EUR 850.00 For Business Accounts Only

Morningstar | Bayer Posts Steady 1Q as Crop and Drug Segments Show Solid Growth as Glyphosate Concern Linger

Bayer reported first-quarter results largely in line with our expectations, and we don't expect any major impacts to our fair value estimate. We continue to view the stock as undervalued with the investment community likely overly concerned with the ongoing glyphosate litigation and not appreciating the underlying core fundamentals of a well-positioned drug and crop science firm with strong intellectual property supporting a wide economic moat.

In the quarter, both the crop and drug segments posted steady gains of close to mid-single-digit growth, a trend we expect will continue over the next several years. With limited patent exposure combined with new drug launches and new indications for key drugs, Bayer's drug business is well positioned. Xarelto's new indication in coronary artery and peripheral artery disease should drive strong gains as its key competitor in atrial fibrillation Eliquis will not carry this highly prevalent indication. Also, we expect steady gains from cancer drug Vitrakvi, which Bayer now holds full rights to following Lilly's acquisition of Loxo. Additionally, while prostate cancer drug darolutamide will likely enter a crowded market, we expect the drug's approval by early 2020 should still set up a major opportunity since prostate cancer is so wide spread.

On the glyphosate litigation front, few updates were given, and we continue to expect this process to take several years to complete. We expect Bayer will continue to litigate each case one by one and appeal many cases, which will likely wear down the plaintiffs, a similar strategy employed by Merck when defending Vioxx. Also, we believe the scientific data supports Bayer's claim that glyphosate doesn't cause cancer. Nevertheless, we expect Bayer will eventually settle the over 10,000 cases, and we have modeled in EUR 2 billion in related costs but also continue to rate the firm with a high level uncertainty, largely due to a wide range of potential outcomes around the litigation.

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."