Chairman's Letter

People should know
what Bayer stands for

Dear stockholders and friends of Bayer (signature)

I am pleased to present to you Bayer’s new annual report. It reflects an eventful year in which our employees around the world once again showed great commitment to drive the success of our company. On behalf of the Board of Management – and on your behalf as well I’m sure – I would like to sincerely thank all our employees for their dedication.

The trust you have in our employees, in the members of the Supervisory Board and Board of Management, and in me personally strengthens us in our daily work. I would like to sincerely thank you and I am pleased that we are once again able to let you participate in Bayer’s success. We are therefore proposing to the Annual Stockholders’ Meeting an increase in the dividend to with an increased dividend of €2.80 per share.

2017 was a year of ups and downs. We saw many advances, but also experienced setbacks. We received new approvals, formed new collaborations and celebrated encouraging successes. But we also had to deal with unexpectedly high inventories in our Crop Science Division in Brazil and with the weak business development of our Consumer Health Division, which meant we had to adjust our guidance during the year. Overall, sales and earnings in 2017 remained only on a par with 2016.

Our share price reflected this development. Over the course of 2017, Bayer stock delivered just over seven percent, which was less than the DAX and the Euro STOXX 50. The ongoing regulatory process for the planned Monsanto acquisition certainly played a role here. We are very confident that we will receive final antitrust approval in the second quarter of 2018.

In 2017, we also benefited from the long-term realignment of our company across the rest of the portfolio. Since the IPO of Covestro in October 2015, we have been aiming to sell our shares step by step and to achieve full separation from Covestro in the medium term. Last year, Bayer AG reduced its direct interest in Covestro from 64.2 percent to 24.6 percent, generating cash inflows of around €4.7 billion thanks to Covestro’s good share price performance. Bayer’s strategic foresight has proved successful and we also have had a lucky hand.

It is with the same long-term perspective that we are pursuing the Monsanto acquisition. We are deeply convinced that both companies together can create significant additional value for our customers and shareholders, as well as for the society in which we live and whose acceptance we need. Providing food in high quality, sufficient quantity and at affordable prices is crucial to human coexistence. And we want to contribute to that.

In 2017, we made important progress in obtaining antitrust approval for the planned acquisition. Of particular importance was the agreement with BASF in October regarding large parts of our seeds business and the Liberty™ / LibertyLink™ herbicide platform. These are excellent businesses that have been built up by our employees over the years. We regret having to divest these businesses, but we are convinced that in BASF we have found a long-term strategic purchaser and an employer with a first-class reputation.

Bayer reached another long-term decision in November by in-licensing two development candidates from biotechnology company Loxo Oncology. Both these candidates complement our existing oncology portfolio. Moreover, it shows that we are keeping our word because we have always emphasized that we will continue to invest in our other businesses regardless of the acquisition of Monsanto.

Clear focus and long-term perspective – that’s the way we run our company.

Bayer CEO Werner Baumann (Foto)

Bayer CEO
Werner Baumann

Covestro, Monsanto and Loxo are prime examples of how Bayer has demonstrated its strategic foresight in 2017. Clear focus and long-term perspective – that’s the way we run our company. We have aligned our business activities to the main societal challenges in the fields of health and nutrition, and we are convinced that we are able to provide substantial and sustainable solutions, based on the highest standards and our responsibility to humankind and the environment. This aspiration is conveyed by Bayer’s corporate purpose: “Science for a better life.”

It is an aspiration that brings us together across borders and business activities. But what are the main societal challenges? And what could the solutions to these look like?

For example, we are aware that human life expectancy is increasing with every generation. But the older we get, the more susceptible we become to illness. It is of enormous social importance that we address this development with better preventive medicine and treatments. Shaping demographic change through research and innovation in order to enable people to have longer, healthier lives is one of the greatest challenges of our time.

Our Pharmaceuticals Division has dedicated itself to this task and also made progress in 2017. In February, a Phase III clinical trial involving rivaroxaban, the active ingredient in Xarelto™, in combination with Aspirin™ was ended ahead of schedule due to its outstanding efficacy. This combination can substantially reduce the risk of serious diseases such as heart attack or stroke.

Operationally, sales of Pharmaceuticals increased by a currency- and portfolio-adjusted 4.3 percent in 2017. Clean EBITDA rose by 8.8 percent. This performance was driven by another significant increase in sales of our key growth products Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™, which advanced by over 16 percent to more than €6 billion. This is a very encouraging development.

