Bayer AG’s $63 billion bet on Monsanto Co. is finally showing signs of paying off, as food shortages stoked by Russia’s invasion of Ukraine drive demand for seeds and pesticides to boost global crop production.
Among Europe’s best-performing large stocks this year, the German agricultural-chemicals and pharmaceutical giant is up 40%. That is ahead of rivals including BASF SE, which is also based in Germany, and New York-listed Corteva Inc.
Bayer...
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Bayer AG’s $63 billion bet on Monsanto Co. is finally showing signs of paying off, as food shortages stoked by Russia’s invasion of Ukraine drive demand for seeds and pesticides to boost global crop production.
Among Europe’s best-performing large stocks this year, the German agricultural-chemicals and pharmaceutical giant is up 40%. That is ahead of rivals including BASF SE , which is also based in Germany, and New York-listed Corteva Inc .
Bayer acquired Monsanto in 2018, expecting the combination of its pesticides business with its U.S. rival’s seeds and high-tech crops to boost sales as the world’s increasing population pressures farmers to become more productive with a shrinking pool of available farmland. Instead, Bayer was hit by a wave of lawsuits claiming Monsanto’s Roundup herbicide and its active ingredient glyphosate causes cancer.
Within about a year of the deal’s closing, the company had lost some 40% of its market value, ranking it among the worst corporate takeovers in years.
The outperformance of Bayer’s stock price so far this year shows, however, that investors are starting to buy into the deal’s merits even though the company is still litigating Roundup cases. Last month the company’s crop- science unit, Bayer’s largest division, reported a 22% sales jump to €8.45 billion, equivalent to about $9.03 billion, in the first quarter amid higher prices for herbicides, corn seed and other products.
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By comparison, Bayer’s pharmaceutical division, its next biggest, saw sales rise 2.6%, while the consumer-health unit, which sells the well-known aspirin brand, increased sales by 17.2%.
The latest period represents the third consecutive quarter Bayer’s agricultural-chemicals business has exceeded expectations, said Markus Manns, a portfolio manager at German asset manager Union Investment. “I am hesitant to assume three quarters is the start of a long-term trend, but it’s a good sign,” Mr. Manns said, whose firm owns Bayer shares.
Ukraine is a top exporter of grains, accounting for 13% of global corn exports and 12% of wheat, but the Russian invasion is preventing it from shipping much of those volumes to world markets. The resulting threat of food shortages underscores the demand for Bayer’s genetically modified crop seeds, as well as its weedkiller and pest-control products that are designed to boost yields, analysts said.
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Bayer’s herbicide portfolio, led by glyphosate-based products inherited from the Monsanto deal, are the biggest contributors to the crop-science division’s recent strength. Production and energy disruptions slowed output of glyphosate from China, pushing prices higher. China produces about 60% of total global output, and Bayer is responsible for the rest.
While claimants against Bayer over Roundup exposure say glyphosate is carcinogenic, the herbicide is widely used by farmers in the U.S. and elsewhere to kill weeds. Bayer has earmarked $16 billion to deal with Roundup litigation and maintains the chemical is safe. The U.S. Environmental Protection Agency has also said glyphosate doesn’t present a health risk.
Bayer is trying to bring the legal fight over Roundup to an end, petitioning the U.S. Supreme Court last year to invalidate a $25 million jury verdict in the case of California resident Edwin Hardeman. He has blamed Roundup for causing his cancer.
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Last month, Bayer’s stock fell 6.2% the day after the U.S. Justice Department recommended the court reject that request, which diminishes the chances of the court hearing the case. A favorable court ruling would end thousands of claims against Bayer.
Bayer remains hopeful the Supreme Court will hear the case and reverse the Hardeman decision. If the decision is left standing, “it would undermine the ability of companies to rely on official actions taken by expert regulatory agencies and to meet today’s pressing food security and environmental challenges,” a Bayer spokesman said in an email.
The Supreme Court could decide as soon as June 9 on whether to hear the case.
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The continued uncertainty is enough for some investors to avoid the stock. “I just can’t take the litigation risk,” said Kay Eyre, a portfolio manager at Scotland-based investment firm Abrdn.
Bayer’s stock has recovered from the selloff in May, demonstrating its appeal to some investors’ willingness to bet on its improving operations and comparatively low valuation, analysts said. Bayer trades at close to nine times forecast earnings, according to S&P Global Market Intelligence. That compares to 23 times for Indianapolis-based Corteva. Corteva’s stock is up 32% year to date.
The promise of Bayer’s pharmaceutical division is another differentiating factor, analysts said. Its pipeline of potential new drugs includes an oral blood thinner known as Asundexian that aims to prevent strokes and blood clots without the risk of causing excessive bleeding. The drug is expected to enter later-stage trials in the coming months and if successful could be worth more than $6 billion in annual revenue, Citigroup analyst Peter Verdult estimates.
“After years you finally have an improving narrative across the group,” Mr. Verdult said.
Write to Ben Dummett at ben.dummett@wsj.com