Bayer AG

founded: 1863

Contact Information:

headquarters: 51368 bayerwerk, bldg. w-1
leverkusen, germany phone: 49-214-305-8992 fax: 49-214-307-1985 url: http://www.bayer.com

OVERVIEW

Bayer AG is a globally diversified chemicals company with more than 350 individual companies in its portfolio. The parent company operates four major divisions: healthcare, crop science, polymers, and chemicals. The health care segment consists of five business groups: pharmaceuticals, biological products, consumer care, diagnostics, and animal health. The pharmaceutical business group researches, develops, manufactures, and markets prescription drugs. The consumer care business group researches, develops, manufactures, and markets nonprescription, over-the-counter products as well as pest control products. The diagnostics group provides diagnostic tools to assist in identifying diseases in their early stages of development. Bayer's crop science business group focuses on crop protection. The polymers division consists of five business groups: plastics, rubber, polyurethanes, coatings and colorants, and fibers. The chemical division's business groups include basic and fine chemicals and specialty products, as well as subsidiaries Haarmann & Reimer, H.C. Stark, and Wolff Walsrode.

COMPANY FINANCES

In 2001 Bayer Group posted a net profit of 965 million euro on net sales of 30.3 billion euro, down from a net profit of 1.8 billion euro on 31.0 billion euro in sales in 2000. (The average exchange rate in 2001 for 1 euro was $0.90.) Earnings per share also dropped significantly from 2.49 euro per share in 2000 to 1.32 euro per share in 2001. The 2001 year-end stock price was 35.80 euro per share, down from £55.87 at the end of 2000, and the company's market capitalization fell from 26.1 billion euro to 15 billion euro. During the year, Bayer took significant hits in three of its four divisions. The operating results for health care and polymers fell 71 percent, and chemicals dropped 49 percent. The biggest hits came in health care's pharmaceuticals division, which posted an operating result of £51 million in 2001 compared to £1.2 billion in 2000, and polymers, which posted an operating result of 284 million euro in 2001 compared to 988 million euro in 2000. Bright spots for the company included health care's consumer care and diagnostic divisions, which jumped in operating revenue from £177 million in 2000 to £341 million in 2001, and the agricultural division, which reported operating results of £625 for 2001, up from £584 in 2000.

Bayer's financial difficulties in 2001 were due to several factors. In August of 2001 Bayer was forced to withdraw its new cholesterol drug Baycol/Lipobay after reports of 52 patient deaths, and the company experienced production problems with its product Kogenate, used to treat hemophilia. The following month terrorist attacks in the United States significantly depressed the stock market. Several significant acquisitions also factored into Bayer's year-end statement, including the purchase in 2000 of Sybron Chemicals Inc. for 206 million euro and the polyols business of Lyondell Chemical Company for 202 million euro. However, despite the significant decrease in net income, net sales for the entire Bayer Group fell by 2.2 percent. To compensate shareholders for the lackluster year in 2001, Bayer announced that it would distribute to investors the net income of parent company Bayer AG, totaling 657 million euro and equaling a dividend of 0.90 euro per share.

ANALYSTS' OPINIONS

In light of an announcement in late 2001 that Bayer would restructure into a holding company format, with each of its four divisions becoming legally separate entities, analysts remain mildly optimistic regarding the future value of Bayer stock. Although the company will incur some restructuring costs, analysts are hopeful that the reorganization will lead to more radical changes. Also encouraging to analysts was a series of announcements by Bayer that it would be selling off numerous nonessential businesses. However, analysts agree that Bayer is moving slower than necessary to shed itself of its less profitable ventures and focus on its high margin segments such as pharmaceuticals. They question the wisdom of Bayer management's firm commitment to the benefits of being both a chemical and a pharmaceutical company. Thus, the reorganization of the company is viewed as a positive step, but it will require more extensive changes to garner the enthusiasm of the analysts.

