Bayer pushed to put growth plans on ice

IN recent emotion-charged, real-life courtroom dramas in the United States, Bayer, the German multinational pharmaceuticals and chemicals conglomerate, was cast as a purveyor of cancer-causing products against victims who may not have long to live.

Two landmark court verdicts in the US have declared that Bayer's flagship pesticide, Roundup, caused cancer, and another 8,700 lawsuits are awaiting trial. When Bayer purchased the US chemicals giant Monsanto last year for US$63 billion, it took over all its previous lawsuits and legal liabilities.

While Bayer has confirmed that it faces 8,700 lawsuits in the US, other estimates place the number of plaintiffs at between 9,300 and 11,200.

The court verdicts point to the millions of lives at risk following their exposure to the pesticide - and Bayer's potential liabilities. For the German pharma giant, the big threat is that in the two US court cases, the juries reached their verdict based on expert medical testimonies linking Roundup to cancer.

On March 27, a federal jury in San Francisco ordered Bayer to pay more than US$81 million in damages to Edwin Hardeman of California, whose cancer, the court argued, was partly caused by his use of the popular Monsanto/Bayer weedkillers, Roundup and Ranger Pro.

The 70-year-old had used Roundup to control weeds and poison oak on his property for 26 years. In 2015, he was diagnosed with non-Hodgkin's lymphoma.

The following year, he sued Monsanto after the World Health Organization declared glyphosate (a chemical contained in Roundup) a possible carcinogen.

There were loud cheers around the courtroom when the award was announced: he was given more than US$5 million in compensation for the affliction he suffered, and US$75 million in punitive damages after the court found that Roundup was not only defectively designed, but also that Monsanto acted negligently by failing to warn of the herbicide's cancer risk.

Mr Hardeman's lawyers declared in a statement: "As demonstrated throughout trial, since Roundup's inception over 40 years ago, Monsanto has refused to act responsibly. Instead , the company was focused on 'manipulating public opinion and undermining anyone who raised genuine and legitimate concerns about Roundup'."

In the other case last August, a San Francisco court ordered Monsanto to pay US$289 million to DeWayne Johnson, a 46-year-old former groundskeeper, ruling that its weedkillers had caused Mr Johnson's terminal cancer. However, the court reduced the damages to US$78.5 million in this case.

As a result, regulatory authorities in European countries are phasing out or banning the pesticide that generates large revenues for Bayer.

Above all, Bayer's image is being battered, leaving investors worrying about two great risks to its stock - legal and regulatory. How serious are these risks to investors?

On March 20, following the court ruling that Roundup played a substantial role in the development of non-Hodgkin lymphoma in Mr Hardeman, the German conglomerate's share price plummeted by more than 12 per cent that day to 60.81 euros (US$69.04) on the Frankfurt exchange, fuelled by fears that the judgement may pave the way for other lawsuits.

After the DeWayne Johnson verdict, the company's stock fell 18 per cent, and Bayer reassured investors that the judgement in that case did not necessarily indicate the verdict would be the same in all others.

The legal costs are tending to be very high because Monsanto failed to include a label on its product, warning of the weedkiller's risk of causing cancer. Medical studies have shown that Roundup and its active ingredient glyphosate, the world's most widely used weedkiller, is extremely cancerous.

If Bayer had won at least one legal victory, it may have dissuaded Roundup users from moving the courts. But the message has now gone out, and two precedents have been set by verdicts going against Bayer.

The verdicts are likely to harden the stance of government regulators towards the company.

Pressure from environmental and consumer protection groups succeeded in persuading the European Union into renewing its licence for Roundup for just five years in November 2017, instead of the customary 15 years. Some EU member countries are set to ban the product altogether or restrict its use.

In January this year, the French food and environmental safety agency ANSES banned sales of Roundup. President Emmanuel Macron has pledged to outlaw its use in France by 2021.

Germany's Environment Ministry has announced that it will impose tougher curbs on the sale of glyphosate and similar herbicides within the country. German Environment Minister Svenja Schulze declared that her ministry would change the approval process for pesticides and herbicides that affect the environment.

"If other, perhaps even more damaging, pesticides are used instead of glyphosate, the environment won't be any better off, so we will demand new nature-conservation requirements for the approval process of every pesticide that harms biodiversity," she said.

Germany announced plans to phase out or ban the use of glyphosate and environmentally detrimental herbicides and pesticides after the EU last year extended the licence to use glyphosate for another five years despite resistance from some member states.

The decision of European regulators to ban Roundup will, of course, strengthen the arguments that plaintiffs will make in US courts about the dangers of using the product, and weaken Bayer's defence.

If regulators in other countries also tighten or shut access for Bayer products, it may force the company to withdraw some or all its pesticide product range from household use in gardens, and sell it to farmers.

But selling to farmers will not be simple because these sales will need to get licensed from government authorities.

The loss of household customers would make a dent in Bayer's sales. It may offset the loss by counting on farmers to buy more. Some estimates are that the switch from household consumer to farmer may cost Bayer an estimated US$200 million in annual revenue, about 1 per cent of Monsanto's US$3.5 billion profit in 2017.

Monsanto/Bayer is believed to have set aside US$277 million to pay for litigation costs, but it may need to allocate much more, given the swarming lawsuits.

Bayer may be able to switch its customer base, but it may not be able to handle the thousands of lawsuits - if they all result in verdicts of hundreds of millions of dollars.

It had acquired Monsanto with a view to creating an agrichemical giant offering specialised seeds, compatible pesticides and data services for farmers. But now its consumers and the regulators are pressuring the company to reform itself as a responsible corporate citizen before it reaches for the skies.