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Rounding Up Big Pharma Earnings

Recent results from some of the most undervalued large drugmakers we cover.

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Bayer Shows Strength Across Portfolio as Litigation Concerns Continue
Bayer (BAYRY) reported third-quarter results largely in line with our projections. We continue to view the company as undervalued, with the market attributing too much concern to the ongoing glyphosate litigation. While the number of glyphosate-related plaintiffs increased to 42,700 as of early October, we believe many of these cases hold little merit and are joining the lawsuit due to aggressive advertising campaigns by trial lawyers ($51 million spent in the third quarter, up from $6 million in the first quarter). Despite some early plaintiff wins for substantial amounts, we expect the appeals process to significantly reduce the costs. Overall, our base projections include EUR 2 billion in legal costs related to the glyphosate litigation, which leads to our current fair value estimate. However, our bear case projects more than EUR 13 billion in costs related to the litigation, which is a key driver behind our high fair value uncertainty rating.

All divisions posted steady gains in the quarter, leading to 5% normalized sales growth, and business operations continued to track well, supporting our wide moat rating. In the largest segment, pharmaceuticals, almost all of Bayer’s leading drugs posted strong gains. Top drug Xarelto (for cardiovascular disease) looks well positioned for future gains with the recently added new indication in coronary and peripheral artery disease. However, we expect a slowing in growth for ophthalmology drug Eylea (up 16% in the quarter) in 2020 due to competitive pressures from Novartis’ (NVS) new competing drug, Beovu. The crop science segment generated solid growth, partly rebounding from challenges in North America caused by poor weather earlier in the year. The consumer division generated encouraging growth of 4%, which suggests a potential return to more stable growth following a prolonged period of poor performance.

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