Pursuant to Section 315a of the German Commercial Code, the consolidated interim financial statements as of September 30, 2012 have been prepared in condensed form according to the International Financial Reporting Standards (IFRS) – including IAS 34 – of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date.
Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2011 fiscal year, particularly with regard to the main recognition and valuation principles.
Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations.
The exchange rates for major currencies against the euro varied as follows:
|Exchange Rates for Major Currencies||[Table 26]|
| || ||Closing Rate||Average Rate|
|€1|| ||Dec. 31, |
|Sep. 30, |
|Sep. 30, |
|First Nine Months 2011||First Nine Months 2012|
The most important interest rates applied in the calculation of actuarial gains and losses from pension obligations are given below:
|Discount Rate for Pension Obligations||[Table 27]|
| ||Dec. 31, 2011||June 30, 2012||Sep. 30, 2012|
The strategic business entity “Diagnostic Imaging,” comprising contrast agents for imaging applications such as X-ray and MRI, was transferred at the end of 2011 from the Specialty Medicine business unit (Pharmaceuticals segment) to the Medical Care Division (Consumer Health segment) for organizational reasons and combined with the related injection systems into a single business unit. The prior-year figures have been restated accordingly.
The following table contains the reconciliation of the operating result (EBIT) of the segments to income before income taxes of the Group.
|Reconciliation of Segments’ Operating Result to Group Income Before Income Taxes||[Table 28]|
| ||3rd Quarter 2011||3rd Quarter 2012||First Nine Months 2011||First Nine Months 2012|
| ||€ million||€ million||€ million||€ million|
|Operating result of segments||1,151||893||3,670||3,404|
|Operating result of Corporate Center||(52)||(55)||(150)||(179)|
|Operating result (EBIT)||1,099||838||3,520||3,225|
|Income before income taxes||875||666||2,912||2,674|
Changes in the Bayer Group
Changes in the scope of consolidation
As of September 30, 2012, the Bayer Group comprised 288 fully or proportionately consolidated companies (December 31, 2011: 283 companies). Three joint ventures were included by proportionate consolidation according to IAS 31 (Interests in Joint Ventures) (December 31, 2011: four joint ventures). In addition, four associated companies were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates) (December 31, 2011: four associated companies).
Acquisitions and divestitures
On March 31, 2012, Bayer acquired the remaining 50% interest in the systems house joint venture Baulé S.A.S., France. This joint venture was formed in 2008 by MaterialScience and Michel Baulé S.A., which was later renamed EXIMIUM S.A.S. Baulé S.A.S. is a global leader in the development, formulation and processing of polyurethane cast elastomers. The purchase price of €50 million pertained mainly to customer relationships and goodwill. The income statement of Baulé S.A.S. was included in the consolidated financial statements by proportionate consolidation for the last time in the first quarter of 2012, whereas its assets and liabilities were already fully consolidated as of March 31, 2012. Following the purchase price allocation, the following assets and liabilities were recognized: goodwill (€39 million), other intangible assets (€55 million), other noncurrent assets (€3 million), inventories and other current assets (€21 million), cash and cash equivalents (€5 million), other liabilities (€8 million) and deferred tax liabilities (€16 million). The revaluation of mainly intangible assets that were previously held by the joint venture resulted in other operating income of €19 million. The fair value of the prior interest was €49 million at the time of the acquisition. As the purchase price allocation has not yet been completed, changes may yet be made in the allocation of the purchase price to the individual assets. Baulé achieved sales of €24 million since the date on which the remaining interest was acquired.
On July 2, 2012, CropScience acquired the watermelon and melon seed business of the U.S. company Abbott & Cobb, Inc., headquartered in Feasterville, Pennsylvania. Abbott & Cobb has a robust watermelon position in the U.S. market with increasing business in Mexico, Australia and Asia. This makes the acquisition a significant step forward for the presence of CropScience in the watermelon market. In addition, the melon business and the germplasm will further broaden the existing seed portfolio and provide the basis for future new hybrids. A net purchase price of €43 million was agreed, pertaining mainly to germplasm, customer relations and goodwill. As the purchase price allocation has not yet been completed, changes may yet be made in the allocation of the purchase price to the individual assets. Sales of €2 million were recorded since the acquisition date.
On July 3, 2012, CropScience signed an agreement to purchase the U.S. company AgraQuest Inc., headquartered in Davis, California, United States. AgraQuest is a global supplier of innovative biological pest management solutions based on natural microorganisms. It focuses on discovering, manufacturing and marketing highly effective products for biological pest and disease control to safeguard and increase crop production. The acquisition will help CropScience to build a leading technology platform for biological products and to further strengthen its strategically important fruit and vegetables business. A purchase price of approximately €370 million was agreed, pertaining mainly to the technology platform and goodwill. This amount comprises a one-time payment and potential milestone payments with a total fair value of €29 million. The acquisition received the necessary regulatory approvals and closed on August 15, 2012. As the purchase price allocation has not yet been completed, changes may yet be made in the allocation of the purchase price to the individual assets. AgraQuest had sales of €2 million since the acquisition date.
