Bayer's Most Controversial CEO and the Lost Market Value of Hundreds of Billions, Can a Turnaround Still Be Achieved in This Life-or-Death Situation?

After 162 years, Bayer, with the legendary wonder drug aspirin and its glorious moment in 2015, now finds this giant ship already stranded.

Who exactly inflicted serious injuries on Bayer, or rather, how did Bayer come to this?

At the shareholders' meeting that just took place in March, Bayer CEO Bill Anderson told investors straight that 2025 will be the toughest year for the company's transformation.

In 2024, Bayer reported a net loss of 2.552 billion euros, with sales down 2.2% year-on-year. From a market value of 130 billion US dollars in 2015 to less than 25 billion US dollars today, Bayer's predicament has sparked calls for a breakup from activist investors.

Anderson then reiterated, "refuse to divest any of the company's major business units."

But the patience of the capital market is running out, and if litigation payouts exceed expectations, growth of products like Nubeqa slows down, and financial performance continues to decline by 2025, investors may force the company to spin off its business.

This helmsman from Roche, Anderson, known for streamlining structures, is under pressure to revitalize Bayer.

In fact, a hellish marriage with Monsanto has mired Bayer in a quagmire, with its stock price falling to the lowest point since 2007, massive losses, an avalanche of lawsuits, overwhelming debt, and a weak pipeline...

For many investors, there is a stronger desire for Bayer to join the trend of global pharmaceutical giants splitting up.

Over the past two years, in the trend of almost all major pharmaceutical companies splitting and focusing, for example, Merck spinning off Organon, Pfizer merging its generic drug department Viatris with Mylan, GSK spinning off its consumer healthcare division, Johnson & Johnson spinning off its consumer health brand Kenvue...

Recently, Sanofi has also been reported to be selling 50% of the controlling stake in its consumer healthcare business Opella, with the transaction expected to be completed as early as the second quarter of 2025.

Bayer's spin-off news was first publicly proposed in 2021 by investors such as the American hedge fund Elliott Management, and subsequently received support from many board members. However, after Anderson took office, he firmly rejected the spin-off, but currently, Bayer's stock price has fallen by about 60%.

Shareholders had doubts about the restructuring plan proposed by Anderson, and for this reason, Bill Anderson accepted a 21% pay cut in 2024.

So, why do activist investors want to split Bayer? Why is Anderson so firmly against the split? What are the variables on the path to a split?

01

Activist Investor: Break Up Bayer

The loudest call in the industry is: break up Bayer!

This voice reached its peak after Bill Anderson became the CEO of Bayer in June 2023 and has continued to the present.

Hedge fund Artisan Partners, which holds 0.8% of Bayer's shares, is calling for increased pressure on Bill Anderson. The fund believes that crop science is more advantageous, while the pharmaceutical and over-the-counter drug divisions are too small in scale and have low profit margins, suggesting that "it might be better to collaborate with others."

Activist investor Bluebell Capital has publicly proposed to split the company, alluding to the company "using the profits from pharmaceuticals to fill the black hole of agriculture," and demanding a breakup to clarify the independent financial responsibilities of each business line.

The largest investor is Harris Associates, holding 3% of Bayer's shares, and for some time they have been calling for at least the spin-off of the over-the-counter business.

In fact, activist shareholders want to split Bayer, with a clear purpose: stemming from an urgent need for short-term financial returns and risk isolation.

The crop science business, with the acquisition of Monsanto, has embroiled Bayer in long-term legal disputes. If the crop science (including the glyphosate litigation subject) were to be separately spun off into a legal entity, it could to some extent prevent the pharmaceutical and consumer health sectors from being affected (refer to Johnson & Johnson's move to isolate talcum powder litigation by establishing LTL Management).

And, after the spin-off, the crop science division could seek debt restructuring or bring in strategic investors (such as agricultural private equity funds) to alleviate the pressure of 32.7 billion euros in net debt.

Pharmaceutical business, two ace drugs Xarelto (rivaroxaban) and Eylea (aflibercept) will lose patent protection in 2026:

• In 2024, the sales of the oral anticoagulant Xarelto reached 3.48 billion euros, a decline of 14.7% due to patent expiration.

