Monday, August 13, 2018

Dear Bayer shareholders, what are you thinking?

Bayer is a life-sciences company. It sell drugs with litigation risks (especially Xarelto), it genetically modifies seeds (which I guess has litigation risks). It sells herbicides and pesticides all of which have litigation risks.

If you do "life sciences" you muck around with living things and that has litigation risks.

On twitter recently I sought out discussion on risks of Bayer stock and litigation was the key one.

Today Bayer stock is down 12 percent on a California court case where a dying plaintiff claimed that roundup caused his cancer and a jury agreed.

The damages were set at $289 million.

Having watched lots of legal stuff in American stocks I would be surprised if this were not rounded down at least 90 percent on appeal, and if the agglomeration of future cases didn't cost a lot of money.

But whatever. Here is a list of the biggest class actions in US history. None break $10 billion except the global tobacco settlement.

The biggest aggregate claim I can remember is fen-phen which wound up costing about $13 billion.

All of these are spread over many years. And are tax deductible to boot.

Today Bayer's market cap dropped $14 billion, bigger than the biggest set of (non-tobacco) legal losses in history.

This seems disproportionate to me - but then I own Bayer stock. And I am puzzled.

So I am asking the people trading it in Germany - why are you so pessimistic about this?

I genuinely want to know.



Anonymous said...

I run a German family office. We don't have a position in Bayer, however just to give you a fair overview of investor sentiment here, public opinion has soured dramatically on this stock ever since the Monsanto deal. In the German media Monsanto (mainly because GMO, pesticides are a very touchy topic in Germany) is the incarnation of evil. Lots of documentaries have been aired on the state owned TV channels over the years about Monsanto and it's (allegedly) dirty agribusiness practices (again GMO, pesticides, treatment of seed / farmers).Has nothing to do with the financials, it's just sentiment.
Make of that what you want, that's just a local impression on the ground here in Germany.

Anonymous said...

That the Monsanto merger is a big mistake. Europeans care about environment whereas US is big enough to dump whatever it wants in some remote corner. This merger is a big error from the start, it should spin-off the Monsanto crap the soonest as possible. Monsanto is known for a long history of bad agro-economics behavior. Why would anyone want that heritage.

My shares of Bayer got sold on the day of the announcement of that merger.

Matthew said...

I know I am not answering your question (not German, not a shareholder) but who are the buyers here? Stock is not super cheap, and is in a multiyear downtrend, so probably the universe of entities that are going to buy quickly on an overreaction to bad news are the those have done the analysis and decided to own it already, and also have a deep value orientation. Maybe there just aren't very many of them.

Anonymous said...

Just a few weeks ago, JNJ was sentenced to more than 4.5bn for selling talc that supposedly causes cancer. The company, having battled this for a long time, is confident that it will be overturned in appeal. The shaes fell 2,4% on the day (a non-event then and ever since…).
From what I read, the claimant will have a tough time proving causation between the Monsanto product and his cancer..

Anonymous said...

Because - believe it or not - people in Europe (even the investing kind of people) really liked the Bayer brand and really hate the Monsanto brand.
The amount of brand value destroyed is unbelievable high. It will need a ton of football sponsoring (more Bayer Leverkusens) to sort this out.
The Roundup brand is maybe totally dead now.

Anonymous said...

Thinking about it again:
Now they own a complete value chain:
Causing the cancer in the first place and healing it afterwards.
This is maybe why they did choose Eckert + Ziegler as their Thorium supplier back in June.
Well, at least this stock is going through the roof.

Pete-0 said...

Word-combination based algorithms, not stopping to apply any common sense

Anonymous said...

Dear John, big fan of your blog. History does in fact rhyme: remember Lipobay? Bayer stock dropped on the news to somewhere in the range of 11 €, which was in retrospect the bargain of a lifetime, valuing Bayer for less than its chemical devision alone. Same pattern applies to the roundup-litigation risk; valuation is more difficult today than in 2001, but therein lies the opportunity for excellent risk adjusted returns for a time horizon of 5 to 10 years.

memyselfandi007 said...

