Not a long while ago, I noticed the brand on the Aspirin bottle, a medicine found in everyone’s first aid box. The logo conscientiously resembles the Red Cross sign used for medical services. I could recall the Bayer logo on multiple OTC products. I assumed that it was a pharma company. Another day, While scrolling through the news feed, I was appraised with Bayer’s trouble with the law. But this litigation was for weed killer, something related to agriculture. I started noticing Bayer everywhere. But not until one of my friends mentioned the stock lost 60% value in the last couple of years was I distinctly interested. Contrary to my presumption Bayer is a more prominent and diverse company.
I will again follow a simple template to analyze a company in a 3 part series.
- What is the industry?
- What is the business?
- How do they make money?
- Understand their financials.
- Why it lost 60% value?
- My story & conclusion.
Company in their own words, “Bayer is a Life Science company with a more than 150-year history and core competencies in the areas of health care and agriculture.” They operate in 3 divisions – Pharmaceuticals, Crop Sciences & Consumer Health. At a higher level, I will try to understand Pharma and Crop science industry.
THE INDUSTRY
Pharma: Global Pharma industry is valued at 1.2 trillion dollars and will keep growing at 8% for the next 5-6 years. The Pharma industry is too big to comprehend. But it touches lives everywhere. So It will be a reasonable assumption that it will keep growing at mid-single-digit for the next couple of years because of the growing and aging population and better access to medical care.
Crop Sciences: According to Food and Agriculture Organization, the world population will grow to 9.7 billion, and demand for food will also follow. But the cultivable land would more or less remain the same. And on top of it, Climate changes will impact food production (source). Engineered seeds & crop protection being some of the solutions. The Crop protection market is 60 Billion dollars, and The expectation is that it will grow at the rate of 3.5% till 2027. The seed market is 20 Billion dollars and will grow at 5.5% CAGR in the next five years. This sector is highly consolidated, and only a handful of 5-6 companies control the market share.
The BUSINESS
Bayer is a 150-year-old German company notorious for its role in World War. But it has come a long way and now operates in 3 divisions Crops Science, Pharmaceuticals, and Consumer Health. It’s a massive company. Company global presence is also evident from the international ownership structure, Listed in various European indices & a large number of analysts who follow it.
A growing and aging world population will increasingly put a strain on the ecosystem. The company is looking forward to providing solutions with innovative products for health and food production. Sustainability is their prime target, and They aim to use 100% electricity through renewable energy sources by 2030.
Crop Science: Bayer is the world leader in crop protection, seeds, and digital farming. They offer Genetically modified seeds with improved plant traits, chemical & biological crop protection products, Digital solutions for sustainable agriculture. Plant seeds with characteristics to be good in extreme conditions, drought-tolerant, and less prone to diseases. They market these products to wholesalers, retailers, and even directly to farmers. Product innovation in crop protection, seed, and traits will drive near-term growth. For the long term, they would tap into digital farming. Digital farming connects farms and creates an industry-wide ecosystem for tailor-made custom solutions for customers. A Digital data-driven model will supplement the core business and help the company drive sales using custom solutions. Their strategy is to empower 100 million smallholder farmers in low & middle-income countries by improving access to agronomic knowledge, products, services.
Pharmaceutical: Contrary to my original beliefs, Aspirin isn’t part of the Pharma division. The division concentrates on prescription products, especially for cardiology and women’s health care, and specialty therapeutics focused on the areas of oncology (cancer), hematology (blood), ophthalmology (an eye disorder). Like all pharma companies, they have a couple of blockbuster drugs that drive revenue, but those revenues can decelerate based on patent expiration. Medium-term growth is lead by critical products, such as Xarelto™ and Eylea™, new drug launches & late-stage clinical trials. For the long term, it seems they have a healthy product pipeline. I have noticed in their annual report & conference calls multiple references to Gene therapy. They are optimistic about opportunities in the long term. They recently acquired BlueRock Therapeutics, AskBio, to strengthen their market share and establish an independent strategic unit for cell & gene therapy. It might play a more significant role in the future, but not everyone is as excited (Read FT here).
Consumer Health: This division concentrates on non-prescription products like Aspirin, Claritin. These products I can get at pharmacy chains, supermarkets, online retailers, and other large and small retailers. It is also one of the best growing divisions as Covid 19 raised awareness about the importance of self-care. Nutrition supplements, Dermatology products, Digestive health, Pain and Cardio, Cough & Cold, Allergies are the basic categories in which Bayer products compete. They are among the leaders.
Key Takeaways
- The growth rate is more or less the same as what is expected globally for the industry.
- Bayer has a global presence which is evident from shareholder distribution.
- World leader in Crop sciences and market leader in a couple of pharma categories.
- The world population will increase & with the same amount of agricultural land, dependency on companies like Bayer will increase over the long term.
- Digital Transformation in all divisions will help them predict customer needs and provide tailor-made solutions.
- According to external estimates, the Cell & Gene therapy market to grow to more than €25 billion by 2025. It is considered the next big thing. But not all agree.
- Pharma revenue depends on the patent’s date expiration.
- Overall a good & stable business with global reach.
- Consumer Health Division is expanding because of the awareness created by Covid 19.
- New drug launch this year.
- A couple of Drugs are waiting for FDA approval, and some are in phase III.
- Have trouble with the law in both Crop science and Pharma division (More on this later).
- Major Focus on sustainability. Aim to become a 100% carbon-neutral company by 2030.
I will check how they make money in my next post and look closely at their financial numbers. Stay tuned. Until then, Ciao !!
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