• Sales rise 20 percent to over EUR 7 billion
• EBIT before special items up 39 percent
• Group net income almost tripled to EUR 406 million
• Significant increase in guidance for 2005 sales and underlying EBIT
• About 40 percent growth in underlying EBIT predicted for 2005

“The Bayer Group achieved its highest-ever underlying EBIT in the first half of 2005,” commented Management Board Chairman Werner Wenning, “bringing us another step closer to meeting our profitability targets.” Wenning expressed his confidence that the Group will again improve its year-on-year operating performance in the second half of the year. “We are therefore significantly raising our sales and earnings forecasts for the full year,” he said. Bayer now expects Group sales to exceed EUR 26 billion against previous guidance of over EUR 25 billion. Underlying EBIT is forecast to rise by about 40 percent, compared with the previous guidance of 20 percent, the 2004 figure being EUR 2,117 million.

Adjusted for currency and portfolio effects, Group sales increased by 11.2 percent in the second quarter. The marked increase in EBIT before special items was driven mainly by higher margins at MaterialScience and HealthCare, along with additional cost savings and efficiency improvements. Bayer Group EBITDA (earnings before interest, taxes, depreciation and amortization) before special items advanced 15.0 percent to EUR 1,285 million (2004: EUR 1,117 million).

Second-quarter earnings were impacted by net special charges of EUR 106 million (2004: EUR 105 million), including EUR 74 million in litigation-related charges, EUR 25 million in restructuring expenses at CropScience, and EUR 17 million in integration costs for the consumer health business acquired from Roche. After special items, second-quarter EBIT climbed by 46.3 percent to EUR 746 million (2004: EUR 510 million) and EBITDA by 16.0 percent to EUR 1,179 million (2004: EUR 1,016 million). Group net income almost tripled to EUR 406 million (2004: EUR 146 million). Gross cash flow advanced by 27.5 percent to EUR 908 million (2004: EUR 712 million), while net debt was reduced by EUR 240 million compared with the end of the first quarter, to EUR 6,875 million.

Strong second-quarter growth at MaterialScience and HealthCare

The pleasing overall performance was driven primarily by continuing high demand for the products of Bayer MaterialScience. Sales of this subgroup advanced by 30.8 percent to EUR 2,734 million (2004: EUR 2,091 million), while underlying EBIT rose by 56.7 percent to EUR 337 million (2004: EUR 215 million). The main contributors to this upward trend were the Polycarbonates and Polyurethanes business units. Favorable market conditions helped the subgroup to implement what were in some cases substantial price increases. In this way, Bayer MaterialScience offset the significant rise in raw material costs and achieved the necessary margin improvements in key areas of the business.

Second-quarter results from the HealthCare business were also greatly improved, with faster-than-average EBIT growth. Underlying EBIT climbed by 56.2 percent year on year to EUR 339 million (2004: EUR 217 million), while sales rose 18.1 percent to EUR 2,370 million (2004: EUR 2,007 million), thanks largely to the acquisition of the Roche consumer health business. Adjusted for currency and portfolio effects, sales were 5.4 percent above the same period last year. Above-market growth was recorded particularly in the Diabetes Care, Diagnostics and Biological Products divisions, while sales of the Pharmaceuticals Division remained steady. Good business with products such as Trasylol, Avelox and Levitra more than offset the lower sales figures in the United States resulting from the expiration of market exclusivity for Cipro and Schering-Plough’s marketing of Bayer’s primary care products.

Bayer CropScience had a more difficult second quarter. Sales and earnings declined mainly because of the prolonged drought in Brazil and some southern European countries, with earnings additionally impaired by write-downs of receivables. Higher sales in the Seed Treatment and Fungicides business units only partially offset the declines in Insecticides and Herbicides. Second-quarter sales of the subgroup slipped 2.3 percent to EUR 1,604 million (2004: EUR 1,642 million), while underlying EBIT was down 6.5 percent to EUR 187 million (2004: EUR 200 million). However, underlying EBIT for the first six months as a whole rose 5.4 percent to EUR 610 million (2004: EUR 579 million).

Strong growth impetus in Europe

About two-thirds of Bayer’s sales growth was generated in Europe, where sales increased by 31.1 percent to EUR 3,188 million. Business grew faster than average in Germany, with sales up 47.8 percent to EUR 1,082 million. After adjusting for portfolio effects, the improvement in Germany was around 15 percent, partly because of a strong performance by HealthCare. Sales in North America climbed 5.2 percent to EUR 1,904 million. While MaterialScience reported good growth in this region, CropScience sales declined. Pharmaceuticals sales, too, were lower due to the effect of the Schering-Plough alliance. Sales moved ahead by 17.2 percent in Asia/Pacific, and by 21.7 percent in the Latin America/Africa/Middle East region, with MaterialScience the main growth driver in both cases. In Greater China, second-quarter Group sales grew by more than 30 percent.

Positive first-half performance

Wenning was also well pleased with the first six months of 2005 as a whole. Sales for this period advanced by 17.8 percent to EUR 13,757 million (2004: EUR 11,682 million), while EBIT before special items rose by 44.9 percent to EUR 1,994 million (2004: EUR 1,376 million). Reported EBIT also showed a substantial 38.4 percent improvement to EUR 1,750 million (2004: EUR 1,264 million). First-half net income increased by 87.3 percent to EUR 1,058 million (2004: EUR 565 million).

Wenning optimistic for the second half

Wenning also expressed his optimism for the second half of 2005. “Bayer remains on course for expansion. We still expect MaterialScience to make the biggest contribution to earnings growth,” said the Bayer CEO, adding that this of course depends on how the economy develops and on the trend in raw material prices. At CropScience, a clear improvement in underlying EBIT is predicted. Wenning said that Bayer is increasingly optimistic about the outlook for HealthCare, and is therefore raising its full-year guidance for this subgroup once again: the company now expects underlying EBIT from this business to be at least 10 percent higher than in 2004.

Bayer also anticipates that changes to its pension plans in the United States and Germany and will result in non-cash one-time income of around EUR 200 million in the third quarter. Including this effect, the company expects to take net special charges (excluding any additional litigation-related expenses) of between EUR 100 million and EUR 150 million for the full year.

Bayer HealthCare aims for higher EBITDA margin in 2006

In view of the improved prospects for Bayer HealthCare, Wenning expressed confidence that the subgroup would exceed its target EBITDA margin of 17 percent in 2006. Bayer CropScience continues to aim for an EBITDA margin of 25 percent in 2006. The same applies to Bayer MaterialScience, where the first-half performance showed that a margin of 18 percent is attainable in a favorable economic environment. The Group’s overall target EBITDA margin for 2006 continues to be 19 percent, with 22 percent the long-term goal.

Wenning attributed Bayer’s strong performance primarily to the company’s strategic realignment towards innovation and growth. “This success is reflected not just in our quarterly figures, but also in the performance of our stock,” the Bayer CEO pointed out. Bayer’s share price is currently at its highest level in three years, having risen by 52 percent between early November 2003, when the realignment decision was announced, and August 5, 2005. The German stock index DAX improved by only 29 percent over the same period. This represents additional market capitalization of EUR 7.4 billion. “The whole enterprise can be proud of this performance,” declared Wenning. “On behalf of the Board of Management, I would like to thank all the employees who have contributed to Bayer’s successful performance. And I would also like to thank our stockholders for the trust they have placed in us.”