Bayer: Recent Glyphosate Ruling Is a Reminder of Risk Overhang, but Shares Look Undervalued

A Philadelphia court ruled against Bayer, awarding the plaintiff $2.25 billion in damages related to side effects of using glyphosate, but we expect this case will be appealed and the damages significantly lowered. On appeal, we expect these costs to fall by over 90%. We are not making any changes to our fair value estimate based on the court ruling, as Bayer has already factored in close to $6 billion for future glyphosate cases (beyond the almost $10 billion already paid out to settle over 100,000 cases). However, with close to 50,000 cases remaining, we have already factored in additional glyphosate costs to Bayer of close to $4 billion to add to the reserves already taken. Also, Bayer has won the majority of recent glyphosate cases. Nevertheless, there is still elevated uncertainty around the exact amount of glyphosate payments remaining, which partly drives the firm’s High Uncertainty Rating. However, even with the higher level of uncertainty, we view the stock as undervalued, with the market likely overly concerned about the glyphosate litigation overhang and not appreciating the firm’s continuing innovation that is core to the firm’s narrow moat. We expect the firm’s pipeline to improve significantly under the leadership of recently appointed CEO Bill Anderson, who brings strong innovation credentials from Roche.