Bayer's Health Unit Pinches Pennies With Monsanto Draining Cash

(Bloomberg) -- Mass layoffs at the inventor of aspirin show that Bayer AG, the German maker of drugs and seeds, has more headaches than its Monsanto hangover.

The conglomerate’s health-care division, which provides more than half its revenue, needs urgent attention. Bayer will begin losing patent protection for two blockbuster drugs in the next five years and has little under development to compensate. Growth in the consumer-health unit, beefed up four years ago with brands like Claritin, has stalled.

Chief Executive Officer Werner Baumann acknowledged the company’s challenges Thursday, airing plans to cut 12,000 jobs and dispose of the animal health, foot-care and sunscreen divisions. The moves have nothing do with Monsanto, the agricultural business the German company acquired this year, he said. But the acquisition, which also brought costs for defending the Roundup weedkiller against lawsuits linked to cancer risk, cut resources that Bayer could have invested in health care.

“They used up all their dry powder and then some on Monsanto,” said Damien Conover, an analyst at Morningstar Inc. in Chicago. “They don’t have as much capital to redeploy for pharma.”

Bayer’s shares, which have slumped by almost a third since the Monsanto deal was first announced in 2016, were up 1.9 percent as of 4:24 p.m. in Frankfurt.

On their own, Bayer’s health care operations would rank as Europe’s fifth-biggest drugmaker by sales. As things stand, however, growth will stagnate in just a few years as blood thinner Xarelto faces cheaper generics and eye treatment Eylea squares off against newer drugs.

Unimpressive Roster

Meanwhile, despite some successes in prostate cancer and lymphoma, Bayer’s list of experimental drugs doesn’t impress Wall Street. In 2016, the company targeted 6 billion euros ($6.8 billion) in peak revenue for its roster; that was before anetumab ravtansine, which accounted for a third of the total, failed in a cancer trial last year. Bayer’s pipeline is worth about 3 billion euros in 2025 sales, Sanford C. Bernstein & Co. analyst Wimal Kapadia estimated in October.

In the ultra-competitive pharma world, Bayer is short on focus. Rivals such as Novartis AG and Roche Holding AG are fixed on health, and their potential future medicines look stronger, according to David Evans, an analyst at Kepler Cheuvreux. Merck KGaA, a smaller conglomerate that went a decade without developing a new drug before last year, has a more exciting pipeline, Evans said. Only GlaxoSmithKline Plc’s late-stage pipeline is thinner than Bayer’s among the six biggest drugmakers in Europe, Bloomberg Intelligence analyst Cinney Zhang said.

The company is aware of the challenge, according to Oliver Renner, a spokesman. Its review of the pharma unit’s research and development operations is dubbed “Super Bowl,” a reference to last winter’s National Football League championship game in which the Philadelphia Eagles upset the defending champion New England Patriots.

The game shows that “through better collaboration and techniques, the underdog beat the favorite,” Renner said.

Bayer already expected to free up 1 billion euros a year with the Monsanto integration. The streamlining outlined on Thursday could contribute another 1.6 billion euros to that tally by 2022, the company said. Selling the veterinary unit could generate as much as 6.5 billion euros, according to Kapadia. The plans were announced as Baumann prepares to face investors Wednesday at a meeting in London.

While the company plans to plow some of those proceeds back into drug R&D, it will rely more on early-stage R&D from outside, bringing a “longer-term better outcome, higher productivity and with that a stronger pipeline going forward,” Baumann said Thursday on a call with reporters.

Bayer has the financial strength to invest in mid- and late-stage medicines, Baumann said. While open to expanding into new areas of treatment, it’s more likely to seek candidates in current focus areas, including hematology, clotting disorders, heart disease, women’s health and oncology. Yet the company has largely missed out on one of the pharma industry’s most lucrative trends: the immune-oncology revolution, which will probably fetch $10 billion in sales for Merck & Co. next year.

There are bright spots. Last year, Bayer signed a licensing deal with Loxo Oncology Inc. for larotrectinib, which has shown success in treating a variety of cancers and was approved in the U.S. on Monday. It could gain a hefty slice in a market worth as much as 1.2 billion euros, according to Markus Mayer, an analyst at Baader Bank.

Innovation Future

The task of keeping Bayer pharma competitive now falls to Stefan Oelrich, formerly head of diabetes at French rival Sanofi, who joined as the German drugmaker’s new chief for the business this month. He’s got a mandate to rejuvenate research efforts and speed up product development.

Bayer’s steps “bode well for bondholders,” analysts at CreditSights wrote Friday in a note to clients. The company’s ratings slid after it borrowed more than $30 billion to fund the Monsanto acquisition, and Bayer has said it wants to regain single-A standing.

Bayer’s future in pharma depends on its ability to innovate, said Michael Leuchten, a London-based analyst for UBS AG.

“The only way pharma companies continue to grow in the long run is by having R&D productivity,” he said. “And what Bayer’s doing is saying, ‘We’re addressing the things we can address, today.’”

--With assistance from Tom Freke.

To contact the reporters on this story: Tim Loh in Munich at tloh16@bloomberg.net;Naomi Kresge in Berlin at nkresge@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John Lauerman

©2018 Bloomberg L.P.