Economics

Bayer was successful in 2009 in difficult circumstances: earnings before interest, taxes, depreciation and amortization (EBITDA) before special items came in at €6.5 billion, the third-highest level in our history. However, that was 6.6 percent lower than in 2008. The operating result (EBIT) was diminished by a number of special items totaling €766 million. These chiefly related to the integration of Schering, restructuring and litigation.

Group sales declined in 2009 by 5.3 percent to €31.2 billion. As expected, sales trends differed in the three subgroups. HealthCare lifted its sales by 3.8 percent in nominal terms to almost €16.0 billion. CropScience gained market share and grew sales by 2.0 percent to €6.51 billion. MaterialScience was severely impacted by the global financial and economic crisis, and sales declined 22.8 percent to €7.5 billion.

Stockholders benefited from last year’s robust overall business performance. Bayer paid an unchanged dividend of €1.40 per share, giving a payout ratio of 38.5 percent of core earnings per share.

Further key data can be found here and in the Annual Report 2009.

As an inventor company, Bayer stands for research and development. Innovation is vital for the future of the company. With this in mind, we maintained our commitment to research and innovation despite the economically challenging environment. In 2009, we invested €2.75 billion in research and development (R&D), more than ever before, and more than any other company in the German chemical and pharmaceutical industry. Our R&D budget was 3.5 percent higher than in the previous year and amounted to 8.8 percent of sales.

Research has always been a driving force of the Bayer Group and we will strive to continue our high level of research in the future. Our R&D budget is expected to total some €2.9 billion in 2010. .

We currently have some 12,400 people employed in R&D. Their work is supplemented by an international network of leading universities, public research institutes and partner companies.

Our open innovation approach to research plays an increasingly important role. Projects are undertaken in collaboration with a range of partners from all stages in the value-added chain. Such research alliances are supported by public funding, thus facilitating the entrepreneurial decision to invest in risky development projects. Overall, Bayer was involved in 80 research alliances in Europe in 2009, for which it received public funding amounting to €12 million. For example, Germany’s Federal Ministry of Education and Research supports the commitment of Bayer MaterialScience and Bayer Technology Services to the innovation alliance Carbon Nanotubes Inno CNT. This initiative brings together more than 80 highly specialized small and mid-sized companies, large industrial corporations, scientific institutions and a large number of universities. The objective is to support the development and use of carbon nanotubes (CNT). Findings from 2009 pave the way to raise the energy efficiency of many products.

Reliable global protection of intellectual property is essential for an inventor company like Bayer because intellectual property is vital for innovation. Without effective global patent protection, companies like Bayer would have no way of recouping the substantial amounts they spend on research into new solutions. This would eliminate the commercial incentive and funding for further innovation. Patented products and technologies account for around 40 percent of the sales generated by each of our three subgroups. We therefore vigorously defend our intellectual property.

Since the end of 2008, Bayer has been engaged in a dispute with the Drug Controller General of India (DCGI), which processed a registration application submitted by an Indian company for a generic version of our cancer drug Nexavar® despite valid patent protection because, unlike Europe and the United States, India does not recognize protection of registration documents. Before expiry of the patent, Bayer would have to take out a court injunction against every single distributor to prevent marketing of this me-too product even though it infringes patent protection. That would be extremely expensive and time-consuming. And we could make better use of those resources.

Innovations are essential for the future of our company. Indeed, since innovative products and services are the key drivers of sustainable growth at an inventor company, they are at the heart of our corporate and sustainability strategy. Focused development of new products that strengthen our core businesses is particularly important. We therefore strive for constant renewal and expansion of our product portfolio and endeavor to optimize our production processes. Since our research and development activities are closely aligned to market needs, they are subject to a continuous process of adjustment. Our subgroups and service companies contribute their specific know-how and utilize synergies, for example in interface technologies such as nanotechnology and biotechnology. Areas of innovation that are not central to the subgroups’ areas of business are developed by Bayer Innovation GmbH in cooperation with the subgroups and external partners such as universities, start-up initiatives or other companies.

