Bayer AG - Stockholders' Newsletter Third Quarter 2006

Bayer’s Perspective on Innovation 2006:

Research is key to success

The Bayer Group aims to further strengthen innovation as one of the principal objectives of its corporate strategy. “Research is key to success. We must exploit our potential to the full and consistently translate the results of our research into new products,” said Bayer AG Management Board Chairman Werner Wenning at the press forum “Bayer’s Perspective on Innovation 2006” in Leverkusen. This year the company is investing €1.9 billion in research and development – not including Schering. “This is the biggest R&D budget of any chemical and pharmaceutical company in Germany,” said Wenning.

One area of focus at the Perspective on Innovation forum was the opportunities presented by plant biotechnology. Bayer researcher Marijke van Mansart harvests canola seeds following a cross-breeding procedure.

Bayer’s research activities already result in an average of three new patent applications every working day. In 2005, recently launched products or applications accounted for more than €4 billion of Group sales. The acquisition of Schering AG strengthens Bayer’s research activities particularly in the field of pharmaceuticals. “Never before has the research-intensive pharmaceuticals business accounted for such a large share of Bayer Group sales,” Wenning explained before an audience of 140 journalists from 16 countries. With combined sales of €9.1 billion and a research budget of €1.6 billion (based on 2005 figures), the new Bayer Schering Pharma AG, Germany*, headquartered in Berlin, will be one of Germany’s biggest pharmaceutical companies. It plans to strengthen above all the areas of cardiovascular risk management and oncology.

Bayer’s outstanding developments in pharmaceuticals include the kidney cancer drug Nexavar®, which the company brought to market in the United States – three years faster than the average for a drug product – at the end of 2005. Marketing authorization in the European Union was granted this year. The product’s active ingredient is already at an advanced stage of clinical testing for the treatment of liver, skin and lung cancer. Further examples of progress in pharmaceutical research include the anti-thrombosis drug rivaroxaban and expanded registrations for the oral contraceptive YAZ® and the multiple sclerosis treatment Betaferon®/Betaseron®.

The future of the Bayer CropScience subgroup also depends heavily on its innovative capability. The company has achieved milestones in conventional crop protection in the past. Patent-protected products currently account for more than one third of this subgroup’s sales, and the proportion is set to rise to well over half within the next ten years.

Bayer CropScience plans to boost research spending from roughly €630 million annually at present to about €750 million by 2015. This includes substantial increases for the seed and bioscience businesses.

”Apart from the continued development of crops such as vegetables, cotton, canola and rice, plant biotechnology harbors major potential with respect to many unsolved problems,” Wenning said. “We must not throw away future opportunities in this growth area here in Europe and in Germany,” he went on. But Wenning also cautioned that in order to better exploit the potential of plants, the current genetic engineering law urgently needs to be amended as regards biotechnology.

The research activities of Bayer MaterialScience are focused on new applications, environmentally sustainable production methods and customized solutions.

Last year this subgroup spent more than €250 million on research and development, along with nearly €80 million on joint development projects with its customers. This too is one of the biggest R&D budgets in the industry, corresponding to 3 percent of the subgroup’s sales. The investment is paying off, with new products and applications developed within the past five years currently accounting for more than 20 percent of Bayer MaterialScience’s sales.

At the “Bayer’s Perspective on Innovation” press forum, Management Board Chairman Werner Wenning and Board Research spokesman Dr. Wolfgang Plischke presented a new issue of the Bayer scientific magazine “research”.

Bayer’s materials researchers are focusing in part on nanotechnology, one of the key technologies of the future. Nanotechnology offers endless possibilities, ranging from surfaces that repel dirt through medical applications to coatings that repair themselves following minor damage.

Dr. Wolfgang Plischke, the Bayer Management Board member responsible for research, described numerous innovations of the inventor company Bayer, which he said do not only focus on improving the quality of life. The need for sustainability and environmental protection also plays a central role.

Active ingredients from bioreactors

Bayer Innovation GmbH (BIG) is responsible for developing innovative products and new fields of business outside of the subgroups’ existing core activities. The current focus here is on new ways of treating wounds and the manufacture of active ingredients for drug products using biotechnology. “Every fourth new medicine today is a so-called biopharmaceutical whose active ingredient is produced in bioreactors,” Plischke explained. For example, big subsidiary Icon Genetics uses tobacco plants to produce pharmaceuticals. Said Plischke: “Many new drug products – particularly those used to treat cancer – are what are known as monoclonal antibodies. These proteins can also be produced in plants, as can vaccines.” According to Plischke, Bayer currently possesses the leading technology for plant-made pharmaceuticals. The advantages are much lower costs, more flexible manufacturing options and faster production of proteins.

The names "Bayer Schering Pharma" or "Schering" as used in this publication always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively.