32. Legal risks

Bayer HealthCare

Product-related litigation

Competition law proceedings

Patent disputes

Further legal proceedings

Bayer CropScience

Proceedings involving genetically modified rice

Asbestos:

Premise®:

Bayer MaterialScience

Antitrust proceedings in connection with rubber products

Personal injury litigation

Liability considerations following the Lanxess spin-off

As a global company with a diverse business portfolio, the Bayer Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax assessments and environmental matters. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal or regulatory judgments could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect our revenues and earnings.

Legal proceedings currently considered to involve material risks are outlined below. The legal proceedings referred to do not represent an exhaustive list.

HealthCare:

Product-related litigation

Lipobay/Baycol: As of February 1, 2010, approximately 200 Lipobay/Baycol cases, approximately 175 of them in the United States, remain pending against Bayer worldwide, claiming economic loss and personal injury. We are currently aware of fewer than five pending cases in the United States that in our opinion meet our criteria for potential settlement. Bayer believes the legal risks remaining in the Lipobay/Baycol litigation are no longer material.

Magnevist®: As of February 1, 2010, there were approximately 310 lawsuits pending and served upon Bayer in the United States involving the gadolinium-based contrast agent Magnevist®. Three other manufacturers of gadolinium-based contrast agents in the United States also have been named party to the same or similar lawsuits. Additional cases are anticipated.

In the lawsuits, plaintiffs allege that patients developed nephrogenic systemic fibrosis (NSF) as a result of the use of Magnevist® during medical imaging procedures. NSF is a rare, severe condition that can be debilitating and in some cases fatal. Plaintiffs seek compensatory and punitive damages under various theories, including strict liability and negligence and/or breach of warranty, claiming, among other things, that the product is defective and unreasonably dangerous and that Bayer knew, or should have known, of the risks associated with Magnevist® and failed to disclose them or adequately warn its users.

All cases pending in federal courts have been consolidated in a multidistrict litigation (MDI) proceeding for common pre-trial management. Without admission of liability, Bayer has reached agreements with approximately 140 plaintiffs in the United States to settle their claims. Bayer will continue to consider the option of settling individual lawsuits on a case-by-case basis. Irrespective of these settlements, Bayer continues to believe that it has meritorious defenses and intends to defend itself vigorously in the cases remaining. Bayer has taken accounting measures.

Trasylol® (aprotinin) is a drug approved for use in managing bleeding in patients undergoing coronary artery bypass graft surgery. As of February 1, 2010, there were approximately 1,600 lawsuits pending in the United States and served upon Bayer on behalf of persons alleging, in particular, personal injuries, including renal failure and death, and economic loss from the use of Trasylol®. Bayer also has been served with three class actions in Canada. Plaintiffs in both the United States and the Canadian cases seek compensatory and punitive damages, claiming, among other things, that Bayer knew or should have known of these risks and is liable for having failed to disclose them or adequately warn users of Trasylol®. All cases pending in U.S. federal courts have been consolidated in a multidistrict litigation (MDI) proceeding for common pre-trial management. Additional cases are anticipated.

In 2006 and 2007 observational studies reported on a possible correlation between the administration of Trasylol® and severe renal dysfunction, myocardial infarction, stroke and an increase in mortality. In 2007, Bayer temporarily suspended worldwide marketing of Trasylol® after preliminary results from an independent clinical study in Canada raised concerns about a possible increased risk of mortality in patients who had received Trasylol®. The marketing suspension will remain in effect until the final results from the Canadian study have been analyzed and the benefit-risk assessment for Trasylol® can be re-evaluated together with the health authorities. In some countries, including the United States, Trasylol® continues to be available to certain surgical patients with an established medical need. We are closely cooperating with health authorities to resolve the questions that have arisen.

Bayer believes it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.

