Financial Statements
Explanatory Notes
Accounting policies
Pursuant to Section 315a of the German Commercial Code, the consolidated interim financial statements as of September 30, 2011 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 2010 fiscal year, particularly with regard to the main recognition and valuation principles.
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 for Major Currencies | [Table 26] |
|---|
| | | Closing Rate | Average Rate |
| 1 € / | | Dec. 31, 2010 | Sep. 30,
2010 | Sep. 30,
2011 | First Nine
Months 2010 | First Nine
Months 2011 |
| ARS | Argentina | 5.31 | 5.41 | 5.67 | 5.11 | 5.74 |
| BRL | Brazil | 2.23 | 2.33 | 2.47 | 2.34 | 2.29 |
| CAD | Canada | 1.33 | 1.41 | 1.41 | 1.36 | 1.37 |
| CHF | Switzerland | 1.25 | 1.33 | 1.22 | 1.40 | 1.23 |
| CNY | China | 8.82 | 9.13 | 8.62 | 8.94 | 9.14 |
| GBP | United Kingdom | 0.86 | 0.86 | 0.87 | 0.86 | 0.87 |
| JPY | Japan | 108.65 | 113.68 | 103.79 | 117.43 | 113.12 |
| MXN | Mexico | 16.55 | 17.13 | 18.59 | 16.69 | 16.90 |
| USD | United States | 1.34 | 1.36 | 1.35 | 1.31 | 1.41 |
The most important interest rates applied in the calculation of actuarial gains and losses from pension obligations are given below:
| Discount Rate for Pension Obligations | [Table 27] |
|---|
| | Dec. 31, 2010 | June 30, 2011 | Sep. 30, 2011 |
| | % | % | % |
| Germany | 4.90 | 5.10 | 4.70 |
| United Kingdom | 5.45 | 5.55 | 5.10 |
| United States | 5.20 | 5.30 | 4.40 |
Segment reporting
In contrast to the presentation in the Consolidated Financial Statements for 2010, the CropScience subgroup is now treated as a single reportable segment. This adjustment resulted from organizational changes effected to more closely align Crop Protection and BioScience and integrate the steering of these businesses. The operating segments Crop Protection/BioScience and Environmental Science show a similar long-term economic performance, have comparable products, production processes, customer industries and distribution channels, and operate in the same regulatory environment; they were therefore combined into a single reportable segment.
The following table contains the reconciliation of the operating result (EBIT) of the segments to income before income taxes of the Group.
| Reconciliation of Segments' Operating Result to Group Income Before Income Taxes | [Table 28] |
|---|
| | 3rd Quarter 2010 | 3rd Quarter 2011 | First Nine Months 2010 | First Nine Months 2011 |
| | € million | € million | € million | € million |
| Operating result of segments | 610 | 1,151 | 2,823 | 3,670 |
| Operating result of Corporate Center | (46) | (52) | (144) | (150) |
| Operating result (EBIT) | 564 | 1,099 | 2,679 | 3,520 |
| Non-operating result | (267) | (224) | (772) | (608) |
| Income before income taxes | 297 | 875 | 1,907 | 2,912 |
| 2010 figures restated |
Changes in the Bayer Group
Changes in the scope of consolidation
As of September 30, 2011, the Bayer Group comprised 301 fully or proportionately consolidated companies (December 31, 2010: 291 companies). Four joint ventures were included by proportionate consolidation according to IAS 31 (Interests in Joint Ventures) (December 31, 2010: three joint ventures). In addition, four associated companies were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates) (December 31, 2010: five associated companies).
Acquisitions and divestitures
Acquisitions
On January 7, 2011, we acquired the New Zealand-based Bomac group, which supplies a broad range of animal health products for the livestock sector. The net purchase price of €73 million pertained mainly to customer relationships and goodwill. Bomac had sales of €30 million in the first nine months of 2011.
On April 1, 2011, CropScience acquired Hornbeck Seed Company, Inc., United States. Hornbeck supplies soybean, rice and wheat varieties in the southern United States and has an in-house soybean breeding program and a proprietary soybean germplasm. The net purchase price paid amounted to €30 million and pertained mainly to research and development projects and goodwill. Hornbeck had sales of €6 million since the acquisition date.
