Werner Baumann, the chief executive of German pharma and agrochemicals group Bayer, started his job with a bang. He had only been at the helm for three weeks when, on May 23 this year, he announced plans for a mega takeover of U.S. seed manufacturer Monsanto for $66 billion.
Half a year on, we met Mr. Baumann in the Bayer board conference room at the company’s headquarters in Leverkusen, near Düsseldorf. The wave of criticism the deal has attracted from investors and the public doesn’t seem to have fazed him. The 54-year-old, ever the sober strategist, outlined his plans for Bayer and Monsanto, predicting it would enhance growth, boost innovations and help generate essential increases in farming productivity.
Mr. Baumann, how proud are you of what you have achieved as the new boss of Bayer this year?
We have achieved a great deal this year. We are very happy with that.
The takeover of Monsanto is a gigantic project, the biggest in German corporate history. Chief executives usually save something like that for around the middle of their time in office. You started with it. Why?
Of course, the timing was not perfect. I only took over as management board chairman at the beginning of May. But it was the right time for this strategic decision. Monsanto is a very good fit for Bayer, because we complement each other extremely well in terms of products and technology.
But the risks inherent in a takeover costing $66 billion are enormous for Bayer. It looks like an expensive bet on the future.
The sheer size of the takeover was not important in our thinking. We had been watching the development of the agricultural industry, and it was clear that Monsanto was the ideal partner for us. We also have the necessary financial strength. We at board level implemented things which had been in preparation for a long time.
You are taking a big personal risk right at the beginning of your CEO career.
Possibly. But in the final analysis, our decisions should be made on the basis of what is right for Bayer and have nothing to do with personal sensibilities.
Would you still have your job if negotiations with Monsanto had broken down?
That is not a decision I would have had to make – it would have been up to the supervisory board. I feel good about this. My colleagues on the board and I are convinced we are doing the right thing for the company. I never felt bad during all the discussions, or fearful that we might be on thin ice. Because I have complete confidence in our team and the quality of their work.
If the cartel authorities give their approval, Bayer will complete the biggest takeover a German company has ever dared to make. You are sure of a place in the history books. Is that important to you?
No, not at all. It simply doesn‘t interest me. And anyway, assessments of that nature only tell half the story.
Not all managers think like that, and that is why major takeovers repeatedly fail, often to the detriment of the workforce. Captains of industry, much like politicians, have become a target for sections of the population in Europe and the United States. How do you interpret increasing anger against elites?
Among the middle classes there are certainly losers due to globalization, real and imagined. They are unhappy with their status, unsettled and find it increasingly difficult to deal with the risks they are exposed to. And neither politicians nor society in general have adequate answers for them.
Should globalization be regarded more critically?
It is right that we highlight the great, undisputed advantages of globalization. But we also have to be clear about its negative sides. And people who only get to know the latter will not be helped by its overall advantages. Just look at southern Europe. Many people there are without adequate employment, despite the fact they have good qualifications. That creates big potential for social unrest.
It is also difficult to explain why managers pay themselves big bonuses when their company is in crisis. Has all sense of proportion been lost when it comes to managers’ remuneration?
I can only speak for Bayer. In our remuneration system the criteria are the same for everyone, whether they are in lower or higher management. We have clear upper limits with regard to variable income components. Despite immense growth in the value of the company, there has been no exorbitant growth in managers’ remuneration at Bayer in the last 15 years.
But you can understand the fundamental criticisms of high bonuses at Volkswagen and the Deutsche Bank?
I can certainly understand the fundamental discussion about remuneration systems.
Does a manager have to get back to embodying what used to be called an “honorable businessman?”
Most companies work very steadily and well. Negative exceptions should not form the overall picture. But of course managers should show sensitivity; after all, they also have an important function as role models. Every company needs a strong internal constitution that sets boundaries for CEOs. With regard to remuneration that means it has to be appropriate. And it means having the courage sometimes not to claim what has been contractually assured, if that would be inappropriate at the time – certainly in the case of a serious crisis.
