INSIGHT: Bayer looks to stronger growth

19 June 2007 17:06  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--There is a new sense of optimism at Bayer following the big push in healthcare and consolidation of the Schering business.

Bayer Schering Healthcare is being integrated faster than planned. The financial rewards are expected to be greater for the group as a whole.

Bayer said on Tuesday that it expected its underlying EBITDA (earnings before interest, tax depreciation and amortisation) margin to sales to be more than 22% in 2009 – it was 19.3% last year. The guidance for this year was raised also – to more than 20%.

While MaterialScience and CropScience are doing their bit, it is the better than expected performance of healthcare that matters.

“The strengths of all four [healthcare] divisions make Bayer HealthCare a growth engine for the entire Bayer Group,” Bayer management board chairman Werner Wenning said.

“Both the Schering acquisition and the strong performance of the consumer health business are contributing to an increased profitability,” he added.

The impact of the Schering acquisition on Bayer should not be underestimated.

Bayer has upped the expected synergy savings from combining the two drugs groups: to €800m ($107m) a year from €700m a year. It expects to achieve 80% of the synergies by the end of 2008.

Schering has given Bayer new impetus. In ethical drugs it is key to the development of a leading international business. Bayer’s drug discovery in future will focus on four areas: Oncology, cardiology, women’s healthcare and diagnostics imaging.

Pharmaceuticals research & development spending will be between 15% and 17% of the division’s sales, Bayer says. A re-evaluated new drugs pipeline has seen 20 pipeline projects cut.

Bayer says it is currently the number two global over-the-counter consumer healthcare company. The value of its strong brands - eight of them have sales of more than €100m a year each - is the basis for future success.

The group has been buoyed through the difficult times in healthcare by MaterialScience but faces the inevitability of a turndown for the business.

Cyclicality was once a big issue for the pharmaceuticals, agrochemicals and chemicals conglomerate. It will be once again when MaterialScience hits more difficult times.

It is not possible to look too far ahead in MaterialScience where raw material costs and capacity issues loom large. The company indicated back in April that it expected second quarter earnings to be flat compared with the second quarter of 2006 following a difficult start to the year.

But Bayer is as forward-looking in its materials segment as it is elsewhere.

“Innovation must be an integrated component of all corporate activities and must go clearly beyond the development of new products and applications,” Bayer MaterialScience chairman Patrick Thomas said at a news conference showcasing Bayer innovations destined for the big K plastics fair in Frankfurt this October.

“By setting up largely independent; highly specialized business entities, we can ensure a powerful customer focus while at the same time maintaining a high level of flexibility in our business decisions,” he said.

Thomas was referring to companies like the start-up LYTTRON Technology that has begun producing electroluminescent three-dimensionally formable sheets.

Another example of the customer-focused business model, Bayer says, is the expanding worldwide network of BaySystems polyurethane systems houses.

Bayer can grow with the MaterialScience businesses but it remains to be seen how difficult the company finds it to grow profitably.

Bayer is the world leader, in terms of market share, in polyurethanes, polycarbonates, thermoplastic polyurethanes and coating raw materials.

Forecasts for global volume growth for the overall business in currently about 6% a year with segments, like polycarbonates and polycarbonate blends likely to grow faster.

Cashing in on that growth is the great challenge.

($1 = €0.75)

 

By: Nigel Davis
+44 20 8652 3214

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