Bayer (BAYRY) on Tuesday sought to reassure investors of the wisdom of its $66 billion acquisition of Monsanto (MON) but may have succeeded in doing the opposite as it unveiled impressive new growth and profitability projections for its pharmaceuticals operations.
The German group said it expects its prescription medical business to grow at an annual average rate of 6% from the end of 2018 and said peak revenue from five recently launched drugs would top €10 billion ($11.2 billion), up from an earlier forecast of €7.5 billion.
"We anticipate especially significant sales and margin growth at pharmaceuticals," Bayer chairman and CEO Werner Baumann told analysts and investors on Tuesday. "This growth is expected to be driven particularly by the positive development of our recently launched products."
Bayer said Ebitda margins at pharmaceuticals were likely to be between 32% and 34% in 2018, up from the 2015 level of 30.1% on €15.3 billion of sales.
The Leverkusen, Germany-based group said it expects peak sales of more than €5 billion a year for stroke prevention medicine Xarelto, up from its previous forecast of €3.5 billion and €2.5 billion a year from eye medicine Eylea, up from €1.5 billion.
"We are also very confident about our pharmaceuticals business beyond these products," said Baumann, citing a pipeline of six promising drugs that he expected to have combined peak sales of more than €6 billion.
Bayer shares traded Tuesday at €93.30, up €1.70, or almost 2%, even as the good news once again raised the issue of why the German group, with its Monsanto bid, is diverting resources away from a highly profitable and fast-growing drugs business into the struggling farm inputs sector.
Bayer on Sept. 14 agreed to pay $128 per share for Monsanto, securing a deal after a four-month chase and with its fourth bid. The deal follows two disappointing quarters for Monsanto as low prices for key crops have left farm incomes at their lowest level since 2002 and undercut spending. Monsanto CEO Hugh Grant in late June lamented that his industry was "running at a low point."
Baumann said on Tuesday he was confident that the acquisition of Monsanto would enable Bayer's crop science business to achieve "above-market annual sales growth." Yet he also revealed that Ebitda margins will continue to trail pharmaceutical profit margins. The combined unit would have made a pro-forma margin of about 27% on its roughly €23 billion of sales in 2015, and is expected to hit 30% in the fourth year after the closing of the deal.
Hitting that margin increase suggests that Bayer expects to find about $700 million of cost savings from its forecast $1.5 billion of synergies from the deal, according to Goldman Sachs. The bank described the increased pharmaceutical sales forecasts as a modest plus for Bayer, which it rates a buy with a 12-month price target of €129.
Monsanto traded Tuesday at $102.33, up $0.53, or 0.5%, and well below Bayer's offer price as investors continued to doubt that the deal will close.