Bayer is a global enterprise with core competencies in the fields of health care, nutrition and high-tech materials. The company’s products and services are designed to benefit people and improve their quality of life. At the same time Bayer creates value through innovation, growth and high earning power. The Group is committed to the principles [...]
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Bayer is a global enterprise with core competencies in the fields of health care, nutrition and high-tech materials. The company’s products and services are designed to benefit people and improve their quality of life. At the same time Bayer creates value through innovation, growth and high earning power.
The Group is committed to the principles of sustainable development and to its role as a socially and ethically responsible corporate citizen. Economy, ecology and social responsibility are corporate policy objectives of equal rank. In fiscal 2011, Bayer employed 111,800 people and had sales of €36.5 billion. Capital expenditures amounted to €1.7 billion, R&D expenses to €2.9 billion.
Organization Bayer AG defines common values, goals and strategies for the entire Group. The three subgroups and three service companies operate independently, led by the management holding company. The Corporate Center supports the Group Management Board in its task of strategic leadership.
Company profile Bayer is a pharmaceutical and chemical company with three divisions: (i) Bayer Healthcare (58% EBITDA and 50% of total sales): prescription drugs and over-the-counter (aimed to the relief, treatment and prevention of minor condition), segments of Pharma and Consumer Healthcare. (ii) Bayer CropSicence (23% EBITDA and 17% of total sales): chemical and agricultural products. (iii) Bayer Material Science (18% EBITDA and 33% of total sales): high performance materials (polyurethanes, polycarbonates). The main catalyst of the company is the growth of the Healthcare division, its blockbusters being: Betaferon (multiple sclerosis, 3,2% of total sales), Kogentae (anti-hemophiliac, 3,1% of total sales), Yazmin (contraceptive, 2,8% of total sales) y Nevarax (cancer, 2% of total sales). The two main pending comercialiacion of drugs in the next 18 months are: (i) Xarelto: anticoagulant (Peak sales over 2 billion euros), that has already been aproved in the US for hip and knee surgery, and as anticoagulant in patients with cardiac arrhythmia and/or Venous Thromboembolism (VTE); at the moment it is pending authorization for another two conditions. (ii) VEGF Trap-Eye: ophthalmology, peak sales within 500 million and one billion euros. (iii) Alpharadin y Regorafenib: oncology, peak sales of one billion euros.
Company strategy Bayer expects Healthcare division growth rates to be over the sector based on (i) a drugs portfolio balanced and with low exposure to generic drugs (ii) a focus on most profitable therapeutics areas, and (iii) appealing projects on maturity stage (emphasizing Xarelto). CropScience division constitutes the second pillar for growth, with an investment plan of 3,2 billion in five years for active ingredients (34% of CAPEX total). Lastly, Material Science completed the operations portfolio, adding a more cyclical profile to the company. Regarding its corporate policy, Bayer doesn’t rule out a more organic growth in areas like Animal Health. In that regard, we highlight the constant rumours on the company’s interest on Pfizer Animal Health division.
More recent results Last February Bayer published its 4Q´11 results, that, even if were good, they were bellow the expectations on the Sales and BDI. Regarding EBITDA, the biggest impact was the decrease of -64% on the Material Science division (EBITDA margin of 4% vs. 11% in 4Q´11), caused by the increase on commodities and energy costs.
The most relevant aspect of these results, by divisions, were: (i) Healthcare (constitutes 50% of total sales, growth of +3% in Sales and +4% in EBITDA): Pharma sales growth was flat, with an emerging markets growth that compensates fall in mature markets. (ii) CropScience (17% of total sales, +1% in Sales, +1% in EBITDA) y (iii) Material Science (33% of total sales, flat growth in Sales, -64% in EBITDA): prices increase (+3%) compensated the decrease on volumes, without managing to weigh down on the commodities and energy increased cost, one that has eroded margins (EBITDA margin of 4% vs 11% t 4Q’10). This keeps on being the division that raise more questions.
Company’s prospect Last March 14, the company hold an investors meeting, in which it established a very ambitious set of goals for 2014. By divisions: (i) for the Healthcare division sales are expected to be in the 20 billion euro, with an improvement on EBITDA margin to 24% (vs. 27,4% in 2011). Within this division, for the Pharma segment, sales are expected to reach in 2014 11,5 billion euro. (ii) In the CropScience division they try to strengthen their top position in the market, because they are planning increase in volume over the global growth of GDP (+3,9% estimated by the IMF). We think these goals are realist and reachable and that the company can benefit from the momentum the sector is in. Moreover, we belief that the increasing IT corporate investment and that the evolution on change rates (given that 35% of sales are in euros) will be a deciding factor.
Conclusion In spite of the good performance of the stock this year (+4% YTD), the company keeps on being cheaper than the sector (9,8x PER’13 vs. 10,6x PER’13 of the European Pharma sector). Moreover, it is a clearly defensive company, thanks to the good diversification of their products portfolio, which allows reducing the volatility risk in their operational results. To all this we have to add that they enjoy a great financial flexibility and that the company have shown their intention to keep the A- rating, even if they took some corporate operation. On the other hand we trust on their long term potential for launching new projects (especially Xarelto launching), which we consider to be key to reinforce main business lines growth. Given all this, we would recommend to stay in the stock, even if we expect possible corrections to get in.
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