Bayer proceeds with caution over restructuring: timing is crucial in any refocus on pharma
      WEDNESDAY, 13/03/2024 - Scope Ratings GmbH
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      Bayer proceeds with caution over restructuring: timing is crucial in any refocus on pharma

      Bayer AG’s caution over a possibly far-reaching restructuring of its pharmaceutical and crop-science activities is frustrating shareholders but is understandable given the high stakes involved in restoring the company’s investment case.

      Choose the wrong moment to sell the crop-science business and end up with a poor price – Bayer paid USD 63bn for Monsanto in 2018 – and the German conglomerate will miss out on badly needed funds for re-investment in its pharmaceutical business. Management would face criticism of compounding the damage done with the original acquisition of Monsanto.

      For now, Bayer CEO Bill Anderson has prioritised enhancing the company's operational performance (see Figure 1), considering it a more suitable approach than a corporate split.

      Shareholders and creditors see the company’s future in pharma, but that requires rebuilding Bayer’s research and development pipeline, organically or through acquisitions, as quickly as possible considering the modest near-term outlook for revenue growth at the business.

      Revenue from Bayer's two leading blockbusters is under pressure from generic competition which is set to become more intense. For Xarelto, revenue is in steep decline (EUR 4.0bn in 2023, down 9.6% YoY) while growth for Eylea (EUR 3.2bn, up 0.6% YoY) has stagnated.

      Figure 1: Bayer’s Scope-adjusted EBITDA and EBITDA margin, 2019-25E
      EUR bn (lhs), % (rhs)

      Source: Company reports, Scope estimates

      Weak R&D pipeline adds to litigation woes

      Bayer is running out of time to replace those revenues with other drugs under development after failures of some once-promising molecules, so big-ticket acquisitions beckon. Over the next two to three years, Anderson has vowed to build up a robust pharmaceutical product pipeline, but first he has other challenges to address.

      Bayer’s immediate priority is stemming the cash outflow, primarily from legal claims related to Roundup, the herbicide developed by Monsanto, but also due to falling prices for agricultural products. In response to a slight increase in glyphosate-related lawsuits in the US, Bayer has adopted a state-by-state approach to disputing the claims and engaged new legal firms to handle the cases.

      The company has also slashed its dividend to the minimum to conserve cash. The real catch is that the company is contending with both the drain on cash from settlements related to the Roundup litigation – Bayer has faced thousands of lawsuits claiming that Roundup causes cancer, which it denies – and dedicate time to addressing these legacy issues, diverting attention from more profitable business areas. This situation limits Bayer´s capacity to invest in its future and enhance EBITDA margins.

      Bayer pins near-term hopes of efficiency drive to boost profitability

      Finding ways to revive growth in Bayer’s earnings before interest, taxes, depreciation and amortisation is management’s main challenge. Anderson is confident that a radical overhaul of Bayer’s operational model – by introducing dynamic shared ownership (DSO) to enhance patient, farmer, and consumer focus in addition to improving innovation and productivity – can do better than just improve profitability at the margin. The company anticipates saving EUR 2bn a year through the DSO model starting from 2026, though it also expects one-time restructuring costs, including severance payments, to amount to EUR 2bn.

      One option for Bayer is to buy time and raise cash by selling its consumer health division, which is estimated to be worth around EUR 15bn, a path that other European pharmaceutical companies such as Merck KGaA (2018), GSK PLC (2022) and Sanofi SA (4Q 2024E) have taken to concentrate their efforts on developing new prescription drugs. With the proceeds, Bayer could significantly reduce debt or strengthen investment in its core division.

      However, this would be a difficult decision, as it would involve parting ways with aspirin, the pain-relief and anti-inflammatory drug that the German company discovered in the 1890s. Additionally, such a separation would come with significant costs and tax implications and require relinquishing a business that generates steady cash flow.

      Nor is it necessarily the only option. Earnings growth is weak, but Bayer’s leverage – as measured by Scope-adjusted debt/EBITDA – likely peaked in 2023 at 3.6x. We see further slight deleverage ahead, with net debt under control and gradually improving Scope-adjusted EBITDA.

      Creditors are likely to be more patient than shareholders with the lack of restructuring until management is confident that the uncertainty over Roundup-related litigation no longer prevents the sale of the crop-science business at a good price.

      Access all Scope rating & research reports, including our subscription rating on Bayer, on ScopeOne, Scope’s digital marketplace, which includes API solutions for Credit Sphere, providing institutional clients access to Scope’s growing number of corporate, bank, sovereign and public sector ratings.


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