Financial Statements
Explanatory Notes
Accounting policies
Pursuant to Section 315a of the German Commercial Code, the consolidated interim financial statements as of September 30, 2010 have been prepared in condensed form according to the International Financial Reporting Standards (IFRS) – including IAS 34 – of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date.
Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2009 fiscal year, particularly with regard to the main recognition and valuation principles. In the statement of cash flows, interest received on interest rate swaps, and cash outflows for the purchase of additional interests in subsidiaries, are included in financing cash flow. The prior-year figures are restated accordingly.
Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations.
The exchange rates for major currencies against the euro varied as follows:
| Exchange Rates of Major Currencies | [Table 26] |
|---|
| | | Closing rate | Average rate |
| €1 | |
Dec. 31,
2009 |
Sep. 30,
2009 |
Sep. 30,
2010 | First Nine
Months
2009 | First Nine
Months
2010 |
| ARS | Argentina | 5.47 | 5.63 | 5.41 | 5.06 | 5.11 |
| BRL | Brazil | 2.51 | 2.62 | 2.33 | 2.84 | 2.34 |
| CAD | Canada | 1.51 | 1.57 | 1.41 | 1.59 | 1.36 |
| CHF | Switzerland | 1.48 | 1.51 | 1.33 | 1.51 | 1.40 |
| CNY | China | 9.84 | 10.00 | 9.13 | 9.33 | 8.94 |
| GBP | U.K. | 0.89 | 0.91 | 0.86 | 0.89 | 0.86 |
| JPY | Japan | 133.16 | 131.07 | 113.68 | 129.51 | 117.43 |
| MXN | Mexico | 18.92 | 19.75 | 17.13 | 18.62 | 16.69 |
| USD | United States | 1.44 | 1.46 | 1.36 | 1.37 | 1.31 |
The most important interest rates applied in the calculation of actuarial gains and losses from pension obligations are given below:
| Discount Rates of Pension Obligations | [Table 27] |
|---|
| | Dec. 31, 2009 | June 30, 2010 | Sep. 30, 2010 |
| | % | % | % |
| Germany | 5.5 | 4.8 | 4.2 |
| U.K. | 5.7 | 5.3 | 5.0 |
| United States | 5.8 | 5.2 | 4.9 |
Segment reporting
The following table contains the reconciliation of the operating result (EBIT) of the operating segments to income before income taxes of the Group.
| Reconciliation of Segment Result | [Table 28] |
|---|
| | 3rd
Quarter
2009 | 3rd
Quarter
2010 | First Nine
Months
2009 | First Nine
Months
2010 |
| | € million | € million | € million | € million |
| Operating result of reporting segments | 694 | 602 | 2,781 | 2,902 |
| Operating result of Corporate Center | (48) | (46) | (141) | (144) |
| Operating result [EBIT] | 646 | 556 | 2,640 | 2,758 |
| Non-operating result | (262) | (267) | (888) | (772) |
| Income before income taxes | 384 | 289 | 1,752 | 1,986 |
Changes in the Bayer Group
Changes in the scope of consolidation
As of September 30, 2010, the Bayer Group comprised 290 fully or proportionately consolidated companies (December 31, 2009: 302 companies). Four joint ventures were included by proportionate consolidation according to IAS 31 (Interests in Joint Ventures). In addition, five associated companies were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates).
Acquisitions and divestitures
The total cost of acquisitions made in the first three quarters of 2010 was €37 million. In addition to smaller acquisitions, MaterialScience acquired Artificial Muscle, Inc., Sunnyvale, California, United States, for €21 million on March 9, 2010. Artificial Muscle, Inc. is a technology leader in the field of electroactive polymers for the consumer electronics industry. The purchase price pertained mainly to patented technologies and goodwill.
At the end of May 2009, we implemented the strategic alliance with Genzyme Corp., United States, announced on March 31, 2009. In accordance with the agreement signed, we transferred products from our hematological oncology portfolio to Genzyme. In the first three quarters of 2010 this agreement led to a net cash inflow of €69 million, comprising the balance of revenue-based payments received from Genzyme Corp. and taxes paid.
