Bayer Earnings: Expected Cost Pressures Lead to a Valuation Cut, but Stock Remains Undervalued

We are lowering Bayer’s fair value estimate to EUR 68 ($18.50 for the ADR) from EUR 75 ($20.50) following Bayer’s fourth-quarter earnings and capital markets day that revealed a higher cost structure than we expected over the next several years. In particular, we expect the patent loss on cardiovascular drug Xarelto to have a bigger impact on margins. While we expect next-generation drugs will largely replace the Xarelto revenue over the next five years, the new sales will likely carry lower margins largely due to higher royalty payments for the new drugs. Despite the lower fair value, we still view the company as undervalued with the market likely too focused on the litigation concerns and the heavy debt load.