Image source@Visual China
Text: Amino Observations
In April 2019, it was warm and cold in Leverkusen, Germany.
A middle-aged man with slightly bald hair sat in a conference room, subjected to the wave of accusations and disappointed and angry gazes of many investors.
In May 2016, in the same venue, he enjoyed everyone's applause, praise, and eyes full of expectation and trust. Just three years later, the once infinite scenery is gone.
This man was Weiner Baumann, then CEO of the German pharmaceutical giant Bayer, who had just taken office in May 2016.
After 160 years, Bayer has a long past, the legend of the miracle drug aspirin, and the glory moment of 2015, but now, the giant ship has long been stranded. Under Baumann's leadership over the past few years, Bayer has been going through a series of crises.
In the first quarter, Bayer's stock price rose 23% due to the progress of blockbuster drug research and development, and by the end of the year, the overall decline was nearly 40%. If you look at the stock price performance in the past 10 years, Bayer can be said to be the worst big pharmaceutical company, there is no one, the peak market value in 2015 was nearly 130 billion US dollars, and now there are only more than 30 billion US dollars left.
You may say that compared with Pfizer, Bayer has evaporated 100 billion dollars in market value in 10 years, and Pfizer has evaporated 130 billion US dollars in a year, who is more miserable?
Don't forget, Pfizer made a lot of money with the new crown, and also bought a so-called goose that lays golden eggs, and even if the stock price plummeted, it only returned to the level before the skyrocketing three or four years ago. What about Bayer, a hellish marriage with Monsanto, which has left it mired in a quagmire, with its stock price falling to its lowest point since 2007, huge losses, sky-high lawsuits, overwhelming debts, and weak pipelines......
Who seriously injured Bayer, or why did Bayer do this?
In the past, when we talked about the crisis of Big Pharma, we were inseparable from a common problem: the patent cliff. Bayer's crisis today is also inseparable from the patent cliff.
But if you look at it from a different angle, you can see that the management team is also a very important factor. A good team can turn a bad market into a good market, and a very bad market is often not due to the market, but to the people.
In February, Bowman, who had lost investor trust, ended his tenure a year early, and new CEO Bill Anderson announced his employment at Bayer on LinkedIn, saying he couldn't wait to "unleash the company's full potential."
Will he be able to push the Bayer ship to turn again?
CEOs who are no longer trusted
In the 21st century, Bayer's three largest acquisitions were Schering's $19.95 billion acquisition in 2006, Merck's OTC business for $14.2 billion in 2014, and Monsanto for $63 billion in 2016-2018.
These three mergers and acquisitions are all bidding on the halfway of the bull market, and they are expensive.
Strategically, the first two acquisitions have at least strengthened Bayer's pharmaceutical business, with the worst being the acquisition of Monsanto.
Monsanto was once the world's largest pesticide and genetically modified seed company, and the high acquisition costs and large-scale social controversy after the acquisition have left Bayer mired in debt and legal proceedings.
Prior to the acquisition of Monsanto, Bayer had a net debt of $20 billion in 2015 and borrowed another $57 billion from investment banks during the acquisition. How many years will it take Bayer to pay off such a high debt?
To make matters worse, after the completion of the acquisition, Bayer has been in turmoil because of Monsanto's "glyphosate carcinogenic scandal", and was awarded $10.9 billion in damages in 2019 alone, which directly caused Bayer to report a record loss of 10.5 billion euros in 2020, and from June 2018 to May 2019, Bayer's stock price plummeted by 45% in less than a year, and its market value evaporated by nearly $40 billion.
In the face of stark reality, investors and the media unceremoniously called the acquisition a "marriage of hell." And the CEO Bowman, who contributed to this marriage, is no longer trusted by investors, which is why there is the scene at the beginning of the article.
