Bayer AG
Annual Report 2016

Plain-text annual report

6 1 0 2 t r o p e R l a u n n A r e a B Show true color Color Zones Acres Zone 1 Zone 2 Zone 3 1.6 6.9 1.2 Annual Report 2016 Augmented Version Fiscal 2016: Another record year for Bayer – good progress with the acquisition of Monsanto Group sales €46.8 billion (Fx & portfolio adj. + 3.5%) Substantial sales and earnings increases at Pharmaceuticals Consumer Health grows with competition Crop Science successful in a difficult market environment EBITDA before special items €11.3 billion (+ 10.2%) Net income €4.5 billion (+ 10.2%) Core earnings per share €7.32 (+ 7.3%) Operating cash flow €8.3 billion (+ 20.8%) Forecast for 2017: further growth in sales and earnings Cover picture: The digitization of farming aims to support the efficient and sustainable use of resources. Our cover shows Charles Godoy on his farm near the town of Catalão in Brazil. He monitors his fields on a daily basis so that he can react quickly to problems. You can read more in the Magazine section of this Annual Report beginning on page 9. Key Data Key Data € million Bayer Group Sales EBITDA 1 EBITDA before special items 1 EBITDA margin before special items 1 EBIT 1 EBIT before special items 1 Income before income taxes Net income (from continuing and discontinued operations) Earnings per share (from continuing and discontinued operations) (€) 1 Core earnings per share (from continuing operations) (€) 1 Net cash provided by operating activities (from continuing and discontinued operations) Net financial debt Capital expenditures Bayer AG Total dividend payment Dividend per share (€) Innovation Research and development expenses Ratio of R&D expenses to sales – Pharmaceuticals (%) Ratio of R&D expenses to sales – Crop Science (%) Employees in research and development Employees Number of employees 2 (Dec. 31) Personnel expenses (including pension expenses) (€ million) Proportion of women in senior management (%) Proportion of employees with health insurance (%) Fluctuation (voluntary / total) (%) Hours of vocational and ongoing training per employee Safety & Environmental Protection Recordable Incident Rate (RIR) for Bayer employees Loss of Primary Containment Incident Rate (LoPC-IR) 3 Total energy consumption (terajoules) Energy efficiency (MWh/t) 4 Total greenhouse gas emissions (CO2 equivalents in million t) 5 Specific greenhouse gas emissions (CO2 equivalents in t / manufactured sales volume in t), according to the market-based method 6 Hazardous waste generated (thousand t) Water use (million m³) 2015 2016 Change from 2015 (%) 46,085 9,573 10,256 22.3% 6,241 7,060 5,236 4,110 4.97 6.82 6,890 17,449 2,511 46,769 10,785 11,302 24.2% 7,042 8,130 5,887 4,531 5.44 7.32 9,089 11,778 2,578 2,067 2.50 2,233 2.70 4,274 16.0 10.7 4,666 17.0 11.7 + 1.5 + 12.7 + 10.2 + 12.8 + 15.2 + 12.4 + 10.2 + 9.5 + 7.3 + 31.9 – 32.5 + 2.7 + 8.0 + 8.0 + 9.2 14,753 15,229 + 3.8 116,600 11,176 115,200 11,357 28 96 29 98 5.0 / 13.9 20.0 4.6 / 12.3 22.1 0.42 0.22 0.39 0.32 83,182 84,494 6.34 9.71 1.69 541 346 6.77 9.87 1.54 547 330 – 1.2 +1.6 +10.5 – 7.1 + 45.5 + 1.6 + 6.8 + 1.6 – 8.9 + 1.1 – 4.6 2015 figures restated; figures for 2012-2014 as last reported 1 For definitions of the indicators see Chapter 2.4 2 Employees calculated as full-time equivalents (FTEs) 3 Number of incidents per 200,000 working hours in which chemicals leak from their primary container, such as pipelines, pumps, tanks or drums 4 Quotient of total energy consumption and manufactured sales volume; Life Sciences only 5 Direct emissions from power plants, waste incinerators and production plants and indirect emissions from external supplies of electricity, steam and refrigeration (according to the market-based method); portfolio-adjusted in accordance with the GHG Protocol 6 Life Sciences without Currenta At a Glance Sales1 EBITDA Before Special Items1 Net Income1 + 3.5 % 2 + 10.2% 2015 2016 Core Earnings per Share1 Supplier Management3 + 7.3 % + % Investment in Research and Development €4.7 billion + 9.2% compared with 2015 98 % of all strategically important suppliers evaluated since 2012 2015 2016 Specific Greenhouse Gas Emissions 4 Work-Related Accidents Proportion of Women in Senior Management – 18 % since 2012 7.1% – 29 % 1 Change from 2015; 2015 figures restated 2 Currency- and portfolio-adjusted 3 Life Sciences 4 Life Sciences without Currenta Chairman’s Letter Innovation is our core competence I am pleased to present to you Bayer’s annual report for fiscal 2016. It has been a very exciting and intensive year – for me personally as well because I became Chairman of the Board of Management in May. I would like to thank the entire Board of Management, which started working in its new constellation at the start of last year, for its commit- ment to the company. Creating an integrated organizational structure and appointing the heads of the divisions to the Board of Management have proven to have been the right steps at the right time. We have a very good management team that works extremely well together. I would also like to thank the members of the Supervisory Board for our trust-based cooperation and all our employees, who displayed great commitment and personal dedication in making 2016 another successful year for Bayer. In 2016, we again substantially raised both sales and earnings and thus posted a new record for our operating performance. Group sales increased by a currency- and portfolio-adjusted 3.5 percent to €46.8 bil- lion and clean EBITDA rose by 10.2 percent to €11.3 billion. Core earn- ings per share advanced by 7.3 percent to €7.32. At Pharmaceuticals, sales rose by an encouraging 8.7 percent on a currency- and portfolio-adjusted basis, with our five key growth products again making a significant contribution to growth. Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™ posted combined sales of €5.4 billion, compared with €4.2 billion in 2015. We raised our assessment of the combined peak annual sales potential of these five products from our previous estimate of at least €7.5 billion to more than €10 billion. Adjusted for currency and portfolio effects, sales at Consumer Health advanced by 3.5 percent. This division posted substantial gains in Latin America and Asia / Pacific in particular. Despite a weak market environment, Crop Science sales matched the prior-year level. Seeds expanded business significantly and Environmen- tal Science also posted gratifying sales gains. Animal Health grew sales by a currency- and portfolio-adjusted 4.8 percent. Covestro remains fully consolidated on account of our continued majority interest of around 64 percent at present. This business posted currency- and portfolio-adjusted sales on a level with the prior year. We are very pleased with the way Covestro has developed since its stock market listing in October 2015. It confirms that separating the two enterprises was the right move for both of them. Thanks to its very good business performance, Covestro has successfully established a good position on the capital market in its first year of independence; Bayer has excellent growth perspectives resulting from its focus on the 2 Bayer CEO Werner Baumann Life Sciences. It remains our intention to divest our entire interest in Covestro in the medium term. A particular highlight of 2016 was the agreed acquisition of Monsanto, which is intended to further strengthen Bayer as a Life Science company and create substantial additional value in the long term for you, our 3 stockholders, through more innovation, stronger growth and greater efficiency. The two businesses are highly complementary, both in terms of their geographical fit and their product portfolios. It is a good step for Bayer as a whole since the two companies’ com- bined expertise will improve our ability to help address one of the most urgent issues of our time: how to feed the some ten billion people who are expected to be living on our planet by 2050. Together with Monsanto, we would be better able to provide farmers worldwide with a product offering that is tailored to their needs and offers them genuine added value: from the right choice of seeds through seed treatment to controlling weeds, pests and plant diseases. With regard to the increasing digitization of farming, Monsanto will give us valuable expertise. We are confident that we will be granted all the necessary antitrust clearances enabling us to close the transaction before the end of 2017. The acquisition is to be financed through a mix of debt and equity. In November 2016, we successfully placed mandatory convertible notes as a first equity measure in this connection. Despite the large investment being made to acquire Monsanto, we will continue to pursue organic growth in Pharmaceuticals, Consumer Health and Animal Health. The necessary funding will also be available for investments at our sites as well as for smaller acquisitions and in-licensing. It goes without saying that this applies to research and development as well. In 2016, we again increased R&D spending in the Life Science areas to €4.4 billion. And we are planning a further increase in the cur- rent fiscal year because innovation is our core competence. In the Life Science areas in particular, there is great demand for new products 4 and solutions. For example, better treatments are needed for conditions such as cancer and cardiovascular disease. Likewise, solutions are required to achieve the necessary increase in agricultural productivity and feed the growing world population. In addition, investments in self- care are designed to keep our aging population healthy and contribute to the sustainability of public health care systems around the world. Our investments in research together with targeted in-licensing are the basis for our long-term growth – as shown by the projects which have made it into our development pipelines. At Pharmaceuticals, for example, we estimate the combined peak annual sales potential of six promising product candidates in the mid- to late-stage pipeline to be at least €6 bil- lion. And the combined peak sales potential of Bayer’s crop protection and seed technology pipelines should total more than €5 billion