Bayer fallout continues

August 9, 2001 Posted: 1044 GMT

LONDON (CNN) -- German drug maker Bayer on Thursday posted a sharply lower quarterly profit and announced 1,800 job cuts, a day after withdrawing one of its most promising products on safety concerns.

Europe's second-largest drugs and chemicals company said Thursday its operating profit from continuing operations fell 45 percent to 508 million ($449 million) from 920 million in the three-month period a year earlier.

That fell short of the forecasts of analysts polled by Reuters, who expected operating profit of between 693 million and 883 million. Sales from continuing operations rose 5.6 percent to 7.96 billion.

On Wednesday, Bayer had issued its second profit warning in three months as it halted sales of Lipobay, also sold as Baycol, a cholesterol-lowering drug that has been linked with at least 40 patient deaths.

The company's stock, which plunged 18 percent in Frankfurt on Wednesday, slipped a further 1.7 percent on Thursday to close at 36.90.

Bayer said in response to the financial ramifications of withdrawing Baycol it will expand its cost-saving measures to save 1.5 billion by 2005.

In its polymers business, Bayer will cut 1,800 jobs worldwide and close one production plant. In its pharmaceutical business, Bayer plans to consolidate the consumer care division in Europe and in North and Central America, closing one production facility in Indiana.

In an earlier cautionary statement published in June, the company said that the U.S. economic slowdown has spread globally, cutting demand for its chemicals, and warned of a further downward effect on profit from slowing shipments of its haemophilia drug Kogenate. 

The U.S. Food and Drug Administration found bacteria present in some of the manufacturing stages of Kogenate in November, forcing the company to halt shipments in January.

That and the withdrawal of Baycol is expected to slash this year's earnings at its healthcare business by 40 percent-to-50 percent. The company has said it no longer expects to meet its target of improving operating margins by 20 percent.

The company said it recalled Baycol after it received reports that the drug caused deterioration in muscle tissue, a condition called rhabdomyolysis, which is known to cause severe pain and potential kidney failure.

The drug was expected to generate sales of 1 billion this year, Bayer said, up from 636 million last year. Chief Financial Officer Werner Wenning said on a conference call on Wednesday earnings would fall by between 600 million and 650 million this year, and 250 million-to-300 million would be booked as an exceptional charge

"In view of the financial burden and loss of earnings in the Health Care segment resulting from the withdrawal of Lipobay/Baycol, as well as the continuing weakness of the world economy, which particularly affects the industrial business, it is now assumed that operating profit for the full year will fall substantially short of previous estimates," the company said.

Before Wednesday's shock, Bayer, which makes products ranging from Aspirin to chemicals for industry and fragrances for perfumes, had forecast that its operating profit for 2001, excluding one-time effects, would drop to about 3 billion from 3.3 billion last year.

Bayer's troubles increased calls from investors that it should split its operations and possibly merge its drugs business with another company.

"The results are disappointing and should further fuel the concerns which began yesterday," Boris Boehm, fund manager at Nordinvest in Hamburg, Germany, told Reuters.

"It says to me that Bayer is now forced further into the situation where they have to look for a merger with another company. The bright spot of Bayer, the pharma part, has now failed," Boehm said.

Bankers also indicated the threat of a hostile takeover is set to grow.

On Wednesday Bayer Chief Financial Officer Werner Wenning said in a conference call that Bayer's pharmaceutical business is not for sale.

And on Thursday, Bayer Management Board Chairman Dr. Manfred Schneider said in a statement that the company is "currently analyzing the situation and will then draw the necessary conclusions, but hasty reactions will not get us anywhere at this stage."

U.S.-based analysts said there were no rumors of a large company moving in for Bayer's drug business just yet, but did not rule out the possibility.

"I'm sure there are a lot of companies that are interested, but it's not a business that a big pharmaceutical company would be interested in," said Larry Smith, analyst with Tucker Anthony Capital Markets. "Baycol was the driving drug of that business."

Smith said there's always a buyer for a pharmaceutical property, but interested parties would most likely be GlaxoSmithKline or American Home Products (AHP: down $1.50 to $56.26, Research, Estimates), rather than Merck (MRK: down $0.03 to $67.82, Research, Estimates), Pfizer (PFE: up $0.65 to $40.75, Research, Estimates), or Schering-Plough (SGP: down $0.10 to $38.25, Research, Estimates).

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