Bayer Baycol Kansas City Facility Construction Halted Following Withdrawal

Bayer is halting construction of a $200 mil. manufacturing facility in Kansas City, Mo. following the withdrawal of the cholesterol-lowering drug Baycol.

The company had completed preparatory work and was laying the foundation for the facility. Bayer had invested $27 mil. in the building at the time of the withdrawal. Baycol was withdrawn Aug. 8 due to reports of severe rhabdomyolysis (¹ (Also see "Baycol Withdrawal Gives Boost To Pravachol; Will Crestor NDA Be Affected?" - Pink Sheet, 13 Aug, 2001.)).

Construction was on track to be completed in January 2002 with production start-up slated for early 2004. The facility would have added 140 jobs to the Kansas City site's 800-employee base.

Baycol (cerivastatin) was the primary product to be manufactured, but the facility would have been set up to add other drugs.

The canceled manufacturing plant may prove to be a relatively small impact of the Baycol withdrawal for Bayer in the long term. The company told an Aug. 9 investor meeting that it may be reconsidering its presence in the pharmaceutical market altogether.

"The fact that we are losing Baycol - one of the cornerstones of our future growth strategy in the pharmaceutical area - has automatically the consequence that we have to check again our strategy in healthcare," Bayer said. "We will be looking carefully at all aspects of our strategy, including maybe some principles that have so far appeared unshaken."

After the Baycol withdrawal, "our strategic position has changed enormously," the company said. "Every strategy is based on the present situation, but the present situation is no longer what it was. So a different strategy has to be [devised]." For now, however, "the pharmaceutical business is not for sale."

Bayer expected Baycol sales in 2001 to approach $1 bil. Worldwide sales of cerivastatin (Lipobay in Europe) were up 88% in the first quarter to about $215 mil. ([Euro]247 mil.). Baycol held an 8.4% share of new prescriptions in the statin market prior to the withdrawal, Bayer said, with 700,000 patients on therapy.

With Japan now the sole market for cerivastatin, the company expects to be left with about $177 mil. in sales, Bayer said.

As a result of the Baycol withdrawal, healthcare earnings will be 40%-50% below expectations in 2001. Bayer expects to record a profit shortfall of about $533 mil. to $577 mil. in 2001, including lost earnings and write-down of inventories. Between $222 mil. to $267 mil. will be related to exceptional items.

The withdrawal will prevent Bayer from achieving the expected 22% margin for pharmaceuticals, and will cause the company to record operating profits below the expected $2.7 bil. before exceptional items.

Bayer's ongoing efficiency program for its pharmaceutical business is on track to save more than $533 mil. and cut 2,200 positions between 1998-2005. Bayer expects to record savings of $400 mil. by the end of 2001 with the balance realized by 2002.

In total, Bayer expects to cut between 4,000 and 4,500 positions out of 117,000 over the next four years and close 15 plants, with a concentration on the polymer business. The company hopes to save $1.3 bil. annually by 2005.

Bayer will also presumably revisit its outside sales contracts in light of the Baycol withdrawal. The company added 1,000 contract sales reps over the past year through contracts with Professional Detailing, Inc. and Ventiv.

Healthcare sales through the first half were up 3.8% to $4.4 bil. Operating income, however, fell 38.7% to $395 mil. (down 77.5% in the second quarter) after exceptional items. The results include a $187 mil. Kogenate write-down.

Total pharmaceutical sales were up 2% through six months, offset by continued Kogenate manufacturing problems, and sales of non-biologics were up 8%.

CFO Werner Wenning acknowledged the disappointing performance of Bayer in recent years, but maintained that the Baycol withdrawal was "not due to a management error."

"Setbacks, like success," he said, "are part of business life. That these setbacks would accumulate to such an extent in recent weeks and months in our pharmaceutical business, was something we could simply not predict."