Bayer Needs Aspirin -- Or a Buyer

Germany's Bayer AG has been doing deals with biotech drug makers, aiming to fill its ailing drug pipeline. That pipeline just got emptier, with today's announcement that Bayer's pulling its Baycol/Lipobay cholesterol drug, slated to hit $876 million in revenues this year. The company denies that the drug unit's on the auction block, but that may be because almost all of the big drug makers don't need it.

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By Tom Jacobs (TMF Tom9)
August 8, 2001

Most people know big drug maker and Europe's number-two chemicals maker Bayer AG (OTC: BAYZF) only for Bayer aspirin, in large part because investors outside of Europe can't yet buy the shares on the Nasdaq or New York Stock Exchange. But it may become a lot more prominent soon: With Bayer's drug business failing and not much in the pipeline between now and the distant future of alliances with biotechs, few believe management's protestations that it's not for sale. 

The latest bad news: Today the company announced that it will withdraw its cholesterol-lowering drug Baycol/Lipobay from the market due to negative side effects: The company will not confirm deaths, but the U.S. Food & Drug Administration reports 31, reportedly due to side effects of the drug in combination with another drug. Because the other drug is not sold in Japan, Bayer will continue its sales there. 

The withdrawal eliminates an estimated $876 million in revenue from the ailing company's top line for this year, and there are no heavyweight -- or even middleweight -- contenders on the horizon. The FDA in January stopped shipments of Bayer's hemophilia drug Kogenate due to contamination, and side effects forced the company to halt development of an asthma drug in June. 

Bayer has made key drug target and discovery deals worth up to $1.8 billion with Millennium Pharmaceuticals (Nasdaq: MLNM) and CuraGen (Nasdaq: CRGN). The company hopes these deals will fill its drug development pipeline. But while the first targets from the Millennium deal are emerging, no drug has yet entered human trials, so products are years from possible approval and marketing. The CuraGen deal, meanwhile, was struck only this year. (We make drug discovery and development clear for you at our InDepth: Pharmaceuticals page.) 

Who would buy?
The company has long denied speculation about the possible sale of Bayer's pharmaceutical business. Instead, it has stood stoically by while mergers and acquisitions have created mega-drug companies such as U.K.-based GlaxoSmithKline (NYSE: GSK), the amalgam of such venerable names as Burroughs Wellcome, Glaxo, and Smith, Kline & French (does that date me?), and Pfizer (NYSE: PFE), at $255 billion the world's largest drug maker by market capitalization.

It's tough to guess the market value of Bayer's pharmaceutical business, which contributed about a third of the company's $30.9 billion in FY 2000 revenue. For a company valued at $24 billion based on today's close in Europe, the drug business might go for a bargain price of somewhere between $8 billion and $16 billion, assuming that it's a higher-margin business than Bayer's chemicals, agriculture, and polymers divisions. Add in a share of Bayer's $2.8 billion in long-term debt, and a wild-eyed, back-of-the-envelope guess is that the company wouldn't sell for less than $10 to $20 billion. 

That's a lot of money to pay for a company with declining revenues and no big drugs coming through. The only potential source of real value for a big drug maker looking to add future revenues in a cost-effective manner are drug target discovery deals, such as those with Millennium and CuraGen. Because Bayer committed up to $1.8 billion in payments, company financial experts must have estimated potential future drug profits at many times that.

If anyone would be a suitor, it would likely be a company that hasn't bought or made a huge investment in a biotech drug maker, and which thinks that it can get Bayer's genomics deals for a good price relative to future value. That eliminates Johnson & Johnson (NYSE: JNJ), which has Centocor and Ortho Biotech, American Home Products (NYSE: AHP), with its share of Immunex (Nasdaq: IMNX), and Pfizer, with its Agouron unit. 

Merck (NYSE: MRK) may need some pipeline bolstering, but it may have staked its claim by acquiring bioinformatics tool company Rosetta Inpharmatics (Nasdaq: RSTA). In the U.S., that leaves only smaller big pharmas, such as Bristol Myers Squibb (NYSE: BMY), Schering-Plough (NYSE: SGP), or Eli Lilly (NYSE: LLY), who might not have the stomach to issue the stock or debt required to buy. No wonder Bayer hasn't sold: There may be no buyer.

There is one outside possibility. GlaxoSmithKline's exclusive deal with Human Genome Sciences (Nasdaq: HGSI) for drug target discovery expired last month. It might be looking for more. After the huge merger of GlaxoWellcome and SmithKlineBeecham, this would be a piece of cake.

For now, Bayer denies any plans to deal, and still reportedly plans to buy Aventis' (NYSE: AVE) and Schering AG's (NYSE: SHR) CropScience business. Stay tuned.    

Tom Jacobs (TMF Tom9) enjoys watching The Weakest Link. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.

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