HISTORY

Bayer AG was formed by Friedrich Bayer in Wuppertal, Germany in 1863 to produce synthetic magenta dye. Two years later, production facilities opened in Elberfield, followed by additional manufacturing operations in Leverkusen in 1891, Uerdingen in 1907, and Dormagen in 1913. The first significant discovery by Bayer scientists was made in 1892 when they discovered the first synthetic pesticide, naming it Antinonin. In 1899, Bayer chemist Felix Hoffman discovered aspirin, prompting Bayer to dedicate more resources to pharmaceuticals. In 1908 the basic compound for sulfa drugs was created synthetically in Bayer laboratories. The primary purpose of the compound was for use as a reddish orange dye; however, Bayer researchers quickly discovered that it could be used effectively as a drug against pneumonia, a major health threat at the turn of the century. Despite its obvious benefits to health care, Bayer refused to release the formula. Eventually French chemists reproduced the drug in their own work and introduced it to the market.

During World War I Bayer joined the German war effort by manufacturing mustard gas and explosives. Bayer scientists' development of the first synthetic rubber also added to military efforts. Bayer also actively sought to keep drugs and anesthetics out of the hands of Allied forces. As a result, in 1917 the United States government, under the Trading with the Enemy Act, confiscated all Bayer assets in the United States. The following year Sterling Winthrop Inc., a New York-based company, purchased the rights to the Bayer name and products for $3.3 million.

In 1921 Bayer chemists made another discovery, finding that a certain dye compound could cure African sleeping sickness, a bacterially based infection that made parts of Africa dangerous, if not impossible, to live in. Bayer, understanding the pharmaceutical importance of the discovery, also understood its political implications. The formula, known as Germanin, was offered to the British, who had significant colonial interests in Africa, in exchange for African territories. When the British declined, Bayer refused to release the drug.

In 1925 Bayer president Carl Duisberg and Carl Bosch of BASF AG orchestrated a mega-merger of all Germany's major chemical companies into a single, giant enterprise. Interessen Gemeinschaft Farbenwerke, known as I.G. Faben, effectively eliminated all competition in the chemical industry. It was the largest conglomeration in Europe and the fourth largest in the world. Along with dominating and controlling the market, I.G. Faben also maintained a strong political agenda. Fearing leftist workers' movements that might threaten its stronghold on the industry, I.G. Faben lavished financial support on right-wing politicians and groups, including the Nazi party.

Although Bosch stepped down as head of I.G. Faben in 1935 in protest of the company's growing involvement with the Nazis, the company continued its support of the conservative movement, still under the guise of avoiding a workers' revolt. The company reaped vast financial rewards for its loyalty to Hitler. In 1942 profits reached 800 million marks, more than the company's entire worth when it was formed in 1925, and control of chemical companies in countries invaded by Germany was handed over to I.G. Faben. The chemical giant also took advantage of the abundance of slave labor for its manufacturing by building plants near Maidanek and Auschwitz. Because operations were placed outside the cities and often camouflaged, unlike many industries located in German cities, I.G. Faben was able to avoid significant destruction of its facilities from Allied bombings.

FAST FACTS: About Bayer AG

Ownership: Bayer AG is a publicly owned company traded on the Frankfurt and New York Stock Exchanges.

Ticker Symbol: BAYZY

Officers: Werner Wenning, CEO, 56; Attila Molnar, Pres., 54; Klaus Kuehn, CFO

Employees: 119,500

Principal Subsidiary Companies: Bayer AG is an international corporation with 350 companies in countries around the world, including Agfa-Gevaert N.V., Bayer Corporation, and Bayer Faser GmbH.

Chief Competitors: Bayer faces competition on many fronts in the fields of pharmaceuticals, crop production, polymers, and chemicals. Important competitors include ATOFINA, BASF AG, and Novartis.

Although the physical structures remained for I.G. Faben, in 1947 the entire board of directors was sentenced to up to four years in prison for war crimes and Allied forces took over control of the company. In 1952 Allied control ended when the conglomerate was dissolved into three separate entities: Bayer AG, BASF, and Hoechst. For the next few years Bayer attempted to get back into the normal routine of doing business by updating and modernizing operations and focusing on advancements in insecticides, fibers, and plastics. In 1954 Bayer joined Monsanto to form U.S.-based Mobay. By the late 1950s the company had rebounded sufficiently to begin to expand internationally, moving into eight countries, including India and Pakistan. Operations were also increased in the United States to avoid high import tariffs of Bayer products. By the end of the 1960s, domestic business had increased by 350 percent and overseas operations had jumped 700 percent during the decade.

