Bayer Aktiengesellschaft (BAYN) Earnings Call Transcript & Summary

Okay. Thank you, Magnus. I think we're going to keep going down the line. So Dave, you're up next. In terms of like your role, Chief Scientific Officer, can you maybe sort of outline your key priority -- what are you trying to actually do? And then numerically, can you sort of tell us today how much you're spending on science or R&D or however you quantify it and how you measure, I suppose, your returns from that? So it's a multipronged question, but how do you measure returns on the R&D pipeline?

So I think science means lots of things to a lot of different people. For us, when we're thinking about science and R&D, we look across the whole life cycle of our portfolio. So we look about innovation and growth, and we also look about how do you protect and maintain the existing portfolio on the market, which needs improvements, reformulations, changes along the way to kind of maintain them on the business. And it's about 50-50 split between that growth side of things and kind of maintaining and improving. So, that's the kind of the overall scope. When it comes to investment, we invest about 3.8% of net sales in R&D, and that covers off both that innovation and maintenance side, which is, I think, broadly speaking, it's kind of at the upper end of investment, recognizing that science is very important to us as a business. When I think about things like the innovation pipeline, we have lots of leading lagging KPIs. But ultimately, for this, you need to have a pipeline which is large enough, that's differentiated. It goes over multiple time horizons that is also scaled. That's really important. And there's lots of metrics with that. But for me, this is all about impact in the market. There's no point having a wonderful on paper pipeline. This is impact in the market. That's how we understand what's successful or not. So when you take something like a brand like Bepanthen in China, we launched that brand via cross-border a couple of years ago, great kind of pickup from consumers. We then formulated a local product, launched that becomes #1 for nappy rash in China, which gives us the confidence to then launch range upon range of whether that is summer skin care, winter skin care that is bespoke for those consumers in China. So for me, the innovation really comes to life in the market rather than the pipeline.

Yes. And in terms of the portfolio, how do you think about sort of trying to deseasonalize the portfolio and sort of reduce the dependence of that volatile category? What can you do from the science point of view to try and help reduce that kind of inherent volatility on the top line?

I think there's probably maybe 3 ways in which the -- that topic is being addressed. The first is, I think that a lot of the other categories are growing faster, dermatology, digestive health. So there is a natural shift away and into those faster-growing categories is one. Another is we have obviously brands like Claritin in the U.S., which are large, and we are continuing to invest in those brands in other parts of the world. So for example, again with China, launching into nasal sprays in China, which gives you more of that spread around the world. And the last piece, particularly for things like allergy, allergy is seasonal, but there's also a huge component of nonseasonal allergy. So you take a brand like Claritin, this works against 200 allergens beautifully well. And we know that about 50% of people suffer with allergies all year round. And so, there's opportunities to then build the evidence base and help people kind of choose our brands year-round rather than just in those kind of hay fever kind of scenario. So that combination of the 3 kind of can spread your risk a little bit.

I'd love to also ask you about Rx-to-OTC switches. It's obviously a big topic in consumer health. And when you get 1, or 2, it can really move the needle. I think it's been a while since you've had 1, looking back, I think, '22, '23. Can you maybe sort of outline where you are on that? And do you see any signs, particularly here in the U.S. where there's a push to lower drug prices that perhaps the political backdrop or the regulatory backdrop is a bit more supportive to actually reduce the administrative admin burden that is required to actually deliver the Rx-to-OTC switches. Is there anything kind of in the pipe or it's hard to say, but I'd love to get your sort of general perspective on how important Rx-to-OTC switches is for Bayer Consumer Health?

Our take is Rx-to-OTC switch has been a great driver of the consumer health industry over the years, and many of our brands like Claritin, MiraLAX, they emerged from Rx-to-OTC switch. And it's still important. We retain the capability to do that. And we have a number of projects ongoing internally. These are high risk, high reward. So they're not something that we would talk about until much closer to the market. And I think in general, there is an increased appetite or an increasing appetite amongst governments around the world, including the U.S. There's an increased openness to switch. I think what remains to be seen is how does that translate in the U.S. I think we're expecting early next year, a little bit more feedback on the different benefit areas and what the approach might be within switch. So we remain kind of active. But I think it's really important that whilst it is -- it's a great form of innovation and it's part of this toolbox, what's equally important, probably even more important, is actually building out our brands into new markets, into new areas, building that up with our internal capabilities and also bringing new technologies into our brands from licensing. About half of our pipeline comes from contributions from outside of Bayer as well as our internal capabilities. So I see it's much more of one component, and we remain active, but it isn't something that we're relying upon.

