Bayer CEO Werner Baumann has already put the company on a major overhaul mission to focus on life sciences. But apparently, investors aren’t satisfied yet.
Shareholders are still complaining about how Bayer management is handling the Roundup weedkiller litigation and executives' lack of communication with the market over business information and future stock-moving events, Bernstein analysts Wimal Kapadia and Gunther Zechmann wrote in a letter to Baumann.
Their suggestions? “Start with the simple things (communication) and keep going” by settling the Roundup suits, addressing the pharma patent cliff and, last but not least, splitting up.
The Bernstein analysts' observation echoes a rare no-confidence vote in management that came out of the company’s annual general meeting in April. There, more than half of shareholders voted against ratifying the Baumann-led executive team’s actions in 2018.
One reason? Bayer has made little effort at offering information on the standalone performance progress of Monsanto and the pre-merger crop business, the analysts said. And that doesn't give investors the peace of mind that everything is going according to plan.
“In general, information availability vs. peers and willingness to disclose non-material information, is an opportunity for improvement,” they argued. “This matters more than you think.”
On the pharma side, Kapadia has long warned of the patent cliff for blood clot-buster Xarelto and eye drug Eylea, which could make up about 70% of Bayer’s pharma earnings in 2023, right before their protection expires. Despite the importance of those drugs in Bayer’s portfolio, the vicinity of the cliff and the lack of strength in the company's late-stage pipeline, “investors do not sense urgency” from management, he said.
As no internal in-development drug is significant enough to help soften the blow, the Bernstein analysts suggest Bayer go after the in-licensing route; just two to three assets would give investors comfort.
“Given the capital constraints due to potential litigation settlement and the Monsanto acquisition, Bayer should approach U.S. Biotech with limited infrastructure (out of U.S.) and offer to be a partner of choice (like Eylea and original Vitrakvi deal with Loxo) in exchange for a manageable upfront and royalty payment,” they said.
That way, investors will notice Bayer is working to mend things, and the company can avoid competing with cash-rich bigger pharma peers for more mature assets.
For now, that seems to be the direction Bayer is moving. In its restructuring announcement last December, the company said it was cutting 12,000 jobs, selling two consumer health care brands and hiving off its animal health business. The savings from the reduction would go toward “investment in collaborative research models and external innovations,” the company said at the time.
But again, in those Bernstein analysts’ opinion, licensing is just a near-term remedy. For the long term, a separation of pharma and crop would create value for shareholders, they said.
“We struggle to see major synergies between the two divisions,” they explained. “Yes, they are both ‘research’ focused, but we suspect the overlap and tech transfer are minimal and provides no competitive advantage to peers.”
This is not the first time Bernstein has rooted for a split at Bayer. Before the makeover, they noticed Bayer’s shares were hurt by its multiple divisions and said a two-way separation could be its best option to restore the pharma division to trade at fair multiples.
As for the mounting Roundup lawsuits that have taken a $33 billion toll on Bayer’s stock, the Bernstein analysts are asking management to “settle the litigation and move on.”
“Past practices of ‘campaigning’ to defend the chemical must no longer be pursued and a genuine dialogue with regulators sought,” the Bernstein team suggested.
Despite recent defeats in U.S. state and federal trials that come with damages in the millions of dollars, Bayer hasn’t budged, saying it “continues to believe that it has meritorious defenses and intends to defend itself vigorously in all of these lawsuits.” By Bayer’s last count in April, the number of suits that claim Roundup caused cancer has swelled to 13,400.