A few thoughts why German investors might be pesimistic:
- maybe Bayer overpaid for Monasanto in the first place ?
- Volkswagen paid around 25 bn USD and the climate between Germany and The Donald's country has not been improving since then ?
- the track record of German companies doing large US deals is pretty bad anyway ?
- A weak EUR is not ideal if you have to pay huge USD denominated fines ?

Disclosure: I don't owm Bayer shares so everything above is pure speculation

Anonymous said...

I am German, though not a Bayer shareholder. I considered the stock for a while, but stuck to BASF, which have a better record of organic growth. I will tell you plainly what I think:
I never saw a major acquisition or merger of any US company by a German corporation, which did not go horribly wrong. From Daimler-Chrysler to the Thyssen-Krupp investment in an integrated Steel Americas business, any and all of these mergers or takeovers wrecked the German investors.
There is something inherently bad about the set of incentives: Managers in US firms earn a lot more than their counterparts in Germany. Becoming a US-German titan usually means a windfall for the agents of the German corporation; a life style changing one at that.
There is hybris, there is a lack of connection to the specific risks involved in doing business in the US and the interactions with US politics and the topography of law and lobbyism. The different legal frameworks are not understood, even while expert advice is sought.
If I was a Bayer shareholder I would run for the hills to boot, because the entire affair can become an unrelated casualty of the EU-big tech antitrust cases, trade war and tarrifs or a political hostage to other conflicts and the defendant suddenly is no longer a US company.

Respectfully from Germany, a shareholder.

Former CFA said...

"...the agglomeration of future cases didn't cost a lot of money."

I think here's where your logic gets shaky. The total costs to Monsanto/Bayer of future cases is now (possibly) a very large number. In no way do we know that these cases won't cost a lot of money.

If I were a class action lawyer I would be trying to find as many "Roundup users with health problems" as I possibly can. An analogy would be asbestos claims, or silicone implant claims and what the aggregate costs of these claims did to various companies' values. Once something is "found" by the court system to cause health problems the future liability risk might easily become unbounded.

I don't have a dog in this fight here, just sharing a possible explanation for the stock's seemingly disproportionate decline.

Former CFA

Anonymous said...

Dear John,
While I agree that the verdict will be reduced, I suggest to be cautious in terms of using the benchmarks due to the following reasons:
1) Monsanto is now a German, not a US owned company and US companies often get a discount / foreign companies have to pay more ; think of the large settlement for BNP, ie the cost might have increased just by being taken over by Bayer
2) German are risk averse and will rather give in to external pressure and settle, i.e. this can also increase the cost; I am not sure, if Bayer has the guts like J&J in their talc cases, which is otherweise similar in many respects
3) German will compare it to VW and its Diesel issue, which has cost by now more than the 13bn and still growing
So I would not rule out that it will be a more severe issue than you might assume given the US benchmarks and not factoring the risk aversion of German

Anonymous said...


Thanks for bring that plunge to my attention. I am not sure I like Bayer though. I am concerned about constant dilution they cause to common the stockholder.

Would you buy a house, if the previous owner kept getting few basis points of the house back every year? How would that modify your economic calculation about it?

I understand that I am bring here slight off topic, however given this dilution (and perhaps bumpy roe) I feel Bayer is only now starting to trade around fair value.

Anonymous said...

The other thing to mention is the capital allocation within Bayer. It may very well be that this Monsanto acquisition will be net positive for bayer shareholders, but so far it seems they doubt it.

Anonymous said...

Between the timing of the sale of Covestro and the impact of Monsanto purchase on the share price, the current CEO has not gotten many things right so far.

HS said...

There are a few (not many) situations where a legal verdict like this could be the start of a major loss of value. Most investors hate legal risk even if they know it exist generally. Bayer is a large complicated conglomerate with many businesses so the likelihood of “new buyers” immediately is low. Basically you have panicked sellers thinking about legal liability in a country they don’t understand that have to sell to buyers that have to increase their position. I imagine you did not raise your position by 50% (as I still remember your post on doubling down). So really while the headline loss might not make sense on a probability weighted basis, it’s not that surprising.

Anonymous said...

