Shares in German drugs and chemicals maker Bayer closed down almost 5% at $38.85 on the New York Stock Exchange yesterday, reflecting investor sentiment as a relatively mixed bag of financial results for its fourth quarter - which fell slightly short of general expectations - were buffered by a robust performance for the full year and predictions of modest growth for 2006.

Net profit for the quarter dropped 32.4% to 46 million euros, as a net charge of 423 million euros for extraordinary items masked sales growth of 16.1% to 7.1 billion euros. But it was operating profit before charges - which came in at 615 million euros - that fell shy of general expectations and unsteadied investor confidence.

On the other hand, results for 2005 came as a pleasant surprise, with the year turning out to be one of the most successful since the company’s inception in 1863, according to Werner Wenning, Chairman of Bayer’s Management Board.

For the full year, the group generated total sales of 27.4 billion euros, marking a rise of 17.6% over 2004, while EBIT before special items leapt 55.9% to 3.3 billion euros, with the Bayer MaterialScience and HealthCare divisions leading the way in terms of earnings growth.

Bayer HealthCare turned in sales of 9.4 billion euros for the year, bolstered to the tune of 1.1 billion euros from the sale of new products acquired via the purchase of Swiss drug giant Roche’s over-the-counter medicines unit at the end of 2004 for 2.4 billion euros.

Under the HealthCare umbrella, the pharmaceuticals division posted sales of 3.1 billion euros, almost completely offsetting the 312 million-euro fall in revenues from the group’s popular antibiotic, Cipro (ciprofloxacin), after it lost its US patent armour, as well as buffering the drop in turnover stemming from primary care products marketed by Schering-Plough in the USA. The erectile dysfunction drug Levitra (vardenafil) and Trasylol (aprotinin), used to prevent blood loss after surgery, also fared well, each recording growth of 35%, while Avelox (moxifloxacin) also pleased with a 15% rise in sales.

Revenues from the Biological Products Division were given a boost by the haemophilia treatment Kogenate (recombinant antihemophilic factor), which pushed growth of 21% for the unit, but the biggest gain was booked by the Consumer Care Division, which saw sales rocket 76% to 2.4 billion euros as “the integration of the Roche OTC acquisition progressed faster than we originally expected,” Wenning explained to delegates at Bayer’s annual results conference yesterday in Leverkusen, Germany.

“A very positive performance was recorded by the newly-acquired products Bepanthen/Bepanthol and Supradyn, with 19% growth each, and Rennie, which advanced by 7%,” he said. Importantly, the strong performance of the newly-acquired portfolio of OTC drugs helped the group largely offset - within the same year - the increase in net debt resulting from the purchase. Although currently the world’s third-largest OTC business, Wenning boldly stated that Bayer is hoping to become the leading global provider of self-medication products, but he would not be drawn to a specified date of when he expects to the group to take pole position.

Commenting on Bayer’s achievements for 2005, Wenning told conference attendees that the numbers “underscore the fact that our strategic alignment toward innovation and growth has brought a sustained improvement in Bayer Group’s earning power.” And he went on to say that the company intends to build on this positive performance this year, to “achieve further growth in all areas and improve the underlying operating results once again.”

As a further testament to the firm’s solid performance, return on capital, a leading internal indicator of Bayer’s performance, was at a record level for 2005, with a cash flow return on investment of 12.4%, while the firm’s share price has rocketed 51% in just one year - adding 8.7 billion euros to its market capitalisation, Wenning pointed out.

And, at first glance, Bayer’s HealthCare segment looks set to continue turning in solid results and positive news flow for the foreseeable future, especially if Nexavar (sorafenib) does as well as the group expects and a number of the 12 early-stage candidates currently in Phase 1 shift up a gear into Phase II development.

Nexavar, the first new drug in more than a decade to treat adults with advanced renal cell carcinoma, was approved in the USA late last year, and looks set to be one of the brightest stars in Bayer’s future. Not only has the agent been shown to double progression-free survival of patients from three to six months on average, but it also appears to be much less toxic than current treatments for this type of cancer, such as interleukin-2 or interferon-alpha, and has the additional benefit of being dosed orally rather than by injection.

All this adds up to a drug with real blockbuster potential, according to Wenning, who predicted sales of 1 billion euros for the product. And, just last month, Bayer and its US partner Onyx Pharmaceuticals launched a further Phase III trial of the agent in lung cancer, in addition to the ongoing late-stage trial in skin and liver cancer.

Wenning also highlighted the group’s antithrombotic Factor Xa inhibitor, which entered Phase III testing for the prevention of blood clotting in the legs at the end of last year, as a key driver of future growth with peak sales potential of 1 billion euros, and noted that Kogenate still has un-tapped potential, especially if a new formulation currently in development, aimed at treating haemophiliacs, makes it to market.

Although the group considers its R&D pipeline, which houses 12 projects in Phase I, three in Phase II and eight in Phase III development, to be well stocked compared to those of its similar-sized peers, Wenning said that Bayer plans to further support its business through external growth, such as buying-in potential candidates. But he refused to comment on whether the firm would make a move for Pfizer’s OTC unit, saying only “if something on the market fits our business we will take a look at it.”

With regard to this year, Wenning told journalists that Bayer expects a 5% hike in sales during 2006 to around 28 billion euros coupled with a small rise in earnings. But he warned of a dip in income from the plastics division and revealed that, further, largely-unspecified belt-tightening measures, expected to shave around 600 million euros from the cost base, would be implemented over the coming years to improve efficency, further denting investor confidence.