We recorded total income from divestitures of €134 million before taxes in the first three quarters of 2009. The aforementioned agreement with Genzyme accounted for most of this amount. In May 2009, furthermore, we acquired the remaining 49% interest in Berlimed, S.A., Spain, from Juste S.A. Química Farmacéutica (Juste), and in return sold our 51% share of Justesa Imagen, S.A., Spain, to Juste. In addition, the Thermoplastics Testing Center, Krefeld, Germany, was sold to Underwriters Laboratories Inc., United States, in May 2009.
| Earnings Per Share | [Table 29] |
|---|
| | 3rd
Quarter
2009 | 3rd
Quarter
2010 | First Nine
Months
2009 | First Nine
Months
2010 |
| | € million | € million | € million | € million |
| Income after taxes | 249 | 285 | 1,203 | 1,503 |
| of which attributable to non-controlling interest | 0 | 5 | (3) | 5 |
| of which attributable to Bayer AG stockholders (net income) | 249 | 280 | 1,206 | 1,498 |
| | | | | |
| Financing expenses for the mandatory convertible bond, net of tax effects | 0 | 0 | 47 | 0 |
| Adjusted net income | 249 | 280 | 1,253 | 1,498 |
|
Shares |
Shares |
Shares |
Shares |
| Weighted average number of issued ordinary shares | 826,947,808 | 826,947,808 | 792,321,971 | 826,947,808 |
| (Potential) shares (to be) issued upon conversion of the mandatory convertible bond |
0 |
0 |
33,366,875 |
0 |
| Adjusted weighted average total number of issued and potential ordinary shares | 826,947,808 | 826,947,808 | 825,688,846 | 826,947,808 |
|
€ |
€ |
€ |
€ |
| Basic earnings per share | 0.30 | 0.34 | 1.52 | 1.81 |
| Diluted earnings per share | 0.30 | 0.34 | 1.52 | 1.81 |
The ordinary shares issued upon conversion of the mandatory convertible bond on June 1, 2009, were treated as already issued shares. Diluted earnings per share were therefore equal to basic earnings per share even before the conversion.
Legal risks
HealthCare:
Product-related litigations
Trasylol® (aprotinin) is a drug approved for use in managing bleeding in patients undergoing coronary artery bypass graft surgery. As of October 15, 2010, there were approximately 1,280 lawsuits pending in the United States and served upon Bayer on behalf of persons alleging, in particular, personal injuries, including renal failure and death, and economic loss from the use of Trasylol®. Without admission of liability, Bayer has reached settlement agreements with about 290 plaintiffs as of October 15, 2010. Bayer will continue to consider the option of settling individual lawsuits on a case-by-case basis, but will continue to defend itself vigorously against all claims that are not considered for settlement.
HIV/HCV: Numerous actions are pending against Bayer in the United States and other countries seeking damages for plaintiffs resident outside of the United States who claim to have become infected with HIV or HCV (hepatitis C virus) through use of blood plasma-derived therapies provided by Bayer. Additional actions are pending by U.S. residents who claim to have been infected with HCV. In 2009, Bayer and its three co-defendants entered into a settlement agreement with the U.S. law firms representing the vast majority of plaintiffs in the U.S. federal multidistrict factor concentrates litigation. The agreement was subject to conditions that had to be satisfied before the settlement could be completed. The remaining requirement of broad acceptance by the groups of clients represented by these firms has now been met and the settlement is being implemented. Bayer will continue to vigorously defend any claims that are not included in theresolutionprocess,but Bayer believes the legal risks remaining in the HIV/HCV litigation are no longer material.
Yasmin®/YAZ®: The number of lawsuits pending in the United States and served upon Bayer was about 4,800 as of October 15, 2010. The number of Canadian class actions served upon Bayer was 13. Plaintiffs allege to have suffered personal injuries, some of them fatal, from the use of Bayer’s oral contraceptive products Yasmin®, YAZ® and/or Ocella®, a generic version of Yasmin® distributed by Barr Laboratories, Inc. in the U.S. market. Bayer believes that it has meritorious defenses and intends to defend itself vigorously.
Competition law proceedings
Cipro®: Several lawsuits remain pending in the United States in which plaintiffs allege that a 1997 settlement between Bayer and Barr Laboratories, Inc. to end patent litigation concerning the antibiotic drug Cipro violated antitrust laws. The United States Court of Appeals for the Second Circuit (New York) recently affirmed the 2005 ruling of the federal district court dismissing lawsuits brought by direct purchasers of Cipro®. The Second Circuit also has denied plaintiffs´ request for rehearing en banc. It is possible that plaintiffs will seek certiorari before the United States Supreme Court. Further cases are pending before various state courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously.