HIV/HCV: Numerous actions are pending against Bayer in the United States and other countries seeking damages for plaintiffs resident outside of the United States who claim to have become infected with HIV or HCV (hepatitis C virus) through use of blood plasma products sold by Bayer. Additional actions are pending by U.S. residents who claim to have been infected with HCV. Bayer and its three co-defendants have entered into an agreement with two U.S. law firms representing the vast majority of plaintiffs in the U.S. federal multidistrict factor concentrates litigation. The agreement is subject to conditions that must be satisfied before the settlement can be completed, including broad acceptance of, and overall participation in, the settlement by the groups of plaintiffs represented by these firms. Bayer will continue to vigorously defend any claims that are not included in the resolution process.

Yasmin®/YAZ®: As of February 15, 2010, there were about 1,100 lawsuits pending in the United States served upon Bayer on behalf of persons alleged to have suffered personal injuries, some of them fatal, from the use of Bayer’s oral contraceptive products Yasmin®, YAZ® and/or Ocella, a generic version of Yasmin® distributed by Barr Laboratories, Inc. in the U.S. market. Plaintiffs seek compensatory and punitive damages, claiming, in particular, that Bayer knew or should have known the alleged risks and should be held liable for having failed to disclose them or adequately warn users of Yasmin® and YAZ®. Bayer has also been served with three putative consumer class actions claiming economic loss, one of them also claiming personal injuries. All cases pending in U.S. federal courts have been consolidated in a multidistrict litigation (MDL) proceeding for common pre-trial management. In addition, two Canadian class actions have been served upon Bayer. Additional lawsuits are anticipated. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. Bayer is also taking over Barr’s defense in certain cases according to the parties’ supply and licensing agreement. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.

In connection with the above matters concerning Lipobay/Baycol, Magnevist®, Trasylol®, HIV/HCV and Yasmin®/YAZ®, Bayer is insured against product liability risks to the extent customary in the industry.

Competition law proceedings

Cipro®: Approximately 40 putative class action lawsuits and one individual lawsuit against Bayer involving Cipro®, a medication used in the treatment of infectious diseases, have been pending in the United States since 2000. The plaintiffs are suing Bayer and other companies also named as defendants, alleging that a settlement to end patent litigation reached in 1997 between Bayer and Barr Laboratories, Inc. violated antitrust regulations. The plaintiffs claim the alleged violation prevented the marketing of generic ciprofloxacin as of 1997. In particular, they are seeking triple damages under U.S. law. After the settlement with Barr, the patent was the subject of a successful re-examination by the U.S. Patent and Trademark Office and of successful defenses in U.S. federal courts. It has since expired.

All the actions pending in federal courts were consolidated in federal district court in New York in a multidistrict litigation (MDL) proceeding. The Court of Appeals for the Federal Circuit in Washington D.C. affirmed the 2005 ruling of the federal district court in New York dismissing all lawsuits filed in federal court. Meanwhile, there are no further avenues of appeal in these federal indirect purchasers’ cases. Another appeal remains pending in the United States Court of Appeals for the Second Circuit (New York) concerning the claims brought by direct purchasers of Cipro®. Further cases are pending before various state courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously.

Patent disputes

Yasmin®: In 2005, Bayer filed suit against Barr Pharmaceuticals, Inc. and Barr Laboratories, Inc. in U.S. federal court alleging patent infringement by Barr for the intended generic version of Bayer’s Yasmin® oral contraceptive product in the United States. In 2008, the U.S. federal court invalidated Bayer’s ’531 patent for Yasmin®. In August 2009, the U.S. Court of Appeals for the Federal Circuit in a two-to-one opinion affirmed this decision. Bayer has filed a petition for review in the U.S. Supreme Court.

In 2008, Bayer and Barr Laboratories, Inc. signed a supply and licensing agreement for Yasmin® covering the United States. Bayer supplies Barr with a generic version of Yasmin® which Barr markets solely in the United States. Barr pays Bayer a fixed percentage of the revenues from the product sold by Barr. Bayer continues to pursue its appeal of the court decision that invalidated Bayer’s U.S. patent ’531 for Yasmin®. If Bayer should ultimately prevail, Bayer would receive a larger share of Barr’s revenues from sales of its generic version of Yasmin® in the United States.