The effect of this and other, smaller transactions and of purchase price adjustments pertaining to previous years’ transactions on the Group’s assets and liabilities as of the respective acquisition or adjustment dates are shown in the table. Net of acquired cash and cash equivalents, they resulted in the following cash outflow (disregarding the assets and liabilities that were previously included by proportionate consolidation):
|Acquired Assets and Assumed Liabilities||[Table 29]|
| ||Fair value|
| ||€ million|
|Other intangible assets||417|
|Property, plant and equipment||13|
|Other noncurrent assets||1|
|Other current assets||15|
|Cash and cash equivalents||4|
|Deferred tax liabilities||(161)|
|Net purchase prices||483|
|Acquired cash and cash equivalents||(4)|
|Liabilities for future payments||(24)|
|Net cash outflow for acquisitions||455|
Cash outflows for acquisitions and for the purchase of additional interests in subsidiaries in the first nine months of 2011 amounted to €239 million and related mainly to the purchase of the animal health company Bomac, New Zealand; Hornbeck Seed Company, Inc., United States; and the U.S. company Pathway Medical Technologies, Inc., a supplier of products to mechanically remove arterial plaque.
On April 15, 2012, Bayer entered into an agreement to sell all PET tracer substances to Piramal Imaging SA., Switzerland. This transaction includes the PET tracer florbetaben, which is currently in development for the detection of Alzheimer’s disease, the most common form of dementia. Milestone and royalty payments were agreed.
The agreement with Genzyme Corp., United States, announced in March 2009 comprised the transfer of the hematological oncology portfolio to Genzyme, which was effected in May 2009. We also agreed to transfer the production site for Leukine after final inspection by the U.S. Food and Drug Administration (FDA). This inspection took place in March 2012. The agreement concerning the sale of the production site including inventories was signed on May 29, 2012. A purchase price of €71 million was agreed.
We received revenue-based payments of €71 million in the first nine months of 2012 in connection with the aforementioned transfer of the hematological oncology portfolio to Genzyme Corp., United States.
The effects in the first nine months of 2012 of the above divestitures, an additional smaller divestiture and the receipt of a payment pertaining to a transaction effected in the previous year are shown in the table:
| ||€ million|
|Assets held for sale||70|
|Net cash inflow from divestitures||139|
|Changes in future cash payments receivable||(65)|
|Net gain from divestitures (before taxes)||3|
Assets held for sale, and provisions directly related to assets held for sale
The negotiations concerning the sale of a research center in Japan (CropScience), a pharmaceutical product, a pharmaceutical research and development project, and a property including buildings in France (Consumer Health) were concluded in the first half of 2012. These assets had been reclassified as “assets held for sale” as of December 31, 2011. They were also transferred in the first half of 2012.
Due to new contractual negotiations concerning the sale of a production site in the United Kingdom, an impairment loss of €8 million was recognized in the CropScience reporting segment in the second quarter of 2012 in accordance with IFRS 5.
Contingent liabilities and other financial commitments
In April 2012, the unpaid portion of the capital provided to Bayer-Pensionskasse VVaG for its effective initial fund was increased by €800 million to €1,005 million.
In June 2012, Bayer AG signed a guarantee declaration in favor of the trustee company for the U.K. pension plans concerning pension obligations of Bayer Public Limited Company and Bayer CropScience Ltd. Bayer AG, in addition to these two companies, thus guarantees that further funds will be paid in should the trustees make a request for such payment. As of September 30, 2012, the net obligation according to IAS 19 arising from the pension plans of the above-mentioned companies was €146 million.
Yasmin™/YAZ™: As of October 15, 2012, the number of lawsuits pending in the United States and served upon Bayer was about 12,400. In addition, about 720 asserted claims were pending that have not been filed in court. The number of claimants in the pending lawsuits and claims totaled about 13,500 (excluding claims already settled). Claimants allege that they have suffered personal injuries, some of them fatal, from the use of Bayer’s drospirenone-containing oral contraceptive products such as Yasmin™ and/or YAZ™ or from the use of Ocella™ and/or Gianvi™, generic versions of Yasmin™ and YAZ™, respectively, marketed by Barr Laboratories, Inc. in the United States. As of October 15, 2012, Bayer had reached agreements, without admission of liability, to settle the claims of about 3,490 claimants in the U.S. for a total amount of about US$750 million. Bayer is only settling claims in the U.S. for venous clot injuries (deep vein thrombosis or pulmonary embolism) after a case-specific analysis of medical records on a rolling basis. Such injuries are alleged by about 3,800 of the pending unsettled claimants and therefore by fewer than one third of the currently pending claimants. Bayer has taken appropriate accounting measures for anticipated defense costs and for agreed and anticipated future settlements based on the information currently available and based on the number of pending claims alleging venous clot injuries. Bayer is insured against product liability risks to the extent customary in the industry. However, the accounting measures taken include an amount in excess of the available insurance coverage. For the accounting measures exceeding the insurance coverage, Bayer recorded expenses totaling about €0.7 billion in the second and third quarters of 2012.
