To say Bayer’s acquisition of Monsanto has not gone smoothly would be a significant understatement. Since Bayer closed the deal, lawsuits regard Monsanto’s “Roundup” have started to gain traction which has lead to the market trying to “price in” Bayer’s glyphosate liability.
Roundup’s main active ingredient is glyphosate, an herbicide first registered for use in the US in 1974. Glyphosate is a non-selective herbicide, meaning it will kill most plants. This is great for killing weeds, but you also don’t want to kill the plant you are growing.
Enter Roundup Ready – genetically modified crops such as soybeans and corn that are resistant to glyphosate and therefore will not die when you spray glyphosate over top. Kills the weeds, not your lawn.
As you can imagine, this was a huge boon to farming crops in monoculture. And as such, the use of glyphosate has proliferated. Here is a chart below of the pounds applied annually, sourced from the EPA. The herbicide represented 56% of total herbicide usage according to the EPA.
Considering glyphosate is the world’s most widely used weed killer, we should all be pretty worried if it does indeed cause cancer. That is the question for the Roundup lawsuits set to go to trial in the US. It is estimated that there will be at least 13,000 lawsuits.
So far, Bayer’s ability to fight these lawsuits has been abysmal. A California man was awarded $289MM in August 2018 after a state court found Roundup caused his cancer (this was later reduced to $78MM and is on appeal). A couple was also awarded $2 BILLION in punitive damages, on the jury finding that Roundup was responsible for their cancers (though the expectation is this will be reduced dramatically).
What is most surprising to me is that glyphosate is one of the most studied chemicals in the world. And nearly all determine that glyphosate is safe. Here are a few snippets:
The study that has gained a lot of traction is from the the International Agency for Research on Cancer. They issued a rating for glyphosate that gained a lot of media attention because IARC classified glyphosate as a “probable carcinogen.” Read the IARC report.
However, what gets much less attention is that IARC’s findings were challenged by other organizations around the world as inconsistent with other scientific assessments conducted by scientists from countries worldwide who are responsible for ensuring public safety.
In total, more than 100 countries have approved glyphosate for use. A few of those publications can be found here:
Let’s also not forget what has been happening recently. Anything that could remotely cause cancer is being labeled as such… even coffee.
What is amazing about these jury cases is that a jury can now decide something gave you cancer… hmmm.
How much is the market pricing in for Bayer’s glyphosate liability? One way we can estimate this is by looking at Bayer’s price performance since the first trial compared to the broader market, in this case using the German DAX.
By taking the difference between performance, we can get a rough proxy of what the market is pricing for a liability:
By this analysis, the market is pricing in $40BN liability for Bayer…
Another way to look at it would be the difference in multiple. I would normally argue Bayer is worth more than the broader market (given its healthcare assets + crop protection), but assuming they should trade-in line, we can take the difference in multiple today and see what the market is pricing in.
Therefore, this albeit crude analysis points to the market pricing in a $30-$40BN liability for Bayer. Is this reasonable?
Perhaps if you think every case will go through and get huge settlements, but that’s not typically how it works.
Let’s take a look at other class action lawsuits. In some cases, these were clearly drugs / chemicals that caused issues in humans and weren’t defensible by science like glyphosate is. The claimants range from ~3,000 to 27,000 and the settlement per case was $0.18MM to $0.37MM.
So what does a $30BN-$40BN mean for Bayer? Based on the sensitivity table below, the market is pricing >25,000 claimants and a settlement of $1MM a piece. This seems extreme, especially when the other cases settled in total for a max of $5BN. If you think Bayer will eventually $5BN to settle all these claims, you could then argue it is mis-priced to the tune of $25-$35BN.
A larger question with the stock is if glyphosate is determined to cause cancer, is the entire $68BN acquisition of Monsanto impaired? This would likely mean that you can no longer use GMO plants and spray glyphosate like you used to, so Monsanto’s seeds business would also deteriorate in addition to its glyphosate sales.
I also don’t think this is likely, especially in the face of how much we use glyphosate and how much we need GMO to feed the planet.