Bayer Settlement Leads to Fair Value Estimate Decrease

Bayer BAYRY announced an agreement to settle all major outstanding glyphosate litigation for $10.1 to 10.9 billion, close to $8 billion more than we had projected. Bayer also announced close to $1.2 billion in settlement costs related to dicamba and PCB water issues. Due to the higher than expected legal costs, we are lowering our fair value estimate to EUR 93 ($26 ADR) from EUR 101 ($27 ADR). Based on the large number of scientific studies showing no link between glyphosate and cancer as well as the typical corporate strategy to exhaust plaintiff efforts through long legal battles, we had expected Bayer to continue to aggressively litigate the plaintiffs. However, partly due to the potential damaging headline risks coming from the litigation process, Bayer decided to largely end the majority of cases with a large settlement. While the costs will deplete capital that Bayer could have used for debt repayment and tuck in acquisitions for new pipeline products, we don’t expect the settlement to create a major drag on the firm’s wide moat.

We continue to rate the firm with a high uncertainty based partly on the lack of clarity surrounding the finalization of the glyphosate litigation process. As part of the $10.1 to $10.9 billion settlement, Bayer is contributing $1.25 billion to establish a class agreement to address future cases. While we expect this amount to largely cover future cases, we are including an additional EUR 5 billion in our bear case reflecting the less likely scenario where Bayer needs to fund more costs around future glyphosate settlements. Additionally, the range of $10.1 to $10.9 billion is based on a lack of clarity around some of the current plaintiffs that appear to have joined the litigation process based on aggressive advertising by legal firms and haven’t provided much medical background. Lastly, the settlement excludes the three cases that have already gone to trial and Bayer expects to continue to litigate these cases.

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