BAYRY - Bayer AG

[BPCAP]

David Einhorn's recent presentation seems to make sense regarding Bayer AG.  The multiple doesn't seem to do the company justice given where peers trade and its high-quality products.  I don't know if the Monsanto deal makes sense, but it seems to reason that a no-go by regulators would be a short term catalyst. 

 

Background: Bayer does pharma, seeds and agricultural chemicals, OTC drugs, and vet. care.  Bayer trades at 11.5x earnings.  European pharmas trade at 14x, and competitors like PFE, MRK, ZTS, BMY, and MON trade closer to 20x.  No big patent cliff issues presently. 

 

http://www.businessinsider.com/david-einhorn-robin-hood-bayer-and-monsanto-presentations-2016-12/#this-is-appealing-to-anyone-who-recognizes-that-food-production-is-increasingly-reliant-on-gmos-but-not-everyone-is-on-board-36

 

Macro seems all wrong for the current environment (hence the cheapness?)  European based, lots of exposure outside the U.S. and U.S. dollar (which everyone wants), conglomerate-like, debt and pension obligations.  Perhaps these account for the lower multiple, or perhaps there is more I haven't seen yet. 

 

Any negative "ah-ha!" insight would be appreciated. 

 

 

[John Hjorth]

BCPAP,

 

Thank you for starting this topic in the investment forum. I have this company on my European "search list", I just need to do some work on it, to get some kind of understanding of  the business on overall level.

 

The difference in P/E level to comparables is screaming to the sky.

 

Thank you for reminding me.

[bennycx]

Like Bayer as a stand alone, but the acquisition of Monsanto seems very expensive. If the deal does go through, I don't think the stock (combined entity) is cheap..

[BPCAP]

This is one of those rarer cases where the best capital allocation strategy could be massive share repurchases, rather than M&A. 

 

At least they're buying MON during a period of cyclical weakness and not during peak earnings.  And the combination does shrink the seed oligopoly a bit, meaning better pricing power on the next upward swing. 

 

That said, the odds of a marriage seem less than 50%.  MON's $105 price to the $128 deal price signals as much.  Buy MON if you think the deal will go through.  It'll take over a year to close, but $23 on a $105 investment isn't bad in such a time frame. 

 

 

[bennycx]

hi BPCAP,

 

Am I missing something about Einhorn's valuation? It seems to be 17x P/E trailing 12 months but Einhorn says 11x 2017. Where does he get 11x from?

 

Thanks.

[Malitar]

11x is based on 2017E consensus EPS

 

[Peregrine]

11x is based on 2017E consensus EPS

 

Ah, the good old consensus forward adjusted EPS that's about 30-40% greater than reported. Be wary of this especially with pharma companies because sell-side tends to add back very relevant and significant drug amortization costs.

[UNF2007]

Anyone look at this recently?  A few recent articles in the WSJ peaked my interest. Big overhang of the lawsuits for round-up.... But maybe that is overblown? A prelim look at the evidence linking it to cancer is weak at best, they may be able to successfully defend, or at least get the payouts way down.

[Spekulatius]

Anyone look at this recently?  A few recent articles in the WSJ peaked my interest. Big overhang of the lawsuits for round-up.... But maybe that is overblown? A prelim look at the evidence linking it to cancer is weak at best, they may be able to successfully defend, or at least get the payouts way down.

 

Besides the issue with the lawsuits, the core issue is that they vastly overpaid for Monsanto, IMO. I like BASFY, the German peer. Much more solid, cheap valuation and a nice dividend. BASFY purchased some AG assets that Bayer had to sale to satisfy regulators for a fair price.

 

FWIW, BASFY is not a perfect peer, sine Bayer more into high value add products.

[peterHK]

Anyone look at this recently?  A few recent articles in the WSJ peaked my interest. Big overhang of the lawsuits for round-up.... But maybe that is overblown? A prelim look at the evidence linking it to cancer is weak at best, they may be able to successfully defend, or at least get the payouts way down.

 

Besides the issue with the lawsuits, the core issue is that they vastly overpaid for Monsanto, IMO. I like BASFY, the German peer. Much more solid, cheap valuation and a nice dividend. BASFY purchased some AG assets that Bayer had to sale to satisfy regulators for a fair price.

