This German outfit—a long-time recommendation of ours—is spinning off of its low-profit chemicals business while increasing its focus on healthcare and crop sciences; these moves should boost the company’s intrinsic value, suggests Philip Springer in Personal Finance.

Pharmaceutical and chemicals firm Bayer AG (OP:BAYZF), (OP:BAYRY) has said it will spin off its polymer division into a new, publicly traded company.

The plastics business currently is valued at about $10 billion. Bayer expects the spinoff to occur within 12 to 18 months. The company says it will use the proceeds to invest in its life-sciences business or reduce debt, or both.

Some 70% of the company’s $51.5 billion of revenue now comes from life-sciences, animal-health, consumer-health, and agricultural products. Bayer started in 1863 as a chemical company making dyes for the textile industry, but its best known for inventing aspirin.

Healthcare companies increasingly have been scaling up. Their strategy is to focus on specific sectors where they think their size and expertise will give them market leadership, faster revenue growth, and greater economies of scale. Exiting less-promising businesses boosts profitability and provides funds for new investment.

Earlier this year, Bayer agreed to buy the consumer-health business of Merck & Co. (MRK) for $14.2 billion. That business includes such well-known brands as Claritin, Afrin, and Coppertone.

Currently, these are sold primarily in the US; Bayer plans to expand global sales. The two companies also announced a joint venture to develop and market Bayer’s line of treatments for pulmonary hypertension.

In 2013–14, Bayer also has acquired Norway’s Algeta ASA (cancer treatments), Germany’s Steigerwald (herbal medicines), and China’s Dihon Pharmaceuticals (herbal and over-the-counter products).

Bayer’s healthcare division (currently 50% of sales) features a solid roster of recently launched drugs and solid exposure to biologics and cancer drugs. Biologics are manufactured from a living cell to create a complex mixture of molecules.

Overall, the spinoff will continue Bayer’s increasing emphasis on healthcare and crop sciences. The company’s moves in that direction have delivered big profits for shareholders. We recommend that you buy up to our raised limit of $145.

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