Science For A Better Life
`
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`
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`))COVERPICTURE
`
`Annual Report
`
`: : O I
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`I
`
`ABOUT THIS REPORT
`This Annual Report combines
`our financial and our sustairr
`ability reporting. On page
`3031 you can find further
`information about this report
`and learn how to use it.
`
`» Bayer: Science For A Better Life
`it KGy Data
`» Chairman’s Latter
`
`,-, FOCUS ON LlFE SCEENCE BUSINESSES
`:> For a better life
`
`» Promoting health and well—being
`» Food for the world
`» Research at the interface
`» Optil‘nally equipped for the future
`
`» TO OUR STOCKHOLDERS
`>> Executive Council
`
`» Report at the Supervisory Board
`)1 Investor Information
`
`:3 Masthead, Disclaimer
`
`01 n COMBINED MANAGEMENT REPORT OF THE BAYER GROUP AND BAYER AG
`
`Report on Economic Position
`>> Overview of Sales, Earnings and Financiai Position
`» Business Development by Subgroup, Segment and Region
`>> Earnings; Asset and Financial Position ofthe Bayer Group
`» Earnings; Asset and Financial Position of Bayer AG
`
`02 >> CONSOLIDATED FlNANClAL STATEMENTS OF THE BAYER GROUP
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`» RESPONSIBILITY STATEMENT
`
`)3 AUDITORS' REPORT
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`03 » FURTHER INFORMATiON
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`» Financial Calendar
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 1 of 299
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`» TABLE OF CONTENTS
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`Bayer is a global enterprise with core competencies
`
`in the fields of health care, agriculture and high—tech
`
`polymer materials.
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`As an innovation company, we set trends in research—
`intensive areas. Our products and services are designed
`to benefit people and improve their quality of life. At the
`
`same time we aim to create value through innovation,
`growth and high earning power.
`
`We are committed to the principles of sustainable
`development and to our social and ethical responsi—
`
`bilities as a corporate citizen.
`
`Cover picture
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`Employees at the research and development laboratory in Memphis, Tennessee,
`are working on formulations for non-prescription products. The laboratory now
`belongs to Bayer following the acquisition of the consumer care business of U5.
`pharmaceutical company Merck Er Co., Inc. Our cover picture shows Angie Robertson
`and Patrick Williams inspecting a sample.
`
`[I] You can read more about Bayer's range of non-prescription products in the
`magazine section of this Annual Report beginning on page 10.
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 2 of 299
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`» TABLE OF CDN'I'EN'I'S
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`Chairman's Letter
`
`Decisive step to create a pure
`
`Life Science company
`
`2g.“ flaw Mad
`Ma: 9742; Mia/77¢ .-
`
`In 2014, just a year after our 150th anniversary, Bayer opened up
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`a new chapter in its history: we initiated the decisive step toward
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`becoming a pure Life Science company. In the future we will
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`focus our entire innovative capability on designing molecules
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`and solutions that improve human health or nutrition. Never has
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`our mission ”Bayer: Science For A Better Life” more truly
`reflected who we are and what we do.
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`While we continued to harvest the fruits of our own science and
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`research in 2014 with the global marketing of our recently
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`launched pharmaceuticals as well as our crop protection products
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`and seeds, we also successfully acquired the consumer care busi
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`ness of Merck 8 Co., Inc., United States —- making us the global
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`number two in consumer care. This largely stable business now
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`helps us to compensate volatility in other businesses.
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 4 of 299
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`» TABLE OF CONTENTS
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`Bayer MaterialScience also performed well in 2014, successfully
`
`addressing previous challenges. Against this background,
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`MaterialScience requested further significant investment in its
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`organic growth along with financial headroom for possible future
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`acquisitions.
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`In recent years, however, Bayer’s strategy and strong perfor-
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`mance have increasingly been driven by our success in the
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`Life Sciences. This has meant that MaterialScience is competing
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`for resources against businesses that we believe continue to
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`promise significantly higher returns. Therefore we decided to
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`demerge MaterialScience so that it will have independent
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`access to the capital market, while Bayer focuses solely on the
`Life Sciences.
