Can Bayer Cure Its Own Headache?

Shareholders would like it to shed everything but health care

On Jan. 24, Germany's biggest drugmaker, Bayer, will make its debut on the New York Stock Exchange. The Leverkusen company, best known for inventing aspirin, in 1897, likely hopes to use its new shares as currency for acquisitions in the world's most profitable drug market: the U.S.

But why should American investors buy into a sluggish, old-fashioned conglomerate? After all, Bayer's German shareholders are deserting the company in droves: Its Frankfurt-traded shares have plunged close to 40% in the past 12 months. Bayer's recent performance indicates that its glory days are behind it. Goldman, Sachs & Co. estimates that 2001 pretax profits for Bayer's four divisions--health care, crop sciences, chemicals, and plastics--will fall 86%, to $373 million, on sales of $26.8 billion.

Bayer can attribute some of its disastrous results to Baycol, the cholesterol-lowering drug that was pulled from the market last year after it was implicated in 52 deaths. But the problems run much deeper. For years, shareholders have tried and failed to persuade management to sell underperforming units and focus on the more lucrative pharmaceuticals business. Citing a recent study by Boston Consulting Group, Bayer executives say conglomerates perform better than more narrowly focused companies over the long term. Yet that's not a convincing argument for one London analyst: "This is a classic case of a company that should be broken up to get some value out of it, but management clearly doesn't agree," he says.

Blame this impasse on Bayer's determination to cling to the now discredited notion that there are real benefits in owning both chemical and pharmaceutical businesses. The synergies, however, aren't there. Just ask other giants of the so-called life-sciences industry. Switzerland's Novartis and Britain's AstraZeneca spun off their agrochemicals units in 2000. Bayer, in contrast, has been expanding its own, buying Aventis Crop Sciences in October for $6.5 billion. The acquisition pushed Bayer's net debt to more than $12.5 billion. "Any successful drug company today doesn't have all this baggage of specialty chemicals or plastics," says Barrie James, president of Pharma Strategy Consulting in Huntingdon, England.

A well-run drugmaker tends to boast higher, more consistent margins than chemicals. But even Bayer's $8.5 billion drug division needs a pickup. Last year, Bayer's top-selling drugs were antibiotic Cipro, hypertension drug Adalat, Baycol, and aspirin. Cipro is set to go off patent in the U.S. in 2003, and both Adalat and aspirin have been around for ages. Meanwhile, a class action related to Baycol is soon to be filed against Bayer in the U.S.

Bayer's fortunes are now pinned to Vardenafil, an anti-impotence drug the company claims is more effective than Viagra. Bayer, however, will split any revenues with Britain's Glaxo SmithKline PLC, which is co-marketing the drug in the U.S. Vardenafil will have to compete with Cialis, another anti-impotence drug from Eli Lilly & Co. and ICOS Corp.

Bayer Chairman Manfred Schneider is open to a joint venture. "This could involve part of our activities or even the whole [health-care] business," he says. Schneider hopes any partner would have a strong position in the U.S. market yet be small enough that Bayer could retain management control. Few drugmakers fit that bill. One possibility: a U.S. biotech such as Chiron or Biogen.

Schneider, 63, may need to moderate his criteria if he is ever to find a partner for Bayer. Besides, he has only six months before he's set to hand over the reins to Chief Financial Officer Werner Wenning. In December, Schneider announced that in 2003 Bayer would separate its four divisions into legally independent entities. The move could open the way for strategic partnerships. But a bolder, fast-working treatment is in order for Bayer's long-suffering shareholders.

By Kerry Capell in London

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