EUR 850.00 For Business Accounts Only

Morningstar | Bayer Outlines Glyphosate Legal Defense Strategy as Market's Reaction Looks Overdone

In a conference call, Bayer outlined its defense strategy against the legal cases mounting over glyphosate weedkillers, including Roundup products, and we believe the market has overreacted to the initial Aug. 10 verdict (an early case in this litigation process). 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 causes about 2% pressure to our fair value estimate, and we continue to view this narrow-moat company as undervalued.

We expect Bayer's defense strategy will follow the typical pattern seen in major drug litigation, where cases are litigated one by one over a long period of time, 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 that awarded $289 million to a former groundskeeper with cancer will be appealed and that the final amount will be much lower. While nearly 8,000 cases remain, we believe most of them have low validity and are likely 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 resulted in charges of around $2 billion that worked through close to 10,000 claims.

For the Roundup product line, we don't expect usage to fall off materially and its contribution to overall profits is relatively minor. We estimate that glyphosate, the chemical used in the Roundup brand, would account for less than 10% of Bayer’s total sales and even less of Bayer’s profits. While Bayer does not break out glyphosate-specific sales, we believe glyphosate accounted for a low-single-digit percentage of Bayer’s profits since glyphosate has been off patent for nearly two decades and margins are likely on the lower end of Bayer’s crop chemicals.