Bayer HealthCare Ends 2006 on High as Schering Buyout Boosts Q4 Sales 75.3%

All eyes were on Bayer HealthCare today as Germany's Bayer AG released its annual report and financial performance breakdown for 2006. Out of Bayer's three corporate pillars, Bayer HealthCare easily recorded the strongest pace of sales growth over both the fourth quarter (Q4) and the year as a whole. Full-year turnover of 11.7 billion euro (US$15.5 billion), up 46.6% year-on-year (y/y), made an important contribution to Bayer AG's overall sales of just under 29 billion euro. Pharmaceutical sales continued to be inflated in the fourth quarter by the inclusion of top-selling products from rival Schering AG, which Bayer acquired last June, rising by 75.3% y/y to 3.8 billion euro. Bayer's total sales for 2006 include some 3.1 billion euro in revenues from Schering AG, all factored in from 23 June. On a regional basis, Bayer HealthCare's U.S. business particularly profited from the Schering takeover, with a 50.6% y/y increase to 3.7 billion euro in U.S. sales over 2006 as a whole.

In terms of operating profit, it was a year of extremes for Bayer Healthcare, as a 42.3% y/y rise to 1.3 billion euro in earnings over the full year could not stop the financial drain of the Schering acquisition from dampening fourth-quarter growth of just 0.5% y/y, to 187 million euro. Schering itself brought in some 774 million euro in full-year profit, which Bayer consolidated into its EBITDA (earnings before interest, taxation, depreciation and amortisation) for the year.

Schering drugs continue to dominate Bayer HealthCare's top-sellers, with multiple-sclerosis treatment Betaferon/Betaseron leading the way. Over the year as a whole, Betaferon sales were up 14.3% y/y to 991 million euro, of which 535 million euro was factored into Bayer's results from late June. The Yasmin contraceptives franchise also continued to grow at double-digit levels, and promises to be a strong and steady source of future revenue for the newly formed Bayer Schering Pharma going forward. Schering drugs accounted for approximately 30% of the revenue brought in by Bayer HealthCare's top 10 products in 2006, after only having been included in the results for the second half of the year. Among Bayer's "own" drugs, haemophilia treatment Kogenate (recombinant Factor VIII) remained the highest seller, with full-year turnover up by 18.7% y/y to 787 million euro. However, it was erectile dysfunction drug Levitra (vardenafil) which saw the biggest bounce-back over the year, with a 20.8% y/y rise to 314 million euro in sales.

Among the products not yet featured in the top 10, kidney cancer drug Nexavar (sorafenib) continued to make market inroads, with turnover amounting to 130 million euro during the treatment's first year on sale. However, blood-loss drug Trasylol, which has been the subject of safety fears in the U.S. market (see Germany: 18 December 2006: New Blow for Bayer as FDA Demands Stronger Warning Label, Restricted Use for Trasylol), saw its full-year sales contract by 33.5% y/y. Out of the total 11.7 billion euro in sales secured by Bayer HealthCare, some 7.5 billion euro was achieved by the Pharmaceuticals division (up 83.9% y/y)—which has since merged with Schering AG to form Bayer Schering Pharma—and the remaining 4.2 billion euro brought in by the Consumer Health unit (up 8.1% y/y). OTC (over-the-counter) products also saw some impressive growth in sales, with Bepanthen turnover up by 14.9% y/y and Canesten sales up by 11.7% y/y. Most impressive of all the OTCs was painkiller Aleve (naproxen), which saw a 27.5% y/y rise in full-year turnover. This growing demand for the popular headache pill will serve as its own justification for Bayer's recent decision to nearly double production of the drug by 2008 (see Germany: 22 November 2006: Bayer Ramps Up Production of Aleve).

Outlook and Implications

Despite its seemingly glowing financial results, Bayer has much work ahead of it in 2007 in order to recover from the acquisition of Schering AG. Net debt for Bayer AG as a whole amounted to 17.5 billion euro on 31 December 2006, spiralling by 218% y/y. First on the agenda for Bayer, therefore, will be a reduction of this debt, which the company is planning to achieve through the proceeds of the divestments of the Diagnostics division (see Germany: 12 July 2006: Bayer Divests Diagnostics Franchise to Siemens for US$5.3 bil. as 92.4% of Schering Acquired), H.C. Starck and Wolff Walsrode. This should lead to a reduction in net debt of approximately 4.5 billion euro over 2007.

Looking ahead, Bayer is expecting a 10% rise in group sales over 2007, or 5% if adjusted for currency and portfolio effects. Total capital expenditures on the property and equipment are expected to reach 1.7 billion euro, while R&D (research and development) spending should total approximately 2.8 billion euro. The newly launched Bayer Schering Pharma has been formed by merging Schering AG into Bayer HealthCare's Pharmaceuticals segment, and here also the outlook is positive. Boosted by Schering drugs, Bayer HealthCare is aiming to grow at the same pace or faster than the market average across all its divisions in 2007, and is targeting an improvement in underlying EBITDA margin toward 24%.

Between the divestment of its diagnostics franchise, the ongoing crumbling of Trasylol's market share, the slow process of building up Nexavar and the recent Phase III disappointment of cardiovascular compound alfimeprase (see Germany: 12 December 2006: Trial Woes Multiply for Bayer as Alfimeprase Fails to Meet Cardiovascular Phase III Endpoint), the inclusion of Schering's blockbuster drugs could not have come at a better time for Bayer HealthCare. The company is now dependent on its top 10 products to bring in some 57% of its total pharmaceutical sales, and with new top-seller Betaferon set to lose patent protection by the end of the decade, Bayer cannot afford a gap in its mid-to-long-term pipeline. For now, however, the year ahead will be one concentrated on building up existing growth and branching out into new markets, as Germany's new pharma champion asserts itself.