In 2008 Bayer received two notices of an Abbreviated New Drug Application with a Paragraph IV certification (an “ANDA IV”) pursuant to which Watson Laboratories, Inc. and Sandoz, Inc. each seek approval to market a generic version of Bayer’s oral contraceptive Yasmin® in the United States. Bayer has filed suit against Watson and Sandoz in U.S. federal court alleging patent infringement by Watson and Sandoz for the intended generic version of Yasmin®. In reply, Watson and Sandoz have filed counterclaims alleging, among other things, the invalidity of various Bayer patents. Sandoz has further alleged that Bayer and Barr have made arrangements that are anticompetitive and violate antitrust and unfair competition laws.

YAZ®: In 2007 and 2008, Bayer received notices from Barr Laboratories, Inc., Watson Laboratories, Inc. and Sandoz, Inc. that each company has filed an ANDA IV seeking approval of a generic version of Bayer’s YAZ® oral contraceptive in the United States. All three applications claim that Bayer’s patents are invalid and/or that the respective generic product does not infringe them. Bayer has filed patent infringement suits against Watson and Sandoz in U.S. federal court claiming that certain of Bayer’s patents have been infringed. In its defense statement, Sandoz has alleged, among other things, that Bayer and Barr have made arrangements that are anticompetitive and violate antitrust and unfair competition laws. If Bayer should ultimately prevail in its litigation with Barr regarding Yasmin®, Bayer would evaluate its options to use the ’531 patent against Watson and Sandoz.

In 2008, Bayer and Barr agreed that Bayer will grant Barr a license to market a generic version of YAZ® in the United States starting July 2011. Bayer will supply Barr with the product for this purpose. Should Bayer lose patent lawsuits in the United States against other companies concerning YAZ®, Bayer would begin supplying the product to Barr at that time and Barr would begin marketing generic YAZ® in the United States. Barr will pay Bayer a fixed percentage of the revenues from the product sold by Barr.

Blood glucose monitoring devices: In 2005, Abbott Laboratories commenced a lawsuit in the United States against Bayer and another party alleging infringement of two of Abbott’s patents relating to blood glucose monitoring devices. The devices concerned are sold by Bayer as part of its Ascensia® Contour® system and its DEX® and Autodisc® system. The Ascensia® Contour® system is supplied to Bayer by a Japanese manufacturer, who originally designed the product and is contractually obligated to indemnify Bayer. In 2006, Abbott added a separate claim of infringement against the devices sold by Bayer as part of its DEX® and Autodisc® system. Bayer is not entitled to indemnification on this separate claim. In 2008 the court granted summary judgment in favor of Bayer with regard to one of the two patents and held the patent claims at issue invalid. After a trial on the issue of invalidity, the court also held the second patent invalid. In January 2010, the U.S. Court of Appeals for the Federal Circuit affirmed both decisions. It is not clear whether Abbott will pursue further legal remedies.

In 2007, Roche Diagnostics Operations and Corange International commenced a lawsuit in the United States against Bayer and several other parties alleging infringement of two of Roche’s patents relating to blood glucose monitoring devices. Two of the accused devices are sold by Bayer as part of its Breeze® 2 and Contour® systems. Bayer believes that these patents are covered by an existing license agreement between the parties, and the litigation has been dismissed in favor of an arbitration under this earlier license agreement. The arbitration proceeding is currently pending. Roche has added to the arbitration four additional patents which Roche alleges the Bayer Contour® systems infringe.

Bayer believes it has meritorious defenses in the above patent disputes and intends to defend itself vigorously.

Kogenate®: In 2008, Novartis Vaccines and Diagnostics, Inc. and Novo Nordisc A/S commenced a patent infringement suit in the United States alleging that Bayer’s manufacturing and marketing of the recombinant Factor VIII product Kogenate® infringe a patent granted in 2006. The suit primarily seeks damages. Bayer does not believe that it has infringed any valid patent. Proceedings were stayed in December 2009 because the parties had reached a settlement in principle. The parties are working to finalize the settlement agreement.

