Tuesday, September 8, 2009


Top pick; blue-sky 90% upside

Attractive valuation, cyclical recovery, pipeline newsflow
Bayer is our top pick in the EU pharma sector, and we add it to our Europe 1 list, based on: 1) Attractive valuation with shares trading at only c10x 10E PE despite premium EPS growth (10-13E EPS CAGR 10%); 2) Strong pipeline newsflow (outlined below); 3) A continued improvement in Material Science profitability from trough levels and 4) Potential for new long-term Healthcare margin targets to represent upside to forecasts.

Richest newsflow EU pharma in next 12 months
In our opinion, Bayer has the richest run of pipeline newsflow in EU pharma in the coming 12 months with updates expected including: Xarelto Phase III data from the EINSTEIN-Extension study end 09 ; First Phase II data for Kogenate liposomal (haemophilia) 2H09; Further PII data for riociguat (pulmonary hypertension) end 09; Nexavar Phase III data in lung cancer 1H 2010; Xarelto ROCKET-AF Phase III data in stroke prevention mid-2010; Launch of Yaz plus (oral contraceptive) mid-2010, potential protection against future generic erosion.

Blue-sky valuation of Eur80, c90% upside
Our Eur52 PO offers c25% upside and is based on an average of our SOTP (Eur49) and DCF (Eur55) valuations. However, our base case assumes limited contribution from the pipeline catalysts listed above. In a blue-sky scenario, with stars aligning and all above pipeline data positive, we see an upside DCF valuation of Eur81. Potential Xarelto peak sales potential of Eur5bn vs Eur1.5bn currently assumed accounts for Eur13 (or roughly half) of the upside, with the major data coming in mid-2010 (ROCKET-AF in stroke prevention).

To see full report: BAYER (MERRILL LYNCH)