Bayer (BAYRY) announced its intention to shed its MaterialScience business and focus fully on its Life Science businesses – HealthCare and CropScience. Bayer’s shares gained almost 6% following the announcement.
The MaterialScience business is expected to trade in the stock market as a separate company within the next 12 to 18 months. The segment, which will have a global workforce of 16,800, is expected to have a separate name.
The MaterialScience segment is one of the world’s largest polymer manufacturers and will become Europe's fourth-largest chemical company when it starts trading separately, as per Bayer. MaterialScience will have direct access to capital for its future development.
What is in it for Bayer?
Although Bayer’s MaterialScience business was the second highest (28%) contributor to its top line in 2013, the segment has been performing poorly in the last couple of years. Segment sales were down 2.2% year over year to €11.2 billion in 2013 while sales from the company’s HealthCare and CropScience segments increased 1.7% and 5.2% to €18.9 billion and €8.8 billion respectively in the year.
Revenues from the HealthCare segment are expected to display mid- single-digit percentage growth with segmental revenues of around €19.5 billion in 2014. Sales from the CropScience segment are expected to display high single-digit growth.
As a result of the divestment of its MaterialScience segment, Bayer can focus on its better performing businesses. Primarily, the HealthCare segment has been driving growth at the company. The addition of newly approved pharmaceutical products like Xarelto, Eylea, Xofigo, Adempas and Stivarga has given a boost to the HealthCare segment at Bayer. All these products have performed encouragingly since their launch and are expected to do so in the future.
These new products are expected to contribute around €2.8 billion to segmental sales in 2014. The company is also looking to expand their label beyond current indications. Label expansion of these drugs will drive growth further.
Our Take
We are positive on Bayer’s decision to shed MaterialScience. The German large-cap company has been growing on the back of its HealthCare and CropScience segments, which together contribute more than 70% of Bayer’s top line. We expect both HealthCare and CropScience segments to keep performing well in the coming quarters as well.
Bayer presently carries a Zacks Rank #3 (Hold). Some better-ranked stocks include Allergan (AGN), Endo International (ENDP) and Gilead Sciences (GILD). All three stocks sport a Zacks Rank #1 (Strong Buy).
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