Company Reports

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.

Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a narrow economic moat. Bayer is evaluating the divestitures of the crop science and consumer healthcare businesses, which appear to hold few synergies with the prescription drug business.

We are not changing our Bayer fair value estimate after the firm announced a dividend reduction to EUR 0.11 per share for fiscal 2023 from EUR 2.40 per share in 2022. We believe the dividend cut is based on poor capital allocation from the 2018 Monsanto acquisition ($63 billion) and related ongoing glyphosate litigation (close to $17 billion) that created high debt levels, restricting optimal business decisions. We expect Bayer to use the cash to pay down debt and increase investments in innovative new products that are core to its narrow moat.

A Philadelphia court ruled against Bayer, awarding the plaintiff $2.25 billion in damages related to side effects of using glyphosate, but we expect this case will be appealed and the damages significantly lowered. On appeal, we expect these costs to fall by over 90%. We are not making any changes to our fair value estimate based on the court ruling, as Bayer has already factored in close to $6 billion for future glyphosate cases (beyond the almost $10 billion already paid out to settle over 100,000 cases). However, with close to 50,000 cases remaining, we have already factored in additional glyphosate costs to Bayer of close to $4 billion to add to the reserves already taken. Also, Bayer has won the majority of recent glyphosate cases. Nevertheless, there is still elevated uncertainty around the exact amount of glyphosate payments remaining, which partly drives the firm’s High Uncertainty Rating. However, even with the higher level of uncertainty, we view the stock as undervalued, with the market likely overly concerned about the glyphosate litigation overhang and not appreciating the firm’s continuing innovation that is core to the firm’s narrow moat. We expect the firm’s pipeline to improve significantly under the leadership of recently appointed CEO Bill Anderson, who brings strong innovation credentials from Roche.

We are lowering Bayer’s moat rating to Narrow from Wide and cutting the firm’s fair value to EUR 75 ($20.50 on the ADR) from EUR 83 ($22.50) due to a slowing of innovation within the firm and continuing glyphosate legal issues. We are increasing Bayer’s Uncertainty Rating to High from Medium based on the firm’s high debt levels and less clarity around glyphosate legal issues.

Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a narrow economic moat. Bayer is evaluating the divestitures of the crop science and consumer healthcare businesses, which appear to hold few synergies with the prescription drug business.

We are placing Bayer under review on the basis of the discontinuation of a key phase 3 asundexian drug trial and increasing glyphosate litigation concerns.

Bayer reported third-quarter results below our projections, but we are holding firm to our fair value estimate, as the third quarter contributes a less meaningful amount to total full-year earnings due to the seasonality of the business. Management remains confident in the full-year 2023 guidance, which we expect Bayer to meet, but on the low side of the guidance range.

Bayer reported poor second-quarter results largely as projected, and we don’t expect any major changes to Bayer’s fair value estimate. Following the recently announced lowered 2023 guidance in July, we were expecting weaker results. The return of competitive glyphosate production is causing headwinds to Bayer’s crop science business, especially in the herbicide group. We expect these headwinds to normalize toward the middle of 2024 as the business annualized the return of competition from China that was disrupted over a year ago.

Bayer lowered guidance for the full-year 2023 largely based on declines in the sales of glyphosate products, but we don’t expect a major impact to the firm’s fair value estimate or moat based on the lower expectations. We had already incorporated lower projections for 2023 than management’s guidance based on the first-quarter results. Given the return of competitive glyphosate production, we had expected a major decline in herbicide crop science sales. Also, the lowered outlook for 2023 doesn’t have a major impact on our long-term outlook for the firm.

Bayer hosted a pharmaceutical research and development presentation that did not impact our fair value estimate but provided more details around earlier-stage assets that will be important in fortifying the company’s wide moat. Additionally, the company largely reiterated peak annual sales potential for recently launched drugs and late-stage assets, including cancer drug Nubeqa (EUR 3 billion-plus), chronic kidney disease drug Kerendia (EUR 3 billion-plus), vasomotor treatment elinzanetant (EUR 1 billion-plus), and cardiometabolic drug asundexian (EUR 5 billion-plus). With the exception of the very well positioned Nubeqa, we remain skeptical of Bayer's peak sales expectations, but even at lower expectations, we still view the company as undervalued. If key additional studies report positively for these drugs, we see upside to our sales projections and Bayer’s fair value. We are also encouraged by Kerendia tracking at a similar initial growth trajectory as Novartis’ older drug Entresto, which now generates close to $5 billion annually.