Maybe just one to add because the U.S. is a big market for Switch. And our last one was Astepro, which was a nonsteroidal nasal spray. One of the things we're looking at is to have a balanced approach to innovation. And so Switch is a great growth driver, but in the right circumstances. So where you have a very strong differentiated product. Astepro was a great example. It was the first nonsteroidal nasal spray, works in 30 minutes that had not been seen in the category for us. So that gave us a differentiation. But in a category that's growing. So when you look at allergy, yes, seasonal is sometimes tough to balance, but the spray segment was growing. But also, it takes significant investment. Whenever you launch a new brand, you have to give it the runway. And so that's one of the things we consider when we look at the portfolio is how do we make sure we're making the right investments, but giving them enough time to grow and build in the market. It's now a $60 million-plus business. So we're very happy with where it's at, #2 spray, but we have to be careful about not jumping too quickly into multiple new brands. And so that's why we're very discerning on the switch. I think it will still be a part of our program overall. But being a bit more discerning in terms of what the balance is.

And continuing that theme, Trevor, maybe we can have a couple of questions specifically on the U.S. Maybe the first one would be helicopter view. U.S. consumer seems to be pretty challenged. Affordability is a big topic. The category growth doesn't look great from the consumption data that we can see, excluding seasonal ranges, and even ex that. So, what's your, kind of, take on the U.S. consumer in your category at the moment? What kind of growth are you seeing for the category? And any particular subsectors where the growth is above the average or below the average, Yes.

Yes, happy to share. The OTC market is soft in the U.S. It's been a challenged -- a challenge and it's actually progressed throughout the year. We expected it to be a bit more resilient this year. We've seen it a bit softer. Seasonal does account for some of that, but it's not all of it, as you mentioned. Some of the macroeconomic pressures are real. Inflation is expected to be at 4%. We do see some consumer confidence fading. So that is impacting the market overall. We expect probably low single-digit decline this year versus a year ago. On the seasonal side, there's incidents that are definitely impacting that. Ironically, in allergy, weather played a big part of it. And if you look at this year, precipitation is up 11%. That puts a damper on the pollen and the impact of the incidents. But that being said, there are pockets of growth. So if you look at the Digestive Health business, that's one of our strongest businesses. We have 2 great brands in there with MiraLAX and Alka-Seltzer. We see that growing significantly strong for us as well. Nasal is another one. We have a leading brand in the nasal sprays of Afrin. That's one of our top power couples that we talked about that we're investing behind to extract that growth. And we're also seeing resilience, honestly, in our cardio business and the prevention business overall. So there are pockets of growth. And what we're trying to do is make sure we manage with agility, how to extract those pockets of growth while managing some of the volatility in the market. But we expect it to be subdued for the next.

And the other big topic on the U.S. is, of course, channel, right? Being in the right channel is key. I mean we've all seen what's happening with the drugstore channel here. Can you maybe outline what your channel split is currently? And then what you would consider to be an optimal channel split, I suppose, and trying to understand the kind of the interplay between the drugstore channel and making sure that in the e-commerce channel, Amazon and walmart.com, that you're also winning. So yes, if you can just maybe touch a little bit on how you're thinking about channel evolution, that would be really useful.

Yes. I think overall, we have very strong partnerships with a lot of retailers. And our goal is to try to have strong joint business plans that create value. So I won't say there's an optimal split of that. But what I will say is as we look at the consumer journey evolving, we want to be where consumers are looking for information, finding information, and ultimately making a purchase decision. You mentioned drug. Drug is a key partner for us because we see them, although they've struggled in the last little bit in terms of growth, they play a key part in that consumer journey from Rx to consumer. They're about 25% of our business, and so they're an important partner for us to work with. But that being said, we're also very focused on where the growth is and where the consumers are. So we've made a lot of investments in our e-commerce business, our digital capabilities to really gain the growth there. The U.S. is leading the Bayer group in general in terms of penetration amongst e-commerce, but we still have a lot more headroom to grow there. So that's a big focus for us to continue to build and focus on growth. So that's it.

I would also ask you about digestive health. Digestive health, I think, was pretty strong in Q2. Do you see digestive health becoming one of the more attractive categories structurally over the next decade, especially given the growing interest in gut health and GLP-1 adjacencies? I'd love to get your sort of perspective because there's different investor opinions about GLP-1 and what it all means for digestive. So, yes, what's your sort of perspective on that?

Yes, I'll talk about digestive health. We see it as a very attractive category and with long-term growth potential. And so it's 1 of our fastest categories today. We have 2 brands that compete in that category with MiraLAX and with Alka-Seltzer on a big basis. We also have a smaller business in Phillips'. But where we see the opportunity is even within constipation, which is more of a treatment category, there's a big discrepancy between sufferers and treaters, okay? Now GLP-1s drugs and gut health is creating more focus in that area, but we're focused on how do we close that gap between suffering and treating. And that's where MiraLAX has played a huge role. So there's really 2 key areas that we're growing with that brand. One is on the base business, continuing to try to close that gap between suffering and treating, really educating non-treaters and kind of destigmatizing the marketplace because a lot of folks have pretty bad stigmas around laxatives. And how do you really make that more of a part of a normal conversation. We have a new campaign, Relax, it's MiraLAX, which really talks about how can you help treat and prevent that going forward. The other part is innovation. MiraLAX is an incredible brand with a great equity with the ability to expand. And so back to innovation, really fast innovation, we saw the opportunity. MiraFAST, which is for overnight laxatives, we expanded into that market. That is going 300% above what we thought it was going to be, okay? MiraFIBER in the fiber space, anybody that's involved in the fiber market can see that, we're seeing huge growth in that space, too. So actually, between the base business and closing that treatment gap, but also innovation and broadening the shoulders, we see a lot of opportunity in digestive health for our business.

