Hope for a quick end to the glyphosate trial is fading

Investors fear that the glyphosate cause will now become another burden for years to come. Bayer stock fell nine percent on Wednesday. “It is likely that investors will again be confronted with negative news flow such as lawsuits, lost lawsuits and damages payments in the next few years,” says Markus Manns, portfolio manager at Union Investment, the Handelsblatt.

Bayer has developed a plan B and set aside 3.8 billion euros for new settlements. But there is a risk of further financial burdens.

Glyphosate – the controversial profit driver

The drop in Bayer share price to 57 euros after the rejection by the US government shows that investors are still focused on the glyphosate factor and the consequences of the Monsanto takeover. The Dax group had recently scored with good business results on the financial market and regained trust.

The Crop Science agricultural division is doing well operationally and achieved a return of 43 percent in the first quarter – mainly because glyphosate of all things is so popular and scarce in agriculture that the price has doubled within a year. The controversial remedy was the profit driver.

In the past few weeks, Bayer stock has gained 40 percent since the beginning of the year. Despite the sharp decline, it is currently still 20 percent. “The uncertainty has now increased significantly again,” says Union Investment Manager Manns. The Monsanto takeover continues to weigh on the share price, states Ingo Speich, Head of Corporate Governance and Sustainability at Deka. “Another attempt to reduce legal risks has failed. Now it is important to move forward quickly with the further processing of the open legal cases.”

Bayer refers to the pending decision of the Supreme Court. He will take into account the opinions of all parties, including another submitted by the group. But it is already clear that the US government’s reaction is another blow in the long dispute with glyphosate plaintiffs in the US.

Bayer’s numerous glyphosate defeats

The Leverkusen-based company has been selling the glyphosate-based weed killer Roundup since the takeover of Monsanto in the summer of 2018. Shortly thereafter, lawsuits began by private users who blame the drug for their lymph node cancer.

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Bayer lost three of these cases in a row in the USA, failed with objections and appeals to the courts and was ordered to pay millions in damages in each case. In addition, there was a high loss of reputation due to the legal consequences of the Monsanto purchase: For a long time, Bayer was mainly in the news with lawsuits, ill plaintiffs and criticism of Monsanto’s previous business conduct.

Negotiations on out-of-court settlements with the plaintiffs’ attorneys began in 2019, which led to an agreement worth billions a year later. Bayer is citing an amount of around ten billion euros for the settlement of the present lawsuits. A good 107,000 of 138,000 lawsuits filed have been resolved so far.

In 2021 alone, the group spent more than four billion euros on settlements, which weighed heavily on free cash flow. At the Annual General Meeting at the end of April, the shareholders punished the Bayer management for not reflecting this in the bonuses for the Board of Management. They rejected the compensation report.

The decisive factor for the further course of the legal dispute is how Bayer can and will deal with new litigants. The simplest solution would be for the Supreme Court to remove the basis for processes. Legally, the lawsuits are based on the fact that Roundup’s product label does not print a warning about the possible carcinogenic ingredient.

Bayer argues that such a reference is neither factual nor legal. The US Environmental Protection Agency (EPA) still considers glyphosate harmless, a warning is misleading, has not been approved by the EPA and is therefore excluded by American federal law. The Supreme Court should review that.

The Biden government did not agree with Bayer’s argument that federal law prevents claims for damages in individual US states. In US legal circles, this is interpreted as a clear change of position. Under ex-President Donald Trump, the government had sided with Bayer and supported the company.

The crucial question is: If the Supreme Court denies the appeal, will a new massive wave of lawsuits build up against Bayer? Lawyers welcomed the US government’s statement. “We’ve always known the law was on our side, and now the government agrees,” said Jennifer Moore, who is representing the plaintiff in the pending appeal. “It’s a very good day for cancer victims in this country who are trying to hold abusers like Monsanto accountable.”

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If the appeal fails, Bayer itself expects new lawsuits to arise – albeit in a far smaller volume than before. Lawyers could increase the solicitation of lawsuits from the population again. But the big law firms in the US that specialize in such cases have accepted Bayer’s terms of the settlement and have not heard from them much. “They get billions in fees and have largely closed the issue,” says US legal circles.

Sale of glyphosate to private users will be stopped

In addition, the prospects of successful lawsuits for the plaintiffs have declined somewhat because Bayer won the two previous glyphosate lawsuits. At the beginning of May, another trial began in the US state of Missouri, the outcome of which is now likely to attract greater public interest.

Bayer also points out that the sale of the glyphosate-containing roundup to private users will be discontinued in 2023. That’s an important part of Plan B. It’s financially viable because 90 percent of the glyphosate business is in professional farming. However, almost all complaints come from private users who use the product in their garden, for example.

Union fund manager Manns still thinks it is likely that new cases will increase in the next few years. He points to the latency period of five to ten years for lymph gland cancer. Put simply, Americans who use Roundup today and develop cancer in five to 10 years could then threaten to sue Bayer.

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The Dax group is preparing to continue defending its position in court if the group considers the plaintiffs’ claims to be unreasonable. However, plan B provides that potential claimants can contact the company directly and do not have to first mandate a litigator.

In doing so, the group wants to avoid high-profile proceedings and disputes. Bayer itself has estimated the potential cost of settling such claims over the next 15 years at the equivalent of $4.5 billion.

Debate about splitting up could die down

Whether that will be enough to finally settle the glyphosate lawsuits remains to be seen. JP Morgan analyst Richard Vosser sees no financial impact on the company’s forecasts — at least not immediately, he writes. However, the history of the entire glyphosate case has shown that there have always been negative surprises for Bayer in the US judiciary. The legal risks inherited from Monsanto could not be eliminated as planned by the group.

If the Supreme Court rejects an appeal, Bayer could also gain something positive: The debate about a possible split of the company could lose momentum. Because the glyphosate legal burdens were always considered a “poison pill” for the independence of the agricultural business with its own stock exchange listing.

This pill would be gone if the judges on appeal would abruptly end the cases. But as it looks now, the legacy of Monsanto will occupy the Leverkusen group for a long time.

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