Yasmin™: In the patent infringement proceedings against Watson, Sandoz and Lupin, a U.S. federal court dismissed Bayer’s infringement claims in 2010. In April 2012, the U.S. Court of Appeals for the Federal Circuit affirmed these judgments. Bayer did not seek a review of the decision. The dismissal of Bayer’s infringement claims is now final. In June 2012, Watson Pharmaceuticals, Inc., Watson Laboratories, Inc. and Watson Pharma, Inc. filed a complaint against Bayer in a U.S. state court in New York. Watson seeks compensatory and punitive damages claiming malicious prosecution, tortious interference and unjust enrichment by Bayer in connection with the patent infringement proceedings. The case is now pending before a U.S. federal court. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. In September 2012, the U.S. Federal Trade Commission (FTC) closed its investigation on the supply and licensing agreement between Bayer and Barr.
YAZ™: In the patent infringement proceedings against Watson, Sandoz and Lupin, the U.S. federal court ruled in March 2012 that Bayer’s patents are valid and enforceable. The defendants have also infringed Bayer’s patents as was conceded by them earlier in the proceedings. Watson, Sandoz and Lupin have appealed. Bayer will vigorously pursue its claims for relief. In September 2012, the FTC closed its investigation on the supply and licensing agreement between Bayer and Barr.
Blood glucose monitoring devices: In April 2012, Bayer and Roche settled the arbitration over the alleged infringement of six of Roche’s patents by Bayer’s Breeze™ 2 and Contour™ systems. The terms of the settlement are confidential. The settlement did not have a material effect on Bayer’s results.
Staxyn™: In April 2012, Bayer filed a patent infringement suit in a U.S. federal court against Watson Laboratories, Inc. In March 2012, Bayer had received notice of an Abbreviated New Drug Application with a Paragraph IV certification (an “ANDA IV”) pursuant to which Watson seeks approval to market a generic version of Bayer’s erectile dysfunction treatment Staxyn™ prior to patent expiration in the United States. Staxyn™ is an orodispersible (orally disintegrating) formulation of Levitra™. Both drug products contain the same active ingredient, which is protected in the U.S. by two patents expiring in 2018.
Proceedings involving genetically modified rice (LL RICE): As of October 15, 2012, Bayer was aware of a total of approximately 130 lawsuits, involving about 4,900 plaintiffs, pending in U.S. federal and state courts against several Bayer Group companies in connection with genetically modified rice in the United States. A large percentage of these cases will be dismissed upon completion of the settlement with rice growers, discussed below. 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 U.S.
As reported previously, in 2011 Bayer reached settlement agreements with U.S. long-grain rice growers. More than 94% of all of the eligible rice acreage will participate in the settlement. Bayer has now paid more than US$632 million to rice growers under the settlement. Additional payments will be made in the coming months once all claims have been verified until the full US$750 million agreed to under the settlement has been paid.
Without acknowledging liability, Bayer also settled the claims filed by six European rice importers, one U.S. rice exporter, nine U.S. rice mills or rice dryers, six rice seed sellers and several growers outside of the US$750 million master settlement at a total settlement value of about US$170 million. This amount includes settlement of all of the cases that went to trial, except for the case involving Riceland Foods. In addition, 18 cases that have not yet gone to trial continue to be pending in the U.S. with business entities that are not a part of the US$750 million settlement program.
Antitrust proceedings in connection with rubber products
Antitrust proceedings in connection with rubber products: The reported actions for damages have been settled and are no longer considered to be material.
Our business partners include companies in which an interest is held, and companies with which members of the Supervisory Board of Bayer AG are associated. Transactions with these companies are carried out on an arm’s-length basis. Business with such companies was not material from the viewpoint of the Bayer Group. The Bayer Group was not a party to any transaction of an unusual nature or structure that was material to it or to companies or persons closely associated with it. Business transactions with companies accounted for in the consolidated financial statements using the equity method, or at cost less impairment charges, mainly comprised trade in goods and services. The value of these transactions was, however, immaterial from the point of view of the Bayer Group. The same applies to financial receivables and payables vis-à-vis related parties.
Leverkusen, October 25, 2012
Dr. Marijn Dekkers
Prof. Dr. Wolfgang Plischke
Dr. Richard Pott