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We are reverting to a Neutral recommendation on Bayer (BAYRY - Analyst Report) as we believe that all the positive news that led to our previous Outperform recommendation on the stock are reflected in the current price.

Bayer performed impressively in the third quarter of 2012, driven by an increase in revenues. Bayer’s earnings per share during the third quarter of 2012 came in at €1.68 compared with €1.12 in the year-ago period. The company recorded 11.5% growth in revenues to €9,665 million. Growth was witnessed across all the major divisions at Bayer.

Bayer continues to expect 2012 earnings to increase by 10% year over year. Blood-thinner Xarelto, which has significant commercial potential, performed well during the quarter. The HealthCare unit of Bayer has co-developed Xarelto with Johnson & Johnson (JNJ - Analyst Report).

We are also impressed by the US approval of Stivarga for use in treatment-experienced metastatic colorectal cancer patients. Bayer is also looking to get Stivarga approved for treating patients suffering from metastatic and/or unresectable gastrointestinal stromal tumors (GIST). The US Food and Drug Administration (FDA) is reviewing the marketing application seeking approval of Stivarga for the GIST indication on a priority basis. Bayer is also seeking Japanese approval of Stivarga for the GIST indication. The sales potential of Stivarga would be further boosted if the regulatory authorities clear the drug for the GIST indication.

We are also positive on the European approval of eye-drug Eylea for treating patients suffering from neovascular (wet) age-related macular degeneration (wet AMD). Bayer is also seeking to expand the label of Eylea into other eye disorders. The HealthCare unit of Bayer has co-developed Eylea with Regeneron Pharmaceuticals (REGN - Analyst Report).

However, we are mindful of the regulatory/pipeline setbacks at Bayer. In August 2012, Bayer and partner Sanofi (SNY - Analyst Report) suffered a setback when the FDA issued a refuse-to-file letter regarding the marketing application submitted in June 2012, seeking approval to market Lemtrada for the treatment of relapsing multiple sclerosis.

Apart from this regulatory setback, Bayer suffered a pipeline setback in May 2012 when Nexavar (sorafenib), co-developed with Onyx Pharmaceuticals Inc. , failed to prolong the overall survival in patients suffering from advanced non-squamous non-small cell lung cancer in a phase III study.

Moreover, the generic threat looming over many of Bayer’s key products including the Yaz franchise (oral contraceptives) is another challenge for the company.

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