German drug-chemical hybrids post strong results
Thu Apr 27, 2006 11:28 AM ET
FRANKFURT, April 27 (Reuters) - Germany's drug-chemical conglomerates posted strong quarterly results on Thursday as investors got a chance to catch their breath after a wave of restructuring that has swept the domestic sector.
The results underlined a continued upswing in chemicals, marked the resilience of key drugs at Altana and Bayer and showed again how vital Merck's liquid crystals business is to the 338-year-old group.
"The three results show that an upswing in the chemicals sector is not at an end," said Sal. Oppenheim analyst Ludger Mues.
"They show the strength of technical polymers at Bayer, liquid crystals at Merck and coatings at Altana," he said.
But, he added, the broader European trend of breaking up conglomerates was likely to continue despite the apparent advantage of having diverse businesses shown by these results.
For now, the results brought the focus squarely back to performance, although analysts were disappointed that Altana said little about a restructuring that could see it sell its drugs unit and list its chemicals business separately.
Shares in Merck climbed 6.5 percent after the company put behind it a failed bid for rival drugmaker Schering to beat the average of analysts' forecasts for operating profit by 21 percent, thanks to a sparkling performance by its liquid crystals unit.
Earnings at the unit, which supplies makers of flat screens and mobile phone displays, rose nearly 80 percent.
Bayer, the company that beat Merck in its bid to take over Schering, reported quarterly earnings rose 8.2 percent, confounding analysts' expectations of a fall and sending shares up 3.6 percent to 36.80 euros at 1442 GMT.
Altana beat forecasts with a 23 percent rise in quarterly operating earnings thanks to strong sales of flagship anti-ulcer drug pantoprazole and the acquisition of pigment maker Eckart.
Its shares rose as much as 1.6 percent before falling away in afternoon trade.
NO BREAKUPS HERE
While Altana has opted to break up its business, Merck and Bayer remain two of Europe's most committed conglomerates.
At Merck, the liquid crystals unit subsidises the drugs business in a sense, given that Merck's top drug hope Erbitux is still some distance from the sales potential of 1 billion euros that some say it can reach.
Bayer Chief Executive Werner Wenning ruled out afresh any idea of shedding MaterialScience, the plastics and chemicals unit that could be hit worst by a cyclical downturn.
"You can never say never, but in the medium term I don't see Bayer or Merck breaking up," said Mues.
In most cases, analysts want conglomerates to break up in order to focus more on one of the businesses.
Merck shares trade at 23 times forecast 2006 earnings according to Reuters Estimates, while Altana stock trades at 14.5 times and Bayer has a multiple of 13.5, with prospects for the liquid crystals business at Merck compensating for the so-called "conglomerate discount".
Analysts say Bayer could boost valuations by becoming a pure play healthcare company, or at least a lifesciences firm that encompasses healthcare and agrochemicals.
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