At the annual general meeting in April 2019, all Bayer shareholders expressed a strong sense of distrust towards Baumann. One major shareholder even bluntly stated, "We want to know what else we can do with holding Bayer shares in today's situation." ”
This was the first of its kind for Bayer to be listed in Germany, and it held a vote of confidence against Baumann, which scored less than half of the score. On the European continent, close to 90% shareholder support is the norm.
The Chairman of the Supervisory Board, Wiener Winning, expressed regret for this. However, he stressed that the supervisory board still chose to stand with Bowman. In order to alleviate the dissatisfaction of many shareholders, Bayer announced that it would strengthen its oversight of the company's legal affairs and increase the appointment of outside legal counsel to deal with Monsanto's lawsuit.
In an effort to regain investor confidence in the face of the odds, Bayer announced a restructuring plan at the end of 2018, with plans to sell various assets while laying off 10% of its workforce. However, employees affected by the layoffs staged mass demonstrations. This has once again hit investor confidence.
At the height of Bayer's glory in 2015, it was once considered the most valuable company in Germany, but at that time, Baumann had not yet taken the position. At the end of December 2018, in order to boost morale and restore his image in a state of collapse, Bowman announced his sales forecast for the next four years.
He believes that with Monsanto's help, the company's sales and profits will climb steadily until 2022. Unfortunately, in the first half of the year, Monsanto suffered from extreme weather, and Monsanto was deeply affected by its negative impact, and its business was weak, so it could only deliver a performance that made Bowman slap in the face.
Bayer's share price continues to plummet. When the acquisition was announced in 2016, the market value was around $90 billion, and by the time of the 2019 shareholders' meeting, Bayer's market value had fallen to Monsanto's purchase price of around $63 billion.
Four years later, Bayer has not yet stepped out of the shadow of Monsanto, and its stock price has fallen all the way, hitting its lowest point since 2007, with a market value of only $34.7 billion.
In other words, after this transaction, Bayer's own value and nearly half of Monsanto's purchase price have long been evaporated. The time is also, the momentum is also.
Boom and bust
In a modern joint-stock enterprise, when you meet a qualified professional manager, sometimes you really need some luck.
Bowman's predecessor was Marin Deckers, who served as Bayer's CEO from 2010 to February 2016 and built Thermo Fisher's success step by step through a major restructuring that focused resources on the company's most profitable core business.
Bayer's glorious culmination in 2015, with annual sales exceeding 46 billion euros, net profit increasing by about 18%, setting a new record of more than 10 billion euros, and a market capitalization of nearly $130 billion, can also be said to be driven by Dirks.
The business wizard, who is well versed in corporate restructuring and integration, acquired the consumer products business from Merck and divested the materials science division, which is far removed from its main business, to focus the entire company on the more lucrative life sciences sector.
In fact, over the past decade, Bayer has been accelerating its transformation to reduce its dependence on the chemical business. Previously, Bayer's complex business could be divided into three core segments: healthcare, crop science, and materials science, and although it had a large sales scale ($55 billion in sales in 2014), it had low profits and a single-digit net profit margin, which was much lower than that of pharmaceutical giants of the same size.
In order to improve its profit margins, Bayer has gradually shifted its focus to pharmaceuticals, and although it has not fully transformed, it has strengthened its healthcare business, especially the pharmaceutical business, as much as it can in addition to securing the development of other businesses.
During this period, the sales of blockbuster drugs such as rivaroxaban and aflibercept increased steadily, and the pharmaceutical business accounted for half of Bayer's revenue, and its profitability also increased significantly. Between 2014 and 2017, Bayer's average net profit reached 14.1 percent, far exceeding the 4.4 percent in 2001-2010.
At the end of 2015, Dirks stated: "At the strategic level, we have taken all the necessary steps to make Bayer a pure life sciences company." In his short six-year tenure as CEO, Bayer's share price has risen by more than 200 percent, and the company's strength and value have been greatly enhanced.
Of course, this does not hide the crisis at Bayer. Boom and bust seem to be the law that all businesses cannot escape.
