Bayer A.G.

1865–1952

Bayer A.G., along with BASF and Hoechst, is heir to the German chemical cartel known as I.G. Farben, which the Allies disbanded in 1952 for its close association with the Nazi Party and active participation in war crimes. Rising above its checkered past, Bayer has again assumed a commanding position in the world chemical industry. The diversified company now operates in six broad areas: health care (pharmaceuticals and self-medication), industrial products (including polyurethane), polymers (fibers, plastics, and rubber), imaging technologies (including photographic products), organic products (dyes, pigments, and organic chemicals), and agrochemicals.

Bayer A.G. was founded in Elberfield by Friedrich Bayer in 1865. Bayer's first product of note was a synthetic magenta dye. The works at Elberfield were followed by additional production facilities in Leverkusen (1891), Uerdingen (1907), and Dormagen (1913).

Although Bayer was a world leader in dyestuffs, its place in the history of early twentieth-century chemistry was secured by its contributions to pharmacology. A Bayer chemist, Felix Hoffman, discovered aspirin at the turn of the century. In 1908 the basic compound for sulfa drugs was synthesized in Bayer laboratories. The immediate application of the compound was a reddish orange dye, but it was soon discovered to be effective against pneumonia, a major health hazard of the early twentieth century. Despite the lives that could have been saved if the sulfa drug had been released immediately, Bayer held on to the formula. Frustrated French chemists were forced to duplicate the drug in their own laboratories in order to introduce it to the market.

Bayer chemists regularly tested dye compounds for their effectiveness against bacteria. In 1921 they discovered a cure for African sleeping sickness, an infectious disease that had made parts of Africa uninhabitable. Aware of the political, as well as the pharmacological, implications of its compound, Bayer offered the British the formula to the drug, known as Germanin, in exchange for African colonies. Britain declined the offer. This led to a policy during World War I whereby Bayer deprived the Allies of drugs and anesthetics whenever possible.

In 1925 the president of Bayer, Carl Duisberg, organized a merger of the major German chemical companies into a single entity known as the Interessen Gemeinschaft Farbenwerke, or I.G. Farben. From their inception, the German chemical companies had been organized into a series of progressively more powerful trusts, but with I.G. Farben the last vestiges of competition in the chemical industry were extinguished. Other industries, such as steel, were undergoing a similar process in Germany.

In addition to setting quotas and pooling profits, I.G. Farben pursued political aims, working to prevent any possibility of a leftist uprising that would establish worker control over industry. In order to prevent such an uprising, I.G. Farben financed right-wing politicians and attempted to influence domestic policy in secret meetings with German leaders. The trust also exercised its influence abroad, with Bayer and other companies contributing an estimated ten million marks to Nazi Party associations in other countries. Money was also designated for propaganda: in 1938 Bayer forced an American affiliate, Sterling Drug, to write its advertising contracts in such a way that they would be immediately canceled if the publication in which the advertising appeared presented Germany in an unflattering light.

antitrust suit forced Bayer to buy Monsanto's share of Mobay, which generated $540 million in sales.

1925–1962

Bayer and I.G. Farben profited handsomely from their support of Adolf Hitler. By 1942 the I.G. Farben was making a yearly profit of 800 million marks more than its entire combined capitalization in 1925, the year the cartel was formalized. Not only was the I.G. Farben given possession of chemical companies in foreign lands (the I.G. Farben had control of Czechoslovakian dye works a week after the Nazi invasion), but the captured lands provided its factories in Germany with slave labor. In order to take full advantage of slave labor, I.G. Farben plants were built next to Maidanek and Auschwitz.

Many of the I. G. Farben plants contracted during the war were built in remote areas, often with camouflage. These factories did not sustain much physical damage, in contrast to the many German cities that were completely destroyed. By I.G.'s account, only 15 percent of its productive capacity was destroyed by the Allies. The worst damage was sustained by the extensive BASF works and factories in eastern Germany, which were destroyed by I.G. Farben employees so that the buildings would not fall under Russian control.

