Will bargain Bayer attract a buyer after setback? - Source Reuters - September 8,2011

Will bargain Bayer attract a buyer after setback? By Ludwig Burger FRANKFURT | Wed Sep 7, 2011 10:57am EDT (Reuters) - One day after a damning appraisal by U.S. regulators of Bayer's (BAYGn.DE) Xarelto pill, analysts took stock of what the group could be worth without its most important pipeline drug, and some now see it as a takeover target. The prevailing view is that the share rout that followed the Food and Drug Administration's preliminary verdict on Tuesday made Bayer quite a bargain, even in the worst case that Xarelto wins no or only a small inroad in the world's largest drug market. One analyst even suggests that industry rivals, Sanofi (SASY.PA) in particular, stand to gain from buying Bayer outright. U.S. drug regulators said Bayer and Johnson & Johnson's (JNJ.N) experimental stroke preventer Xarelto, an anti blood-clotting agent, was not ready for approval and questions were raised about its effectiveness, sending Bayer shares down more than 7 percent. Xarelto is Bayer's most important pipeline drug by far, and the company eyes more than 2 billion euros ($2.8 billion) in annual sales from it. On Wednesday, the shares had recouped 2 percent, hitting 38.49 euros by 9:37 a.m. EDT. "On average the European Pharma companies would stand to increase their (2015 estimated earnings per share) by 50 percent even in the scenario of zero contribution from Xarelto globally," J.P. Morgan analysts Alexandra Hauber and Richard Vosser said in a note issued on Wednesday. "We believe the best strategic fit is with Sanofi, Novartis (NOVN.VX) and AstraZeneca (AZN.L)," they said, basing their analysis on a hypothetical 20 percent takeover premium over Tuesday's close. Bayer would be a "very strong fit" across Sanofi's oncology, multiple sclerosis, diabetes, animal health and consumer health businesses, they added. For its part, Sanofi on Tuesday again ruled out major transactions. Apart from the deal size -- Bayer has a market value of more than 30 billion euros even after the slump -- Bayer's chemicals-to-drugs hybrid structure would make a takeover a highly complex transaction. A healthcare buyer seeking to preserve its "pure play" bonus would have to divest Bayer's pesticides and chemicals business, which according to J.P.Morgan could be a 20-25 billion euro deal. Still, UniCredit analysts echoed J.P. Morgan in saying that Bayer was now a "compelling acquisition target" with a fair value of 76.08 euros per share, more than double Tuesday's close. Both Bayer's alpharadin, a drug against bone metastases, and eye drug Eylea, previously known as VEGF Trap-Eye, make for an attractive pipeline without Xarelto, several brokerages said. Of the 36 Bayer analysts tracked by Thomson Reuters StarMine, 23, or more than 60 percent, rate the stock "buy" or the equivalent of "strong buy." Their average price target is 61.07 euros per share. The FDA's recommendation, however, took most analysts by surprise. "This view is significantly different from the consensus of cardiologists presenting at the European Society of Cardiology conference last week," said Craig Maxwell at UniCredit. Many of his peers stressed that the FDA advisory committee of independent experts due to vote late on Thursday could still take a different view from the FDA's initial statement, but peak sales estimates were slashed or put in doubt across the board. Equinet analyst Martin Possienke cut his estimate of maximum annual sales from Xarelto to 500 million from 3 billion euros. Barclays Capital's Mark Purcell said he was bracing for "commercial failures" of the Xarelto franchise. Even if approved, Xarelto's use in the United States might be limited to those patients for whom the established stroke prevention drug warfarin and Boehringer Ingelheim's new Pradaxa pill is not advisable. Rival treatment Eliquis, under development by Bristol-Myers Squibb (BMY.N) and Pfizer (PFE.N), is currently viewed as the drug with potentially the best benefit-risk profile in a stroke prevention market that could top $10 billion a year. (Editing by Will Waterman)