Revenues Rise at Bayer

Mar. 1.11 | About: Bayer A.G. (BAYRY)

Bayer AG’s (OTCPK:BAYRY) earnings per share during the fourth quarter of 2010 came in at €0.95 (approx $1.29) compared to €0.90 (approx. $1.33) in the year-ago period. Bayer incurred €825 million towards impairments and asset write-downs, €67 million towards litigations in the US and €62 million towards restructuring and healthcare during the quarter.

The company recorded a 14.5% growth in revenues to €9,012 million. Growth was witnessed across all divisions at Bayer. Net sales improved 8% (portfolio and foreign exchange adjusted) driven primarily by higher volumes. Higher selling prices contributed 2% to the increase reported in the final quarter of 2010.

The three major segments: Healthcare, Material Science and Crop Science accounted for approximately 45.6%, 26.7% and 5.3%, respectively, of total revenues during the reported quarter. Revenues from the Material Science, Crop Science and the Healthcare segments improved by 28.2%, 18.2% and 7.3%, respectively. Exchange rates had a positive effect on earnings in the reported quarter.

Net cash flow improved 10% in the reported quarter to €1.9 billion. Free operating cash flow improved 11% to €1.4 billion. Bayer brought down net financial debt by €1.2 billion during the quarter. Net financial debt at the end of the final quarter of 2010 stood at €7.9 billion.

Annual Results

For full year 2010, Bayer earned €4.19 (approx $5.50) compared to €3.64 (approx. $5.10) in 2009. 2010 revenues climbed 12.6% to €35,088 million. The Zacks Consensus Estimate hinted at earnings of $5.56.

The Healthcare segment recorded revenues of €16,913 million in 2010 compared to €15,988 million in 2009. The improvement in this segment is a result of an 8.8% growth in Consumer Health and a 4.2% growth in revenues from Pharmaceuticals. Products such as Kogenate (foreign exchange adjusted 10.3% growth) and Nexavar (foreign exchange adjusted 11.9% growth) performed impressively during 2010.

The Pharmaceuticals segment witnessed strong growth in the Asia/Pacific and Latin America/Africa/Middle East markets. North American sales in 2010 were hurt by the disappointing performance of the Yaz family of oral contraceptives mainly due to low US demand resulting from increased generic competition. The US Healthcare reform also negatively impacted the performance of the segment in 2010.

Growth in the Consumer Health subgroup, comprising Bayer’s over the counter (OTC) drug business for human beings and animals, was driven by impressive performances across all regions, primarily the North American markets. Sales in the Consumer Care unit benefited from strong performances of pain reliever Aleve and dermatological treatment Bepanthen/ Bepanthol.

The Medical Care unit was hurt by weakness in the US diabetes care market. The Animal Health unit performed impressively in 2010 driven by the Advantage line of flea, tick and worm control offerings.

Sales in the Material Science segment climbed 35% to €10,154 million in 2010. Results were helped by higher selling prices for the products, which more than offset the negative effect of increased raw material prices. The company noted that demand increased significantly in Bayer’s primary customer industries.

Sales in the Crop Science division improved 4.9% to €6,830 million in 2010, mainly because of the impressive performance of the Environmental Science/BioScience subgroup (up 23.1%). The Crop Protection unit performed disappointingly in 2010 mainly due to generic competition.


Apart from disclosing financial results, Bayer also provided guidance for 2011 and 2012. Bayer projects currency- and portfolio-adjusted sales growth in the range of 4% - 6% in 2011. Revenues for 2011 are expected between €35 billion and €36 billion. Earnings are expected to increase by 10%. The Zacks Consensus Estimate for 2011 is $6.29.

For 2012, Bayer expects sales to grow by 5%. Earnings are expected around €5.00 in 2012. The company intends to invest €15 billion towards capital expenditure and research & development.

Our Recommendation

We have an Underperform recommendation on Bayer primarily because of the lack of near-term late-stage catalysts, increasing generic competition and rising development costs. Moreover, any hiccups or delays in the US approval of blood thinner Xarelto, which has been co-developed with Johnson & Johnson (NYSE:JNJ), will weigh heavily on the stock.

Furthermore, we believe that the US Food and Drug Administration’s (FDA) approval of Boehringer Ingelheim’s Pradaxa last year will eat into the upside potential for Xarelto. These negative factors cause us to believe that there is little reason for investors to own the stock at current levels.

Our long-term negative sentiment on the stock is supported by the Zacks #4 Rank (Sell recommendation) carried by Bayer in the short-term.