Last week, Bayer lost phase one of the first Roundup bellwether trial, which could set the tone for more than 11,200 others waiting in the wings. And Bayer's shares took an immediate beating.
But that hasn't shaken the Bayer supervisory board’s confidence in management—at least not to hear chief executive Werner Baumann tell it.
“The share price is significantly impacted by the legal cases related to glyphosate in America, the discounts are greatly exaggerated,” Baumann told German newspaper Frankfurter Allgemeine Sonntagszeitung, as quoted by Reuters. “The [management] board enjoys the full backing of the supervisory board,” he added.
Once again, the Bayer helmsman stood by the $63 billion buyout of Monsanto he engineered. Buying the Roundup maker “was and is a good idea,” Baumann insisted. But it's Monsanto and its steadily growing Roundup litigation that have inflicted serious harm to Bayer’s stock.
Bayer’s Frankfurt shares fell more than 12% last Wednesday as a U.S. federal jury in San Francisco ruled that Roundup was a “substantial factor” in causing the cancer of plaintiff Edwin Hardeman.
“We are disappointed with the jury’s initial decision, but we continue to believe firmly that the science confirms that glyphosate-based herbicides do not cause cancer,” Bayer said in a statement on March 19.
Still, it’s another blow to Bayer after a California state court jury last year found Roundup caused another man’s non-Hodgkin lymphoma. The judge in that trial had slashed the jury’s original $289 million award to $78 million.
“This looks like 2-0 plaintiffs, and clearly not helpful for the overall payout calculus and resolution of the litigation, hardening the resolve of plaintiffs to pursue the company versus moving towards a settlement,” Bernstein analyst Gunther Zechmann wrote in a note to clients on Wednesday.
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The Hardeman case holds more significance because it’s the first of three scheduled bellwether trials at the federal level whose results will serve as an indicator for the fate of some 11,200 pending lawsuits on similar claims. The outcome of the bellwether trials will likely affect whether Bayer moves to settle the remaining cases or continue defending the product in court.
At Bayer's request, the Hardeman case was split into two phases, and the ongoing second phase will determine liability and damages. As Zechmann sees it, the prospect doesn’t look good for the German conglomerate, calling it “a damage limitation exercise,” what with a negative judgement from U.S. District Judge Vince Chhabria, who questioned Bayer’s focus on “manipulating public opinion.”
“We are confident the evidence in phase two will show that Monsanto’s conduct has been appropriate and that the company should not be liable for Mr. Hardeman’s cancer,” Bayer said in its statement.
Monsanto's joining the fold has cut into Bayer’s stock, and the fact that Bayer knowingly and willingly took on the litigation risk with the acquisition could undermine investors’ confidence in Baumann’s leadership. According to Zechmann, at current valuations, an ultimate liability well above the $5 billion is baked in.
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In addition, the Monsanto deal has consumed Bayer’s cash for potential investment in its pharma business. Pointing to Bayer’s lethargic pipeline, Bernstein analyst Wimal Kapadia has called for a split-up to free cash for external drug collaborations or M&A deals. Bayer’s low 2019 expectations for top-selling drugs Xarelto and Eylea only highlighted that need.
Under pressure, Bayer has already initiated a large restructuring, with plans to cast off its animal health business, some consumer health brands and about 10% of its workforce. But last December, rumors emerged that activist investor Elliott Management, headed by billionaire Paul Singer, was pushing even further for a divorce of the crop science and pharmaceutical businesses.
In what could be interpreted as Bayer’s commitment to its crop science franchise, Baumann on Saturday just appeared on an agriculture panel at this year’s China Development Forum in Beijing, where he talked about global cooperation in ensuring food supply and safety.
All eyes will be on the company’s annual general meeting scheduled on April 26, a day after its first-quarter report, when Baumann is expected to unveil the exact plans for the animal health business—whether it’s a spinoff or sale.