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`This is a turning point in Bayer’s history. But our action is con—
`sistent with what our founders did and what the focus of our
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`research has been for more than 150 years. The best way we can
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`innovate is by inventing new molecules that ultimately lead to
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`innovative applications. The only thing that has changed over
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`time are the markets or fields of application in which our mole-
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`cules deliver the largest value contribution. Today, the focus is on
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`the Life Sciences. It is crucial for Bayer's long—term success that
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`we continually adjust our business portfolio to market require—
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`ments and respond to the needs of customers and society.
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`In September 2014, the Supervisory Board unanimously approved
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`the demerger of MaterialScience, which we intend to float
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`on the stock market by mid-2016. We are all convinced that this
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`strategic decision will bring great benefits and opportunities —
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`for Bayer and for MaterialScience. The new, independent
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`company is set to retain leadership positions in all of its business
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`areas. We strongly believe in its future success.
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 5 of 299
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`3) TABLE OF CONTENTS
`
`
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`Diaiogue with physicians: Bayer CEO Dr. Marijn Dekkers and Associate Prufessor Dr. Jiirgen Zumhé, Directur ufthe
`Urology Department at Leverkusen Hospital
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`As a pure Life Science company, Bayer will have a unique research
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`focus on the health of humans, animals and plants. And this re-
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`search shows us today that the similarities between the different
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 6 of 299
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`3) TABLE OF CONTENTS
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`species are far greater than was generally assumed just a few
`
`decades ago. This is especially true at the cellular biochemical
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`level at which our active ingredients operate. While we are still at
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`an early stage, we are in the best position to potentially leverage
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`many synergies from species' common characteristics.
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`To continue innovating and help physicians to care for their
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`patients, veterinarians to look after animals and farmers to feed the
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`growing world population, we must increasingly invest in research
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`and development (RsD). Our RsD budget for the Life Sciences in
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`2014 was €32 billion. Overall we expect the Ran-to-sales ratio to
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`continue increasing in the coming years.
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`The success of our pharmaceutical products, in particular, has great
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`significance in this regard. We are among the fastest-growing of
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`the world's major pharmaceutical companies. Last year we lifted
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`Pharmaceuticals sales by 11.2 percent on a currency" and portfo—
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`lio«adjusted basis. The increase was driven by our recently launched
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`products XareltoTM, EyleaT“, Stivargam, XofigoTM and Adempas‘“.
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`CrOpScience, too, achieved a sales improvement of 11.2 percent
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`on a currency- and portfolio-adjusted basis, gaining market share
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`especially with the new products we brought to market in the past
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`few years.
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`Spurred by these successes, our company's financial development
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`has also been outstanding. We can look back at another record
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`year for Bayer. Revenues increased in 2014 to over €42 billion,
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`which means we saw more than 7 percent growth after adjusting
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`for currency and portfolio effects. Our clean EBITDA amounted to
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`€3.23 billion, up by nearly 5 percent compared with the prior year.
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`Core earnings per share rose by 7.3 percent to €6.02.
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`n TABLE OF CONTENTS
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`Thanks to this successful development and the appreciation it
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`has brought from investors, Bayer for the first time became the
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`company with the highest market capitalization in the German
`share index DAX.
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`To continue strengthening our Life Science businesses, we
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`need not only organic growth but also bolt-on acquisitions. These
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`improve our regional positioning, round out our product portfolio
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`and can give us access to major new technologies. In 2014 we
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`spent a total of e13.5 billion for acquisitions.
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`The largest among these was Merck s Co., Inc.'s consumer care
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`business. This significantly strengthens Bayer’s business with
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`non-prescription products across multiple therapeutic categories
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`and geographies. We also acquired Dihon Pharmaceutical Group
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`Co. Ltd, China, a consumer care company specializing in derma-
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`tology products. And we successfully completed the acquisition
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`of Algeta ASA, Norway, with which we had already collaborated on
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`the development and commercialization of the cancer drug
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`Xofigol'“ since 2009.
