Restructuring And New Pharmaceuticals Will Improve Operational Efficiency By 2026

Key Takeaways

• Bayer's strategic focus on innovation in Crop Science and Pharmaceuticals could fuel significant revenue growth and margin improvement.
  
• Efficient cash management and debt reduction, alongside litigation and restructuring strategies, aim to enhance cash flow and financial stability.
  
• Bayer anticipates financial struggles ahead, with challenges from patent losses, regulatory issues, currency headwinds, and the need for litigation management impacting margins and earnings.

Catalysts

Operates as a life science company worldwide.

• Bayer's focus on improving profitability in Crop Science, including targeting over €3.5 billion in incremental sales from innovation and achieving an EBITDA margin improvement to the mid-20s by 2029, suggests potential for enhanced revenue and margin growth in the future.
  
• The launch of new pharmaceuticals, Beyonttra and elinzanetant, combined with the expected growth in Nubeqa and Kerendia sales to over €2.5 billion in 2025, indicates potential revenue growth in Bayer’s Pharmaceuticals division.
  
• The company's emphasis on debt reduction and effective cash management, with targets to decrease net financial debt to €31-32 billion by 2025, could enhance free cash flow, impacting EPS and financial stability.
  
• Bayer's litigation strategy, focusing on significant containment of cases by the end of 2026, could reduce legal expenses and financial risk, positively impacting net margins.
  
• The restructuring and efficiency programs, with targeted savings of €800 million in 2025 and a total of €2 billion by 2026, could bolster net margins and improve overall earnings through increased operational efficiency.

Bayer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bayer's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.5% today to 6.1% in 3 years time.
• Analysts expect earnings to reach €2.9 billion (and earnings per share of €2.96) by about April 2028, up from €-2.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €4.1 billion in earnings, and the most bearish expecting €2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, up from -7.5x today. This future PE is lower than the current PE for the GB Pharmaceuticals industry at 17.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.77%, as per the Simply Wall St company report.

Bayer Future Earnings Per Share Growth

Risks

• Bayer is expecting 2025 to be the most difficult year financially, with net sales flat and earnings lower than the previous year, which could negatively impact the company's revenue and earnings.
  
• The Pharmaceuticals division is facing pressure from the accelerating impact of the Xarelto patent loss, leading to expected declines in net sales and margins, which could impact earnings.
  
• Crop Science is experiencing earnings pressure due to regulatory challenges and pricing pressure, particularly in Crop Protection, affecting margins and revenue.
  
• The company's plan for significant litigation containment by 2026 could pose financial risks if not successfully managed, impacting net margins and cash flows.
  
• Bayer is facing currency headwinds, which have already impacted net sales and EBITDA before special items, putting pressure on revenue and profit margins.

Valuation

• The analysts have a consensus price target of €28.7 for Bayer based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €68.0, and the most bearish reporting a price target of just €22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €48.0 billion, earnings will come to €2.9 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 5.8%.
• Given the current share price of €19.47, the analyst price target of €28.7 is 32.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.