Sustainable Development Report 2006

This year’s Sustainable Development Report continues our Group’s longstanding tradition of environmental and sustainability reporting that began with the publication of our first environmental report in 1976.

The Sustainable Development Report 2006 is designed to give an insight into our sustainability activities to stockholders, business partners, employees and the media. However, the publication also addresses non-governmental organizations, suppliers and authorities with whom we want to engage in dialogue to develop solutions to ecological and social challenges.

The Report is also intended to demonstrate to the general public how we achieve a balance between ecological, economic and social needs and which steps we take to meet global challenges such as climate protection, clean water or human rights.

In this context we are committed to the ten principles of the United Nations Global Compact. Through this publication we also follow the OECD Guidelines for Multinational Enterprises, 2000 revision (“Disclosure”), and have aligned ourselves to the guidelines of the Global Reporting Initiative (GRI). An index at the end of the Report indicates where in the Report we provide information on individual GRI indicators, known as “G3” in their October 2006 revision.

In the selection of topics this year we took account of our ongoing dialogue with stakeholders, specific feedback on our previous Report and a recent stakeholder survey

. In each of the sections we also focus on a specific issue. We have selected these four topics because of their relevance to the Group; the statements were subjected to an assurance process by Deloitte

.

The statements provided here apply to all sites and activities of the Bayer Group. Our environmental and safety data cover all companies in which we have a share of at least 51 percent. The Report takes into account activities and data for the business acquired from Schering, Berlin, Germany.

This Report is published in German, English and Spanish. The editorial deadline was June 4, 2007. Our next Sustainable Development Report is due to be published in 2008.

Bayer Group key data

	2005	2006	Change
	€ million	€ million	%
Bayer Group
Net sales	24,701	28,956	+17.2
EBITDA¹	4,122	4,675	+13.4
EBITDA before special items	4,602	5,584	+21.3
EBIT²	2,514	2,762	+9.9
EBIT before special items	3,047	3,479	+14.2
Income before income taxes	1,912	1,980	+3.6
Net income	1,597	1,683	+5.4
Earnings per share (€)³	2.19	2.22	+1.4
Gross cash flow⁴	3,114	3,913	+25.7
Net cash flow⁵	3,227	3,928	+21.7
Capital expenditures	1,210	1,739	+43.7
Research and development expenses	1,729	2,297	+32.9
Dividend per Bayer AG share (€)	0.95	1.00	+5.3
Bayer HealthCare
Net external sales	7,996	11,724	+46.6
EBITDA¹	1,280	1,947	+52.1
EBITDA before special items	1,487	2,613	+75.7
EBIT²	923	1,313	+42.3
EBIT before special items	1,177	1,715	+45.7
Gross cash flow⁴	923	1,720	+86.3
Net cash flow⁵	1,087	1,526	+40.4
Capital expenditures	225	576	+156.0
Bayer CropScience
Net external sales	5,896	5,700	-3.3
EBITDA¹	1,284	1,166	-9.2
EBITDA before special items	1,273	1,204	-5.4
EBIT²	690	584	-15.4
EBIT before special items	685	641	-6.4
Gross cash flow⁴	964	900	-6.6
Net cash flow⁵	904	898	-0.7
Capital expenditures	201	197	-2.0
Bayer MaterialScience
Net external sales	9,446	10,161	+7.6
EBITDA¹	1,721	1,499	-12.9
EBITDA before special items	1,764	1,677	-4.9
EBIT²	1,250	992	-20.6
EBIT before special items	1,293	1,210	-6.4
Gross cash flow⁴	1,254	1,166	-7.0
Net cash flow⁵	1,337	1,281	-4.2
Capital expenditures	642	753	+17.3

2005 figures restated.

EBITDA = EBIT plus amortization of intangible assets and depreciation of property, plant and equipment. EBITDA, EBITDA before special items and EBITDA margin are not defined in the International Financial Reporting Standards and should therefore be regarded only as supplementary information. The company considers underlying EBITDA to be a more suitable indicator of operating performance since it is not affected by depreciation, amortization, write-downs/write-backs or special items. The company also believes that this indicator gives readers a clearer picture of the results of operations and ensures greater comparability of data over time. The underlying EBITDA margin is calculated by dividing underlying EBITDA by sales.

EBIT as shown in the income statement.

Earnings per share as defined in IAS 33 = net income divided by the average number of shares.

⁴

Gross cash flow = income after taxes from continuing operations plus income taxes, plus/minus non-operating result, minus income taxes paid, plus depreciation, amortization and write-downs, minus write-backs, plus/minus changes in pension provisions, minus gains/plus losses on retirements of noncurrent assets, plus non-cash effects of the remeasurement of acquired assets. The change in pension provisions includes the elimination of non-cash components of the operating result. It also contains benefit payments during the year.

⁵

Net cash flow = cash flow from operating activities according to IAS 7.