We aim to create a dynamic and sustainable culture of innovation that is based on our strengths in research and development and is constantly enriched by new ideas. Triple-i – Inspiration, Ideas, Innovation – was introduced in 2006 to encourage Bayer employees worldwide to submit ideas for possible new products and thereby help to strengthen the company’s innovative capability. So far, more than 10,000 suggestions have been submitted and the first products have already been commercialized. In 2009, Triple-i had a threefold focus: a drive to find ideas to improve marketing of the Supradyn nutritional supplement, the “Womanology” campaign for new women’s health products and services, naturally including the areas of contraception, pregnancy and gynecological therapies, and a Triple-i China campaign.

As an international company, Bayer supports economic and social development in many parts of the world. As an employer, fair remuneration and pension and health care plans improve the social security of employees at our sites and strengthen local purchasing power. In 2009, our personnel expenses and expenses for pension plans and pension obligations amounted to €23,707 million. We also make a contribution to the common good through our tax payments.

Our procurement volumes are also a significant factor in the development of many regions. Bayer sources goods and services totaling some €13.7 billion from around 87,000 suppliers in around 100 countries. Roughly 14 percent of the total is for purchases made in non-OECD countries.

We actively support local development in many parts of the world. For example, Bayer CropScience facilitates direct market access for farmers in 15 villages in the Indian state of Karnataka in collaboration with the Indian commodity futures exchange and the Indian post office, thus cutting out middlemen. An employee funded by this project provides the farmers, many of whom cannot read and write, with information from specialized websites such as those operated by the commodities exchange. Post offices, which all have computers, are used to distribute information to the farmers, for example on current market prices for crops. This gives farmers better access to the market, enabling them to sell their crops where they obtain the highest prices, so a higher proportion of value-added remains in their villages.

At our CHEMPARK site in Dormagen, Germany, we are planning to invest €150 million in the construction of a new high-tech production facility for toluene diisocyanate (TDI). Capacity will be 300,000 metric tons p.a. and the facility will replace the present plants in Dormagen and Brunsbüttel. The new facility will be based on innovative, patented TDI process technology that cuts energy requirements by up to 60 percent and uses 80 percent less solvent.

The area occupied by the CHEMPARK sites in Leverkusen, Dormagen and Krefeld-Uerdingen in Germany totals some 11 km_². More than 70 manufacturing, research and service companies operate from these three CHEMPARK sites. Over 45,000 people work at these locations, which are responsible for one-third of chemical production in the German state of North Rhine-Westphalia. Securing the ongoing development of these sites by attracting new companies is one of the main tasks of Currenta, which manages and operates CHEMPARK. A partnership agreement has now been signed with Nanjing Chemical Industry Park, one of the three largest chemical and industrial parks in China. The aim is to share information and experience and step up site marketing. This is the world’s first cooperation between two chemical parks.

Lawful and responsible conduct is mandatory for all employees in the Bayer Group and we do not tolerate infringements of the law. This is set out in our Corporate Compliance Policy, which contains a strict ban on corruption and anti-competitive practices. It specifically fosters the creation and safeguarding of fair and respectful working conditions and contains a clear commitment to respect intellectual property rights. It also forms the basis for our sustainability principles. Corporate Auditing reviews the effectiveness of the Corporate Compliance Policy at regular intervals on behalf of the Group Compliance Committee.

The Corporate Compliance Policy brochure is available in 38 languages and compliance information is published in the intranet Group-wide in German, English, French and Spanish. Here, employees can also find details of how to contact compliance officers, together with the phone numbers of local compliance hotlines, which are organized either nationally or regionally. In countries where we have not been able to set up a local compliance hotline for legal or organizational reasons, this function is fulfilled by ombudsmen or compliance officers.

A web-based training program, “Corporate Compliance Basics,” has been developed to accompany the Corporate Compliance Policy, which was updated at the end of 2008. The first group of around 900 employees from two of our German companies has already completed this training program and roll-out within the Group will continue in 2010. In parallel with this, we will be continuing our Group-wide employee training sessions on compliance to bring the importance of the issue home to employees.

Every Bayer employee is required to report any violation of this policy. The only exception is in France, where this reporting requirement is not applicable due to the nature of national law. In the event of proven violation of the compliance policy, the consequences range from a reprimand to dismissal, and may also include changes in business processes. In 2009, our global compliance hotline and e-mail address registered 57 reports – 27 from Germany and 30 from other countries. 43 of these were received by e-mail, including 19 anonymously, and 14 were phone calls, 11 of which were anonymous. All reports were investigated by the responsible compliance officers. In most cases where the investigations have been completed, no infringement of compliance principles has been found.

