After a court in California awarded $289 million to a man claiming his cancer was caused by top-selling weed killer Roundup, shares in Roundup manufacturer Bayer AG (OTC:BAYR.Y) fell 11.3% on Monday.
The San Francisco jury awarded the substantial figure to Dewayne Johnson, a former school groundskeeper who sued Monsanto after developing non-Hodgkin's lymphoma following years of Roundup use.
The suit followed the release of a report by the World Health Organization's International Agency for Research on Cancer (IARC) in 2015 that classified glyphosate -- the herbicide in Roundup -- as "probably carcinogenic to humans." According to Johnson's lawsuit, the IARC's working group found an increased risk of non-Hodgkin lymphoma with exposure to glyphosate.
Monsanto's lawyers presented conflicting study results supporting Roundup's use, but clearly, the jury wasn't convinced Roundup wasn't responsible for Johnson's cancer, and potentially, that's a big problem for Bayer, which just completed its $63 billion acquisition of Monsanto in June. Out of the $289 million awarded to Johnson, $250 million was awarded in punitive damages to Johnson after the jury concluded the company and its officers acted with "malice" and "oppression."
There are over 4,000 similar cases pending, and the size of Johnson's verdict is likely to cause the number of lawsuits to climb higher. Bayer will appeal the court's decision, and even if the appeal results in a negative outcome, there's still a good chance the size of the award to Johnson gets reduced. It's also possible that a settlement will be reached between Johnson and Bayer.
The combination of the size of the verdict and the number of lawsuits filed suggests that the total amount necessary to settle all cases could stretch well into the billions of dollars. The negative publicity associated with the award could also significantly reduce future Roundup sales and, perhaps, demand for Monsanto crop seeds specifically engineered to be resistant to glyphosate. Bayer's Roundup ready seeds are among the most widely planted seeds by farmers in the United States, accounting for 70% of corn and 90% of soybean seeds planted in 2010.
Because investors hate uncertainty, the question marks associated with Bayer's future sales and potential damages due to lawsuits has shareholders hitting the exits. The impact on Bayer shouldn't be ignored, but investors might want to bear in mind that Roundup only contributes less than 3% to total revenue, and Bayer's after-tax net income was 4.5 billion euros in 2017. Regardless, until these lawsuits are resolved, investors are probably best off focusing on other investment opportunities.