Bayer HealthCare: The Soon-to-Be Pure-Play Life Science Company


From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 08-03-2015 10:12

  

Bayer AG is proceeding with a strategy to demerge its material sciences business to become a pure-play life sciences company by mid-2016 at the latest, with pharmaceuticals the leading piece. So how would Bayer's pharma business measure comparative to the other pharmaceutical majors? DCAT Value Chain Insights (VCI) examines the company's pharma position. 

Marijn Dekkers
Management Board
Chairman and CEO
Bayer AG
Photo courtesy of Bayer AG

The German chemical conglomerate first announced in September 2014 that it would demerge its material science business and float it as a separate company, now to be called Covestro, leaving the strategic focus of Bayer on its healthcare businesses, which accounted for almost half of the company’s revenues in 2014. In taking that path, Bayer is following a strategy taken over the last decades by other chemical giants in spinning out life sciences operations to become pharmaceutical powerhouses today. So will this be a winning formula for Bayer? DCAT Value Chain Insights (VCI) takes a prospective and retrospective look.

“We are convinced that Bayer has outstanding growth perspectives as a pure life science company,” said Martijn Dekkers, Bayer's Management Board Chairman and CEO at the company's annual stockholder meeting in Cologne, Germany held in late May 2015, in a company statement. Bayer's life sciences businesses consists of Bayer HealthCare (which includes pharmaceuticals and consumer health care) and Bayer CropSciences. Bayer has announced that the new name of its MaterialScience business as Covestro, effective on September 1, 2015. Bayer intends to float Covestro on the stock market by mid-2016 at the latest. 

Bayer HealthCare: an inside look
Bayer HealthCare accounted for 47% of Bayer's total 2014 revenues of EUR 42.2 billion ($46.3 billion) with its pharmaceutical business accounting for 28% and its consumer healthcare business 19% of total revenues for Bayer AG. The pharmaceuticals segment focuses on prescription products, especially for women’s healthcare and cardiology, and also on specialty therapeutics in the areas of oncology, hematology, and ophthalmology.The company's consumer health segment includes the consumer care business (non-prescription medicines, dietary supplements, and dermatology products), medical care (includes the diabetes care business unit, which markets blood glucose monitoring systems, and the radiology business unit, which offers contrast-enhanced diagnostic imaging equipment along with the necessary contrast media), and the animal health division (makes products for livestock and companion animals). Bayer CropScience accounted for 22% and the to-be-demerged material science business 28%.

In 2014, Bayer's pharmaceutical business generated revenues of EUR 12.1 billion ($13.2 billion). The primary growth drivers in the pharmaceuticals business in 2014 were the recently launched products: the anticoagulant Xarelto (rivaroxaban), the eye medicine Eylea (aflibercept), the cancer drugs Stivarga (regorafenib) and Xofigo (radium 223 dichloride), and Adempas (riociguat) to treat pulmonary hypertension. These products generated combined sales of EUR 2.9 billion ($3.2 billion) in 2014, which was nearly twice as much as in the previous year. Bayer expects this figure to rise further to more than EUR 4 billion ($4.4 billion) in 2015. Table I highlights Bayer's top-selling pharmaceutical products in 2014, which on a collective basis accounted for 78% of the company's pharmaceutical sales.

The company's top-selling prescription product, the oral anticoagulant Xarelto, had strong sales gains in 2014, especially in Japan, France and Germany. Royalties received and recognized as sales in the United States, where Xarelto is marketed by a subsidiary of Johnson & Johnson, more than doubled. Following its approval in additional indications, sales of the company's eye medicine Eylea increased, particularly in Europe. The cancer drug Stivarga developed positively, and the cancer drug Xofigo also saw higher sales, especially in the United States (see Table I). 

In 2014, Bayer's consumer healthcare business generated sales of EUR 7.9 billion ($8.65 billion). Pro forma sales of two key acquisitions in the company's over-the-counter pharmaceutical business, the $14.2 billion acquisition of Merck & Co. Inc's consumer healthcare business (deal closed in October 2014) and the acquisition of Dihon Pharmaceutical Group Co. Ltd., China, which provides self-medication products in the fields of dermatology and traditional Chinese medicine (deal closed in November 2014),was EUR 1.6 billion ($1.75 billion).

In addition to prescription and OTC products, Bayer's life science business will also include Bayer CropScience, the company's agrochemical business. The company is exiting its medical products business. In June 2015, Bayer AG agreed to sell its diabetes care business to Panasonic Healthcare Holdings Co., Ltd., a company backed by funds by the investment firm, KKR and the Panasonic Corporation, for EUR 1.022 billion ($1.151 billion). The sale will include the Contour portfolio of blood glucose monitoring meters and strips, as well as other products such as Breeze 2, Elite, and Microlet lancing devices. Closing of the transaction is subject to customary conditions, including relevant antitrust clearance, and is expected to occur in the first quarter of 2016.

