Bayer AG

Pharmaceuticals

Life Science businesses delivering well

On Tuesday Bayer held its annual Meet Management event in

Leverkusen. In this note we review some key themes from the event and update our model after the Q4 results. We think Bayers Life Science divisions (Healthcare and Crop) are performing extremely well, driven by new products from the pipeline. We have increased forecasts in all divisions with group core EPS forecasts increasing by 2-5%. Our DCF- and SOTP-derived price target climbs from 80 to 85 and we reiterate our Buy recommendation. At the group level CEO Marijn Dekkers continues to emphasise the importance of the Life Science model (Healthcare and Crop), which now makes up 85% of group EBITDA. However, he also indicated there would be no immediate changes to the group structure. We would not expect major acquisitions either. Dr Dekkers emphasised organic growth as the top priority for the company and we expect Bayer to remain disciplined on external opportunities. Within Healthcare the pipeline roll-out continues. The company reiterated the more than 5.5bn sales potential for Xarelto, Stivarga, Eylea, alpharadin and riociguat. The roll out of Xarelto will be closely watched now that Eliquis is approved in the US and Europe. However, Bayers Andreas Fibig thinks the initial signs show there has been no meaningful impact on Xarelto. Furthermore, he believes the next-generation anticoagulants are beginning to make real inroads into displacing warfarin. The CropScience division is rolling out a pipeline with close to 2bn sales potential and that is already showing through in the sales growth for 2011 and 2012. The company reiterated its confidence that 2013 will be another very good year. MaterialScience remains the laggard, falling short of its CFROIC target. This division needs to see demand absorb excess capacity, particularly in polycarbonates (PCs). However, there are encouraging signs of growth and the company thinks it can cross its returns hurdle in 2015.
2012 39,760 8,284 5,671 2,446 7,837 2.96 5.35 5.48 1.90 51.5% 20.8% 14.3% 2.4% 10.2% 1.8 8.8 12.8 14.6 6.2% 2013E 40,948 8,773 5,880 3,809 5,458 4.61 5.84 7.96 2.34 51.5% 21.4% 14.4% 3.0% 15.3% 1.8 8.3 12.4 13.4 9.0% 2014E 42,964 9,439 6,487 4,379 2,688 5.30 6.53 8.46 2.61 52.0% 22.0% 15.1% 3.3% 17.1% 1.7 7.7 11.2 12.0 9.6% 2015E 44,933 10,132 7,133 4,995 -900 6.04 7.27 9.04 2.91 52.5% 22.5% 15.9% 3.7% 18.5% 1.6 7.2 10.2 10.8 10.3% 2016E 46,588 10,669 7,634 5,505 -4,847 6.66 7.89 9.58 3.16 52.5% 22.9% 16.4% 4.0% 18.5% 1.6 6.8 9.5 9.9 10.9%

Buy
Rating system Current price Absolute Price target

EUR 78.24

EUR 85.00

19/03/2013 XETRA Close Market cap EUR 64,700 m Reuters BAYGn.DE Bloomberg BAYN GY Changes made in this note Rating Buy (no change) Price target EUR 85.00 (80.00) Chg
2013 2014e 2015e old % old % old % Sales 40279 1.7% 42017 2.3% 43765 2.7% EBIT 5792 1.5% 6325 2.6% 6875 3.8% EPS 5.73 1.9% 6.36 2.6% 7.02 3.6% Source: Berenberg Bank estimates

Share data

Shares outstanding (m) Enterprise value (EUR m) Daily trading volume

827 70,158 2,598,000 79 48 DAX 4.9 % 4.9 % 36.3 % 1.3 10.5 % 4.0 % 22.5 %

Performance data
High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 6.5 % 3 months 7.6 % 12 months 41.2 %

Key data
Price/book value Net gearing CAGR sales 2011-2016 CAGR EPS 2011-2016

Business activities:
Development, production and marketing of pharmaceutical goods; material and crop sciences.

Y/E 31.12., EUR m Sales EBITDA EBIT Net profit Y/E net debt (net cash) EPS (reported) EPS (recurring) CPS DPS Gross margin EBITDA margin EBIT margin Dividend yield ROCE EV/sales EV/EBITDA EV/EBIT P/E Cash flow RoEV Source: Company data, Berenberg Bank

20 March 2013 Alistair Campbell

Analyst +44 20 3207 7876 alistair.campbell@berenberg.com

Louise Hinds
Analyst +44 20 3465 2747 louise.hinds@berenberg.com

Frazer Hall
Specialist Sales +44 20 3207 7875 frazer.hall@berenberg.com

Bayer AG
Pharmaceuticals

All about execution

Bayers annual Meet Management day in Leverkusen once again provided an excellent opportunity to understand how well the company is positioned and how key executives expect the business to evolve in the medium term. In truth, following hot on the heels of the Q4 results, there was no new news to share. However, Bayer remains very well positioned in its two main divisions of Healthcare and CropScience. The Healthcare division is rolling out an excellent portfolio of new products and this division will be the primary driver of top-line growth and margin expansion for the foreseeable future. It is all about delivering on the promise built from its pipeline. In this note we review some highlights from the key divisions, with a few illuminating slides from the event. We also update our model following the Q4 results.

