Bayer's Big Headache

Can its new chairman, Werner Wenning, provide a cure?

Werner Wenning is a self-proclaimed Bayermann. This native of Leverkusen, the sprawling industrial town outside of Cologne that Bayer built more than a century ago, skipped university to join the company as a trainee in 1966. He spent the next 36 years working his way through Bayer's various businesses, signing on for stints in Spain and Peru. And of course, he's a fan of Bayer Leverkusen, the professional football team owned by the company. Wenning's loyalty hasn't gone unrewarded: On Apr. 26, the 55-year-old finance director will become chairman of the drug and chemical maker, which, with $27 billion in sales, is a mainstay of Germany's DAX stock index.

The promotion could turn out to be the zenith of his career--or its nadir. Wenning takes the reins during one of the most difficult moments in Bayer's history. Unlike previous company men, the incoming chairman is not in denial about the problems he has inherited. "No one will pay us one cent just for being a 140-year-old company," he says. He's right there: The stock is 24% off its January, 2000, high. What about Bayer's all-important drug business? "We have a growth problem for the next four years until some of the products in our pipeline come to market," Wenning concedes. And he admits Bayer may have been too slow to respond to changing market conditions: "In the future, we have to act more quickly."

Coming from an executive of this most staid of companies, such candor is remarkable. "His direct management style is really refreshing," says Martin J. Evans, an analyst at Crédit Lyonnais Securities in London. Plus, Wenning is putting his own pay on the line: More than half of his compensation is tied to the performance of Bayer's stock. He has to get it moving, if he wants a cushy retirement.

It certainly won't take off when Wenning announces first-quarter results on his first day on the job. Consensus forecasts point to a 47% year-on-year decline in operating profits, to $443 million, on sales of $6.1 billion. And that's on top of a 51% profit plunge last year.

Wenning's first priority is fixing the ailing pharmaceuticals business. With $5 billion in sales, it ranks a lowly 15th in the industry. Its most promising product, a cholesterol-lowering therapy sold under the Baycol brand in the U.S., was pulled from the market last August after being implicated in 100 deaths. The move wiped out some $616 million in sales. And, if successful, pending lawsuits could cost Bayer up to $5 billion, say analysts. Wenning says the company plans to plead not guilty.

Bayer is betting heavily on one drug to offset the Baycol disaster. Clinical tests show its new treatment for erectile dysfunction, tentatively named Nuviva, works faster than Viagra. Analysts are betting Nuviva will be a blockbuster, with peak sales of more than $1 billion a year. To maximize its potential, Bayer has inked a global co-promotion deal with Britain's GlaxoSmithKline PLC. Nuviva should be available by yearend.

One hit, however, won't change the fact that Bayer's drug business, the highest-margin operation in its stable, is too small to survive on its own. Wenning needs an acquisition or joint venture. But there's a sticking point: Bayer wants majority control. Yet with its mature product portfolio, the company has little to offer aside from a world-recognized name and an extensive distribution network. Wenning is realistic about his options: He's angling for a smaller company than Bayer with an arsenal of new drugs. He won't mention names, but analysts say targets may include U.S. biotechs Chiron Corp. and Biogen Inc.

A deal is just one step in the elaborate restructuring dance Wen-ning is planning. Bayer is reinventing itself as a hold-ing company for its four core businesses. The move should make it easier for investors to figure out what's going on. It should also facilitate sales, mergers, or restructuring of the separate companies.

That restructuring may soon start in earnest. Under its contract with German unions, Bayer is entitled to eliminate 1,000 jobs a year, and more cuts could come from operations overseas. Wenning also wants to extend performance-linked pay further down the company's ranks. If this Bayermann has his way, managers will be rooting a lot more for shareholders than they are for Bayer's football team.

By Kerry Capell in Leverkusen

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