Trimming Bayer's Fair Value on Restructuring Costs

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Despite the reduction in fair value, we continue to view the stock as undervalued with concerns surrounding glyphosate litigation creating too much pressure on the stock. The company signaled close to five related legal cases should be litigated in the first half of 2019 with close to another five in the second half of 2019. We have modeled in legal costs of EUR 2 billion related to the cases as we continue to believe the first case's (Johnson) outcome of $78 million is likely to be reduced and is not representative of the likely outcome of the remaining close to 9,000 cases. We believe the support by key regulatory agencies and a large amount of scientific studies showing no causal relationship between glyphosate and cancer will lead to Bayer prevailing in the legal cases. However, we do rate the company's uncertainty as high due to the variable in potential legal outcomes.

Beyond the restructuring charges and glyphosate legal updates, Bayer also issued long-term guidance that was slightly below our long-term sales projections but also included offsetting lower expense expectations, leading to no major impact on our valuation. The company's drug division looks well positioned for growth over the next five years, and the firm is making strides to address its patent cliff in 2023 following the Xarelto patent loss by moving next generation drugs into late-stage development. New drugs combined with a solid outlook for crop sciences and improving outlook for consumer healthcare products reinforces our wide moat rating for the firm.

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