Bayer Stock Surge Gives Way to Pfizer Challenge in 2013

Bayer AG will be hard pressed this year to top its world-beating 2012 stock market performance.

Analysts predict the stock will be at 72.19 euros in 12 months, based on the average target compiled by Bloomberg, below yesterday’s closing price. Bayer surged 46 percent in 2012, the biggest gain among the world’s 10 largest drugmakers, and reached a record high as a series of successes in the Leverkusen, Germany-based company’s health-care unit encouraged investors that earnings growth will pick up.

Now Chief Executive Officer Marijn Dekkers faces competition for the blood thinner Xarelto, Bayer’s biggest new drug, from a Pfizer Inc. product. The company also must spend more to market its new medicines, and may not get the same boost from its agricultural unit as it did last year.

“I’m positive about Bayer in the long term,” Ulrich Huwald, a Hamburg-based analyst for Warburg Research GmbH, said in a telephone interview. “The question is to what extent it comes out on top this year. I don’t see a massive risk of a drop, but there’s only a limited amount of upside.” He rates Bayer’s shares “hold.”

Bayer fell 0.8 percent to 72.15 euros in Frankfurt, giving the company a market value of 59.7 billion euros ($79.6 billion). The stock has added 0.4 percent in 2013.

Bayer declined to comment because it hasn’t yet issued a forecast for 2013, spokesman Christian Hartel said by telephone yesterday. The company may make a forecast for the year when it announces fourth-quarter earnings on Feb. 28.

Health Care

Health care accounts for about 40 percent of Bayer’s sales, and positive news poured in for the company’s new drugs last year.

A pair of trials showed the lung treatment riociguat helped patients, Stivarga was approved for use against advanced colorectal cancer, Alpharadin aided prostate-cancer patients and regulators in the U.S. and Europe cleared the eye drug Eylea. The four products plus Xarelto have combined annual sales potential of more than 5.5 billion euros, Bayer said in November. The company won approval in the same month to sell Xarelto for a broader group of patients in the U.S.

Meanwhile, Bayer’s CropScience division, which accounted for about a fifth of 2011 sales and makes seeds and farming chemicals, enjoyed rising revenue and a successful reorganization that helped contribute to the company’s increased revenue and profit forecast in July.

“Absolutely nothing went wrong this past year,” said Sebastian Frericks, a Frankfurt-based analyst for Bankhaus Metzler. He rates Bayer’s shares “buy.”

German Market

Bayer’s stock also got a boost last year from the performance of the German stock market, said Asthika Goonewardene, an analyst for Bloomberg Industries in London. The benchmark Dax Index rose 29 percent, among the biggest gains in Europe.

Rumblings of a fresh challenge came at year-end, when Pfizer announced it had won approval in the U.S. for its new blood thinner Eliquis in irregular heartbeat patients. The Dec. 28 approval came after two delays last year.

Bayer needs to invest to win market share for its medicines, said Odile Rundquist, a Geneva-based analyst for Helvea SA who rates Bayer’s shares “accumulate.” Though the new products should boost sales, the company doesn’t expect significant expansion in profit margin for the pharmaceutical division, she said.

Three Limbs

Bayer, inventor of Aspirin, is the one of the last examples of the sort of drugs and chemicals conglomerate once common in Europe. The company’s three limbs sell into more or less unrelated markets: health care, industrial plastics and agriculture.

Speculation started after Dekkers was named CEO in 2009 that he would amputate one of the units, probably the MaterialScience plastics division. Yet Dekkers has consistently said he sees no pressing need to do such a deal. The CEO walked away from his first major acquisition, a $1.1 billion bid for vitamin maker Schiff Nutrition International Inc., in November after Reckitt Benckiser Group Plc made a higher offer.

The high share price may increase Bayer management’s confidence in its strategy of organic growth, Frericks said.

“They don’t have a need for a big transformative deal,” he said. “While management is probably proud of their share price, I don’t see them doing anything imminently.”

Xarelto Bet

In the meantime, Bayer is betting big on Xarelto. The German company said in November it would recruit 20,000 patients for a new trial of the drug in combination with aspirin therapy to prevent heart attacks and strokes in people with coronary artery disease or peripheral artery disease. The company has said it expects annual Xarelto sales to peak at more than 2 billion euros.

To be sure, last year’s stock surge partly reflected a recovery from 2011, when Bayer’s plastics division was out of favor with investors and the possibility of competition from Eliquis was looming, said Tim Race, a London-based analyst for Deutsche Bank.

Race recommends buying Bayer shares and has the highest target price, at 86 euros, of analysts tracked by Bloomberg. Deutsche Bank included the stock on the list of the firm’s three best big pharmaceutical bets for this year.

Bayer still trades at only about 11 times estimated earnings for 2014, the middle of the pack for pharmaceutical stocks, while its potential annual growth rate is double the sector average, Race said.

“We’re not looking for huge catalysts and eureka moments in terms of data,” Race said in a telephone interview. “It’s more about confirmation and execution, basically investors growing in confidence that the sector-beating performance is real.”

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