Global Company Strategy - Bayer


Overview

Historically enshrined as the inventor of aspirin, Bayer is a diversified, scientifically-focused company with three major divisions: MaterialScience, CropScience and HealthCare. Healthcare is divided into two sectors, consumer health and pharmaceuticals, and accounted for around half the company's sales in 2010. Since its founding in 1863 and the invention of aspirin in 1899, Bayer has built up annual revenues of EUR35.1bn (US$47.0bn), as recorded in 2010, and employs 111,400 people.

SWOT Analysis

Strengths

  • Leading multinational pharmaceutical company

  • Diversified portfolio with little exposure to patent cliff from single products

  • Strong branded drug portfolio

  • Presence in three industry verticals makes the company less exposed to the weak macroeconomic conditions of the pharmaceutical market

  • Of the leading multinational drugmakers, Bayer generates the largest proportion of its sales in the emerging markets

  • Net income above expectations after efficiency savings reduced overhead costs

Weaknesses

  • Lack of blockbuster status drugs

  • Strategy to increase research and development (R&D) expenditure unlikely to yield results for a decade

  • German pharmaceutical tender system is becoming increasingly commoditised

  • Total revenues below market expectations

Opportunities

  • Company is restructuring its sales force towards emerging markets

  • Xarelto (rivaroxaban) developed with Johnson & Johnson (J&J) could be a potential blockbuster drug

  • Emerging markets continue to enjoy high growth over long term

  • CropScience and MaterialScience currently showing strong growth

Threats

  • Xarelto is threatened by Bristol-Myers Squibb's apixaban which looks like it will have superior clinical efficacy. Xarelto will also compete against Boehringer Ingelheim's Pradaxa (dabigatran)

  • Lost European patent for Yasmin (ethinylestradiol + drospirenone)

  • OTC portfolio in emerging markets exposed to counterfeiting

  • Likelihood of further price cuts in Europe

  • Strong euro affecting sales

Strategy

Although Bayer improved its profitability in 2011, and continued to see moderate revenue growth, the real success of the year has been in its pharmaceutical pipeline with the development and approval of Xarelto (rivaroxaban), which has the potential to be a blockbuster. In response to weak share price performance in 2011 and the outperformance of the product pipeline, the company has raised its dividend 10% to EUR1.65 (US$2.14), and has also raised its guidance for 2012 slightly.

Bayer's diversified portfolio is not heavily dependent on blockbuster drugs and it has limited exposure to the patent cliff. Of all the multinational drugmakers, it generates the highest proportion of its sales in the emerging markets - an encouraging sign. It is focusing its R&D efforts on four core areas: oncology, cardiology, women´s healthcare and diagnostic imaging, with the aim of becoming a market leader in these areas.

However, BMI expects Bayer's pharmaceutical and healthcare sectors to continue to underperform in the medium term, as its blood thinner Xarelto looks to be facing tough competition and the company has lost the European patent for Yasmin, its second best selling drug. Nevertheless, the other sectors in the company, CropScience and MaterialScience, seem to be performing well.

Marijn Dekkers, CEO of Bayer, has stated that the company will focus on R&D to ensure long-term investor value. He has stated that the company plans to invest a total of EUR15bn (US$22bn) in its operations through to 2013, with R&D accounting for around two thirds of this amount. The firm has also stated that it plans to raise its dividend to shareholders to EUR1.50 (US$2.20) per share, which seems slightly inconsistent with a strategy of re-investment.

Financial Results

Bayer's Q212 financial results show that net income has been hit hard by a significant year-on-year (y-o-y) increase in net special items. Total sales were up by 10%, from EUR9.25bn (US$11.5bn) in Q211 to EUR10.18bn (US$12.6bn) in Q212, although this growth falls to 5% when adjusted for currency and portfolio changes. Earnings before interest and tax, excluding special items (EBITDA) increased by 6.7% over the period, from EUR2.04bn (US$2.53bn) to EUR2.17bn (US$2.69bn), indicating improvements in overall operating performance. Net special items increased drastically, by nearly fivefold from EUR144mn (US$178mn) in Q211 to EUR762mn (US$943mn) in Q212. Provisions made for litigations connected to oral contraceptive Yasmin made up 80% of the charges, valued at EUR496mn (US$614mn), with the remainder related to impairment losses of intangible assets and reconstructing charges. Consequently, the company's net income plummeted by 33.9% y-o-y, from EUR747mn (US$924mn) to EUR494mn (US$611mn).

Yasmin Litigation Payouts Hit Net Income
Bayer Q212 Financial Snapshot (EURmn)

Sub-Division Performance

In Q212, Bayer achieved its largest sales growth of 17.1% (12.7% when currency and portfolio-adjusted) from the Cropscience division, with HealthCare following in second at 10% growth (4.1% currency and portfolio-adjusted), increasing sales from EUR4.21mn (US$5.22mn) to EUR4.63mn (US$5.74mn). Healthcare EBITDA improved by 8% y-o-y, from EUR1.16mn (US$1.44mn) to EUR1.25mn (US$1.55mn), due to business development and positive currency effects. HealthCare, comprising Pharmaceutical and Consumer Health segments, had its best quarter of all time for sales growth and EBITDA indicators.

The growth was largely attributed to strong performance of both segments in North America and emerging markets. Pharmaceutical sales increased by 10.5% (4.3% currency and portfolio-adjusted) and Consumer Health sales increased by 9.3% y-o-y (3.8% currency and portfolio-adjusted) over the quarter. EBITDA increased by 12% and 1.2% for the Pharmaceutical and Consumer Health segments respectively.

