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Bayer Walks a Neutral Path

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We are maintaining our Neutral recommendation on Germany’s Bayer (BAYRY - Free Report) with a target price of $76.00.

Headquartered in Leverkusen, Germany, Bayer is one of the world’s largest healthcare and chemical corporations. Bayer operates in three major segments: Healthcare, Material Science and Crop Science. The Health Care segment is involved in the research, development, manufacturing and marketing of products for the prevention, diagnosis and treatment of diseases.

The Material Science segment is one of the world’s largest polymer manufacturers. The Crop Science segment is one of the world's leading crop-science players in the areas of crop protection, non agricultural pest-control, seeds and plant biotechnology.

In February 2012, the company had reported fourth quarter and full year 2011 results. Bayer’s earnings per share during the quarter came in at €0.97 (approx $1.31) compared to €0.95 (approx. $1.29) in the year-ago period. Higher revenues boosted earnings. The Zacks Consensus Estimate hinted at earnings of $1.26.

(Read our full coverage on this earnings report: Revenues Rise at Bayer).

We are impressed by Bayer’s focus on emerging markets, defined by the company as Asia (excluding Japan), Latin America, Eastern Europe, Africa and the Middle East. Emerging markets represent significant commercial opportunity. Sales in these markets improved 9% on an adjusted basis to €13,290 million in 2011.

We are also impressed by the potential of Bayer’s late-stage candidates, alpharadin, Lemtrada (co-developed with Sanofi [(SNY - Free Report) ]) and regorafenib.

However, we believe that investor focus will be on blood thinner Xarelto going forward. The HealthCare unit of Bayer has co-developed Xarelto with the Janssen Research and Development unit of Johnson & Johnson (JNJ - Free Report) .

Xarelto is already approved for multiple indications including the lucrative stroke prevention in non-valvular atrial fibrillation (SPAF) indication. Apart from SPAF, Xarelto is also approved for the treatment of deep vein thrombosis (DVT) in the EU (December 2011). DVT refers to the obstruction of a blood vessel, courtesy a blood clot. Furthermore, in July 2011, the FDA cleared Xarelto for the prevention of DVT, which may cause pulmonary embolism in patients undergoing knee or hip replacement surgery.

Bayer/Johnson & Johnson are looking to expand Xarelto’s label further. The partners are looking to get Xarelto approved to reduce the risk of cardiovascular events in patients suffering from acute coronary syndrome (ACS). ACS refers to a heart disease, which results in the blockage of a coronary artery via a blood clot. Successful label expansion of Xarelto, which offers significant commercial opportunity, would further boost the top lines of the companies.

We prefer to remain on the sidelines until more visibility is obtained on Xarelto’s performance and hence remain Neutral on the stock. Our long-term recommendation is in line with the Zacks #3 Rank (Hold rating) carried by the stock in the short run.

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