Bayer Agchem Unit Looks to Brazil

Wrapping up a strong 2004, executives at Bayer CropScience boast that they have taken the lead position in the global crop science industry. Bayer surpassed Syngenta last year as the largest agricultural chemical producer, with a 20% market share, according to Friedrich Berschauer, chairman of Bayer CropScience's management board. Actual sales rose modestly to $7.40 billion, while pretax earnings jumped 44% to $612 million.

Moreover, according to Berschauer, continued growth in earnings is at the top of the company's agenda. "We plan a further significant increase in pretax earnings in 2005 and 2006," he said at the unit's annual press conference earlier this month. Thanks to newer, higher margin products, Bayer CropScience expects to raise its operating profit margin--earnings before taxes, depreciation, and amortization as a percentage of sales--to 25% by 2006, he said.

The aim is to further raise the margin to 26%. Last year, the figure was 21%, he said, "and we are well on our way to our target."

That's important for the entire Bayer Group. Bayer CropScience accounts for about 26% of group sales, but its share of operating income was about one-third of the group's total last year.

The improvement reflects results of various integration projects following Bayer's acquisition of Aventis CropScience in 2002. These projects included consolidation to streamline information technology systems, cost savings in marketing and sales, and site rationalization.

"This process is still ongoing and will lead to a reduction of our plants for production of active ingredients and formulations from over 60 to about 40 sites," said Dirk Suwelack, chief financial officer. "Some 95% of the projects initiated have been completed by now, and we have reached accumulated savings of [nearly $500 million] in 2004." The unit has set a target for accumulated savings of roughly $620 million for this year.

One area for streamlining is the business's product portfolio. From a range of more than 100 active ingredients today, the company intends to phase out about 20 active ingredients by 2008.

The company will also be trimming its R&D spending, Suwelack said. Between 2005 and 2007, it will cut R&D spending to about $780 million per year, down 8% from 2004, although the firm will still have the agchem industry's largest R&D budget, both absolutely and relatively, he added.

On the other hand, by next year, the company expects to achieve roughly $1.25 billion in additional annual sales from new active ingredients introduced in key countries since 2000. In the first quarter of this year, these new products achieved combined sales of $333 million, which is an increase of 39% over first-quarter 2004.

The latest of the new product launches came earlier this month in Brazil as Bayer began rolling out its Nativo fungicide, a broad-spectrum mixture of trifloxystrobin and tebuconazole. The company expects Nativo to achieve annual peak sales of more than $125 million. It will also soon be launched in Argentina.

The launches reflect the importance that Bayer places on the Latin American market. Globally, Berschauer said, the star performer in 2004 for all agrochemicals marketers clearly was Latin America. The region's agrochemical market grew nearly 30% in U.S. dollars. Even translated into euros, growth in the region was still 18% over the previous year, he said.

"Bayer CropScience has a traditionally strong position in Latin America, and, as the crop protection market leader in this region, we have benefited substantially from the upswing in the agricultural markets there. Our sales were up more than 20% in euro terms in Latin America," he said.

BUOYED by the new fungicide launches, fungicides make up 22% of Bayer CropScience's sales. Herbicides are the largest segment, with 31% of sales. Insecticides make up 23%, environmental science--consumer products and professional products for applications such as golf courses--are 11%, seed treatments are 8%, and a budding biotechnology unit is 5%.

The biotechnology unit is small, Berschauer conceded, particularly in comparison with the company's rivals. "To be realistic, we can't catch up with Monsanto and DuPont, of course. But to be strong in conventional crop protection is nothing to be unhappy about. In the long term, we will intensively discuss and analyze our opportunities in seeds and biotech.

"Presently, the situation in Europe is not favorable to biotechnology," he added. "And I don't think it will change in the next couple of years. But in the long term, we are convinced, biotechnology will become more important."

Bernward Garthoff, the board member responsible for R&D, noted that the hostile European environment to biotechnology makes managing researchers a challenge. "It is difficult to motivate your researchers in this area when they don't see the fruits of their research in their home markets," he acknowledged. "But we are all convinced that eventually the consumer will see the benefits of biotechnology."