• In 2024, the sales of the ophthalmic drug Eylea reached 3.306 billion euros, a year-on-year increase of 2%, but in 2026, the patent protection for Eylea in Europe will expire.

Despite the strong growth of prostate cancer drug Nubeqa and kidney drug Kerendia in 2024, with year-on-year increases of 75% and 72% respectively, contributing a total revenue of 2 billion euros, shareholders are skeptical about their ability to replace the star product.

Stefan Oelrich, the head of Bayer's pharmaceutical business, expects: "Pharmaceutical sales will hit rock bottom in 2025 or 2026, and the next wave of growth will arrive no later than 2027."

And after the split, the pharmaceutical division (with low debt and high cash flow) can independently support R&D.

Consumer health, with revenues continuously declining in recent years, is seen as "sleeping assets."

Activist shareholders, referring to the spin-off of Johnson & Johnson's consumer health business Kenvue, noted that Kenvue's market value reached $40 billion, approximately twice the valuation within the original group; after GSK spun off Haleon, its market value increased by 33%. Therefore, if Bayer's consumer health business were to be listed independently, its valuation would be significantly higher than the current implied value within the group.

In addition, the independent consumer health company can be more flexible in acquiring brands (such as in hair care and skin care) without being restricted by the compliance reviews of the pharmaceutical sector.

02

CEO directly says "not now"

Bayer CEO Bill Anderson

As the former head of Roche's pharmaceutical division, Anderson's task is to revitalize Bayer's stock price, but with a cumulative decline of over 60% in Bayer's stock price just in 2024, market doubts remain.

In addition, Anderson's reforms mainly focus on streamlining the organizational structure, with a total of 5,500 layoffs for the year, targeting the management level in particular. Among these, 1,500 positions were cut in the first quarter, two-thirds of which were managerial positions.

In addition, Bayer announced that the layoffs in the U.S. division are expected to be completed by the end of 2025, while the layoffs in Germany will be extended until the end of 2026, with the goal of saving 2 billion euros in costs by 2026.

These have already touched on the interests of some investors, and outsiders speculate that activist investors may want to use the spin-off to gain board seats and interfere with Anderson's reform plans.

However, Anderson still has many supporters, especially Bayer Chairman Norbert Winkeljohann, who publicly expressed support for Anderson and praised: "Anderson has an outstanding record of building a strong product pipeline and converting biotech breakthroughs into products, making him the ideal candidate for CEO."

Heike Hausfeld, the chair of the General Works Council of Bayer AG, said: "Anderson's new operating model is a great opportunity to significantly improve our economic situation."

At the financial meeting in March, facing calls from incentivized investors to spin off Bayer, Anderson reiterated, "Not now."

Why is Anderson so opposed to the breakup of Bayer? There are three reasons.

Derived from the lessons of acquiring Monsanto, Anderson is cautious about radical spin-offs, stating: "Bayer cannot repeat the mistake of sacrificing long-term strategic integrity for short-term capital return rates."

Second, Anderson believes that the premium plan for activist investors to split may fail. The market and activist investors' optimistic expectations for the split are often based on "sum-of-the-parts" (the total valuation of the split parts is higher than the current market value).

However, the liability from glyphosate lawsuits makes it difficult to completely divest the crop science division; the scarcity of consumer health assets is insufficient, with GSK and Johnson & Johnson having already completed similar business spin-offs; coupled with an inadequate pipeline in pharmaceuticals and core products nearing patent expiration, the standalone valuation may fall below expectations.

In addition, Bayer's balance sheet carries a high level of net financial debt, reaching 32.7 billion euros. The spin-off would incur substantial separation costs (taxes, legal fees, etc.). The credit rating of the independent subsidiary may be downgraded, further eroding the premium space for the spin-off.

Third, as a company like Bayer that has gone through 162 years, reform takes time.

Anderson's insistence on "no divestiture" is essentially a move to buy time, waiting for the DSO reform to release efficiency, new drug launches to offset the patent cliff, and legal settlements to alleviate debt pressure, allowing Bayer to achieve "prosperity without disintegration" before 2026.

