of the patents covering Alcon's Patanol® anti-allergy eye product.  Alcon's raw material supplier, Kyowa Hakko Kirin Co., Ltd., holds another U.S. patent that has not been challenged in this case and expires on December 18, 2010.  The patent that Apotex has challenged, which is co-owned by Alcon and Kyowa, will expire in 2015.  Alcon and Kyowa, as co-plaintiffs, filed suit against Apotex Inc. and Apotex Corp. on November 15, 2006 in the U.S. District Court in Indianapolis, Indiana.  As a result of the lawsuit filing, the FDA must delay any approval of the Apotex ANDA for 30 months unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval.  Trial is currently rescheduled for July 27, 2009.  Should Apotex succeed in overcoming the challenged patent and secure FDA approval, it would not be entitled to begin selling a generic olopatadine product that would compete with Alcon's Patanol® product in the United States until December 18, 2010.  Such competition would be expected to impact significantly the Company's sales and profits.

The third patent infringement action was filed after Alcon received notice on October 1, 2007 that Barr Laboratories, Inc. had filed an ANDA challenging the patents underlying Alcon's Patanol® product.  Unlike the Apotex ANDA described above, which is challenging only the patent jointly owned by Kyowa and Alcon, the Barr ANDA is also challenging Kyowa's composition patent on olopatadine, the active agent in Patanol®.  The 30-month period after which the FDA could approve Barr's generic product will expire at the end of March 2010, nine months before the Kyowa composition patent expires.  Alcon and Kyowa filed suit in the Federal District Court in Indianapolis (where the Apotex case is pending) on October 23, 2007.  As a result of the lawsuit filing, the FDA must delay any approval of the Barr ANDA for 30 months unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval.  Trial is currently scheduled for late April 2010.  Should Barr succeed in overcoming both of the challenged patents and secure FDA approval, it and Apotex may be entitled to begin selling a generic olopatadine product that would compete with Alcon's Patanol® product in the United States prior to December 18, 2010.  Such competition would be expected to impact significantly the Company's sales and profits.


 
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The fourth patent infringement action was filed after Alcon received notice late November 2008 that Barr Laboratories, Inc. had filed an ANDA challenging the patents underlying Alcon’s Pataday™ once daily olopatadine product.  The Barr ANDA is challenging the patent jointly owned by Kyowa and Alcon (described above), as well as two later issued patents owned by Alcon that cover the Pataday™ formulation.  Of the two Alcon patents, the latest expiry date is November 2023.  Barr is not challenging the Kyowa patent on olopatadine that expires in December 2010.  The 30-month period after which the FDA could approve Barr's generic product should expire in May 2011.  Alcon and Kyowa filed suit in the Federal District Court in Indianapolis (where the Apotex and Barr Patanol® product cases are pending) on January 8, 2009.  As a result of the lawsuit filing, the FDA must delay any approval of the Barr ANDA for 30 months unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval.  Trial has not yet been scheduled in this case.  Should Barr succeed in overcoming all of the challenged patents and secure FDA approval, then, subject to the unchallenged Kyowa patent expiring in December 2010, it would be entitled to immediately begin selling a generic olopatadine product that would compete with Alcon’s Pataday™ product in the United States.  Such competition would be expected to impact significantly the Company's sales and profits.

The fifth and sixth ANDA patent suits were filed February 2, 2009 in the U.S. District Court in Indianapolis against Apotex and Sandoz, respectively.

Alcon received notice January 12, 2009, that Apotex has followed Barr in filing an ANDA challenging the patents underlying Alcon's Pataday™ once daily olopatadine product.  Like Barr's ANDA, the Apotex ANDA is challenging the patent jointly owned by Kyowa and Alcon (described above), as well as two later issued patents owned by Alcon that cover the Pataday™ formulation.  Apotex is not challenging the Kyowa patent on olopatadine that expires in December 2010.  Because the suit was filed within the statutory 45-day period, the FDA must delay any approval of the Apotex ANDA until June 2011, unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval. Trial has not yet been scheduled in this case.  Should Apotex succeed in overcoming both of the challenged patents and secure FDA approval, then, subject to the unchallenged Kyowa patent expiring in December 2010 and Barr's potential 180-day "first filer" exclusivity period, it would be entitled to immediately begin selling a generic olopatadine product that would compete with Alcon’s Pataday™ product in the United States.  Such competition would be expected to impact the Company's sales and profits.

Alcon received notice on January 15, 2009 that Sandoz Inc. (generic affiliate of Novartis AG) has filed an ANDA challenging one of the patents underlying Alcon’s Patanol® product.  Similar to the Apotex ANDA on Patanol®, the Sandoz ANDA is challenging only the patent jointly owned by Kyowa and Alcon, but not the Kyowa-owned patent on olopatadine, which expires December 2010.  Because the suit was filed within the statutory 45-day period, the FDA must delay any approval of the Sandoz ANDA until June 2011 unless the litigation is earlier resolved or the court modifies the 30-month stay on FDA approval.  However, as a third ANDA filer (behind both Apotex and Barr), Sandoz would not be entitled to receive FDA approval until the expiration or forfeiture of a 180-day exclusivity period that would be granted to Apotex (the first filer) if it were successful in its patent challenge.  Trial has not yet been scheduled in this case.  Subject to the possibility of the 180-day exclusivity period that could accrue to Apotex, should Sandoz succeed in overcoming the challenged patent and secure FDA approval, it would be entitled to immediately begin selling a generic olopatadine product that would compete with Alcon's Patanol® product in the United States.  Such competition would be expected to impact the Company's sales and profits.

On April 16, 2008, Synergetics USA, Inc., a microsurgical device company, filed a civil antitrust lawsuit in the United States District Court for the Southern District of New York against the Company and its subsidiary, Alcon Laboratories, Inc.  Synergetics asserts that it has suffered losses resulting from alleged unlawful/unfair practices and seeks a recovery that it claims could exceed $100 million.  Synergetics alleges that Alcon has used monopoly power in the market for vitreoretinal surgical equipment to control purchasing decisions in favor of its surgical illumination sources and associated accessories, and that Alcon has done this to the detriment of sales of Synergetics's products, particularly its line of light sources, light pipes and other accessories.  Synergetics also asserts that Alcon engaged in allegedly anti-competitive behaviors.  While there can be no assurance that an adverse outcome in the case cannot occur, the Company believes that the Synergetics claims are without merit.  On June 23, 2008, the Company filed its answer and counterclaim in the District Court.  Synergetics subsequently amended its original Complaint, and on October 14, 2008, the Company filed its Motion to Dismiss Synergetics's First Amended Complaint.  On February 23, 2009, the Court granted the Company's Motion to Dismiss based on Synergetics's failure to properly plead its claims.  On March 6, 2009, Synergetics filed a further amended Complaint.  The Company intends to vigorously defend itself in the case and is seeking in its counterclaim to enjoin Synergetics from using Alcon trade secrets that

 
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are believed to have been misappropriated by Synergetics.  A trial date in 2010 is expected, but has not yet been scheduled by the Court.

A subsidiary of the Company, Alcon Research, Ltd., filed a Complaint on October 9, 2008 against Synergetics USA, Inc. for patent infringement of U.S. Patent No. 5,603,710, entitled, "Laser Delivery System with Soft Tip."  The suit was filed in the United States District Court for the Northern District of Texas in Fort Worth.  The Complaint asserts that Synergetics has knowingly and willfully infringed the Company's patent, which is directed to ophthalmic laser delivery systems having a probe with a soft tip.  In addition to seeking actual and exemplary monetary damages relating to the willful patent infringement and injunctive relief to prevent Synergetics from continuing its infringement of the patent, the Company is requesting that the District Court award the Company its attorneys' fees and costs.  Synergetics has answered the Complaint and counterclaimed for a declaratory judgment of non-infringement and patent invalidity.  No trial date has been set.  An adverse ruling by the Court, while possible, would not be expected to impact significantly the Company's sales and profits.

