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Stock Strategist

Recent Drug Launches Buoy Bayer's Growth

We continue to think the shares are undervalued.

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 Bayer (BAYRY)/(BAYN) reported first-quarter results that were slightly ahead of our expectations, but we don't expect any changes to our fair value estimate, and we continue to view the stock as undervalued. Bayer's recently launched drugs continue to post solid growth, driving 3% total sales growth ahead of our 2% expectation. While we view the pipeline as relatively weak, we don't believe the market is giving Bayer enough credit for currently approved drugs. In particular, cardiovascular drug Xarelto and ophthalmology drug Eylea look poised to register peak annual sales over EUR 4 billion and EUR 2 billion, respectively, for the company. While the pipeline needs improvement, multiple phase 3 starts increase our confidence in the company's valuation and its narrow moat. Also, we believe the eventual divestment of no-moat material science group Covestro will strengthen Bayer's moat.

Bayer announced updates to several phase 3 programs, which should help improve a weak pipeline, but the strategic decisions reinforce our view of the firm's conservative stance on risk-taking in drug development. We are most interested in the phase 3 start of vilaprisan in uterine fibroids, where there is a high unmet medical need and limited competition. We believe vilaprisan and the phase 3 AbbVie drug elagolix hold the most promise in an indication with close to 20 million patients, where surgery is the primary option. Additionally, we believe the focused decision to move finerenone into phase 3 development only for diabetic kidney disease and not heart failure is a good strategic move to reduce development expenses; the recent approval of Novartis' heart failure drug Entresto creates a higher hurdle for efficacy in this indication. Also, Bayer is now looking for a partner to start its phase 3 program for anemia drug molidustat, reinforcing its conservative approach of sharing the risk of drug development.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.