Healthcare Segment Sales Grow 10%
Bayer's Q212 Pharmaceutical And Consumer Health Sales (EURmn)

Regional Performance and Emerging Markets

In line with the focus shift from developed markets towards emerging markets by multinational companies, Bayer experienced a sales drop in Europe by 0.9% (-1.5% currency adjusted) and growth of 21.5% and 7.5% in Asia Pacific and Latin America/Africa/Middle East respectively in Q212 compared with Q211 (8.2% and 6.7% currency adjusted). The Healthcare division grew in emerging markets by 15% from EUR1.03bn (US$1.28bn) to EUR1.19bn (US$1.48bn). Sales growth of 18.4% was recorded in North America, from EUR1.06bn (US$1.31bn) to EUR1.26bn (US$1.56bn), and was again due to the weak euro.

Emerging Markets And US Drive Growth
Bayer's Q212 Healthcare Sales By Region And Division (EURmn)

Drug Product Performance

Bayer's product portfolio is made up of an array of diversified drugs and as such the overall performance in Q212 has been varied but generally positive. The company recorded significant sales growth in all three of its top-line speciality medicines: multiple sclerosis drug Betaferon (interferon beta-1b), blood-clotting medicine Kogenate (octocog alpha) and cancer drug Nexavar (sorafenib) sales increased by 16.8%, 10.3% and 14% respectively. Bayer successfully achieved increased sales of key general medicines including anticoagulant Xarelto (rivaroxaban), hormone-releasing intrauterine device Mirena (levonorgestrel) and Aspirin Cardio following market launches in further countries and extending market activities in emerging markets, especially China. Although revenue is small compared to other drugs, the increases 257.9%, 38.2% and 16.2% for Xarelto, Mirena and Aspirin Cardio respectively are promising for the future of the company. Sales of oral contraceptive Yasmin (drospirenone), erectile dysfunction drug Levitra (vardenafil) and antibiotic Cipro (ciprofloxacin) fell back slightly over the period, but the overall performance of the portfolio remains very strong given recent reforms in North America and the expansion into emerging markets, especially China in the Asia Pacific region.

Overall Positive Portfolio Performance
Bayer's Q212 Global Pharmaceutical Drug Sales (EURmn)

Share Price Performance

On the day Bayer's Q212 financial results were released, 31 July 2012, the share price increased by 1.37% and 1.50% in euro and US dollar terms respectively. In the last six months of 2011, Bayer's stock performed in a similar manner to that of other German equities, sitting below its base value on July 1 2011. However, in Q112-Q212 and at present, Bayer is outperforming other major German companies. From the end of Q411 to Q212, Bayer's stock was up 10.7%, which was significantly more than the wider DAX index of 4.6%. Between Q112 and Q212, Bayer's stock was up by 0.3% whilst the DAX was down by 7.1%. In Q312, Bayer continues to significantly outperform other companies comprising the DAX and is rapidly approaching its US peers.

Bayer's Stock Price Speeds Ahead
Relative Share Performance Of Bayer And The DAX, Q311-Q212 (EUR)

As a result of the weakening euro, Bayer's stock price in US dollar terms has maintained a value below that of the base value at the end of Q211. Between the beginning of Q311 and the end of Q212, Bayer's share price dropped by 11% and the DAX dropped by 24.6% in US dollar terms. Over the same period, BMI's Pharma 20 Index and the S&P 500 were up 3.7% and 1.1% respectively. However, since the end of Q212 and the release of its financial report, the company has gathered additional confidence from investors and is making good speed, with significant positive jumps in its share price.

Bayer Catching Up Fast
Relative Share Performance Of Bayer, S&P 500, BMI's Pharma 20 Index And The DAX, Q311-Q212 (US$)

Equity Screening Analysis

Bayer remains a fairly attractive company to investors, with a price-to-earnings ratio of 17.78, above the median (14.41) of the top-20 multinational pharmaceutical companies. The company's return on equity sits at 14.32% which is slightly below the median of its competitors (15.50%). As a result of increased special items financing due to litigations associated with Yasmin, the company's profit margin of 10.44% is significantly lower than the industry average of 16.66%. However, Bayer remains strong with an average sales growth over three years of 8.45%, significantly above the industry average of 5.45%, research and development spending is a pragmatic 9% of total revenue, compared with the 16% average. Emerging markets account for a strong 38% of total revenue, which is far above the industry average of 19%.

Bayer Emerging Markets Presence Dominates
Emerging Markets Performance Ratio

Recent Developments

July 2012

Following the marketing authorisation application to the European Medicines Agency (EMA) for oral anticoagulant Xarelto in Q112, Bayer's cooperation partner Janssen Research & Development submitted marketing authorisation applications to the US Food and Drug Administration (FDA) seeking approval for Xarelto in the treatment of deep vein thrombosis or pulmonary embolism and in secondary prevention of recurrent venous thromboembolism (VTE). The FDA granted priority review designation to the applications.

An international phase III trial to evaluate the investigational compound BAY94-9027 for the treatment of haemophilia A was launched. The trial is designed to investigate whether the recombinant coagulation factor VIII (rFVIII) BAY94-9027 can prolong the duration of protection from bleeding when used prophylactically, while also having the ability to treat acute bleeding events.

June 2012

Bayer submitted marketing authorisation applications to the FDA and to the EMA for regorafenib for the treatment of patients with metastatic colorectal cancer. The FDA granted priority review designation to this application.

May 2012

Bayer and Kythera Biopharmaceuticals' ATX-101, an injectable drug for the reduction of unwanted fat under the chin , successfully completed a European phase III clinical trial. The ATX-101 drug demonstrated statistically significant efficacy compared to placebo.

This article is tagged to:
Sector: Pharmaceuticals & Healthcare
Geography: Global