On February 25, 2009, the Company, together with subsidiaries Alcon Laboratories, Inc. and Alcon Research, Ltd., filed a second suit against Synergetics in the United States District Court in Fort Worth.  This case alleges infringement of Alcon's U.S. Patent 5,318,560 directed to aspirating laser probes, as well as trademark infringement and unfair competition relating to Synergetics's unauthorized use of Alcon's marks (ALCON®, Accurus®, and Grieshaber®) on its website.  The complaint has not yet been formally served on Synergetics.  The Company will request that the District Court permit this suit to be merged with the previously filed (October 9, 2008) patent infringement suit.  An adverse ruling by the Court, while possible, would not be expected to impact significantly the Company's sales and profits.

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 "instrumentalities" sold by the Company, but fails to name any specific ALCON® products.  The patent, which expires at the end of October 2009, was previously licensed to Advanced Medical Optics, Inc.  Alcon filed its Answer January 12, 2009.  The Answer includes a counterclaim for a declaratory judgment that the patent-in-suit is invalid and not infringed.  No trial date has been set.

On January 22, 2009, Elan Pharma International Ltd. sued two of the Company's subsidiaries, Alcon Laboratories, Inc. and Alcon Manufacturing, Ltd., in the U.S. District Court for the Eastern District in Sherman, Texas, 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 has not yet received formal service of process, and consequently its answer date is not set.  Although it is still assessing the allegations in the Elan complaint, the Company believes that it has strong defenses and intends to defend itself vigorously if the suit is not dismissed.

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.

Economic conditions and price competition may cause sales of our products used in 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.


 
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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 could adversely affect sales and prices of our products.  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, 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 member states impose controls 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.  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.

·  
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 which 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 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.


 
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The FDA and other regulators may authorize sales of some prescription pharmaceuticals on a non-prescription basis, which would reduce the 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 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 consolidation of wholesale and retail customers could further increase pricing and competitive pressures on pharmaceutical manufacturers, including us.

Wholesale and retail customers comprise a significant part of the distribution network for pharmaceutical and consumer eye care products in the United States.  This distribution network has undergone significant consolidation marked by mergers and acquisitions.  As a result, a smaller number of large wholesale distributors and retail pharmacy chains control a significant share of the market.  Consolidation of drug wholesalers and retail pharmacy chains has led to and may further increase pricing and competitive pressures on pharmaceutical manufacturers, including us.  In addition, this consolidation may lead to excess inventories and result in reduced wholesaler and retailer purchases in future quarters.

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 2008 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 2008, our most significant currency exposures were to the euro, the Japanese yen, the Canadian dollar, the British pound sterling, the Brazilian real and the Australian 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

 
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example, many emerging markets have currencies that fluctuate substantially, in response to which we may reduce our prices, making our products less profitable.  Inflation in emerging markets also makes our products less profitable and increases our exposure to credit risks.  We have experienced currency fluctuations, 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 all of the major 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 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 contact lens care products, including TRAVATAN® ophthalmic solution, OPTI-FREE® EXPRESS® No Rub® and OPTI-FREE® RepleniSH® contact lens care solutions, 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 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

 
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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 is further change in 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 both drugs and medical devices, (ii) ongoing compliance and reporting obligations for products with post-approval review and (iii) ongoing pricing and reimbursement reviews for both drugs and devices.  These government regulations increase our internal processes and 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 approval from the FDA 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 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 or 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

 
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Trade Commission ("FTC"), 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, adverse events and malfunctions associated with the products, and the 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 promotion 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 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 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.  On July 17, 2007, CMS published a final rule implementing provisions of the Deficit Reduction Act of 2005 regarding Medicaid drug rebates.  The rule addresses a broad range of issues relating to the determination of average manufacturer price, determination of best price, treatment of authorized generics, the definition of nominal prices and new manufacturer reporting requirements, among other issues.  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.  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, Maine, Massachusetts, Minnesota, Nevada, New Hampshire, New Mexico, Texas, Vermont and West Virginia, as well as the District of Columbia, also 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, Massachusetts and Nevada) 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.

 
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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 new regulatory requirements affecting pharmaceutical and medical device manufacturers.  These new 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.

New requirements also have been imposed in some 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.  We historically have relied on a combination of self-insurance and third-party insurance to cover potential product liability claims.  The combination of our insurance coverage, cash flows and reserves may not be adequate to satisfy product liabilities that we may incur in the future.  Furthermore, since January 1, 2005, we no longer purchase third party product liability insurance coverage for this risk.  Even meritless 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 product liability claims brought against the Company could have a material adverse effect on our results of operations or our financial condition.

 
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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.

We historically have relied on a combination of self-insurance and third-party insurance to cover potential environmental liability claims.  The combination of our insurance coverage, cash flows and reserves may not be adequate to satisfy environmental liabilities that we may incur in the future.  Furthermore, since January 1, 2005, we no longer purchase insurance coverage for this risk.  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 self-insure through our captive insurance subsidiaries 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.  Historically, we have 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 coverages required by law to be purchased from third parties, such as workers' compensation and automobile insurance.  We also purchase the personal side of directors' and officers' liability insurance from a third party.  Consequently we are exposed to all self-insured risks.

Our captive insurance companies have invested premiums from our subsidiaries in a manner and for terms appropriate to their possible use under the standards required for all insurance companies.  Although our third-party insurance coverage and internally generated cash flows have been adequate to provide for liability claims in the past, future liability claims and other losses from these risks could exceed our insurance coverage limits for past activities and future cash flows, and 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.


 
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Risks Related to Our Relationship with Nestlé

We will be controlled by Nestlé S.A. 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.

Nestlé, a Swiss corporation, owns approximately 52% of our outstanding common shares.  Because Nestlé's interests may differ from those of our other shareholders, actions Nestlé 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 Nestlé owns at least a majority of our outstanding common shares.  So long as it owns at least a majority of our common shares, Nestlé will be able to control, among other things: the election and removal of all of our directors; amendments to our Articles of Association (other than those subject to a two-thirds majority requirement); payment of dividends; changes to our capital structure unless the change is subject to the requirement that it be approved by holders of two-thirds of our common shares represented at a shareholders' meeting; and appointment and removal of our statutory and group auditors.  In certain instances, Nestlé's rights as a shareholder are subject to the Shareholders Agreement (defined below) that Nestlé entered into with Novartis AG as further described below.

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

Most of our agreements with Nestlé (or Nestlé affiliates), including the Separation Agreement discussed in Item 7.B.2, "Separation Agreement with Nestlé," were finalized while we were a wholly owned subsidiary of Nestlé and, as a result, the terms of each may not be as favorable to us as if they had been negotiated between unaffiliated parties.  Various conflicts of interest between Alcon and Nestlé could arise.  For example, ownership interests of directors or officers of Alcon in Nestlé shares or service as a director or officer of both Alcon and Nestlé 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.

Nestlé may sell its majority interest to Novartis and the transaction may trigger change of control provisions in the Company's contractual obligations and may affect our business development opportunities.

On April 6, 2008, Nestlé and Novartis executed a Purchase and Option Agreement ("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 now owns a minority stake in Alcon of slightly less than 25% of Alcon's outstanding shares, while Nestlé remains Alcon's majority shareholder with approximately 156 million Alcon shares comprising approximately 52% of the Company's outstanding shares.