The strategic view

CEO Marijn Dekkers pointed to the overall aim of the company, science for a better life, with an emphasis on human, animal and plant life. This Life Sciences concept at Bayer, first discussed in detail last year, is now responsible for 70% of sales and 85% of EBITDA. Life Sciences on the rise

Source: Bayer Meet Management Event 2013

As ever, this raises the question as to whether the MaterialScience division really has a long-term future within the group. The CEO gave little away. He stressed that each generation of management at Bayer has had the opportunity to review and improve the corporate portfolio, and the company has undergone substantial change over the years. But he also added that he did not see the need to keep the same pace of change when he took over as CEO. That does not mean large reorganisations are off the table, but there is no big necessity to do anything major now. We think this is sensible, particularly given that the MaterialScience division needs time to prove it can generate adequate returns (more later), but we continue

Bayer AG
Pharmaceuticals

to believe Bayer will part company with MaterialScience and become a 100% Life Science company in the medium term. Meanwhile, the near-term priority is delivering the pipeline in the pharmaceuticals business. The company reiterated its 5.5bn peak sales expectation for the five major pipeline products of Xarelto, Stivarga, Eylea, alpharadin and riociguat. In reality this portfolio is not really pipeline anymore three of these drugs now have regulatory approval and a fourth should gain approval before year end. It is now all about realising the commercial potential for these drugs and the company revealed how it thinks this collection of products will drive sales over the next three years. Pipeline rolling out

Source: Bayer Meet Management Event 2013

Given the growth potential in the pharmaceuticals division, it is no surprise that top-line organic growth is the number one priority for Bayer. Bolt-on deals will be considered, but only if they make strategic sense, and only at the right price. Over dinner, CFO Werner Baumann reiterated Bayers stance that it is not willing to give up more than 50% of the value of synergies in any transaction to the seller, unless there is an extremely compelling strategic rationale for the deal. Last years failed attempt to acquire Schiff was a case in point. Bayer liked the deal and wanted to acquire Schiff, but it could not justify raising the offer to compete with Reckitt so stepped aside. This financial prudence is good news for investors.

Bayer AG
Pharmaceuticals

Healthcare in delivery mode

The healthcare sessions were presided over by the interim divisional head, Wolfgang Plischke. The sessions focused on the roll out of the key late-stage assets, with Xarelto leading the way. So far, Xareltos roll out has been a success. It is stripping market share from Boehringer Ingelheims Pradaxa and beat analyst expectations throughout 2012. However, it now faces a new challenge with the launch of Pfizer/Bristol-Myers Eliquis. It is still very early days in the launch, but the initial signs from the US prescription data are encouraging. Early prescription data for Eliquis will be unreliable due to product sampling during the launch phase. Nevertheless, we do not see evidence of an impact on Xarelto prescriptions. Andreas Fibig pointed to further encouraging signs in the marketplace. He believes the roll out of Eliquis shows that the later you are to market, the harder it is to establish a dominant position. He thinks this will also apply to the potential fourth entrant, edoxaban. Dr Fibig also hinted that the working relationship between Pfizer and Bristol is not ideal, and this could account for what he sees as a relatively muted roll out. More importantly for the class as a whole, Bayer thinks the new agents are finally gaining momentum versus warfarin. The stickiness of warfarin was probably the biggest problem during the launch phase of the newer anticoagulants. Dr Fibig now believes warfarin is beginning to retreat and there is an accelerating switch to newer agents. This is good news because the true multi-billion dollar potential of this drug class relies upon the displacement of warfarin. If this trend gathers pace, there will be sufficient room for all of the new anticoagulants to be successful. Given this background, Dr Fibig described the guidance for Xarelto sales of 600m this year as probably on the conservative side. The next three years will be underpinned by the late-stage pipeline, but there were some questions raised about the depth of the pipeline behind phase III. In fact the early pipeline does look thin. Pipeline lacks depth

Source: Bayer Meet Management Event 2013

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Bayer AG
Pharmaceuticals

Bayer did recognise that this is a potential problem and it is its intention to reinforce the phase I/II line up with new projects and further lifecycle management studies with later-stage drugs. However, it is also fair to say that the company has time on its side with Xarelto, Stivarga, Eylea, alpharadin and riociguat rolling out in the next few years, there will be no desperate need for a late-stage product. The company has time to reload, but we believe this process needs to start now. Finally the departure of Jrg Reinhardt for Novartis leaves a vacancy at the top of this division. The company believes it has the operational team in place to deliver the pipeline and there is no need to rush to make a new appointment. Bayer has started the process of reviewing internal and external candidates, but we would not expect an imminent appointment. Wolfgang Plischke indicated the company will take time to make sure the right appointment is made.

