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Bayer's French Sojourn

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In a bid to further strengthen its product portfolio, the MaterialScience segment of  Bayer (BAYRY - Free Report) recently purchased the remaining shares from French company EXIMIUM SAS (formerly Michel Baulé SA) and other stockholders pertaining to its 50:50 systems house joint venture, Baulé SAS. The financial terms of the deal were not revealed.  The joint venture had its origin in 2008.

The move to gain full control over the joint venture, which is a market leader in developing, formulating and processing polyurethane cast elastomers, is a smart move by Bayer’s Material Science division - one of the world’s largest polymer manufacturers. We remind investors that in 2011, the MaterialScience segment recorded sales of €10,832 million, up 8.2%. The encouraging performance of the segment was attributable to the increase in selling price across all divisions and markets primarily in Europe.

All the sub-units namely Industrial Operations (up 21.9%), Polyurethanes (up 9.5%), Polycarbonates (up 5.6%) and Coatings, Adhesives, Specialties (up 4.5%) performed well in 2011.

We note that Bayer is on an acquisition/deal signing spree to expand its business. In September 2011, Bayer purchased Kirkland, Washington based Pathway Medical Technologies, Inc. to strengthen its HealthCare segment. Moreover, in July 2011, Bayer joined hands with Trius Therapeutics to gain exclusive rights to antibiotic tedizolid phosphate in Asia (apart from North and South Korea), Africa, Latin America and the Middle East. Furthermore, in early 2011, Bayer inked a deal with Zydus Cadila to strengthen its pharmaceutical operations in one of the most sought after markets - India.

We believe that investor focus will be more on blood thinner Xarelto going forward, rather than on deals/acquisitions. The HealthCare unit of Bayer has co-developed Xarelto with the Janssen Research and Development unit of Johnson & Johnson (JNJ - Free Report) .

Xarelto is already approved for multiple indications including the lucrative stroke prevention in non-valvular atrial fibrillation (SPAF) indication. Apart from SPAF, Xarelto is also approved for the treatment of deep vein thrombosis (DVT) in the EU (December 2011). DVT refers to the obstruction of a blood vessel, courtesy a blood clot. Furthermore, in July 2011, the FDA cleared Xarelto for the prevention of DVT, which may cause pulmonary embolism in patients undergoing knee or hip replacement surgery.

Bayer/ Johnson & Johnson are looking to expand Xarelto’s label further. The partners are looking to get Xarelto approved to reduce the risk of cardiovascular events in patients suffering from acute coronary syndrome (ACS). ACS refers to a heart disease, which results in the blockage of a coronary artery via a blood clot. Successful label expansion of Xarelto, which offers significant commercial opportunity, would further boost the top lines of the companies.

Neutral on Bayer, Johnson & Johnson

Currently, we are Neutral on both Bayer and Johnson & Johnson. In the short-run, while Bayer carries a carries a Zacks #3 Rank (Hold rating), Johnson & Johnson carries a Zacks #4 Rank (Sell rating).

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