We're almost on the buzz, but I want to have to ask you one final question about VMS. It's been a big topic. So I want to get your perspective as well. It's obviously been a pretty hot area right with P&G, Thorne and Unilever, Gruns and Nestle making moves out. When I look at the Bayer VMS portfolio, I'm thinking about brands like, say, Berocca, where that had initially a big first-mover advantage, but you've now got kind of new disruptive companies coming in. How can you kind of -- how are you seeing the market evolving? It seems like it's barbelling a little bit. And how do you kind of find your niche and impact those forces that are happening in the VMS market? Do you think you need to buy? Or how are you going to, I guess, animate the next 3 years in the U.S. because the category is changing so dynamically?

It is a very dynamic and a very competitive category. And we see it as really core to our strategy because as Julio said at the beginning, we see the continuum of health, and this is on the prevention side. When you look at sort of the VMS supplement category, this is where you start to play on the prevention side, and we see that as a core area that we want to continue to grow in our business. The category has been very dynamic. If you look at how we measure the category and the channels we measure, it's down about 3%. But there's pockets of growth, like if you look at magnesium, collagen, nutrition, like functional nutrition, there's growth there. But we're seeing a shift, a shifting dynamic. The first thing, though, is we have leading brands in this space. We're 20% of the children's multivitamins. We have a leading brand with One A Day. But we're not happy with the performance recently. So we've done a lot of interventions to really focus on that first, how do you stabilize your business and continue to grow? A couple of things. First of all, how do you get consumer-relevant formulations, claims, updating our packaging, building stronger relationships with our retailers. We've seen some of that now show up on shelf, which is really important for us and continuing to invest on the brand equity and the science. And I think that's one of the biggest differentiators for us going forward. I would say over the last 5 to 10 years, you've seen a lot of start-ups, a lot of influencer-led brands that maybe didn't have all the science behind it and consumers now are getting much more discerning. And with the advent of agentic commerce, LLMs, they're having access to that science in a much more relevant way. So our focus is on making sure we're hitting the needs and like delivering on the science overall. A couple of examples. We just launched the Women's Gummy upgrade with biotin. So One A Day has the largest concentration of biotin in a gummy for women. That's critically important, a top need for nails, hair, skin doing well for us. One A Day Kids with iron. I can let Dave talk about it. But putting iron into a gummy, if anybody has ever tried it, it's a very difficult thing to do. Iron is not a very flavorful molecule. And what they've been able to do is really formulate using our science expertise to develop something that kids want to take, delivers 2/3 of their iron intake. So we're looking for very smart ways to compete in the market with the businesses we have. And of course, we're always looking for opportunities to expand our presence in that area. So we're always looking at is there opportunities to build an area that we're not in, but also build in capabilities that we might have available. I don't know, Julio, you want to talk a little bit to the work in Europe on Natsana on some of the capabilities, but we are looking at opportunities.

I don't know if we have time. I think...

We can squeeze it in. I'd love to hear your view on that.

Definitely. So we're very bullish on nutritionals. And it's in which part of nutritionals you want to play and the recent moves, you see the cloud competitors are not entirely coming out. They're just being selective in terms of where they're playing. We are in the same way what Trevor has mentioned as well as Dave, we believe we have the hardware out there. There isn't anything that is out there that we don't have. And whatever we don't, we continue to scout in terms of what is it that we need to have to be able to complement our portfolio. But most importantly, we do have the brands all across the world in nutritionals that we can leverage to expand those brands and be able to bring a hardware that is working somewhere else and bring it into that. Now what we're focused on is on the capabilities. And it's the capabilities in terms of what is it going to take to be able to win in that space. And it's not only being able to have the product, the packaging, et cetera, et cetera, but making sure that you have the evidence and you have the science that really has the -- shows the evidence that your product is actually doing what you say you're doing in your marketing. And that is going to be important. It's going to become even more relevant as we go into agentic commerce. This is something we're seeing right now. We see it increasingly as an opportunity because in the last couple of years, the barriers of entry in this space were too low. Too many new players came in that perhaps created a lot of confusions in consumers. And we believe that agentic commerce is going to bring in a little bit more rationality in terms of how do they discover the products and how do they choose which are the ones they want to take.

Absolutely fascinating. Thank you, Julio. Thank you, Magnus, Dave and Trevor. I think it kind of works this 5-way discussion. So looking forward to hearing you...

In consumer health. So...

Thanks again, everybody. Thank you.

Thanks, everyone.