Markets are forward looking. Sign that there products have a lower TAM now

Anonymous said...

To bring another point which was not yet been mentioned: you assume that the verdict will be cut 90% in appeal, which would bring it to $28.9 million. But there are 5,000 such cases in the US - if only 10% of them are similarly successful, and the remaining ones are dismissed, the total fine will be the $14 billion the stock has fallen. And this does not even account for people who have not yet filed a suit, but might now be encouraged to do so, lost sales, and the PR damage.

Anonymous said...

Some context:

- From the time the first dollar was put into discovering effective herbicides (glyphosate) to full commercialization (under the brand Roundup) past some 20 years.
- Roundup's patent expired in the year 2000.
- Despite that, today Roundup is the first herbicide in terms of sales globally, which means farmers make a free choice from using this product or a non-branded alternative, and choose Roundup nevertheless.
- Other non-branded glyphosate manufacturers are BASF, DOW-Dupont or Syngenta just to name a few.
- Farmers choose Roundup because 1) it is known to work, and 2) it is sometimes sold under a bundle with GMO seeds (Roundup ready crops). [By the way, it is in GMO seeds where the value really is - oligopoly with 30% margins after 15% R&D to sales, big licensing revenue, double digit growth with massive untapped plant species and geographies, no relevant patent cliff and a massive barrier to entry: germplasm. Bayer payed around 4,5x sales for such a complementary business with such deleveraging potential].

- Roundup's operating profit was in the 300 million dollars area last year (around the size of the fine).
- Just shy of 60% of its sales are from outside the US (you would guess profits too).

- There are numerous studies that say Glyphosate doesn't cause cancer when used adequately.
- The WHO, that said Glyphosate was probably carcinogenic said the same from coffee or red meat, both of which probably cause cancer when used inadequately.

- By using effective herbicides, farmers don't need to plow the field as much, which prevents soil erosion (therefore using less chemical fertilizers) and less plowing tractors (therefore consuming less diesel).
- It also increases yield, as crops don't compete for nutrients with weeds, and grow larger.

- Nevertheless, nature adapts and weeds develop Roundup tolerance, which is happening now and glyphosate as a herbicide may have its days counted anyways.

Anonymous said...

Monsanto may now be seen as German and people here have not forgotten VW. There was real cost, impact on production, prison and afaik. there are still outstanding warrants.

Anonymous said...

As some commentators have implied already, there is a growing feeling in Europe of disproportionate punishment of European companies by the American justice system. This impression stems from various cases involving banks and more recently VW. I do not have the expertise to judge if this is warranted, but I can certainly understand why Europeans, and Germans specifically, would think so.

A German living in the US

kfe1000 said...

According to Bayer IR only 21.9 % of the shareholders are german.

kfe1000 said...
This comment has been removed by the author.
Anonymous said...

"Shares in Germany’s Bayer fell 6 per cent on Thursday to their lowest point since 2013 after California’s top court declined to hear an appeal against the state’s decision to list an ingredient in herbicide Roundup as a known carcinogen."

Anonymous said...

It's not just the direct litigation cost. What's the value and impact on the RoundUp brand for Monsanto going forward? If these suits continue to come up and distributors no longer are willing to carry the RoundUp brand, what's the value impact on Bayer? It's a lot more than a couple of nuisance lawsuits.

Contrahour said...

I have an investing rule..."When a German company finally sells a foreign acquisition that has gone terribly wrong, it's time to buy. Until then, it will be a disaster for the German company and its shareholders."

The commentator above ("Respectfully from Germany, a shareholder") has analyzed it correctly. The Germans, like the Japanese, do not have an understanding of US managerial or business culture. Any large merger such as Bayer and Monsanto will inevitably end with the Germans giving up in disgust.

I would sell Bayer and wait for the inevitable liquidation. At that point, you will be able to buy both Bayer and Monsanto on the cheap.

Anonymous said...

Roundup is used everywhere. It's one of the most common herbicides in the United States (and thus probably the world). The potential liability, if it's shown repeatedly that Monsanto knew of the problem and did bubkis about it, is on the scale of the asbestos settlement, which was roughly $30b IIRC.