Patent disputes
Yasmin®: In 2005, Bayer filed suit against Barr Pharmaceuticals, Inc. and Barr Laboratories, Inc. in U.S. federal court alleging patent infringement by Barr relating to the intended generic version of Bayer’s Yasmin® oral contraceptive product in the United States. In 2008, the U.S. federal court invalidated Bayer’s ’531 patent for Yasmin®. In August 2009, the U.S. Court of Appeals for the Federal Circuit affirmed this decision. In May 2010, the U.S. Supreme Court rejected Bayer’s petition for review.
In 2008, Bayer received two notices of an Abbreviated New Drug Application with a Paragraph IV certification (an “ANDA IV”) pursuant to which Watson Laboratories Inc. and Sandoz Inc. each seek approval to market a generic version of Bayer’s oral contraceptive Yasmin® in the United States. Bayer has filed suit against Watson and Sandoz in U.S. federal court alleging patent infringement by Watson and Sandoz for the intended generic version of Yasmin®. In September 2010, the U.S. federal court granted a motion to dismiss Bayer‘s infringement claims against Watson and Sandoz. Bayer will appeal.
YAZ®: In 2007 and 2008, Bayer received notices from Barr Laboratories, Inc. and from two further companies that each company had filed an ANDA IV seeking approval of a generic version of Bayer’s YAZ® oral contraceptive in the United States. In 2008, Bayer and Barr agreed that Bayer will grant Barr a license to market a generic version of YAZ® in the United States starting July 2011. According to this agreement, Bayer will supply Barr with the product for this purpose. In December 2008, Barr was acquired by Teva Pharmaceutical Industries Ltd. In June 2010, Teva Pharmaceutical Industries Ltd. announced that it had commercially launched in the United States Gianvi™, a generic version of YAZ®. The product for Gianvi™ was not supplied by Bayer. Bayer filed a patent infringement suit against Teva Pharmaceutical Industries Ltd., Teva Pharmaceuticals USA, Inc., Barr Pharmaceuticals LLC and Barr Laboratories, Inc. in U.S. federal court claiming thatcertainofBayer’s patents have been infringed. Teva Pharmaceuticals USA, Inc. and Barr Laboratories, Inc. filed a declaratory judgment action in another U.S. federal court seeking a declaration by the court that the patents are invalid and not infringed. Bayer intends to pursue its rights vigorously.
Blood glucose monitoring devices: In 2005, Abbott Laboratories commenced a lawsuit in the United States against Bayer and another party alleging infringement of two of Abbott’s patents relating to blood glucose monitoring devices. In 2008, the court decided in favor of Bayer with regard to both patents. In January 2010, the U.S. Court of Appeals for the Federal Circuit affirmed both decisions, but in April 2010 it granted Abbott’s petition for rehearing. Bayer believes it has meritorious defenses and will continue to defend itself vigorously.
Kogenate®: In 2008, Novartis Vaccines and Diagnostics Inc. and Novo Nordisk A/S commenced a patent infringement suit in the United States alleging that Bayer’s manufacturing and marketing of the recombinant Factor VIII product Kogenate® infringe a patent granted in 2006. In the second half of February 2010, the parties reached a settlement on mutually acceptable terms.
Betaferon®/Betaseron®: In May 2010, Bayer filed a complaint against Biogen Idec MA Inc. in U.S. federal court seeking a declaration by the court that a patent issued to Biogen in 2009 is invalid and not infringed by Bayer‘s production and distribution of Betaseron®, Bayer’s drug product for the treatment of multiple sclerosis. The next day, Biogen Idec MA Inc. filed a complaint against Bayer in the same court alleging that Bayer would infringe the patent through production and distribution of Betaseron® and Extavia®. Betaseron® is manufactured and distributed in the United States by Bayer. Extavia® is also a drug product for the treatment of multiple sclerosis; it is manufactured by Bayer, but distributed in the United States by Novartis Pharmaceuticals Corporation, another defendant in the lawsuit. Bayer does not believe that it has infringed any valid patent and intends to vigorously defend itself against the complaint.