from products that have been or will be brought to market between 2015 and 2020. Today, any company wishing to remain at the cutting edge of scientific and technological development needs excellent partners. For this rea- son, we maintain a network of collaborations and strategic alliances with leading universities, public research institutes, partner companies and start-ups. Last year, for example, we concluded a cooperation agree- ment with Danish company FaunaPhotonics. Together we are seeking to develop novel sensor solutions which will improve farmers’ ability to monitor the development of pest populations and thus control pests more effectively. Another example is the joint venture named BlueRock Therapeutics we established with Versant Ventures with combined funding of US$225 million to develop stem cell therapies for curing a range of diseases. BlueRock Therapeutics is the second large investment made by the Bayer Lifescience Center, which has the mission to rapidly uncover, encourage and unlock fundamental scientific breakthroughs in medicine and agriculture. 5 We are aware that our employees are the basis for everything we do. It is their creativity, knowledge and commitment which shape Bayer’s performance ability. We therefore invest a great deal of effort in recruit- ing and retaining the best employees for Bayer. To this end, we provide an attractive working environment and have built a creative corporate culture that is characterized by diversity and internationality, customer focus, experimentation, collaboration and trust. Another reason our people enjoy working for Bayer is because they know that sustainability and social responsibility are firmly anchored in our corporate culture. We have committed to upholding the basic tenets of sustainable development and the Ten Principles of the United Nations Global Compact. Each year, we contribute to society through our wide-ranging humanitarian commitment and social sponsorship activi- ties. One example of this is our range of initiatives aimed at supporting refugees living in Germany. At our sites in Leverkusen and Berlin, we have established projects to prepare young refugees for subsequent vocational training. Our commitment to social responsibility is also shown through our daily collaboration with smallholder farmers across the world. We support them through numerous initiatives, especially in Africa and Asia. Our expertise helps them to grow more food and market their produce more effectively – thus generating a higher income. As you can see, Bayer is making good progress in every respect. How- ever, we need a reliable regulatory environment if we are to remain suc- cessful in the long term. To this end, legislators will have to make clever decisions focused on growth and prosperity. We need a Europe that is flourishing and fit for the future so we will have to inject new strength 6 into the European ideal. The debate on how to achieve this has only just begun. We view it as a matter of course that we as a company should actively, openly and transparently contribute to the discourse on impor- tant social and political issues. On behalf of the entire Board of Management, I would like to thank you – our valued stockholders – for the continuing confidence you have placed in Bayer. Sincerely, Werner Baumann Chairman of the Board of Management of Bayer AG 7 M agazi ne 10 Magazine Augmented Version Bayer Annual Report 2016 Innovation is a cornerstone of Bayer’s success and critical to achieving our mission of “Science For A Better Life.” Through our innovations, we are helping to solve the major challenges of our time. With a view to further strengthening Bayer’s culture of innovation, we have identified four Focus Behaviors: customer focus, collaboration and experimen tation – all underpinned by trust. Experimentation Customer Focus Focus on Innovation Trust Collaboration Passion to innovate: research scientist Lara Kuhnke from Bayer’s Pharmaceuticals Division in a Berlin laboratory. Patient Prasanna Oommen trusts her physician and Bayer’s innovative medicines. Düsseldorf pharmacist Petra Jeremias advises a customer. Working toward a common goal: Jose-Miguel Robles-Turiel from Bayer’s Crop Science Division and colleague Mira Begic in a meeting. 12 Magazine Bayer Annual Report 2016 Research issues have become so complex that no one scientist alone is able to resolve them. Dr. Ruth Wellenreuther, alliance manager at the DKFZ Oncology research at Bayer is committed to improving the lives of cancer patients. Bayer’s researchers are working together with external partners to develop new therapeutic approaches to this disease. Bayer Annual Report 2016 Magazine 13 You will find a video of the two Heidelberg-based cancer researchers in our Online Annual Report at www.bayer.com/ar-cancer We develop therapies that enable the patient’s body to detect cancer cells and then defeat them itself. Dr. Rafael Carretero, cancer researcher at Bayer In the Heidelberg laboratory run jointly by Bayer and the German Cancer Research Center (DKFZ): Alliance manager Dr. Ruth Wellen- reuther (left) and Dr. Rafael Carretero (right). 