Bayer's Q3 Profits Dip 15.4% as Schering Takeover Drains Capital

Germany's Bayer AG has released its third-quarter (Q3) financial results, which boast a better-than-expected profit picture after the costly acquisition of rival pharma heavyweight Schering AG. While still officially operating as two separate companies, Schering's drug sales are now factored into Bayer HealthCare's third-quarter turnover figures, where they helped boost sales by 72.5% year-on-year (y/y) to 3.5 billion euro (US$4.6 billion). Without the benefit of Schering products, Bayer HealthCare revenues would have increased by just 7.5% y/y over the period, adjusted for currency effects. Overall group turnover reached just under 7.8 billion euro, up by 26% y/y including sales of Schering products, but just 3% y/y if those sales are excluded. Profit-wise, Bayer continued to feel the pinch of funding the Schering acquisition, with operating profit—expressed as earnings before interest, taxation, depreciation and amortisation (EBITDA)—contracting by 15.4% y/y to 1.2 billion euro. EBITDA of 565 million euro at Bayer HealthCare was also affected by the Schering purchase, with EBITDA before the acquisition's "special effects" calculated at 882 million euro.

Over the first nine months of the year, Bayer HealthCare was the fastest-growing of Bayer AG's three component parts. The MaterialScience unit remained the biggest sales driver and occupied the largest proportion of overall group revenues, but HealthCare is rapidly closing the gap, accounting for 36% of nine-month group sales compared to the 39% stake held by MaterialScience and the 20% held by CropScience.

Schering's footprint has been most noticeable within the Pharmaceutical sub-division of Bayer HealthCare, which saw its third-quarter sales inflated by 137.5% y/y to 2.4 billion euro compared to the 7.4% increase it would have felt without the influx of blockbuster products. The two best-selling drugs in Bayer's Pharmaceutical portfolio are now Schering treatments Betaferon (multiple sclerosis) and contraceptive pill Yasmin (levonorgestrel estradiol), and Schering drugs account for four of Bayer's top 10 most successful treatments during the third quarter. Bayer has not provided any comparative y/y sales figures for Schering's drugs, but Schering itself has said that nine-month sales of Betaferon rose by 16% y/y to 727 million euro, while Yasmin sales increased by 33% y/y to 566 million euro. Intrauterine contraceptive device Mirena, which is now also part of Bayer's third-quarter top 10, saw a 27% y/y rise to 217 million euro in nine-month sales.

Bayer's existing pre-Schering portfolio, by contrast, fared rather more mutedly during the third quarter, with falling sales reported for hypertension drug Adalat (nifedipine), antibiotic Ciprobay (ciprofloxacin) and type-2 diabetes drug Glucobay. This is only a recent development, as all three of these products were still seeing gains in sales during the second quarter of 2006 (see Germany: 29 August 2006:  Q2 Sales at Bayer Up 5.8% Y/Y as Schering Acquisition Effects Kick In). Elsewhere, however, quinolone antibiotic Avalox/Avelox (moxifloxacin) continued to perform extremely well, building on second-quarter success to register third-quarter turnover growth of 23.4% y/y.

Outlook and Implications

Bayer is forecasting full-year group sales to amount to 30 billion euro, with 3.0 billion in revenues from Schering AG factored in. Underlying operating profit (EBITDA), meanwhile, is expected to rise from 4.8 billion euro in 2005 to 5.7 billion in 2006, with Schering accounting for some 0.7 billion euro. According to Bayer, this profit figure has been adjusted for non-cash charges arising from "the acquisition-related step-up of Schering inventories, thus ensuring comparability with future periods." Bayer HealthCare, meanwhile, is expected to secure a full-year EBITDA margin of 22%. This factors in an expected rise in marketing and research and development (R&D) costs over the fourth quarter.

Bayer held 96.1% of shares in Schering AG on 1 September 2006, and is now in a position to "squeeze out" the remaining shareholders. As such, the merger of Bayer Schering Pharma is not yet complete, but is likely to be done by early 2007. The addition of Schering drugs to Bayer HealthCare's portfolio is having the desired effect, sales-wise, but it is interesting to note that Betaferon, an ageing product that is due to come off patent in a few years' time, has taken the top spot as Bayer's best-selling drug. The increased marketing and development costs anticipated for the fourth quarter of 2006 are likely, therefore, to be geared towards building up Bayer products such as Kogenate, Avalox and Nexavar into stronger-selling products over the medium-to-long term.

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