CropScience:
Proceedings involving genetically modified rice (LL RICE): As of October 12, 2010, Bayer was aware of a total of approximately 500 lawsuits, involving about 8,900 plaintiffs, pending in U.S. federal and state courts against several Bayer Group companies in connection with genetically modified rice in the United States. The number of plaintiffs is calculated by totaling the number of plaintiffs identified in the complaints. However, the number of plaintiffs does not allow any conclusions on the number of farming operations involved. U.S. rice farmers often have a number of entities associated with their operations. In some cases just an individual sued, in others all the entities sued. In addition, a partnership and its individual partners are counted separately if they are listed as plaintiffs in the complaints.
In development of the genetically modified rice, field testing was conducted in the United States in cooperation with third parties from 1998 to 2001. The genetically modified rice was never commercialized. Two trials in the multidistrict litigation (MDL) at the U.S. District Court in St. Louis, Missouri, were decided by two juries in December 2009 and February 2010. The juries found that Bayer should pay a total of approximately US$3.5 million in compensatory damages for losses sustained by five farming operations comprising 29 plaintiffs. The juries rejected the farmers’ claims for punitive damages. In a third trial in February 2010, a jury in an Arkansas state court found Bayer liable to one farming operation comprising two plaintiffs for compensatory and punitive damages totaling approximately US$1 million. In a fourth trial in April 2010, a jury in an Arkansas state court found Bayer liable to 11 farming operations comprising 14 plaintiffsforcompensatoryand punitive damages totaling approximately US$48 million. In a fifth trial in July 2010, a jury at the U.S. District Court in St. Louis, Missouri, found Bayer liable in a case involving one farming operation in Louisiana comprising 10 plaintiffs. Compensatory damages were fixed by the jury at approximately US$500,000. Punitive damages were not available under the laws of Louisiana applicable in this case. In a sixth trial in July 2010, a jury in the State Court of Desha County, Arkansas, found Bayer should pay a total of approximately US$946,000 in compensatory damages to five farming operations comprising 36 plaintiffs. The jury rejected the farmer’s claims for punitive damages.
Bayer disagrees completely with the present findings of liability and the awards of compensatory and punitive damages. To the extent it has not already done so, Bayer will appeal the adverse findings.
One trial scheduled for September 2010 in a state court in Arkansas has been continued indefinitely for procedural reasons. The remaining trial this year involving three farming operations comprising eight plaintiffs was settled in October 2010 before the U.S. District Court in St. Louis, Missouri. The settlement calls for the plaintiffs to receive US$290,000 collectively. Additional trials have been scheduled for the year 2011 both in federal court in St. Louis and in state courts.
The facts and the types and amounts of damages claimed differ significantly from case to case. Management believes that the outcomes of these first trials do not allow any direct conclusions on the outcomes of the other cases. The company is willing to discuss with rice growers and other plaintiffs reasonable compensation for economic losses associated with its genetically modified rice without acknowledging liability, but intends to continue to defend itself vigorously in all cases in which resolutions on that basis are not possible.
Bayer has established appropriate provisions, mainly for legal and defense costs and an intended settlement program.
MaterialScience:
MDI: In August 2010, Bayer settled in principle - without admitting liability - the multi-defendant litigation for personal injuries allegedly resulting from exposure to diphenylmethane diisocyanate (MDI) based products used in coal mines. Terms of the settlement agreement are being negotiated. Bayer has taken appropriate accounting measures.
Related parties
Our business partners include companies in which an interest is held, and companies with which members of the Supervisory Board of Bayer AG are associated. Transactions with these companies are carried out on an arm’s-length basis. Business with such companies was not material from the viewpoint of the Bayer Group. The Bayer Group was not a party to any transaction of an unusual nature or structure that was material to it or to companies or persons closely associated with it. Business transactions with companies accounted for in the consolidated financial statements using the equity method, or at cost less impairment charges, mainly comprised trade in goods and services. The value of these transactions was, however, immaterial from the point of view of the Bayer Group. The same applies to financial receivables and payables vis-à-vis related parties.
Changes on the Board of Management
Werner Wenning’s tenure of office as Chairman of the Board of Management of Bayer AG ended on September 30, 2010. He was succeeded as Chairman of the Board of Management by Dr. Marijn Dekkers, who had already been appointed to the Board of Management of Bayer AG effective January 1, 2010.
Leverkusen, October 25, 2010
Dr. Marijn Dekkers | 
Werner Baumann |
| |
Prof. Dr. Wolfgang Plischke | 
Dr. Richard Pott |