Bayer Evenly Poised; Decision By FDA On Blood-Thinner Xarelto Is Anticipated

| About: Bayer A.G. (BAYRY)

We are maintaining our Neutral recommendation on Germany’s Bayer (BAYRY.PK) with a target price of $56.00.

With headquarters in Leverkusen, Germany, Bayer is one of the world’s largest healthcare and chemical corporations. Bayer operates in three major segments - Healthcare, Material Science and Crop Science. The Healthcare segment is involved in the research, development, manufacturing and marketing of products for the prevention, diagnosis and treatment of diseases.

The Material Science segment is one of the world’s largest polymer manufacturers. The Crop Science segment is one of the world's leading crop-science players in the areas of crop protection, non agricultural pest-control, seeds and plant biotechnology.

In July 2011, the company reported its second quarter 2011 results. Bayer’s earnings per share during the quarter came in at €1.29 (approx. $1.86) compared to €1.16 (approx. $1.67) in the year-ago period. Higher revenue boosted earnings. The emerging markets performed well during the quarter.

All sectors at Bayer are expected to continue performing well. However, we believe that investor focus will be on the fate of blood-thinner Xarelto, co-developed with Johnson & Johnson (JNJ), for stroke prevention in atrial fibrillation (SPAF) more than earnings reports.

In July 2011, the US Food and Drug Administration (FDA) cleared Xarelto for a limited indication - the prevention of deep vein thrombosis, which may cause pulmonary embolism in patients undergoing knee or hip replacement surgery. A decision from the FDA regarding the lucrative SPAF indication is expected in November 2011.

We remain concerned about the generic threats/competition faced by Bayer for many of its products such as Levitra (erectile dysfunction) and the Yaz franchise (oral contraceptives). The genericization of key drugs would negatively impact revenue at Bayer.

The Yaz franchise is already facing significant generic competition with sales declining 7% in the second quarter of 2011. We expect Yaz sales to continue declining. Moreover, any hiccups or delays in the approval of Xarelto will weigh heavily on the stock. We prefer to remain on the sidelines until Xarelto is approved in the US for the SPAF indication.