Bayer’s pharma business raced ahead in the third quarter, putting up a sales increase of more than 7%. Some of its Big Pharma rivals would lash themselves to a mast during a storm to post that sort of number.
But it’s not so far out of the ordinary for Bayer’s drugs--and therein lies the problem for the German conglomerate, analysts say, because Bayer, of course, is buying Monsanto in a Big Ag megamerger, putting the focus squarely on its crops division, which actually saw sales slide by more than 1% on the quarter.
In a note titled “A good set of numbers to confirm investor fears,” Bernstein analyst Ronny Gal cited not only the pharma group’s sales growth, to €4.1 billion, but its 13% increase in earnings before interest, depreciation and taxes.
And for the full year, Bayer expects €16 billion or more in pharma sales, with €6 billion in consumer health--a so-far-underperforming business--on top of that. Together, that’s almost half of Bayer’s overall sales forecast of up to €47 billion.
Gal and other analysts have worried that, with so much of Bayer’s attention and capital tied up in Monsanto, the company will lose focus in pharma. They also worry that Bayer will pull back on pharma R&D spending, which Bayer has used to add indications to its blockbuster eye therapy Eylea and anticoagulant Xarelto, in addition to advancing pipeline meds such as copanlisib, a non-Hodgkin’s lymphoma drug that the company thinks could be on the market by 2018.
The Monsanto deal marks a “lost opportunity to develop the pharma pipeline,” Gal wrote in late July, noting that “Bayer does not have the funds to invest in both Ag and Pharma at the same time”--and with patent expirations coming, not to mention rivals for drugs such as its cancer-fighter Stivarga, it doesn’t have the time to wait before making more pharma investments.
BMI Research’s Craig Smith echoed similar concerns earlier in the year, pointing out that the Leverkusen-based company already spends less than its Big Pharma peers do on R&D. With that in mind, “this deal could significantly weaken” Bayer’s “capacity to grow within the pharmaceuticals space.”
A pullback on investment could in particular hamper the consumer health unit, which is underperforming margin-wise and growing only slightly. After this quarter’s results were released Wednesday, Gal noted that development is key to that unit’s future.
When Bayer acquired Merck’s over-the-counter drug business, “new product development had to be taken at face value and some of these assets did not materialize,” Gal wrote, adding that some had to be discontinued.
Marketing spend is important here, too, he noted: “While brand equity is strong, Coppertone was not managed well and Bayer is now investing heavily to improve the offering.”
Bayer has acknowledged that its healthcare division, which includes pharma, consumer healthcare, and animal health, will shrink in importance after the Monsanto deal closes. The healthcare group represented almost 70% of the company's sales in 2015, while pro forma numbers for the postmerger company show it will amount to 49% going forward.
Detractors may find their criticism moot, however. Some lawmakers have raised questions about the combo, European officials worry about a back-door entry for genetically modified ag products, and some analysts see the deal’s approval chances at 50%. Bayer says it plans to file the requisite apps in the U.S. by year’s end and in the EU during the first quarter of next year. It’s targeting a close by the end of 2017.
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