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Glass Half Full for Bayer

Bayer (NYSE: BAY  ) is the latest company to find itself in hot water over a drug recall. But as the company gears up to burnish its image, the improvement in its financial performance promises to more than offset any future legal difficulties.

The German drug and chemical giant posted a net profit of $42 million, reversing a massive loss recorded in the same period last year. Revenue also showed welcome improvement, rising 3.4% to $8.8 billion. Looking ahead, the company now expects that revenue growth in the fourth quarter will be on par with that for the first four quarters, rather than up just slightly as it had anticipated previously. Underlying earnings before interest and taxes are forecast to be "well above" last year's fourth quarter.

Indeed, optimism appears to be in the air for Bayer. The purchase of Roche's over-the-counter drug business along with the coming spinoff of its low margin chemical business Lanxess should serve Bayer well over the long term. In keeping with the buoyant attitude, Bayer is reportedly launching a new media campaign to enhance its brand in the minds of consumers.

Unfortunately, the company is also battling some demons with its ad blitz. A recent article in the Journal of the American Medical Association asserted that the firm knew of the dangerous side effects of its cholesterol-reduction drug Baycol long before it pulled it from the market. Now rumors are swirling about the possibility of the FDA launching a criminal investigation of the matter.

While government action would be unwelcome, it's important to remember that Bayer is not Merck (NYSE: MRK  ) . Pharmaceuticals are just one part of Bayer's business, so a problem in its pharma side is not the end of the world. What's more, the company has made some progress in clearing the liability associated with Baycol by reaching settlements in 2,895 lawsuits related to the medicine. Of the remaining 7,169 suits pending, management believes that fewer than 100 hold a potential for settlement.

In the meantime, Bayer continues to position its pharma segment as a medium-sized entity, while managing its other business lines more efficiently. Phase III trials for BAY-43-9006, a promising oral anticancer drug the firm is developing with Onyx Pharmaceuticals (Nasdaq: ONXX  ) , continue to move forward. Further, Bayer's material science unit is enjoying a strong rebound. Even with the Baycol fallout, Bayer's positives appear to outweigh its negatives.

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Fool contributorBrian Gormanis a freelance writer living in Chicago. He does not own shares of any companies mentioned here.

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