Bayer says business disruption is holding back consumer care growth in China

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More than two years after buying Merck's ($MRK) OTC unit and local player Dihon, bringing together three separate consumer care businesses in China remains a challenge, Bayer said this week.

The company told investors this week that it was experiencing "stronger business disruption than anticipated during the integration of Merck Consumer Care (MCC) and Dihon in China" as it wrestles with lower-than-expected growth for its consumer care business in emerging markets. The drugmaker has previously alluded to the difficulty integrating three separate companies, as well as geopolitical and economic problems in emerging markets--and has referred to China as a "wild card" for its consumer health business.

Bayer didn't go into much detail about the problems it's facing in China, although it's well recognized that cultural differences and unfamiliar business techniques often plague M&A between Chinese and Western companies--and that could be the case with Dihon.

While considerably smaller than Bayer's $14 billion MCC buyout, the Dihon takeover was seen as a key platform for Bayer's growth in China, which is one of the target growth markets for Bayer's consumer health division, along with Brazil, Russia and the U.S. Dihon's reach in China provides a broader platform to roll out Bayer's OTC offerings and the new Merck meds and gives the group a stronger position in traditional Chinese medicine, which is still favored by many people in the country.

Chief executive Werner Baumann went into more detail about Bayer's problems integrating the Merck unit during firm's meeting with investors this week. Cost savings are ahead of targets, he said, but those savings "cannot compensate for the effects we have had to deal with right from the get-go," he said.

After taking over the business it quickly emerged that top-line revenues were around €100 million lighter than expected, and there had been under-investment in key brands such as Dr. Scholl's and Coppertone, both in terms of follow-up products and promotion to consumers. 

"The new product development was not nearly as good as it was presented and there was limited ability to do due diligence in a highly competitive process," Baumann said.

The bottom line? Bayer won't make the gains it hoped from the acquisition--at least in the timeframe hoped--and has had to spend more than expected to prop up some of the key products.

That situation mirrors one the company found itself in after acquiring Roche's ($RHHBY) OTC portfolio, though, according to Erica Mann, head of consumer health at Bayer--and that gives her hope.

She insisted Bayer would be able to work some turnaround magic on the new acquisitions as it did with the Roche business. Roche's brands have since seen annual growth of around 7% a year--two points ahead of the background market--and expansion beyond Europe into new geographies.

Mann gave as examples of 20-year-old painkiller Aleve, which had annual sales of €226 million in 2005 and made €413 million in 2015, and 70-year-old skincare product Bepanthen, which has almost quadrupled to hit €355 million last year.

"It really does take a long-term commitment to build brands," she said. "It takes consistent investment and proven brand-building techniques and this is exactly what we will do with the ex-MCC brands."

- read Bayer's press release

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