11.2 Strategy

Business Strategy

The Bayer Group focuses on the rapidly growing, innovation-driven health care, nutrition and high-tech materials businesses in line with its mission statement: “Bayer: Science For A Better Life.” Our strategic alignment toward these attractive markets and our concentration on core competencies enable us to invest in growth areas and innovative technologies. We aim to achieve leadership roles and expand our already strong market positions. We will also continue our efforts to contain costs and improve efficiencies in order to further increase the company’s value. We are pursuing a long-term growth strategy, mindful of the need to manage the business sustainably.

HealthCare

HealthCare continues to target above-market growth in all of its businesses. We aim to further strengthen this subgroup and grow it into a world-leading diversified health care company. For example, we plan to continue strengthening our Consumer Health segment for the long term, sharpen our focus in the Pharmaceuticals segment on specialty pharmaceuticals, further increase the overall productivity of research and development and place even greater importance on the emerging markets.

Within our strongest HealthCare segment in terms of sales – Pharmaceuticals – the activities of the General Medicine business unit focus on drug products that are usually prescribed by general practitioners. The Specialty Medicine, Women’s Healthcare and Diagnostic Imaging business units concentrate on products that are mostly prescribed by medical specialists.

We will maintain our focus on diseases where there is a high unmet medical need and major potential exists for improving diagnosis and therapy. Research and development is thus an important growth engine for our pharmaceuticals business, and this segment consequently accounts for the largest share of the HealthCare subgroup’s R&D budget. Here we also aim to strengthen our portfolio and supplement our own research and development activities with in-licensing, alliances and collaborations. Examples in 2009 included the agreements relating to the MEK inhibitor RDEA-119 of Ardea Biosciences, Inc., United States, and the radiopharmaceutical Alpharadin™ of Algeta ASA, Norway, both of which are being developed to treat tumor diseases.

The Pharmaceuticals segment already occupies a leading position in many emerging markets, particularly China and Russia. A key element of our pharmaceuticals strategy is the selective expansion of business in the emerging markets, the in-licensing of an insulin product from Bioton S.A., Poland, for the Chinese market being a significant example.

Our Consumer Health segment includes non-prescription medicines, dermatology products, blood glucose meters, medical devices and the animal health business.

The goal of our Consumer Care Division is to build on our position in the global over-the-counter (OTC) medicines market. The division’s strategy is aimed at fully leveraging the growth potential of proven brands such as info

Aspirin®,

Aleve®,

Canesten®, info

Bepanthen®, info

One-A-Day®, info

Supradyn®, info

Rennie® and info

Alka-Seltzer®. We are pursuing a clear course of expansion in fast-growing regions such as central and eastern Europe and Asia/Pacific and aim to further develop our business in new growth segments. We will continue to take advantage of external growth opportunities in the form of strategically relevant acquisitions or in-licensing. One such growth opportunity is provided by the exclusive licensing agreement with AstraZeneca PIC for the marketing of omeprazole (10 and 20 mg) as an OTC medication under the trademark info

Antra® that came into effect in Germany in August 2009. In the fall of 2009, we strengthened our prescription dermatologicals business with the acquisition of the U.S. product lines info

Desonate® and info

NeoBenz® Micro from SkinMedica, Inc., Carlsbad, California, United States.

The goal of the Medical Care Division is to build on its competitive positions in the fields of blood glucose monitoring, diabetes management and injection systems for contrast agents, along with vascular intervention systems, such as thrombectomy systems for treating constricted or blocked blood vessels. We also plan to add to our portfolio by investing in more business areas and geographic regions and entering into strategic partnerships. We intend to continuously improve our products, reduce costs and deploy resources more efficiently. We want to expand our product range by developing new blood glucose measurement systems and innovative solutions that help people with diabetes to better manage the disease. In our medical equipment business, we are continuing to develop our core business in radiology as well as new IT-based services to optimize both contrast media dosage and the clinical workflows involved in processing diagnostic data and images.

