Chemicals vs. drugs. (chemical manufacturers' pharmaceutical revenues increase)(Cover Story)

A year ago, many believed that chemical groups were going to exit pharmaceuticals in the wake of the Novartis merger (CW, April 10, 1996, p. 31). Consolidation in the drugs industry--Glaxo and Wellcome merged to become the world's biggest drugs firm about a year before Novartis was born--combined with the higher valuations awarded pharmaceuticals stocks made a powerful argument that pharmaceuticals was no place for diversified chemical firms to dabble. According to the conventional wisdom, those firms should either get serious--like Novartis's spin-off of Ciba Specialty Chemicals or American Cyanamid's spin-off of Cytec--or get out--like ICI's 1993 spin-off of Zeneca.

One year later, a more complicated drama is unfolding. An increasingly pronounced life sciences versus chemicals watershed is emerging. But a review of the diversified chemical firms shows managements are displaying a lot of confidence about their ability to straddle that divide. "There seems to be a firm commitment to maintain the chem-pharms," says ABN Amro Hoare Govett (London) pharmaceuticals analyst Robin Campbell.

Asked last month whether Bayer was considering spinning off its drug business, chairman Manfred Schneider unwaveringly told CW, "No. Pharmaceuticals is an integral part of Bayer. Pharmaceuticals and chemicals will remain integrated." According to Schneider, keeping both businesses together "gives us a balanced risk structure and a considerable potential to gain competitive advantages through synergies."

Bayer's commitment to both segments is highlighted by its refusal to sell large chunks of its chemicals division, despite a 1997 return on sales of 1% for chemicals compared with 16% for health care (CW, March 26, p. 13).

Although health care is easily Bayer's biggest-selling, highest-margin business, the company is resolutely committed to a broad portfolio that spans plastics and industrial chemicals as well. Even so, investment bank Deutsche Morgan Grenfell ranks Bayer well ahead of Hoechst or BASF for returning shareholder value. Few would argue with Bayer's success; …