Bayer/Schering’s Complementary Portfolios Include Focus On Oncology

Bayer does not expect to divest any pharmaceutical products following the acquisition of Schering AG, CEO Werner Wenning said March 24 during a briefing outlining the planned merger.

"The portfolio that Schering has, in particular the combined portfolios, will provide us with excellent growth potential for the future, so currently there is no intention for divestment," the exec said.

Bayer announced its plan to make a public offer for Berlin-based Schering AG March 23 for €86 ($103) per share in a transaction valued at €16.3 bil. ($19.5 bil.).

The combined company would have estimated annual sales of nearly €15 bil. ($17.95 bil.).

With "complementary" pharmaceutical portfolios, the merged businesses will have an established position in the specialty market, Wenning said. The combined specialty pharmaceutical business would rank number seven in the world, he added.

The deal "would enable us to achieve our stated aim of substantially strengthening our health care business," Wenning stated. "We would create a leader in the area of specialty pharmaceutical products....We would produce a healthcare heavyweight of international standing."

Oncology, in particular, will be a core growth driver for the business. The merger would combine Schering's €400 mil. oncology portfolio, including the lymphocytic leukemia treatments Fludara and Campath and immune system booster Leukine , with Bayer's oncologics. Bayer's products include the renal cell carcinoma agent Nexavar , which was approved in the U.S. last year, and prostate cancer therapy Viadur .

"The existing oncology platform of Schering will be helpful to us in the market launch of our own products," Wenning said.

Bayer established a new oncology unit in the U.S. in 2004 as part of a plan to focus on oncology, blood products and OTCs while divesting the marketing rights to its primary care products to Schering-Plough (¹ (Also see "Bayer U.S. Focus Will Be Oncology, Blood Products And OTCs" - Pink Sheet, 20 Sep, 2004.), p. 28).

Following completion of the transaction, which is expected in the second quarter assuming antitrust approval, Bayer will merge Schering AG with its existing pharmaceuticals division to create an independent pharma business under Bayer Healthcare called "Bayer-Schering Pharmaceuticals."

The new business unit, which will be based at Schering's current headquarters, will have combined sales of more than €9 bil. ($10.77 bil.).

Bayer's bid for Schering is a white knight offer that sidelined Merck KgaA's hostile takeover attempt. Merck said March 24 that it will not pursue a takeover of the firm after reaching the "conclusion that a higher price per Schering share is not justified."

Bayer's acquisition price is 11.6% higher than Merck's €14.6 bil. ($17.47 bil.) bid. Merck announced plans to make a cash offer for Schering March 13, but Schering's management maintained that the deal undervalued the company.

Wenning said he contacted Schering's management to negotiate a merger the same day Merck announced its hostile takeover attempt.

In a March 23 statement, Schering's management said it supports Bayer's public offer and that by joining forces, Schering and Bayer "will form a leading specialized pharmaceutical company."

The transaction would enable Bayer to increase its share of sales from specialty pharmaceuticals from 25% to 70%, the company reported.

In addition to oncology, Bayer-Schering Pharmaceuticals would have a balanced portfolio in areas such as cardiology and gynecology. Within biotechnology, the business unit will offer a combined portfolio of products that generate €2 bil. ($2.39 bil.) in sales.

Schering's biotech products include Leukineand multiple sclerosis therapy Betaseron , while Bayer's portfolio includes its top-selling product, the hemophilia treatment Kogenate .

Bayer is currently developing a long-acting formula for Kogenate using a pegylated liposome technology, which Wenning said may have applications for some of Schering's products as well.

The deal would also give Bayer an established gynecology business, including Yasmin , the top-selling brand of oral contraceptive, with sales of €586 mil. ($705.3 mil.) in 2005. The gynecology franchise will also benefit from a new oral contraceptive, Yaz , which cleared FDA March 16.

Following the acquisition, Bayer-Schering would have four projects in registration, 19 in Phase III, 14 undergoing Phase II and 17 in Phase I.

By combining R&D resources, Bayer will be able to put more resources towards attractive pharmaceutical projects, the company said. The research budget would be roughly 15% to 17% of combined sales.

The acquisition would allow Bayer to "significantly strengthen its earning power," the company noted. EBITDA margin within the healthcare business would increase from 19% to 25% by 2009, the firm predicted.

Bayer anticipates cost savings from synergies as a result of the transaction of roughly €700 mil. ($842.4 mil.) annually. Synergies will stem from areas like purchasing and duplication within the global framework, Wenning said.

Together, Bayer and Schering would employ 60,000 people; Bayer said it anticipates restructuring initiatives would eliminate roughly 6,000 positions. One-time restructuring costs are estimated at roughly €1 bil.

The company said it plans to divest two of its MaterialScience subsidiaries - H.C. Starck and Wolff Walsrode - to help fund the transaction.

The merger would create a global healthcare company that ranks among the top 12 in the world, Bayer said. In addition, the combination would re-establish Germany's pharmaceutical industry.

"It cannot be denied that Germany's standing as a pharmaceutical industry base, as the world's pharmacy, has declined over the past 20 years," Wenning said. "It is all the more important that we give a clear signal with today's step."

"I'm convinced that the move is the best way of re-asserting the importance of Germany as a pharmaceutical base."