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Interim report for the first quarter of 2006: Bayer achieves record earnings


Wenning: dynamic start strengthens our optimism for the full year / Sales up 11.8 percent to EUR 7,494 million / EBIT before special items reaches an all-time high of EUR 1,236 million / Record underlying EBITDA of EUR 1,680 million

Thursday - April 27, 2006 Leverkusen – The Bayer Group had a record-breaking first quarter in 2006: the operating result (EBIT) before special items advanced 8.2 percent to an all-time high of EUR 1,236 million (2005: EUR 1,142 million). “We got off to a dynamic start in 2006, continuing the previous year’s positive trend in terms of both sales and earnings,” said Bayer Management Board Chairman Werner Wenning, commenting on the interim report. Sales improved by 11.8 percent to EUR 7,494 million (2005: EUR 6,704 million). Adjusted for currency and portfolio effects, sales grew 5.8 percent. This gratifying improvement was mainly attributable to the Bayer HealthCare and Bayer MaterialScience subgroups. Despite difficult market conditions in Brazil, Bayer CropScience almost matched its high earnings level of the previous year.

Earnings before interest, taxes, depreciation and amortization (EBITDA) and before special items rose by 6.7 percent to a record EUR 1,680 million (2005: EUR 1,575 million). However, the very good earnings performance in the first three months was impacted by special charges totaling EUR 128 million (2005: EUR 138 million). These comprised largely an amount of EUR 110 million arising from an arbitration proceeding in the United States concerning MaterialScience regarding the production of propylene oxide. Bayer will explore all possibilities for legal recourse in this matter and has also asserted a claim to payment in a separate arbitration proceeding.

After special items, EBITDA for the first quarter of 2006 rose 8.0 percent to EUR 1,552 million (2005: EUR 1,437 million), while EBIT advanced 10.4 percent to EUR 1,108 million (2005: EUR 1,004 million). Taking into account, in particular, the higher interest expense due to interest incurred on retroactive tax payments in Germany and on payment obligations arising out of the above-mentioned U.S. arbitration proceeding, a non-operating loss of EUR 213 million was recorded (2005: minus EUR 131 million). After tax expense and minority interests, Group net income amounted to EUR 600 million (2005: EUR 652 million). The prior-year figure included EUR 52 million in income from discontinued operations (mainly Lanxess).

Considerable improvement in gross and net cash flow

Benefiting from the growth in EBIT, first-quarter gross cash flow improved 8.1 percent to EUR 1,190 million, while net cash flow came in a clear EUR 354 million ahead of the prior-year quarter, at EUR 128 million. Net debt on March 31, 2006 amounted to EUR 5.7 billion. This was EUR 0.2 billion higher than on December 31, 2005 and EUR 1.4 billion lower than on March 31, 2005. Provisions for pensions and other post-employment benefits, at EUR 6.3 billion, were EUR 0.9 billion lower than on December 31, 2005, mainly as a result of higher capital market rates.

Bayer HealthCare posts highest sales and earnings gains

The biggest sales and earnings gains in the first quarter of 2006 were achieved by Bayer HealthCare. This subgroup lifted sales 20.9 percent year on year to EUR 2,581 million (2005: EUR 2,135 million). All divisions contributed double-digit sales increases. The biggest contribution to the subgroup’s sales, at EUR 1,148 million (up 20.6 percent), came from the Pharmaceutical Division. Since January 1, 2006 this division has been divided into three business units: Primary Care, Hematology/Cardiology and Oncology. While the Primary Care business unit saw sales expand 9.6 percent due especially to strong growth in Avelox® and Levitra®, sales of pharmaceutical specialties (Hematology/Cardiology and Oncology) advanced 54.3 percent overall. This performance was chiefly attributable to the dynamic growth of the hemophilia drug Kogenate® and the successful launch of the new cancer drug Nexavar® in the United States. Through the planned acquisition of Schering, Bayer intends to substantially expand this high-earning business, where marketing is concentrated on specialist physicians.