As the new CEO you moved into the spotlight very quickly this year. Were you surprised at the scale of negative public reaction to the Monsanto takeover plans?
It didn’t surprise us. We had expected that.
That was clearly down to Monsanto’s bad reputation.
It was clear to us that Monsanto’s reputation was particularly bad in Germany and France. But we have known the company for many years and value the quality of the management, the technology and the products. It is an excellently managed biotech company.
Investors seemed horrified by the takeover plans, as shown clearly by the fall in Bayer’s share price. Why was that?
There was certainly a moment when the market was surprised, although we had been communicating since the fall of 2014 that we wanted to develop Bayer as a life-science company with health and agricultural products – and that we did not want to become a pure pharmaceutical company.
Is it so surprising that people tend to associate the Bayer slogan “Science for a better Life” more with medicine than with seed products?
I think that describes our focus very comprehensively. The discrepancy in perception resulted above all, I think, from the fact that over the years, specifically since 2003, our investment in external growth was predominantly in the health sector. And we got out of firstly chemicals and then last year the plastics sector, Material Science. That seems to have built up expectation on the stock exchange that we would also sell our agricultural sector Crop Science and concentrate on pharmaceuticals.
With the combined agricultural business we are aiming for average annual growth of 4 percent. That is above the growth levels expected for the market as a whole.
It was expected that Bayer would invest heavily in the pharmaceutical business and make acquisitions in that sector. Isn’t that the more attractive market in comparison with agrochemicals?
For us, the decisive question is how we can create value in the long term. The agricultural market is very attractive above and beyond its cyclical nature, also in comparison with many other industries. With the combined agricultural business we are aiming for average annual growth of 4 percent. That is above the growth levels expected for the market as a whole.
But surely the pharmaceutical market should see stronger growth in the coming years.
You have to make a differentiation here. Market growth in pharmaceuticals does not mean that all manufacturers can grow equally. Often the growth is driven by just a few companies which have made a real breakthrough in therapy. One single top drug can be responsible for a significant portion of the growth in the pharmaceutical market.
You have now had half a year to convince the skeptics of the merits of Bayer AG’s new direction. But the capital markets still seem to have doubts about its success, as a look at the weak share price shows.
Again: There has been no change of our fundamental orientation as a life science company. And with regard to our valuation on the stock exchange, we are now practically back to the level shortly before the announcement of the Monsanto takeover. But it is clear: The markets are currently unsure whether the transaction will clear all the regulatory hurdles at the end of the day. That is certainly a burden on our stock, and indeed on Monsanto’s.
But that is not the only concern investors have. There is great anxiety that Bayer will wind up destroying value because the price being paid for Monsanto is too high.
If this were the case, it would be reflected in the target prices of the analysts which assess us. But they have predominantly made buy and hold recommendations for the stock with target prices often considerably higher than the current price. So the assessment is that today‘s stock price does not reflect the intrinsic value of the company. It has nothing to do with the destruction of value.
What does it have to do with then?
Sometimes company managers and owners have a different timeframe. The average investor and fund manager has relatively short periods during which his success is measured. And that means high sensitivity toward things which can influence the price of a share in the short to mid-term. Company managers, on the other hand, should be focused on long-term creation of value. That is something we analyzed and evaluated intensively in the case of the Monsanto takeover.
And how high do you gauge the risk that Bayer is overstretching itself financially?
The financing is in place. We have arranged long-term bank financing with a term of over 30 months, so we have sufficient leeway for a good preparation and a flexible approach to the long-term external funding of the deal. We have just done that with the first step, with the placement of the first 25 percent of the equity tranche that we eventually plan to raise. Now we are preparing to take the next steps, each at the next possible time that makes sense.
The combination of Monsanto and Cropscience will be decidedly profitable, with very attractive, pharmaceutical-like profit margins.
That means you will first of all bring in more equity capital, such as in the form of the planned issuing of new stocks?