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`Acquisitions in CropScience include the Biagro group in
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`Argentina. Biagro's portfolio comprises organic seed treatments
`
`as well as crop protection products based on bacterial and fungal
`
`strains. In addition, we acquired the seed business of Paraguayan
`
`company Granar, which specializes in the breeding, production
`
`and marketing of improved seeds, especially for soybeans.
`
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`i) TABLE OF CONTENTS
`
`I would like to emphasize at this point that our excellent
`
`employees are our core business asset. Our corporate values of
`
`Leadership, Integrity, Flexibility and Efficiency — represented
`
`by the acronym LIFE ~ remain the cornerstones of our behavior.
`
`Continuous learning is a fundamental part of our organizational
`
`and talent development. Building specific skills, removing
`
`organizational obstacles and making improvements every day
`
`remain important elements of Bayer’s culture.
`
`In the future we also intend to intensify the dialogue with our
`various stakeholders. We are convinced of what we do and of the
`
`value of our products. We will communicate even more effectively
`
`to customers, society and politicians how our products improve
`
`the lives of millions of people across the globe.
`
`I am concerned by the growing number of critical stakeholders
`whose claims and demands are based on emotions and beliefs
`
`rather than on scientific facts. It is up to all of us to ensure that
`
`society creates the right framework for future innovations. In
`
`this context it is also important to us that economic growth be
`
`achieved in harmony with environmental and social responsibility.
`
`We adhere to the fundamentals of sustainable development and
`
`the ten principles of the Global Compact of the United Nations.
`
`On behalf of the entire Bayer Group management team, I would
`
`like to thank our employees for their dedication, motivation and
`
`ingenuity. Bayer would not be the great company it is today
`without them.
`
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`h TABLE OF CONTENTS
`
`We enter 2015 with continued optimism. Bayer's innovations
`
`have helped millions of people around the world and, in doing so,
`
`have strengthened our leadership position. In 2014 we added more
`
`innovative products to our portfolio and posted record financial
`
`results. We are committed to continue with this approach in 2015
`
`and beyond as we finalize our transformation into a pure Life
`
`Science company and work to further improve people's lives.
`
`Finally, Iwould like to thank you, our stockholders, for your ongo-
`
`ing support for our strategy and appreciation of our performance.
`
`Sincerely,
`
`WW Dew“
`
`Dr. Marijn Dekkers
`Chairman of the Board of Management Of Bayer AG
`
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`J) TABLE OF CONTENTS
`
`MAGAZINE
`
`Life Science businesses
`
`Focus on
`
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 11 of 299
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 12 of 299
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`WATSON LABORATORIES, INC. , Ex. 1076, p. 12 of 299
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`
`
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`
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`JzayerAnnualRepon201-1
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`

`14
`Magazine ll Focus on Life Science businesses
`
`>3 TABLE OF CONTENTS
`
`Bayer Annual Report 2014
`
`Pharmaceuticals // Across the globe, people continue to
`suffer from severe illnesses for which very few effective,
`well tolerated treatments are available. Research-driven
`
`pharmaceutical companies like Bayer are working on inno-
`vations intended to benefit these patients. Take pulmonary
`hypertension, for example. The treatment options for this
`condition have recently improved to a significant degree.
`
`Exercise is out of the question for Noemi Baert. Even a
`staircase with 20 steps pushes her to the limit. Awalk of
`just a few hundred meters is more than she can manage.
`The 13-year-old from Destelbergen in Belgium isn't even
`able to carry her own schoolbag. Since the age of six,
`Noemi has suffered from pulmonary hypertension. This
`lifesthreatening illness can affect people of any age.
