Bayer AG - Stockholders' Newsletter Third Quarter 2006 - Sales, Earnings and Financial Position

Schering acquisition provides additional boost to Bayer’s business

Gratifying sales and earnings increases

Third-quarter sales up 26 percent to €7.8 billion

EBITDA before special items up 39 percent to €1.5 billion

EBIT before special items up 22 percent to €0.8 billion

Schering integration well on track

HealthCare earnings forecast raised

Overview of Sales, Earnings and Financial Position

The positive business trend at Bayer continued in the third quarter of 2006. Sales advanced by 26.0 percent to €7,783 million (Q3 2005: €6,177 million). Group sales included €1,410 million in revenues from the Schering business. Adjusted for currency and portfolio effects, sales of the Bayer Group rose by 6.4 percent. Sales of the MaterialScience and HealthCare subgroups rose by 12.4 and 7.5 percent, respectively, while currency and portfolio-adjusted sales of CropScience were down by 5.9 percent from the prior-year quarter.

Including the Schering business, we improved EBITDA before special items by 38.5 percent to €1,505 million (Q3 2005: €1,087 million). Earnings of the Bayer HealthCare subgroup climbed by 113.6 percent to €882 million (Q3 2005: €413 million) thanks to a €392 million contribution from the Schering business and strong performances by both Pharmaceuticals and Consumer Health. MaterialScience was unable to match the high earnings level of the prior-year quarter, the subgroup’s underlying EBITDA declining by 14.9 percent to €427 million, chiefly because of higher raw material costs. Earnings of the CropScience subgroup declined by 17.8 percent to €143 million, largely because of difficult market conditions in the United States and South America.

Net Sales by Market

EBIT

Gross Cash Flow

Net Cash Flow

EBIT before special items climbed by 22.2 percent in the third quarter, to €798 million (Q3 2005: €653 million). The acquired Schering business contributed €80 million to this figure.

Net special charges in the third quarter amounted to €139 million. This figure included €106 million for HealthCare alone, most of which was related to the integration of Schering. Restructuring charges totaling €45 million were incurred in the CropScience and MaterialScience subgroups. The special charges were partially offset by special gains of €41 million from the sale of some small product lines and active ingredients in CropScience and HealthCare.

EBIT of the Bayer Group declined by 17.2 percent in the third quarter of 2006, to €659 million (Q3 2005: €796 million). However, EBIT for the corresponding period of 2005 was boosted by a onetime gain of €244 million in connection with changes to our pension systems.

After a non-operating result of minus €272 million, pre-tax income dropped by 37.0 percent to €387 million. The non-operating result included net interest expense of €214 million (Q3 2005: €116 million). This figure in turn contains about €160 million in interest expense for the financing of the Schering acquisition. After tax expense of €118 million, income after taxes from continuing operations came in at €269 million (Q3 2005: €457 million). Group net income including earnings from discontinued operations and after minority interests amounted to €320 million (Q3 2005: €493 million).

Benefiting from the positive business trend and the inclusion of Schering, gross cash flow improved by 35.6 percent to €1,170 million (Q3 2005: €863 million), while net cash flow rose by 10.7 percent to €1,521 million.

Net debt decreased by €0.9 billion in the third quarter, to €19.0 billion. The approximately €1.2 billion proceeds of a capital increase were nearly offset by outflows for the purchase of further Schering AG shares.

Provisions for pensions and other post-employment benefits rose by €0.8 billion compared with June 30, 2006, to €7.0 billion. This was mainly attributable to a decrease in capital market interest.

The Bayer Group’s operating performance in the first nine months of 2006 also improved compared to the same period last year. Sales from continuing operations grew by 14.1 percent to €21,971 million, or by 5.1 percent when adjusted for currency effects and portfolio changes. EBITDA before special items for the first three quarters increased by 16.9 percent to €4,457 million, against €3,814 million for the prior-year period. Nine-month EBIT before special items advanced by 13.2 percent, to €2,931 million (9M 2005: €2,590 million), with EBIT after special items increasing by 5.0 percent to €2,614 million.

The integration of Schering is progressing well. Important decisions have already been made with regard to the future of Bayer Schering Pharma AG, Germany*. We have made the appointments to executive positions through the third management level, defined the structure of the global research and development organization and, in the fourth quarter, initiated site consolidation in the United States. In addition, the Bayer AG Board of Management has approved a consolidation plan involving some 70 sites of Bayer Schering Pharma AG, Germany*.

Regarding synergies from the acquisition, we confirm our previously stated target of €700 million in annual savings which we plan to achieve by 2009.

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.