In Germany, each subgroup and service company has a compliance committee and there is at least one compliance officer and often a local compliance committee in every country where we operate. In April 2009, a new Group Directive on Compliance Organization came into effect. This sets out the clear and binding responsibilities of the compliance officers, defines reporting lines and integrates the established hotline system. In connection with this new regulation, in 2009 we introduced a standardized training concept for our compliance officers, covering the responsibilities associated with this function, and held our first Compliance Officer Training Workshop in September. The workshops, which also aim to foster networking between compliance officers and the creation of a Group-wide compliance community, will be continued in 2010.

Compliance officers are also expected to become more involved in verifying and approving payment instructions. To support this, we issued a procedure on verifying payment transactions in 2009. Payments to external parties are checked by the accounting departments from a range of viewpoints. In cases of doubt, the matter should be passed on to the responsible compliance officer, who will then decide whether to approve or halt the payment.

In 2010, we plan to introduce a global database where local compliance officers will be required to enter compliance issues that are drawn to their attention and investigated. In parallel with the introduction of this tool, a Group-wide regulation will be issued defining how to conduct investigations when suspected infringements of compliance rules are reported.

To anchor compliance even more firmly at senior management level, an initiative to integrate compliance into performance management for Group executives (members of the Group Leadership Circle) was introduced in 2009. From 2010, a compliance target will be included in the performance objectives agreed with every executive and taken into account in their annual appraisal. They are required to compile an overview of the potential risks in their area of responsibility, prepare and implement a risk limitation plan and report regularly on its progress. Systematic violation of the law in their area of responsibility that has damaged the Bayer Group can have serious implications for executives if suitable measures could have prevented them from occurring.

Politics and legislation play a key role in shaping the conditions in which we operate. As a global company, we want to actively contribute our expertise and participate in the political decision-making process. We see lobbying as an important and legitimate way of doing this.

We have set clear rules for these activities. These are applicable for all employees and consultants of the Bayer Group and are set out in a Group-wide Code of Conduct for Responsible Lobbying, which was issued on January 1, 2009. Since 2005, there has been a mandatory directive covering the conditions under which German employees may exercise public and voluntary offices.

To ensure transparency, Bayer was one of the first companies in the chemical and pharmaceutical sector to be entered in the European Commission’s lobby register and discloses the relevant costs of its lobby work at E.U. level (€1.5 million in 2009). We are expecting a similar initiative in Germany and would enter the company in a German register if one were to be introduced.

In keeping with its directives, Bayer does not make any direct donations to political parties, related institutions, politicians or candidates for political office. However, associations to which we belong make donations on their own initiative, in compliance with the relevant statutory regulations, especially laws on party political activity. For example, the German Chemical Industry Association (VCI) makes donations to political parties on behalf of member companies. The amounts donated and their distribution among the parties are determined by the Executive Board of the VCI. In the United States, individual employees utilize the opportunity to support candidates for parliamentary office by making private donations to the Bayer Corporation Political Action Committee (BayPac). In 2009, donations totaling US$216,500 were made to various candidates in federal and state elections.

Within the Bayer Group, uniform communication with political decision-makers is coordinated by the Community Council for Politics, which is responsible for defining the focus and priorities of the company’s political affairs activities. This includes Group-wide issues such as the newsletter on research at our German sites, entries in the lobby register and subgroup-specific issues.

Key interfaces are our liaison offices in Berlin, Brussels, Washington and Beijing. Bayer collaborates closely with national and international industry associations on key political plans in the interests of a consensus-based approach. We also maintain close contact with other stakeholder groups in society, for example in the environmental and health care areas. Good collaboration with local initiatives and organizations close to our sites is also important to us.

Business operations necessarily involve opportunities and risks. Effective and proactive management of opportunities and risks is therefore a key factor in maintaining the company’s value over the long term. In the Bayer Group, the management of opportunities and risks forms an integral part of the Group-wide corporate governance system. Key elements of the opportunity and risk management system are the planning and controlling process, Group regulations and the reporting system. The qualitative and quantitative assessments of the opportunities and risks used to define the strategy of the business entities and regions are updated at regular conferences on business development, and targets and necessary actions are agreed upon.

