Bayer Earnings: Poor Results Weighed Down by Crop Science; In Line With Recently Lowered Guidance

Bayer BAYN 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.

In the quarter, total sales fell 8% operationally, dragged down by competitive pressures in the crop business (down 19%), partially offset by steady performance in the drug group (flat sales). While we still view the crop science business as well positioned, the strong gains seen in 2022 due to less competition are reversing out and weakening current results.

The steady drug group results should continue, with strong new drug launches offsetting maturing older drugs and supporting Bayer’s moat. We believe recently launched cancer drug Nubeqa (up 96%) holds the potential to drive peak annual sales over EUR 3 billion. Also, kidney disease drug Kerendia should develop into another blockbuster based on a unique mechanism of action and solid efficacy data. The newer drugs should help offset the future expected declines from cardiovascular drug Xarelto and ophthalmology drug Eylea as generics increasingly target these older drugs over the next three years.

Additionally, while the recently lowered 2023 guidance is disappointing, we continue to believe new CEO Bill Anderson (started in the second quarter) is likely establishing a low base from which to build growth. Also, we are increasingly optimistic that Anderson will increase the speed of development and execution that Bayer needs in order to accelerate innovation, especially in the drug business.