Chairman’s Letter

Innovation is our core competence

Dear stockholders and friends of Bayer (signature)

I am pleased to present to you Bayer’s annual report for fiscal 2016. It has been a very exciting and intensive year – for me personally as well because I became Chairman of the Board of Management in May.

I would like to thank the entire Board of Management, which started working in its new constellation at the start of last year, for its commitment to the company. Creating an integrated organizational structure and appointing the heads of the divisions to the Board of Management have proven to have been the right steps at the right time. We have a very good management team that works extremely well together.

I would also like to thank the members of the Supervisory Board for our trust-based cooperation and all our employees, who displayed great commitment and personal dedication in making 2016 another successful year for Bayer.

In 2016, we again substantially raised both sales and earnings and thus posted a new record for our operating performance. Group sales increased by a currency- and portfolio-adjusted 3.5 percent to €46.8 billion and clean EBITDA rose by 10.2 percent to €11.3 billion. Core earnings per share advanced by 7.3 percent to €7.32.

At Pharmaceuticals, sales rose by an encouraging 8.7 percent on a currency- and portfolio-adjusted basis, with our five key growth products again making a significant contribution to growth. Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™ posted combined sales of €5.4 billion, compared with €4.2 billion in 2015. We raised our assessment of the combined peak annual sales potential of these five products from our previous estimate of at least €7.5 billion to more than €10 billion.

Adjusted for currency and portfolio effects, sales at Consumer Health advanced by 3.5 percent. This division posted substantial gains in Latin America and Asia / Pacific in particular.

Despite a weak market environment, Crop Science sales matched the prior-year level. Seeds expanded business significantly and Environmental Science also posted gratifying sales gains. Animal Health grew sales by a currency- and portfolio-adjusted 4.8 percent.

Covestro remains fully consolidated on account of our continued majority interest of around 64 percent at present. This business posted currency- and portfolio-adjusted sales on a level with the prior year. We are very pleased with the way Covestro has developed since its stock market listing in October 2015. It confirms that separating the two enterprises was the right move for both of them. Thanks to its very good business performance, Covestro has successfully established a good position on the capital market in its first year of independence; Bayer has excellent growth perspectives resulting from its focus on the Life Sciences. It remains our intention to divest our entire interest in Covestro in the medium term.

Bayer CEO Werner Baumann (Photo)

Bayer CEO Werner Baumann

A particular highlight of 2016 was the agreed acquisition of Monsanto, which is intended to further strengthen Bayer as a Life Science company and create substantial additional value in the long term for you, our stockholders, through more innovation, stronger growth and greater efficiency. The two businesses are highly complementary, both in terms of their geographical fit and their product portfolios.

It is a good step for Bayer as a whole since the two companies’ combined expertise will improve our ability to help address one of the most urgent issues of our time: how to feed the some ten billion people who are expected to be living on our planet by 2050.

Together with Monsanto, we would be better able to provide farmers worldwide with a product offering that is tailored to their needs and offers them genuine added value: from the right choice of seeds through seed treatment to controlling weeds, pests and plant diseases. With regard to the increasing digitization of farming, Monsanto will give us valuable expertise.

We are confident that we will be granted all the necessary antitrust clearances enabling us to close the transaction before the end of 2017. The acquisition is to be financed through a mix of debt and equity. In November 2016, we successfully placed a mandatory convertible bond as a first equity measure in this connection.

Despite the large investment being made to acquire Monsanto, we will continue to pursue organic growth in Pharmaceuticals, Consumer Health and Animal Health. The necessary funding will also be available for investments at our sites as well as for smaller acquisitions and in-licensing.

It goes without saying that this applies to research and development as well. In 2016, we again increased R&D spending in the Life Science areas to €4.4 billion. And we are planning a further increase in the current fiscal year because innovation is our core competence. In the Life Science areas in particular, there is great demand for new products and solutions. For example, better treatments are needed for conditions such as cancer and cardiovascular disease. Likewise, solutions are required to achieve the necessary increase in agricultural productivity and feed the growing world population. In addition, investments in self-care are designed to keep our aging population healthy and contribute to the sustainability of public health care systems around the world.

Our investments in research together with targeted in-licensing are the basis for our long-term growth – as shown by the projects which have made it into our development pipelines. At Pharmaceuticals, for example, we estimate the combined peak annual sales potential of six promising product candidates in the mid- to late-stage pipeline to be at least €6 billion. And the combined peak sales potential of Bayer’s crop protection and seed technology pipelines should total more than €5 billion from products that have been or will be brought to market between 2015 and 2020.

Today, any company wishing to remain at the cutting edge of scientific and technological development needs excellent partners. For this reason, we maintain a network of collaborations and strategic alliances with leading universities, public research institutes, partner companies and start-ups. Last year, for example, we concluded a cooperation agreement with Danish company FaunaPhotonics. Together we are seeking to develop novel sensor solutions which will improve farmers’ ability to monitor the development of pest populations and thus control pests more effectively.

Another example is the joint venture named BlueRock Therapeutics we established with Versant Ventures with combined funding of US$225 million to develop stem cell therapies for curing a range of diseases. BlueRock Therapeutics is the second large investment made by the Bayer Lifescience Center, which has the mission to rapidly uncover, encourage and unlock fundamental scientific breakthroughs in medicine and agriculture.

We are aware that our employees are the basis for everything we do. It is their creativity, knowledge and commitment which shape Bayer’s performance ability. We therefore invest a great deal of effort in recruiting and retaining the best employees for Bayer. To this end, we provide an attractive working environment and have built a creative corporate culture that is characterized by diversity and internationality, customer focus, experimentation, collaboration and trust.

Another reason our people enjoy working for Bayer is because they know that sustainability and social responsibility are firmly anchored in our corporate culture. We have committed to upholding the basic tenets of sustainable development and the Ten Principles of the United Nations Global Compact. Each year, we contribute to society through our wide-ranging humanitarian commitment and social sponsorship activities. One example of this is our range of initiatives aimed at supporting refugees living in Germany. At our sites in Leverkusen and Berlin, we have established projects to prepare young refugees for subsequent vocational training.

Our commitment to social responsibility is also shown through our daily collaboration with smallholder farmers across the world. We support them through numerous initiatives, especially in Africa and Asia. Our expertise helps them to grow more food and market their produce more effectively – thus generating a higher income.

As you can see, Bayer is making good progress in every respect. However, we need a reliable regulatory environment if we are to remain successful in the long term. To this end, legislators will have to make clever decisions focused on growth and prosperity. We need a Europe that is flourishing and fit for the future so we will have to inject new strength into the European ideal. The debate on how to achieve this has only just begun. We view it as a matter of course that we as a company should actively, openly and transparently contribute to the discourse on important social and political issues.

On behalf of the entire Board of Management, I would like to thank you – our valued stockholders – for the continuing confidence you have placed in Bayer.

Sincerely,

Werner Baumann (signature)

Werner Baumann
Chairman of the Board of Management of Bayer AG