`
`It usually begins gradually. The patient tires more easily
`than before, and any exertion leads to shortness of
`breath. The symptoms remain non-specific as the condi-
`tion progresses. They can include increasing shortness
`of breath, a decline in physical strength, chest pains,
`water retention in the legs, blue lips and fainting. These
`symptoms are caused by a narrowing of the pulmonary
`arteries, which can happen for a variety of reasons. As
`other, comparatively common conditions involve similar
`symptoms, it may be several years before a patient is
`diagnosed with pulmonary hypertension. This is the
`term physicians use to group together the various forms
`of the disease. Noemi was lucky in one respect, as a
`cardiologist quickly reached the correct diagnosis. "That
`helped my daughter to get the right treatment," says
`Noémi’s mother, Danielle Verbrugghen.
`
`However, Christian Miiller from Arnsberg had to wait many
`years. His ordeal began in 2oo4 with a severe pulmonary
`embolism caused by a vein thrombosis. Miiller, who was 36
`at the time, spent several months in critical condition in the
`hospital. Even during his subsequent rehabilitation, he just
`wasn't recovering properly. "I wasn’t able to do the exere
`cise section of the program,” recalls Miiiier, who is trained
`in wholesale and export trade. The doctors couldn’t pin—
`point the cause and, to alleviate the symptoms, they pre—
`scribed oxygen treatment. For the next three years, an oxy
`gen machine was Miiller's constant companion. "I couldn't
`work anymore and it was impossible to live an indepen-
`dent life," he says. His parents helped him with daynto-day
`tasks, but eventually he had to use a wheelchair. When
`Muller was admitted to the hospital in the spring of 2007
`
`
`
`Dr, Olivier Brandicourt,
`Chairman of the Bayer HealthCare
`Executive Committee. on the subgroup's strategy
`
`"Fueling growth through
`diversification and research ”
`
`The acquisition of Merck 3 Co., Inc.'s non-prescription
`business marked an important milestone for Bayer
`HealthCare. Alongside strengthening our Consumer
`Care division, this acquisition also reflects our commit
`merit to Bayer HealthCare’s diversification strategy.
`Whether it is human or animal health, innovative pharma-
`ceutical products or selfsmedication, the breadth of our
`business and portfolio enables us to respond to a rapidly
`evolving environment. For example, the boundaries
`between "patients” and “consumers" are increasingly
`fading, with prevention and well-being becoming almost
`as important as the treatment of diseases. The know-
`how and expertise within and across our four divisions
`enable us to capture our customers' needs in what we
`thiuk is the best possible way.
`
`Due of the key pillars of our long~term strategy is research
`and development mso) across our businesses, aimed at
`driving innovation beyond 2020. Some of our current and
`recently launched products will run out of patent betweeu
`2o23 and 2025. It is therefore essential that the next
`Wave of iunovation follow seamlessly to safeguard growth.
`Our Ref) efforts in this regard focus on the areas in which
`we excel and have a proven track record of success, for
`example in cardiology, women's health and some areas of
`oncology.
`
`Our strengths throughout our diversified businesses
`coupled with the required investments will elevate our RED
`activities to the next level and ultimately enable us to intro-
`duce customer-centric, innovative products to the market.
`
`
`
`
`
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`

`Bayer Annual Report 2014
`
`.\2 TABLE OF CONTENTS
`
`Focus on Life Science businesses 1/ Magazine
`
`An operation at Cologne
`University Hospital: Professor
`Stephan Rosenkranz and
`surgical nurse Nlna Kopper
`
`
`
`
`
`13-yeareolo Noemi suffers from pulmonary hypertension. Here in the Wupperr
`tat laboratory, Bayer researcher Professor Johannes-Peter Stasch talks to
`Noéml and her mother, Danielle Verbrugghen, about the disease.
`
`Cardiologist Professor Stephan Rosenkranz and his
`colleague Dr. Joana Jesus during the morning rounds
`
`following yet another pulmonary hemorrhage, a doctor
`there suspected he was suffering from pulmonary hyper?
`tension. "He sent me to the cardiac center at Cologne Uni-
`versity Hospital for further tests," Miiller explains.
