Is Bayer a litigation leading indicator?

Should Bayer’s recent 2024 Capital Market’s Day be a warning for all financial institutions which are investing and lending to producers of toxic synthetic chemicals? The life science company demonstrates how debilitating litigation can be. Free cashflow is being absorbed by ongoing litigation (EUR 13 billion in the last 5 years) and the legal cases are continuing. The dividend has been cut by 95% and strategic options, such as investing in growth areas, curtailed. Chemical and petrochemical companies should take note and investors should be scrutinising the risk premium they require to fund these enterprises.

Bayer’s message

Bayer (BAY) is a leading company in crop science, pharmaceuticals, and consumer health. On 5 March 2024, the CEO presented his vision for the company.ⁱ He identified four major challenges: pharma loss of exclusivities and the pipeline, hierarchical bureaucracy – essentially the present operating model – high debt, and litigation. Of these four, litigation is viewed as ‘top of the agenda’. ChemSec, a not-for-profit which aims to speed up the transition to a world free of hazardous chemicals, gives Bayer a grade of C-, on a scale of A+ to D-.ⁱⁱ Presently, Bayer produces 23 SIN List substances,ⁱⁱⁱ of which 13 are persistent (up from two persistent chemicals last year).

Bayer’s litigation issues centre on two main products: polychlorinated biphenyl (PCB) and glyphosate. Bayer view these products as having ‘different cases, with very different dynamics’.^iv For PCBs, management believe litigation will ebb and flow while for glyphosate, they argue it is safe which has ‘been confirmed time and time again by regulatory authorities and scientific bodies worldwide’.^v

The CEO goes on to comment that these ‘four challenges greatly limit our ability to choose our destiny: whether that be as a three-division company or in smaller parts’.^vi The last 12 months has seen the company change the Chair of the Management Board (February 2023),^vii cut its profit guidance (July 2023),^viii recognise the need to win back investor confidence (August 2023), confirmed its reduced profit guidance (November 2023), announced job cuts (January 2024),^ix and cut the dividend by 95% (February 2024).^x Most recently, the management team stated that they are focused on ‘tackling our challenges, boosting performance, and creating strategic flexibility’.^xi

The devastating effect of ongoing litigation was clearly laid out by Bayer’s CFO in his financial presentation this month^xii – see Figure 1. Litigation has been costing on average about EUR 3 billion per annum.

Between 2019 and 2023, the EUR 13.0 billion litigation cost has been greater than that of dividends (EUR 11.7 billion). The latter has now been slashed to reduce cash usage. Of the three credit rating agencies, S&P, Moody’s and Fitch, the latter two have a negative outlook while S&P is positive.^xiii

Note NFD = net financial debt. Free cash flow litigation related payouts (2019-2023) include settlements, judgements, reimbursements from insurances, & cost of defence.

Figure 1: Bayer- Cash flow mainly used for dividend and litigation related payouts (Euro billion); Source: Bayer Capitals Market Day, 5 March 2024

It is noteworthy that much of the ongoing litigation risk results from its acquisition of Monsanto, which it completed in 2018.^xiv Monsanto was purchased for USD 63 billion (including debt). Today, Bayer has a market capitalisation EUR 26 billion (USD 28 billion) and if net financial debt is added it is valued at EUR 61 billion (USD 67 billion). Litigation continues with over 50,000 ongoing cases. By March of this year, settlement agreements with close to 100,000 lawsuits had been reached. At the end of 2023, litigation provisions totalled EUR 6.5 billion (USD 7.1 billion)^xv of which EUR 5.7 billion (USD 6.3 billion) was for glyphosate.^xvi

A message for financial markets?

Should the financial markets be thinking more widely about the possible implications of Bayer’s present predicament on other investments?

Planet Tracker’s analysis of Bayer’s filings and presentations (e.g. annual reports, earnings calls, shareholder meetings) demonstrates that references to litigation have risen since 2020, notably in the annual report – see Figure 2. On earnings calls, where analysts are given an opportunity to question the management team, it is also being raised. This suggests that the ongoing threat from litigation is continuing to be seen as of significance to Bayer’s financial market valuations.

Figure 2: Mentions of litigation in Bayer filings and presentations (2020-2023); Source: Planet Tracker

An area of similar concern is the plastic industry and petrochemical sector which has and continues to produce thousands of synthetic chemicals which are suggested to be harmful to human or environmental health, including phthalates, bisphenols, and per- and poly-fluoroalkyl substances (PFAS), also known as ‘forever chemicals’.

Planet Tracker continues to warn about the potential litigation embedded in the chemicals and petrochemicals industries from these substances. See ‘Plastic Risk – Measuring Investors’ Risk in the Plastic Sector’ and ‘Exposing Plastic Risk’. We also draw attention to toxic emissions in ‘Toxic Footprints USA’ and ‘Toxic Footprints Europe’. Our research shows that financial markets are generally resistant to pricing in more risk in the plastic value chain – although we note a gradual rise since our publication in mid-2023 – presumably based on the hope that plastic-related pollution and additives, and ‘chemicals of concern’^xvii do not become a focus for widespread litigation.

We question if this subdued response to litigation risk can last given the potential downside. A report by the Minderoo Foundation^xviii, which examined the social costs and corporate liabilities related to plastic-related pollution (i.e. macroplastics, microplastics, nanoplastics, chemicals, additives and gases) valued them at ‘hundreds of billions of dollars each year, much of it driven by harms to human health’.^xix Furthermore, a publication by the Minderoo-Monaco Foundation Commission on Plastic and Human Health found that ‘that current patterns of plastic production, use, and disposal are not sustainable and are responsible for significant harms to human health, the environment, and the economy as well as for deep societal injustices’.^xx

Will the financial markets view Bayer’s litigation and associated financial troubles as an isolated incident, perhaps a case study for MBA students, or will they view this a leading indicator of where other synthetic chemical manufacturers could end up, if they are proved harmful? The pricing of these novel entities^xxi producers will provide an answer.

Bayer near-term events:

• 11 March 2024 – Sustainable Pathways: Industry’s role following COP28 – A LinkedIn Live Talk by Bayer
• 21 March 2024 – Bayer Pharma Media Day 2024
• 26 April 2024 – Annual Stockholders’ Meeting 2024