It has not been a great 15 years being a Bayer stockholder. After hitting brilliant all-time highs in 2014, the executive team shot for the fences with a blockbuster $66 Billion acquisition of crop science juggernaut Monsanto.
When they started pressuring the acquisition in the early 2010s, it made a lot of sense. Bayer is an OG powerhouse in the pharma business, while Monsanto is the new king of crops and agricultural chemicals. Basically, both companies exist to find new and interesting ways to glue carbon atoms together—making organic chemicals for either sick people or sick crops.
But by the time Bayer lawyered up hard enough to pull the trigger, a LOT of consolidation had happened in the world of agri-business (lol, thanks 2008 crash), which made Monsanto more and more expensive. So when the ink dried on the deal in 2018, the market decided it was way too expensive.
And then Bayer got hit with litigation from the German government over monopoly risks — and THEN Monsanto (which has a GREAT reputation, by the way) got hit with wave after wave of lawsuits based on personal injury suffered by some of the folks at the hands of their pesticides.
The result ended up being that Bayer shed just north of 40% of its stock value over the last 5 years—stabilizing at about $12/ share. But the world of pharma and agribusiness works on very long cycles.
And even though we’re experiencing 40-year highs for inflation and watching valuations get compressed, the long winter for their agribusiness appears to finally be ending. Ever since reporting solid 2021 results, Bayer has gone on a tear that shows no signs of slowing down.
Market forces on both sides of Bayer's business are starting to move their way. With a blockbuster heart medication entering final medical trials and fertilizer/crop prices rising across the board, Bayer is about to soar through Q2 and shift market sentiment back in its favor.
Let’s get into it👇
Bayer Overview:
Look, these life-sciences firms can get pretty tough to navigate with how complex and compartmentalized they are. So let us try to boil this down to the essentials so we don’t talk your ear off.
Bayer today is a giant held up by 2 main pillars:
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46% of their revenue comes broadly from Crop Science (that is, seeds, fertilizers, and pesticides)
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And 42% of their revenue stems from their core pharmaceutical products.
Both businesses are really difficult to manage, with deep R&D costs and long regulatory pipelines.
The crop business has been under fire the most, given Monsanto’s less-than-stellar reputation and recent lawsuits over their herbicide -- RoundUp (more on this below).
But tailwinds are approaching for both arms of the business. Crop Sciences is getting buffeted by geopolitics, while Pharma has the potential to do well on the back of a few massive drugs entering the back half of the trials and approvals process.
Let’s tackle them individually 👇
Bayer Crop Science:
Crop Science is the less exciting of the two, and the growth here is due to Bayer finally starting to settle and close out some major lawsuits.
Bayer, mainly through its Monsanto acquisition, provides an immense amount of seed and fertilizer to clients worldwide.
Monsanto was a bit of a bomb to acquire though, as their weed killer RoundUp was shown to have a carcinogenic ingredient (glyphosates).
Bayer though is finally through the majority of closing out more than 130,000 settlements against them, with only ~30,000 settlements left to go. These settlements were expensive (and they really should have been). Don’t get us started on this whole glyphosate situation, but they are going to be less of a weight on Crop Science for Bayer moving forward.
Furthermore, Bayer still has a lot of debt from the Monsanto acquisition. But enough of that debt has left their balance sheet to make institutional investors more comfortable about investing in Bayer again.
Meanwhile, the conflict in Ukraine has taken ~14% of the world’s wheat supply out of circulation, as well as a huge share of the fixed nitrogen and phosphorus we use to produce fertilizer.
This is having a lot of downstream effects — one of which being American farmers are planting more soybeans than corn in 2022. Soy needs less fertilizer than other crops, and so America is seeing about a 4% rise in soy planting.
Bayer is a significant supplier of soy and other seeds. If crop and fertilizer prices rise further, this will put even more significant upward pressure on the stock.
But that’s a small part of what will provide tailwinds for Bayer. A far more significant boon is coming out of their pharmaceutical division.
Bayer Pharma:
There’s a lot to like in Bayer’s pharma work right now, but we’re choosing to focus on one drug entering stage II trials that look really promising. That drug is called Asundexian at the moment.
There are a lot of really cool details here, but we don’t want to bore you with medical and pharmaceutical minutia. So we're going to drastically oversimplify this. Here we go:
Asundexian is a competitor of an established drug, Eliquis. These drugs are basically anti-stroke medications that help folks who have developed a heart condition called Atrial Fibrillation.
Isn’t reading about pharma-businesses super fun? 😂
With an aging population worldwide, the demand for drugs to mitigate the risk of stroke caused by heart disease has gone up significantly.
And the trendline for Eliquis prescriptions since approval has absolutely dominated the marketplace.
But two weeks ago, Bayer put out research showing that their competitor to Eliquis was 4% more effective at stopping events that lead to stroke. Which is huge in the small sample sizes these phase II trials have.
If Asundexian gets approved for phase III trials and then makes it to the market, it can significantly put a dent into Eliquis’s dominance.
This is one of many massive wins Bayer is gearing up to pull off on the pharmaceutical side of things, adding to the overall positive pressure the stock can experience.
Bayer Outlook:
In short, these snapshots are showing that positive growth is here for Bayer and that the market is finally starting to warm up to their disastrous acquisition of Monsanto.
A lot can still go wrong on the Crop Sciences side of things, and any one of Bayer’s blockbuster pharmaceutical trials can go sideways once there is more data.
However, the declining headwinds and increasing tailwinds are enough for us to think that Bayer is about to go on a long run. Large firms like Bayer take time to build back their value–and the company is a LONG way from its all-time high of $39.
We think the long dip for Bayer is finally ending and that there’s still some upside to come this year.
But this is going to end up being a multi-year hold as Bayer makes their way out of the giant hole that they dug themselves into.
Price Target: $22 (23% upside)
Target Date: Q4 2022
Rating: Overweight
Risk / Reward: Medium / Medium
Ticker: BAYRY
Market Cap: $71.1B
Dividend Yield: 3.04%