We recently downgraded
Bayer
(
BAYRY
) to Underperform from Neutral purely on valuation grounds. We
believe that the stock is overvalued at current levels.
Even though the US Food and Drug Administration (FDA) cleared
Bayer/
Johnson & Johnson
's (
JNJ
) potential blockbuster blood thinner Xarelto for stroke prevention
in atrial fibrillation (SPAF) earlier in the month, the associated
warning that discontinuation of the drug increases the risk of
stroke in SPAF patients could hamper its sales. Below-par showing
by Xarelto could pull down the stock significantly. Moreover, the
presence of Boehringer Ingelheim's Pradaxa (approved by the FDA in
2010) has intensified competition in the market.
Moreover, Bayer delivered average results in the third quarter
of 2011 with key drugs such as Betaferon, Kogenate and Levitra not
performing well. Sales in the Pharmaceutical segment were flat due
to weakness in the North American and Western European markets
because of healthcare reforms in those territories. Continued weak
performance in the key markets could also pull down the stock.
Moreover, the limited near-term catalysts at Bayer also concern us.
We have reduced our 2011 and 2012 earnings estimates by $0.16 and
$0.46 per ADS, respectively.
Furthermore, Bayer, which operates through three major segments-
Healthcare, Material Science and Crop Science - has been looking to
strengthen its HealthCare segment. The company has been inking
deals/making acquisitions to achieve the objective. For example, in
September 2011, Bayer purchased Kirkland, Washington based Pathway
Medical Technologies, Inc. to strengthen its HealthCare segment.
Moreover, in early 2011 Bayer inked a deal with Zydus Cadila to
strengthen its pharmaceutical operations in one of the most sought
after markets - India. However, if these initiatives fail to
deliver the desired results due to integration risks associated
with mergers, then it will weigh heavily on the stock.
These negative factors cause us to believe that the stock is
overvalued and there is little reason for investors to own the
stock at current levels.
BAYER A G -ADR (
BAYRY
): Free Stock Analysis Report
JOHNSON & JOHNS (
JNJ
): Free Stock Analysis Report
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