On April 6, 2008, Nestlé and Novartis also executed a Shareholders Agreement ("Shareholders Agreement") that provides for the expansion of the Alcon board of directors from eight to ten members upon the completion of the sale, with one of the additional members designated by Nestlé and one designated by Novartis.  Alcon's shareholders voted to expand the Alcon board and elected two new directors at Alcon's annual general meeting held on May 6, 2008 in Zug, Switzerland.  James Singh, Nestlé's executive vice president and chief financial officer and Nestlé's designee, and Daniel Vasella, M.D., chairman and chief executive officer of Novartis and Novartis's designee, were elected to these two director positions and joined Alcon's board upon the closing of the 74 million share sale transaction on July 7, 2008.

The Purchase and Option Agreement between Nestlé and Novartis also contains put and call option rights on the balance of approximately 156 million Alcon shares owned by Nestlé.  The option rights commence on January 1, 2010 and expire on July 31, 2011.  As outlined by the two parties, these rights grant (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, which will be 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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The consummation of a purchase and sale transaction under the option rights is subject to regulatory approvals.  The consummation would trigger certain change of control provisions in the Company's share-based awards plan (including the vesting of certain outstanding share-based awards), certain retirement plans for Company employees and other agreements.

As a result of Novartis's acquisition of slightly less than 25% of Alcon's shares, Alcon's relationships with third parties in the pharmaceutical and other industries may be impacted, which in some cases may affect Alcon's business development and licensing opportunities.

Sales or distributions of our common shares by Nestlé or Novartis could depress the market price for our common shares.

Subject to provisions in the agreements between Nestlé and Novartis, either Nestlé or 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 Nestlé or 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 Nestlé or Novartis.  In addition, sales or distributions by Nestlé or 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.  Except as provided in the agreements between Nestlé and Novartis, Nestlé and Novartis are not subject to any contractual obligation to maintain their respective ownership positions in our shares.  Under the Purchase and Option Agreement, until the earlier of a closing pursuant to the exercise of the option rights or July 31, 2011, neither Nestlé nor Novartis shall buy, sell, otherwise encumber or take any action to register with the SEC any of Alcon's common shares.

Nestlé provides services discussed under "Major Shareholders and Related Party Transactions" that are beneficial to the Company and its operating results.  Under a divesture by Nestlé, the Company may be forced to either seek other providers of these services or add these functions internally.  These alternatives could have a negative impact on our results of operations or our financial condition.

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, and changes in estimates of our financial performance or changes in recommendations by securities analysts.  At December 31, 2008, stock options and share-settled stock appreciation rights totaling approximately 1.4 million granted under our incentive plan were scheduled to become exercisable in 2009.  The exercise prices for these instruments exceeded the market price of our shares at December 31, 2008.  In the event that the market price for our shares rises to the extent that such instruments are exercised and there are sales of substantial amounts of common shares in the public market in connection with or immediately following such exercise by the holders of these 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.


 
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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.

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.  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.  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 2008

Novartis Transaction

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 now owns a minority stake in Alcon of slightly less than 25% of Alcon's outstanding shares, while Nestlé remains Alcon's majority shareholder with approximately 156 million Alcon shares comprising approximately 52% of the Company's outstanding shares.

On April 6, 2008, Nestlé and Novartis also executed the Shareholders Agreement that provides for the expansion of the Alcon board of directors from eight to ten members upon the completion of the sale, with one of the additional members designated by Nestlé and one designated by Novartis.  Alcon's shareholders voted to expand the Alcon board and elected two new directors at Alcon's annual general meeting held on May 6, 2008 in Zug, Switzerland.  James Singh, Nestlé's executive vice president and chief financial officer and Nestlé's designee, and Daniel Vasella, M.D., chairman and chief executive officer of Novartis and Novartis's designee, were elected to these two director positions and joined Alcon's board upon the closing of the 74 million share sale transaction on July 7, 2008.


 
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The Purchase and Option Agreement between Nestlé and Novartis also contains put and call option rights on the balance of approximately 156 million Alcon shares owned by Nestlé.  The option rights commence on January 1, 2010 and expire on July 31, 2011.  As outlined by the two parties, these rights grant (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, which will be 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.

The consummation of a purchase and sale transaction under the Purchase and Option Agreement is subject to regulatory approvals.  The consummation would trigger certain change of control provisions in the Company's share-based awards plan (including the vesting of certain outstanding share-based awards), certain retirement plans for Company employees and other agreements.

For further details about the Shareholders Agreement and the Purchase and Option Agreement, please refer to the following link at the SEC's web site:  http://idea.sec.gov/Archives/edgar/data/1167379/000110465908045488/0001104659-08-045488-index.idea.htm.

Expansion of Swiss Operations

In September 2007, Alcon announced that it planned to establish Fribourg, Switzerland, as the central location for an expansion of the Company's Swiss-managed global administration operations.  This expansion included the 2008 relocation of finance, logistics, certain information technologies and other centralized administrative operations from Hünenberg to Fribourg and the establishment of a new European area and marketing management center in Geneva.  Alcon remains resident in Hünenberg, Switzerland, where local Swiss sales and marketing activities continue to be managed.  No changes are contemplated for the Alcon Grieshaber manufacturing operations, which remain in Schaffhausen, Switzerland.

The Company's global administration operations provide an array of common services for European and other affiliates and the 2008 relocation to Fribourg was the first step in an expansion of these activities.  Relocation activities began in late 2007 and may take more than two years until their completion.  During the five years following the relocation, Alcon expects to double the size of the Fribourg operations and broaden the common services it offers to affiliates.  The expansion will support the continued expected growth of the Company's European affiliates in terms of sales and employment.

Alcon expects to realize certain Swiss tax benefits in exchange for its commitment to relocate and significantly expand its global administration operations in Switzerland.  The initial term of these benefits commenced on January 1, 2008 and continues for a period of five years.  These benefits would be extended for an additional five years if the Company fulfills employment commitments and maintains these commitments through 2022.

Capital Expenditures, Acquisitions and Divestitures for the Last Three Years (January 1, 2006 through December 31, 2008):

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, 2008, 2007 and 2006 were $302.7 million, $227.2 million and $222.3 million, respectively.

WaveLight Acquisition

On November 9, 2007, Alcon completed a voluntary tender offer for WaveLight AG, as discussed in note 19 to the consolidated financial statements, culminating in Alcon's acquisition of 77.4% of the issued shares of WaveLight.  All relevant documents related to the completed tender offer can be found on Alcon's Web site, www.alcon.com/investors-media/alconrefractiveacq.asp.  In the fourth quarter of 2008, Alcon acquired additional shares of WaveLight, a German company listed in Deutsche Börse AG's Prime Standard since January 2003.  WaveLight develops, manufactures and markets innovative refractive laser and diagnostic systems, including the ALLEGRETTO laser system for refractive eye surgery.  Effective February 1, 2008, Alcon and WaveLight

 
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executed several agreements to integrate both companies' commercial operations in the U.S. market.  Following the execution of these agreements, Alcon's U.S. subsidiary, Alcon Laboratories, Inc., has taken over all sales, marketing, service and support operations in the United States for the two companies.

Also, during the latter part of 2008, Alcon and WaveLight executed distributorship agreements in certain countries outside the United States whereby Alcon's Swiss subsidiary, Alcon Pharmaceuticals Ltd., assumed the distribution activities related to the WaveLight products in such countries.

Further, in May 2008, the shareholders of WaveLight approved a Domination Agreement between Alcon and WaveLight.  On March 4, 2009, the Domination Agreement was registered and became effective.  The Domination Agreement allows Alcon to instruct WaveLight with regard to operational and financial matters. This will allow for the efficient integration of both companies in the near term and in the future.

