German Drug Giants Vex Investors

(Bloomberg) -- Most of the world’s biggest drugmakers are focusing ever more closely on innovative new drugs and health technologies, shedding businesses ranging from toothpaste to animal vaccines as they snap up promising biotechnology companies.

German pharma companies, on the other hand, seem to be looking off in different directions, and investors are getting uneasy.

Merck KGaA, struggling to compete in the red-hot world of immune cancer therapy, on Tuesday stuck to its guns on a $5.9 billion hostile bid for Versum Materials Inc. to bolster its smallest business, performance materials. Bayer AG, facing patent loss for its best-selling pill, spent $63 billion to become the top seller of seeds to farmers, a deal that diversified its business while opening the gate to lawsuits and activist investor Elliott Management Corp.

These diversified pharma players generally trade at a discount, according to Michael Leuchten, a London-based analyst at UBS, in part because investors may not have the desire to wrap their heads around multiple sectors.

“People are looking at this and saying, ‘What am I investing in here? Am I investing in a health-care company?”’ Leuchten said. “‘Or am I investing in a chemicals company?”’

Bayer and Merck shares were little changed in early trading Wednesday in Frankfurt.

Disliked Label

Analysts at Citi call Bayer a conglomerate and apply a 10 percent discount to its shares on that basis. Recent moves in Big Pharma reflect wariness over that label. Many -- such as Sanofi, Novartis AG and GlaxoSmithKline Plc -- are trimming their portfolios and divesting ancillary businesses as they shunt investment into deals and research on future therapies where they expect to get the biggest payoff.

“It’s easier as a health-care investor for me to evaluate whether a biotech transaction is a good one or a bad one,” said Dan Mahony, a London-based portfolio manager at Polar Capital LLP, which doesn’t own Bayer or Merck shares. “It’s a lot harder to look at the chemical sector, because I don’t look at it everyday.”

Since Bayer closed the Monsanto takeover in June, its shares have fallen 26 percent, while the Bloomberg Europe 500 Pharmaceuticals Index of pharma and biotechnology companies climbed 13 percent through Tuesday. And when Merck announced its bid for Versum last week, its stock promptly dropped 4.2 percent.

Family Ownership

One reason Merck, which isn’t linked to U.S. drugmaker Merck & Co., pursues diverse interests is family ownership, which relieves any concerns about activism. Family owners control some 70 percent of Merck, allowing it to adopt a take-it-or-leave-it approach to a business model that seeks to balance divisions that make drugs, lab equipment and display panels.

“The capital markets sometimes have questions about this conglomerate thing,” Merck Chief Executive Officer Stefan Oschmann said Feb. 1 in an interview. “But more and more people understand it, and especially during times of downturn, such companies have more resilience, and they tend to perform better.”

Bayer, Germany’s biggest listed drugmaker, has been thrown into a legal maelstrom as the company faces some 11,200 U.S. plaintiffs claiming that best-selling weedkiller Roundup brought on cancer. Meanwhile, its pharma pipeline has lagged behind peers – despite some recent bright spots tied to licensing and acquisitions in prostate cancer and lymphoma -- and the company faces potential waning sales for some top-selling medicines that will face competition in a handful of years.

Activism Target?

Bayer’s Monsanto woes may make it a target for activism. Elliott Management has built a stake and wants the German drugs-and-chemicals company to consider splitting in two, according to people familiar with the matter. Baumann declined to comment on that situation at the company’s earnings last week, and Elliott representatives declined to comment.

Baumann has said that Bayer is making good on its strategy to be a leader in the life sciences sector, leveraging its role as the world’s top agriculture player and investing in advanced cell and gene therapies that could prove useful in both sectors.

The company may want to take heed of Siemens AG CEO Joe Kaeser, who’s fretted that if he doesn’t trim his disparate business units, an activist investor might do it for him. The Munich-based industrial giant floated its health-care business in March of 2018, after merging its wind-power unit with a Spanish rival’s. Fellow industrial giant Thyssenkrupp AG already capitulated last year: the company said it would split itself in two after pressure from Elliott and other activist shareholders.

Still, the diversified approach must have at least a few positive features, as some companies have branched out into different businesses without much criticism from investors, Oschmann said, invoking technology giant Apple Inc.

“Is Apple a hardware company?” he said an interview in February. “Is Apple a software company? Is Apple a music company? I don’t know what, but nobody is asking these questions.”

©2019 Bloomberg L.P.