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Thursday - September 18, 2014

Conference Call

"Transforming Bayer into a Pure Life Science Company – Exit of MaterialScience"

Address by Dr. Marijn Dekkers, Chairman of the Board of Management

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Ladies and gentlemen, good afternoon.

Thank you for taking the time to dial in on such short notice. You have just received today’s announcement. We would also like to inform you about the background and answer your questions.


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Let me start by briefly summarizing the main points: At today’s meeting, the Supervisory Board approved our plans to demerge the MaterialScience business and transform Bayer into a pure Life Science player.

Going forward, Bayer will focus its strategy on being a global leader in the Life Sciences. We plan to exit the MaterialScience business by way of a stock-market listing, which should take place within the next 12 to 18 months.

Let me say very clearly: MaterialScience is a world-class business, and we are convinced that it has the potential to create significant long-term value on a stand-alone basis. As a separate company, MaterialScience will be the fourth largest European chemicals player, with excellent prospects for sustainable success in its markets. The transaction will make MaterialScience better able to fund the investment needed to develop its portfolio.

The demerger will enable Bayer to concentrate its resources on the HealthCare and CropScience businesses, thereby creating a global leader in Life Sciences with extensive experience in science and innovation and the capability to leverage this expertise to improve human, animal, and plant health.

We therefore expect this portfolio decision to be beneficial for both entities – Bayer and MaterialScience.

So why have we decided to take this step – and why now?


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The Life Science activities already clearly dominate Bayer’s portfolio, accounting for more than two thirds of Group sales and almost 90 percent of earnings.

Back in 2007, HealthCare and CropScience generated 66 percent of Bayer Group sales; by last year the figure had risen to 71 percent. While the two businesses contributed 76 percent to our adjusted EBITDA six years ago, last year they achieved 88 percent of Bayer’s earnings.

Important developments in recent years have taken the Life Science businesses to where they stand today.


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Looking back to 2010, our pharma business was posting rather moderate growth rates but had a very promising pipeline – but one that still had to score success in the clinical and regulatory development, and in the respective market introductions. The five products we have launched in recent years, Xarelto™, Eylea™, Adempas™, Stivarga™, and Xofigo™, turned out to be transformational for our pharma business and have turned us into one of the fastest-growing pharma companies worldwide. And we expect to continue growing above market in the future.

Significant progress is also visible in our OTC business: four years ago, our challenge was to remain among the leaders in a highly fragmented OTC market at a time of ongoing industry consolidation. Strong execution of our emerging-market focus strategy in Russia, Brazil, and China and the successful leveraging of our brand reputation have resulted in continued market share gains. It was at that time when we formulated our aspiration to become the number 1 OTC company. In this context we continued to invest in the organic growth of the business and concluded a series of attractive acquisitions, including this year’s announced acquisition of Merck & Co.’s Consumer Care business for more than 10 billion Euro.

This transaction means we overtake J&J and take up a strong 2 position, right behind the announced Novartis/Glaxo joint venture.

In CropScience we had not previously been fully able to transform our superior product portfolio into market share gains; we were actually losing share. So we developed and executed a new go-to-market approach with a new management team in order to more effectively transform our R&D capabilities into sales. We invested in the expansion of our seeds business, our activities in biologicals, and our technology platforms. The success of this new approach is now evident from 3½ straight years of almost double-digit organic sales growth, and there are now indications that we are actually gaining share.

Now we must focus to sustain our strong strategic and operational progress in the Life Science businesses and thus maintain our positive momentum. However, going forward, we feel it will become increasingly difficult to adequately resource both businesses, Life Sciences and MaterialScience, in one group. Let me explain why:


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We have already demonstrated the transformational nature of our pharma pipeline, and we want to continue exploiting our research assets. And that means, amongst others, increasing our R&D spend. Above-market growth in our Life Science businesses will also entail the expansion of capacities, as we are now for instance seeing with the significant investment of more than 500 million Euro being made for the new Factor-VIII plant in Germany. And lastly, we will continue to complement organic growth with targeted bolt-on acquisitions, for example to gain scale or to fill gaps in our portfolio.

On the other hand, MaterialScience also has significant investment needs if it is to keep pace with the competition. The chemicals and polymers industries have changed structurally in recent years: new competitors have emerged, huge amounts have been invested in state-of-the-art production plants, and the shale-gas boom in the US is transforming industry structures. With the market environment changing so rapidly, MaterialScience will need to find answers and take appropriate measures to remain ahead of the competition. These changes will require substantial investment in capacity expansion projects, process improvements, and more active portfolio management.

