Industry analysts said on Wednesday a total payout of around $2 billion was more likely, partially lifting the fog on an issue that has hampered Bayer's efforts to find a partner for the sub-scale drugs business.

"The indirect effect of the judgement is that Bayer's management can now concentrate better on finding a partner for its pharmaceutical business," said Christian Faitz, analyst at Julius Baer.

A jury in Texas ruled on Tuesday that Bayer was not liable for injuries an elderly man claimed were caused by the recalled drug in the first of 8,400 lawsuits facing the German drugmaker.

The Leverkusen-based group has been seeking a partner for its beleaguered pharmaceuticals unit for months without success and indicated last week that it may have decided to wind down the search and concentrate on trying to strengthen the business.

If confirmed, that is likely to disappoint investors who believe Bayer lacks the means to give the business critical mass in a consolidating global pharmaceuticals industry.

Its shares, which surged 40 percent late on Tuesday in reaction to the news, slipped five percent to 13.58 euros, underperforming a stronger German DAX index "It is a technical reaction after yesterday's massive rally, people are now trying to make some profits," said a senior trader at major German bank.

The stock has underperformed the DAX by 22 percent in 2003.

Analysts said the company still faced legal uncertainties, but the victory in Texas -- a jurisdiction with a reputation for favouring plaintiffs -- indicated it should avoid the worst-case scenario of mammoth damages. "The market was expecting at least six billion in claims and now that appears to be down to two billion," said Stephan Thomas, a fund manager at Frankfurt Trust.

"The market sees fair value for the shares at 16-18 euros... but I expect a lot of volatility in the shares," he added.

More than 100 deaths have been linked to Baycol, which can cause a severe muscle disorder called rhabdomyolosis. The medicine, known as Lipobay outside the United States, was withdrawn from the market in 2001.

Fears that massive damages would trigger a cut in credit ratings hung over Bayer's debt recently and its bonds rose sharply, with the six percent bond due April 2012 bid 4.5 points higher at 98.6 percent of face value at 1445 GMT.

INSURANCE COVER

Although Bayer has product liability insurance, it admitted last week that Baycol charges could exceed its cover if plaintiffs "substantially prevail". However, Schroder Salomon Smith Barney analysts think it is now likely that the vast bulk of settlements relating to Baycol will be settled by insurance.

Bayer has already settled claims with some 500 patients who took Baycol for a total of about $150 million, giving analysts some yardstick by which to judge future payments.

"If Bayer continues to pay out around 280,000 euros per patient, it works out to 2.3 billion euros ($2.44 billion)," said Bayerische Landesbank analyst Michael Butscher.

Merrill Lynch analyst James Knight noted the actual figure could still vary significantly, with the total turning out lower if it transpires Bayer has settled the most severe cases first.

Alternatively, the figure might rise because some of the 8,400 claims are class actions covering a number of individuals -- and further claims may yet be filed.

Hollis Haltom, the 82-year-old Texan who brought the case against Bayer in Corpus Christi, claimed $560 million.

Haltom, who developed rhabdomyolysis after taking Baycol, claimed Bayer was negligent in the way it sold the drug. But the 12-member jury determined that Baycol's design and marketing instructions were not defective.

"We believe it is a vindication of Bayer and its position all through this litigation that it acted responsibly when developing and marketing the drug, and finally with its decision to pull Baycol from the market," said Philip Beck, Bayer's lead attorney.

Next on the horizon for Bayer is a case in Minnesota, where plaintiffs' lawyers are seeking class action status for several thousand patients who claim they were injured by Baycol.