The second-largest acquisition in Bayer's history, led by Dex, proved to be unsuccessful, but what really accelerated Bayer's decline was Bauman's major realignment of the company's development strategy.
Neither did Dix anticipate that shortly after he stepped down, the "pure life sciences company" would be rewritten by his successor.
As a group company spanning prescription drugs, consumer health and agrochemicals, Bayer's advantage is that it covers a wide range of areas due to its diversified layout, and the challenge is that when problems arise in all major business segments, it is quite difficult for the company as a whole.
Looking back, the cause of the sequence of actions is still a perennial question: the patent cliff.
From 2016 to 2020, Bayer's two blockbuster products, rivaroxaban and aflibercept, increased their annual revenue in prescription drugs from 27% in 2016 to 39% in 2020. And as time goes on, these two drugs are getting closer and closer to the expiration of their patents.
In response to the patent cliff, mergers and acquisitions are a common practice in the industry, whether it is a company or a product, and Bayer's choice is the same. The difference is that it has chosen to return to diversification and acquire agrochemical giants.
In 2016, less than 10 days after Bowman took over as CEO of Dirks, he immediately launched the acquisition of Monsanto. A year before taking office, he had proposed a takeover of Monsanto, but was met with strong opposition from Dicks.
At that time, the global agrochemical industry was surging with mergers and acquisitions, DuPont "flashed" Dow to surpass Monsanto to become the world's largest seed and pesticide company, and ChemChina acquired the Swiss agrochemical giant Syngenta for $43 billion.
These two deals have caused a huge shock to the global agrochemical industry, and obviously have a big impact on Bayer, which is one of the reasons why Bowman insisted on acquiring Monsanto.
Most importantly, Bowman argues that as the global population grows, the amount of arable land per capita is shrinking, and based on the rigid need for human beings to have enough to eat, farmers must buy Monsanto's genetically modified seeds to increase the yield per unit of land. Moreover, once you buy the "promising" Monsanto, it can also make up for the decline in sales after the expiration of the patent.
After the disclosure of the acquisition plan, shareholders reacted strongly. If the acquisition is completed, it means that the agrochemical business will account for half of the total revenue, and for Bayer, such a business transformation is tantamount to "a strong man breaking his wrist".
However, Bowman was firm in his strategic judgment.
"The acquisition of Monsanto was, and will continue to be, a step on the right side for Bayer," Bauman said in his opening remarks at the shareholders' meeting. Maybe he thought that with this battle, he would be famous in Bayer's history, but he didn't know that Bayer was completely pulled into the abyss.
The rift deepened
Had it not been for the successive lawsuits, the transforming Bayer would have landed in Normandy as an agricultural empire, and Baumann himself would have left his mark on business history.
Unfortunately, there are no ifs.
After the acquisition of Monsanto, Bayer's sales exceeded 40 billion euros again, but its profitability returned to the level of 10 years ago, and the net profit margin fell to less than 10%.
After 2018, Bayer was unable to invest in large-scale drug research and development, nor was it able to launch high-frequency mergers and acquisitions to expand its product pipeline.
The more immediate cost is the high price of compensation in Monsanto's lawsuit. In 2019, $10.9 billion was paid, and on November 17 this year, Bayer lost the case again, and a jury in the US state of Missouri ruled that Bayer paid $1.56 billion to the three plaintiffs.
According to regulatory filings, there are still about 50,000 claims pending.
Against the backdrop of successive losses in the Monsanto lawsuit, all the shortcomings of Bayer under Bowman are being magnified. The weakness of the health care and medical business, the chaos of strategic transformation, the huge financial pressure, and the plummeting stock price have all become the excuse for shareholders to attack Bowman.
In fact, back in 2019, a significant number of shareholders had reservations about changing the CEO.
"With such a drop in stock prices, we can't possibly vote for Bowman, but asking for management to be fired now will only lead to even more chaos. A representative of the German fund company Deka believes that Bayer is currently in the dual dilemma of transformation and Monsanto disputes, and it is too risky to change the leadership rashly.
