We have recently downgraded our recommendation on Bayer (BAYRY) to Underperform from Neutral. During the fourth quarter of 2009, the company’s core earnings per share came in at €0.90 surpassing €0.71 reported in the year-ago period. 

Bayer has been shifting its focus towards its HealthCare segment over the past few years in order to maintain solid growth in the long run. While we are pleased with the growth recorded by the HealthCare segment, we remain concerned about the disappointing performance of the Material Science segment.
The global economic crisis leading to weaker demand in the relevant customer industries is primarily responsible for the disappointing performance of this segment since 2005. Although sales during the fourth quarter of 2009 have stablized to some extent, the segment recorded €7,520 million in annual revenues in 2009, down 22.8% from €9,738 million in 2008 due to a decline in selling prices and lower overall volume. 

Moreover, we are disappointed with the delay in the approval of Xarelto, one of Bayer’s most promising pipeline candidates for the prevention of venous blood clots in adult patients undergoing hip or knee replacement surgery. Although the drug is approved in the European Union (EU) and Canada, US approval is yet to come.
The New Drug Application (NDA) for Xarelto was submitted in July 2008 to the US Food and Drug Administration (FDA), and its advisory committee voted 15-2 in favor of approval in Mar 2009. Unfortunately, in May 2009, Bayer received a complete response letter (CRL) from the FDA which requested for additional information on the drug. Bayer is looking to submit the information in the second half of 2010.
In addition, the outlook for 2010 provided by the company is not quite encouraging. It expects to generate 5% growth in sales (on currency and portfolio adjusted basis) and core EPS in 2010 with an EBITDA of around €7 billion. However, Bayer is banking heavily on the improvement of its MaterialScience segment, which might not be achievable given the current economic scenario.
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