In the Animal Health Division, we aim to build on our strong position in the companion animals market, serving as a preferred supplier and partner. Our strategy is directed toward achieving organic growth by focusing on countries and markets with long-term sales potential and successfully managing the life cycles of existing core brands. In addition, we are pursuing external growth opportunities through acquisitions and in-licensing. We plan to focus more on developing new products ourselves in order to safeguard our long-term success. For this reason, the Animal Health Division has restructured its innovation process to more closely align its research and development activities to the market in the future and ensure earlier and more efficient prioritization of our development projects.

CropScience

CropScience, one of the leading innovation-driven companies in its industry, aligns its corporate planning to long-term trends in agricultural markets. It aims to offer products and integrated solutions to meet the growing demand for affordable, high-quality food, feed, fiber and energy crops. Against the background of limited arable land, advancing climate change and a steadily increasing global population, it is essential to safeguard and further increase crop yields. We manage our business responsibly in keeping with our commitment to sustainable development and our goal of achieving long-term growth and attractive returns.

To offer our customers comprehensive, single-source solutions, we evolve coordinated and sustainable concepts – from seed to harvest – for specific crops in different regions. Our integrated approach comprises seed, optimized plant traits and crop protection products as well as related services and partnerships along the food value chain.

Innovation forms the basis for value creation at CropScience. The development of new active ingredients and formulations and high-quality seed enables us to replace older products and technologies with products offering superior performance properties, environmental compatibility and user safety along with greater customer value. Our new products are crucial to increasing sales and achieving attractive margins, to which our strict cost management also contributes.

In Crop Protection, the larger of its business segments, CropScience aims to safeguard and further expand the market-leading positions in the Herbicides, Fungicides, Insecticides and Seed Treatment businesses by maintaining a broad regional presence and offering innovative, highly effective products. To achieve this strategic goal, we are steadily enhancing our product mix by launching new active ingredients and products from our research and development pipeline as well as successfully managing product life cycles. In addition, we engage in complementary research activities in breeding, plant traits and new growth areas. For example, we are currently working on new integrated methods and solutions in the areas of plant health and quality, stress tolerance, nutrient uptake, diagnostics and biological pest control.

The Environmental Science business unit makes use of the development and production capacities of Crop Protection and its innovative active ingredients. Our strategy is to expand our leading market position by developing and marketing innovative and sustainable products tailored to the specific needs of consumers and professional users. Such products are designed to be easy to use and safe to handle while satisfying society’s increasing requirements in the growing and greening, and health and hygiene areas.

Our BioScience business unit comprises the research, development and commercialization of seeds and solutions based on modern breeding methods and plant biotechnology. We will continue to expand our activities in seeds and plant traits with the aim of raising BioScience sales to about €1.4 billion by 2018. Our seed business has traditionally focused on four core-crop growth areas: canola, rice, cotton and vegetables. We aim to build on the strong market positions we have achieved in these crops by introducing new varieties and expanding into new regional markets. In 2009 we embarked on research into improved cereal varieties and defined soybeans as an additional research focus. As in other crops, our goals here include increasing yields and making plants more resistant to adverse weather conditions. Furthermore, we not only market our technologies in our own seed products, but also increasingly offer them for other crops through out-licensing.

CropScience markets its products in more than 120 countries worldwide. In the coming years we intend to further expand our business particularly in fast-growing markets such as eastern Europe, Russia, India, China and Brazil. In these countries there is major potential for the agriculture industry to cover the increasing demand for high-quality food and feed by deploying innovative, leading-edge technologies. In this environment we aim to steadily expand our business and help farmers raise productivity by providing them with comprehensive solutions from seed to harvest.

MaterialScience

The strategy of MaterialScience is based on safeguarding its existing competitive position in its traditional markets, supplementing the portfolio with innovative new businesses and achieving profitable growth in the emerging markets. The financial and economic crisis has presented a major challenge to our customer industries, particularly in North America and Europe, to which we have responded appropriately. However, we believe that the long-term market trends remain unaffected by the crisis and continue to be relevant to our business strategy.