CropScience still going strong for now

After an excellent 2011 and 2012 we were concerned that the division could have peaked. The guidance for 2013 of high single-digit sales growth suggests that is not the case. The key to this divisions recent success is its pipeline. When Dr Dekkers first took over at Bayer, he quickly identified this division as an area in need of an overhaul. Dr Dekkers believed the division had been guilty of failing to deliver on its excellent science base. Innovative products came to market but did not get the price points they deserved. Over the last 2-3 years this has changed. This division continues to have a well-stocked pipeline, but now products reach the market and are priced for the added value they deliver. The sales potential of products launched from 2006 is approaching 2bn; off a 2006 sales base of under 6bn, its easy to see how this portfolio is transforming the division. CropScience new product development a 2bn platform

Source: Bayer Meet Management Event 2013

This pipeline is set to underpin 6% compound sales growth towards 10bn in sales by 2015.
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Bayer AG
Pharmaceuticals

This great opportunity requires investment. A significant part of the increased capex budget for 2013 is aimed at boosting capacity in this division. Furthermore, the crop business is working capital intensive and as the top-line grows so will the working capital requirement. The capex pressures should ease over a few years, but we will be watching to see whether Bayer can translate the sales opportunity into good cash generation further ahead.

Materially important?
The MaterialScience division remains the underperformer within the group. Once again in 2012 this division failed to deliver a return above its hurdle WACC. This is largely due to the current phase of the cycle. Bayer made substantial investments in new capacity in 2005-08, particularly in PC and polyurethane (TDI and MDI). Unfortunately, these investments were made pre-crisis and, subsequently, demand has fallen short. Nevertheless, the company believes the underlying drivers of PC and polyurethane demand are robust and will return in coming years. In fact, the company already sees some recovery in demand in China, a vital market for this division. Division head Patrick Thomas provided an excellent overview of its intelligence on industry supply and demand for the three core segments of PC, TDI and MDI. MaterialScience demand to absorb more excess capacity through 2015

Source: Bayer Meet Management Event 2013

MaterialScience demand to absorb more excess capacity through 2015

This division intends to deliver a cash flow return on invested capital in excess of WACC by 2015. We think growing demand for PCs in particular is key to achieving this target. Early signs are encouraging. After declining 7% in 2011, Bayers PC sales stabilised in 2012. Some key areas of PC demand are growing, for example the prestige car market an Audi A6 typically uses around 30kg of PC compared with 4kg in a Chinese-made Cherry. PC sales will be the key number to watch this year. After sales growth of 1% last year we forecast 3% this year.
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Bayer AG
Pharmaceuticals

Berenberg forecasts versus Bayer s 2013 guidance

2013 Bayer guidance Berenberg estimates 40.9bn $1.31 5.9% 9.1% 19.1bn 28.0% 11.1bn 30.0% 8.0bn 24.0% 8.8bn 24.0% 11.6bn 1.8% 1.9bn 3.2bn Group Full year sales Grow 4-5% towards 41bn USD:EUR Currency Assumption $1.29 per EBITDA before special items mid single digit increase Core EPS high single digit increase HealthCare Sales growth (CER) mid single digit growth to 19bn EBITDA before special items margin slightly up from 27.2% Pharma Sales growth (CER) mid single digit growth to 11bn EBITDA before special items margin slightly up from 29.6% Consumer Sales growth (CER) mid single digit growth to 8bn EBITDA before special items margin level with prior year (23.9%) CropScience Sales growth (CER) high single digit growth to 9bn EBITDA before special items margin slightly up from 24% MaterialScience Sales growth (CER) slight increase to 12bn EBITDA before special items Adj. EBITDA to improve Further assumptions CapEx approx. 1.9bn R&D 3.2bn Source: Company reports, Berenberg estimates

Berenberg forecasts versus Bayer s 2015 guidance

2015 Bayer guidance Berenberg estimates 21.0bn 29.7% 12.3bn 31.8% 8.7bn 24.7% 9.8bn 24.0% HealthCare Sales Towards 22bn EBITDA margin Towards 29% Pharma Sales towards 13bn EBITDA margin >31% Consumer Sales ~9bn EBITDA margin ~25% CropScience Sales towards 10bn EBITDA margin ~24% Source: Company reports, Berenberg estimates