Capital Expenditures, Acquisitions and Divestitures Currently Underway:

In 2008, capital expenditures were made to add manufacturing capacity and upgrades to our Fort Worth, Texas, Puurs, Belgium, Barcelona, Spain, and Cork, Ireland, manufacturing facilities and to initiate construction of a new manufacturing plant in Singapore.  Capital expenditures were also made to upgrade our research and development facilities and administrative facilities in Fort Worth.  We had capital expenditure commitments of $45.7 million at December 31, 2008.  We expect to fund these capital projects through operating cash flow and, if necessary, short term borrowings.

The Company has not announced any acquisitions or divestitures subsequent to December 31, 2008.

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 2008, we had sales of $6.3 billion, operating income of $2.2 billion and net earnings of $2.0 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®
DuoTrav™
AZARGA®
Azopt®
Betoptic S®
 
Vigamox®/Vegamox® (1)
TobraDex®
Tobrex®
NEVANAC®
Maxitrol®
 
 
Patanol®/Opatanol®
Pataday
 
 
Timolol GFS
Pred Acetate
Ciprofloxacin
Brimonidine
Trifluridine
 
Cipro® HC Otic (1)
CIPRODEX® (1)
Patanase®
   

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

Glaucoma Treatment

In 2008, sales of our glaucoma products were $954.6 million, or 37.3% of our total pharmaceutical sales.

In 2001, we launched TRAVATAN® ophthalmic solution, our entry into the prostaglandin analogue class of glaucoma treatments, in the United States.  Prostaglandin analogues are the largest class of compounds currently available to reduce intraocular pressure, which is a primary characteristic of glaucoma.  We have continued to improve and enhance the TRAVATAN® brand with the launch outside the United States of DuoTrav™ ophthalmic solution, which combines the prostaglandin in TRAVATAN® with a beta blocker, timolol, and with the launch in both the United States and international markets of TRAVATAN Z® ophthalmic solution, a new formulation of TRAVATAN® that replaces the preservative benzalkonium chloride ("BAC") with the SOFZIA® preservative system.  Brands containing our proprietary prostaglandin have been launched in more than 115 countries.

In addition, we offer Azopt® and Betoptic S® ophthalmic suspensions, both of which utilize other 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.  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.

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 2008, combined sales of our ocular anti-infectives, ocular anti-inflammatories and combination therapies were $882.5 million, or 34.4% 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.

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 active ingredient is released upon instillation in the eye.  We also executed several launches of NEVANAC® outside the United States during 2008.
 
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Our combination ocular anti-infective/anti-inflammatory products, TobraDex® ophthalmic suspension and ointment, combine a broad-spectrum antibiotic with a proven anti-inflammatory. TobraDex® has been the only tobramycin/dexamethasone ophthalmic combination product in the U.S. market.  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.  We expect that the new competitive generic products will negatively impact our sales and profits for TobraDex®.

Ocular Allergy

We market and manufacture products for the treatment of ocular allergies.  In 2008, sales of our ocular allergy pharmaceutical products were $463.3 million, or 18.1% 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.  According to Wolters Kluwer Health Source Prescription Audit, Patanol® was the leading ophthalmic topical anti-allergy prescription product in the United States in 2008.  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 and only once-a-day ocular prescription allergy medicine, Pataday™ ophthalmic solution, which is a new formulation of olopatadine, the active ingredient in Patanol®.  We currently sell Patanol® in more than 100 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, Cipro® HC Otic, for the treatment of otitis externa, is currently marketed in over 30 countries.  Sales of our otic products are seasonal, with a higher percentage of prescriptions written during the summer months.

The initial distribution and U.S. launch of Patanase® nasal spray in May 2008 began subsequent to its FDA approval in April 2008.

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 2008 were $91.2 million, or 3.6% of our total global pharmaceutical sales.  Falcon currently manufactures and markets approximately 30 generic pharmaceutical products.

Falcon's largest product is Timolol GFS, a patented gel-forming solution used to treat glaucoma, which accounts for 37.4% of Falcon's sales.  Timolol GFS is currently 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®.  We are not aware of any other generic competitors that have filed or received approval of a substitutable version of Timoptic-XE®.

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), Brimonidine 0.2% (for the treatment of glaucoma), 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).


 
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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
AcrySof ® intraocular lenses
    - AcrySof® Natural
    - AcrySof® IQ
    - AcrySof® ReSTOR®
    - AcrySof® ReSTOR® Aspheric
    - AcrySof® Toric
Viscoelastic devices
    - DuoVisc®
    - DisCoVisc®
    - VISCOAT®
    - ProVisc®
 
ALLEGRETTO WAVE®
    200 Hz laser
ALLEGRETTO WAVE®
    Eye-Q 400 Hz laser
ALLEGRO ANALYZER®
    wavefront system
ALLEGRO TOPOLYZER®
    corneal topography
    system
ALLEGROOCULYZER®
    pentacam system
WaveLight's
    biometry system
RONDO® microkeratome
AcrySof ® Phakic
    intraocular lens
 
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
   


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 2008 were approximately $2,391.6 million, or 83.0% 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.

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.  Over 35 million AcrySof® intraocular lenses have been implanted since introduction.


 
28
 
 

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® 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® ReSTOR® Aspheric intraocular lens.  This lens incorporates aspheric correction designed specifically for the AcrySof® ReSTOR® apodized diffractive, refractive design.

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.

Generally, we price our advanced technology intraocular lenses that provide additional vision benefit to patients significantly above our standard monofocal intraocular lenses.  This pricing approach impacts the market acceptance of our 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.  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.

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 2008, sales of our products for vitreoretinal surgery were $318.7 million, or 11.1% 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.  We believe the CONSTELLATION® is the most advanced surgical system because it continues to deliver a higher level of control to the physician and more efficiency through higher cutting rates.  The CONSTELLATION® is also available with embedded laser technology.  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® 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.

 
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Refractive Surgery

In 2008, sales of our laser refractive products and related technology fees were $116.3 million, or 4.0% of our total surgical sales.  In February 2008, Alcon Laboratories, Inc. fully integrated the U.S. portion of WaveLight's business into our U.S. refractive operations, which account for 36.6% of our global refractive sales.

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 and offers optimized treatment protocols.  The ALLEGRETTO WAVE® Eye-Q 400 Hz laser was the fastest growing laser in the United States with approximately 100 new systems installed in 2008.  Since the acquisition of a majority interest in WaveLight in late 2007, Alcon and WaveLight have continued to explore opportunities to combine WaveLight's technological expertise with the Company's global marketing, distribution and service platform and to provide additional clinical solutions and laser technology for Alcon's and WaveLight's refractive customers.  Alcon will continue to support the existing LADARVision® 4000 laser platform while working with our customers to transition them to the WaveLight technology.

Our Consumer Eye Care Products

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

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
 
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 2008 were $469.0 million, or 55.1% 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 many key markets.  OPTI-FREE® EXPRESS® No Rub® multi-purpose disinfecting solution was the first 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 85 countries.  Systane® has an "in-the-eye" gelling formula that provides long-lasting relief of dry-eye symptoms.  We added a preservative-free unit-dose Systane® to the product line in 2004.  In August 2008, we launched Systane® Ultra lubricating eye drops, a line extension of our Systane® franchise, in the United States.  In the bottle, Systane® Ultra has 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.  Systane® was our #1

 
30
 
 

artificial tears product in the U.S. marketplace based on sales dollars in 2008.  However, outside the United States, our largest selling artificial tears brand remains the Tears Naturale® line of products.

