The Cost Of Change At Hoechst

The dizzying shift into a drug player leaves investors confused

Only last year, it seemed that Jurgen Dormann could do no wrong. The chief executive of German chemical and drug giant Hoechst saw his company's stock price soar 81% in 1996 as investors applauded his streamlining strategy. He was hailed as Mr. Shareholder Value--the man brave enough to lay off workers, exit weak businesses, and dump undervalued subsidiaries.

Suddenly, his winning streak appeared to end. On Mar. 12, Hoechst posted a fourth-quarter loss, surprising the market. Then Dormann axed a plan to take drug unit Hoechst Marion Roussel (HMR) public as a separate entity. His explanation for the change of plans confused investors, who drove Hoechst's share price down by 11% in three days. On Aug. 13, when the stock had recovered, Hoechst released poor results for the first half of 1997. Traders slammed the shares by 9% (chart).

What's going on? Answer: one of the most drastic restructurings in Germany's postwar corporate history. And while Hoechst evolves, investors' patience will be tested. Dormann, 57, wants to transform Hoechst from an old-line chemical maker into a predominantly life-sciences company by 2000. But as he prepares to launch the road show before Hoechst lists its American depositary receipts on the New York Stock Exchange on Sept. 24, he will need to reassure the investing public that his restructuring is on track.

Dormann must play catch-up to his industry. World-class drugmakers from Britain's Glaxo Wellcome to Swiss giant Roche have jettisoned noncore businesses and teamed up with biotech startups. The idea is to focus on the lucrative prescription-drug market and put research money where the big payoff is.

Hoechst may have been slow to catch on. HMR is the world's seventh-largest drug company, and it already accounts for 46% of Hoechst's operating profits from only 25% of sales. Yet its operating margin of 14.2% trails more than 20 other competitors, and it has no blockbuster drug on the market. Says Glaxo CEO Richard Sykes: "Hoechst has just missed the boat" in the shift from chemistry to biology.

Dormann is racing to make up for lost time. Since buying a beachhead in the crucial U.S. market with its 1995 purchase of Marion Merrell Dow Inc., Hoechst has concentrated on bringing together three companies under HMR and eliminating overlap. It will cut 8,000 jobs and close 44 manufacturing sites by 1998, for a total cost savings of $600 million. The target: operating-profit margins of 20% by 1999.

HMR's new leadership will be key to its success. Richard J. Markham, former president of Merck & Co. and president of Marion Merrell Dow, took over as CEO in January, 1997. His goal is to turn HMR into a branded-drug company in the same league as Pfizer, Merck, or Glaxo. Within a year, he expects to divest the company completely of generic drugs and other noncore businesses. The drug pipeline already looks more promising. Analysts are keenly watching two treatments in clinical trials, one for heart-attack patients and one for schizophrenia, due for launch in 1999 and 2000. Their annual worldwide sales could reach $272 million and $1 billion, Markham predicts.

Still, Dormann must work full time to restore his reputation for attending to the bottom line. Since taking the reins at Hoechst in 1994, he has tried to replicate his big success of 1991, when he spun off a money-losing unit that turned into SGL Carbon, one of Germany's hottest stocks. But as late as mid-1996, after selling such obviously noncore operations as cosmetics, Hoechst still thought of itself as a hybrid chemical-and-drug company. It was only in October, 1996, that management decided to aim for the fat profit margins and steady growth of life sciences.


That may be why the market is still easily confused by Dormann's moves. Investors expected an initial public offering of HMR this month. Instead, Dormann spun off Hoechst's specialty chemicals business and used the proceeds to buy the rest of drugmaker Roussel Uclaf. The IPO was no longer necessary, Dormann says, and HMR became the essence of the new Hoechst. But investors didn't understand why the offering had been canceled. "We could have been more careful in communicating," admits management board member Horst Waesche.

Dormann remains unruffled by his stock's volatility. Now, he is focusing on creating a long-term incentive scheme for his top managers to attract world-class talent. But only the market can reappoint him as Mr. Shareholder Value.

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