Does Bayer have to dismantle itself?
The outlook for Bayer is bleak, debts are high and the pharmaceuticals division is weakening. There is also legal trouble. The share price plummets. CEO Bill Anderson has little alternative but to split up the Group.
Those who still find their way to the investor pages of the Bayer website are greeted by the words "Creating value for our shareholders". However, the pharmaceutical and agricultural group is currently a long way from this: since the beginning of the week, the Leverkusen-based company has lost almost EUR 8 billion in market capitalization and its shares have plummeted by around 20 percent. This has never happened before in the company's history. And this now makes radical changes necessary.
The drama was triggered by a whole series of bad news: The run of bad luck started on Friday when the Leverkusen-based conglomerate had to recall a batch of its cancer drug Vitrakvi because impurities had been found during routine tests. Luckily, the drugs had not yet been administered.
On the same day, a court in the US state of Missouri sentenced Bayer to pay a fine of 1.5 billion dollars. The judges held Bayer responsible for the cancer cases of three farmers who had used the glyphosate-based weed killer "Roundup" from Bayer subsidiary Monsanto.
The third low blow followed on Monday: Bayer had to discontinue the cost-intensive development of the blood thinner Asundexian in phase three, i.e. at an advanced stage, due to poor efficacy. With more than 30,000 participants in 40 countries, the clinical trial was one of the largest Bayer had ever undertaken. The company had hoped to generate sales of up to 5 billion euros from the drug for patients at risk of stroke. And the patents for Xarelto, the precursor to asundexiant, with which Bayer has already generated 3 billion euros this year, will soon expire. Other manufacturers are then likely to imitate the product and Bayer's share of sales will dwindle.
Expensive lawsuits
Bayer subsidiary Monsanto also got itself into further trouble at the start of the week: In Seattle, six teachers and a janitor had sued because the chemical PCB produced by Monsanto, which is used in building materials, is said to have caused them cancer, brain damage and other health problems. The jury found that the company was responsible and sentenced Monsanto to pay 165 million dollars. Further payments in the hundreds of millions could follow.
It may be a coincidence that the latest low blows rained down on Bayer at almost the same time. But they have a long history and can be traced back to "the biggest management mistake in history", according to some investors. In 2018, Bayer acquired US competitor Monsanto for a horrendous 63 billion euros. At the time, this was at the limit of what was affordable and Bayer took on massive debt to be able to finance the takeover. The then CEO Werner Baumann believed that he had saved Bayer from being taken over by Monsanto. Since then, Bayer has consisted of three divisions: Pharmaceuticals, Crop Science (fertilizers) and Consumer Health (non-prescription drugs).
However, shortly after the Monsanto takeover, tens of thousands of users of the Monsanto product "Roundup" triggered an enormous wave of lawsuits in the USA. Baumann had actually hoped for protection from the US Department of Justice, but they stayed out of it. They did not want to offend so many voters. Bayer lost one lawsuit after another and had to pay huge sums in damages: the company has already paid 16 billion dollars in part or set aside for penalties.
The high level of debt, coupled with the never-ending lawsuits in the USA, drove more and more investors away. At the time of the Monsanto deal, the share price was around 100 euros. Over the past six years, it has fallen to below 33 euros.
Hopefuls under pressure
Such a scenario calls activist investors onto the scene: at the beginning of the year, Bluebell Capital from London invested in the DAX-listed company and argued with other investors that Bayer should spin off the fast-growing consumer health segment with non-prescription drugs such as aspirin and thus reduce the debt mountain of around 36 billion euros. This mountain of debt would further cloud Bayer's prospects in an environment of rising interest rates. US investor Inclusive Capital also got on board and joined forces with Bluebell.
Shareholder Union Investment is also on board: "It would make the most sense to separate from Consumer Health as part of a spin-off," says portfolio manager Markus Manns in response to a question from "Capital". The company would be valued higher on the stock exchange than within the Group.
The owners can chalk up the fact that Baumann stepped down in February as a partial success. His successor Bill Anderson, who had previously initiated extensive changes as head of pharmaceuticals at the Swiss company Roche, was seen as a new beacon of hope at the time. Today he is under pressure.
Because there is much more at stake than just the legacy issues. The outlook for the coming year is subdued: "The Crop Science division is likely to face headwinds due to lower corn acreage and price pressure in crop protection, among other things, while the pharmaceutical business should continue to be under price and reimbursement pressure," writes Deutsche Bank analyst Falko Friedrichs. He also expects high cost pressure and a decline in profits in 2024.
"Toxic cocktail"
Anderson actually no longer has a choice. He has to announce the demerger if he wants to save the share price. And he would not be the first pharma CEO to take this step: Johnson&Johnson has already floated its consumer health division Kenvue on the stock market, Sanofi is preparing a spin-off and Glaxo and Pfizer have spun off their joint consumer health company Haleon.
However, analyst Friedrichs assumes that it will still be a while before Anderson announces what could be the saving move. "Therefore, the operationally difficult outlook for 2024 remains in the foreground."
However, this does not mean that investors have to sell now. Some banks, including Deutsche Bank, have downgraded the share. But no one is advising to sell. As Manns from Union Investment says: "The toxic cocktail of high interest rates, glyphosate lawsuits and now weaknesses in the pharmaceuticals division does not pose a threat to the company's existence." In an emergency, Bayer could also cut the dividend or raise fresh capital on the stock market. The important thing is that Anderson's strategy is clearly defined. In the meantime, patience and strong nerves are required above all. Because if Anderson can withstand the pressure from the capital market, he will only announce his new strategy as planned at the Capital Markets Day in March 2024.
This text first appeared on capital.de
Source: www.ntv.de
