What's Ailing Bayer?

Profits are up, but the German pharma giant has seen one drug pulled and another fail trials. The future holds one blockbuster—and lawsuits

by Kerry Capell

Photo: Bayer HealthCare AG

On Feb. 28, German drug and chemicals conglomerate Bayer (BAYG.DE) is expected to report some of its best results in recent years. Analysts forecast sales to rise by more than 10%, to $49 billion, with earnings up 22% before exceptional items and acquisition charges of $10.2 billion. Flush with success, the Leverkusen company announced plans on Feb. 26 to increase its dividend by 35%. "2007 was a very good year for Bayer and we would like our stockholders to participate appropriately in this success," Chairman Werner Wenning said in a statement.

Bayer's shareholders are in need of bit of a sweetener. Despite the company's strong profit and revenue growth, shares are down 15% since the start of the year following a string of setbacks that no amount of aspirin is likely to cure.

The bad news kicked off on Feb. 18, when the company announced it was scrapping a late-stage trial for one of its most promising new drugs, cancer treatment Nexavar, after it failed to improve survival rates in lung cancer patients. The drug is already approved to treat liver and advanced kidney cancer, but analysts say lung cancer offered the biggest commercial potential.

Heart Drug Pulled From Market

Only two days later, on Feb. 20, Swiss drugmaker Novartis (NVS) and Denmark's Novo Nordisk (NVO) sued Bayer for patent infringement, claiming the German company's hemophilia drug Kogenate, which is expected to post sales of $1.3 billion this year, infringes on their intellectual property.

That was followed by the publication of two new studies in the Feb. 21 edition of the New England Journal of Medicine, one of which was funded by Bayer, which noted that heart surgery patients were more likely to die if given Bayer's anti-bleeding drug Trasylol. The drug, approved in 1993 and known generically as aprotinin, is designed to prevent blood loss during heart bypass surgery and is estimated to have been given to 4.8 million patients worldwide. The drug generated peak sales of $338 million before it was pulled from the market in November, 2007. Bayer contends both studies are flawed, including the one it underwrote.

The burst of bad news came just as Germany's oldest and largest pharmaceutical company seemed to have put its troubles behind it. Seven years ago Bayer was forced to recall its cholesterol-busting statin, Baycol, after the drug was implicated in more than 100 deaths. Bayer paid more than $1.2 billion in settlements. The $19.6 billion acquisition of rival German drugmaker Schering in 2006 promised to revitalize Bayer's ailing drugs business (BusinessWeek.com, 3/24/06), and the company undertook a major restructuring, slashing 6,100 jobs last year alone.

Setback for Cancer Drug

The strategy was to strengthen Bayer's focus on health care, which includes prescription drugs and over-the-counter medicines such as Alka-Seltzer, Bayer Aspirin, and the painkiller Aleve (naproxen sodium). Health care now accounts for nearly 50% of total revenues, up from 34% in 2005. (The balance is from chemicals and crop science.) Within prescription drugs, the company has benefited from the strong growth of best-selling contraceptive Yasmin, multiple sclerosis treatment Betaferon-Betaseron, cancer drug Nexavar, and hemophilia drug Kogenate.