Germany based Bayer AG (BAYRY, Financial) reported a drop in net profit of 51% for the fourth quarter of 2014, feeling let down by higher research, development and selling costs.
The German pharmaceutical giants reported net profit for the three month period ending December 31 was $253 million compared to $515 million 12 months ago, hence not reaching analysts’ expectations. Earlier, analysts’ predictions net profits would reach $546 million.
In light of its poor fourth-quarter performance, Bayer AG announced it would be divesting itself of its high-tech plastics business, further stating it would legally and economically separate the Material Science division by the end of August.
The scheduled listing of the Material Science division by mid-2016 at the latest is on track, and the legal processes of the separation will be completed by August, according to Bayer. Sales and profits for this unit were the slowest of Bayer’s three businesses last year due to dropping prices for the plastics used in smartphones and cars.
Preventive measures taken
As a result of higher volumes in all business areas, earnings before interest, taxes and amortization rose 4.4% to $2.1 billion. In this same period sales increased 12% to $1.21 billion, partly assisted by a weak euro currency and the consolidation of US based Merck & Co’s (MRK, Financial) over the counter business that Bayer bought over for $14.2 billion last year. With the Merck acquisition, Bayer, perhaps best known for aspirin, has added key pharma brands such as Claritin and Coppertone to its portfolio.
The planned divestment is part of a concerted strategy shift by Marijn Dekkers, Bayer AG’s chief executive. This step is to streamline the company and refocus it on its core healthcare and crop science businesses.
Bayer’s five most recently launched drugs – blood thinner Xarelto, eye treatment Eylea, cancer drugs Stivarga and Xofigo and pulmonary hypertension drug Adempas – contributed $3.19 billion in sales for 2014, slightly ahead of what Bayer predicted. It predicted its new drugs would contribute close to $4.4 billion in sales for 2015.
Competition for the five drugs, however, will face stiff competition from rivals such as Bristol-Myers Squibb (BMY, Financial) and Pfizer (PFE, Financial), and experts have started focusing on Bayer’s mid-to-late stage pharma pipeline. Experts are in doubt over the company’s drugs that are being tested becoming blockbuster sellers and adding to the profits.
Dekkers feels Bayer’s pipeline will likely prove increasingly important as he continues to streamline business and get rid of noncore assets. The company is in process of selling its diabetes device business to Panasonic Healthcare Co, a joint venture supported by buyout firm KKR & Co (KKR, Financial), according to insider knowledge. The unit could further contribute $2.2 billion.
The plan going forward
Bayer AG expects underlying core earnings to increase by more than 10 percent banking on a boost from one of its new drugs, stroke prevention pill Xarelto. The company is currently benefiting from the strong dollar as North America accounts for nearly one-fourth of its sales.
Bayer AG earlier announced a change in personnel with Olivier Brandicourt, the head of its health-care business, will leave to become CEO of Sanofi and will be replaced by Werner Baumann.
Experts are apprehensive currently over the state of Bayer’s cashflow and profit margins. With a lot of changes currently taking place in the company, Bayer is putting a lot of their eggs in one basket with the reliance on their new drug to boost their profits. It is advised to stay bearish over the pharmaceutical giants for now and see how they do in the coming quarter before reinvesting in them.
