BAYZF - Bayer: A Strong Buy Now

Summary

• Bayer stock is poised to see strong buyer interest, as the company raised its peak sales forecast for new pharmaceutical drugs.
• Investor sentiment is also positively impacted by news that activist investors Bluebell Capital Partners and Inclusive Capital Partners were advocating for a partial company break up and a replacement of CEO Werner Baumann with a 'Bayer outsider'.
• Reflecting on EPS upgrades on the backdrop of stronger-than-expected pharma sales, I upgrade my target price for Bayer to $36.13/share.
• As a function of valuation and positive momentum, I upgrade Bayer stock to 'Strong Buy'.

Thesis

Bayer ( BAYRY ) shares surged almost 20% within less than two weeks after the company significantly raised its peak sales forecast for new pharma drugs. In addition, sentiment was supported by news that activist investors Bluebell Capital Partners and Inclusive Capital Partners pushed for a conglomerate break-up and replacement of Werner Baumann with an outside CEO respectively.

I continue to believe that Bayer stock is strongly undervalued. And reflecting on EPS upgrades on the backdrop of stronger-than-expected pharma sales, I upgrade my target price for Bayer to $36.13/share, as compared to $28.58/share prior . As a function of valuation and positive momentum, I upgrade Bayer stock to 'Strong Buy'.

Bayer Raises Peak Sales Forecast For New Pharma Initiatives

During the JPMorgan Healthcare conference in San Francisco on January 10th, Bayer's pharma unit head Stefan Oelrich predicted that peak revenue contribution from the company's new drugs could be as high as EUR 11 billion. Oelrich said that sales from the company's new thrombosis treatment Asundexian could surpass EUR 5 billion, while sales from Nubeqa, a prostate-cancer drug, and Kerendia, a cardio-renal therapy, could both exceed EUR 3 billion each. In addition, the non-hormonal menopause drug Elinzanetant could contribute another $1 billion in sales, Oelrich estimated. The news is well received, given that investors have been worried about how Bayer's pharma unit will perform after the patent expiration of Xarelto and Elyea.

The JPMorgan Healthcare conference also revealed that Bayer is increasingly betting on innovative cell and gene therapy solutions, initiatives that are currently in early clinical trials to treat illnesses such as Parkinson's disease. According to Oelrich, although it is difficult to predict the potential sales for these new initiatives, revenues from cell and gene therapy could likely grow into 'billions of euros'.

Finally, Bayer is also confident that an increased focus on NAM and Asia, which Bayer considers to be commercially more welcoming than the 'innovation unfriendly Europe' will support stronger earnings in the future.

Activist Investors See Path To Unlocking Shareholder Value

On January 9th, the Financial Times reported that activist investor Jeff Ubben, from Inclusive Capital Partners, has bought more than EUR 400 million worth of Bayer shares, or 0.83 percent of the company's equity value. Ubben is reportedly pushing for Bayer to recruit an external CEO, following the disastrous Monsanto acquisition. Ubben said that:

the CEO has an obligation - among other obligations - to drive the stock price. The existing management team has been unable to do so

...adding that:

Management has not shown a strong propensity to disrupt the status quo

Then, on January 10th, Bloomberg reported that Bluebell Capital Partners has accumulated an undisclosed amount of shares in Bayer and is now pushing for breaking up the conglomerate. According to rumors and speculations, Bluebell has demanded Bayer should spin off its crop science business from its pharma business, which Bluebell argued could unlock as much as 70% upside for equity investors. In addition, Bluebell also urged management to consider selling the company's consumer-health business, which could likely claim an enterprise valuation of approximately $30-45 billion, assuming a comparable EV/sales multiple of approximately 2-3x.

Although Ubben has not voiced a strong opinion about a break-up, he did not rule it out as an attractive option:

the ultimate break-up of the company is not necessary in our opinion to create value from here. But it has to be on the table

A third activist investor is Elliott Management. The fund reportedly owns a EUR 1.1 billion stake since 2019 but has so far not moved much.

In any case, there is definitely a lot of value in Bayer. And I appreciate the effort from activist investors to unlock it.

Valuation Update: Raise TP To $36.13

Against the backdrop of a much stronger-than-expected pharma outlook, I upgrade my EPS expectations for Bayer through 2025: I now estimate that Bayer's EPS in 2023 will likely expand to somewhere between $2.3 and $2.6. Moreover, I also raise my EPS expectations for 2024 and 2025, to $2.75 and $2.98, respectively.

I continue to anchor on a 3.5% terminal growth rate (one percentage point higher than estimated nominal global GDP growth), as well as on a 9% cost of equity.

Given the EPS upgrades as highlighted below, I now calculate a fair implied share price of $36.13, as compared to $28.58 prior .

Below is also the updated sensitivity table.

Risks

As I see it, there has been no major risk update since I initiated coverage on Bayer stock. Thus, I would like to highlight what I have written before :

... the major headwind for the company is and will likely remain the Monsanto litigation. While the lawsuits should be manageable, and Bayer has set aside adequate funds for potential liabilities, the costs are still open-ended and uncertainty persists. However, one could argue that Monsanto is the opportunity, not the risk, as without the litigation investors would never be able to buy Bayer at such a cheap valuation. At this point I see the risk/reward skewed to the upside.

Conclusion

Bayer stock is poised to see strong buyer interest, as the company raised its peak sales forecast for new pharmaceutical drugs. Additionally, investor sentiment is positively impacted by news that activist investors Bluebell Capital Partners and Inclusive Capital Partners were advocating for the company to (partially) break up and replace its CEO, Werner Baumann, with an outsider.

Reflecting on EPS upgrades on the backdrop of stronger-than-expected pharma sales, I upgrade my target price for Bayer to $36.13/share. Bayer is a Strong Buy.

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