The rift between shareholders and management is deepening.
Shareholders have been asking Bayer to spin off and reorganize its Crop Science division to get rid of Monsanto's heavy burden as soon as possible. But the board of directors, headed by Bowman, has been under pressure from shareholders and continues to drive on the original course, "I can assure you that we will do everything we can to win back the trust of the capital market." ”
In the past two years, under the trend of almost all big pharmaceutical companies spinning off and focusing, Bayer under the leadership of Bowman seems to have become an outlier.
Bowman didn't stand a chance. Due to the unusual dissatisfaction of shareholders, Bowman ended his term a year early in February.
The new CEO, Anderson, is the former CEO of Roche and is very popular on the board. Bayer's chairman considers Anderson to be the "ideal candidate" for the CEO position, stating that "he has an excellent track record of building strong product pipelines and translating biotech breakthroughs into products." ”
The implication is that Bayer may be back on the life sciences trajectory.
Perhaps more important to Bayer shareholders is that during Anderson's tenure at Roche (2019-2022), Anderson underwent large-scale reforms, cutting management and recharting the direction.
For now, they undoubtedly want Bayer to find a strong reformer to lead Bayer anew.
Can it turn the tide?
On Nov. 19, Bayer said it had closed its phase 3 trial of Asundexian due to the lack of efficacy of Asundexian, a new anticoagulant drug to prevent stroke.
This is even worse for Bayer and Anderson.
Among anticoagulant drugs, rivaroxaban, which Bayer cooperated with Johnson & Johnson, was once one of the top 10 blockbuster small molecule drugs in the world in terms of sales, with sales of about $6 billion in 2022. However, in 2020, the rivaroxaban patent expired in China, and from 2023, the patents in the European Union, the United States, and Japan will also expire one after another.
In response to this patent cliff, Bayer began looking for a replacement early on, and Asundexian emerged as its top drug candidate. Bayer had expected annual sales of Asundexian to exceed 5 billion euros, but the results showed that it was less effective than Eliquis, a vascular thinner jointly developed by Pfizer and BMS.
Fund managers at Germany's third-largest asset manager said the abandoned asundexian trial was "a major setback for Bayer". In his opinion, Asundexian is the most promising drug in Bayer's pharmaceutical pipeline. "Without it, there would be no sustainable growth in the pharmaceutical sector. ”
Indeed, even Anderson bluntly said that in the face of the patent cliff, Bayer's late-stage pipeline is very weak. Bayer's stock price plummeted nearly 20 percent after the announcement of the clinical termination, the largest one-day drop in history, and the stock price also reached its lowest point since 2008.
In fact, in the six months since he became CEO of Bayer, Anderson has been trying to focus more on his core business. "We are restructuring Bayer so that it focuses only on the business that is essential to our mission and abandons everything else. ”
At the same time as the release of the third quarterly report, Bayer announced that it would spin off and reorganize. As part of the restructuring, Anderson is evaluating the spin-off of its consumer health or crop science divisions, but has ruled out splitting the company into three, while Bayer will also make significant layoffs, starting with various management. Anderson noted that Bayer has "too many 12 layers of management" between its customers and will significantly reduce management positions in 2024 in order to speed up decision-making and operational efficiency.
Bayer may also reorganize the assets of the pharmaceutical division, for example by increasing the tilt of the CGT.
According to the data, Bayer has invested more than $5 billion in CGT over the past five years. The acquisition of AskBio was announced in October 2020 alone, and the deal was as high as $4 billion. AskBio's product portfolio covers neuromuscular, central nervous system, cardiovascular and metabolic, rare diseases and other fields.
According to Stefan Oelrich, President of Bayer's Pharmaceutical Division, these investments provide the company with a series of value pipelines, including bemdaneprocel, a cell therapy for Parkinson's disease that will enter Phase II clinical trials in 2024. In October, Bayer also invested USD 250 million in a new plant in the United States, which will initially serve the production of Bembaneprocel.