The Consumer Care Division also turned in a very pleasing first-quarter performance. Sales of non-prescription medicines advanced 22.8 percent to EUR 642 million, driven mainly by rapid expansion in the United States and Europe. Particularly strong gains were registered by the leading products Aspirin®, Aleve® and Canesten®. Sales of the Diabetes Care, Diagnostics segment climbed by an even more substantial 23.9 percent to EUR 571 million, chiefly due to brisk business in North America. The Animal Health Division saw sales advance 10.6 percent to EUR 220 million.

Underlying EBIT of the Bayer HealthCare subgroup improved by 37.7 percent overall in the first quarter, to EUR 416 million (2005: EUR 302 million).

CropScience sales grow slightly despite difficult market conditions

Bayer CropScience generated first-quarter sales of EUR 1,771 million (2005: EUR 1,744 million), thus improving on the prior year’s high level by 1.5 percent. However, underlying EBIT declined by 3.5 percent to EUR 408 million (EUR 423 million) due to persistently tough market conditions in the crop protection business, especially in Brazil. In that country, the continuing appreciation of the currency is holding back exports of farm produce, clipping demand for insecticides and fungicides in particular. As expected, sales of Bayer’s herbicides and seed treatment products declined in Europe due to the reduction in sugar beet acreages. On the positive side, sales of the subgroup’s top ten products advanced 5.8 percent. Recent product launches such as the cereal fungicides Proline® and Fandango® and the herbicide Atlantis® were particularly successful. Overall, sales in the Crop Protection segment were almost unchanged year on year at EUR 1,413 million.

On the other hand, the Environmental Science, BioScience segment lifted first-quarter sales 9.5 percent to EUR 358 million. Contributing to this increase were higher sales of our products for professional users and good business with vegetable seeds.

Positive performance in all Bayer MaterialScience business units

Bayer MaterialScience grew sales in the first quarter, posting a rise of 10.5 percent year on year to EUR 2,811 million (2005: EUR 2,544 million). All business units contributed to this positive performance. In the Materials segment, higher volumes were achieved especially by the Polycarbonates business unit, while H.C. Starck in particular raised sales through price increases. Sales of the Materials segment came to EUR 1,035 million, an increase of 12.1 percent. In the Systems segment, sales advanced by 9.6 percent to EUR 1,776 million, driven mainly by price increases for TDI and polyether implemented by the Polyurethanes Business Unit. In contrast, prices and volumes for MDI declined slightly. Overall, the subgroup’s EBIT before special items improved by 11.1 percent to EUR 451 million (2005: EUR 406 million).

Pleasing growth in North America

About half of the Bayer Group’s growth was generated in North America, where sales moved ahead 22.2 percent to EUR 2,179 million. First-quarter sales in Europe advanced by 6.4 percent to EUR 3,308 million, with Germany reporting above-average expansion of 16.2 percent to EUR 1,197 million. Adjusted for portfolio effects, the improvement was around 11 percent in Germany and about 4 percent in Europe as a whole. In Asia/Pacific, sales rose 8.9 percent to EUR 1,130 million. Business in China developed particularly well, growing by 33 percent. In the Latin America/Africa/Middle East region, sales rose 13.3 percent to EUR 877 million.

Outlook for 2006 confirmed

“We have gotten off to a very good start in 2006 and can confirm our forecast for the full year,” summarized Wenning. For 2006 the Bayer Group is expecting a slight improvement in underlying EBIT and underlying EBITDA, and an EBITDA margin before special items of about 19 percent. “Thus we are targeting a new earnings record for the Bayer Group,” emphasized the Bayer Chairman. This guidance does not take the effects of the planned acquisition of Schering into account.

Forward-looking statements
This news release contains forward-looking statements based on current assumptions and forecasts made by Bayer Group management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in our public reports filed with the Frankfurt Stock Exchange and with the U.S. Securities and Exchange Commission (including our Form 20-F). The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.


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