INSIGHT: Bayer saying no to BMS sale

07 March 2008 15:42  [Source: ICIS news]

By Dede Williams

FRANKFURT (ICIS news)--Many executives in Bayer’s HealthCare segment may have been feeling slightly unwell of late, and those already employed there during the Lipobay/Baycol near-collapse of 2001 may be suffering from bouts of deja vu.

Even as Bayer appears to have revitalised its healthcare franchise with the €16.5bn ($25.4bn) acquisition of Schering in 2006, a spate of largely unforeseen events is once again driving home the dangers of putting all your chips on one number.

The potential cost of some of these problems makes the increasingly “difficult market environment” for MaterialScience (BMS), as Bayer group CEO Werner Wenning described it at the recent annual results press conference, seem less difficult.

It also illustrates why management in Leverkusen continues to be wary of forsaking the materials business.

With Schering, Bayer leapt forward in the ranks of global pharmaceutical players. At €14.8bn, HealthCare - which also includes OTC (over-the-counter) products such as aspirin - accounted for nearly half the group’s €32bn turnover in 2007.

The segment’s EBITDA margin, at 25.6%, was 10 points ahead of the 15.6% return at BMS.

Schering gave Bayer a number of blockbusters or potential blockbusters, but some of these are facing challenges, like the Leverkusen group’s traditional products.

Going off-patent is just one. Schering’s gadolinium-based contrast agent Magnevist, for example, is being named in 29 US lawsuits as the source of serious health problems. Additional cases are expected.

Renewed obstacles to a healthy healthcare business began cropping up in mid-2007 with the sub-optimal settlement of a dispute with Novartis over rights to make a generic version of the Schering-developed MS treatment Betaseron/Betaferon.

The troubles culminated temporarily in November 2007 with the partial market withdrawal of the Bayer blood thinner Trasylol, used in cardiovascular surgery.

The new year, too, started out on shakier footing, when the Bayer-developed oncology drug Nexavar, although still seen as promising for treating kidney and liver cancer, failed to impress in clinical trials for the non-small cell lung cancer indication.

Only this week a district court in New Jersey ruled in favour of US generics player Barr Labs, with which Bayer has clashed in the past, in a dispute over the patent - due to expire in March next year - for Schering’s low hormone-dose oral contraceptive Yasmin.

Another generics producer, Watson, is battering away at the patent of the sister product Yaz/Yasminelle.

A substantial chunk of drugs revenue could be lost if Barr launches a generic version of Yasmin or Yaz. The two pills have enjoyed tremendous growth in the US, where Yasmin alone accounted for sales of €321m in 2007, and together they have worldwide sales of nearly €1bn.

A fight with Novartis and Novo Nordisk in the US over the alleged infringement of one of their patents by Bayer’s Factor VIII haemophilia treatment Kogenate is also raring up.

In particular, the seemingly never-ending saga of Baycol has taught Bayer management the value of diversification. More than 300 Baycol lawsuits are still pending, and its insurance coverage is exhausted. 

So when analysts who pressured Bayer in the depths of its Baycol crisis to quit pharmaceuticals laid the worn “concentrate on life sciences” vinyl on the turntable again and tried to pass it off as a shiny new Blu-Ray disc, Wenning found it easier to “just say no”.

That Bayer for the foreseeable future would stand firm on three pillars is a pledge the CEO made when announcing plans to remove the fourth pillar, chemicals business Lanxess, which was spun off in 2004 and listed on the stock market in 2005.

Although some corporate leaders might be relatively unconcerned about admitting a change of heart, one gets the feeling that Wenning would feel uncomfortable with it.

Besides, as BMS CEO Patrick Thomas routinely asks rhetorically: “What could Bayer do with the proceeds?”

Along with drugs and agrochemicals, Bayer knows and understands polymers, as Thomas points out.

The German group has often leveraged its strong technology base to show that even products that are increasingly becoming commodities have an innovative “flip” side, which with the right acquisition and R&D strategy, can fill a pipeline with considerable profit potential.

Unobserved by many analysts, who are (figuratively speaking) “hooked on drugs,” BMS has been investing steadily downstream, in higher margin businesses such as polyurethane systems houses or nanotechnology, as well as building a substantial presence in booming China.   

Even evaporating margins on polycarbonate or isocyanates are easier pills to swallow if you are global market or technology leader, as Bayer is in many of these fields.

($1 = €0.65)

By: Dede Williams
+44 20 8652 3214

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