Bayer Sheds R&D Projects Ahead Of Joint Venture, Is Flexible On Control

Bayer is reducing the size of its R&D pipeline through product eliminations and outlicensing opportunities to maximize its influence over a future pharmaceutical partnership, Management Board Chairman Werner Wenning announced Nov. 12.

"These measures are primarily aimed at maximizing the value of Bayer's pharmaceuticals business, and thus also our influence in a future partnership," the exec said during the company's fall financial briefing in Leverkusen, Germany.

"We must exploit the full potential of our own business, press on with restructuring and fully support the market launch of new products," he said. "The more successful we are here, the more weight we will carry in a partnership."

Therefore, to "concentrate our development activities on the most promising projects," Bayer will outlicense two investigational respiratory products - a Phase II PDE IV inhibitor for respiratory infections and a Phase II interleukin-4 antagonist for asthma.

Bayer has already discontinued work on its once-daily oral phosphodiesterase-4 inhibitor (BAY 19-8004) in asthma; a decision in chronic obstructive pulmonary disease was awaiting a comprehensive review of Phase II results (¹ (Also see "Bayer Comparing Vardenafil To Viagra In Attempt To Gain Edge In ED Market" - Pink Sheet, 25 Jun, 2001.), p. 10).

The company will also cease development of the Phase III broad-spectrum antibiotic faropenem and Phase I oncologic camptothecin I.V., "as the results of clinical trials make it unlikely that we could market these drugs successfully," Wenning told investors.

A faropenem NDA was expected to be filed in the third quarter of 2002; the antibiotic has been cited by Bayer as one of three new molecular entities to be launched between 2003-2006.

Intravenous camptothecin (BAY 38-3441) has been under development for advanced cancer. Pharmacia's Camptosar (irinotecan) and GlaxoSmithKline's Hycamtin (topotecan) are two camptothecin analogs.

R&D spending will be adjusted accordingly, to less than 20% of sales, compared to the current level of 28%, Wenning said. The R&D cutbacks will start immediately and continue into 2004.

Bayer's decision to seek a joint venture in pharma stemmed from two major setbacks: the August 2001 withdrawal of the cholesterol drug Baycol (cerivastatin) and past manufacturing problems with the hemophilia biologic Kogenate .

While Bayer has repeatedly stated that it would "remain in the driver's seat" in any deal, the company now says it will consider partnerships in which it does not assume a majority holding. "A possible partnership must not be prevented by rigid insistence on Bayer having a certain shareholding," Wenning maintained.

"We can no longer realistically expect Bayer to have a majority interest in a partnership that would at the same time benefit our business. Therefore, the pursuit of this option is currently no longer a priority."

Wenning indicated, however, that a minority holding is not under consideration.

In response to an analyst's question characterizing Bayer's stake as a "minority" holding, he said: "I never used, I will not use today, and I didn't use yesterday the word 'minority.' I didn't talk about 'minority,' just to clarify." His comments leave open the possibility that Bayer is in talks over a 50%-50% joint venture.

Bayer's decision to change its "strategic restrictions" appears to reflect an inability to sign a deal under which it would retain a controlling interest.

With its largest selling drug withdrawn and its most promising pipeline product - the erectile dysfunction drug Levitra (vardenafil) - tied up under a marketing agreement with GlaxoSmithKline, Bayer may have had trouble finding a joint venture under those criteria.

In explaining Bayer's change of heart, Wenning noted that along with the Baycol withdrawal, the company faces certain market challenges. "Our products are roughly 90% in the [general practitioner] market....You know how competitive [the] situation is in this market and what are our capabilities with today's existing portfolio and with our future new products...to be competitive."

Partnership discussions are ongoing. Bayer is "involved in very good and constructive discussions along the lines I've mentioned," he said. "We are confident that these discussions will lead to a value-enhancing solution for our pharmaceuticals business."

The exec declined to give a specific timeline by which a deal might be announced. "Due to the fact that this decision is one of the most important for Bayer and for the future of the Bayer group, we will put ourselves under tremendous pressure to present as quickly as possible," Wenning said. However, "to mention a specific timeframe is unrealistic."

In August, Bayer suggested an announcement could come by the end of the year (² (Also see "Bayer Pharma Partnership Announcement Expected By Year-End" - Pink Sheet, 5 Aug, 2002.), p. 34).

Wenning stressed that an outright sale of the pharmaceutical business is not under consideration. "It does not make any sense for us to divest only healthcare" because "when we have finished our restructuring process, we will be able to generate value" across the entire company.

Bayer is also in the final stages of finalizing its blood products joint venture with Aventis. The deal includes hemophilia A marketing rights for Aventis' Helixate FS/NexGen and Bayer's Kogenate FS (³ (Also see "Bayer Finds Partial Pharma Partner In Aventis Blood Products Joint Venture" - Pink Sheet, 25 Feb, 2002.), p. 17).

Kogenate manufacturing appears to be back on track, with 900 mil. units to be produced in 2003, compared to 520 mil. in the first nine months of this year. FDA recently approved six 200 liter fermenters in Berkeley, Calif. (⁴ 'The Pink Sheet' Oct. 7, In Brief). Kogenate sales were up 123% to $96 mil. in the third quarter.

Healthcare sales, however, which includes pharma and biologics, were down 4.9% to $2.3 bil. in the third quarter, due to lower sales of Cipro (down 30%) and Adalat (down 24%). Bayer said it sees "limited potential" to grow pharma earnings in the short-term.

Going forward, Bayer will "focus our research on therapeutic fields in which we possess expertise all the way along the value chain, such as anti-infectives and cardiovascular risk management," Wenning said. "We will also continue to expand our new specialist field of cancer drugs."

Bayer named Levitra, once-daily Cipro XR (ciprofloxacin) and the antihypertensive telmisartan as "significant value drivers for our pharmaceuticals business." Bayer signed a letter of intent for Boehringer Ingelheim's telmisartan in Germany, Scandinavia and Switzerland.