Will Bayer heed the advice from investors and analysts and split up the conglomerate? New clues suggest it just might.
The German company is weighing a sale of its animal health business as part of a broader review of its portfolio, now that its $63 billion Monsanto deal is in the rearview mirror, Bloomberg reported, citing people familiar with the company’s plans. Because the evaluation is ongoing, no final decisions have been made, Bloomberg said, which means the company might still keep the business.
The rumor bears some weight as it comes just days after Bernstein analyst Wimal Kapadia suggested the same thing in a note to clients. As compared to splitting off pharma from Bayer's now-enormous crop unit, Kapadia said “an animal health sale is a real possibility [for Bayer] and we encourage management to consider this option.”
Kapadia reached that conclusion after taking a close look at Bayer’s pharma business—particularly its longer-term prospects. Bayer’s drug pipeline lacks growth opportunities in the mid-to-long term, the analyst figured, and could pose trouble after the business’s key revenue source, blockbuster oral anticoagulant Xarelto, comes off patent in 2024.
To make it worse, Bayer won’t have enough cash for any large licensing deals before 2020, because it'll be paying off debt tied to the Monsanto acquisition. And large M&A after 2020 would be risky, Kapadia noted, because Bayer won’t be able to achieve much in the way of cost cuts, thanks to its smaller presence in the U.S.
Selling animal health would bring Bayer at least €6 billion ($6.9 billion), applying a discount to the €7 billion it is worth, Kapadia figured. That would be enough to free up cash for pharma licensing deals at least. It might even herald the healthcare-crop separation, an option Kapadia said management hasn’t entirely ruled out.
If Bayer eventually decides to jettison animal health, the likeliest option would be a sale, though it could also list the business in a spinoff, one of the people told Bloomberg.
Bayer’s animal health business could be an enticing target: It turned in €1.57 billion in 2017 sales, growing about 2% after currency and portfolio adjustments.
And compared with Eli Lilly’s Elanco, Kapadia also sees lots of demand for the business. Lilly raised about $1.5 billion when it pushed Elanco in a New York IPO just last month, and the unit’s shares jumped nearly 35% on first day of trading, reflecting enthusiasm for the animal health market.
Big Pharmas have been spinning off, trading and selling their animal health franchises in recent years, as outliers to their core prescription drugs businesses. In addition to Lilly, Pfizer officially spun off Zoetis in 2013; Sanofi exchanged its animal health unit, Merial, for Boehringer Ingelheim’s consumer health business in early 2017; and while Merck & Co. held onto its veterinary business, suspicions of a sell-off did emerge after it sold its consumer unit to none other than Bayer.