Bayer Posts Mixed Q4

Bayer BAYN reported fourth-quarter earnings ahead of our expectations but issued 2023 guidance slightly below our projections, leading us to maintain our fair value estimate based on the mixed report. The weaker-than-expected 2023 guidance is likely to weigh on the stock in the near term, but we continue to view the stock as undervalued, with the market likely missing the improving long-term innovation outlook that also gives us confidence in Bayer’s wide moat.

Bayer posted 4% total operational sales growth, led by crop science growth of 19%, but we expect a normalization of glyphosate pricing will reduce crop science sales growth in 2023. As more glyphosate supply likely enters the market from China in 2023, we expect Bayer’s glyphosate pricing to fall, which is likely leading to the weaker-than-expected 2023 overall guidance. While the exact timing was unclear, we had projected a normalization of glyphosate pricing, so this development doesn’t impact our fair value.

In healthcare, pressure in the branded drug group was mitigated by gains in the consumer portfolio. Pricing pressure in China for cardiovascular drugs Xarelto and Adalat weighed down growth. We expect continued pressure for these maturing drugs, especially as an increasing number of Xarelto generics launch between 2024 and 2027.

Despite the near-term pressures, Bayer is launching new, innovative products. Prostate cancer drug Nubeqa posted EUR 158 million in sales in the quarter and is on track to exceed annual peak sales of EUR 3 billion. Kidney disease drug Kerendia is making steady progress. A wild card that could provide significant upside to our fair value is asundexian (next generation Xarelto), with phase 3 data expected in 2025. High-dose eye-care drug Eylea (European approval likely in late 2023) offers improved dosing and potential exclusivity through 2039, but we model declines in 2025. Also, we believe the 20% increase in the announced dividend messages management’s long-term positive outlook.