14 Magazine Bayer Annual Report 2016 Areas of oncology research at Bayer Antibody-drug conjugates Certain proteins occur more frequently on the surface of cancer cells than in healthy cells. Bayer researchers are developing molecules called antibody-drug con- jugates which recognize these proteins. Like a Trojan horse, they dock onto the cancer cells and destroy them with a cell toxin. Antibody-thorium conjugates work in a similar way and transport radioactive thorium-227 to the cancer cells. The re- sulting energy-rich alpha particles destroy the cancer cells. By using different anti- bodies, conjugates can be developed for various tumor types. Blocking oncogenic signaling pathways in specific tumor types The multiplication of cancer cells is to be halted by intervening in their key molecular processes. One approach aims to block the signaling pathways which prevent cancer cell death and often result in mutations, while another approach seeks to exploit the differences in the metabolic activity of tumor cells. A third approach is investigating can- cer stem cells that may result in the develop- ment of resistance mechanisms and the fail- ure of chemotherapy and radiation therapy. And a further approach is focused on the epigenetic changes which play a role in ma- lignant cancers. Bayer scientists are working to understand these processes better so they can reverse harmful modifications in diseased cells. Immuno-oncology Every day, cancer cells are formed in the human body because of a genetic predis- position or as a result of exposure to ciga- rette smoke, UV radiation or other envi- ronmental influences. They are usually eliminated by the immune system’s cells. In certain cases, however, they can evade the immune response and become a harmful tumor. Bayer researchers are working mainly in collaboration with scien- tists from the DKFZ on approaches lead- ing to a reactivation of the immune system to eliminate the tumor cells without affect- ing healthy nontumoral cells. The immune system’s memory function may result in long-term therapeutic success. T he moment my best friend was told his mother had died is one I’ll never forget. We were at school together at the time,” remembers Dr. Rafael Carretero. Rafael and Francisco were like brothers. They lived close to each other in the same neighbor- hood in Granada, Spain, played soccer in the street and spent the summers together with their parents, either hiking in the Sierra Nevada or We are working to develop innovative treat- ments for patients with serious diseases such as cancer in order to extend their lives and improve their quality of life. Professor Andreas Busch, head of Drug Discovery at Bayer on the beach at La Herradura. But then Rafael experienced how his best friend’s warm-hearted and cheerful mother suffered the side effects of chemotherapy and radiation therapy before dy- ing – much too young – of breast cancer. “That hit me really hard and was one of the reasons why I decided to devote my life to fighting cancer – so that other people would be spared this fate,” says the Bayer researcher. Carretero is now 33, a molecular biologist and sci- entific manager of a laboratory run jointly by Bayer and the German Cancer Research Center (DKFZ). Its 12 employees on the sixth floor of the DKFZ’s state-of-the-art building in Heidelberg, Germany, are conducting research to determine how the body’s own immune system can be reactivated to combat tumor cells. This approach was also the subject of Carretero’s PhD at the Hospital Univer- sitario Virgen de las Nieves in Granada. The battle against cancer has been the common thread through his life. “We want to develop therapies that enable the patient’s body to detect cancer cells and then fight them itself without harming healthy cells at the same time,” he explains. What’s special about the laboratory in Heidelberg is that scientists from both Bayer and the DKFZ work side by side. “This allows us to pick up on novel research findings as early as possible so that they can be channeled into drug develop- ment,” explains Dr. Ruth Wellenreuther, alliance manager at the DKFZ. “Research issues have become so complex that no one scientist alone is able to resolve them. Our scientists identify po- tential new drug targets, and Bayer has extensive libraries of substances and antibodies. The two Bayer Annual Report 2016 Magazine 15 parties’ respective expertises complement each other ideally, which enables us to reach our objective more quickly.” The joint laboratory is one aspect of a partner- ship that has been in existence since 2009. Wellenreuther was involved in developing the framework for the collaboration. “This is an alli- ance between equals. We clarified all the struc- tural and legal issues right at the beginning, so when we identify a new target we can move straight on to searching for suitable active ingre- dients.” The partnership has already been suc- cessful: The first active ingredient to treat brain tumors and leukemia has been undergoing clini- cal testing in patients