In Monsanto, Bayer Investors Inherit Hard-to-Predict Risk

(Bloomberg) -- Bayer AG investors can take heart that a $289 million verdict against its newly acquired Monsanto unit will be challenged on appeal, but they’re not wrong to dread thousands more lawsuits alleging that the company’s popular Roundup herbicide causes cancer.

Some financial analysts predicted the Aug. 10 jury award in San Francisco will be knocked down or wiped out entirely, while legal experts warned of more uncertainty ahead. More than 5,000 U.S. residents have joined similar lawsuits against Monsanto -- and the lawyer who won the trial said an equal number are poised to file new claims.

“If it was a resounding victory for the defense, a lot of the plaintiffs would be discouraged and wouldn’t bring a case,” said Thomas G. Rohback, an attorney who represents companies in trials and appeals and isn’t involved in the Monsanto litigation. “But now the word is out: ‘You can win.’ Does it mean that every case is going to be a win? No, but it doesn’t mean every case is going to be a loss, either.”

The fight is over glyphosate, the main ingredient in Roundup, which was first approved for use in 1974 and grew to become the world’s most widely used herbicide. The San Francisco case was filed two years ago and the trial started in June, the same month that Bayer acquired Monsanto for $66 billion. The trial was expedited because the plaintiff, a former school groundskeeper, was dying of lymphoma.

If the verdict stands that Monsanto failed to warn consumers of glyphosate’s hazards, that in itself is of marginal consequence to Bayer, said Jonas Oxgaard, an analyst at Sanford C. Bernstein & Co. He’d expect Bayer to pull the product for common gardening use and require a license to handle it.

The move would shift liability to users, and while the company would lose household customers, farmers would simply add it to their list of regulatory requirements, he said. The shift would cost Bayer an estimated $200 million in annual revenue, equal to about 1 percent of Monsanto’s $3.5 billion profit in 2017, and amounting to a “rounding error” for Bayer, he said.

Monsanto had set aside $277 million to pay for the litigation -- slightly less than the first verdict. Oxgaard doesn’t see prospects for a settlement until there have been a few more jury verdicts, along with a decision by an appeals court reducing the damages awarded by the first jury.

If thousands of lawsuits somehow all produced verdicts of hundreds of millions of dollars, the company would face an “enormous” problem, Oxgaard said. That’s the sentiment that drove Bayer shares down as much as 14 percent Monday. The stock regained some stability Tuesday, rising 0.5 percent to 84.17 euros at 11:53 a.m. in Frankfurt.

“It quickly becomes more than Bayer’s market cap,” the analyst said. “But that assumes they all get the same thing, and that they survive appeal, and I don’t think that’s likely to happen.”

In Monsanto, Bayer Investors Inherit Hard-to-Predict Risk

Neither does Bayer.

“While Bayer and Monsanto continue to operate independently, Bayer believes that the jury’s verdict is at odds with the weight of scientific evidence, decades of real world experience and the conclusions of regulators around the world that all confirm glyphosate is safe and does not cause non-Hodgkin’s lymphoma,” Bayer said in a statement.

The next Roundup trial is scheduled to start in October in state court in St. Louis, where Monsanto is based, with two more trials scheduled in the same court in early 2019. Hundreds more cases are pending in San Francisco, Oakland, California, and Delaware.

While juries are always unpredictable, appeals are decided by judges, said Bloomberg Intelligence analyst Chris Perrella.

“It’s easier to sway a jury than to argue medical data before a judge, so those should be easier for Monsanto to win,” he said.

If Monsanto had been trading on its own, investor reactions wouldn’t be as severe because agricultural chemical investors are “well familiar with the story of litigation risk and chemicals,” whereas pharmaceuticals going awry is a different story, Perrella said. It’s often easier to prove negative effects of a drug than whether Roundup causes cancer, he said.

“You’re going to see large jury awards that will get knocked down or overturned or reduced, and they’re going to appeal this case in six different ways -- that’s standard operating procedure,” he said. “There’s headline risk big-time, and pharma investors are not as comfortable with headline risk as materials investors.”

Plaintiffs’ lawyers in the San Francisco trial said they didn’t get to put on as strong a case as they could have because the judge excluded some of their evidence. A federal judge in San Francisco overseeing more than 300 cases has voiced skepticism about the science backing plaintiffs’ claims but has agreed to let the suits go to trial.

One of the considerations an appeals court will weigh is whether the judge who handled the first trial allowed plaintiffs to introduce evidence “designed to inflame the jury with too much emotional appeal,” Rohback said.

“What’s too much is not cut and dry,” he said. “That’s why you have a trial -- because there’s enough material evidence of fact on both sides.”

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