I'm not a specialist in these areas, but I am an attorney in the US and have followed major product liability lawsuits in the past. This isn't going to break Bayer the way Perdue and other opioid producers are going to get broken in the next half decade, but there's more risk here than you think.

Marfir said...

Bayer is, after the Monsanto deal, not worth to own this stock at any price. The debt load will be increase a lot. Goodwill and intangible assets will be inflationary increase. If the Monsanto integration failed, then they could loss the half of their equity, because of the write downs of the very big goodwill and intangible asset positions.
Bayer needs a long time to repay the debt to a previous level (also because of the merger one-time related costs that reduce the income in the first years). Until they must repay the debt, they have not the money to spend more on dividends and stock repurchase.

The management did a lot of mistake in a short time and will not stop to fail:
- spin-of of Covestro at the button of the cycle (revenues goes up after them; the management should know the nature of the business)
- overpaid Monsanto (why buying a competitor if the stock market is at all time high? why buying a company/trademark that have a lot of negative spirit in the public?)
- declare some of the goodwill as intangible (we will see if its worth)
- increase the debt a lot at a time where interest rates are 0% (EU) and the economy running out of traction (what will they do if both metrics works against them? raise again more equity?)

A good management buys assets countercyclical. A good management knows how to make value and not destroy value.
Bayer was a good company in the past. Now it's another bad story like General Electric.

Thats my opinion.
But I'm not a Bayer shareholder. Only an investor from Germany.

catsickspam said...

For the downside to a European company exposed to US litigation look no further than BP, An accident on a rig caused by a US contractor lead to over 50 billion of value destruction over many years, non US companies getting involved in the US do not see the massive country risk that exists for them ...

Anonymous said...

After the Glyphosate, the Dicamba product is hitting the headlines.
We could be for a remake of the litigation years of Tobacco, when PEs fell to 7-8x. That would halve Bayer's stock price in 2 and with the high debt burden, it is not a place to be long.

sean said...

The US does seem to fine/punish foreign companies much more than US companies.

Surprised no one has mentioned Deutsche Bank. It seems like their fines for the financial crisis dwarfed the fines of US Banks. And this applies to a few more Europeans banks too.

BP though likely got a fair punishment. That was massively expensive to the public and the cleanup was costly. Also they are British with less of a cultural divide.

JuanDz said...

You’re not seeing it right.

If Roundup (or generic glyphosate) was to be banned (or at least discouraged), RoundupReady seeds would no longer be demanded by farmers, as they are way more expensive than conventional seeds (almost twice). Monsanto's acquisition price was made based on increased (neither decreased, nor flat) expected sales of RoundupReady seeds (and to a less extent Bt seeds).

Not that I'm saying it will happen. As a matter of fact, arguments are stronger (from an ethical, economical and practical point of view) for the use of glyphosate. I could elaborate on that, but I wouldn’t be answering your question.

For full disclosure, Bayer is one of my biggest longs.

Jaap said...

hi John,

How do you feel about Bayer now? It's been down with the market, with a little higher beta.
No gloating, I have gotten into the boat as well! As a trader, I have speculated a little with short gamma (high vols!) since the last breakdown to 70 euros, but of course, that hasn't made me much money yet.

Jaap said...

hi John,

Sorry to keep pestering you about this one. Can you give us an update?
I am mostly interested in the breakup value. Bayer's pre-merger value -$66 bln in cash is being approached quickly (if not already there).
What would happen if Bayer would spin off Monsanto (which would go down to zero in a heartbeat imo)? I have a feeling that Bayer will survive and will actually go up in value from here. It's a bloody expensive lesson the Germans have learned (again; and again and again) to tread carefully doing business on American soil of course....

Unknown said...

I am grateful for your blog. It is tremendously valuable. Question: are you still long Bayer? If Elliott is now involved to engineer a separation, it seems likely we have a floor underneath the stock. I am not long - yet - and would love your thoughts here.

Anonymous said...

Not John, but I think now may be the right time to buy, stock is cheap, negativity is huge, fears possibly overbloan. Curiuos also, what author of the idea feels?

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