Levitra®: In July 2009, Bayer filed a patent infringement suit in U.S. federal court against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries, Ltd. In May 2009, Bayer had received notice of an Abbreviated New Drug Application with a Paragraph IV certification (an “ANDA IV”) pursuant to which Teva seeks approval to market a generic version of Levitra®, Bayer’s therapy for the treatment of erectile dysfunction, prior to patent expiration in the United States. Bayer intends to pursue its rights vigorously.

Further legal proceedings

Wholesale prices in the U.S.: Bayer and a number of pharmaceutical companies in the United States are defendants in pending lawsuits in which plaintiffs, including states, are alleging manipulation in the reporting of wholesale prices and/or best prices for their prescription pharmaceutical products. The plaintiffs seek damages, including disgorgement of profits and punitive damages. Bayer believes it has meritorious defenses and intends to defend itself vigorously.

Bayer Schering Pharma AG former shareholder litigation: In 2008, the squeeze-out of the former minority shareholders of Bayer Schering Pharma AG became effective. As usual in such cases, several shareholders have initiated special court proceedings to review the adequacy of the compensation payments made by Bayer for the transfer of the shares in the squeeze-out. The adequacy of the compensation and the guaranteed dividend paid by Bayer in connection with the Bayer Schering Pharma AG profit and loss transfer agreement made in 2006 is also being reviewed by the courts. (Please note that Bayer Schering Pharma AG and the former Schering-Plough Corporation, New Jersey, are unaffiliated companies that have been independent of each other for many years. The names “Bayer Schering Pharma” or “Schering” as used in this Annual Report always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively.)

Regorafenib: In May 2009, Onyx Pharmaceuticals, Inc. filed a complaint in the U.S. District Court for Northern California alleging that the compound regorafenib, which is under development by Bayer in cancer indications, is a compound to which Onyx has rights under a collaboration agreement which was originally concluded in 1994. Under this agreement, the parties jointly developed Nexavar®, a drug product to treat kidney and liver cancer. Bayer believes it has meritorious defenses and intends to defend itself vigorously.

Compliance investigation: Bayer is conducting an internal investigation into compliance by a former operating unit of one of its U.S. subsidiaries with the United States Foreign Corrupt Practices Act. That statute prohibits, among other things, corrupt payments by U.S. persons to governmental officials outside the United States. The unit, which conducted Bayer’s plasma-derived products business, was sold in 2005. The initial focus of the internal investigation has been on sales by that unit to certain Eastern European and Middle Eastern countries. In order to evaluate Bayer’s compliance efforts, Bayer is also reviewing sales practices in other units and countries. Bayer has voluntarily advised the United States government of the internal investigation. The United States government has not indicated what action it may take, if any, against Bayer or any individual, or whether it may conduct its own investigation. Because the internal investigation is ongoing, no statements on its outcome, or on any disadvantages for Bayer that may result therefrom, can be made at this point in time.

CropScience:

Proceedings involving genetically modified rice: As of February 1, 2010, Bayer was aware of a total of approximately 500 lawsuits, involving about 6,400 rice farmers and resellers, pending in U.S. federal and state courts against several Bayer Group companies in connection with genetically modified rice in the United States. Plaintiffs allege that they have suffered economic losses after traces of genetically modified rice were identified in samples of conventional long-grain rice grown in the United States. This is alleged to have led to various commercial damages, including a decline in the commodity price for long-grain rice, costs associated with restrictions on imports and exports, and costs to secure alternative supplies. All the actions pending in federal court were consolidated in 2006 in federal district court in St. Louis, Missouri, in a multidistrict litigation (MDL) proceeding. In 2008, this court denied plaintiffs’ request to certify a class action. Plaintiffs’ subsequent request for interim appeal was denied by the appellate court.

In development of the genetically modified rice, field testing was conducted in cooperation with third parties, including a breeding research institute in the United States. The genetically modified rice was never commercialized.

The USDA and the FDA have stated that the genetically modified rice does not present a health risk and is safe for use in food and feed and for the environment. Additionally, in 2007, the USDA released its report concerning its investigation into how the genetically modified rice entered the commercial rice supply. The USDA was unable to determine a cause and indicated it would not pursue any enforcement actions against Bayer or any other party.