Anderson is also reshaping the valuation model for diversified pharmaceutical companies, and if successful, Bayer may become a "template for the transformation of traditional pharmaceutical companies."

However, this reform does indeed touch on the interests of established groups, and if it were to be split up at this point, it might distract the management, leading to a disruption in the reform process, or even triggering internal unrest.

03

MNCs Split En Masse, What's the Goal?

Bayer's potential spin-off leaves a悬念 for the market. It seems there was an oversight in the instruction to not translate "悬念" directly. The correct translation should be: Bayer's potential spin-off leaves suspense for the market.

However, as MNCs enter middle age, this round of OTC department spin-offs has actually been ongoing for nearly a decade, with Pfizer, GSK, Merck, Sanofi, Johnson & Johnson, and others providing a successful model.

If no longer suitable for "symbiosis," then separate, each pursuing their own "fulfillment of wishes," seeking higher profits and maximum value.

Especially the split of GSK/Pfizer and Johnson & Johnson shareholders can be considered a good return on investment, which is evident from GSK and Pfizer's continuous selling of Haleon shares in recent years to generate more cash flow.

In addition, Johnson & Johnson also enhances shareholder value through stock exchange programs.

• In March 2024, Pfizer announced plans to sell 630 million shares of Haleon, worth about 2 billion pounds, reducing its stake from 32% to around 24%. In the future, Pfizer will continue to wait for better opportunities to exit.

• In May 2024, GSK announced that it would divest all of its shares in the consumer health company Haleon, completely exiting the consumer health sector.

• In May 2024, Johnson & Johnson sold 182 million shares of the consumer health company Kenvue to Goldman Sachs and JPMorgan, accounting for 9.5% of Kenvue's issued share capital.

After the split, for Pfizer, GSK, and Johnson & Johnson, shedding the "burden" also marked a crucial turning point for each:

• Pfizer was able to streamline and restructure its business on one hand, and on the other, complete the acquisition and integration of Seagen, focusing on the oncology sector. With a strong operational will, it returned to the growth track and reclaimed the top spot in the global pharmaceutical industry.
• Johnson & Johnson then successively completed the restructuring plan of the orthopedic business, and Kefu began to operate completely independently, focusing more energy on strategic strengthening in the field of solid tumors and introducing innovative products in the field of advantageous diseases.

And the true value of the spun-off companies is also being reasonably assessed.

In fact, many of the companies that were acquired by MNCs in the last round of "land grabbing" have decades, or even hundreds of years, of accumulation.

Therefore, after the split, based on their powerful resource endowments, they quickly gained a dominant advantage of "bloodline suppression" in their respective niche fields, each becoming a "king."

If you look closely at the financial reports of these companies that have regained independent operating space, you will find that most of their performances have met or exceeded expectations, seeking progress while maintaining stability.

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From the financial data, it can be seen that Haleon, which has embarked on its solo journey, has achieved a double increase in revenue and net profit for two consecutive years, with overall performance basically in line with industry expectations. After Kenvue's complete independent operation, its first annual report showed good performance, with sales reaching $15.44 billion, achieving organic growth of about 5%.

And now, among the world's top pharmaceutical companies, the ones receiving the most attention are Sanofi and Bayer.

Sanofi's "Play to Win" strategy, which mentions the possibility of spinning off the consumer business.

In October 2024, Sanofi finally confirmed amid market speculation that it would sell 50% of its stake in Opella to the US private equity firm CD&R for approximately $17.4 billion.

If all goes well, the transaction will be completed as early as the second quarter of 2025. According to foreign media reports, Sanofi plans to sell off the remaining shares of its consumer health division over the next few years. At that time, it will become a pure biopharmaceutical company.

Based on this, by 2025, perhaps another "born in Rome" giant in the pharmaceutical industry will emerge.

left, the other one is Bayer.

Despite Bill Anderson holding up under pressure, 2025 will be the crucial year for deciding whether Bayer will be split up.

This will depend on the progress of the glyphosate litigation, whether DSO can improve its debt situation, and the clinical results and market launch status of three upcoming major new drugs: Elinzanetant for menopause, Acoramidis for cardiovascular disease, and Asundexian Stroke as a novel anticoagulant.