Q2 Sales at Bayer Up 5.8% Y/Y as Schering Acquisition Effects Kick In

Germany’s leading healthcare company Bayer AG has unveiled its much anticipated second-quarter (Q2) financial results, which include data from recently acquired Schering AG for the final week of June. While growth has broadly continued in all areas, acquisition and divestment effects appear to have taken their toll on growth in overall turnover, with a rise of just 5.8% year-on-year (y/y) recorded to 7.1 billion euro (US$9.1 billion). Operating profit, calculated as earnings before interest, taxation, depreciation and amortisation (EBITDA) from continuing operations (including Schering, but excluding Bayer’s divested Diagnostics franchise) fared better, rising at 11.2% y/y before special items to reach 1.3 billion euro. Maintaining the previous corporate structure, in other words excluding Schering and including Diagnostics, EBITDA before special items would have risen by just 7.6% y/y to 1.4 billion euro.

These figures translated into six-month group sales of 14.2 billion euro (up by 8.5% y/y) and EBITDA before special items of just under 3 billion euro (up by 8.5% y/y).

As in the first quarter, Bayer HealthCare generated the strongest of sales growth of all three Bayer business units during the April–June period, with turnover in continuing operations up by 12.7% y/y to 2.3 billion euro. The Pharmaceuticals subdivision saw an impressive 20.2% (9% if adjusted for currency and portfolio effects) increase to 1.2 billion euro in sales, helped by an extra 144 million euro derived from Schering AG revenues between 23 and 30 June. The Consumer Health subdivision, meanwhile, saw a 5.3% rise in second-quarter revenues to 1.1 billion euro. Operating profit for the HealthCare unit as a whole, reported once again as EBITDA, was up by a solid 27.4% y/y to stand at 470 million euro. This encompassed some 30 million euro from Schering’s own EBITDA. The company has not released any detailed sales figures for individual Bayer drugs.

Trasylol Suffers as Safety Scare Hits Home

With mostly modest growth in turnover felt among Bayer’s leading pharmaceuticals, a 37.5% y/y nosedive in sales of Trasylol (aprotinin injection) was the last thing the company needed. Earlier this year, Trasylol was made the subject of an investigation after the U.S. FDA issued a public health advisory over possible severe side-effects triggered by the blood-loss drug (see Germany: 9 February 2006: FDA Warns Doctors to Limit Use of Bayer's Trasylol, as Safety Review Gets Under Way). It has not taken long for the effect to be felt on Trasylol’s sales. Elsewhere, haemophilia drug Kogenate saw a rather disappointing 2.9% y/y rise to 179 million euro in second-quarter sales, although former problem-children Levite (erectile dysfunction) and Aleve (pain relief) have picked up again, seeing y/y rises in turnover of 15.9% and 24.4%, respectively.

Outlook and Implications

The lack of sales information concerning Schering’AG pharmaceutical products for the period makes it difficult to assess the core strengths and weaknesses of the new Pharmaceuticals division following the Schering merger. Arguably, including only one week’s worth of sales results would not make a significant impact on Bayer’s own pharmaceutical turnover. However, with lower-than-expected revenues from some of Bayer’s previously top-selling drugs, and with kidney-cancer hopeful Nexavar not yet pulling in blockbuster sales, it will be up to Schering to inject some much-needed vitality into Bayer Pharmaceuticals’ sales profile.

Profit-wise, Bayer has managed avoid significant losses so far; the modest sales growth for the group as a whole since the second quarter of 2005 is nonetheless a cause for concern (see Germany: 10 August 2005: Bayer Back on Track in Q2 with 18.1% Leap in Pharma Sales). Second-quarter group sales are also down slightly from the level recorded during the first three months of 2006 (see Germany: 27 April 2006: German Big Pharma Lays Cards on Table as Bayer, Merck, Altana Release Q1 Results). The restructuring of the HealthCare division means that a direct sales comparison between the first and second quarters is not possible, although in general the unit appears to be progressing at a strong pace.

The discrepancy between the strong HealthCare unit and the more subdued growth for the company overall reflects difficulties in Bayer’s other business units. Indeed, Bayer took the opportunity, while releasing its second-quarter results, to announce a restructuring programme for its CropScience subgroup, designed to trigger savings of some 300 million euro per year.

If Schering profits are excluded and Diagnostics earnings still factored in, Bayer is predicting a slight increase in underlying EBITDA as well as an EBITDA margin of 19% for the full-year 2006. Bayer’s CEO, Werner Wenning, has also given “an even more optimistic outlook for continuing operations, predicting higher underlying EBITDA [...] even without the inclusion of Schering”. In total, Schering AG is expected to contribute some 600 million euro to group EBITDA by the end of 2006. As a result, Wenning has also boosted the 2006 guidance for Bayer Healthcare, with earnings before interest and taxation (EBIT) from continuing operations excluding Schering expected to rise by 20%, with an underlying EBITDA margin also seen increasing to 20%.