for several months now. The substance recognizes proteins that are found only in cancer cells in a subset of patients, an approach that could enable the development of effective, patient-specific therapies. “We are working to develop innovative treat- ments for patients with serious diseases such as cancer in order to extend their lives and improve their quality of life,” says Professor Andreas Busch, member of the Executive Committee of Bayer’s Pharmaceuticals Division and head of Drug Discovery. “Our particular strength at Bayer is that we have strong expertise in identi- fying active ingredients and taking them through all phases of clinical development up to and including drug approval, for the benefit of the patients.” In the battle against cancer, Bayer is pursuing three main approaches (see page 14): blocking signaling pathways that lead to uncontrolled cell division; selectively docking molecules onto cancer cells to trigger their targeted destruction; and reactivating the immune system to eliminate cancer cells itself. This latter approach is the focus of the research by Carretero and his col- leagues. “Our understanding of cancer is con- stantly improving, but there are still plenty of unanswered questions,” says Carretero, before turning his attention to the next test findings from the laboratory. “Our goal is to make cancer curable or be able to transform it into a chronic disease by providing therapeutics that keep tumor cells in check.” mmmmmmmmmmmmmmmmiiiiiiiiillllllllllllliiiion people died of cancer in 2012, according to the World Health Organiza- tion (WHO). In the same year, 14.1 million people were newly diagnosed with cancer. In 2012, according to WHO, 32.6 million people worldwide had been living with cancer for five years. Source: International Agency for Research on Cancer, World Health Organization Dr. Rafael Carretero (left) from Bayer in conversation with Dr. Ruth Wellenreuther and Dr. Stefan Pusch from the German Cancer Research Center in Heidelberg, Germany. 16 Magazine Bayer Annual Report 2016 Bayer Annual Report 2016 Magazine 17 Between 10 and 20 percent of people worldwide (with regional variations) have upper respiratory allergies, the symptoms of which often impact their daily lives. Bayer markets well-known and easy- to-use products to effectively relieve these allergy symptoms. L ulu knows she shouldn’t be on the sofa. “Get down from there!” commands Jennifer T. Lulu understands straight away. The black bulldog mix with the trusting eyes knows she has done something wrong and shoots a guilty glance at her owner before exiting the room. All that remains on the sofa are black dog-hairs, and until a few years ago this would have been a major problem. Jennifer is allergic to dogs and cats. It took her a while to realize this. When she was a student at New York University, she caught a cold – or at least, she thought that was what she had. The symptoms suggested as much, but they refused to go away even after several weeks. An internist in Manhattan correctly diagnosed the then 22-year-old’s condition: Her immune system overreacts to normally harmless substances. Like many other sufferers, she is allergic to pollen and animal hair. “Finally I knew what was going on. But it was also a shock. I grew up spending tons of time outdoors with my German Shep- herd, a Yorkshire Terrier and a Labrador. Now I could no longer even visit friends who had pets.” Jennifer quite simply doesn’t have time for allergies. The single mother lives with her daughters Molly (9) and Lindsey (6) about an hour by car from New York City. The 42-year-old’s days are tightly scheduled. The alarm clock rings shortly before 7. Mom makes breakfast, gets her daugh- ters ready for school and then goes jogging or heads over to her gym or her yoga school, both of which are only a few minutes away. “I don’t have time for long drives.” Then she starts work in her office adjacent to her kitchen. Jennifer is vice president of an association that helps students repay their loans. Her clients attend colleges on the East Coast of the United States, from Maine to Maryland. Once a month, she travels to the association’s headquarters in the Midwest. Allergies and their treatment with antihistamines Allergen 1 2 Mast cell Antihistamine 4 3 Histamine Histamine receptor Tissue cell An allergy is a hypersensitive reaction of the body’s immune system to ordinarily harmless substances known as allergens. The immune system responds to these substances as if they were dangerous. They trigger a defense reaction by the body to, for example, pollen protein. Following initial contact with the allergen, the body develops corresponding antibodies. 1 – If an allergen comes into contact with the body again, it is recognized by the mast cells of the body’s defense system, which are found especially in the mucous membranes. 2 – Already sensitized by the initial contact, the mast cells have formed large num- bers of special receptors for the aller- gen. Mast cells release histamine, which serves as a messenger for the sur- rounding tissue. 3 – Histamine then docks onto the recep- tors in the tissue cells, which then trigger the immune response. The body reacts with allergy symptoms. 4 – Antihistamines like loratadine, the active substance in Claritin™, block histamine from docking onto its recep- tors, thereby hindering the cascade triggered by allergens. 18 Magazine Bayer Annual Report 2016 Regular relaxation: as often as possible Jennifer T. attends a yoga class with instructor Fiona. Despite her very busy professional life, Jennifer is also a class mom at her daughters’ school and a Girl Scout Daisy Troop leader. She lives an active life despite her allergies – and now she has Lulu, a two-year-old crossbreed she got from an animal sanctuary. “I want my daughters to grow up with a pet. Dogs provide unconditional love and teach us how to take responsibility. That’s important to me.” For Jennifer, spring is a particularly difficult time. “I used to have to sneeze all the time, my nose would run.” She tried out lots of things to control her allergy symptoms. “Then I started using Claritin™. It’s exactly right for me. I can be there for my children and I can do my job and live my life without my allergies holding me back.” “We know the symptoms that affect allergy sufferers: itchy, watery eyes, sneezing, a runny or itchy nose. They can have an enormous impact on their daily routine and quality of life,” says Jay Kolpon, Global Category Business Unit Leader, Allergy. “We want to relieve sufferers from these symptoms. Our purpose is to enable them to embrace life with all their senses. Jennifer’s story is a wonderful example of how our products help people live a better life.” Bayer Annual Report 2016 Magazine 19 Family time in the garden: Jennifer with daughters Molly (right) and Lindsey (left) on their climbing tree – Lulu the dog often joins in (photo at left). Round the clock Bayer’s Claritin™ family of products is available in more than 100 countries worldwide. Claritin™ is the market leader in the world’s largest OTC market, the United States. Indications and trademarks vary from country to country. In the United States, Claritin™ provides 24-hour nondrowsy relief from runny nose, sneezing, itchy, watery eyes, and itchy nose or throat, helping sufferers to actively enjoy their daily lives both indoors and out- doors. Claritin-D™ 12- and 24-hour products relieves the same symptoms as Claritin™, plus nasal congestion and sinus congestion and pressure. Allergies are on the rise Up to 30 percent of all adults suffer from allergic rhinitis according to the World Allergy Organiza- tion and these figures are set to rise. Best-selling product Claritin™ is the Consumer Health Division’s best-selling brand globally. Our video shows how Bayer’s nonprescription medicines help patients lead an active life: www.bayer.com/allergy Consumer Health can look back on a long tradition in the self-care market. It began in 1899 with the launch of Aspirin™, Bayer’s world-renowned iconic brand. 20 Magazine Bayer Annual Report 2016 Smart fields The world’s population is growing, but the amount of farmland available per head is shrinking. Agricultural productivity will have to increase if we want to safe- guard our food supply in the long term. Digitalization in farming can help us deploy our resources efficiently and sustainably, enabling farmers to get the best out of their fields with minimal environmental impact. Self-propelled sprayer Cell telephony Agriculture is in the grip of a revolution. Modern farmers are using digital information to optimize harvest yields. All of this information is stored in a cloud so it can be accessed by farmers on the move. The photo shows farm manager Ediney Afonso Dias in a soybean field in Brazil. Sensors Drone Tractor Bayer Annual Report 2016 Magazine 21 Satellite Silos Cloud Harvester H umming quietly, the drone hovers over the field, the lens of its camera surveying the ground below it. Not 200 meters away, a twin-engined Piper stands in its hangar. The propeller plane is much faster, but the drone is better for this job. The remote-controlled aircraft’s camera delivers high-resolution images from every cor- ner of the soy fields, much better than the Piper could. If a problem comes up, Ediney Afonso Dias can react immediately. The Brazilian agronomist can then take targeted action to control weeds, fungal diseases and pests without having to treat the entire field. “Cutting- edge, sustainable agriculture needs lots of accurate information,” says Dias. “Now we don’t have to use crop protection agents on large areas when only cer- tain sections are affected. That’s good for us farmers and for the environment.” Dias, a graduate of the Universidade Estadual de Goiás in Brazil, has been working on Francisco and Charles Godoy’s farm near the town of Catalão in the South American country for four years. A look at his office reveals the 24-year-old’s structured approach to farm management. On the walls are whiteboards for each of the ten farms belonging to the Agricola Godoy company, which have a total area of 12,500 hectares. Each farm is divided into plots. For each