Now, keeping both businesses in one Bayer Group company poses a tremendous challenge for the MaterialScience business because it always has to compete with the Life Science businesses for investment funding, and those businesses offer consistently better returns. That’s why we decided to separate MaterialScience from Bayer and make it an independent company.

We are convinced that – equipped with more flexibility and independent access to capital – MaterialScience can successfully develop its portfolio and emerge as an even stronger player in the future.


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We believe MaterialScience is in an excellent position from the start, and managing its own business outside the Group will enable the new company to build on its strong fundamentals and leverage its competitive position.

MaterialScience is a leader in its markets. Thanks to significant investment in recent years, it can benefit from one of the most modern, state-of-the-art global production networks and from the cost leadership and customer proximity this network provides.

All this now puts MaterialScience in a position to operate as an entity separate from the Bayer Group. There are several reasons why its business can be better leveraged in a stand-alone scenario:

MaterialScience would have the ability to further shape and develop its portfolio. The planned capital-market exit would allow for autonomous funding to finance imperative investment needs. In an independent setting, our MaterialScience colleagues would have the opportunity to develop a culture that optimally fits with their business. Business processes and incentive systems could be tailored to steer the business as efficiently as possible and bring the new company more in line with its industry peers in this respect.

The planned capital-market exit is intended to put MaterialScience in a position in which the business can create long-term value, for all its stakeholders.

Let me now briefly explain how we anticipate to structure and time the capital-market exit from our side.


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We expect the exit to take place during the next 12 to 18 months. The exact timing and structure of the exit will be decided at a later stage; both will depend on future business- and capital-market environments.

During the remainder of this year and into next year, we will prepare and execute the legal carve-out of the MaterialScience business. We will draw up pro-forma financial statements for both companies, Bayer HealthCare and CropScience combined, and MaterialScience New – and have them audited. We will also design the detailed company set-up for MaterialScience to ensure it is fully sustainable as a separate entity.

We expect to use any potential proceeds mainly for investing in the further development of our Life Science businesses and / or for reducing net debt so that we deleverage the balance sheet following our recent acquisitions of Algeta and Merck & Co. Consumer Care.

Please be assured that all of our businesses will continue to operate as normal while we are preparing for the capital-market exit.


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Both entities are expected to be very significant players in their respective markets.

The companies of the future Bayer Group had pro-forma sales of approximately 29.3 billion Euro and an EBITDA margin pre-special items of 24.8 percent in 2013. They will employ nearly 99,000 people, including about 29,500 in Germany.

Following the intended flotation, MaterialScience will generate global sales of approximately 11.3 billion Euro, based on pro-forma 2013 figures, and an EBITDA margin pre-special items of 9.1 percent. The new company is planned to have a global workforce of roughly 16,800, including about 6,500 in Germany.


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Ladies and gentlemen,

It was important to us from the start to give the employees of the future Bayer and MaterialScience companies the security they need to accept and actively support the coming changes. We therefore discussed our plans with the employee representatives from an early stage in order to agree on an early extension of the existing agreement to safeguard employment in Germany that will apply to both companies.

I am pleased that we and the employee representatives on the Supervisory Board of Bayer AG have succeeded in issuing a joint statement. We have agreed to extend the existing employment pact by a further five years. This means there will be no dismissals for operational reasons before the end of 2020.

In the new employment pact we also want to continue many tried-and-tested arrangements and tools from the previous agreements. For example, we intend to maintain vocational training at a high level in both companies and create perspectives for young people. At the same time we have committed to continued investment in the coming years at the German sites of both companies.

It is our firm intention to keep the number of employees worldwide and in Germany stable in the coming years.


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To sum up: We are convinced that today’s strategic decision will benefit both businesses and enable them to create value in the long term.

Bayer will be an Innovation and Life Science company that is recognized for 150 years of success in science and innovation, and on which we can continue to build. Our Life Science businesses operate in markets that are attractive in terms of growth and profitability. We will leverage our broad product portfolio along with the strong brand reputation and focus our entire management team on the successful development of the Life Science businesses.

MaterialScience will be at a clear advantage as it sets about leveraging its competitive edge outside the Bayer Group. Strengthened by the significant investments over the last years, the business will have the know-how for successful operation as a separate company. As Europe’s fourth largest chemicals company, and with autonomous access to capital to fulfill its investment needs, MaterialScience New will continue its operations as a market leader in high-tech polymers under new ownership.

That concludes my remarks. We will now be happy to take your questions.


Forward-Looking Statements
This release may contain forward-looking statements based on current assumptions and forecasts made by Bayer Group or subgroup management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.