On August 31, 2011, HealthCare acquired Pathway Medical Technologies, Inc., United States, through its subsidiary MEDRAD, Inc. Pathway supplies products to mechanically remove plaques from the arteries. The net purchase price of €88 million pertained mainly to patents and goodwill. Pathway had sales of €1 million since the acquisition date.
In connection with the acquisition of Athenix Corporation, United States, in November 2009, milestone payments were agreed that led to a disbursement of €25 million in the first quarter of 2011.
The effects of these and other, smaller transactions and of purchase price adjustments pertaining to previous years’ transactions on the Group’s assets and liabilities as of the respective acquisition or adjustment dates are shown in the table. Net of acquired cash and cash equivalents, they resulted in the following cash outflow:
| Acquired Assets and Assumed Liabilities | [Table 29] |
|---|
| | Fair value |
| | € million |
| Goodwill | 98 |
| Other intangible assets | 82 |
| Property, plant and equipment | 10 |
| Other noncurrent assets | (2) |
| Cash and cash equivalents | 5 |
| Other current assets | 34 |
| Financial liabilities | (12) |
| Other liabilities | (13) |
| Deferred taxes | (2) |
| Net assets | 200 |
| Non-controlling interest | 1 |
| Net purchase price | 201 |
| Acquired cash and cash equivalents/financial liabilities | 7 |
| Liabilities for future payments | 31 |
| Net cash outflow for acquisitions | 239 |
The total purchase price of acquisitions made in the first nine months 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.
Acquisitions after the closing date
On October 6, 2011, CropScience acquired the oilseed rape business of the mid-size seed company Raps GbR, Germany. This mainly includes oilseed rape varieties that are already on the market and the company’s breeding material. The agreed purchase price of €27 million pertains mainly to technologies, inventories and goodwill.
Divestitures
No divestitures were made in the first nine months of 2011. We received further revenue-based payments of €80 million in the first nine months of 2011 in connection with the transfer of the hematological oncology portfolio to Genzyme Corp., United States, effected in May 2009.
Assets held for sale
On March 31, 2011, an exclusive agreement was signed between CropScience and Agile Real Estate Pvt. Ltd., India, concerning the sale of a parcel of land in Thane, India. On this date we received an advance payment of €41 million. The land will be transferred at a later date subject to receipt of the necessary regulatory approvals.
HealthCare
Product-related litigations
Yasmin™/YAZ™: The number of lawsuits pending in the United States and served upon Bayer was about 10,400 as of October 8, 2011. Plaintiffs allege that they have suffered personal injuries, some of them fatal, from the use of Bayer’s oral contraceptive products Yasmin™ and/or YAZ™ or from the use of Ocella™ and/or Gianvi™, generic versions of Yasmin™ and YAZ™, respectively, marketed by Barr Laboratories, Inc. in the United States. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs. Bayer is insured against product liability risks to the extent customary in the industry. Going forward and depending on further developments, the company’s global liability insurance program may not be sufficient or fully applicable to cover all expenses and potential liability (if any) resulting from this litigation.
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. In 2010, the United States Court of Appeals for the Second Circuit (New York) 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. In March 2011, the United States Supreme Court denied plaintiffs’ request for certiorari. This ends the federal litigation. Further cases are pending before various state courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously.
Patent disputes
Blood glucose monitoring devices: In 2005, Abbott Laboratories commenced a patent infringement lawsuit against Bayer. The court and, thereafter, the U.S. Court of Appeals for the Federal Circuit held in favor of Bayer, finding that Abbott’s patents inter alia were invalid or not infringed. But, on one aspect of the decision with respect to one of the patents, the Court of Appeals granted a rehearing which took place in November 2010. In May 2011, the Court of Appeals vacated the lower court’s decision in part and remanded the case to the lower court for further proceedings. The favorable findings of non-infringement or invalidity of Abbott’s patents are not affected by the Court of Appea’'s May decision or by these further proceedings. Bayer believes the risks remaining in this litigation are no longer material.
Roche commenced a patent lawsuit against Bayer in 2007, which later proceeded in arbitration. The proceedings and findings of the arbitration are confidential. At this time, Bayer does not believe that the outcome of the arbitration will have a material effect on the Bayer results in 2011.