Bayer AG
Pharmaceuticals

Forecast changes
(m) Group Sales New Old Chg Group core EBIT New Old Chg Pharma Sales New Old Chg - EBITDA (underlying) New Old Chg Consumer Sales New Old Chg - EBITDA (underlying) New Old Chg Crop Science Sales New Old Chg - EBITDA (underlying) New Old Chg Mat. Sci. Sales New Old Chg - EBITDA (underlying) New Old Chg Group Core EPS New Old Chg Source: Berenberg Bank estimates 2013 E 40,948 40,279 1.7% 5,880 5,792 1.5% 11,239 11,051 1.7% 3,421 3,325 2.9% 8,000 7,889 1.4% 1,920 1,893 1.4% 8,845 8,595 2.9% 2,123 2,063 2.9% 11,577 11,422 1.4% 1,274 1,228 3.7% 5.84 5.73 1.9% 2014 E 42,964 42,017 2.3% 6,487 6,325 2.6% 11,868 11,537 2.9% 3,740 3,581 4.4% 8,342 8,209 1.6% 2,027 1,991 1.8% 9,380 9,020 4.0% 2,251 2,178 3.3% 12,062 11,901 1.4% 1,387 1,339 3.6% 6.53 6.36 2.6% 2015 E 44,933 43,765 2.7% 7,133 6,875 3.8% 12,534 12,091 3.7% 4,092 3,901 4.9% 8,671 8,506 1.9% 2,142 2,075 3.2% 9,838 9,408 4.6% 2,361 2,281 3.5% 12,550 12,383 1.3% 1,506 1,424 5.8% 7.27 7.02 3.6% 2016 E 46,588 45,333 2.8% 7,634 7,307 4.5% 13,034 12,591 3.5% 4,365 4,165 4.8% 8,985 8,775 2.4% 2,233 2,154 3.7% 10,221 9,753 4.8% 2,453 2,365 3.7% 12,981 12,809 1.3% 1,590 1,473 7.9% 7.89 7.57 4.2% 2017 E 48,064 46,728 2.9% 8,036 7,642 5.2% 13,463 13,026 3.4% 4,595 4,355 5.5% 9,262 8,996 3.0% 2,316 2,222 4.2% 10,556 10,060 4.9% 2,533 2,440 3.8% 13,389 13,213 1.3% 1,640 1,520 7.9% 8.42 8.02 4.9%

Bayer AG
Pharmaceuticals

Sales summary
Key Sales m Yaz franchise Mirena Betaferon / Betaseron Kogenate Xarelto (Bayer consolidated) Nexavar Eylea Alpharadin Stivarga Other Pharmaceuticals Pharmaceuticals Consumer Care Medical Care Animal Health Consumer Health Crop Protection Environmental Science BioScience Crop Science Polyurethanes Polycarbonates Coatings, adhesives Industrial operations Material Science Reconciliation Group Sales 2012A 1,045 677 1,216 1,182 325 792 14 0 32 5,520 10,803 3,853 2,653 1,303 7,809 6,741 680 962 8,383 5,995 2,823 1,972 713 11,503 1,262 39,760 2013E 965 737 1,146 1,194 601 800 100 50 130 5,515 11,239 3,942 2,681 1,376 8,000 7,087 677 1,080 8,845 6,125 2,761 1,967 725 11,577 1,287 40,948 2014E 916 796 1,066 1,242 839 808 230 175 215 5,581 11,868 4,099 2,773 1,470 8,342 7,500 691 1,188 9,380 6,431 2,844 2,026 761 12,062 1,313 42,964 2015E 871 843 991 1,292 1,065 784 368 394 300 5,627 12,534 4,251 2,868 1,552 8,671 7,862 705 1,272 9,838 6,752 2,929 2,077 792 12,550 1,339 44,933 2016E 827 886 902 1,318 1,288 745 478 524 390 5,676 13,034 4,404 2,953 1,629 8,985 8,168 719 1,335 10,221 7,022 3,017 2,118 823 12,981 1,366 46,588 2017E 12-17 CAGR 786 -5.5% 912 6.1% 812 -7.8% 1,278 1.6% 1,545 36.6% 708 -2.2% 574 110.2% 602 n/a 468 71.0% 5,778 0.9% 13,463 4.5% 4,526 3.3% 3,037 2.7% 1,699 5.5% 9,262 3.5% 8,434 4.6% 733 1.5% 1,388 7.6% 10,556 4.7% 7,303 4.0% 3,077 1.7% 2,160 1.8% 848 3.5% 13,389 3.1% 1,393 2.0% 48,064 3.9%

Source: Berenberg Analysis, Company Reports

Bayer AG
Pharmaceuticals

Financials
Profit and loss account
Consolidated P&L (m) Sales COGS Gross Profit
- Margin