We market a variety of formulations of ICAPS® dietary supplements, including an 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, Soft Gel with the same ingredients of our original AREDS formula, which is a 4 x day tablet.  In its Age Related Eye Disease Study ("AREDS"), the National Eye Institute found that high levels of anti-oxidants and zinc reduce the risk of age-related macular degeneration in patients at risk for developing it.

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 20 representative/branch offices around the world.  We have a global sales force of approximately 3,750 sales representatives consisting of approximately 1,050 sales representatives in the United States, our largest market, and approximately 2,700 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, France, Spain, Germany, Brazil, Canada, Italy, the United Kingdom, Australia and Russia.

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, technical service assistance and practice management programs.

In each of our markets, we rely on our strong relationships with eye care professionals to maintain and expand our market share.  We have established several long-standing programs, as well as sponsor 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.

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 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 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.  Sales of $660.6 million to one U.S. customer accounted for more than 10% of our global sales in 2008.

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, over 95% of 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.

 
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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 1,700 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 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 $2.5 billion over the last five years and plan to invest at least $3.0 billion in the next five years to carry out our strategy of developing products primarily from our own research and development activities.

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 small 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.

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 and nasal areas specifically focused on leveraging compounds we use for ocular treatments into these areas.


 
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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 outside the United States.

       
Expected
 
Status at
Name
 
Condition
 
Submission Date
 
December 31, 2008 (1)
             
Pharmaceutical
           
Ophthalmology
           
DuoTrav
 
Glaucoma
 
Jpn Filed
 
Filed
Anecortave acetate
 
Glaucoma
 
U.S. 2011 or later
EU 2011 or later
Jpn 2011 or later
 
Phase II/III
Aganocide
 
Anti-infective
 
U.S. 2011 or later
EU 2011 or later
Jpn 2011 or later
 
Phase I/II
Vigamox®
 
Anti-infective
 
EU Filed
 
Filed
Moxifloxacin, new formulation
 
Anti-infective
 
U.S. Filed (2)
 
Filed
NEVANAC®
 
Anti-inflammatory
 
Jpn Filed
 
Filed
AL-43,546
 
Dry eye
 
U.S. 2011 or later
EU 2011 or later
Jpn 2011 or later
 
Phase I/II
Hyaluronic acid (3)
 
Dry eye
 
U.S. 2009
 
Pre-submission
Triesence® injectable suspension
 
Retinal surgery
 
EU 2009
Jpn 2009
 
Pre-submission
Pre-submission
Otic/Nasal
           
Moxifloxacin/dexamethasone
 
Anti-infective &
 
U.S. 2011 or later (2)
 
Phase III
   
anti-inflammatory
       
Patanase® pediatric
 
Allergy
 
U.S. 2009
 
Phase III
             
Surgical
           
AcrySof ® Toric diopter range expansion
 
Cataract
 
U.S. 2011 or later
EU 2009
 
Advanced development
Advanced development
AcrySof ® ReSTOR® diopter range expansion
 
Cataract
 
U.S 2009
EU 2009
 
Advanced development
Advanced development
AcrySof ® ReSTOR® Aspheric,+3.0 add lens
 
Cataract
 
Jpn 2009
 
Advanced development
AcrySof ® ReSTOR® Toric lens
 
Cataract
 
U.S. 2011 or later
EU 2011 or later
Jpn 2011 or later
 
Advanced development
AcrySof ® angle-supported phakic lens
 
Refractive
 
U.S. 2009
Jpn 2011 or later
 
Advanced development
DisCoVisc® viscoelastic
 
Cataract
 
Jpn Filed
 
Filed
             
Consumer Eye Care
           
Systane® Ultra unit dose
 
Dry eye
 
U.S. 2009
 
Advanced development
Systane® ORB
 
Dry eye
 
U.S. 2009
 
Advanced development
OPTI-FREE® multi-purpose solution
 
Lens solution
 
Jpn Filed
 
Filed
OPTI-FREE® silicone hydrogel
 
Lens solution
 
U.S. 2010
EU 2010
 
Early development
Early development
ICAPS® next generation
 
Ocular vitamin
 
U.S. 2009
EU 2009
 
Advanced development
Advanced development
ICAPS® AREDS2
 
Ocular vitamin
 
U.S. 2011 or later
EU 2011 or later
 
Early development
Early development

 
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(1)  
For a description of the FDA approval process, see "­­– Government Regulation" below.
(2)  
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.  As a result, additional Phase III clinical studies may be required for approval.
(3)  
This project is being managed and conducted by River Plate Biotechnology, Inc., which filed its NDA in January 2009.

Pharmaceutical Product Development

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

Glaucoma.  We have continued development of a glaucoma project in 2008 involving the administration of anecortave acetate via a unique injection method beneath the conjunctiva near the front of the eye.  Based upon the results of an initial proof-of-concept clinical study, anecortave acetate may have the potential for providing long term intraocular pressure reductions of three months or more following a single administration in a significant proportion of patients.  We also 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. AL-39,256 is one such compound that is presently being evaluated in clinical activities to establish a proof-of-concept before potentially entering full development.

Our research into glaucoma also seeks to improve patient care and address unmet medical needs in the management of glaucoma.  Two such areas include providing prolonged intraocular pressure lowering benefit from a single administration and improving the ocular surface health relative to the chronic use of topical ocular medications.  Our anecortave acetate project is an example of our efforts to deliver long term lowering of intraocular pressure following a single administration of the drug.  Reformulations of our Travatan® and DuoTrav™ formulations to remove or replace 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.

Retina.  In 2008, we discontinued our work on an indication for RETAANE® suspension that reduces the risk or progression from "dry" to "wet" age-related macular degeneration ("AMD").  We remain fully committed to the treatment of retinal diseases, including developing treatments for “wet” AMD, “dry” AMD and geographic atrophy, diabetic retinopathy and diabetic macular edema.    During 2008 we initiated a natural history study in patients with geographic atrophy in order to better assist us in the design of developmental clinical studies.  We plan to use this information in 2009 to initiate clinical studies to investigate treatments for this disease.  We also plan to begin the clinical evaluation of a novel agent for treating “wet” AMD and diabetic macular edema.

Dry Eye.  In 2008, we continued our collaboration with River Plate Biotechnology, Inc. to develop a hyaluronic acid dry eye product.  This collaboration is progressing and River Plate has informed us that they submitted an NDA in the United States for this compound in January 2009.  We also concluded a licensing agreement with GlaxoSmithKline plc to gain access to Cilomilast as a potential treatment for dry eye and we expect to initiate our clinical evaluation program in 2009.  Our internal development of AL-43,546 for dry eye progressed during 2008 and we expect to enter full development in 2009.

Infection & Inflammation.  In 2008, we completed our development program for TobraDex® ST ophthalmic suspension, a new formulation of tobramycin and dexamethasone that was developed to be a replacement product for TobraDex®.  The FDA approved our TobraDex® ST NDA in February 2009; however, we have not determined whether we will launch this product because two generic formulations of its predecessor, TobraDex®, were launched in January 2009.  We also filed an NDA in 2008 for a new formulation of moxifloxacin which will provide a more convenient twice-per-day dosing administration for the treatment of bacterial conjunctivitis.  In 2009, we will be entering the clinic with a new class of compound, called aganocides, which we believe will have utility in treating bacterial conjunctivitis as well as viral conjunctivitis due to adenovirus.  In 2008, we filed our Japan NDA for NEVANAC®, a non-steroidal anti-inflammatory product that is used to control inflammation associated with cataract surgery.


 
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In the last half of 2007, the FDA issued a notice of a change in their requirements for clinical studies supporting approval of anti-infective products.  In this notice, they also advised companies to reconfirm their development plans because agreements reached either through End-of-Phase II meetings or via special protocol assessments may no longer be valid.  Based upon this change in regulatory requirements, we have discontinued development of a moxifloxacin and dexamethasone ophthalmic combination product for treating eye infections and controlling inflammation for the U.S. market.  Continued development of a similar otic anti-infective/anti-inflammatory combination to treat middle ear infections in children with tympanostomy tubes will be assessed following the completion of presently on-going studies.

Nasal.  We received FDA approval of Patanase® nasal spray in 2008.  Studies to expand the indication to include use in patients below twelve years of age are currently in progress.  During 2009, we expect to file a supplement to our Patanase® NDA, requesting approval of use in the pediatric population.

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 2008, the FDA approved the AcrySof® ReSTOR® Aspheric, +3.0 add intraocular lens, which was designed to increase the quality of vision for people with presbyopia following cataract surgery.  By changing the near vision add power of the lens, clinical experience has demonstrated an improvement in patient preference for reading distance along with better intermediate vision compared to the AcrySof® ReSTOR® Aspheric, +4.0 add version of the lens.  In addition, our AcrySof® Aspheric Toric lens was filed with the FDA in 2008 and was approved in February 2009.  This new lens corrects not only for astigmatism, but also for spherical aberration to provide improved contrast sensitivity and a higher quality of vision. We have a project ongoing that seeks to add a toric feature to our AcrySof® ReSTOR® platform in future years to correct pre-existing astigmatism and presbyopia following lens replacement.

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.  In 2008, the Company introduced the 12 degree OZil® phaco tip, an enhanced performance tip for the market-leading Infiniti® vision system.  We also introduced the Laureate® compact phacoemulsification system, which advances the performance of cataract equipment while meeting the specific cost and access needs of emerging markets.  In 2009, we expect to introduce additional advancements in technology to further facilitate lens removal and we will continue to investigate ways to reduce the potential for the occurrence of posterior capsule opacification.

Vitreoretinal Surgery.  The Company launched the CONSTELLATION® vitreoretinal system at the end of 2008 as the next-generation product to replace the Accurus® system.  The new CONSTELLATION® is designed to integrate all requirements for posterior segment surgery in a single unit with enhanced performance features for the efficient and effective use of related accessories.  In parallel, we continue to enhance the Accurus® with the addition of new micro-incision vitrectomy consumables, handheld accessories and illumination products designed to respond to the increased needs of ophthalmic surgeons for instrument performance.  The PUREPOINT® vitreoretinal laser was launched in early 2008 as a replacement for our EYELITE® laser.  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.

In 2008, the Company gained U.S. approval to market a new ophthalmic irrigating solution based on a proprietary polymer system that we believe will improve surgical performance and ocular protection.   We applied for a CE Mark for the European Union market in the second half of 2008.  In 2009, we will initiate the regulatory processes to introduce some of our ocular surgical irrigating solutions in more environmentally friendly package configurations that will significantly reduce waste disposal issues and costs for our customers.

Refractive Surgery.  The Company received CE Mark approval in the EU for the AcrySof® angle-supported phakic intraocular lens in the second half of 2008 and plans to file in the United States before the end of 2009.  This new lens is made from the biocompatible AcrySof® lens material and provides myopic patients with refractive error of -6 to -16 a treatment alternative to laser refractive surgery that may provide greater predictability.

 
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Alcon acquired majority control of WaveLight AG in November 2007.  Since then, the two companies have worked to build on WaveLight's technology platform to expand its surgical capabilities.  We plan to expand the indications for use of WaveLight's ALLEGRETTO WAVE® Eye-Q 400 Hz laser in the United States by commencing clinical studies to demonstrate the safety and efficacy of topography-guided laser eye surgery.  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.

WaveLight also is developing a femtosecond laser for the creation of corneal flaps.  This product development activity is scheduled to be completed by the end of 2009, with applications for a CE Mark for the European Community and 510K approval within the United States.  In addition, WaveLight is currently developing their next generation excimer laser platform.  This next generation platform will have improved ergonomics and enhanced performance capabilities.

WaveLight also continued to expand its diagnostic offering with the introduction of a biometry system outside the United States in 2008.  This diagnostic instrument is designed to help 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.  Our product development is focused on solutions that work well with new contact lens materials, especially the rapidly growing silicone hydrogel lens segment.

We also are developing new active ingredients and compounds for over-the-counter products that treat dry eye.  In addition to Systane® Ultra, which we launched in 2008, we plan to introduce two new formulations under the Systane® brand in 2009 that will address unique needs of the various patient segments of the dry eye target population.

In the ocular health area, we introduced a new easy to swallow softgel formulation in the ICAPS® dietary supplement family based upon the AREDS formulation.  We also are supporting 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.  We will use the results of this study to develop 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.  All of our manufacturing plants in the United States and Europe are ISO 9001:2000, ISO 13485:2003 and ISO 14001:2004 certified, except that the WaveLight plant in Germany is not ISO 14001:2004 certified.

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, 2008, we employed approximately 2,000 people to manufacture our pharmaceutical and contact lens care products at seven facilities in the United States, Belgium, France, Spain, Brazil and Mexico.  As of

 
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December 31, 2008, we employed approximately 2,900 people to manufacture surgical equipment and other surgical medical devices at eight facilities in the United States, Belgium, Switzerland, Ireland and Germany.  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 pharmaceutical 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®
 
Fort Worth, Texas
   
Accurus®, LEGACY®, Infiniti®
 
Irvine, California
   
WaveLight ALLEGRETTO WAVE® Eye-Q
 
Pressath, Germany
   
Cipro® HC
 
Barcelona, Spain
   
         
(1)  
The Cork, Ireland, facility continues to manufacture 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.

Supplies

The active ingredients used in our pharmaceutical and consumer eye care products are sourced from facilities approved by the FDA or by 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.

 
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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 Advanced Medical Optics, Inc. across most of the ophthalmic surgical market, and with national or regional companies, such as Hoya Corporation (Japan and Korea), in some international 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 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, Advanced Medical Optics, Inc., CIBA Vision Corporation (a Novartis company) and, in Japan, Rohto Pharmaceutical Co., Ltd.  We compete with Allergan, Inc., Advanced Medical Optics, Inc., Bausch & Lomb Incorporated, Johnson & Johnson and Novartis in artificial tears products and Bausch & Lomb 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, 2008, we owned approximately 1,450 U.S. patents and pending U.S. patent applications and more than 7,550 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.

 
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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.

Philanthropic Efforts

We have a long-standing commitment to bringing ophthalmic products to those who would not otherwise have access to them.  Our Medical Missions Program supported more than 1,200 humanitarian efforts in 2008 involving over 4,400 volunteer eye care professionals in 94 countries.  Using products that we provided without charge, these eye care professionals performed over 32,000 cataract procedures in 2008.  We also conduct a patient assistance program in the United States, which provided ALCON® glaucoma and other ophthalmic pharmaceutical products in response to more than 30,000 requests in 2008.

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 Medical Device Directive 93/42/EEC.  The certifications obtained are accepted by Australia as well.  Japan also has made recent changes by introducing 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

 
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"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 file 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 the 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 aimed at consumers, 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 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.  Certain aspects of these patent and related provisions have been the subject of changes by legislation and by FDA rulemaking in recent years.  Among other things, these changes in the law affect what patents an NDA holder may submit to the FDA for listing, prevent the triggering of multiple automatic stays on FDA approval of an ANDA following initiation of patent infringement suits except in limited circumstances, require ANDA applicants with 180-day exclusivity to bring a product to market within certain prescribed deadlines or forfeit the exclusivity, and clarify or change other aspects of the operation of 180-day exclusivity.

