Bayer AG produces and markets healthcare and agricultural products, and polymers. The company manufactures products that include aspirin, antibiotics, anti-infectives, and cardiovascular, oncology, and central nervous system drugs, over-the-counter medications, diagnostics, animal health products, crop protection products, plastics, and polyurethanes.

Our stance on Bayer

Bayer remains one of our favourite long term stocks. Bayer is resilient to market underperformance in the long term and we are confident it will generate positive returns to shareholders in the medium term.

Investment thesis

On February 25, Bayer reported results for Financial Year 2016 Post the results, we continue to see Bayer as an attractive investment and maintain our 12-month price target of €120.60/share.

The sell-off we have seen in shares over the last couple of days was mainly due to the market expecting management to announce a better outlook for 2016 rather than mediocre growth in revenues and margins.

Although we would have been more comfortable with a stronger outlook for 2016, we are conscientious that 2016 will be difficult for many companies across the board due to global growth concerns.

However, looking beyond 2016 and taking a medium term view, we continue to see Bayer at the forefront in the pharmaceutical industry.

We like Bayer because:

• The group’s pharmaceutical products are still relatively new in the market. We expect to see further growth in sales from existing products

• Bayer is a blue chip company with a history of successful launches of new drugs and diversification (through crop science and material science)

• Bayer has a history of growth through acquisitions. We expect the model to remain the same and the group to pick up new businesses at a better prices due to the weakness in global growth forecasts

• We see descent capital gains in the share price over the medium term without the group reporting supernormal profits in the years ahead

• The group has a history of increasing its dividend

Our concerns are as follows:

• Pharma

o Xarelto which is the flagship product of the Group is seeing increased competition from competitors such as Pfizer and Bristol-Myers Squibb Co.

o No new drugs in the Phase III pipeline for 2016

o Higher R&D costs in the healthcare division putting downward pressure on margins. However this does not concern us in the short term as investors will benefit in the medium term as the Group launches new products

• Crop Science

o The global market slowdown is having a negative impact on the Crop Science business. We do not expect to see a recovery in the short term and expect no growth from this division

• Material Science

o Investors are putting pressure on management to sell its 70% stake in Covestro which operates in the material science industry. There is no indication that management have any plans on doing so

Other

• We are assuming no further weakness in the Euro in 2016. If the Euro had to weaken further, Bayer would benefit from this and result in a higher sales forecast.

Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.