Bayer’s Roundup Misery Toll Depends on Who Runs the Numbers

(Bloomberg) -- There’s a $2.5 billion question hanging over Bayer AG. Or perhaps a $20 billion question, depending on who you ask.

As lawsuits mount claiming the embattled German company’s weedkiller Roundup causes cancer, analysts are scrambling to calculate the size of its potential settlement costs. The exercise requires a little math and a lot of reading tea leaves, which is why estimates range from manageable to colossal.

To arrive at his figure, Tom Claps of Susquehanna Financial Group has drawn, in part, on his decade and a half of experience in his old job as a defense attorney in U.S. mass tort cases. Alistair Campbell of Liberum Capital, like most analysts, has scrutinized a handful of key pharma industry rulings that can serve as precedents -- and then upped that number out of an abundance of caution. Many offer a range of likely scenarios rather than a single value.

“Truth be told, no one knows what the settlement might be,” said Dennis Berzhanin, an analyst at Pareto Securities in Frankfurt.

The answer matters a lot. Chief Executive Officer Werner Baumann’s job may hang in the balance as the architect of the Monsanto takeover that gave Bayer ownership of the controversial herbicide. The company’s double focus on health and agriculture could also be at risk after activist fund Elliott Management Corp. -- which has pushed for breakups in the past -- bought a $1.3 billion stake.

Bloated Estimates

To add to the confusion over the settlement value, the stock market has given its own view of the cost of the Roundup debacle by pummeling Bayer’s shares: the company has lost about $38 billion in value since buying Monsanto. The shares were little changed Thursday in Frankfurt.

Claps, a legal and regulatory analyst at Susquehanna in New York, says bloated settlement estimates are partly to blame for the stock’s collapse. He puts the settlement in a range of $2.5 billion to $4.5 billion.

“Many investors and analysts will put a very high settlement number in their model because they don’t fully understand the mass-tort process,” he said in a telephone interview. “This has resulted in Bayer’s stock being overly punished.”

What Bloomberg Intelligence Says:

“Settlement value of cases could average $500,000 apiece, based on comparable mass-tort settlements, meaning the total payout may be around $6-7 billion. The number of cases has more than doubled since 2Q18.”

-- Holly Froum, litigation analyst
click here to read research

Liberum’s Campbell, based in London, has a different take. His job is to present investors with a case that has enough upside to make money but an acceptable risk profile, he said. As such, he’s concerned about modeling in a figure that could ultimately prove too low.

After scouring historical precedents -- including Johnson & Johnson’s 2013 arrangement over its ASR line of artificial hips as well as the case of Pfizer Inc.’s Wyeth unit, which set aside more than $21 billion to clear lawsuits over the fen-phen diet drug -- he figures that a Roundup deal will probably cost Bayer between $180,000 and $422,000 per plaintiff. Then he roughly doubled that amount and modeled in $10 billion.

“That’s not because that’s what I think is going to happen,” he said by phone. “It’s just because I want to put something which I think is top-end, just for conservatism really.”

Earlier Awards

Since the Monsanto combination, three Roundup cases have gone to trial in the U.S., and Bayer has lost each. In May, a jury awarded an elderly couple who used the herbicide more than $2 billion in damages. While the awards may be lowered on appeal, plaintiffs’ ranks could swell beyond Bayer’s current tally of 13,400. The next trial starts in St. Louis in August.

“It makes a massive difference whether Bayer starts winning any of the cases or the appeals process,” said David Evans, an analyst for Kepler Cheuvreux in London.

So Evans has come up with three different scenarios. If Bayer can win all its coming legal battles (a low probability, he notes) it could pay very little. If it keeps losing in court, a settlement may cost a whopping $20 billion. Evans’s middle scenario has Bayer paying about $5 billion.

Pareto’s Berzhanin is in that range, with an estimate of about $4.5 billion. His math is based on a pharmaceutical debacle that most every analyst is finding useful, even if it’s more than a decade old: Merck & Co.’s outlay of $4.85 billion to settle 27,000 lawsuits over Vioxx, a painkiller found to increase people’s risk for strokes and heart attacks. That came to about $180,000 per plaintiff.

There are similarities. In the first Vioxx trial, the jury awarded the plaintiff about the same amount as in the first Roundup case. And Merck called in high-profile attorney John Beisner to help with its defense. Bayer last month turned to Beisner for Roundup.

Berzhanin acknowledges the uncertainty of the parallel, though, because unlike with Vioxx, Roundup’s health risks aren’t proven and the product hasn’t been pulled from the market. Bayer insists Roundup’s active ingredient is safe, as do most of the world’s regulators.

To contact the reporter on this story: Tim Loh in Munich at tloh16@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Marthe Fourcade, John Lauerman

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