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Morningstar | Litigation Concerns About Glyphosate Weedkillers Weigh on Bayer, but No Major FVE Impact Expected

The multimillion-dollar verdict on Aug. 10 against Monsanto over glyphosate weedkillers, including the Roundup brand, is concerning for Bayer, which acquired the company in June, but we don’t expect a major change to our fair value estimate. Bayer is appealing the ruling. If there are other lawsuits, they are likely to be litigated slowly, over many years, and, historically in cases like these, the final results tend to be more minor than the initial cases.

The Roundup product line makes up a small portion of Bayer’s revenue and profits. Based on pro forma numbers from the two companies, 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. For context, we expect all of the crop science segment to make up about 44% of Bayer's total revenue in 2019.

Bayer does not break out glyphosate-specific sales, but in 2017, herbicides accounted for just 7.5% of total sales. We note that Bayer did have to divest some of its glyphosate assets (to BASF) to complete the Monsanto acquisition. Glyphosate has been off patent for nearly two decades, and margins are likely on the lower end of Bayer’s crop chemicals. Based on this, we believe glyphosate accounted for a low-single-digit percentage of Bayer’s profits.

In 2017, Monsanto’s crop chemicals segment, called agricultural productivity, accounted for around 25% of total sales, but only 11% of profits. Monsanto, like Bayer, did not break out specific brands, but it sold only two major crop chemicals: glyphosate (under the Roundup brand) and dicamba. The majority of Monsanto’s crop chemicals profits were from glyphosate, so we estimate Roundup profits to be 8%-9% of Monsanto’s total profits.

Both Monsanto and Big Pharma have historically weathered regulatory and litigation risks. While the health effects of Monsanto's crop chemicals have long been questioned, the firm continued to be the market leader in herbicides. While we maintain our investment thesis for Bayer at this time, the Roundup court ruling continues to develop, and we will be sure to update our research if any new details result in a material change to our outlook.