EUR 850.00 For Business Accounts Only

Morningstar | Buoyed by Xarelto and Eylea Gains, 4Q Keeps Bayer on Track to Meet Long-Term Outlook

Bayer reported fourth-quarter results largely in line with our expectations, with some outperformance on the bottom line offset by lower-than-expected top-line growth. We don't expect any major changes to our fair value estimate based on the results, and we continue to view the stock as undervalued partly due to an overreaction to the firm's glyphosate litigation challenges. Bayer reiterated its long-term annualized earnings growth guidance of close to 10% through 2022, which we expect it will probably meet based on a strong portfolio of branded drugs and a solid entrenchment in the crop science market, both of which also support our wide moat rating.

In the pharmaceutical segment, led by cardiovascular drug Xarelto and ophthalmology drug Eylea, Bayer posted 3% year-over-year growth, a rate that we expect will accelerate over the next two years. We expect Xarelto's recently expanded indication into coronary artery disease and peripheral artery disease will drive further growth as other competing drugs like Pfizer's/Bristol's Eliquis lack an indication in this area. Also, we expect the company's cancer portfolio to increasingly add to growth with the likely approval of prostate cancer drug darolutamide in early 2020 and further traction with TRK cancer drug Vitrakvi.

In crop science, the recently acquired Monsanto business is driving growth, and we expect over 3% annualized long-term sales growth along with close to $1 billion in cost-saving synergies from the deal. Further, we expect Bayer to reach its 2022 goal of net debt below EUR 28 billion, down from close to EUR 36 billion currently, which is elevated due to the Monsanto acquisition.

For a complete review of Bayer's pipeline and currently marketed portfolio, please see "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."

On the glyphosate litigation, Bayer faces just over 11,000 plaintiffs claiming the products caused cancer. We model close to EUR 2 billion in related future legal costs, much lower than the implied market capitalization that was lost largely due to a ruling from an initial case within this group. We believe the support by key regulatory agencies and a large number of scientific studies showing no causal relationship between glyphosate and cancer will lead to Bayer prevailing in the majority of legal cases. However, we do rate the company's uncertainty as high, given the variable potential legal outcomes.