More consumer woes for Bayer drag down sales, earnings forecasts

Bayer logo and dark clouds
Bayer purchased Merck's consumer health unit in a $14.2 billion deal.

On Friday, Bayer announced it would be lowering its earnings forecasts with its second-quarter earnings releaseand that consumer health was, in part, to blame.

The company cited a “business performance by the consumer health division” that is “weaker than previously expected” as one reason it’d be paring down its full-year sales and earnings forecastsalbeit below a Brazilian inventory backup and “unfavorable currency developments,” both of which are set to take a heftier toll.

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Consumer is “the least of the issues,” Bernstein analyst Jeremy Redenius wrote in a note to clients after speaking with the German drugmaker’s investor relations team. The problem with the unit, which is floundering in the face of a U.S. slowdown, “is relatively small” compared with the €300 to €400 million hit CropScience earnings could take, but the company “wanted to clear out the bad news in one go.”

That, of course, doesn’t make it a non-factor, despite that “we knew 2017 was never going to be a strong year,” Redenius said in a separate note. Assuming no growth for the unit, the downgrade would lop €70 million ($80 million) off of earnings, he pointed out.

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And the company is already “reinvesting heavily” in turnarounds for brands Dr. Scholl’s and Coppertone, both of which Bayer nabbed in 2014’s $14.2 billion buyout of Merck’s consumer health unita deal that was meant to position the company to take the lead in the space.

The new portfolio got off to a slow start, though, and since then, Bayer has quieted down about its ambitions in the arenaeven before its $66 billion Monsanto deal agreement signaled a shift in priorities to the agribusiness side.

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When it was inked, the Monsanto pact also set off alarm bells for pharma industry watchers who feared it meant Bayer would neglect its pipeline. But for now, Redenius predicts that a pharma forecast bump-up could be on the way “to offset some of the weakness in Crop and Consumer.”

“Coming away from 1Q17 ... we felt Bayer’s guidance of high single-digit growth in 2017 EBITDA seemed conservative. Margins for the division will sensibly improve as the major products continue to mature and fewer resources are required to achieve sales,” he wrote.