Bayer AG (BAYN GR) holds an overall “narrow economic moat” rating from Morningstar: “The combination of the company’s wide-moat pharmaceutical business, narrow-moat consumer health and crop science businesses, and no-moat material science business leads us to our narrow moat rating.” Bayer’s drug business supports a wide economic moat, given its diverse portfolio of patent-protected drugs and a growing number of biologic drugs that are sold through its strong global sales force. Consumers continue to support its marquee drugs, including Aspirin and Aleve, despite heavy generic competition. Bayer’s 2014 acquisition of Merck’s consumer products increased the scale of Bayer’s consumer group. By contrast, however, Bayer’s crop science business, including biosciences, face high barriers to entry that weaken this moat.

Market Realist

Bayer’s strong economic moat in the pharmaceutical business

Bayer is a German life science company with core competencies in healthcare (XLV) (VHT) and agriculture. Most of its revenue depends on its sales of pharmaceutical drugs (PFE) (NVS), vitamins, and health products.

In 2016, the company owned ~51,000 valid patent applications and patents relating to ~5,000 protected inventions worldwide.

How Bayer Is Creating Value through Innovation

Innovation as a core competency

Bayer considers innovation to be its core competency, resulting in its consistently high expenditure on research and development (or R&D). In 2016, the company’s R&D spending in the life science space rose 9.8% to 4.4 billion euros year-over-year, and the company is likely to spend even more in the years to come.

The company’s investments in research and its targeted in-licensing are the basis of its long-term growth. Bayer estimates the combined peak annual sales potentials of six of its pharmaceutical products in the pipeline to be at least 6 billion euros, and it expects its crop protection and seed technology products to earn more than 5 billion euros leading up to 2020.

Healthy return ratios

During the last five years, the company has generated an ROE (return on equity) of 16.2%, much higher than the sector median ROE of 12.5%. Its ROA (return on assets) has been 5.6%, a bit lower than the sector median ROA of 6.3%.

Acquisition of Monsanto

Though Morningstar has assigned a narrow moat to Bayer’s crop science businesses, Bayer’s acquisition of Monsanto (MON) would be a game changer for the company.

The acquisition could further strengthen Bayer as a life science company and create substantial additional value in the long term through more innovation, stronger growth, and greater efficiency due to the complementary nature of Monsanto’s business.

Latest articles

Broadcom (AVGO) stock fell ~8.5% after markets closed yesterday following the semiconductor giant's fiscal 2019 second-quarter earnings release. It missed analysts' revenue estimate and cut its fiscal 2019 revenue guidance by $2 billion to $22.5 billion due to sluggishness in its semiconductor solutions business.

The SPDR Gold Shares ETF (GLD), which tracks physical gold prices, has underperformed the broader markets year-to-date, rising just 4.4% compared to the S&P 500’s (SPY) gain of 15.9% as of June 14. The sentiment for gold, however, has been turning around.

Safe havens such as Treasuries and gold were back in favor on June 14 as stocks fell due to rising tensions in the Middle East, concerns over growth, and the looming threat of the US-China trade war. The tech-heavy Nasdaq Composite Index fell 0.67% in the first hour of trading.

Lululemon (LULU) stock rose 2.1% on June 13 in reaction to better-than-expected first-quarter results and an upgraded outlook for fiscal 2019 overall. The company's first-quarter adjusted EPS grew 34.5% to $0.74 on revenue growth of 20.4% to $782.32 million. Analysts had expected EPS of $0.70 and revenue of $755.31 million. Here's why the outlook got an upgrade.

14 Jun

IEA Again Slashes Its Oil Demand Growth Estimate

WRITTEN BY Rabindra Samanta

As of 4:40 AM Eastern Time today, US crude oil active futures were at $51.83, ~4% below their closing level in the previous week. If US crude oil prices stay at those levels today, they'll mark their third week of decline in five weeks.

Amazon is discontinuing its Amazon Restaurants service, which has been delivering food for restaurants in parts of the United States. Amazon Restaurants launched in the United States in 2015 and entered the British market the following year. However, it met strong opposition in the British market.