2012A 39,760 -19,059 20,701

51.5%

2013E 40,948 -19,860 21,088

51.5%

2014E 42,964 -20,623 22,342

52.0%

2015E 44,933 -21,343 23,590

52.5%

2016E 46,588 -22,129 24,458

52.5%

2017E CAGR (12-17) 48,064 3.9% -22,830 3.7% 25,233 4.0%

52.5%

Selling expenses
- as % sales

-9,987
-25.1%

-10,114
-24.7%

-10,612
-24.7%

-11,008
-24.5%

-11,297
-24.3%

-11,535
-24.0%

2.9% 4.5% -1.0% -7.8% -22.0% 15.2%

R&D
-as % sales

-3,013
-7.6%

-3,194
-7.8%

-3,351
-7.8%

-3,505
-7.8%

-3,634
-7.8%

-3,749
-7.8%

General admin
-as % sales

-1,866
-4.7%

-1,679
-4.1%

-1,676
-3.9%

-1,707
-3.8%

-1,724
-3.7%

-1,778
-3.7%

Other operating income

-as % sales

1,083
2.7%

614
1.5%

644
1.5%

674
1.5%

699
1.5%

721
1.5%

Other operating expenses

-as % sales

-2,958
-7.4%

-835
-2.0%

-860
-2.0%

-910
-2.0%

-869
-1.9%

-856
-1.8%

Operating Profit
- Margin

3,960
10.0%

5,880
14.4%

6,487
15.1%

7,133
15.9%

7,634
16.4%

8,036
16.7%

Equity Method Non-operating income Non-operating expenses PBT

- Margin

-46 502 -1,168 3,248

8.2%

-46 280 -925 5,190

12.7%

-46 259 -735 5,965

13.9%

-46 312 -597 6,803

15.1%

-46 496 -586 7,497

16.1%

-46 685 -586 8,089 -2,144

-26.5%

20.0% 23.3% 19.0%

Taxation
- Rate

-752
-23.2%

-1,375
-26.5%

-1,581
-26.5%

-1,803
-26.5%

-1,987
-26.5%

PAT
- Margin

2,496
6.3%

3,814
9.3%

4,384
10.2%

5,000
11.1%

5,510
11.8%

5,945
12.4%

Minority interest Basic EPS Diluted EPS Source: Berenberg Bank estimates, company reports Reconciliation to Core EPS Reported EBIT Amortisation of intangibles Write-downs of PPE Other special items (non-A&I) Core EBIT
- Margin

-50 2.96 2.96

-5 4.61 4.61

-5 5.30 5.30

-5 6.04 6.04

-5 6.66 6.66

-5 7.18 7.18

19.4% 19.4%

2012A 3,960 1,637 41 1,364 7,002

17.6%

2013E 5,880 1,536 0 0 7,416

18.1%

2014E 6,487 1,536 0 0 8,023

18.7%

2015E 7,133 1,536 0 0 8,669

19.3%

2016E 7,634 1,536 0 0 9,170

19.7%

2017E 8,036 1,536 0 0 9,572

19.9%

CAGR 15.2%

6.5%

Non-operating result Income taxes Tax adjustment Minority Interest Core PAT Financing adjustment Core EPS Source: Berenberg Bank estimates, company reports

-785 -752 -1,024 -15 4,426 0 5.35

-691 -1,375 -517 -5 4,829 0 5.84

-521 -1,581 -517 -5 5,399 0 6.53

-330 -1,803 -517 -5 6,014 0 7.27

-136 -1,987 -517 -5 6,525 0 7.89

53 -2,144 -517 -5 6,960 0 8.42

9.5% 9.5%

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Balance sheet
Balance Sheet (m) Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale and disc. ops Current assets Goodwill Other intangible Assets PPE Investments in associates Other financial assets Other receivables Deferred taxes Noncurrent Assets Total Assets Other provisions Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Current liabilities Provision for pensions Other provisions Financial liabilities Other liabilities Deferred taxes Noncurrent liabilities Total Liabilities Net Assets Capital stock Capital reserves Other reserves Minority interest Total Equity Source: Berenberg Bank estimates, company reports 2012A 6,980 7,431 856 1,648 376 1,695 0 18,986 9,293 9,464 9,863 284 1,324 541 1,581 32,350 51,336 4,844 2,570 4,295 72 1,318 13,099 9,373 1,986 6,962 409 938 19,668 32,767 18,569 2,117 6,167 10,185 100 18,569 2013E 7,189 7,653 856 1,648 376 2,574 0 20,296 9,293 8,014 10,405 284 1,324 541 1,581 31,442 51,738 4,844 2,570 4,207 72 1,318 13,011 9,073 1,986 5,462 409 938 17,868 30,880 20,858 2,117 6,167 12,469 105 20,858 2014E 7,543 8,030 856 1,648 376 1,700 0 20,153 9,293 6,478 10,808 284 1,324 541 1,581 30,309 50,462 4,844 2,570 4,376 72 1,318 13,180 8,773 1,986 1,818 409 938 13,924 27,105 23,357 2,117 6,167 14,963 110 23,357 2015E 7,888 8,398 856 1,648 376 5,288 0 24,454 9,293 4,942 10,788 284 1,324 541 1,581 28,753 53,207 4,844 2,570 4,535 72 1,318 13,339 8,473 1,986 1,818 409 938 13,624 26,963 26,244 2,117 6,167 17,845 115 26,244 2016E 8,179 8,707 856 1,648 376 9,235 0 29,001 9,293 3,406 10,767 284 1,324 541 1,581 27,196 56,196 4,844 2,570 4,673 72 1,318 13,477 8,173 1,986 1,818 409 938 13,324 26,802 29,395 2,117 6,167 20,991 120 29,395 2017E 8,438 8,983 856 1,648 376 13,799 0 34,099 9,293 1,870 10,714 284 1,324 541 1,581 25,608 59,707 4,844 2,570 4,802 72 1,318 13,606 8,173 1,986 1,818 409 938 13,324 26,931 32,776 2,117 6,167 24,367 125 32,776