In two trials in December 2009 and February 2010, two juries at the U.S. District Court in St. Louis, Missouri, ruled that Bayer must pay a total of approximately US$3.5 million in compensatory damages for losses sustained by five plaintiff farmers. The juries rejected the farmers’ claims for punitive damages. Bayer disagrees with the findings of liability and the awards of compensatory damages. Bayer is considering its options for legal remedies and, as to the first trial, has already filed a motion for a new trial.

Additional trials have been scheduled for 2010. The facts and amount of damages claimed differ significantly from case to case. Management believes that the outcomes of the St. Louis cases do not allow any direct conclusions on the outcomes of the other cases.

Bayer believes it has meritorious defenses in these actions and intends to continue to defend itself vigorously. Bayer has taken accounting measures for anticipated defense costs based on the information currently available.

Asbestos: A further risk may arise from asbestos litigation in the United States. In many cases, the plaintiffs allege that Bayer and co-defendants employed third parties on their sites in past decades without providing them with sufficient warnings or protection against the known dangers of asbestos. Additionally, a Bayer affiliate in the United States is the legal successor to companies that sold asbestos products until 1976. Union Carbide has agreed to indemnify Bayer for this liability. Bayer believes it has meritorious defenses and intends to defend itself vigorously.

Premise®: Bayer, among others, has been named as a defendant in a putative nationwide class action filed in federal court in North Carolina, United States, which alleges violations of antitrust laws in the marketing of a certain pest control product (Premise®). In 2007, the court granted summary judgment in favor of the defendants and plaintiffs have appealed. Bayer prevailed on all appeals and unless plaintiffs petition the United States Supreme Court again in the near future, the case will be concluded.

MaterialScience:

Antitrust proceedings in connection with rubber products

Companies of the Bayer Group are subject to civil damage claims in Europe, the United States and Australia based on alleged violations of applicable competition laws concerning rubber products that were subject to investigations by regulatory authorities. All of these investigations have now been closed.

In 2008, a group of plaintiffs who are primarily producers of tires brought an action for damages before the High Court of Justice in London against Bayer and other producers of butadiene rubber and emulsion styrene butadiene rubber. The plaintiffs allege damages resulting from alleged violations of E.U. competition law in the markets for butadiene rubber and emulsion styrene butadiene rubber. Parallel proceedings are pending before a court in Milan, to which Bayer joined as intervenient. It is still unclear whether the Milan court has jurisdiction.

In the United States, The Goodyear Tire & Rubber Company filed a claim in a federal court in 2008, alleging that Bayer violated antitrust law in the area of butadiene rubber and styrene butadiene rubber. The complaint seeks, among other things, treble damages.

In Australia, a class action alleging antitrust violations in connection with rubber chemicals products was filed in 2008. While the claim was struck out at first instance, the plaintiffs have filed an application for leave of appeal.

Bayer is defending itself in the European, U.S. and Australian litigation. The financial risk from these proceedings cannot currently be quantified. Therefore, Bayer is unable to take any accounting measures in this regard.

It remains possible that further civil damage claims may be filed in connection with public antitrust investigations reported on previously and now closed.

Personal injury litigation

MDI: In the United States, Bayer, together with other manufacturers, resellers and applicators, is a defendant in multiple cases that seek damages for personal injuries allegedly resulting from exposure to diphenylmethane diisocyanate (MDI) based products used in coal mines. In one case the plaintiffs allege that they were also exposed to TDI and HDI based products. Bayer believes it has meritorious defenses and intends to defend itself vigorously.

Liability considerations following the Lanxess spin-off

The liability situation following the spin-off of the Lanxess subgroup is governed by both statutory and contractual provisions. Under the German Transformation Act, all entities that are parties to a spin-off are jointly and severally liable for a period of five years for obligations of the transferor entity that are established prior to the spin-off date. This five-year period ends in March 2010. Bayer believes the liability risks remaining in connection with the Lanxess spin-off are not material.

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