During the 1970s Bayer continued to expand and diversify its operations, especially in the United States. In 1977 the company purchased Cutter Laboratories and Metzeler, a German rubber company, and was forced by a U.S. antitrust ruling to buy out Monsanto's share of Mobay. In 1978 Bayer acquired Miles Laboratories, makers of such brands as Alka-Seltzer and Flintstones children's vitamins. During the 1980s and 1990s, Bayer was negatively affected by an unstable market and economy in Western Europe and ongoing political instability in Eastern Europe. As a result, Bayer made significant efforts to reduce overhead and cut costs. Between 1991 and 1995 $1.6 billion was slashed from the budget through staff reductions of nearly 2,000 and abandoning unprofitable subsidiaries.

In 1986 Bayer paid $25 million to Sterling Drugs, who had made Bayer aspirin a household name, to regain partial use of the Bayer name in the United States. The rights to the name had been lost during World War I. When Eastman Kodak sold Sterling Drugs to British firm SmithKline Beecham PLC in 1994, within a few weeks SmithKline Beecham sold Sterling's North American interests to Bayer for $1 billion. Thus, Bayer regained full rights to its name and products in the United States. Sterling's strong over-the-counter drug business also made Bayer one of the top five nonprescription drug manufacturers in the world.

During the 1990s, Bayer introduced several new important drugs. Kogenate, a treatment for hemophilia, engineered in 1993, became the company's first genetically engineered product. The antibiotic Cipro produced $1.3 billion in sales by 1995. Bayer's ownership of the drug became headline news in 2001 when it became the antibiotic of choice after numerous anthrax attacks were delievered by mail in the United States.

STRATEGY

On January 24, 2002, Bayer AG's stocks began trading on the New York Stock Exchange. In so doing, Bayer gained direct access to the U.S. capital market, making it easier for U.S. investors to purchase Bayer shares and for Bayer's U.S. subsidiaries to initiate stock ownership programs for employees. Bayer also announced its intentions to reorganize as a management holding company with four legally independent operating units: Health Care, Crop Science, Polymers, and Chemicals, along with three service companies. The new structure, scheduled to be in place by January 2003, will allow Bayer to seek out strategic partnerships, which the company is actively pursuing for its HealthCare and Chemical divisions.

CHRONOLOGY: Key Dates for Bayer AG

1863:

Friedrich Bayer founds Bayer AG in Wuppertal, Germany to produce a synthetic magenta dye

1899:

Bayer chemist Felix Hoffman discovers aspirin

1918:

Sterling Winthrop Inc. of New York purchases right to use Bayer's name and products in the United States for $5.3 million

1935:

Bayer AG supports Nazi party as a means of avoiding a workers' revolution

1947:

All members of the board of directors are sentenced to up to four years in prison at the Nuremberg trials for their support of Hitler

1957:

Bayer makes advances in insecticides, fibers, and raw and plastic finished materials

1962:

Increases number of chemical laboratories, with operations in eight countries, making products mostly for farming and drugs

1969:

During the 1960s U.S. production grew 350 percent and all other operations increased by 700 percent

1978:

Purchases U.S.-based Miles Laboratories, makers of Alka-Seltzer and Flintstones and OneA-Day vitamins

1990:

Becomes world leader in production of synthetic rubber after acquiring Polysar of Nova Corp. in Canada, Belgium and France

1991:

The entire Bayer operation posts annual sales of $28 billion

1993:

Bayer's first genetically engineered drug, Kogenate, a blood-clotting compound used to treat hemophiliacs, reaches the market

2000:

Bayer becomes the largest supplier of polyurethane raw materials after purchasing the polyols business of Lyondell Chemical Co. for $2.45 billion

Other priority strategies addressed by Bayer included accelerated portfolio management. Namely, Bayer is looking closely at its long list of companies to see which are profitable and which are not. Having spent over 13 billion euro from 1997 to 2001 on new acquisitions, Bayer is determined to divest other areas of its business segments that are not performing well. Bayer projected at the end of 2001 that additional cost-containment and efficiency-improving projects already underway would shave off as much as 1.8 billion euro in expenditures by 2005. Cost-cutting measures include dissolving 4,000 employee positions worldwide, and due to the Lipobay/Baycol withdrawal, the pharmaceutical division was slated to lose 1,250 jobs.

