After Roundup Battle, Bayer CEO’s Next Task Is Keeping His Job

(Bloomberg) -- Throughout the high-stakes takeover of Monsanto and the ensuing legal battles, Bayer AG Chief Executive Officer Werner Baumann has maintained a cool demeanor that gives him an air of inscrutability.

But after he clinched a landmark accord to settle litigation stemming from the deal, Baumann revealed some emotion.

“Unfortunately you have to pay an awful lot of money for a product that is perfectly well-regulated, which can make you, quite frankly, angry,” Baumann said on a call with reporters “But it is what it is. The most important thing is now that we can set course to the future.”

Whether Baumann gets to shape that future remains an open question. The CEO will forever be defined by the mega-deal he set in motion just weeks after taking over in early 2016, showing up in St. Louis at Monsanto’s headquarters to propose the $63 billion purchase. When Baumann prevailed, he not only pulled off Germany’s biggest-ever corporate takeover -- he also led the storied inventor of Aspirin and longtime stock-market darling into a legal quagmire from which Bayer is finally emerging, albeit at considerable cost.

On Wednesday, Bayer announced that it had reached a deal with a majority of plaintiffs who allege that the Roundup weedkiller that’s long been a Monsanto staple causes cancer, a charge that Bayer denies. The accord stands to cost Bayer as much as $10.9 billion, and there are still tens of thousands of holdouts who haven’t settled, creating the potential for more legal woes. Bayer also settled other litigation against Monsanto, bringing the potential legal bill to $12.1 billion.

Little Time

While Baumann has laid the vast majority of Roundup cases to rest and created a blueprint for those still pending, it may prove tough for him to win back the faith of many investors, who penalized him last year in an unprecedented rebuke by withholding support at the company’s annual general meeting. Things went more smoothly for Baumann this April, when he won 93% backing, but with a contract expiring in less than a year, time is running short to prove that he deserves to keep steering the company.

“It’s time to discuss which direction Bayer is moving with Monsanto,” said Ingo Speich, head of corporate governance for Deka Investment, a top shareholder. While Deka isn’t calling for a change in Bayer’s leadership, Speich is raising questions now that the Roundup agreement has been reached. “The debate is ‘How do we structure the management and supervisory board? How do we structure the expertise? And who is responsible?”

The other architect behind the Monsanto deal, former chairman Werner Wenning, retired this spring before his term had expired, potentially clipping Baumann’s support network. And the cost of the takeover and legal settlements have diminished the company’s financial maneuverability, even as Baumann has vowed to keep Bayer whole.

How much lost ground Bayer’s stock can regain in coming weeks may influence whether investors forgive Baumann or push him out to make room for a management team that’s unencumbered by the Monsanto baggage. In the year after the deal was cemented, Bayer shares lost 40% in value as troubles mounted. In March, the shares of Germany’s erstwhile most valuable company fell to 47.50 euros, the lowest level in almost eight years. They are down 7% this year, in line with the DAX benchmark index.

With the legal drama from that deal now largely resolved, Baumann finally has a chance to demonstrate that his vision for Bayer -- which keeps crop science, pharmaceuticals and consumer health divisions under one roof -- makes sense. Some investors say those units could be better off on their own and would create a welcome windfall. In an interview, Baumann rejected that approach, saying the businesses that Bayer is in make sense.

“Management can focus now on the operational side of the business again,” said Markus Manns, a portfolio manager at Union Investment, another top shareholder. “They have been quite busy with all the litigation and all the negotiations.”

Whether Baumann or somebody new is at the top, there are several pressing matters to address. Towering above them all is the fact that Bayer’s pharmaceuticals division is facing a cliff in sales when blockbuster drugs Xarelto, a blood thinner, and Eylea, for eye care, come off patent in the next few years. The pipeline of new products is weak compared to many of Bayer’s pharmaceutical peers and the company doesn’t exactly have the firepower for a transformational acquisition. That’s especially the case since the company needs to pay down debt from the Monsanto deal and wants to keep its dividend policy in place, said Markus Mayer, an analyst at Baader Bank.

“When the rejoicing of the capital markets fades, we expect the discussion of whether the Monsanto takeover will ever pay off to restart,” Mayer said. The settlements “lift pressure” from Baumann’s shoulders, but don’t “delete it completely.”

Beyond that, the Roundup situation may not be fully over. While Baumann downplayed the likelihood of this happening, it’s possible that the scientific panel being set up to review whether Roundup can cause cancer will ultimately decide against the company -- which could open Bayer to even more legal risk on the matter in the years to come. Then there is the matter of the 30,000 or so cases that are still pending.

Pending Risk

“There is still no immediate trial risk for Bayer and it can continue to negotiate with these holdout plaintiffs during this quiet period,” Tom Claps, a litigation analyst with Susquehanna Financial Group, said in a note. “However, the holdouts could also renew the advertising blitz for new cases, which could present increases in case filings.”

Bayer’s consumer health unit, its smallest division, presents another question mark. While the business has experienced faster growth in recent quarters, it’s in an industry that’s undergoing consolidation. Other pharma giants including Novartis AG and GlaxoSmithKline Plc have separated their own consumer health units so that they can focus more intently on cutting-edge cancer drugs and gene and cell therapies.

“Disposing of consumer health would in normal circumstances be anathema to Bayer, the inventor of Aspirin,” said Sebastian Bray, an analyst with Berenberg, in a June 22 note. Nevertheless, there’s a growing argument for turning the unit into a joint-venture with another company, especially as the industry evolves into one more aligned with the marketing and sales practices of other consumer-facing industries.

Until now, the Roundup drama created such uncertainty that it was difficult to consider a breakup of Bayer’s major divisions. That conversation could pick up steam again. Last summer, Elliott Management, in announcing its stake in Bayer, suggested there are more ways to unlock value at Bayer than simply getting beyond the Roundup litigation.

On a call with analysts Wednesday night, Baumann pushed back against the notion that Bayer needs to change fundamentally.

“We continue to see ourselves as the best owner operators of the three core businesses that we have,” he said.

Now Baumann must convince weary investors that he is also the best leader of these three core businesses.

”I enjoy doing what I am doing together with my colleagues,” he said in a Bloomberg Television interview. “Relative to my future, this is a question that has to be addressed by our supervisory board. I’m not the right person to talk to.”

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