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We're Bullish on Bayer

The market reaction to glyphosate's legal issues looks overdone.

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 Bayer (BAYRY)/(BAYN) has outlined its defense strategy against the legal cases mounting over glyphosate weed killers, including the Roundup products that came with its acquisition of Monsanto. We believe the market has overreacted to the initial Aug. 10 court verdict regarding glyphosate. However, based on the high number of cases--close to 8,000 pending--and likely settlements in certain cases, we have increased our litigation-related charges by EUR 2 billion to be paid out over the next three years. This caused about 2% pressure to our fair value estimate, but we continue to view narrow-moat Bayer as undervalued.

We expect Bayer’s defense strategy, which management discussed in an Aug. 23 conference call, will follow the typical pattern seen in major drug litigation, where cases are litigated one by one over a long period, wearing down the defense with heavy scientific support showing that glyphosate-related products were not responsible for causing cancer. Further, we believe the Aug. 10 ruling, which awarded $289 million to a former groundskeeper with cancer, will be appealed and the final amount will be much lower. While nearly 8,000 cases remain, we believe most of them have low validity and are probably looking for any minor payment that might come with a potential class-action settlement. While precedent is not clear in this case, Bayer’s recent settlement over its birth control drugs, which worked through close to 10,000 claims, resulted in charges of around $2 billion.

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