`
`The center is home to cardiologist Professor Stephan
`Rosenkranz, one of the few experts on pulmonary hyper
`tension in Germany. He is in charge of the center's pul»
`monary hypertension outpatient clinic and knows from
`experience that it can still take a long time before a pa—
`tient with the condition gets to see a specialist. "Early di-
`agnosis is very important for treating this condition - and
`the treatment options have greatly increased over the past
`few years," he says. A complex diagnostic program has to
`
`be performed before treatment can begin. To confirm the
`diagnosis, it is essential to measure the blood pressure in
`the pulmonary arteries and examine the right ventricle of
`the heart using a catheter. Further tests are needed to de-
`termine the type of pulmonary hypertension affecting the
`patient. In Muller’s case, it turned out that his illness was
`caused by the pulmonary embolism he had suffered back
`in 2004. In this form of the disease. known as chronic
`thromboembolic pulmonary hypertension (CrEPI-ll, tiny
`blood clots in the small pulmonary arteries are responsi-
`ble for the increased pressure and associated symptoms.
`CTEPH can occur as a rare complication of acute pulmd
`nary embolism, but the pathogenesis is not completely
`understood. "In many cases, this form of pulmonary hy-
`
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`16
`Magaaine .f/ Focus on Life Science businesses
`
`Bayer Annual Report 2014
`
` The blood vessels in the lung
`
`are CUHSIFK‘iEd, so the heart has
`to worl: harder to pump hlorrrl
`through them.
`l'lils progressively weakens the
`heart, thus rvrlurmg the body's
`oxygen supply
`
`PULMONARY HYPERTENSION 1'!
`there are tar-Everal types of pulmonary hyperten-
`sion (PH), H! which the blood pressure in the
`vessels of the lung is chronically elevated. Early
`diagnosis and Clear identification or the lorrn of
`the disease are essential to ensure the patient
`receives the best possible treatment at an early
`stage. A delay ll'! starring treatment may greatly
`rerluco life expectancy.
`
`pertension is potentially curable with special surgery,"
`says Rosenkranz. That was true for Mliiler, too. Although
`he still very much feels the effects of his disease, he can
`now live without an oxygen machine again.
`
`This type of surgery is not possible for young Noemi, as
`she suffers from a different form of pulmonary hypertens
`sion called pulmonary arterial hypertension. She is
`helped by various medications that lower the pressure by
`expanding the pulmonary arteries and relieving the strain
`on her heart. "There are now several drugs that have
`this effect. The first member of a distinct substance class
`has become available in addition. It is also the first active
`
`ingredient that can significantly improve the condition
`of patients with inoperable CTEPH or persistent or recur-
`rent CTEPH after surgery,” Rosenkranz reports. Yet there
`remains a great need for further research. "We haven't
`achieved our goal yet," he points out, adding that univers
`sities and the research-driven pharmaceutical industry
`still have much work to do. "On the one hand, we must
`continue to improve existing treatment options. 011 the
`other, we need to identify new targets for active ingredi-
`ents in order to develop new drugs that inhibit excessive
`cell growth. This cell growth is partly responsible for
`the narrowing of the pulmonary arteries."
`
`Deveioping drugs that can dilate arteries or address the
`remodeling or increased formation of tissue in the inner
`lining of the arteries is a core area of research at Bayer
`HealthCare. Under a co—development and Co-commers
`cialization agreement concluded last year, Bayer Health
`Care is collaborating with U.5. pharmaceutical company
`Merck 6 Co., Inc. (known as MSD outside the Us. and
`Canada) in this field.
`
`Bayer scientists are also working on other important
`approaches to therapy. These include active ingredients
`for the specific treatment of various cancers, serious car
`diovascular conditions such as stroke and heart failure,
`and certain renal function disorders. A further focus is on
`
`the development of novel medicines to treat gynecologi—
`cal diseases. "We are concentrating on innovative active
`ingredients that represent real breakthroughs in the
`treatment of a range of illnesses and that address high
`unmet medical needs. The needs of patients who urgent~
`ly require new treatment options are always at the fore-
`front of our work. The successful launch of numerous
`
`products over the past few years is the result of this long-
`term focus on innovation," says Dr. Jorg MO'ller, head of
`Global Development at Bayer HealthCare.