Yes, from the beginning, we’ve had the plan of first carrying out the equity capital measures and afterwards the outside financing. It’s the right path. A larger equity capital base underpins our investment grade- rating and that, in turn, leads to better interest terms.
Now a hike in interest rates is possibly forthcoming. To what extent would that adversely affect your financing plans for acquiring Monsanto?
We planned the transaction on the basis of an average interest charge of 3.5 percent. So we aren’t basing it on super-low interest rate calculations. Overall, meaning including the equity components, we reckoned with capital costs totaling 7.6 percent. Even on this basis, the takeover creates a lot of value.
Will there be anything left of the profits of the combined agricultural divisions in the future after deducting the costs of financing?
Don’t worry about that. This transaction is different than many in the pharmaceutical market where sometimes astronomical prices are paid for a fantastic pipeline that first of all has to be further invested in. The combination of Monsanto and Cropscience will be decidedly profitable, with very attractive, pharmaceutical-like profit margins. We will service our debts from the earnings from Monsanto and from the synergies we expect and, on top of that, also continue to be able to pay attractive dividends.
Will Baumann still be CEO when the final euro for the deal is paid?
That isn’t my decision. By the way, we plan to consistently reduce the debt.
The Monsanto shareholders voted in favor of the takeover Tuesday this week. But the shares are still trading far below the offer price. There is a lot of skepticism in the market that the deal will be allowed by the cartel authorities.
We are very pleased that the Monsanto shareholders’ meeting approved the transaction with a 99 percent vote. And we are confident that we will receive the necessary official approval.
What makes you so sure?
Our businesses hardly overlap regionally or on the production side. Basically, there are only two areas where a significant overlapping exists. Naturally, it’s up to the cartel authorities to make the decision and we’ll work very closely with them.
Considering the general trend in the industry toward consolidation, do you expect the cartel office to be particularly vigorous in their examination?
This subject is certainly harder to grasp. It has to do with the two key questions, whether the industry’s innovative power as a whole is being reduced and whether pricing power will be created on the supply side. Our analyses come to the conclusion that no one will have a monopoly in certain technologies in future either and the industry will continue to remain characterized by very intense competition between larger, medium-sized and smaller companies.
The pharmaceuticals division is growing strongly; this year we additionally invested more than €300 million alone in research and development.
That’s hard to believe when the largest producer of seeds joins together with Bayer, the second-largest producer of crop protection.
The combination of our crop protection products with Monsanto seed businesses doesn’t change the market power of the new company. We continue to be in stiff competition not only with the big players, like Syngenta, BASF, and the merged businesses of Dow Chemical and Dupont, but also with many other companies in every region.
The European Commission is concerned that the Dow/Dupont merger will come at the cost of research and development. Is this also likely to be a worry regarding the Bayer and Monsanto?
We won’t cut costs in research and development, except with a few technical overlaps or in the service divisions like IT. The combined companies have a R&D budget of pro forma €2.5 billion ($2.6 billion), the largest in the industry. And we want to increase that in the future. The potential of new technologies in farming is far from exhausted. By the way, Bayer’s and Monsanto’s research activities complement each other to a large degree.
And that won’t be to the detriment of Bayer’s other divisions, such as the pharmaceutical business, which was dominant up to now?
No. Once more, just to make it clear: We are not cutting costs in pharmaceuticals so we can invest in the agricultural business. The pharmaceuticals division is growing strongly; this year we additionally invested more than €300 million alone in research and development. The R&D share is increasing.
There are doubts that Bayer’s pipeline of new drugs is strong enough to continue to maintain the current high standard of the pharmaceuticals division.
I don’t share this concern. We have prioritized six new products in development that together add up to a top sales potential of at least €6 billion. And on top of that we are investing in additional projects, so I see that as having us well positioned going forward. For example, just this week we founded the company BlueRock Therapeutics together with Versant Ventures and made $225 million available for the development of stem cell therapies.
