Bayer incoming CEO highlights OTC challenges in China in three-way integration

Bayer HealthCare has exceeded its cost savings targets in integrating the purchase of the consumer unit of Merck ($MRK), though sales gains are bumpier than expected and even more so in China where a third company is in the mix, according to remarks on the fourth-quarter earnings call.

Incoming Bayer CEO Werner Baumann

Outgoing Chairman and CEO of Bayer AG, Marijn Dekkers, discussed China briefly along with emerging markets before turning related questions to Werner Baumann, chairman of Bayer Healthcare.

"In China, pharma achieved a solid 6% growth, and consumer care advanced 12%," said Dekkers who is due to be replaced at the end of April by Baumann. "Our consumer care business performed especially well in Brazil, up 23%, underpinning the successful execution of our emerging market strategy."

Baumann then painted a picture of the company working through costs savings of the Merck consumer acquisition, as well as an OTC company--China's Dihon Pharmaceutical--that was buffeted by market conditions that will delay the schedule for sales synergy targets of $400 million mentioned at the time of the acquisition that closed in 2014 for "probably 12 to 18 months."

"We do suffer from difficult market conditions, partially driven by, let's say, national issues, partially driven by the geopolitical situation in some of these emerging markets where most or actually a significant part of the synergistic growth potential outside of the U.S. was supposed to happen, most prominently Russia, China, Brazil, and also Mexico," Baumann said.

He added however that each market has its own dynamics with Brazil seen solid, Russia a concern because of the weaker ruble and with China more of a wild card.

"We had a very, let's say, complex situation in China with a three-party integration," Baumann said on the Feb. 25 earnings call.

"That was not only the Bayer and the Merck business, but at the same time the integration of a fully-fledged very, very large operation (Dihon) … in China. That has been concluded. We are kind of gaining momentum now, but certainly not in 2015. And we do now have coverage of our sales organization in more than 300 cities in China."

Baumann also noted the overall the company has one "of the most profitable OTC businesses in the world."

"It has been and will continue to deliver margins that are in the mid-20s. So, it may be 24% margin in one year. It could be higher in the next year. But, that is the range of a, let's say, mid-20s EBITDA margin that that business is good for. We have seen some margin expansion also on the heels of the Merck acquisition."

Of note as well, Baumann said planned April price cuts for reimbursed products in Japan would bite in Asia as well as the pricing of reimbursement in China, "which is then followed by regional and then even further down to hospital biddings that is actually going to take a toll on our prices in China" and an expected renegotiation for a key product in Australia.

"Beyond that, we do have select markets. One of them specifically is Australia, where we hit certain volumes that were agreed upon for some of our drugs, in this case Eylea, that will trigger a renegotiation. And that is actually also going to lead not necessarily into price increases typically, but the opposite thereof."

- here's the release