`
`The Bayer scientists are currently working to seamlessly
`maintain this innovation flow. This year, the decision
`could be made to transition five further candidates to
`Phase in of clinical development. These active ingredi-
`ents are intended to expand treatment options for various
`serious illnesses, including a specific form of lymphoma;
`anemia caused by certain renal disorders; different forms
`of severe heart failure; and benign tumors of the uterus
`tmyomas). A number of early—stage research projects
`are proceeding in parallel. "Our work in the field of cardi-
`ology, for example, includes new approaches to treating
`the causes of various vascular diseases, such as pulmo
`nary hypertension," Bayer scientist Professor Johannes-
`Peter Stasch reports. in carrying out this work, he and his
`colleagues are fulfilling one of the greatest desires of
`Noemi and her mother: "We very much hope that the
`researchers will continue looking for treatments that will
`help to stabilize Noemi's condition." If
`
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`Bayer Annual Reporl 2014
`
`» TABLE OF CONTENTS
` 17
`Focus on Life Science businesses/f Magazine
`
`3cm 5mm of the consumer care business of u.s. pharmaceullcals company Merck 5 (20., In
`
`_
`
`_
`
`.¥-the labofatnry l|1 Memphi
`
`';
`
`5912, which new belongs to We.
`
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`
`Magazine 1'! Focus on ife Science bus nesses
`
`5) TABLE OF CONTENTS
`
`Bayer Annual Report 2014
`
`Consumer Care // With its range of non-prescription
`and nutritional products, Bayer aims to help people do
`more for their health and well-being. This not only
`increases personal quality of life but can aEso greatly
`reduce health care costs.
`
`Human life expectancy is increasing. At the same time,
`more and more people are making their own choice of
`medicines for the prevention or treatment of day-to-day
`ailments. And many people get information from the
`internet. “It has never been easier — or so important —
`to actively improve your own health,” says Erica Mann,
`spokesperson for the World Self—Medication Industry
`(WSMI) and Head of the Consumer Care Division of Bayer
`HealthCare.
`
`According to forecasts by the U.S. Department of Health
`and Human Services' National Institute on Aging, the
`
`over-65$ are the fastest—growing section of the popula-
`tion. That is causing health care costs to rise, and the
`strain on physicians and care givers is growing. Compas
`nies in the heaith care industry have an important contri
`bution to make: ”We need a new, innovative approach to
`health care," says Mann. "Instead of waiting until people
`become ill before we treat them, we should be giving
`them the products and the information they need to help
`them stay healthy." Non-prescription medicines — also
`known as over—the—counter (OTC) products — and nutri-
`tional supplements play a key role in this, as do opportue
`nities to find out about various healthrrelated topics.
`
`
`
`Microbiologist Aldia Wims-Jones carries out a test in Bayer's nEw research and development laboratory in Memphis, Tennessee.
`
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`Bayer Annual Report 201-}
`
`n TABLE OF CONTENTS
`
`Focus on Life Sciatica businesses/f Magazine
`
`19
`
`
`
`Pollen dispersal can be simulated in the allergy
`room at the Consumer Center in Memphis,
`Tennessee. Vent-(at Venkatakrishnan (right)
`monitors the polien concentration in the room,
`which is designed for up to 12 people.
`
`
`
`As a global leader in the OTC and nutritionals sector,
`Bayer is in a good position to provide access to non—pre—
`scription products worldwide. After all, the company
`can look back on a tradition extending over one hundred
`years, starting with probably the best-known painkiller of
`them all — Aspirinm. Over the decades, the orc portfolio
`has been expanded to include everything from products
`to treat skin problems, gastrointestinal conditions or
`colds to nutritional supplements.
`
`The company‘s recent purchase of