Agrochemicals and pharma are not compatible (Die Zeit)

As Bayer’s troubles continue, Die Zeit interviewed John Rountree to understand what is going on at Bayer and how they should proceed.

Download the article in German above or read the English translation below:

“All that just distracts”

Bayer is fighting the lawsuits over the plant protection product Round-Up. But that hides the real problems of the group, says John Rountree.

ZEIT: Mr. Rountree since acquiring the Agrochem Group Monsanto has lost Bayer 150 billion euros in value, threatening billions in billions due to claims for damages because customers claim they have gotten cancer from the use of the crop protection product Round-Up. Was that worth it?

Rountree: Great scientists work at Bayer. But like many other pharmaceutical companies, Bayer is less good at maintaining a strong and trusted public image. The legal proceedings concerning the active substance glyophosate, which was included in the weed killer round-up, are a burden for the everyday business. Within the group, only a small group of employees take care of it, especially from the legal department and the executive board. But every Bayer employee knows about it and follows the proceedings. In this respect, a shadow hangs over the company. It is easy to imagine what the board meetings are talking about: legal risks, the current status of procedures and possible outcomes. It’s not so much about issues like growth, innovation, research, about things that drive a business forward, but about how the process goes. No matter how the proceedings go, Bayer will not break. But the procedures damage the reputation. It does not make it easier to find new talents. These are all side effects that will show in the performance in a few years. They do not settle down immediately. In that sense, the Monsanto acquisition is a burden for Bayer.

ZEIT: So, was it wrong to want to become one of the largest agrochemical companies in the world?

Rountree: At the moment of the takeover it seemed like no alternative. There was a consolidation process in the agricultural sector. Dupont and Dow Chemicals merged into Dow Dupont and Chem China acquired Swiss manufacturer Syngenta. As you thought at Bayer, you will soon have nothing to report, if you stay small. As such, the Monsanto acquisition seemed the right move. It was about economies of scale and cost reduction. It was about defending the status quo. But: the problem with the matter was already at that time, that one did that within the group structure: one did not separate out the own agricultural division from Bayer and a new enterprise. Now you have the problems: Because Bayer is actually a pharmaceutical company and the agricultural sector is a completely different business. It will not be easy for the board and management to bring that together.

ZEIT: Before that, Bayer was also a company that was active in all these sectors. Why should this not work?

Rountree: First of all, there are the customers. In the pharmaceutical sector, they have three types of customers: patients, doctors and those who pay, insurance companies or governments. You have to be prepared for that and you have to work with this not very simple constellation. In the agricultural sector, the customers are completely different: it is the farmers worldwide. This market is a completely different one. And as a corporation, you always have to think about the customer. So it would be better if the board focused on one thing than trying to bring pharmaceuticals, consumer brands, agrochemicals and veterinary medicine under one roof. It becomes very difficult to concentrate on the necessary things.

ZEIT: The broader a company is set up, the more stable it is. In that sense, is not that wrong?

Rountree: Man can see that as a sign of stability. But one has to wonder if it would not be better to have a board that only cares about pharmaceuticals and a board that deals only with agrochemicals. You could work much more concentrated. In addition, Bayer already has problems today. Bayer’s profit margin was 10 percent in 2018, which is the worst of all major pharmaceutical companies. Then sales general and administrative overheads at Bayer are exceptionally high at 39 percent of sales. In addition, debt has risen dramatically due to the Monsanto acquisition.

ZEIT: But there are savings in the millions by the acquisition …

Rountree: … the latter is a matter of expectation. Let’s put it this way: Bayer was not overly ambitious about these goals. And the high debts are a heavy burden on the management. If you have to save and the costs have to be reduced to pay the debts, then it makes investment in growth difficult. Even strategic investments are no longer so easy. High debts dampen one’s own ambitions. Of course, it can be good for a company to cut its own costs, to clean up, to become more profitable. But if you want to invest in growth, if you want to put money into research and development, impede such austerity programs. Not only on the subject of debt, but also on the subject of profitability are competitors such as Pfizer, Johnson & Johnson or Merck are significantly better.

ZEIT: What are they doing differently?

Rountree: They have no agribusiness and focus on what they do well. Above all, the US companies are much less widely positioned. And that’s good with pharma: you want a board that is extremely focused and can focus on the business. An exception might be Johnson & Johnson, which are broader but have a federal structure, meaning that the individual units are more independent. In addition, few pharmaceutical companies still make large acquisitions or form mergers.

ZEIT: How is this an advantage?

Rountree: Instead of taking over competitors, one works rather together on projects. This has proven to be a successful strategy in the pharmaceutical industry and is a trend. Take the example of Regeneron and Alnylam. These are two independently strong science-based US biotech companies. Bringing Alnylam’s RNAi expertise together with Regeneron’s genetics expertise is a win-win for the companies and for patients. For this they cooperate as independent companies. That means both keep their culture, their ethics, their organizational structure. And they can do research without being distracted by lengthy integration process. There is no need to look for synergies, there is no need to merge departments, employees are not secretly looking for a job because they are afraid of losing their jobs – all this is missing. You can just work in peace. Both sides can learn from each other and focus on their strengths. One plus one is more than two in this case.

ZEIT: But you have to share the profits in the end as well.

Rountree: But you also share the research costs and without further obstacles. This is better for the future of companies. And it works not only between big and small companies but also between big and big ones. For example, Merck cooperates with AstraZeneca in the field of cancer research. Both companies want to learn from each other. And they refrain from buying one another. Imagine if both had come together: A gigantic company would have emerged, the merger would have employed and distracted employees for years. The Monsanto takeover by Bayer has been running for two years. A lot of energy is used on it, the employees and the board are distracted, meanwhile others cooperate and can do research and development without being distracted.

ZEIT: What should Bayer do to your opinion now?

Rountree: It’s difficult at the moment. One should outsource the agricultural sector and lead independently. Let me say it again: agrochemicals and pharma are not compatible. But at the moment this is hardly possible .. In the US, the processes are running because of Monsanto and nobody knows how they go out, there are no investors.

ZEIT: You advise pharmaceutical companies worldwide. How much easier is it to be able to express one’s opinion without being responsible for the consequences of the business, like a board?

Rountree: We have a different role as consultants. I feel that our job is to provoke and challenge the board and management. We need to help them to find a different perspective and to think differently so they can make the best decision they can with confidence. And in one, I have to correct you: we have a lot of responsibility, it’s a tough business and our clients won’t ask for our help if they don’t see value from it.

ZEIT: Can you buy a pack of aspirin tablets at the pharmacy without thinking about which company made it, how it is and how profitable the pack is?

Rountree: When I see a pharmaceutical product like Aspirin I always think about the company that made it and the amazing effort and resources that it took to get it to the point where patients can get the benefit of it.

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Bayer is a company that we have been asked to comment on several times before.