What's Ailing Bayer?

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Nexavar is considered one of the company's most important drugs and its disappointing results in the lung cancer trial are a serious setback, analysts say. "It was one of the few growth drivers for Bayer in the coming years," says Markus Metzger, an analyst at brokerage Vontobel (VONN.DE) in Cologne. The company says it will "continue to investigate Nexavar's potential across a wide variety of tumors." But it is lung cancer, Metzger says, that could have turned the drug into a blockbuster, with peak sales well over $1 billion. "Now this is in question."

More troubling is the controversy still swirling around heart drug Trasylol. The two new studies in the New England Journal of Medicine are likely to reignite the controversy that has surrounded the drug for years because they confirm an earlier NEJM study conducted in 2006 by Dennis Mangano, the founder of the San Francisco nonprofit Ischemia Research and Education Foundation. His findings prompted a U.S. Food and Drug Administration hearing on Trasylol's safety in September, 2006.

Used in One-Third of Heart Surgeries

At the time, Bayer had preliminary results of one of these new studies in hand but says it mistakenly failed to disclose them. This led to charges of a cover-up, which Bayer vigorously denies. Still, Mangano estimates if the FDA had removed the drug when his study was first published in January, 2006, instead of waiting until November, 2007, some 22,000 lives could have been saved.

Now with scientific evidence building, many legal experts expect a tidal wave of litigation. Trasylol is already the subject of more than 200 lawsuits currently pending in U.S. state and federal courts. Jim Ronca, a partner at Philadelphia personal injury law firm Anapol Schwartz, who is currently handling several Trasylol cases, says his firm has been inundated with calls from potential plaintiffs. "This drug has been used in at least one-third of all cardiac surgery in the U.S.," Ronca says. "Now with the growing body of scientific evidence showing that the risks of Trasylol outweigh the benefits, the number of cases could increase substantially, potentially by tenfold."

The problems of Nexavar and Trasylol leave Bayer overly dependent on what many analysts describe as the real jewel in Bayer's future, anti-clotting drug rivaroxaban. The drug is likely to get approval to prevent deep vein thrombosis after orthopedic surgery sometime next year. Its big advantage is that it's given orally, in pill form, vs. the standard treatment—the injectable blood-thinner heparin.

Antiquated Business Model

Bayer also hopes that by 2011 it will secure approval to use the drug to prevent strokes and treat deep vein thrombosis resulting from atrial fibrillation. If this happens, the drug could be a multi-billion dollar blockbuster for Bayer and Johnson & Johnson (JNJ), which holds the rights to market it in the U.S., analysts say. "With rivaroxaban, Bayer has the chance to close the gap with the rest of the industry," Metzger says. "But it might take more than that to get back in the top league in pharmaceuticals."

As one of the few old-line conglomerates with businesses from crop protection to polymers to prescription drugs, Bayer has consistently resisted calls for its breakup. Since buying Schering, Chairman Wenning has spoken often of the company's intention to strengthen its focus on health care. But given the recent setbacks some observers wonder whether Bayer is big enough and focused enough to compete with global giants such as Novartis, Pfizer (PFE), or Britain's GlaxoSmithKline (GSK). Analysts concede the company's antiquated business model is a drag on Bayer's share price.

But a breakup doesn't look likely. For starters, no acquirer—pharmaceuticals or chemical or crop science company—is likely to want to buy all three businesses. And Bayer, with its 145-year heritage, shows no indication of wanting to sell. "Bayer wants to focus more on health care, but its roots are in chemicals as well as drugs," says Alvaro Navarro, an equity analyst at Madrid investment bank Ahorro. "Change is difficult."

Capell is a senior writer in BusinessWeek's London bureau .