May 10 (Bloomberg) -- Bayer AG, Germany's second-biggest drug and chemical maker, said first-quarter profit fell 32 percent, hurt by drops in health care and crop chemicals earnings.

Quarterly net income fell to 400 million euros ($474 million), or 55 cents a share, from 586 million euros, or 80 cents, a year earlier, after gains a year earlier from the sale of insecticides and real estate. Leverkusen, Germany-based Bayer was expected to earn 372 million euros, according to the median estimate of five analysts surveyed by Bloomberg News.

Health care earnings declined as the Cipro antibiotic lost sales to generic versions. Operating profit more than quadrupled at the Lanxess chemical business Bayer aims to divest early next year to focus on higher-margin health care, pesticides and plastics.

``The time of greatest trial is yet to come, after the U.S. Cipro patent expiry'' in June, Tony Cox, an analyst at Dresdner Kleinwort Wasserstein, wrote in a note. Barr Pharmaceuticals Inc. already sells a version of Cipro.

Bayer expects earnings before interest, tax and some items to rise this year, even as sales decline, as it cuts some 900 million euros in costs.

``I'd like to see one or two years of them delivering what they say,'' said Holger Geissler, who helps manage more than 2 billion euros of drug stocks at DWS Investments in Frankfurt, in an interview before the report.

Bayer shares fell 76 cents, or 3.5 percent, to 21.05 euros at the close of trading in Frankfurt.

Sales Little Changed

Excluding one-time items such as the year-ago gains from asset sales, operating profit fell to 827 million euros, from 841 million euros. Sales were little changed at 7.362 billion euros. Sales volumes rose 10 percent from a year earlier, the company said, though prices were down 1 percent, and currency conversion led to a 6 percent drop in sales from last year.

``Earnings before interest and tax were boosted by a 23 percent drop in depreciation and amortization following last year's write downs,'' Cox said. Depreciation and amortization will probably amount to 2.3 billion euros this year, less than the company's earlier forecast of 2.4 billion or 2.5 billion euros, Chief Financial Officer Klaus Kuehn said on a conference call with analysts,

Net debt rose to 6.6 billion euros, from below 6 billion euros at the end of last year, as working capital and inventories rose in the quarter, Bayer spokesman Guenter Forneck said.

Gross cash flow fell by 31 percent to 984 million euros, partly because of 100 million euros in U.S. pension contributions that won't be repeated, Forneck said. The company had negative net cash flow of 299 million euros.

Crop Chemical Profit

Crop chemical operating profit fell 15 percent to 379 million euros. Healthcare operating profit fell 43 percent to 277 million euros, as sales of the Cipro antibiotic dropped 16 percent. Sales of aspirin and Alka Seltzer Plus were lower as fewer people suffered colds in the U.S., the company said.

The first quarter was probably the best this year for crop chemicals, Kuehn said on a conference call with analysts. The company expects an improvement in the second quarter from a year earlier, he added.

Profit rose 38 percent at the MaterialScience plastics business, boosted by higher U.S. demand and sales of plastic films for identity cards. At the Lanxess chemical unit that Bayer intends to bring to the stock market, operating profit rose to 75 million euros from 17 million euros. Higher raw materials prices will hurt profit at the two businesses in the next quarters, Kuehn said.

``How long prices will stay at these high levels is uncertain,'' Kuehn said. ``It will not be possible to pass through the price rises 100 percent,'' to customers. Raising the prices of products is ``hard'' in Europe, he said.

Bayer is in talks and expects to conclude an agreement on the sale of the Dystar textile chemicals business this quarter, Kuehn said. Aventis SA and BASF AG also own stakes in Dystar.

In the first quarter of last year, Bayer booked gains of 168 million euros from the sale of household insecticides and crop chemicals, and 82 million euros from the sale of real estate.

This year's cost cuts are part of a program started in 2002 to save 2.5 billion euros by 2005. Bayer is cutting 14,000 jobs, closing some research facilities and asking employees to forgo bonuses.

Health Care

Operating profit will rise at all businesses this year except health care, Bayer has said. Bayer health care is spending on marketing Levitra, an impotence drug it introduced last year that competes with Pfizer Inc.'s Viagra. Health care profit will also be hurt as the company's top-selling product, Cipro, loses patent protection.

``We're optimistic they'll be able to reach their profit targets,'' said Matthias Engelmayer, an analyst at Independent Research GmbH in Frankfurt, who rates the stock ``hold.''

Competitors including BASF AG, based down the Rhine River in Ludwigshafen, Germany; Dow Chemical Co., Imperial Chemical Industries Plc, Degussa AG and DSM NV also beat analyst expectations for first-quarter profit. Bayer in April stated that first-quarter operating profit was more than 25 percent above average analyst forecasts in its survey of 19 analysts.

To contact the reporter on this story: Hannah Warrington in Dusseldorf, Germany, at hwarrington@bloomberg.net

Last Updated: May 10, 2004 11:54 EDT