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.
 
 
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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.  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 PMA filing is subject to a substantial user fee payment, and PMA supplement applications are also subject to user fees.

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.

 
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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 research 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, particularly in the small number of member states that have yet to implement both Directives fully.  In order to demonstrate safety and efficacy for the medical devices the Company 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 is introduced into the product development cycle for next-generation or new products and considered as part of design controls and risk management practices in place.

All member states currently require regulatory and institutional or other central or regional ethics review board approval of interventional clinical trials for medicines.  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 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:

·  
Mutual recognition or decentralized procedure.  An applicant submits an application in European Union member states of its choosing, each referred to a concerned member state ("EUCMS").  The applicant then selects one of these states, known as the reference member state ("RMS"), to review its dossier and prepare an assessment report, a draft summary of product characteristics and a draft of the labeling and package leaflet.  If the applicant already holds a national approval, it may request that the relevant national authority act as its RMS.  In either case, the RMS circulates these documents to all the EUCMSs.  The EUCMSs then have 90 days within which to review the documents and raise objections.  If no EUCMS objects, the RMS documents their agreement and closes the procedure.  Each EUCMS, and the RMS if it has not already done so, must then grant national marketing authorizations within 30 days.

If any EUCMS objects to the product's approval on the grounds of potential serious risk to public health within the 90-day period, it must communicate its detailed reasons to the applicant, the RMS and the other EUCMSs.  The RMS will then refer the matter to a coordination group for a 60-day conciliation procedure, during which the applicant has a right to comment orally or in writing.  If any disagreement remains, the issue is referred for binding resolution to the Committee for Medicinal Products for Human Use within the European Medicines Agency 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 currently mandatory for products developed by means of a biotechnological process and optional for new active substances and other products that constitute "a significant therapeutic, scientific or technical innovation."  From November 20, 2005, the centralized procedure also has been mandatory for new chemical entities for which the therapeutic indication is the treatment of acquired immune deficiency syndrome, cancer, neurodegenerative disorder or diabetes.  From May 20, 2008, the centralized procedure also has been mandatory for new chemical entities for auto-immune diseases, other immune dysfunctions and viral diseases.  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, which 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.  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, and those intending to accede to the European Union, accept European Union review and approval as a basis for their own national approval.

 
42
 
 

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.  In addition, 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.  In addition, Alcon considers vertical standards wherever applicable and notates these in the applicable Essential Requirement Checklist for any given medical device intended for distribution in the European Union.

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 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.  Foreign manufacturers are required to be accredited by the 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

 
43
 
 

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 manufacturing process and other sensitive information with the authorities to which Japanese licensees may refer in their new drug application.

In the latest 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.

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 a unique device identification ("UDI") system and other changes to enhance postmarket surveillance for medical devices.  In addition, 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.

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 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 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 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

 
44
 
 

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.

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.  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 Healthcare Act 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.  On July 17, 2007, CMS published a final rule implementing provisions of the Deficit Reduction Act of 2005 regarding Medicaid drug rebates.  The rule addresses a broad range of issues relating to the determination of average manufacturer price, determination of best price, treatment of authorized generics, the definition of nominal prices and new manufacturer reporting requirements, among others.  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 our activities are potentially subject to federal and state consumer protection and unfair competition laws.  Finally, certain jurisdictions have other trade 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.

 
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 Agency and Occupational Safety and Health Administration regulations.  Our facilities outside the United States are required to comply with locally mandated regulations that vary by country.

Currently we have thirteen ISO 14001 certified operations.  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.  U.S. certified operations include our manufacturing facilities in Sinking Spring, Pennsylvania, Irvine, California, Houston, Texas,

 
45
 
 

Huntington, West Virginia, and Fort Worth, Texas.  Our manufacturing facilities in Mexico City, Mexico, and Sao Paulo, Brazil, are also ISO 14001 certified, as well as our corporate environmental affairs department in Fort Worth, Texas.  Certification possibilities for our newest surgical manufacturing facility in Erlangen, Germany will be assessed in 2009.  The Company also has developed its own internal Alcon Environmental Management System based on the core elements of ISO 14001 and implemented this system at our domestic distribution centers in Reno, Nevada and Elkridge, Maryland.  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 litigation or significant financial obligations arising from any alleged failure to comply with environmental, health and safety laws and regulations that are likely to have a material adverse impact on our financial position.

We are subject to environmental laws, including the U.S. Environmental Protection Agency’s Clean Air Act program.  The Clean Air Act requires businesses to control or limit the emissions discharged into the atmosphere.  Alcon has consistently monitored this legislation to ensure its operations remain in compliance and, in light of concerns regarding global atmospheric changes, we also monitor proposed rule changes which can affect our operations.  A recently proposed rule by the Environmental Protection Agency was published on December 23, 2008.  This proposal, entitled “Protection for Stratospheric Ozone:  Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export”, has the potential to affect a segment of our sterilization operations at our Huntington, West Virginia, facility.  This rule could affect our current sterilization process which uses a hydrochlorofluorocarbon ("HCFC") in our sterilant gas mixture.  However, we have an ongoing long term commitment, and construction underway, to expand our U.S. facility to support our transition to sterilization operations that do not use HCFCs.  We have been, and are currently, aggressively pursuing alternatives to provide interim relief to this proposed rule.  We believe that we have adequate options to respond to this proposed rule should it take affect as written and that the proposed rule will not have a material adverse effect on our results of operations, liquidity or consolidated financial position.  In an effort to ensure ongoing compliance with applicable environmental laws and regulations, we have a program to continually monitor waste, water, air emissions, ozone depletion components and energy consumption.

We are not aware of any pending litigation or significant financial obligations arising from current or past environmental practices that are likely to have a material adverse impact on our financial position.  There can be no assurance, however, that environmental aspects relating to properties owned or operated 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 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.


 
46
 
 

This focus on pricing has led to other adverse government action, and may lead to other action in the future.  For example, legislative proposals have been made to change the import laws to broaden permissible imports.  Even if the changes to the import laws do not take effect, imports from Canada and elsewhere may increase due to market and political forces, and the limited enforcement resources of the FDA, the Customs Service and other government agencies.  For example, numerous states and localities have proposed programs to facilitate Canadian imports, and some already have begun such a program, notwithstanding questions raised by the FDA about the legality of such actions.  We expect that pressures on pricing and operating results will continue.

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 2008, the Japanese government reduced the overall reimbursement rates by 0.8% and reduced the drug reimbursement rates by 1.3% and 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, Hawaii and Nevada; 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;
·  
NV Alcon Coordination Center (Belgium), our international financing 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.