INFLUENCES

In the recent past, Bayer has been negatively influenced by the overall world economy. Economic recession swept through the United States, moving around the globe and eventually finding its way to Japan, Southeast Asia, Canada, Mexico, and Western Europe. Pharmaceuticals, one division only slightly affected by the economic downturn, was rocked by the company's decision to take Lipobay/Baycol, one of its most profitable products, off the market. Crop protection products were impacted by languishing demand and strong price competition. Both the polymers and chemicals divisions were significantly affected by the world economy as automotive, construction, and electronics cut back on production and reduced inventories.

According to former Bayer chief executive officer Dr. Manfred Schneider, Bayer's decision to restructure was based on two factors. Positively, Bayer's acquisition of Aventis Crop Science for 7.25 billion euro promised to push its agricultural business to the top of the industry. Negatively, the withdrawal of Lipobay/Baycol forced the company to reexamine the relations between its chemical and pharmaceutical segments. Dividing the company into independent entities will allow each segment to pursue growth and increase value at its own pace. Thus, the Crop Science division, poised for tremendous growth, will be freer from the giant corporate beast of the parent company, thus enabling it to make quicker, more radical movements in the market.

CURRENT TRENDS

In 2002 Bayer announced that it was actively seeking partners for its healthcare and chemicals units. The company set specific criteria for the ideal partners; particularly, Bayer wants to remain in charge of any new relationships, and strong U.S. ties would be a definite advantage. Clearly, Bayer has placed its future with healthcare and crop sciences units because it believes that these segments, with combined annual sales totaling 18 billion euro, possess the greatest growth potential. However, Bayer is not quick to dismiss its polymer business, which generated 11 billion euro in sales in 2001, although stiff competition and a saturated market arena are expected to contain any significant growth in this segment. A new partnership in the foreseeable future for its chemical division offers a potential 4 billion euro in sales. Unlike other chemical companies that have stripped operations, Bayer's polymer and chemical divisions are strongholds in their own right, and the company has no plans to divest of its interest in these fields.

PRODUCTS

Bayer companies produce an incredibly vast array of products. Within the health care division, Bayer produces pharmaceuticals that treat cardiovascular, respiratory, and infectious diseases, metabolic and immune disorders, and diseases of the central nervous system. Best-selling products include Ciprobay/Cipro, Adalat, Aspirin, Glucometer Elite, Baygon, ADVIA Centaur System, and Kogenate. Well-known over-the-counter brand names include Bayer Aspirin, Alka-Seltzer, and One-A-Day vitamins. The crop protection group researches and develops products that control crop diseases, pests, and weeds, such as fungicides and insecticides, and the animal health group focuses on the research, development, manufacture, and marketing of veterinary medicines and vaccines, as well as grooming and hygiene products such as Advantage flea control. Crop protection and animal health product brands include Confidor/Gaucho/Admire/Provado, Folicur/Raxil, Advantage, Baytril, FLINT, and Sencor.

The plastics group markets a wide range of products for use in automotive and electrical engineering, business machines and electronic appliances, housing and construction, and medical equipment, as well as sports equipment. The rubber group's product line provides synthetic rubber and rubber chemicals to the rubber and tire industry. Bayer's polyurethane group provides polyurethane raw materials and serves as a resource for processing polyurethane systems and products. The coatings and colorants group produces coatings, adhesives, sealants, and pigments for construction industries.

The chemicals segment plays a vital role in the foundational development of active ingredients in Bayer's pharmaceuticals, crop protection, and animal health products. Chemicals also play an important role as building blocks in the development of plastics, coatings, and pigments. The specialty group provides services to the paper and leather industries, including dyes, tanning materials, and processing chemicals, as well as other specialty chemicals needed for industrial use. The subsidiary Haarmann & Reimer manufactures fragrances, flavors, and cosmetic ingredients, and H.C. Stark operates in the field of metallic and ceramic powders, which it markets to the metal, optics, electronics, and advanced ceramic industries.