Table I: Bayer Healthcare's Top-Selling Pharmaceutical Products, 2014*
Product (Proprietary Name) Active pharmaceutical ingredient 2014 Sales; percentage
change 2014 over 2013*
    
Xarelto rivaroxaban EUR 1.678 Bn ($1.840 Bn); +76.9%
Kogenate antihemophilic factor (recombinant) EUR 1.109 Bn ($1.215 Bn); -7.7%
Betaferon/Betaseron interferon beta 1b EUR 819 M ($898 M);-21.1%
Mirena product family levonorgestrel EUR 819 M ($898);+13.9
Nexavar sorafenib EUR 773 M ($847 M);+0.3%
Yasmin/ YAZ/ Yasminelle drospirenone
/ethinyl estradiol
EUR 768 M ($842 M);-10.0%
Eylea aflibercept EUR 759 M ($832 M); 127.9%
Adalat nifedipine EUR 588 M ($644 M);-2.5%
Aspirin Cardio acetylsalicylic acid EUR 486 M ($533 M);+7.5%
Glucobay acarbose EUR 443 M ($486 M);+4.7% 
Avalox/Avelox moxifloxacin EUR 381 M ($418 M);-10.6%
Levitra vardenafil EUR 245 M ($269 M);-15.5%
Stivarga regorafenib EUR 224 M ($246 M);+13.7%
Cipro/Ciprobay ciprofloxacin EUR 191 M ($209 M);-3.0%
Zeita ezetimibe EUR 168 M ($184 M);-2.3%   
These products constituted 78% of company's pharmaceutical sales in 2014.
Bn is billions; M is millions. Currency exchange as of June 1, 2015 (1 EUR = US$0,91); Revenue percentage change on a reported basis. 
Source: Bayer AG/Bayer Healthcare


Bayer's strategic priorities

At its shareholders meeting in May, Dekkers listed four strategic priorities for Bayer’s successful further development. First, the company plans to focus on further driving forward the organic growth of its HealthCare and CropScience business through new product development. Overall, Bayer plans to invest more than EUR 4 billion ($4.4 billion) in research and development in 2015. At the focus of our clinical development are five active substance candidates currently in Phase ii trials. These are finerenone, vericiguat and molidustat in the cardiology and cardiorenal syndrome areas, copanlisib in oncology and vilaprisan in gynecology.

The second priority listed by Dekkers was the further integration of the consumer care business of Merck & Co., Inc., and Dihon Pharmaceutical, China, two acquisitions made by Bayer in 2014, to strengthen its non-prescription medicines business.

The third area of focus is the demerger of its material science business. The planned stock market flotation is targeted for mid-2016 at the latest. The next important step will be the economic and legal separation of that company. Bayer will likely decide in the second half of this year which of the possible options is to be used for the stock market flotation. Parallel to this process, Bayer’s fourth strategic priority is to drive forward the complete alignment toward the life science businesses. In this connection, the Group’s corporate structure is currently being examined and restructuring proposals are being developed.

“I must emphasize in this connection that it is not about cutting jobs. We continue to anticipate that the number of employees at Bayer will remain stable in the coming years, both worldwide and in Germany,” Dekkers said in a company statement, earlier this year. He said that as pure life science company, Bayer will be able to optimally deploy its strengths: its competencies in research and development and in marketing, a pipeline of innovative products, its strong brands, a diversified portfolio, and a strong presence in emerging markets.

“At the same time, we will benefit from major similarities in our business model,” Dekkers said referring to biochemical processes in organisms and the related mechanisms that serves as a basis for inventing and producing new molecules.

Production and procurement
One issue going forward for the company as it splits the company is the future of its procurement, manufacturing, and supply functions. Currently, both procurement and production are decentrally organized in the Bayer Group and are aligned to the individual requirements of the respective subgroups’ businesses, according to the company's 2014 annual report. Overall, iIn 2014, goods and services were procured from some 112,000 (2013: some 107,000) suppliers in 147 (2013:138) countries for approximately EUR 20.3 billion ($22.2 billion). The procurement volume in Germany, the United States, and Japan in 2014 accounted for nearly 66% of the expenditures in the countries of the OECD (Organization for Economic Cooperation and Development), or about 52% of the Bayer Group’s total procurement spend. Brazil, India, and China together accounted for about 70% of the expenditures in the non-OCED countries or about 14% of the total spend. Overall, Bayer AG had 78,135 suppliers in OCED countries in 2014, which was 69.9% of its total,which included 34.4% located in Germany, the United States, and Japan.

Direct and production-related procurement at Bayer is organized decentrally in the subgroups. Indirect and non-production-related goods and services are sourced in each case by the organizational unit that is their major user within the Bayer Group. The company-wide procurement strategy and application of the major-user principle are used to realize synergy potentials in the form of standardization, volume pooling, and streamlining of negotiations. The activities of the various procurement organizations are coordinated through the Group Procurement Committee, which reports to the chief financial officer.