Bayer reported first-quarter results with falling glyphosate pricing weighing on core earnings per share (down 16%). While we had largely already factored this into our long-term outlook and don’t expect any major fair value estimate changes, the headwinds are likely contributing to pressure on the stock. With increased production of lower-priced competitive glyphosate returning to the market, we expect 2023 to represent a more normalized base year for Bayer’s glyphosate-based herbicides (down 50% in the quarter).

Bayer reported fourth-quarter earnings ahead of our expectations but issued 2023 guidance slightly below our projections, leading us to maintain our fair value estimate based on the mixed report. The weaker-than-expected 2023 guidance is likely to weigh on the stock in the near term, but we continue to view the stock as undervalued, with the market likely missing the improving long-term innovation outlook that also gives us confidence in Bayer’s wide moat.

Bayer announced the appointment of Bill Anderson as CEO effective June 1. He will replace Werner Baumann, who has served as CEO for seven years. While we don’t expect any immediate changes to our fair value estimate based on the announcement, the change in leadership holds significant potential to increase the value of Bayer. We currently give Bayer a Capital Allocation Rating of Poor, largely because of the low and less effective spending in drug development and the poor handling of the Monsanto acquisition. With Anderson taking the helm, we expect a major positive shift in Bayer’s execution. While we don’t expect any immediate changes to our projections or Capital Allocation Rating, we believe Anderson’s strong background will greatly improve Bayer’s operations.

After reviewing Bayer’s pipeline and changes to exchange rates, we are increasing our fair value estimate of Bayer’s local shares to EUR 83 from EUR 76 per share (to $22.50 from $20 on the ADR). Cardiovascular drug asundexian is partly driving the improving outlook for the firm’s pipeline. The drug recently started phase 3 development with data likely in 2025. The drug is still a higher-risk asset, as the phase 2 data was encouraging but didn’t fully de-risk the drug. Nevertheless, the timing of the phase 3 data may give Bayer a first-mover advantage for the next generation factor XI drugs. Also, Bayer is not partnering development of the drug with another firm (as was the case with older cardiovascular drug Xarelto) so the firm will retain all the upside if the drug is successful. The drug holds the potential to offset the likely generic competition for Xarelto that could begin in 2026. Bayer’s ability to develop the next generation of drugs to offset generic competition increases our conviction in the firm’s wide moat.

Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a wide economic moat. Also, the past divestiture of no-moat material science group Covestro leaves the company in a stronger competitive position.

Bayer reported strong third-quarter results ahead of our expectations, but we don’t expect any major changes to our fair value estimate. Strong crop science prices partly supported the outperformance, but we expect increased competition in 2023, which will likely reverse some of Bayer's recent gains. However, the crop science business remains well positioned for growth over the long term, led by innovative new products (such as short-stature corn and next-generation trait protection) that help reinforce the firm’s wide moat.

Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a wide economic moat. Also, the past divestiture of no-moat material science group Covestro leaves the company in a stronger competitive position.

Bayer reported strong second-quarter results ahead of our projections, but we don’t expect any major changes to our fair value estimate based on outperformance that may not last. We attribute a significant portion of the results to strong glyphosate pricing, which could change in 2023 as more competitive production comes on line, likely in China. Nevertheless, all segments of Bayer are posting steady gains, supporting the firm's wide moat and reinforcing our undervalued call on the stock.

The U.S. Supreme Court’s rejection of Bayer’s glyphosate appeal likely means that the close to $16 billion in settlement costs (already set aside) will stay in place, in line with our expectations and current valuation assumptions. Therefore, we do not expect any changes to our fair value estimate based on the court’s decision. We continue to view Bayer as undervalued, and with the glyphosate litigation likely to now fade into the background, we expect the market to focus more on the firm’s fundamentals, which look solid and underappreciated. While Bayer does face some patent pressures over the next five years, its pipeline continues to develop and give us confidence in its wide moat.