Should Bayer consider splitting up now that it has closed its $63 billion acquisition of Monsanto? One analyst thinks so, at least for the good health of its pharma business.
Bayer’s divisions are now trading at a discount, and a breakup could restore them to fair multiples, allow the company to focus and potentially free up cash for licensing deals that would beef up its unexciting pipeline, Bernstein analyst Wimal Kapadia argued in a Tuesday analysis.
The German conglomerate's shares are weighed down by its multiple divisions, the analyst figures. Assuming fair multiples for its crop and consumer businesses, pharma is trading at a multiple of only five times its EV/EBITDA ratio, far below the EU large-cap pharma sector’s 11 times, according to Kapadia.
That wouldn’t be much of a problem if Bayer's drug business had enough cash or a robust pipeline. But it doesn't. “Hard to get excited” is the Bernstein analyst’s evaluation of Bayer’s pharma franchise in the long term.
Johnson & Johnson-partnered oral anticoagulant Xarelto is the main cash cow for Bayer for years to come. It contributed €3.3 billion ($3.8 billion) in 2017 sales, and consensus currently has pegged it at around €5.2 billion in peak sales, partly thanks to recent data that showed it can cut the incidence of major limb problems in peripheral artery disease patients.
Regeneron-partnered eye drug Eylea has also continued to grow strongly for Bayer, which owns ex-U.S. rights. Bayer has upped its peak sales guidance to €2.5 billion, and Kapadia projects Eylea could maintain that level for several years before it goes off patent around 2025.
But other newly launched products will no longer add much. Cancer therapies Xofigo and Stivarga have been performing below expectations. Pulmonary hypertension drug Adempas, another product touted by Bayer, might come €100 million short of management’s forecast of €500 million. And its cancer drug Nexavar—along with its hemophilia (cue Jivi) and multiple sclerosis franchises—all face competitive threats.
Perhaps what’s more worrisome, though, is the outlook for new assets that could soften the blow of Xarelto and Eylea patent losses down the road. Bernstein's pipeline review “suggests no game changers and we have to wait for catalysts,” the analyst wrote. Despite Bayer management’s estimate of €6 billion in peak sales for its pipeline assets, Bernstein figures €4 billion is more realistic.
So what could the company do to turn things around? A spinoff, suggested Kapadia.
According to Kapadia, Bayer’s other options are few, because its hands are tied in trying to pay off debt it took on for the Monsanto buyout. Because of that, Kapadia thinks it’s almost impossible for Bayer to pull off any €2 billion-plus deals before 2020, and trying to land a large M&A deal after 2020 would also be highly risky, because Bayer’s lesser presence in the U.S. means it's unable to achieve much in the way of synergies compared with its European peers.
Separating pharma from the crop business could thus be “the best strategy” to restore the pharma division to trade at fair multiples, and “our sense speaking to investors who have met management recently suggests this is not off the table,” wrote Kapadia.
An animal health sale could be more realistic, though. Using Pfizer's Zoetis and Eli Lilly's Elanco as benchmarks, Kapadia suggests Bayer’s animal health business would be worth at least €7 billion: “This can either be stage one of the Healthcare vs. Crop separation or, at a minimum, free up cash for licensing deals in Pharma.”
Kapadia's far from the only analyst to prod a Big Pharma toward a split. Goldman Sachs' Jami Rubin famously challenged Pfizer CEO Ian Read to consider the prospect and urged Johnson & Johnson to do the same thing. Though both companies have shed their share of business units, Pfizer actually did consider a big split but ultimately decided to stay together, at least for now.
More recently, RBC Capital Markets analyst Randall Stanicky made a detailed case for an Allergan split-up, given its languishing shares and cash-cow aesthetics business.