In November, Bayer said in an interim statement that it expected a further decline in the company's profitability and that free cash flow could be zero. Some analysts believe that Mr. Anderson's move is seeking to quickly release bad news all at once in order to replan the business.
After the stock price plummeted on the 21st, Bayer announced a comprehensive reform strategy, emphasizing that it will not carry out large-scale mergers and acquisitions, focusing on its early pipeline, which has already obtained 8 INDs this year, and plans to use its domestic resources in Germany to reduce costs.
But the market didn't buy it. The day after the crash, Bayer's stock price fell another 3%. The giant ship is still running aground, and it remains to be seen whether Anderson will be able to turn the tide.
Revelation of the stranding of the great ship
If Bayer is regarded as a giant ship, then strategy determines the course of the giant ship, and execution is like an engine. If the strategy is wrong, no matter how strong the execution is, it will not reach the destination.
In a way, the past attempts to strike a balance between the two industries have contributed to its current decline.
The long-term strategy for the development of giant enterprises is to continuously integrate and accumulate resources around the strongest business. Specific to the pharmaceutical industry, looking at the development of overseas large pharmaceutical companies, whether it is Pfizer, Novartis, Sanofi, AbbVie, or Amgen, all of them have achieved long-term development by continuously building the competitiveness of their main business in decades or even hundreds of years.
Even though Johnson & Johnson, which is also diversified, has strong pharmaceuticals, medical devices and consumer health segments and is highly relevant, Johnson & Johnson has now chosen to spin off its consumer health division in order to better focus on its core business and further improve its competitiveness in the global healthcare market.
Five years ago, Bayer gave up the pharmaceutical industry that should have been further consolidated and bought Monsanto, which completely changed the trajectory of Bayer's development.
In horizontal comparison, Novartis, which is also a chemical giant, has chosen the opposite path to Bayer and is driving farther and farther on the pharmaceutical route.
In 1996, Swiss chemical giant Ciba-Geigy merged with Sandoz, and the new company was renamed Novartis (Novartis, Latin for "new technology"). In 2014, Novartis, which was successfully reborn from the chemical industry, once replaced Pfizer and topped the list of global pharmaceutical giants.
Boom and bust.
In the years that followed, Novartis continued to decline in the rankings due to declining revenue and sluggish growth, ranking seventh in the world in 2022.
In order to return to growth, Novartis has embarked on reforms such as divesting Sandoz, streamlining pipelines, laying off employees, accelerating the slimming program, and further focusing on certainty, so as to improve the company's asset quality and profitability. In the first quarter of this year, Novartis raised its full-year sales and profit forecasts, expecting full-year sales to grow in the mid-to-high single-digit range.
The performance growth exceeded expectations, making Novartis "dance with the elephant" again, and the stock price rose by more than 13% for the year. In July, the market capitalization hit a record high of $209.5 billion. Bayer has the same revenue size, but its current market capitalization is less than one-fifth of Novartis'.
From the experience of Bayer and Novartis, we can also get a glimpse of the core wisdom of modern enterprise development. Focus your business on the most profitable industries you can reach. Only scarce commodities have the highest exchange value, and the scarcity of today's society must be achieved through new science and technology.
Under Anderson's leadership, Bayer is getting back on the line.
"I have a very good feeling about the quality of our R&D team, our R&D strategy and our early-stage pipeline," said Anderson, who is operating a machine that is producing a range of promising new drugs.
At the same time, he doesn't think Bayer's pharmaceutical division is too small and has a low R&D budget to keep up with bigger competitors. "Ten years ago, the two pharmaceutical companies with the lowest R&D spending were Eli Lilly and Novo Nordisk, and today they are two of the most valuable pharmaceutical companies in the world. ”
But before he can become the next most valuable pharmaceutical company, he also needs to address the legacy of his predecessor.