Bayer Posts Solid 3Q, Announces Schiff Acquisition and Legal Charges


Bayer reported strong third-quarter results that exceeded consensus expectations as well as our own for top-line growth as all divisions posted stronger-than expected results. Additionally, Bayer announced the $1.2 billion acquisition of Schiff Nutrition, which at 3 times forward sales estimates and 28 times forward earnings estimates appears to potentially overvalue the nutritional company.

However, given the relatively small size of the deal, the likely revenue synergies of distributing the nutritionals through Bayer’s leading emerging-market platform, and the likely cost synergies in both manufacturing and marketing, we expect the deal will have a net neutral valuation impact for Bayer.

Turning to the quarter, total sales increased operationally 6% versus the prior year with steady gains across all divisions. The agriculture group posted robust gains, up 13% year over year operationally as demand for products picked up largely due to persistently high commodity prices.

The health-care group posted 6% operational growth versus the prior year as new product gains help offset slowing mature products. Despite several new important drug launches–including Xarelto for atrial fibrillation, Eylea for eye disease, and alpharadin and regorafenib in oncology– mature products should continue dominating the revenue stream, resulting in mid-single-digit growth for the healthcare division for the next three years.

Lastly, the material science group posted only a slight growth in the quarter as this poorly positioned division unit dealt with flat volumes.

On the bottom line, earnings were hit by an additional reserve of EUR 205 million taken against future expected legal settlements involving side effects from Bayer’s Yasim and YAZ birth control drugs. The additional reserves take the total costs set aside for these legal issues to above EUR 1 billion and we expect several hundred million euros of additional legal costs to continue to weigh on performance through 2013.


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