 
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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 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 seven 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, 2008:

 
Location
 
Approximate Size
 
 
Principal Use(s)
 
Owned/ Leased
     
United States:
 
(sq. feet)
             
Fort Worth, Texas
 
1,668,000
 
Research and development, administrative buildings
 
Owned
     
Fort Worth, Texas
 
165,000
 
Warehouse
 
Leased
     
Fort Worth, Texas
 
346,000
 
Pharmaceutical, contact lens care and surgical solutions
 
Owned
     
Fort Worth, Texas
 
314,000
 
Pharmaceutical and small volume consumer products
 
Owned
     
Houston, Texas
 
364,000
 
Surgical (Custom Pak® and consumables)
 
Owned
     
Irvine, California
 
210,000
 
Surgical (electronic instruments and consumables),
 
Leased
     
       
research and development
         
Huntington, West Virginia
 
151,000
 
Surgical (intraocular lenses)
 
Owned
     
Sinking Spring, Pennsylvania
 
165,000
 
Surgical (hand-held instruments and consumables)
 
Owned
     
Elkridge, Maryland
 
110,000
 
Distribution warehouse
 
Leased
     
Reno, Nevada
 
79,000
 
Distribution warehouse
 
Leased
     
                   
Outside the United States:
                 
Barcelona, Spain
 
448,000
 
Pharmaceutical, contact lens care, research and development
 
Owned
     
Puurs, Belgium
 
470,000
 
Pharmaceutical, contact lens care, surgical
 
Owned
     
       
(viscoelastics and Custom Pak®) and administrative
         
Kaysersberg, France
 
138,000
 
Pharmaceutical and contact lens care
 
Owned
     
Sao Paulo, Brazil
 
90,000
 
Pharmaceutical and contact lens care
 
Owned
     
Sao Paulo, Brazil
 
78,000
 
Administrative and warehouse
 
Leased
     
Cork, Ireland
 
145,000
 
Surgical (intraocular lenses)
 
Owned
     
Schaffhausen, Switzerland
 
16,000
 
Surgical (microsurgical instruments)
 
Owned
     
Schaffhausen, Switzerland
 
21,000
 
Surgical (microsurgical instruments)
 
Leased
     
Mexico City, Mexico
 
44,000
 
Pharmaceutical and contact lens care
 
Owned
     
Mexico City, Mexico
 
84,000
 
Administrative building and warehouse
 
Owned
     
Erlangen, Germany
 
51,000
 
WaveLight administrative, research and development
 
Leased
     
Pressath, Germany
 
22,000
 
Surgical (WaveLight refractive equipment)
 
Leased
     

In addition to these principal facilities, we have office facilities worldwide.  These facilities are generally leased. In some countries, we lease or sublease facilities from Nestlé.

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 approximately $6.3 billion primarily as a result of internal development and selected acquisitions.  In March 2002, Nestlé sold approximately 25% of its ownership of Alcon through an initial public offering.

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.

Novartis Transaction

On April 6, 2008, Nestlé and Novartis AG, a Swiss corporation, 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 now owns a minority stake in Alcon of slightly less than 25% of Alcon's outstanding shares, while Nestlé remains Alcon's majority shareholder with approximately 156 million Alcon shares comprising approximately 52% of the Company's outstanding shares.

On April 6, 2008, Nestlé and Novartis also executed the Shareholders Agreement that provides for the expansion of the Alcon board of directors from eight to ten members upon the completion of the sale, with one of the additional members designated by Nestlé and one designated by Novartis.  Alcon's shareholders voted to expand the Alcon board and elected two new directors at Alcon's annual general meeting held on May 6, 2008 in Zug, Switzerland.  James Singh, Nestlé's executive vice president and chief financial officer and Nestlé's designee, and Daniel Vasella, M.D., chairman and chief executive officer of Novartis and Novartis's designee, were elected to these two director positions and joined Alcon's board upon the closing of the 74 million share sale transaction on July 7, 2008.

The Purchase and Option Agreement between Nestlé and Novartis also contains put and call option rights on the balance of approximately 156 million Alcon shares owned by Nestlé.  The option rights commence on January 1, 2010 and expire on July 31, 2011.  As outlined by the two parties, these rights grant (i) Novartis a call option to

 
49
 
 

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, which will be 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.

The consummation of a purchase and sale transaction under the option rights is subject to regulatory approvals.  The consummation would trigger certain change of control provisions in the Company's share-based awards plan (including the vesting of certain outstanding share-based awards), certain retirement plans for Company employees and other agreements.

WaveLight Acquisition

On November 9, 2007, Alcon completed the acquisition of 77.4% of the common shares of WaveLight AG.  WaveLight, a German company listed in Deutsche Börse AG's Prime Standard since January 2003, develops, manufactures and markets innovative refractive laser and diagnostic systems, including the ALLEGRETTO laser system for refractive eye surgery.  This $113.0 million acquisition combined WaveLight's technological expertise and the ALLEGRETTO laser with the Company's global marketing, distribution and service platform, together providing additional clinical solutions and laser technology to better support cataract and refractive customers.  In the fourth quarter of 2008, Alcon acquired additional shares of WaveLight.

Effective February 1, 2008, Alcon and WaveLight executed several agreements to integrate both companies' commercial operations in the U.S. market.  Following the execution of these agreements, Alcon's U.S. subsidiary, Alcon Laboratories, Inc., has taken over all sales, marketing, service and support operations in the United States for the two companies.  During the latter part of 2008, Alcon and WaveLight executed distributorship agreements in certain countries outside the United States whereby Alcon's Swiss subsidiary, Alcon Pharmaceuticals Ltd., assumed the distribution activities related to the WaveLight products in such countries.

Further, in May 2008, the shareholders of WaveLight approved a Domination Agreement between Alcon and WaveLight.  On March 4, 2009, the Domination Agreement was registered and became effective.  The Domination Agreement allows Alcon to instruct WaveLight with regard to operational and financial matters. This will allow for the efficient integration of both companies in the near term and in the future.

Financial Investments

The Company maintains a substantial portfolio of investments with certain investment managers.  Despite a significant weighting to cash and cash equivalents, the Company has material exposure to the following investment markets: fixed income securities, absolute return funds, senior secured bank loans funds, equities and real estate investment trusts.  The senior secured bank loans funds are professionally managed funds investing in loans made by banks to large corporate borrowers whose assets are pledged as collateral. As discussed in notes 4 and 14 to the consolidated financial statements, the Company recognized losses totaling $133.8 million on its investing activities in the year ended December 31, 2008.  The realized and unrealized losses on investments in the year ended December 31, 2008 included in Other, Net, in the consolidated statement of earnings reflect the downward pressure in the public markets in line with market indices.

Management reevaluated the Company's overall investment portfolio strategy and mix of investments in light of recent market conditions.  In December 2008, the board of directors authorized the Company to liquidate holdings in hedge funds and real estate investment trusts in an effort to reduce investment portfolio volatility.  Proceeds from these liquidations in 2009 will be reinvested primarily in cash, cash equivalents and investment-grade fixed income investments.

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

 
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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, which currently has the leading market share position in generic ophthalmic pharmaceuticals in the United States, based on retail prescriptions filled in 2008, according to Wolters Kluwer Health Prescription Service Audit.  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 has placed additional pressure on policy makers to offset the cost increase 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 cost is accompanied by significant 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.

As a result of recent changes in the U.S. economy, the U.S. market for some of Alcon's prescription drugs has declined in terms of prescriptions filled.  Alcon has continued to increase market share in most of its major specialties, which has provided some offset to the recent market decline.

Outside the United States, third-party payor reimbursement of patients and healthcare providers and prices for healthcare products and services vary significantly and, in the case of pharmaceuticals, are generally lower than those in the United States.  In Western Europe, where government reimbursement of healthcare costs is widespread, governments often require price reductions.  The economic integration by European Union members and the introduction of the euro also have impacted pricing in these markets, as more affluent member countries are requesting prices for healthcare products and services comparable to those in less affluent member countries.

In most of the emerging markets in Latin America and Asia, 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 1.3% decline in overall drug reimbursement in 2008.  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

 
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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, Canadian dollar, British pound sterling, Brazilian real and Australian 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.

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 2008, 2007 and 2006.  During these years the U.S. dollar weakened against most major currencies, positively impacting our sales and, to a lesser extent, profits.  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.  However, as noted above, the recent changes in the U.S. economy have resulted in a decline in terms of prescriptions filled for some of the Company's target therapies.  Alcon has continued to increase market share in most of its major specialties, which has provided some offset to the recent market decline.  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 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