More energy needed for continued stock market recovery

Bayer AG has had a tumultuous year with the share dropping over 30% YTD. The company recently got hit with a two-punch knockout that came in the form of a cancelled phase III study and USD 1.56 billion in settlement fees from a legal battle in Missouri, USA. The company is under a lot of pressure, but, with a relatively new CEO, a reversal might be incoming.

Bayer AG is a global life science company that operates through three business segments: Crop Science, Pharmaceuticals and Consumer Health. The first offers chemical and biological crop protection products like pesticides. The second category focuses on prescription products, mainly for cardiology and women’s health, but also within specialty therapeutics in oncology, hematology and more. The third business area focuses on nonprescription and over-the-counter drugs in areas like skincare and nutritional supplements.

Bayer AG shares have been choppy following a couple of distressing headlines. First off, Bayer retracted their oncology drug Aliqopa from the US market. After being approved under the accelerated approval scheme in 2017 as third line treatment for adults with refractory follicular lymphoma, the drug failed a study, causing the removal.

Six days after the removal, it was announced that Bayer terminated their phase III-study Ocean-Stroke, investigating the efficacy of asundexians in patients with atrial fibrillation at risk of stroke. The recommendation came from an independent data-oversight committee, which noted that efficacy was below the control arm. On the same day, Bayer lost a legal battle in Missouri, USA. The main ingredient of Roundups, glyphosate, has long been in the crosshairs of farmers claiming it causes cancers. After nine straight legal wins, Bayer have, as of recently, started losing, with the latest being the fourth in a row. The loss means Bayer will need to pay USD 1.56 billion in damages. The pile-up of bad news has caused the share to slide, dropping to over 30% in three months. Further woes came from Moody’s, with the credit rating prospects changed from stable to negative, reiterating their Baa2 rating.

There are several reasons why the Bayer share has dropped. However, it is possible that markets have overreacted. The hot-hand fallacy might originally have led investors to believe Bayer would continue to win court cases. Now, four losses in a row, the pendulum might have swung the other way, with investors expecting continued legal troubles. The European Union just extended the approval of the usage of glyphosate by another ten years, highlighting the continued demand. Thus, a legal win could have a bigger than expected positive effect on the share price. Furthermore, there is always the possibility of spinning off businesses, e.g., the Crop Science segment. This would allow Bayer to remove a lot of legal risk as well as deleveraging the business. With a relatively new CEO, Bayer is more likely to be able to enact drastic change, like spinning off a part of the business. Thus, the Bayer share might be oversold, with potential for a bounce upward in the coming months should the CEO be able to get through a major strategic shift or if legal fortunes turn.