Yasmin™/Yasminelle™/YAZ™: In July 2011, a board of appeal of the European Patent Office revoked a formulation patent for Yasmin™, Yasminelle™ and YAZ™. Hexal Pharmaforschung GmbH filed an opposition against Bayer’s patent in 2004. In 2006, an opposition division of the European Patent Office rejected the opposition. The latest ruling follows an appeal by Hexal of the 2006 decision.
Further legal proceedings
Kogenate™: A dispute with Recoly Holding NV and its affiliate Zilip Pharma BV relates to the termination by Bayer of the KG-Lip project (longer acting Factor VIII). Bayer is seeking a declaratory judgment by an arbitration panel that it has exerted best commercial efforts to develop the product and that it is not contractually bound to pay a termination fee. Recoly has counterclaimed for damages.
Regorafenib: In 2009, Onyx Pharmaceuticals, Inc. filed a complaint in the U.S. alleging that the compound regorafenib, which is under development by Bayer in cancer indications, is a compound to which Onyx has rights under a collaboration agreement. Under this agreement, the parties jointly developed Nexavar™, a drug product to treat kidney and liver cancer. Onyx also claimed damages with respect to Nexavar™. In October 2011, the parties settled their dispute. While Bayer maintains ultimate decision-making authority for regorafenib, Onyx will receive a royalty on sales of regorafenib in oncology indications. For Japan, the royalties on Nexavar sales were discharged in exchange for a one-time payment.
CropScience
Product-related litigations
Proceedings involving genetically modified rice (LL RICE): As of October 11, 2011, Bayer was aware of a total of approximately 425 lawsuits, involving about 11,800 plaintiffs, pending in U.S. federal and state courts against several Bayer Group companies in connection with genetically modified rice in the United States. Plaintiffs allege that they have suffered economic losses after traces of genetically modified rice were identified in samples of conventional long-grain rice grown in the U.S.
In March 2011, Bayer tried its seventh case in front of U.S. juries. This case involved a large U.S. rice mill. The jury at an Arkansas state court awarded US$11.8 million in compensatory and US$125 million in punitive damages. In June 2011, the Arkansas County Circuit Court’s ruling on Bayer’s post-trial motion reduced the amount of punitive damages to the statutory cap of US$1 million.
Bayer disagrees with the present findings of liability.
One trial originally scheduled for April 2011 in a state court in Arkansas, involving one farming operation comprising nine plaintiffs, was settled. The settlement calls for the plaintiffs to receive US$636,000 collectively.
Without acknowledging liability, in July 2011 Bayer reached settlement agreements with two groups of attorneys representing U.S. long-grain rice growers in the LL RICE litigation. One agreement involves those cases that are a part of the federal multi-district litigation; the other involves those cases in state courts. Under these agreements, Bayer will pay in total up to US$750 million to resolve claims submitted by growers. The settlement program is open to all U.S. farmers who had been growing long-grain rice during the period 2006 through 2010. The settlements are contingent on the participation of a sufficient number of growers to represent 85 percent of U.S. long-grain rice acreage during that time frame. Rice growers had a 90-day period in which to submit their claims. The deadline was due to expire in October 2011, but was extended for 40 days. The claims submitted are being reviewed, and deficiencies in the information submitted will have to be addressed. This process could take 30 to 60 additional days. Thus, Bayer does not expect to know the actual participation level before November 2011.
Two cases originally scheduled for trial in August 2011 involving approximately 25 farmer plaintiffs have been voluntarily withdrawn and will be settled at the value determined by the settlement program.
Seventeen cases remain pending with business entities that are not a part of the settlement program. The company is hopeful that many of these cases can also be settled. However, Bayer intends to continue to defend itself vigorously in all cases in which reasonable resolutions are not possible and to continue the appeals process regarding previous verdicts in cases where no settlements have been reached.
Bayer has established appropriate provisions for the settlement program as well as for anticipated legal and defense costs.
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.
Leverkusen, October 25, 2011
Dr. Marijn Dekkers | 
Werner Baumann |
| |
Prof. Dr. Wolfgang Plischke | 
Dr. Richard Pott |