Bayer Aktiengesellschaft (OTCPK:BAYRY) is perhaps best known to the public as the maker of Aspirin. The company, with a $35 billion market cap, recently had its worst day of performance in over a decade, as its share price dropped to lows not seen since 2008. The killer was the combination of another loss in the Roundup debacle, with $1.5 billion for 4 plaintiffs.

That combined with a late-stage drug failure. The drug, Asundexian, was a blood-thinner candidate with blockbuster potential. The company estimated the potential for peak sales to cross $5 billion. Now that dream is gone.

Bayer Financial Results

Bayer had tough Q3 financial results, but the company still has significant strength.

The company’s financial picture shows weakness, primarily from some temporary impact from its crop sciences business. However, the company is still guiding for strength for the year. The company’s net sales for the third quarter were $10.3 billion, primarily impacted by currency. The company’s EBITDA was almost $1.7 billion, down from just under $2.5 billion.

That’s a substantial 31% decline. The company’s annual EBITDA guidance of $11.5 billion, is $2.9 billion on a quarterly basis. That shows how the company’s YoY decline is temporary. The company’s free cash flow (“FCF”) is roughly $6.5 billion annualized, a 20% FCF, and a 10% yield on its enterprise value. The company can comfortably pay down its debt and pay long-term returns.

That FCF is impressive.

Bayer Outlook

The company’s outlook shows continued respectable performance despite the impact of Fx currency.

The company’s base is for $49 billion in net sales, turning to $11.5 billion in EBITDA. Currency is expected to cause a $0.2 billion EBITDA loss. It’s worth noting the company is not all profits. With a $33 billion market cap, it is one of the few large companies, outweighed by debt. The company’s net financial debt is $36 billion, a massive cost.

That’s especially true in an environment with rising interest rates. The company has a single-digit P/E ratio, but it needs to pay down its debt and continue strong performance.

Bayer Crop Sciences

The company’s businesses each have their own unique struggle and growth.

In crop sciences, the company’s glyphosate revenue has declined substantially, but pricing was incredibly strong in 2022. That, combined with higher inventory and pricing pressures, means in the most recent quarter the businesses EBITDA dropped to almost $0. However, the company still has strong growth in its core business.

We expect the core business to continue to grow here, supported by almost 9% YoY growth. That means in future quarters, we expect the EBITDA to normalize.

Bayer Pharmaceuticals

In pharmaceuticals, the company maintains a strong and profitable core business, with risks.

For example, the company’s upcoming blood thinner, once forecast to have more than $5 billion in net sales, recently failed a Phase 3 comparison trial to Pfizer’s Eliquis. That’s substantially pushed down the businesses net sales. Currently, the pharmaceutical business is strong, with hefty margins, and making up ~half of the company’s EBITDA.

However, for example, the company’s top drug Xarelto, making up >20% of sales, is expected to see generic competition next year. Eylea, which also makes up almost 20% of sales, is likely safe in the immediate term, but could see generic competition by the end of the decade. The company has a weak pipeline, and it needs to resolve this.

The company does have 3 other drugs in the pipeline, treatments for prostate cancer, kidney disease, and menopause that it hopes will each peak out at more than $1 billion annually. That should replace ~50% of the company’s drugs rolling off expiration. However, its pipeline still suffers from years of underinvestment.

Bayer Consumer Health

Bayer’s customer health business is a much stronger business for the company, but it’s still quite strong.

The company has seen a decline in volume but a growth in prices. A strong currency impacted the company substantially. As a result, the company’s net sales declined to $1.41 billion euros for the quarter. However, the company managed to increase margins slightly, causing EBITDA to decrease by less than net sales.

The company’s consumer health business has a lot of brand value, and despite some immediate term impacts, we expect strong shareholder returns.

Thesis Risk

The largest risk to our thesis is the lawsuits over the company’s Roundup weedkiller, and Glyphosate. The company recently lost another $1.56 billion trial in the United States, and lawsuits are continuously ongoing. The company still sells the drug, and research continues to be done, but of course proving a negative is incredibly difficult.

At this point, the company likely regrets its Monsanto purchase, and the company has already made a more than $10 billion settlement offer in 2020. The net result of the lawsuits remains to be seen, but in the meantime it’s very expensive for Bayer. How it pans out remains to be seen.

Conclusion

Bayer needs to compete. The company has an impressive set of assets and a strong portfolio of brands. It’s well known for numerous value benefits that it provides to customers. However, the company needs to innovate and improve. And in the immediate term it needs to resolve its Glyphosate lawsuits. Those lawsuits are an open ended liability.

In the immediate term those lawsuits are massively difficult to resolve. The company continues to sell Glyphosate and argues that there’s no cancer risk. No global agency currently marks it as a carcinogenic, but some market it as a possible carcinogenic. It’s a substantial risk. However, Bayer AG is working on a class action settlement and it has the FCF to generate overall strong shareholder returns.

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