Our aim is to maintain our position in the isocyanates market and continue improving profitability. To achieve this, we endeavor to steadily boost the efficiency of our production and administration processes. We continuously evaluate potential investments in additional production capacities against the background of a constantly changing market situation. We are also working to strengthen our downstream business activities such as info

BaySystems® in the Polyurethanes business unit and compounding in the Polycarbonates business unit in order to increase the share of sales contributed by our differentiated business. At the same time, we are grasping new business opportunities based on the competencies of MaterialScience. This means driving forward our newly formed Functional Films, Carbon Nanotubes and Medical Coatings & Adhesives businesses, in which we are positioning ourselves as a focused technology leader.

Our goal in the Polyurethanes business unit is to expand our global market leadership in isocyanates, at the same time ensuring cost leadership in all areas. In 2010 we will complete the construction of our 250,000 tons-per-year info

TDI plant in Shanghai, China, which is due on stream in the second half of 2011. This facility is designed to support our long-term growth in Asia. We also intend to consolidate the production of isocyanates in Europe, stepping up our output in line with market trends. Our polyether polyols will primarily support growth in the isocyanates business in order to bolster our portfolio of customer solutions. In the BaySystems® business we aim to generate profitable growth and further expand our global market share. We will therefore proceed with our successful systems house strategy.

The polycarbonate industry currently faces significant overcapacities on the world market. We are addressing this trend with a two-pronged strategy. On the one hand, we aim to achieve cost leadership by operating world-scale facilities in all regions. At the same time, as a leading development and technology partner, we are offering our customers differentiated solutions in all polycarbonate applications.

In the field of semi-finished products, substantial market potential lies in the use of polycarbonate diffuser sheets in liquid-crystal displays for large-format flat-screen televisions. We also plan to sustainably improve the performance of the Polycarbonates business unit by increasing distribution efficiency in standard segments, sharpening the focus of our research and continuing to improve cost structures.

The Coatings, Adhesives, Specialties business unit seeks to defend and selectively expand its market position in the strategic business entity “Basic and Modified Isocyanates.” With this goal in mind, we plan to meet rising demand in the growth regions by increasing production capacities and expanding our technical centers. We aim to further improve profitability in the strategic business entity “Resins” by narrowing the focus of our portfolio toward modern waterborne and UV-curing coating and adhesive systems. The cost structures for our conventional systems are being improved, mainly by consolidating production capacities.

We have combined our activities in innovative surfaces and substrate materials into a new strategic business entity “Functional Films and Specialties.” This includes applications in cosmetics, medical technology, carbon nanotubes for improving the properties of plastics and metals, and the area of functional films. The focuses of this business, which is still at an early stage of development, include formable coated films for electronic and automotive applications and forgery-proof info

Makrofol® films for identification and bank cards.

Financial Strategy

The financial management of the Bayer Group is conducted by the strategic management holding company Bayer AG. Capital is a global resource, generally procured centrally and distributed within the Group. The foremost objectives of our financial management are to help bring about a sustained increase in corporate value and to ensure the Group’s liquidity and creditworthiness. This involves optimizing the capital structure and effectively managing risks. The management of currency, interest rate, raw material price and default risks helps to reduce the volatility of our earnings.

The contracted rating agencies assess Bayer as follows:

Rating			[Table 3.38]
	Long-term rating	Outlook	Short-term rating
Standard & Poor’s	A-	negative	A-2
Moody’s	A3	stable	P-2

These credit ratings reflect the company’s high solvency and ensure access to a broad investor base for financing purposes. It remains our goal to achieve and maintain financial ratios that support an “A” rating in order to maintain our financial flexibility. Accordingly, we plan to use part of our operating cash flows to reduce net financial debt.

We pursue a prudent debt management strategy to ensure flexibility, drawing on a balanced financing portfolio. Chief among these resources are a multi-currency Euro Medium Term Notes program, syndicated credit facilities, bilateral loan agreements and a global commercial paper program.

We use financial derivatives to hedge against risks arising from business operations or financial transactions, but do not employ contracts in the absence of an underlying transaction. It is our policy to diminish default risks by selecting trading partners with a high credit standing. We closely monitor the execution of all transactions, which are conducted in accordance with Group directives.

Further details of our risk management objectives and the ways in which we account for all the major types of hedged transactions – along with price, credit and liquidity risks as they relate to the use of financial instruments – are given in “Opportunity and Risk Report.”