Analysts Think Bayer Shares Have Huge Upside

Despite problems facing the German life sciences company, analysts have set a target price nearly 50% higher than the current stock price

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Mar 04, 2019
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Thousands of lawsuits contend that exposure to the Roundup weed-killer Bayer AG (XTER BAYN) acquired when it bought Monsanto last year caused plaintiffs to develop cancer. Another group is feeling ill, albeit nowhere near the scale of those who have filed suit: company shareholders.

Over the past four years, the Leverkusen, Germany-based life sciences conglomerate has shed more than one-half of its market value, trading today at just below $71.50. As the number of Roundup claimants continues to pile up, Bayer faces other challenges, including competitive pressure on its two biggest drugs, Xarelto and Eylea.

In spite of this spate of bad news, many analysts think the company is way undervalued. In a research note on Jan. 30, Sanford C. issued a “buy” rating on the stock, with a price objective of $104, a lofty 46% about its current selling price, according to the an article in the digital newspaper the fairfieldcurrent.com. Since late last year, the article notes that seven investment analysts have rated the stock a “hold” rating and seventeen a “buy” with a consensus price target of $102.76.

Perhaps members of the financial community are banking heavily on Bayer's plan to become more of a pharma company, where the margins are higher. The company is in the midst of revamping its business mix, including cutting costs and beefing up its drug business. Of the 120,000 people in the company’s work force, Bayer plans to lop off 10%. The company is also trying to jettison its animal health business and some of its consumer products.

Two products on the chopping block are the sun care line Coppertone and foot care products marketed under the Dr. Scholl’s name. Bayer is giving up on the brands just four years after acquiring them from Merck (MRK). In the fourth-quarter earnings conference call CEO Werner Baumann said Bayer will discuss what it plans to do with the animal health business at the same time it reports first-quarter results.

Activist investor Elliot Management wants Bayer to up the ante. Elliot has built a position in Bayer and thinks the company can unlock shareholder value by splitting its pharmaceutical and agrochemical units into two separate companies, reported Reuters this past December. Bayer doesn’t appear receptive to the proposal, and if it doesn’t happen, Elliot may dump its shares.

It certainly looks like Bayer needs to beef up its pharmaceutical line. The company anticipates sales growth of the blood thinner Xarelto will be in the low teens for 2019 after recording a nearly 13% gain last year. That forecast may be somewhat of a surprise given the drug bested Pfizer (PFE) and Bristol-Myers Squibb’s (BMY) Eliquis, to become the first novel oral anticoagulant approved in patients with coronary or peripheral artery disease, according to a recent article in FiercePharma.

Bayer insists the drug will hit more than $5 billion in sales before it tops out. Sales of its other top-selling drug Eylea, seems to be softening. The company said its growth will drop off from about 20% in 2018 to the high single-digits this year. “We’re seeing a little bit of a softening of the growth trend on Eylea,” Bayer pharma Stefan Oelrich said. “We’re getting some headwinds in a few markets in terms of use of alternatives [or] dilute use of our product.”

On top of that, the Novartis (NVS) treatment brolucizumab appears to be a huge threat. It has matched Eylea in sight gains in patients with age-related macular degeneration and has even demonstrated additional benefits.

Disclosure: The author holds a position in Bristol-Myers Squibb.