The pharmaceuticals segment generally procures the starting materials for the active ingredients of its prescription pharmaceuticals from external suppliers. The company's active ingredients are manufactured primarily at the sites in Wuppertal and Bergkamen, Germany and Berkeley, California. Among the sites where formulating and packaging take place are Berlin, Leverkusen and Weimar, Germany; Garbagnate, Italy; Beijing, China; São Paulo, Brazil; and Turku, Finland. For the consumer care Division of the company's consumer health segment, the company's produce certain active substances, such as acetylsalicylic acid and clotrimazole, in La Felguera, Spain. The principal raw materials are purchased from third parties include naproxen, citric acid, ascorbic acid, other vitamins, and paracetamol. Among the division’s production sites are the facilities in Myerstown, Pennsylvania; Cimanggis, Indonesia; Lerma, Mexico; Bitterfeld-Wolfen, Darmstadt and Grenzach-Wyhlen, Germany; Madrid, Spain; and Segrate, Italy. The company's production network further expanded through the acquisitions of the consumer care business of Merck & Co., Inc. and Dihon Pharmaceutical Group Co. Ltd. Animal health products are manufactured mainly at the sites in Kiel, Germany, and Shawnee, Kansas.

A road already taken by other pharmaceutical majors
In taking the decision to focus on life sciences, Bayer is pursuing a path taken by several of today’s pharmaceutical majors. In the 1990s, several top players were not stand-alone drug companies but instead were the pharmaceutical units of multinational chemical companies, reflecting the historical marriage between the chemical and pharmaceutical industries. As the strategic value of pharmaceuticals grew, so did merger and acquisition (M&A) activity as several multinational chemical companies separated their life-sciences businesses and through M&A built their pharmaceutical operations to create today’s Novartis, AstraZeneca, and Sanofi.

Novartis and AstraZeneca, both initially created as life-science companies following demerger of chemical operations and subsequently positioned in both pharmaceuticals and agrochemicals, would later divest their agrochemical operations to become pure-play pharmaceutical companies, a path that may await Bayer, which as of now, has decided to focus on both pharmaceuticals and agrochemicals. In 1993, Imperial Chemical Industries (ICI), a UK-based chemicals and pharmaceutical conglomerate that had been founded in 1926, demerged three of its businesses (pharmaceuticals, agrochemicals, and specialties) to form a separate company, Zeneca. In 1999 , AstraZeneca was formed through the merger of Astra AB of Sweden and Zeneca Group PLC of the UK. In December 1996, Novartis was formed from the merger of Sandoz and Ciba-Geigy. Novartis later spun off the former specialty chemical business of Ciba-Geigy to form a separate company, Ciba-Geigy Specialty Chemicals. The former specialty chemical business of Sandoz had been earlier spun off to form Clariant, which later acquired the specialty chemical business of Hoechst in 1997. In 2000, Novartis divested it agrochemical business and combined it with the divested agrochemical business of AstraZeneca to form Syngenta, thereby focusing Novartis and AstraZeneca in pharmaceuticals.

Another example of the life science split is with Pharmacia prior to its acquisition by Pfizer. In 2000, Pharmacia & Upjohn acquired Monsanto, which consisted of a pharmaceutical business (G.D. Searle) and an agrochemical/agricultural biotechnology business, Monsanto (the chemical business of Monsanto had been earlier spun off as a separate company, Solutia, which was subsequently acquired by Eastman Chemical is 2012). The newly combined company was called Pharmacia. In 2002, Pharmacia spun off its agricultural business as an independent, separate company as Monsanto. Pharmacia was later acquired by Pfizer in 2003.

A final example of chemical/pharmaceutical positioning is Sanofi, which was formed from a series of M&A activity. In 1990, Rhône-Poulenc, a multinational chemical, fibers, and pharmaceutical company headquartered in Paris, merged its human pharmaceutical business with Rorer, a pharmaceutical company based in Fort Washington, Pennsylvania to become Rhône-Poulenc Rorer, making it at the time one of the top 10 pharmaceutical companies in the world. In 1995, the multinational German chemical conglomerate Hoechst acquired Marion-Merrell-Dow of Kansas City, Missouri (a pharmaceutical concern created from the 1989 merger of Marion Laboratories and Merrell Dow Pharmaceuticals). In 1997, Hoechst acquired the French pharmaceutical company, Roussel Uclaf, to create Hoechst Marion Roussel, the life science business of Hoechst. In 1999, Hoechst and Rhône-Poulenc (which had earlier spun off its chemicals, fibers, and polymers business into a separate company, Rhodia) merged their life science operations to form Aventis. Sanofi, which merged with Synthélabo to form Sanofi-Synthélabo, acquired Aventis in 2004 to form Sanofi-Aventis.
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