Bayer Third-Quarter Profit Beats Analyst Estimates

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bayerBayer AG, Germany's largest drugmaker, said third-quarter profit fell less than analysts estimated and raised the earnings forecast for its pharmaceuticals unit after the 17 billion-euro ($22.3 billion) purchase of Schering AG.

Net income fell 35 percent to 320 million euros, or 42 cents a share, from 493 million euros, or 68 cents, a year earlier, Leverkusen-based Bayer said today. That exceeded the 195 million euro median estimate of nine analysts surveyed by Bloomberg. Sales rose 26 percent to 7.78 billion euros.

Schering's Betaferon multiple sclerosis treatment and Yasmin birth-control pills led the drug unit's gain. Bayer expanded the drug division as governments and health insurers around the world cut health-care spending by trimming prices and using generic medicines. Bayer will close sites in the U.S. in a plan to slash expenses by 700 million euros a year to counter higher raw material costs and the crop-science unit's falling profit.

"This is a very good result, and health care is clearly driving it," said Silke Stegemann, an analyst at Landesbank Rheinland Pfalz in Mainz who today raised her rating on the company to "outperformer." "Schering is clearly showing up in these results."

Shares of Bayer rose 69 cents, or 1.8 percent, to 39.69 euros at 1:25 p.m. in Frankfurt. Before today, the stock had gained 12 percent this year, lagging behind Germany's benchmark DAX stock index, which grew almost 19 percent. Of 30 analysts who cover Bayer, 15 recommend buying the stock, 12 holding it and three say it should be sold.

Raised Forecast

The health-care unit's underlying earnings before interest, taxes, depreciation, and amortization, or ebitda, will be about 22 percent this year, up from a target of 20 percent the company set in August. The company plans to cut as much as 10 percent of the workforce after the Schering purchase.

Revenue at the crop chemicals unit declined 5.9 percent in the quarter, while sales at Bayer's material science unit rose 12 percent.

"It will be the pharmaceutical element that will provide the spice, but the others will have to kick in with good profitability in what may be becoming an increasingly difficult cycle," Gary Dugan, chief investment officer at Barclays Wealth, said in an interview.

Bayer, whose third-quarter earnings were held back by 106 million euros of costs from the purchase, outbid German rival Merck KGaA for Schering.

Schering Boost

With Betaferon and Yasmin helping increase sales now, Bayer is betting it can get growth at the health-care unit from the Nexavar cancer treatment and other new medicines.

Nexavar belongs to a new class of cancer products that choke off a tumor's blood supply. Last quarter, Nexavar was outpaced by Pfizer Inc.'s rival drug Sutent. Nexavar sales grew 41 percent in the quarter, while revenue from Sutent rose 75 percent, according to a note from HVB Group analyst Andreas Heine.

Underlying ebitda, which analysts consider an important benchmark for Bayer, rose 38.5 percent to 1.5 billion euros. Underlying ebit is expected to be 3.5 billion euros this year, compared to 3.15 billion euros last year. The Schering integration is on schedule, the company said today.

"Our integration projects are now in full swing. We have decided on our organization structures in all major countries at various levels of management," Chief Executive Officer Werner Wenning said in an interview. "We're fully on course. We have a string of products and projects that make us very confident about the future development of Bayer Schering Pharma."

Last week, Bayer said it will sell the H.C. Stack unit to private equity companies Advent International and Carlyle Group for 1.2 billion euros. This deal and the planned sale of the Wolff Walsrode unit will help finance the Schering acquisition.

Cost Cutting

Bayer is also cutting jobs to reduce costs. The company said earlier this month is will trim more than 800 jobs in the U.S., closing facilities in Connecticut and California to save $210 million a year by the end of 2008.

That's almost one-fourth of the amount Bayer plans to save as a result of the Schering acquisition. Other drugmakers, including Pfizer, are closing plants and cutting jobs after making acquisitions during the past 10 years and losing revenue from patent expirations.

Last month, Bayer's Wenning said the company will spend more than any other German drugmaker to find and develop new medicines after buying Schering in July. Bayer will devote 1.9 billion euros to research and development this year, Wenning told journalists Oct. 31. The amount didn't include Schering's research budget.

source - Bloomberg