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Bayer's blind spot on Monsanto's Roundup may cost billions

The Bayer AG logo sits on display behind silhouetted members of the management board during the company's annual general meeting in Bonn, Germany, on May 25, 2018. Bloomberg photo by Krisztian Bocsi

There's one more tribunal in which Bayer's efforts to defend its Roundup weedkiller are floundering: the court of public opinion.

Bayer says science shows that the herbicide, which the German company gained in its $63 billion acquisition of Monsanto, is safe. Now that a second U.S. jury has linked the product to cancer, the uphill battle Chief Executive Officer Werner Baumann is fighting just got steeper. The company has lost more than $30 billion in market value since the first defeat last August, raising fresh questions about a deal he spearheaded.

Roundup became the company's leading headache after the June 7 completion of the Monsanto deal that Baumann entered to remain a global competitor in seeds and agricultural products. Bayer now faces some 11,000 suits from cancer patients and their families, and its second loss paints a dire picture.

Baumann began crafting the deal just days into his tenure in 2016, with backing from Chairman Werner Wenning, who had hand-picked the CEO and worked closely with him during the acquisition talks. Baumann was aware of the seed maker's image problem, but believed that changing Monsanto's name would help sway public opinion. Bayer's reliance on scientific experts' opinions that the main ingredient in Roundup, called glyphosate, was safe may have blinded it to the burden the giant transaction would bring.

After an earlier case went against the company, the latest verdict came as more of a surprise because the judge and trial setup appeared to favor Bayer. The judge split the proceedings into two parts, one focused on whether Roundup contributed to causing cancer, with the second phase examining the company's conduct.

That was seen as an effort to remove some of the emotion that was thought to be behind the jury verdict from August, said Dennis Berzhanin, an analyst with Pareto Securities in Frankfurt.

"It seemed like this trial would go a little bit differently, it would be a little bit more fact-based, little bit more science-based," Berzhanin said.

Instead, a San Francisco jury ruled after the first phase that a man who sprayed the herbicide on his property for decades contracted non-Hodgkin's lymphoma as a result. Among other things, the second phase of the trial will look at whether Monsanto's strategy unduly sought to influence public opinion via scientific reports.

"We are disappointed with the jury's initial decision, but we continue to believe firmly that the science confirms that glyphosate-based herbicides do not cause cancer," Bayer said in a statement.

U.S. District Judge Vince Chhabria has questioned Monsanto's strategy of relying on experts. While calling evidence of a glyphosate link to cancer "shaky," he has also said the company seemed callous about the possibility.

In the second phase of the case, which starts Wednesday and will determine liability and damages, Monsanto's efforts at influencing public opinion may weigh more than the lack of scientific proof, said Gunther Zechmann, an analyst at Sanford C. Bernstein.

"We fear the worst" for phase two, Zechmann said in a note.

Bayer probably assumed settlements of as much as 5 billion euros ($5.7 billion) when assessing the purchase, said Markus Manns, a fund manager at Union Investment, one of Bayer's top 15 shareholders, according to data compiled by Bloomberg.

If the outlay is around that amount, buying Monsanto was "probably still a good deal. It's simply too early now to say," he said in an interview. Until the payouts become clearer, "we won't be able to say for another year or two whether it was the right decision."

Bayer hasn't set money aside for potential damages or settlements, though it has allocated 661 million euros for legal costs. A settlement of all outstanding Roundup cases would cost more than $6 billion, Berzhanin said. That would weaken Bayer and Baumann's position as he tries to keep activist investor Elliott Management Corp. at bay. The firm, run by billionaire Paul Singer, wants the CEO to evaluate breaking Bayer into separate pharmaceutical and crop chemical companies, people familiar with the matter said in December.

"They knew about the litigation risk and they knew the brand was toxic," said John Rountree, a partner at consulting firm Novasecta Ltd. in London. "Based on hindsight, it wasn't the right deal. Inevitably people will look at the CEO when things aren't looking good."

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This article was written by Tim Loh and Naomi Kresge, reporters for Bloomberg.

Bloomberg's John Lauerman contributed.