Market News

 August 23, 2018
Bayer Has a $289 Million Roundup Headache

 Last fall, as Bayer AG was completing its $66 billion merger with Monsanto Co., Chief Executive Officer Werner Baumann visited the concrete-slab Berlin complex where company scientists develop disease-fighting drugs. At an employee town hall meeting, Baumann asked whether staffers believed environmentalists' claims that the Monsanto weed killer Roundup causes cancer. Despite the CEO's obvious interest in the acquisition, some raised their hands. On Aug. 10 a California court agreed, awarding a school groundskeeper dying of lymphoma $289 million on a claim that exposure to glyphosate, Roundup's key ingredient, had contributed to his cancer. The verdict---the first in what may be thousands of cases---sent shock waves through Bayer and erased $16 billion from the company's market value in a week. "The odds are that Bayer will suffer more losses" in litigation over Roundup, says Elizabeth Burch, a University of Georgia liability law professor. "Investors better get prepared."

Roundup is at the core of the Monsanto portfolio: In addition to the weed killer, the company sells soybean, cotton, and corn seeds genetically engineered to survive being doused with it. After the California verdict, Bayer issued a memo to managers citing studies that found glyphosate to be safe, underscoring Baumann's contention that science should rule over emotion in the debate over Roundup. "Everyone has a right to their own opinion," Baumann told shareholders at Bayer's annual meeting in April. "Nobody, ladies and gentlemen, has a right to their own facts." Bayer declined to make Baumann or other executives available for interviews.

Bayer, which enjoys a positive reputation in its home country, may not have fully grasped the animus that Monsanto faces. The plaintiff in the California case "probably got $2 million to $3 million for the horrible suffering, another $3 million because he was a sympathetic guy, and $280 million because people hate Monsanto," says Jonas Oxgaard, an analyst at Sanford C. Bernstein & Co. Investors were so concerned with the risk that the Monsanto purchase might not pass regulatory muster, Oxgaard says, that they overlooked various product-liability risks Bayer faced if the deal did go through. He predicts that while the California penalty will almost certainly be reduced on appeal, Bayer could end up paying damages and sanctions as high as $5 billion in cases linked to glyphosate.

Although it's best known as the inventor of aspirin 121 years ago, Bayer has never been just a drugmaker. It was founded in 1863 as a producer of synthetic coal-tar dyes for the textile industry, and it invented polyurethanes in the 1930s. In 2001, Bayer became one of the world's biggest agro­chemicals makers with its purchase of Aventis CropScience. Among the overseers of the transaction was soon-to-be-CEO Werner Wenning, who was seeking to reinvigorate the company amid the recall of a cholesterol-lowering medicine called Lipobay. Although Bayer never acknowledged any liability, by 2005 it had paid more than $1.1 billion to settle thousands of lawsuits over the drug, which was ultimately linked to a muscle-wasting disease and more than 50 deaths.

Some 15 years later, Wenning had been promoted to chairman and his protégé Baumann was contemplating the Monsanto deal as an antidote to another pharma problem. In 2023, patents would expire for Xarelto, the heart medication responsible for one-fifth of Bayer's prescription drug sales. Medical research is slow, and Baumann could see that little in Bayer's pipeline had the potential to be as big as Xarelto. Wenning was pushing for another big agrochem purchase, according to a person familiar with the process. After Monsanto lost a bidding war for Swiss pesticide producer Syngenta AG, the German company saw an opportunity to approach the U.S. rival. Competitors were doing big deals to combine seeds and weed killers, and Bayer needed an acquisition to remain a leader in agriculture, says Markus Manns, a fund manager at Union Investment, which owns some $750 million in Bayer shares. "Bayer didn't have any choice but to buy a seeds company," Manns says, "and Monsanto was the only one left."

Bayer executives knew it would be a difficult deal, especially from a brand cleanup perspective, a person familiar with the process says. In a project code-named Moonshot, it extensively examined Monsanto and the potential legal risks associated with Roundup, which has long been a target of environmentalists. While the U.S. Environmental Protection Agency has said glyphosate is "unlikely" to cause cancer in humans, the World Health Organization in 2015 labeled it a probable carcinogen. The designation opened the door to lawsuits by agriculture workers with non-Hodgkin lymphoma, a type of cancer common among farmhands. According to several people inside the company, the size of the California ruling came as a surprise, but since the verdict, Bayer has insisted that "decades of real-world experi­ence" have shown glyphosate to be safe and that regulators have agreed.

Bayer has said it will vigorously defend any challenges to Roundup, and its U.S. legal team has experience with liability lawsuits. In a case involving Xarelto, a Pennsylvania jury awarded more than $27 million to a woman hospitalized with gastrointestinal bleeding after taking the heart drug. Bayer and its partner Johnson & Johnson got the award thrown out by pointing at procedural problems with a doctor's testimony. But more than 20,000 Xarelto suits are still pending---as well as about 8,000 cases involving Roundup. "Managing class actions, that's something Bayer can do," says Marc Tüngler, CEO of DSW, a shareholder rights group in Germany. "As sad as that might be, it's important."