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Pharmaceuticals

Cash flow statement

Cashflow (m) PAT (Continuing Ops) Income taxes Non-operating result Income taxes paid or accrued D&A Pension provisions () Loss - sales of noncurr' assets Revaluation of acquired assets Decrease in inventories Decrease in receivables Decrease in payables Other working capital () Discontinued operations Operating Cash Flow Capex Disposals - PPE Divestitures Non-current financial assets Acquisitions Interest & dividends received Current financial assets Investing Cash Flow Dividend payments Issuances of debt Retirement of debt Interest paid Interest from swaps Purchase of subsids Financing Activities Net Cash Increase Cash (BOP) Consolidation effects Cash (EOP) Source: Berenberg Bank estimates, company reports 2012A 2,496 752 712 -1,560 2,960 -542 -219 0 -674 -452 539 520 0 4,532 -1,929 227 178 -261 -466 104 1,329 -818 -1,366 1,309 -3,254 -793 325 -3 -3,782 -68 1,770 0 1,695 2013E 3,814 1,375 691 -1,375 2,893 -300 0 0 -209 -222 -88 0 0 6,580 -1,934 57 0 0 -108 280 0 -1,704 -1,571 0 -1,500 -925 0 0 -3,996 879 1,695 0 2,574 2014E 4,384 1,581 521 -1,581 2,952 -300 0 0 -354 -377 169 0 0 6,996 -1,879 60 0 0 0 259 0 -1,560 -1,931 0 -3,644 -735 0 0 -6,310 -874 2,574 0 1,700 2015E 5,000 1,803 330 -1,803 2,998 -300 0 0 -345 -368 159 0 0 7,474 -1,504 62 0 0 0 312 0 -1,130 -2,159 0 0 -597 0 0 -2,756 3,588 1,700 0 5,288 2016E 5,510 1,987 136 -1,987 3,036 -300 0 0 -291 -309 139 0 0 7,921 -1,542 64 0 0 0 496 0 -983 -2,406 0 0 -586 0 0 -2,992 3,946 5,288 0 9,235 2017E 5,945 2,144 -53 -2,144 3,073 0 0 0 -259 -276 129 0 0 8,559 -1,550 65 0 0 0 685 0 -799 -2,610 0 0 -586

-3,196 4,564 9,235 0 13,799

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Pharmaceuticals

Contacts: Investment Banking

Equity Research
BANKS Nick Anderson James Chappell Andrew Lowe Eleni Papoula BEVERAGES Philip Morrisey Josh Puddle BUSINESS SERVICES William Foggon Simon Mezzanotte Arash Roshan Zamir Konrad Zomer CAPITAL GOODS Frederik Bitter Benjamin Glaeser William Mackie Margaret Paxton Alexander Virgo Felix Wienen CHEMICALS Jade Barkett Asad Farid John Philipp Klein Jaideep Pandya CONSTRUCTION Chris Moore Robert Muir Michael Watts DIVERSIFIED FINANCIALS Pras Jeyanandhan Richard Perrott +44 (0) 20 3207 7838 +44 (0) 20 3207 7844 +44 (0) 20 3465 2743 +44 (0) 20 3465 2741 ECONOMICS Dr. Holger Schmieding Dr. Christian Schulz Robert Wood FOOD MANUFACTURING Fintan Ryan James Targett +44 (0) 20 3207 7889 +44 (0) 20 3207 7878 +44 (0) 20 3207 7822 E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de MID-CAP GENERAL Gunnar Cohrs Bjoern Lippe Anna Patrice Alexandra Schlegel Stanislaus von Thurn und Taxis +44 (0) 20 3465 2748 +44 (0) 20 3207 7873 REAL ESTATE Kai Klose Estelle Weingrod TECHNOLOGY Adnaan Ahmad Sebastian Grabert Daud Khan Ali Khwaja Tammy Qiu TELECOMMUNICATIONS Wassil El Hebil Usman Ghazi Stuart Gordon Laura Janssens Paul Marsch Barry Zeitoune TOBACCO Erik Bloomquist Kate Kalashnikova UTILITIES Robert Chantry Andrew Fisher Oliver Salvesen Lawson Steele +44 (0) 20 3207 7894 +44 (0) 20 3207 7845 +44 (0) 20 3207 7863 +44 (0) 20 3207 7896 +44 (0) 20 3207 2631

