Bayer (BAYRY) Q4 Earnings Beat Estimates, Sales Down Y/Y

Bayer AG (DE:BAYGN)’s (OTC:BAYRY) fourth-quarter 2017 core earnings per share from continuing operations were 42 cents per American Depository Receipt (“ADR”), which topped the Zacks Consensus Estimate of 31 cents.

On Sep 20, 2017, Bayer performed an ADR ratio change. With the new ratio, four Bayer ADRs correspond to one Bayer ordinary share. The fourth quarter 2017 core earnings per share incorporate the effect of ADR ratio change. Earnings were down 40% year over year from 30 cents per ADR.

Total sales in the quarter were approximately $10.14 billion, down 6.4% year over year. While the company registered growth in sales and earnings at Pharmaceuticals, business declined at Consumer Health and Crop Science. Animal Health improved as well.

All growth rates mentioned below are on a year-over-year basis and after adjusting for currency and portfolio changes.

Fourth-Quarter and Full Year Highlights

The Bayer Group lost de facto control over the Covestro Group at the end of September 2017. As of Sep 30, 2017, there are four reporting segments - Pharmaceuticals, Consumer Health, Crop Science and Animal Health. As such, total figures for the four Life Science segments will no longer be presented separately.

Revenues at the Pharmaceuticals segment decreased 1.4% to €4,215 million in the fourth quarter but increased 2.6% to €16,847 million in 2017. The growth for full year was backed by a persistently strong performance of the key products like Xarelto, Eylea, Xofigo, Stivarga and Adempas. However, this division experienced a considerable decline in Kogenate’s sales, mainly because of a distribution partner placing a lower volume of orders for the active ingredient.

However, Consumer Health sales were down 9.1% to €1,399 million in the fourth quarter and declined 2.9% to €5,862 million in 2017. The decline was due to decline in revenues in North America, particularly in the United States, owing to the challenging market environment. Further, the Chinese authorities unexpectedly changed the legal status of two of Bayer’s medicated skincare brands from OTC to prescription, which led to sales declines in the fourth quarter of 2017. However, business expanded slightly in Europe/Middle East/Africa, while sales in Latin America came in at the prior-year level.

In the reported quarter, Crop Science sales were €2,263 million, down 5.9% year over year while sales for full year 2017 declined 3.4% to €9,577 million. Sales in the agriculture business declined due to the situation in the Brazilian crop protection business, where volumes were held back by unexpectedly high inventories in the market

The Seeds business and Environmental Science registered gains. However, there was a decline at the Crop Protection business.

Sales of the Animal Health segment came in at €322 million, down 2.1% in the fourth quarter but increased 2.2% to €1,571 million in 2017. Sales improved positively in the regions of North America, besides progressing well in Asia Pacific region. The development in North American region was on the back of price increases, lower selling expenses and the revenues generated by the Cydectin product portfolio, which the company acquired from Boehringer Ingelheim Vetmedica, Inc in January 2017.

2017 Results

Core earnings per share from continued operations were $1.9 per share compared with $1.8 in 2016. Earnings missed the Zacks Consensus Estimate of $2.21.

Revenues in 2017 were $39.6 billion, compared with 38.8 billion in 2016. Tjis missed the Zacks Consensus Estimate of $42.3 billion.

Discontinued Operations

Bayer took a big step in 2017 toward its goal of achieving full separation from Covestro in the medium term by selling approximately 36% of the interest in that company for €4.7 billion. Bayer ceded de facto control of Covestro and deconsolidated the company at the end of September 2017. In sync with this, Covestro ceased to be a reportable segment in the third quarter and is now presented as a discontinued operation.

Bayer’s direct interest in Covestro currently amounts to 14.2%. Another 8.9% is held by Bayer Pension Trust.

Acquisitions and Divestment

On Oct 13, 2017, Bayer signed an agreement to sell selected Crop Science businesses to BASF for €5.9 billion, in light of the planned acquisition of Monsanto Company (NYSE:MON) . In the reported quarterthe Brazilian antitrust authorities approved the acquisition. The company also committed to divest its entire vegetable seed business. Certain additional business activities of Bayer and Monsanto may also be sold or out-licensed.

The transaction is subject to regulatory approval as well as the successful closing of Bayer’s acquisition of Monsanto. Meanwhile, Bayer will continue to own, operate and maintain these businesses until the closing of this divestiture.

We note that Bayer has made several acquisitions and entered into a number of deals to boost its portfolio in the past few quarters. In September 2014, it acquired Merck’s (NYSE:MRK) consumer care business for $14.2 billion (€10.4 billion). Besides category expansion, the addition of Merck’s consumer care business expanded Bayer’s geographic reach.

In addition, Bayer has a license and collaboration agreement with Regeneron (NASDAQ:REGN) for the global development and commercialization of Eylea in ex-U.S. markets.

2018 Outlook

For 2018, Bayer expects sales to be in about €35 billion. Bayer expects sales to increase by a low- to mid-single-digit percentage on a currency- and portfolio-adjusted basis.

Through the expected acquisition of Monsanto in the second quarter of 2018, Bayer anticipates a significant increase in sales and earnings before interest, tax, depreciation and amortization (EBITDA) before special items

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