The principles of the Bayer Group’s risk management system are set forth in a Group directive. Our subgroups and service companies and the organizational units at the holding company have named risk officers at top management level and risk management coordinators to ensure the efficiency of the risk management system.

Corporate Auditing is responsible for coordinating Group-wide identification and documentation of risk factors and for ongoing development of the risk management system. The effectiveness of the risk management system is reviewed by internal auditors at regular intervals. In addition, the external auditor of the Annual Report assesses the risk management system as part of the year-end annual audit.

In 2009, we continued to develop and optimize our established risk management processes and our Group Risk Management Directive to take account of current circumstances. We regularly enter and evaluate internal and external risks in a database. The criteria for identifying and evaluating risks are set out in a procedure (BayRisk Instruction), which has also been updated.

Bayer has production facilities in more than 100 countries, some of which could be at increasing risk from the consequences of climate change, such as floods and tornadoes. An emergency response system (Bayer Emergency Response System, BayERS) to protect employees, the environment and production facilities is therefore an obligatory element in the integrated HSEQ management systems at our production sites. The basis for this is set forth in a procedure on crisis management in the Bayer Group.

In 2009, Bayer HealthCare (BHC) published its Directive on Enterprise Risk Management outlining its risk management process for production facilities. Its purpose is to ensure timely identification of potential risk factors in order to prevent them impacting the supply of our products to patients and minimize the potentially adverse consequences for the company. At all BHC production sites, potential risks are recorded and assessed and – where necessary – action is initiated. Included are risks that could affect production, the fields of health, safety, environment and quality (HSEQ), procurement and potential natural disasters. The globally standardized methodology provides a transparent and uniform overview of risks as a basis for deciding on any necessary counteraction.

Moreover, in 2009 Bayer HealthCare issued special directives and contingency plans to prioritize the medicines to be produced, their delivery and the protection of employees in the event of a pandemic.

Bayer participates in European trading in emissions allowances. Scenario-based calculations suggest that we will have to bear substantial additional expenses up to 2012 for rising energy prices and the purchase of emissions allowances, which could amount to up to 1 percent of EBITDA according to current calculations. In the United States, where we operate several power plants, Bayer Corporation voluntarily participates in trading in emissions allowances on the Chicago Climate Exchange (CCX).

As an exporter, Bayer is subject to a wide range of foreign trade regulations. Our Corporate Compliance Policy specifically requires employees to observe these laws. This calls for an efficient organization that ensures compliance with these regulations and provides for corresponding monitoring measures. Bayer’s internal organization comprises export officers, export control officers and an export control department. The organizational framework is set out in the Group Directive on Organization of Export Control in the Bayer Group. Practical information on handling international trade controls is contained in a manual drawn up by Bayer Business Services in consultation with the subgroups and service companies.

Legal proceedings are pending against Bayer in several countries and some cases were concluded in 2009. As a global company with a diverse business portfolio, the Bayer Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law and environmental protection. The outcome of any current or future proceedings cannot be predicted with certainty. It is therefore possible that legal or regulatory judgments could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect our revenues and earnings. Further information on product-related lawsuits, antitrust litigation and patent disputes affecting our company can be found in the Annual Report 2009.

More and more investors are showing an interest in the extent to which companies integrate ecological and social aspects into their strategies and business activities. That is particularly true of long-term investors such as pension funds.

Bayer stock is included in a variety of sustainability indices and funds. For instance, we have been listed in the DOW Jones Sustainability Index (DJSI) World since its establishment in 1999. The analysts at the SAM rating agency have given Bayer consistently good marks on environmental aspects, for example for its contribution to climate protection, and for the overall transparency of its reporting. Moreover, Bayer once again scored more highly than in the previous year on anti-corruption and corporate governance activities.

In September 2009, we were included in the Carbon Disclosure Leadership Index (CDLI) initiated by the Carbon Disclosure Project (CDP) as the world’s best company. This accolade was based on our sound and transparent reporting on our climate strategy and greenhouse gas emissions. Renewed inclusion in this index makes Bayer the only European company in the chemical and pharmaceutical sector to be included for the fifth time in succession in the CDLI.

Our successful performance in these and other sustainability ratings is an acknowledgement of our business strategy and our commitment to sustainable development.