Glyphosate woes prompt calls to split up Bayer

BAYER COULD do with a few Aspirin these days. On July 16th a judge in California rejected a request by the German chemicals giant (which makes the painkiller) for a retrial of a case in which jurors awarded the plaintiff $80m after concluding that Roundup, Bayer’s bestselling herbicide, caused his cancer. The judge’s decision to reduce damages to $25m offered only marginal analgesic relief. The verdict could open the floodgates to 13,400 other plaintiffs around the world who claim to have been harmed by Roundup. It comes on top of another headache caused by Austria’s lower house of parliament, which voted this month to ban glyphosate, Roundup’s active ingredient, from November.

The glyphosate lawsuits—and the political backlash—stem from a finding by a division of the World Health Organisation, which said in 2015 that the chemical was “probably carcinogenic”. The study, controversial among scientists, has dogged Bayer ever since it bought Monsanto, Roundup’s American inventor, in 2018. Bayer’s market capitalisation has nearly halved since the takeover, to €55.5bn ($62.4bn), a little less than the $63bn it paid for the American agrochemicals giant.

The uncertainty over the toll of glyphosate litigation explains much of the fall. It nevertheless looks like an overreaction. The lawsuits could certainly be painful but look unlikely to prove fatal. Markus Mayer of Baader Bank, an investment bank, estimates that they could cost between €5bn and €20bn—a fair bit less than the drop in Bayer’s share price would imply. Bayer plans to appeal against the verdict in California. At the end of June it signalled that it might be open to a settlement to end its legal battles once and for all. It set up a special committee to examine its legal strategy and appointed John Beisner, a combative lawyer, to advise on trial tactics.

Losing Roundup altogether would similarly hurt but not kill the German firm. The weedkiller accounts for 12-15% of sales at Bayer’s crop-business and perhaps €1bn, or around a quarter, of Bayer’s operating profit. Despite talk of prohibitions around the world, many farmers fear that losing Roundup will reduce their yields—and have made their concerns known to their political representatives. The Austrian ban must still be approved by the upper house of parliament. It may be incompatible with the EU’s decision in 2017 to renew glyphosate’s licence for use until 2023.

In the longer term the picture is blurrier still. Counterintuitively, bans may end up benefiting Bayer. Last month the company announced that it will spend €5bn to research alternatives to glyphosate-based weedkillers. That could position it ahead of rivals when the popular weedkiller is eventually phased out.

If, that is, Bayer survives that long. Some investors, including Elliott, a feisty American hedge fund, have called for the company to excise the toxic agribusiness from a healthy drugmaker (Bayer’s original operation). To reassure investors the company’s management is cutting 12,000 jobs and has considered selling its animal-health, sun-cream and foot-care businesses. But it has resisted a full split, having fought hard to combine the two firms.

A separation would contain the legal risk to a smaller unit. Analysts at AB Bernstein, a research firm, who recommend a split, point out that research overlap and technology transfer between the health and crop businesses are minimal. Bayer’s valuation is so low that a willing buyer may come forward. Many shareholders may pounce on the opportunity to rid themselves of the migraine.

This post was originally posted at https://www.economist.com/business/2019/07/20/glyphosate-woes-prompt-calls-to-split-up-bayer.

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