Immediately after the war many members of I.G. Farben's Vorstand, or board of directors, were arrested and indicted for war crimes. I.G. Farben executives were in the habit of keeping copious records, not only of meetings and phone calls, but also of their private thoughts on I.G. Farben's dealings with the government; as a result, there was extensive written evidence incriminating the Vorstand. Despite this evidence and testimony from concentration camp survivors, the Vorstand was dealt with leniently by the judges at Nuremberg. Journalists covering the 1947 proceedings attributed the light sentences, none of which was longer than four years, to the fact that all the sentences handed down at the end of the trials were less severe, as well as to the judges' unwillingness to expand their definition of war criminals to include businessmen.

I.G. Farben plants operated under Allied supervision from 1947 until 1952, when the organization was dismantled in the interests of "peace and democracy." The division of I.G. Farben generally adhered to the boundaries of the original companies; for example, the works at Leverkusen and Elberfield reverted to Bayer. Bayer also received the AGFA photographic works.

In the first five years of its independence from I.G. Farben, Bayer concentrated on replacing outdated equipment and on supplying Germany's need for chemicals. By 1957 Bayer had developed new insecticides and fibers, as well as new raw and plastic finished materials. Bayer's resiliency in recovering from the war impressed U.S. investors, who held 12 percent of the company's stock.

During the late 1950s Bayer began to expand overseas and by 1962 was manufacturing chemicals in eight countries, including India and Pakistan. Most of the work done abroad was "final stage processing," whereby active ingredients were sent from Germany and mixed with locally obtained inert ingredients that would be expensive to transport overseas. Final stage processing arrangements allowed Bayer to manufacture products, mostly farm chemicals and drugs, in developing countries more profitably.

1952–1982

High tariffs in the United States and high labor costs in Germany also provided incentives for Bayer to acquire production facilities in America. In 1954 Bayer and Monsanto formed a chemical company known as Mobay to manufacture engineering plastics and dyestuffs. Because Bayer did not have sufficient funds to build a plant in the United States, it provided technical expertise while Monsanto provided financial resources. Although Bayer had part and eventually full interest in Mobay, Mobay's promotional material was never allowed to mention Bayer's name, because the American rights to the Bayer trademark were given to Sterling Drug after World War I in retaliation for Bayer's suppression of American dye companies during the early years of the twentieth century.

Realizing that West Germany offered only limited opportunity for growth, Bayer worked to develop products for the U.S. chemical market, emphasizing value-added products for which Bayer held the patents, including pesticides, polyurethane, dye stuffs, and engineering plastics. Technical innovations that allowed Bayer to penetrate the U.S. market included the urethane compound that forms the familiar "crust" on urethane used in auto dashboards; before Bayer's discovery, the porous quality of urethane limited its usefulness. During this period Bayer consolidated and slowly expanded its international operations, especially in the United States. Overall, the decade of the 1960s was a good one for Bayer as domestic production increased 350 percent while foreign production increased 700 percent.

In the early 1970s, Bayer began to increase its already substantial investment in the United States. Between 1973 and 1977 its investment rose from $300 to $500 million, which went to expand production capacity and develop its product line, which included dyes, drugs, plastics, and synthetic rubber. Although all patents held by Bayer before 1952 had been taken away as war retribution, by the mid-1970s Bayer had expanded its product line to include 6,000 items, many of them patented by the company.

Bayer increased its capacity by expanding existing plants and purchasing new ones. In 1974 Bayer purchased Cutter Laboratories, a manufacturer of nutritional products and ethical drugs which had financial difficulties until 1977. Later, Allied Chemical sold its organic pigments division to Bayer. In 1977 a U.S. antitrust suit forced Bayer to buy Monsanto's share of Mobay, which generated $540 million in sales. The following year Bayer purchased Miles Laboratories, manufacturers of Alka-Seltzer and Flintstones vitamins.

Bayer had strong incentives to expand its U.S. operations. Due to the prevalence of strikes in Europe which interrupted product shipments, U.S. retailers were wary of contracting with European suppliers who did not have large stockpiles of their products in the United States. Lower energy and labor costs made the United States even more attractive to Bayer. U.S. holdings also cushioned the negative effects of the strong deutsche mark on imports into the United States. By the mid-1970s 65 percent of Bayer's sales came from outside of Germany, making it critical that Bayer protect itself against currency fluctuations.