plot, Dias has noted in detail how the soil was prepared for sowing, which soybean variety was planted, and what fertilizers and crop protection products have been deployed. The information on the walls is the roadmap for a success- ful harvest in 2017. Dias’ desk overlooks the barn used to store the har- vest, which is currently still empty as the big harvesters wait for their turn to get to work. Everything is well prepared for achieving ambitious objectives. Dias plans to increase this harvest’s yield by around five percent, without having to use any additional farmland. “Our 22 Magazine Bayer Annual Report 2016 The soybean plants look healthy to Joao Miguel (right) and Daniel Tablas, Bayer’s representative in Catalão, Brazil. The farm plans to increase yields using modern technologies. New technologies and the internet will make it possible to increase agricultural productivity by up to 70 percent through 2050 (Beecham Research). In 2024, 27 billion interconnected devices will be in use worldwide in the most varied of applications. 225 million will be used in agriculture (Machina Research). Bayer Annual Report 2016 Magazine 23 Farm manager Ediney Afonso Dias (photo left) in his office. Data are transmitted to the on-board systems of tractors con- trolled by GPS technology (below). The photo at right shows Francisco Godoy (2nd from left), his son Charles (right) and his grandsons Charles Francisco and José Victor next to his twin-engined Piper. A video demonstrating the use of new technologies on Charles Godoy’s farm in Brazil can be found at www.bayer.com/farming objective is to increase productivity from 66 to 68 or 70 bags per hectare,” he explains. An important goal, given that the amount of agricultural land available per head worldwide is falling while the global popula- tion is growing. New digital technologies can enhance efficiency. “We monitor our fields every day so that we can quickly intervene if there is a need for action,” says Charles Godoy, who is in charge of the farm’s operational busi- ness and 40 employees. The 43-year-old has been pas- sionate about farming ever since he was 12. “In the old days, we would simply drive through the fields in the tractor and pull out any weeds. Now we can use data from satellites and drones to boost our productivity.” Infrared images, for example, provide information about the status of the plants. Healthy plants have a higher chlorophyll content and appear red in the images. In addition to the satellites and drones, sensors on the state-of-the-art tractors and harvesters provide vital data on soil condition and plant health. These data flow into the digital applications that Bayer is developing to help farmers around the world pursue efficient, sustain- able agriculture. “We provide information which enables farmers to rapidly take decisions tailored to each individual field,” explains Tobias Menne, head of Digital Farming at Bayer. “It ranges from helping them to select the right crop variety to determining the ideal time for crop pro- tection measures and recognizing plant stress factors at an early stage.” All of this information is compiled by the farm manager and transmitted to the tractors and machinery in the fields which already today are con- trolled using GPS technology. The driver in the cab knows at all times exactly where an active ingredient has to be applied. This is precision agriculture, with no waste of resources. “Digital farming offers enormous opportunities,” says Menne. “We can compare the cur- rent data with the values from previous growing peri- ods, allowing farmers to react earlier to changes, initi- ate counter-measures in good time and thus prevent harvest losses. And it can be used by both small-scale and large operations.” Charles Godoy has just one goal: “I want to leave my two sons Charles Francisco and José Victor a farm that is operating to the highest technical standards.” And then he will just use his plane for fun. 24 Contents Augmented Version Contents To our Stockholders Chairman’s Letter Magazine About this Report Board of Management Report of the Supervisory Board Investor Information A Combined Management Report 1. Fundamental Information About the Group Corporate Profile and Structure 1.1 1.1.1 Corporate Profile 1.1.2 Corporate Structure 1.1.3 Value Creation Strategy and Management 1.2 1.2.1 Group Strategy and Targets 1.2.2 Management Systems 1.2.3 Sustainability Management Focus on Innovation 1.3 Sustainable Conduct 1.4 Commitment to Employees and Society 1.4.1 1.4.2 Responsibility in Value Creation 1.4.2.1 Procurement and Supplier Management 1 9 28 30 32 37 41 41 41 44 47 47 47 55 55 62 76 76 90 90 Bayer Annual Report 2016 1.4.2.2 Production and Logistics 1.4.2.3 Marketing and Distribution 1.4.3 Safety for People and the Environment 1.4.3.1 Product Stewardship 1.4.3.2 Safety 1.4.3.3 Environmental Protection Overview of Business Performance Economic Position of the Bayer Group 2. Report on Economic Position 2.1 2.1.1 Target Attainment 2016 2.1.2 2.1.3 Key Events 2.1.4 2.2 Economic Environment Earnings; Asset and Financial Position