CORPORATE CITIZENSHIP

With such an extended global presence, Bayer is faced with multiple issues in acting as good citizens. An annual report on sustainable development outlines Bayer's commitment to society and the environment. Bayer contends that it works hard to produce environmentally friendly products with the most benefits possible. The company also supports the United Nations' Global Compact initiative, designed to achieve sustainable development as well as ensure human rights and improve working conditions around the world. Bayer has also voluntarily stopped production of chemicals proven to be harmful, such as polychlorinated biphenyls, or PCBs. Bayer affirms the goals of responsibility beyond compliance, seeking the ideal product, voluntary withdrawal of products later found to be harmful, and the use of a six-prong eco-check that weighs the pros and cons of a product based on health, economy, public value, technology, life cycle, and environment. Bayer also supports hundreds of social, economic, educational and community-based programs at its sites around the world.

GLOBAL PRESENCE

Bayer's network of research, manufacturing, and marketing operations extend to nearly every country in the world, and global operations are managed from the company's headquarters in Leverkusen, Germany. The majority of its administration and marketing operations are located in Europe, but also extend across the map, including offices in Japan, Thailand, Russia, India, Zimbabwe, South Africa, Chile, Costa Rica, Cuba, and Canada. Manufacturing operations are also spread worldwide, including New Zealand, South Africa, the United States, Argentina, and Ghana, as well as multiple locations in Europe. Research is conducted in Germany, Japan, Sweden, Denmark, and the United States.

During 2001 Bayer sales totaled 13 billion euro in Europe, 9.8 billion euro in North America, 3.8 billion euro in Asia and the Pacific, and 2.3 billion euro in Latin America, Africa, and the Middle East.

CIPRO

When numerous people in the United States began contracting anthrax through the mail during the fall of 2001, soon after the terrorist attacks in New York and Washington, D.C., Cipro, a synthetically produced antibiotic developed and marketed by Bayer, became the drug of choice for anthrax patients. Although Cipro is not the only drug that can be effective in fighting anthrax, it made headlines and was widely discussed by the media.

Cipro is a bestseller for Bayer, generating $1 billion in U.S. sales alone. Fearing future widespread anthrax attacks, the U.S. government contracted with Bayer to supply up to 300 million tablets at the cost of 95 cents a pill, reduced from the regular government discounted price of $1.77 per tablet. Bayer also donated 4 million Cipro tablets to be provided to frontline workers in New York and Washington, D. C., as well as U.S. Postal employees. Bayer, which holds exclusive rights to the drug until the patent expires in 2003, received short-term negative exposure in the press when it refused to release the patent early and for selling the drug to the U.S. government at a price that would still earn the company a profit on the deal.

EMPLOYMENT

Bayer employs some 112,000 around the world, with 65,200 in Europe, 23,200 in North America, 12,600 in Asia and the Pacific, and 11,000 in Latin America, Africa, and the Middle East. To create and sustain a creative and motivated workforce, Bayer commits more than 100 million euro each year to vocational training and continuing education for its employees. Bayer is also introducing new educational methods, such as Web-based training and e-learning. In 2001, the company launched the Bayer Academy to coordinate and support employee-learning opportunities. Other innovative approaches to staff competence and satisfaction include international development programs for young managers, flexible working hours, and using an Internet-based job rotation program that allows shuffling of Bayer specialists around the world to permanent or temporary assignments.

SOURCES OF INFORMATION

Bibliography

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"bayer ag." chemical week, 20 march 2002.

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cage, sam. "bayer deepens cutbacks as earnings slide." the wall street journal, 27 march 2002.

capell, kerry. "can bayer cure its own headache?" business week, 28 january 2002.

grant, tina, ed. international directory of company histories. vol. 13. detroit: st. james press, 1996.

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——. "bayer's journey." chemical week, 6 february 2002.

uniworld business publications, inc. directory of foreign firms operating in the united states., new york: author, 2000.

For an annual report:

on the internet at: http://www.investor.bayer.com/index_en.cfm

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. bayer ag's primary sics are:

2819 industrial inorganic chemicals, not elsewhere classified

2821 plastics materials synthetic resins

2822 synthetic rubber

2833 medical chemicals & botanical products

2834 pharmaceutical preparations

2865 cyclic organic crudes dies & pigments

2879 pesticides & agricultural chemicals, not elsewhere classified

2899 chemicals & chemical preparations, not elsewhere classified

6719 holding companies, not elsewhere classified

8731 commercial physical & biological research

also investigate companies by their north american industry classification system codes, also known as naics codes. bayer ag's primary naics codes are:

325412 pharmaceutical preparation manufacturing

325510 paint and coating manufacturing

551112 offices of other holding companies