In the early 1980s Bayer's worldwide holdings expanded to the point that its corporate structure needed to be reorganized. German law mandates a two-tier structure for corporations, with a management board similar in function to the board of directors of an American corporation reporting to a supervisory board made up of major stockholders, labor representatives, and outside interests. This board serves in a supervisory capacity, approves major decisions, and appoints board members. In 1982 Bayer created a third tier below the management board. This board consisted of senior managers and corporate staff members who took over management of specific product lines that had previously been the responsibility of board members.

1986–2002

The late 1980s and early 1990s were a time of stagnant revenues, cost containment efforts, and an increasing emphasis on non-European markets for Bayer. From 1988 through 1993, sales fluctuated between DM 40 billion and DM 43.3 billion, while profits leveled off. Business was affected by a serious recession in Western Europe, political changes in Eastern Europe, a cyclical downturn in the chemical industry, and government reforms in health care and agriculture. In 1993 Bayer's sales of pharmaceuticals in Germany fell 20 percent as a result of government efforts to cut expenditures on pharmaceuticals: doctors, facing reduced drug budgets, began to prescribe more generic drugs in place of the expensive, proprietary drugs developed by Bayer. Agrochemical sales were dampened by the Common Agricultural Policy reform effort that reduced the amount of farm land in Europe and the amount of chemicals used in farming.

Part of Bayer's response to this crisis was to drastically cut costs--$1.6 billion in expenditures were eliminated between 1991 and early 1995. Its worldwide workforce was slashed by 14 percent, and unprofitable operations were shed, including its polyphenylene sulfide unit. In 1992 Bayer integrated all of its U.S. holdings under its Miles Inc. subsidiary, based in Pittsburgh. The following year, under the leadership of a new chairman of the board of management, Manfred Schneider, Bayer committed to enlarging its Asian and North American operations in order to reduce its dependence on the European market. In Asia, Bayer focused its expansion efforts on joint ventures with firms in Japan, Hong Kong, Taiwan, and China. In 1993 Bayer signed an agreement with the Eisai Company of Japan to sell nonprescription drugs, and the following year several joint ventures were signed in China to set up Bayer and Agfa Gevaert production operations there.

In North America, Bayer began a drive not only to bolster its operations but also to fully regain the use of its name. After securing the rights to the Bayer name in the United States after World War I, Sterling Drugs went on to establish Bayer aspirin as a household name. In 1986, for $25 million, Bayer secured from Sterling partial rights to use its name in North America outside the pharmaceutical area. In 1994 Eastman Kodak sold Sterling to the British firm SmithKline Beecham PLC, and only a few weeks later SmithKline sold the North American side of Sterling to Bayer for $1 billion. With the purchase, Bayer not only won back the full rights to its name in North America, but also gained Sterling's $366 million North American over-the-counter (OTC) drug business. In addition to the Bayer aspirin line, the Sterling acquisition included such familiar products as Midol analgesics and NeoSynephrine decongestant. The acquisition pushed Bayer into the top five producers of OTC products worldwide.

After the purchase of Sterling, Bayer changed the name of its Miles Inc. subsidiary to Bayer Corporation. The OTC operations of Miles and Sterling were integrated into a single Bayer Corporation consumer care division. Another strategic step in North America, and one that brought added diversification to Bayer's health care operations, was the 1994 purchase of a 29.3 percent stake in Denver-based Schein Pharmaceutical Inc., a maker of generic drugs. Bayer planned to expand Schein's operations outside North America.

Bayer also beefed up its R&D budget, particularly in health care. Its drug research efforts were already beginning to pay off in the mid-1990s, especially in North America. Bayer's anti-infective drug Ciprobay had generated $1.3 billion in sales by early 1995, with the firm's patent in effect until 2002. In 1993 the company introduced a hemophilia treatment called Kogenate, Bayer's first genetically engineered drug. Other major drugs under development included a cholesterol reducer and treatments for asthma and Alzheimer's disease.

As a result of its increasing diversification within its core businesses and its aggressive program of worldwide expansion, Bayer seemed well positioned in the mid-1990s to continue to operate as one of the leading chemical and pharmaceutical companies in the world.