By Christopher Alessi
FRANKFURT–German pharmaceuticals and chemicals company Bayer AG reported a 19% rise in net profit for the second quarter of 2016, boosted by strong growth at the pharmaceuticals and specialty plastics businesses, while raising its earnings guidance for the full year.
The results come as Bayer is pursuing what would be the largest acquisition in its history–a $ 65 billion bid for Monsanto Co.–and investors and analysts are watching closely to see if the German firm has the wherewithal to further up its offer for the U.S. agrochemicals giant.
Bayer’s Chief Executive Werner Baumann, on a conference call with analysts Wednesday, said the company had been engaged in “private discussions” with Monsanto and would not make any further public statements at this time. That could suggest that the two companies have signed a non-disclosure agreement, which would allow them to exchange additional information about their businesses privately.
Net profit for the period ended June 30 was EUR1.38 billion ($ 1.52 billion), compared with EUR1.15 billion during the same period last year, in line with analysts’ forecasts. Analysts had predicted a net profit of EUR1.38 billion, according to a recent poll conducted by The Wall Street Journal.
Bayer increased its earnings forecast, saying it aims to increase earnings before interest, taxes, depreciation and amortization, or Ebitda, before special items by a high-single-digit percentage, up from a mid-single-digit percentage. However, the company lowered its sales forecast for 2016, saying it now expects sales in a range of EUR46 billion to EUR47 billion, compared with a prior forecast of sales above EUR47 billion.
Sales dropped slightly, to EUR11.83 billion, held back by all divisions expect pharmaceuticals. Sales at the pharmaceuticals division rose by 5.5%, to EUR4.1 billion, driven by continued uptake of the company’s recently launched blockbuster drugs, including anticoagulant Xarelto.
The company’s closely watched Ebitda before special items rose by 5.7%, to EUR3.05 billion, driven by the pharmaceuticals business and the specialty plastics unit, recently separated as Covestro AG.
However, at the Crop Science division–the business area most under scrutiny as a result of the bid for Monsanto– Ebitda before special items fell by 8.2%, to EUR663 million, amid difficult market conditions in the agricultural industry. The business experienced strong sales growth in the Asia-Pacific region, the company noted.
“Crop Science was steady despite the weak market conditions,” according to Peter Spengler, an analyst at Germany’sDZ Bank. He added that the “focus is on new information about Monsanto.”
But analysts at Berenberg said that Bayer’s “mixed bag” of results “increases the uncertainty around this deal and the appropriate price to pay.” The results “are not helpful” for Bayer’s bid, they noted.
Mr. Baumann first moved to acquire Monsanto in May, less than two weeks after taking over the top job. At that time, Bayer put forward a bid of $ 122 a share, or $ 62 billion, which Monsanto’s board rejected. Earlier this month, Bayer raised its bid to $ 125 a share. Monsanto again rebuffed Bayer’s offer, but the U.S. company left the door open to further talks about a tie-up.
Bayer has said it would continue to pursue the deal, despite the concerns of some shareholders that the acquisition would reshape Bayer’s portfolio at the expense of its lucrative pharmaceuticals division.
“Our concerns remain the same as the ones we expressed when Bayer’s bid first surfaced, namely that the merged company will be left with a highly geared balance sheet and that Bayer’s executive team may take their eye off the ball running the pharma business as their energies are focused on integrating Monsanto,” said Greg Herbert, a fund manager at Jupiter Asset Management Ltd., a Bayer investor.
Henderson Global Investors–Bayer’s 16th-largest shareholder, according to Thomson Reuters–earlier this month called into question whether the deal would create value for investors and urged Bayer to put the deal to a shareholder vote. Bayer has previously said such a move could put the potential deal at risk.
If the deal were to transpire, agrochemicals would account for about half of Bayer’s overall sales.
Mr. Baumann’s dogged pursuit of Monsanto is a departure from the strategy implemented by his recently departed predecessor, Marijn Dekkers. During his six-year tenure, he invested heavily in health care and tried to balance the company around its so-called life science divisions–pharmaceuticals, over-the-counter drugs and agrochemicals.
Mr. Dekkers presided over the launch of five new blockbuster drugs, including Xarelto, the $ 14.2 billion acquisition of U.S.-based Merck & Co.’s over-the-counter drug business and the spinoff of Covestro. Bayer still holds a 64% stake in Covestro but has indicated it would like to fully exit the business down the road.
Write to Christopher Alessi at christopher.alessi@wsj.com
(END) Dow Jones Newswires 07-27-160901ET Copyright (c) 2016 Dow Jones & Company, Inc.
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