At last, after back-and-forth speculation and denials, Bayer has revealed it will indeed cast off its animal health unit, a few consumer health brands and 12,000 jobs amid a large-scale restructuring that touches every area of its business.
The decision is intended to strengthen Bayer's “core life science businesses” and “to enhance productivity and innovation while significantly improving competitiveness,” the German conglomerate said in a statement Thursday. “With these measures, we are positioning Bayer optimally for the future as a life science company,” said group chairman, Werner Baumann.
Bayer is still working out some of the details, including how it will exit the animal health business. But the company did lay out where the 12,000 jobs will be lost, and “a significant number” will happen in Germany, it said.
Even though the company's pharma business has outperformed recently, “strengthening the focus on external innovation is an essential step,” the company stressed. Analysts have previously expressed concerns that Bayer’s internal pharma pipeline likely won't sustain long-term growth, especially after blockbusters like anticoagulant Xarelto and eye drug Eylea lose their patent protection.
Besides looking outside its own walls for innovation opportunities, the company is restructuring its internal R&D activities. As a result, about 900 R&D jobs will be cut, and the resources freed up from the reduction will go toward “investment in collaborative research models and external innovations.”
The company’s hemophilia franchise, which includes older factor VIII treatments Kogenate and Kovaltry and newer entrant Jivi, has been pressured by Roche’s fast-moving newcomer Hemlibra. During the first nine months of 2018, sales of the Bayer drugs together plummeted 10.9% on a currency-adjusted basis.
So Bayer has decided not to use its manufacturing facility in Wuppertal, Germany, and will let go of the 350 positions stationed there. It will instead focus all recombinant factor VIII production at its Berkeley, California site, which itself just saw 227 employees out the door.
For the consumer health division, Bayer plans to get rid of sun care line Coppertone and foot care products Dr. Scholl’s, which “have more favorable development potential outside of Bayer.” That's somewhat surprising, considering Bayer picked up both brands from Merck as part of a $14 billion acquisition of Merck's consumer portfolio just four years ago. But the entire consumer portfolio at Bayer has been struggling. Coppertone, in particular, has posted the largest drop in the first nine months of 2018. Its €167 million sales during the period represented a 15.2% decline.
Selling these brands now might not generate high returns, but Bayer urgently needs to make smarter investments elsewhere, “so a sale is the best strategy,” wrote Bernstein analysts in a Thursday note to investors. The team figures the consumer products could fetch around €800 million.
In addition to the selloffs, Bayer also intends to adapt the consumer section’s organizational structure, which will involve cutting 1,100 jobs. However, the Bernstein analysts said they “would not expect to see major margin expansion even with new efficiency measures in place but rather a slow and steady up-tick.”
Finally, as the Bernstein analysts have strongly rooted for and the market has widely anticipated, Bayer is dumping the entire animal health division.
Despite the fact the unit is “well-positioned in an attractive industry which we continue to grow, the necessary investments to further develop this business are however not available within Bayer, given the priorities with our core areas,” said Baumann during a briefing with reporters Thursday.
Using Zoetis and Elanco as references, the Bernstein team figured the Bayer unit is worth around €7 billion to €7.5 billion, and €6 billion to €6.5 billion would be after applying a discount, “particularly given the recent weak third quarter.” The analysts concurred that there’s a clear appetite for animal health, so either sale or spin would work for Bayer, they said.
Meanwhile, Bayer will also jettison 4,100 positions at crop science as the result of integrating Monsanto and another 5,500 to 6,000 in the corporate functions, business services and country platforms.
“These adjustments will lead to considerable improvement of our cost structure and enhance the competitiveness of Bayer as a whole,” said Baumann. “We’re convinced that a leaner organization will help us become more responsive to changing markets and increase our agility.”
All told, Bayer expects annual savings of €2.6 billion from 2022 after the gigantic revamp and the synergies from the Monsanto acquisition. Assuming stable exchange rates, Bayer expects core EPS of €6.80 in 2019, 7% below consensus according to Bernstein. But the company's 2022 EPS target of €10 is ahead of expectations.