+44 (0) 20 3207 7892 +44 (0) 20 3207 7881

+44 (0) 20 3207 7882 +44 (0) 20 3207 7917 +44 (0) 20 3465 2636 +44 (0) 20 3207 7920

GENERAL RETAIL & LUXURY GOODS Bassel Choughari +44 (0) 20 3465 2675 John Guy +44 (0) 20 3465 2674 HEALTHCARE Scott Bardo Alistair Campbell Charles Cooper Louise Hinds Adrian Howd Tom Jones

+44 (0) 20 3207 7888 +44 (0) 20 3207 7931

+44 (0) 20 3207 7916 +44 (0) 20 3207 7918 +44 (0) 20 3207 7837 +44 (0) 20 3207 7934 +44 (0) 20 3207 7856 +44 (0) 20 3207 7915

+44 (0) 20 3207 7869 +44 (0) 20 3207 7876 +44 (0) 20 3465 2637 +44 (0) 20 3465 2747 +44 (0) 20 3207 7874 +44 (0) 20 3207 7877

+44 (0) 20 3207 7851 +44 (0) 20 3207 7834 +44 (0) 20 3465 2638 +44 (0) 20 3207 7852 +44 (0) 20 3465 2673

HOUSEHOLD & PERSONAL CARE Seth Peterson +44 (0) 20 3207 7891 Andrew Steele +44 (0) 20 3207 7926 INSURANCE Tom Carstairs Peter Eliot Kai Mueller Matthew Preston Sami Taipalus MEDIA Robert Berg Emma Coulby Laura Janssens Sarah Simon

+44 (0) 20 3207 7862 +44 (0) 20 3207 7824 +44 (0) 20 3207 7858 +44 (0) 20 3465 2639 +44 (0) 20 3207 7857 +44 (0) 20 3207 7859

+44 (0) 20 3207 7937 +44 (0) 20 3207 7932 +44 (0) 20 3207 7930 +44 (0) 20 3207 7890

+44 (0) 20 3207 7823 +44 (0) 20 3207 7880 +44 (0) 20 3465 2681 +44 (0) 20 3207 7913 +44 (0) 20 3207 7866

+44 (0) 20 3207 7870 +44 (0) 20 3465 2665

+44 (0) 20 3465 2737 +44 (0) 20 3207 7860 +44 (0) 20 3207 7928

+44 (0) 20 3207 7899 +44 (0) 20 3207 7925

+44 (0) 20 3465 2680 +44 (0) 20 3207 7821 +44 (0) 20 3465 2639 +44 (0) 20 3207 7830

+44 (0) 20 3207 7861 +44 (0) 20 3207 7937 +44 (0) 20 3207 7818 +44 (0) 20 3207 7887

Sales
Specialist Sales CONSUMER Rupert Trotter INSURANCE Trevor Moss LONDON Miel Bakker John von Berenberg-Consbruch Ronald Bernette Matt Chawner Toby Flaux Sean Heath David Hogg Ben Hutton James Matthews David Mortlock Peter Nichols George Smibert Max von Doetinchem Paul Walker E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de +44 (0) 20 3207 7815 HEALTHCARE Frazer Hall TECHNOLOGY Jean Beaubois HAMBURG Susette Mantzel Marco Weiss PARIS Christophe Choquart Dalila Farigoule Clmence La Clavire-Peyraud Olivier Thibert ZURICH Stephan Hofer Carsten Kinder Gianni Lavigna Benjamin Stillfried CRM LONDON Greg Swallow Laura Cooper CORPORATE ACCESS LONDON Patricia Nehring +44 (0) 20 3207 7875 UTILITIES Benita Barretto INDUSTRIALS Chris Armstrong Kaj Alftan Sales Trading HAMBURG Paul Dontenwill Christian Endras Gregor Labahn Chris McKeand Fin Schaffer Lars Schwartau Marvin Schweden Tim Storm Philipp Wiechmann LONDON Stewart Cook Simon Messman Stephen O'Donohoe PARIS Sylvain Granjoux EVENTS LONDON Natalie Meech Charlotte Kilby Charlotte Reeves Hannah Whitehead +44 (0) 20 3207 7829

+44 (0) 20 3207 7893

+44 (0) 20 3207 7835

+44 (0) 20 3207 7809 +44 (0) 20 3207 7879

+44 (0) 20 3207 7808 +44 (0) 20 3207 7805 +44 (0) 20 3207 7828 +44 (0) 20 3207 7847 +44 (0) 20 3465 2745 +44 (0) 20 3465 2742 +44 (0) 20 3465 2628 +44 (0) 20 3207 7804 +44 (0) 20 3207 7807 +44 (0) 20 3207 7850 +44 (0) 20 3207 7810 +44 (0) 20 3207 7911 +44 (0) 20 3207 7826 +44 (0) 20 3465 2632

