Bayer (BAYRY) Faces Generic Threat & Rising Competition

We issued an updated report on Bayer (DE:BAYGN) AG (OTC:BAYRY) on Dec 24.

Bayer AG is a life science company with core competencies in the areas of health care and agriculture.

Bayer is facing generic threats/competition for many of its products, including the Yaz franchise (oral contraceptives). The genericization of key drugs would negatively impact revenues. We expect the declining Yaz sales trend to persist. Continued weak performance of key drugs could impact the company’s top line and pull down the stock.

Bayer is expecting several pipeline and regulatory related news in the coming quarters. Any adverse pipeline related news has the potential to impact the stock adversely.

In August 2018, Bayer and partner Johnson and Johnson (NYSE:JNJ) announced data from two late-stage studies, wherein blood thinner drug, Xarelto failed to show statistical benefits. These studies were being evaluated to expand the drug’s eligible patient population. Data from the two phase III studies — MARINER and COMMANDER HF — showed no significant difference between Xarelto and placebo for the primary efficacy endpoints. The MARINER and COMMANDER HF studies are part of Xarelto’s large clinical development program EXPLORER, which evaluates the potential role of Xarelto in treating a wide range of critical medical needs.

Bayer’s dependence on its pharmaceutical segment for growth is a concern.

Bayer’s stock has declined 44.8% year to date, against the industry's growth of 1.8%.

Last month, the company announced a restructuring plan to streamline business and improve efficiency. The company plans to exit its Animal Health business, and management is currently assessing various options for this business. The decision to exit this business comes as part of the company’s plan to focus on its core businesses of Pharmaceuticals, Consumer Health and Crop Science.

The company is making efforts to revive its Consumer Health division to target market growth in the coming years and improve profitability. The measures include a planned exit from product categories, which were not suiting the company’s business model. In addition to the previously announced divestment of prescription dermatology products, Bayer will review its strategic options in the coming months, and most likely exit its sun care (Coppertone) and foot care (Dr. Scholl's) product lines. The company intends to focus on driving growth in its core Consumer Health categories.

Bayer is also planning to divest its 60% interest in German site services provider Currenta, as this business does not align with its existing model anymore, given the carve-out of Covestro.

Bayer expects annual savings of €2.6 billion by 2022, as a result of its planned efficiency and structural measures, including the synergies expected from the acquisition of Monsanto (NYSE:MON). We remind investors that in June 2018, Bayer acquired Monsanto for $63 million. The combined business is expected to boost Bayer’s Crop Science segment.

Concurrently, the company plans to reduce its headcount by 12,000-118,200 by 2021. Majority of these job cuts will be in Germany.

However, the company has also received some new approvals lately. The company also received new approvals for its candidates. In November, the company received approval by the FDA for Vitrakvi (larotrectinib), the first oral TRK inhibitor. It is approved for the treatment of adult and pediatric patients with solid tumors, with a neurotrophic receptor tyrosine kinase (NTRK) gene fusion without a known acquired resistance mutation, which are either metastatic or where surgical resection will likely result in severe morbidity, and have no satisfactory alternative treatments or have progressed following treatment.

In November 2018, it also received approval for Jivi (BAY94-9027) by the European Commission for the treatment and prophylaxis of bleeding in previously-treated patients aged 12 years or older with hemophilia A.

Zacks Rank & Stocks to Consider

Bayer currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks worth considering are Bristol-Myers Squibb Company (NYSE:BMY) and Eli Lilly and Company (NYSE:LLY) . Both the companies sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bristol-Myers’ earnings per share estimates have increased from $3.84 to $3.87 for 2018 and $4.03 to $4.14 for 2019 over the past 60 days. The company delivered a positive earnings surprise in all the trailing four quarters, with average of 11.99%.

Lilly’s earnings per share estimates have increased from $5.47 to $5.59 for 2018 and $5.78 to $5.90 for 2019 over the past 60 days. The company delivered a positive earnings surprise in all the trailing four quarters, with average of 10.03%. Share price of the company has increased 28.6% year to date.

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