 

FWIW, BASFY is not a perfect peer, sine Bayer more into high value add products.

 

On what basis did they overpay for Monsanto? It's trading on trough numbers so of course it looks like that now, but at higher crop prices there is a lot of operating leverage in that business. One drought is all it takes (remember 2010/2011).

 

I think it's cheap, the problem really is:

 

1) The legal overhang: broadly science is showing more and more that environmental contaminants do hurt health epigenetically, so this isn't a problem that is likely to go away on the crop science side of the business. Further, pesticides/fundicides/herbicides are becoming less effective (dicamba is sort of a low-key disaster).

 

2) They're leveraged, so impairment to EV due to, for example, litigation, affects shareholders even more. A $5bn legal liability is a lot worse for shareholders when there's $36bn of debt ahead of you.

 

3) Germans don't buy back stock, and they can't really anyway because of the leverage.

 

 

[Zorrofan]

Looks like the lawsuit overhang is not going away anytime soon. The company has lost several lawsuits so far and the stock has been just hammered.  Anyone buying at these levels or is the lawsuit risk too great?  I'm not a lawyer but I wonder to what extent can losses be contained at the Monsanto level or is this really a potential existential risk.

[valuedontlie]

2 cases at $80m judgement each... only 11,200 cases to go!

 

WSJ article noted a Susquehanna legal analyst estimated $2.5-4bn total exposure over "many" years... at this rate seems kind of low... can these lawsuits from monsanto bleed into other bayer units? my initial thought would be no...

[Foreign Tuffett]

$2 billion!? At some point the #s just become meaningless. Will obviously be reduced on appeal.

 

https://www.reuters.com/article/us-bayer-glyphosate-lawsuit-stocks/bayer-stock-at-lowest-in-nearly-seven-years-after-2-billion-award-in-roundup-trial-idUSKCN1SK0LQ

 

Is glyphosate carcinogenic? At first glance the evidence seems mixed at best.

 

https://www.the-scientist.com/news-opinion/how-toxic-is-the-worlds-most-popular-herbicide-roundup-30308

[Haasje]

There is no evidence it is carcinogenic.

 

There is one organization IARC that has ranked glyphosate as a probable carcinogenic. That's the same category it ranked red meat.

 

Here are the top 15 largest class action settlements in U.S. history:

 

https://www.gjel.com/blog/largest-class-action-settlements.html

[cameronfen]

There is no evidence it is carcinogenic.

 

There is one organization IARC that has ranked glyphosate as a probable carcinogenic. That's the same category it ranked red meat.

 

Here are the top 15 largest class action settlements in U.S. history:

 

https://www.gjel.com/blog/largest-class-action-settlements.html

 

I don't know much about this but it seems from the article linked that most scientist agree that glyphosate is not carcinogenic, but with everything else in roundup, it can still be extremely harmful and carcinogenic.  I'm not a lawyer but does it matter if something in roundup is causing the cancer or if glyphosate is causing the cancer? 

[StevieV]

"WSJ article noted a Susquehanna legal analyst estimated $2.5-4bn total exposure over "many" years... at this rate seems kind of low... can these lawsuits from monsanto bleed into other bayer units? my initial thought would be no... "

 

That estimate seems very, very low.  The first three trials have gone terribly for Bayer, and I believe the number of pending case is up over 13,000 now.  I'm pretty confident that Bayer would happily pay $4B all at once this year if it would make this go away.

 

They really need some outright wins at trial.

 

[Haasje]

$4 billion is a lot of money given historical settlements. Most of the higher settlements the products were proven to cause harm.

 

https://www.wsj.com/articles/roundup-of-cancer-evidence-11557876010

 

 

[StevieV]

$4 billion is a lot of money given historical settlements. Most of the higher settlements the products were proven to cause harm.

 

https://www.wsj.com/articles/roundup-of-cancer-evidence-11557876010

 

My impression is that $4B may be high given the science.  However, Bayer has done terribly in the first three trials.  Not sure why, but I think $2.5-4B is low given how the initial trials have gone.  Also, looks like Bayer has lost about $44B in market cap since the merger.  No way to segregate out how much of that is the due to the litigation, but I expect it is more than $4B.