We are also addressing long-term developments with our Consumer Health Division for nonprescription medicines. There is a trend toward self-care, which is being further strengthened by individualization and digitalization. People are becoming more aware of the importance of exercise and preventive medicine, and are realizing that they need to do something for their own health. After all, no-one knows us as well as we know ourselves. That’s why we need a customized plan to protect our health – for example, against exposure to the sun or allergies.

Our business is well positioned to address this trend. However, 2017 was still a difficult year operationally. Competition in the United States in particular has had an impact on our business, as has a regulatory decision taken in China. Overall, Consumer Health figures in 2017 were below the prior-year level and also below our expectations. Sales declined by a currency- and portfolio-adjusted 1.7 percent, while clean EBITDA decreased significantly by 12.8 percent.

In agriculture, global challenges are raising particularly pressing questions. How will we feed a continuously growing global population? How will we ensure food security in light of climate change? And how will we facilitate farming practices that use finite resources in a sustainable and efficient way? All of these questions are part of a challenge for humankind that farmers around the world will have to tackle in the years ahead. As a partner to farmers – both large companies as well as smallholders – Bayer wants to contribute to the solution for this challenge.

Business development in our Crop Science Division in 2017 was shaped by the difficult situation in Brazil, where several factors led to unexpectedly high inventories of crop protection products. This meant that we had to establish provisions and adjust our full-year business guidance in the second quarter. We immediately initiated a number of measures to normalize the situation and can already see these measures taking effect. Overall, Crop Science sales in 2017 declined by a currency- and portfolio-adjusted 2.2 percent. Excluding figures for Brazil, however, business was above the prior-year level. Clean EBITDA at Crop Science declined by 15.6 percent in 2017. Our Animal Health business delivered a positive performance, with growth of 2.0 percent in currency- and portfolio-adjusted sales and 9.2 percent in clean EBITDA.

Having a long-term perspective also means continuously investing in the future. Our company has kept investment at a high level, spending €4.5 billion on research and development in 2017. We are also investing in our sites. Capital expenditures for property, plant and equipment amounted to €2.1 billion in 2017 and a similar level of investment is also planned for this year.

Moreover, with “Leaps by Bayer,” we are working on promising, pioneering technologies. For example, in 2017, we set up a joint venture to improve microbes so that they can provide crop plants with nitrogen via their roots, potentially making nitrogen fertilizer no longer necessary one day. This would reduce both soil pollution in fields and greenhouse gas emissions and would be a milestone for greater sustainability in agriculture.

We are investing in our future. This also applies to us as an employer. Last year, we went some way to ensure that Bayer remains a company where people all over the world enjoy working. We promote a culture of trust and mutual respect and offer our employees a variety of development opportunities. In 2017, Bayer once again received numerous awards as a top employer around the world, including in Germany, China and Brazil. In Germany, we had a record number of applicants for our vocational training places and, according to a survey of German school students, we are by far the most popular company in the chemical and pharmaceutical industry. We are proud of that.

We want people to know what Bayer stands for. This is especially important now, given the particular focus on the Monsanto acquisition. In our view, the current debate is often based on an emotional appeal to people’s fears rather than on communicating facts. This is an approach we reject, especially when it is applied as a business model and thus used to gain an advantage.

Our business model is different. We invent and create new and better products that meet people’s needs. These products must undergo meticulous testing and can only be approved if they have a positive benefit-risk assessment. To achieve this, we work to the highest standards in research, development and production, for the benefit of customers and patients and to ensure the sustainability of our activities.

Our endeavor to find new solutions leads to innovations and social progress. But the road we travel to get there often looks more like a steep path with lots of bends and obstacles than a wide street that allows unhindered passage. Research and progress go hand in hand with uncertainty and depend on effort and perseverance. Yet this steep path is the only way to achieve progress as a society. This is something that I strongly believe. And following this path is Bayer’s core competency.

As a global company, we have a responsibility that we accept and that we are living up to through our commitment to the U.N. Global Compact and our pursuit of clearly defined values. These include safety as our top priority. We minimize health and environmental risks along the entire value chain. We communicate to our customers how to use our products safely. We stand for a culture of fair treatment and fair competition. We strictly comply with the law and operate in accordance with the highest ethical standards.

We want to be measured against these values by others, including you, dear stockholders. I would like to thank you for the trust you have placed in Bayer. We will do everything we can to live up to this trust in 2018 as well.

Sincerely,

Werner Baumann (signature)

Werner Baumann
Chairman of the Board of Management of Bayer AG

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