By Ruth Bender 

BERLIN -- Shares of Bayer AG tumbled 9.6% Wednesday -- the biggest single-day percentage decline in seven months -- after the chemicals and pharmaceuticals giant faced another legal setback in its fight against accusations that its Roundup weedkiller causes cancer.

A San Francisco jury found that exposure to Roundup was a "substantial factor" in triggering a man's non-Hodgkin lymphoma. The verdict shows how the German company's $63 billion acquisition of U.S. agriculture giant Monsanto Co. -- which was designed to bolster Bayer's fading fortunes -- has now become its biggest potential liability.

The verdict is the latest to come from a batch of related cases going to trial this year. Bayer needs the tide to turn in its favor both to avoid what analysts fear could be billions in potential legal damages and to convince investors that its Monsanto bet was right.

Bayer said it was disappointed with the jury's decision but continued "to believe firmly that the science confirmed that glyphosate-based herbicides did not cause cancer."

The company is facing lawsuits from 11,200 farmers, gardeners and landscapers. Bayer has said the extent of the litigation it now faces wasn't foreseeable at the time of the Monsanto deal, which turned the inventor of aspirin into the world's largest maker of seeds and pesticides.

After the deal was announced in 2016, many investors and analysts warned of the risks to Bayer's image and to its balance sheet due to the debt Bayer had to take on for the acquisition. Monsanto has for years been the target of environmentalists over its genetically modified crops and its weedkillers based on glyphosate, a chemical.

"The court judgment is another sign that Bayer has probably not reviewed a decisive part of the acquisition thoroughly enough," said Christian Strenger, an individual shareholder in Bayer and a German expert on corporate governance.

Bayer had to fight hard to get the deal over the finish line, with regulators forcing the company to shed more assets than initially planned.

Mr. Strenger has filed a motion ahead of Bayer's annual shareholders meeting in April calling on shareholders to withhold their approval of the management board, made up of top executives. His motion cites among other factors "dramatically increased legal risks of glyphosate related lawsuits."

Bayer's first major legal defeat came in August, when a jury held Bayer responsible for a groundskeeper's non-Hodgkin lymphoma. That verdict, which came barely two months after Bayer closed the Monsanto acquisition, triggered a downward spiral in Bayer's share price. The stock in Germany has lost nearly a third of its value over the past year. Bayer has appealed the August verdict and pledged a robust defense in future cases.

Tuesday's jury verdict hit hard because Bayer had been pointing to this second trial as offering a better frame for its argument that scientific evidence proved Roundup was safe, in part because the plaintiff presented other health issues that Bayer argued could have triggered the cancer. The case is the first bellwether trial scheduled for 2019.

Analysts have hoped Bayer could keep the focus on rational arguments and scientific evidence -- and away from plaintiffs' allegations that Monsanto knew about the product's risks but hid them from the public. Bayer says some 800 studies and regulatory decisions across the globe assert that glyphosate isn't carcinogenic.

U.S. District Judge Vince Chhabria had granted Bayer's request to split the evidence into two phases, with the first phase focusing solely on whether Roundup and its active ingredient, glyphosate, are safe.

Jurors at the end of phase one found Roundup was responsible for the cancer of California resident Edwin Hardeman. Now, the trial will move into phase two, with jurors hearing allegations about misconduct before deciding whether to award punitive damages. Bayer said the trial's second phase "will show that Monsanto's conduct has been appropriate."

"This now appears to be a damage-limitation exercise," said Gunther Zechmann, a Bernstein Research analyst who said he fears the worst.

Bayer's recent efforts to lift investor sentiment -- including a broad restructuring plan to cut costs and boost profits across businesses -- have done little to placate investors and analysts still struggling to put a figure on Bayer's potential payouts. Bayer set aside 613 million euros ($696.4 million) for defense costs over the next three years, with a big part expected to go toward Roundup cases. Bayer hasn't provisioned for any potential liabilities.

Legal experts said the latest verdict could attract new plaintiffs. Some analysts said a few more verdicts need to be handed down before the potential financial impact can be realistically assessed. Six more trials are scheduled to start this year.

"The shares will likely remain depressed until there is evidence of Bayer prevailing in one or more of the six cases to go to trial in 2019," said Peter Verdult from Citi.

Bayer stock closed at EUR63 on Wednesday, down EUR6.70 on the day.

Some analysts on Wednesday cut their recommendations on the stock, assuming a higher risk that the legal battle will end negatively for Bayer.

Analysts say it is difficult to estimate what kind of impact the legal woes might have on Roundup sales. Bayer doesn't break out sales for the products and closed the Monsanto acquisition near the end of the last growing season. Analysts note many farmers depend on Roundup because there are few comparable alternative products on the market.

Markus Mayer, an analyst at Baader bank, said he sees a further risk in the legal uncertainty: If Bayer's share price sinks to new lows, Bayer could become a target for activist investors or even a takeover, he said.

Write to Ruth Bender at Ruth.Bender@wsj.com

 

(END) Dow Jones Newswires

March 20, 2019 19:50 ET (23:50 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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