Bayer: 3 ways to rate the company (OTCMKTS: BAYRY)

A few notes on Bayer modeling

  1. As my readers know, I don’t believe much in role models. Still, I do a lot of modeling to improve my understanding of the dynamics involved and the key issues. While many investors look at the last row of their spreadsheet to inform their decisions, I primarily look at the structure of the spreadsheet to understand what the last row depends on.
  2. Bayer (OTCPK:BAYRY, OTCPK:BAYZF) does not indicate exactly how much it has already spent on each restructuring initiative and what savings these initiatives have already generated. What we know is only how much was spent in each quarter on all the restructuring initiatives combined, and we still get clues about the overall good progress of the most important program (started following the acquisition of Monsanto). Therefore, we cannot project an accurate flow of expenses and savings.

Adjusted EPS projection

This is the “quick and dirty” method. We take the original Bayer projection Investor Day 2018 drag and apply some tweaks:

We now know what the company told us last week, i.e. the recently adjusted outlook for 2020 is confirmed, but 2021 sales are expected to be around 2020 levels, while 2021 basic earnings per share are expected to be slightly below 2020 levels. of 2020 at constant exchange rates. Thus, we can adapt the projection, include two flat years, and simply shift the achievement of the €10 EPS target by two years to the right (or by three years, to be more cautious).

While this would clearly provide a great argument to buy the stock, it would be seriously flawed:

  1. These are adjusted numbers. Whether Bayer pays €10 billion or €80 billion for Roundup settlements has no effect on these numbers.
  2. Watching EPS just ignores the debt and the related risks.
  3. Ironing your shirts and then putting them in the washing machine produces a different result than washing your shirts first and then ironing them. Thus, the exact sequence of cash flows is important. Will Bayer go into debt first before it can recover money? Our model tells us nothing about this.

One thing the slide actually tells us is that the synergies will simply offset the projected cost inflation. Thus, the objective of the restructuring program is to maintain costs close to stability despite growth. This, however, should be part of every leadership’s daily routine. The announcement of a “restructuring programme” is often just a fancy way of shifting attention to savingswhile announcing other costs – which immediately disappear from the “adjusted” result.

Sum of parts

The SOTP valuation has always represented the “pie-in-the-sky” scenario for Bayer, since all of its individual business units deserve a premium multiple. However, that would assume there is a chance of Bayer splitting into three companies – which I think is highly unlikely.

That said, we can still do a SOTP with modest multiples to find a valuation at the bottom for a breakout scenario, where Bayer must separate in order to stay alive.

millions of euros

Adj. EBITDA (last 12 months)







The science of crops




Consumer health











111 152

Less: net debt


Net value

75 152

Per share (€)


This exercise tells us that even taking into account a steep patent cliff and, therefore, applying a very low multiple for the pharmaceutical business, we still obtain around 50 billion euros of value for this segment. An equally modest multiple for the Consumer Health unit adds another ~13 billion euros. Thus, Bayer without CropScience still worth ~€24/share (€60 billion EV minus €36 billion net debt, divided by 983 million shares outstanding). Therefore, we only need the Crop Science business worth around 22 billion euros to justify the current share price of 46 euros. This represents a multiple of 4x EBITDA. While the company certainly has its risks, I suspect that for such a multiple it would find a private buyer tomorrow.

This exercise therefore highlights how cheap Bayer is relative to private market valuations. Again, this tells us nothing about the path to realizing value. Until then comes a tough time where cash flow is tied up in settlements and Bayer needs to save every penny. In theory, once the company crosses the river, they’ll be fine, but it’s unclear if they have a boat, a life jacket, or know how to swim at all.

Finally, in an emergency, Bayer could be forced to use Pharmaceuticals’ cash flow to save Crop Science, which would reduce the value of the Pharmaceuticals segment just to keep Crop Science’s value from going negative.

Cash flow model

The apparent accuracy of these models can easily deceive us, so we must bear in mind how many different assumptions they are being built on and that reversing just one of them could bring down our case. investment as a cookie. I will explain my main assumptions below.

In addition, Bayer has already announced further divestments and its intention to proceed with small-scale mergers and acquisitions. This means that the model is necessarily very imprecise. And it will certainly be denied.

That said, it can still tell us some key conditions for Bayer to find a path to real cash generation (not “before special items”) and debt reduction.


  • Xarelto patent cliff: Xarelto will represent more than 50% of EBITDA in 2023, and two-thirds of it will disappear within 2 years, partially offset by the growth of other drugs.
  • Overall pharmaceuticals will grow by 10% per year from 2020 to 2023. The company forecasts a V-shaped recovery from the pandemic. (Key assumption: very little impact from COVID in 2021.)
  • Crop Science will be so down in 2021 that despite the growth of the other two segments, total EBITDA in 2021 will be stable, after which it will increase by 10% per year.
  • Consumer Health is growing by 4% per year.
  • Capex remains stable.
  • The large Roundup settlement will remain around 12 billion euros in total and will be paid over three years.
  • Other special items that affect cash flow are significant restructuring expenses. I do not take into account the additions to EBITDA of these restructurings, only the fixed costs. I also expect restructuring to continue beyond 2023, albeit at lesser levels.
  • No one can guess how all of this will affect taxation. To be on the safe side, I have included the growth in tax payments over the forecast period.
  • Free cash flow after special items and dividends is provided to assess what is left for growth initiatives or debt repayment. Until 2023, it will be very little.
  • However, my model shows around €13 billion of total available cash in 2023-2025, which will likely be used to buy some growth, which could more than offset the Xarelto patent cliff. Assuming Bayer manages to acquire ~€500m of FCF, 2025 FCF could indeed be stable relative to 2024. So far my model not included any additional income from these growth expenses.

Overall, I think realistic expectations for 2025 could be around €8/FCF share, with very sustainable leverage around 2x Adj. EBITDA and earnings growth in the low to mid range thereafter. This would probably be worth a trading multiple of 16x-20x FCF. Thus, in 2025, a share should be worth between €128 and €160 (~3x compared to the current price). At mid-term, this would represent an EV of ~€170 billion, for an EV/EBITDA multiple of around 12.

Bayer would be past its Xarelto patent cliff and close to losing Eylea’s exclusivity (which, however, shouldn’t result in a significant and immediate loss of revenue, as an injection into the eye creates probably greater brand loyalty).

Acquiring Monsanto would outgrow its primary risks and begin to deliver its benefits.

Obviously, the whole projection depends on the Roundup settlement: how much will be paid, when and if it will also resolve all future cases – these are the key questions.

A higher than expected settlement could have a serious impact on growth investments or even cripple the business. On the other hand, even a slightly higher amount combined with a much slower payment schedule could actually be very helpful.

At the end of the line

Bayer is cheap without a doubt, but there are significant risks. Although I usually manage a concentrated portfolio, I will not make Bayer a large position. Since lawyers and plaintiffs have no interest in putting the company out of business, on a probabilistic basis, it’s a smart bet. However, size your position carefully.

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