Farming productivity will have to increase by 60 percent between 2005 and 2050. We can’t achieve that just by cultivating more land, there isn’t that much arable land available.
At the moment, the pharmaceuticals division is largely carried by the success of the prescription blood thinner Xarelto. How long will this drug be able to continue selling so well?
In the crucial U.S. market, the patent for Xarelto doesn’t run out until August 2024; after that, there is another possibility of extending the market exclusivity for half a year. We expect the product to steadily grow until then and won’t reach its maximum sales until shortly before the patent runs out. So Xarelto will be contributing to the growth of our pharmaceuticals business for a long time to come.
At the same time, there is an increasing number of allegations of this preparation having possible side effects. Bayer is already facing 13,800 law suits in the USA. How much of a threat is that?
Xarelto’s safety profile in clinical practice matches the data of clinical studies. And it confirms Xarelto’s positive benefit-risk profile that led to it being approved in over 120 countries with a variety of indications.
Your competitor Boehringer faced similar problems with a blood thinner and reached a settlement to get the lawsuits off its back. Would that be an option for Bayer as well?
We will vehemently defend our position. A settlement is out of the question.
Mr. Baumann, genetic engineering is being successfully used in medicine and is hardly encountering any criticism. Genetically engineered plants, such as Monsanto produces, on the other hand, are considered the work of the devil in Europe. Will Bayer be able to change this attitude?
We don’t have any interest in trying to introduce products onto the market in Europe that society or governments don’t want. We won’t waste any energy on that whatsoever. I also want to dispel the preconception that our merger was only concerned with the further development of genetic engineering. We’re just as committed to pushing forward conventional and biological crop cultivation.
Have you given up the fight for genetically-modified plants?
No, we haven’t done that. We continue to claim the right to represent a different opinion on this issue than the opponents of genetic engineering. We argue scientifically and are convinced of the benefits.
You’ll hardly get any support from politicians on this subject.
Of course, governments in Europe can decide not to allow genetic engineering in agriculture for certain reasons. We respect that. But it doesn’t stop us from pointing out that genetically-modified plants deliver larger harvests and better quality. In addition, the technology is more environmentally friendly than traditional agriculture because less pesticides are used.
Critics such as Greenpeace warn about yet unrecognized, long-term risks for agriculture.
Genetically-modified plants have been being used in agriculture for over 20 years. During this time no safety risks of any kind have cropped up, not in a single study. This summer over 100 Nobel prize winners from a variety of disciplines wrote an open letter to Greenpeace. They declared their support for the use of genetic engineering of crops because it is necessary to feed a rapidly-growing world population. That is a clear message.
But many people want more organic farming. Why shouldn’t that be the right and better way to feed a growing world population?
We’re not saying that there should only be industrial agriculture in the world. Certainly there’s justification for a variety of cultivation methods. But you can’t romanticize agriculture. For one thing, it takes a very high level of income when a society wants to feed itself solely with organic products. You don’t have that everywhere in the world. But even more crucial is the fact that you can’t produce the amounts of food that will be needed in the future with a purely organic-orientated agriculture.
How much is that going to be?
Productivity will have to increase by 60 percent between 2005 and 2050. We can’t achieve that just by cultivating more land, there isn’t that much arable land available. It can only be done with higher productivity and for that, we need, for example, stress-resistant varieties with higher yields as well as modern agricultural digital technology. That is precisely what we want to create by joining together with Monsanto.
Millions of small farmers can probably hardly afford the new high-tech solutions, unlike the huge industrial agricultural operations in North and South America. Will the new farming technologies from your laboratories reach the people who really need it — people in developing countries?
The trade flows of agricultural commodities today are global. The North and South American agricultural sectors export worldwide all the way to Asia and Africa. Moreover, the impression is wrong that Bayer only focuses on large industrial customers. We support small farms, provide them with basic knowledge of cultivation to attain a higher yield. For them, the use of modern crop protection is also indispensable.
Do you like meals that have been prepared with genetically-modified plants?
They taste good to me – and I’m in excellent health.