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Encouraged by strong second quarter 2012 results, an upbeat guidance and a series of positive subsequent developments, we are upgrading Bayer Corporation (BAYRY - Analyst Report) to Outperform from Neutral. Our long-term recommendation is in line with the Zacks #1 Rank (Strong Buy rating) carried by the stock in the short run.

Bayer performed impressively in the second quarter of 2012 driven by increased revenues. Following the impressive results, management raised their guidance for 2012 revenues as well as earnings.

The company’s earnings in 2012 are expected to increase by 10% as opposed to its previous guidance of slight improvement. Bayer now expects 2012 sales in the range of €39 billion to €40 billion (previous guidance: €37 billion).

Subsequently, Bayer has witnessed a series of positive developments including progress regarding oncology candidate regorafenib and label expansion efforts for Xarelto.

In August 2012, the HealthCare unit of Bayer submitted a new drug application with the US Food and Drug Administration (FDA) for regorafenib. Bayer is looking to get regorafenib approved for treating patients suffering from metastatic and/or unresectable gastrointestinal stromal tumors.

We note that Bayer is also seeking approval of regorafenib for treating patients suffering from metastatic colorectal cancer (mCRC). Regorafenib is being reviewed on a priority basis in the US as well as Japan for the mCRC indication. Bayer is also seeking European approval for the candidate for the indication.

We are pleased with Bayer and partner Johnson & Johnson’s (JNJ - Analyst Report) efforts to expand the label of blood thinner Xarelto. Bayer/Johnson & Johnson made some progress in their label expansion efforts when in September 2012 Johnson & Johnson resubmitted its supplemental new drug application (sNDA) for Xarelto for the reduction of the risk of secondary cardiovascular events in patients suffering from acute coronary syndrome (ACS). Moreover, Bayer/ Johnson & Johnson also resubmitted the sNDA seeking approval to market Xarelto for reducing the risk of stent thrombosis in ACS patients. Xarelto is already approved for multiple indications. Approval of Xarelto for new indications would further boost the sales potential of the drug.

Furthermore, in September 2012, Bayer’s HealthCare unit announced that it will purchase Teva Pharmaceutical Industries Limited’s (TEVA - Analyst Report) animal health business in the US for $145 million. The inclusion of Teva’s US animal health unit will not only add reproductive hormones to Bayer’s product portfolio, but also provide multiple anti-infective solutions for treating infections in livestock to Bayer’s food animal unit. Following the completion of the deal in 2013, Bayer’s companion animal unit will boast of dermatological, pet wellness and nutraceutical offerings.

In view of the series of positive developments, we believe that the current price, which has significant scope for appreciation, represents an attractive entry point for long-term investors.

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