+49 (0) 40 350 60 694 +49 (0) 40 350 60 719

+33 (0) 1 5844 9508 +33 (0) 1 5844 9510 +33 (0) 1 5844 9521 +33 (0) 1 5844 9512

+41 (0) 44 283 2029 +41 (0) 44 283 2024 +41 (0) 44 283 2038 +41 (0) 44 283 2033

+49 (0) 40 350 60 563 +49 (0) 40 350 60 359 +49 (0) 40 350 60 571 +49 (0) 40 350 60 798 +49 (0) 40 350 60 596 +49 (0) 40 350 60 450 +49 (0) 40 350 60 576 +49 (0) 40 350 60 415 +49 (0) 40 350 60 346

+44 (0) 20 3465 2752 +44 (0) 20 3465 2754 +44 (0) 20 3465 2753

FRANKFURT Michael Brauburger Nina Buechs Andr Grosskurth Boris Koegel Joachim Kopp

+49 (0) 69 91 30 90 741 +49 (0) 69 91 30 90 735 +49 (0) 69 91 30 90 734 +49 (0) 69 91 30 90 740 +49 (0) 69 91 30 90 742

+44 (0) 20 3207 7833 +44 (0) 20 3207 7806

+33 (0) 1 5844 9509

+44 (0) 20 3207 7811

+44 (0) 20 3207 7831 +44 (0) 20 3207 7832 +44 (0) 20 3465 2671 +44 (0) 20 3207 7922

US Sales
BERENBERG CAPITAL MARKETS LLC Member FINRA & SIPC Andrew Holder Colin Andrade Cathal Carroll Burr Clark Julie Doherty +1 (617) 292 8222 +1 (617) 292 8230 +1 (646) 445 7206 +1 (617) 292 8282 +1 (617) 292 8228

E-mail: firstname.lastname@berenberg-us.com Kelleigh Faldi Kieran O'Sullivan Emily Mouret Jonathan Saxon +1 (617) 292 8288 +1 (617) 292 8292 +1 (646) 445 7204 +1 (646) 445 7202

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Bayer AG
Pharmaceuticals

Please note that the use of this research report is subject to the conditions and restrictions set forth in the General investment-related disclosures and the Legal disclaimer at the end of this document. For analyst certification and remarks regarding foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG)
Company Bayer (1) (2) (3) (4) (5) (6) Disclosures 5

Berenberg Bank or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. Berenberg Bank acts as Designated Sponsor for this company. Over the previous 12 months, Berenberg Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. Berenberg Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. Berenberg Bank holds a trading position in shares of this company. Berenberg Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of this company, calculated by methods required by German law as of the last trading day of the past month.

Historical price target and rating changes for Bayer in the last 12 months (full coverage) Date 08 May 12 01 August 12 30 November 12 21 February 13 20 March 13 Price target - EUR 67.00 71.00 78.00 80.00 85.00 Rating Buy Buy Buy Buy Buy Initiation of coverage 13 July 09

Berenberg distribution of ratings and in proportion to investment banking services Buy Sell Hold 44.47 % 17.51 % 38.03 % 63.33 % 6.67 % 30.00 %

Valuation basis/rating key

The recommendations for companies analysed by Berenberg Banks equity research department are either made on an absolute basis (absolute rating system) or relative to the sector (relative rating system), which is clearly stated in the financial analysis. For both absolute and relative rating system, the three-step rating key Buy, Hold and Sell is applied. For a detailed explanation of our rating system, please refer to our website at http://www.berenberg.de/research.html?&L=1 NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as described on our website may be breached temporarily.

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Bayer AG
Pharmaceuticals

Competent supervisory authority

Bundesanstalt fr Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Strae 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt am Main

General investment-related disclosures

Joh. Berenberg, Gossler & Co. KG (Berenberg Bank) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by Berenberg Bank are divided into two groups: those under full coverage (regular updates provided); and those under screening coverage (updates provided as and when required at irregular intervals). The functional job title of the person/s responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1

Legal disclaimer
This document has been prepared by Berenberg Bank. This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. Berenberg Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. Berenberg Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. Berenberg Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services.

Analyst certification

I, Alistair Campbell, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates.

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Bayer AG
Pharmaceuticals

I, Louise Hinds, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates.

Remarks regarding foreign investors

The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

United Kingdom
This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

United States of America

This document has been prepared exclusively by Berenberg Bank. Although Berenberg Capital Markets LLC, an affiliate of Berenberg Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information.

Third-party research disclosures Company

Bayer (1) (2) (3) (4) (5)

Disclosures
no disclosures

Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) section above.

Copyright

Berenberg Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without Berenberg Banks prior written consent. June 2012 Berenberg Bank

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