 

[peterHK]

The science shows it's fine (the only longitudinal study of it in humans found no cancer).

 

The issue is that a lot of these are tried in California, where Juries don't have the same burden of proof and can basically rule in the face of every shred of scientific evidence if they want. That's basically what's happened, and when I realized that risk a few months ago after the first case, I sold every share.

[Cigarbutt]

Interesting article summarizing the legal challenge:

https://www.insurancejournal.com/news/national/2019/05/17/526711.htm

 

Many exposure-to-toxicity lawsuits get sympathy at first level courts and damages typically go down after by a wide margin. However, in this specific case, the context and more solid evidence-based research make the cases more resistant to reverse appellate verdicts.

 

The 2016 IARC evaluation is a globalist opinion and may not amount to much in an American court but there is underlying uncomfortable evidence for people who had occupational or unusual exposure.

https://www.iarc.fr/wp-content/uploads/2018/07/MonographVolume112-1.pdf

 

I've followed the Fosamax/Merck case that went to the Supreme Court (decision coming) and agree with the substance of the article about the balance of pre-emption that can be restored to this specific case at the Supreme Court level. So, this will take a long time to figure out.

 

In any case, I hope that the toxicity is limited because the use of glyphosate has gone up ++, especially in certain areas:

https://water.usgs.gov/nawqa/pnsp/usage/maps/show_map.php?year=2016&map=GLYPHOSATE&hilo=H

 

[Foreign Tuffett]

There is no evidence it is carcinogenic.

 

There is one organization IARC that has ranked glyphosate as a probable carcinogenic. That's the same category it ranked red meat.

 

Here are the top 15 largest class action settlements in U.S. history:

 

https://www.gjel.com/blog/largest-class-action-settlements.html

 

I agree that the evidence that glyphosate, in any reasonable use case, is carcinogenic is weak. This is a product that has been on the market since 1974, is extensively studied, and is widely used. If it is a potent carcinogen why hasn't anyone been able to parse this out of the epidemiological data?

 

https://www.ncbi.nlm.nih.gov/pubmed/27677668

 

The recent WSJ editorial "Roundup of Cancer Evidence" is definitely worth a read.

 

This is mostly in jest, but let us not forget that it was a California jury that found OJ not guilty of murder. He was guilty as hell!

 

More seriously, is there evidence that Monsanto has behaved negligently and/or hidden evidence that glyphosate is dangerous?

 

[Cigarbutt]

The problem is that there is sufficient data to be twisted to reach the conclusion that you are looking for.

The product is so ubiquitous that it has made it into wines, beers and even various organic foods.

 

Here is a study published in 2019 that, on the surface, shows a significant increase in relative risk. The authors may very well end up as experts on the demand side. However, the basic weakness in the review of reviews is that it does not put an approriate weight on the quality of the evidence. Otherwise the odds ratios would likely have been insignificant.

https://www.sciencedirect.com/science/article/pii/S1383574218300887

 

Here's a relevant 3rd party analysis of that publication (There may be a link with Monsanto):

https://geneticliteracyproject.org/2019/02/18/41-glyphosate-cancer-increase-claim-under-fire-did-the-authors-of-new-meta-study-deliberately-manipulate-data-or-just-botch-their-analysis/

 

In terms of corporate behavior, IMO internal documents have shown and will continue to show that Monsanto confused business goals with consumer safety but that aspect, in itself, is not sufficient to result, in the end, in large payouts:

https://www.baumhedlundlaw.com/toxic-tort-law/monsanto-roundup-lawsuit/monsanto-secret-documents/

 

Disclosure: Bayer is on a watchlist

[Spekulatius]

I calculate this as being valued at 7.7x EBITDA, and it’s probably worth at least 9.5x EBITDA. This means that a fine of ~20B Euro ($22.4B) is build in the current valuation.

[Haasje]

I think it ultimately won't amount to $20b. Also the fees will be paid in the far future if you calculate it like that you should probaby discount and the implied fine at this perceived gap is even higher.

[HalfMeasure]

I think it ultimately won't amount to $20b. Also the fees will be paid in the far future if you calculate it like that you should probaby discount and the implied fine at this perceived gap is even higher.

 

Won't it also be lower after tax? i.e. $x * (1 - t)