Beleaguered Bayer adds $1.8B to cost-cutting goal amid COVID-19 slowdowns

Once his Bayer CEO tenure was extended into 2024, Werner Baumann wasted no time in launching another round of major cutbacks that may include more job cuts and product selloffs.

Bayer unveiled on Wednesday additional cost cuts to the tune of more than €1.5 billion ($1.8 billion) annually by 2024 as COVID-19 pressures its businesses mainly in the crop science sector. The new goal comes on top of a €2.6 billion ($3.1 billion) annual savings target it set for 2022 as part of a gigantic revamp initiated in late 2018.

The reason for the expanded program? Financial numbers so far this year do not bode well for Bayer, Baumann said during a Wednesday call with investors. Competition and price reductions in the crop sector and COVID-19’s near-term pressure on pharma sales will hurt the company’s cash flow, which “can only be partially compensated by further savings measures,” Bayer said.

The ongoing revamp already affects all three of Bayer’s businesses. The German conglomerate has sold off sun care brand Coppertone and foot care line Dr. Scholl’s in the consumer health division. In pharma, it let go of a manufacturing facility in Wuppertal, Germany, which once supplied meds in its now-lagging hemophilia portfolio, and shed about 900 internal R&D jobs. Thousands more positions were cut in crop science as Bayer integrated its Monsanto buy.

Where will the ax fall this time? While management’s still deciding on the exact measures, Baumann offered some clues.

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Once again, the cuts are expected to hit “different angles of the businesses and functions,” the chief executive said. But the majority of the savings will come from infrastructure in the support functions and “the value chain of the pharmaceuticals business” and also in part from the crop business. As for consumer health, Baumann described it as “beyond the turnaround” and on track to “sustainably outperform our competitors,” but added that it could also use some “further structural infrastructure savings and efficiency measures.”

Job cuts and “options to exit non-strategic businesses or brands below the divisional level” are on the table, Bayer said. That means a complete split-up between pharma and crop, as some industry watchers have championed, will not happen.

One area where the saved money will go is clear, though. “To ensure long-term growth, free cash flows will increasingly be invested in external research and development and in-licensing and also bolt-on acquisitions in order to further strengthen the pharmaceutical’s pipeline and build a next-generation innovation platform,” Baumann said during the call.

Bayer’s pharma business hit a pandemic-induced low in the second quarter but has been gradually recovering, Baumann said. The company now expects the improvement to continue throughout 2020 and eventually lead to a return to growth in 2021.

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That basically leaves agrichemicals as the only Bayer department with a depressed outlook into at least 2021, which once again put into question the rationale behind its $63 billion Monsanto buy.

The company is already weighed down by tens of thousands of lawsuits that claim Monsanto’s Roundup weedkiller causes cancer. It’s now reworking a key part of a settlement pact with plaintiffs that aims to resolve future suits.

Earlier this month, Bayer said it was making progress in finalizing the settlement as it extended Baumann’s contract by three years until 2024, which now coincides with the target year of the expanded transformation. One analyst on the Wednesday call questioned whether Bayer’s new cost-cutting scheme is aimed at hoarding cash in anticipation of a bigger-than-expected Roundup settlement, to which Baumann answered, “there’s no news.”

Overall, Bayer confirmed its 2020 earnings-per-share target but said it wouldn’t meet its 2021 targets. It now expects groupwide sales to be flat next year.