of the Bayer Group 2.2.1 Earnings Performance of the Bayer Group 2.2.2 Business Development by Segment 2.2.3 Value-Based Performance 2.2.4 Asset and Financial Position 2.3 of the Bayer Group Earnings; Asset and Financial Position of Bayer AG 2.3.1 Earnings Performance of Bayer AG 2.3.2 Asset and Financial Position of Bayer AG Alternative Performance Measures Used 2.4 by the Bayer Group 96 99 102 104 114 119 129 129 129 129 129 130 131 131 136 152 153 157 158 159 161 Bayer Annual Report 2016 Contents 25 Augmented Version 3. Report on Future Perspectives and on Opportunities and Risks Future Perspectives 3.1 3.1.1 Economic Outlook 3.1.2 Corporate Outlook Opportunity and Risk Report 3.2 3.2.1 Group-wide Opportunity and Risk Management System 3.2.2 Opportunity and Risk Status 3.2.3 Planned Acquisition of Monsanto 3.2.4 Overall Assessment of Opportunities and Risks by the Board of Management 4. Corporate Governance Report 4.1 Declaration by Corporate Management pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code Compliance 4.2 4.3 Compensation Report 4.3.1 Compensation of the 4.3.2 Board of Management Disclosures Pursuant to the Recommendations of the German Corporate Governance Code 4.3.3 Compensation of the Supervisory Board 4.3.4 Further Information 4.4 Takeover-Relevant Information 165 165 165 166 167 167 170 177 179 180 180 184 187 187 195 198 200 200 B Consolidated Financial Statements Bayer Group Consolidated Income Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Changes in Equity Bayer Group Consolidated Statements of Cash Flows 203 204 205 206 207 Notes to the Consolidated Financial Statements of the Bayer Group 1. 2. 3. 4. 5. 6. 6.1 6.2 6.3 208 Key data by segment and region 208 General information 211 Effects of new financial reporting standards 211 Basic principles, methods and critical accounting estimates Segment reporting Scope of consolidation; subsidiaries and affiliates Changes in the scope of consolidation Business combinations and other acquisitions Divestitures, material sale transactions and discontinued operations 215 229 232 232 234 237 26 Contents Augmented Version Bayer Annual Report 2016 Notes to the Income Statements 7. 8. 9. 10. 11. 12. 13. 13.1 Net sales Selling expenses Research and development expenses Other operating income Other operating expenses Personnel expenses and employee numbers Financial result Income (loss) from investments in affiliated companies 13.2 Net interest expense 13.3 14. 15. Other financial income and expenses Taxes Income / losses attributable to noncontrolling interest Earnings per share 16. 239 239 239 239 240 240 241 242 242 243 243 244 246 247 Notes to the Statements of Financial Position 17. 18. 19. Goodwill and other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Inventories Trade accounts receivable Other receivables Equity Provisions for pensions and other post-employment benefits Other provisions Financial liabilities Trade accounts payable 20. 21. 22. 23. 24. 25. 26. 27. 28. 248 248 252 254 257 258 258 260 260 264 273 277 280 Bayer Annual Report 2016 Contents 27 Augmented Version Other liabilities Financial instruments Financial instruments by category 29. 30. 30.1 30.2 Maturity analysis 30.3 31. Information on derivatives Contingent liabilities and other financial commitments Legal risks 32. Notes to the Statements of Cash Flows 33. Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities 34. 35. Other Information Audit fees 36. Related parties 37. Total compensation of the Board of 38. Management and the Supervisory Board, advances and loans Events After the End of the Reporting Period 39. C Further Information Governance Bodies Organization Chart G4 Content Index of the Global Reporting Initiative (GRI) with the 10 Principles of the U.N. Global Compact Glossary Five-Year Summary 315 318 320 334 336 Financial Calendar and Masthead 280 280 280 286 287 290 291 296 296 296 297 298 298 298 300 301 Responsibility Statement Independent Auditor’s Report Independent Practitioner’s Limited Assurance Report on the Sustainability Information 302 303 313 28 About this Report Augmented Version Bayer Annual Report 2016 About this Report This integrated Annual Report combines our financial and our sustainability reporting. Our aim is to elucidate the interactions between financial, ecological and societal factors and underline their influence on our company’s long-term development, thus providing our stakeholders with comprehensive and transparent information. The consolidated financial statements of the Bayer Group as of December 31, 2016, comply with the International Finan- cial Reporting Standards (IFRS) valid at the closing date and with the provisions of the German Commercial Code in conjunction with German financial reporting standards. With due regard to these provisions, the combined man- agement report provides an overview of the financial posi- tion and results of operations of the Bayer Group. The Compensation Report for the Board of Management and the Supervisory Board complies with the recommenda- tions of the German Corporate Governance Code. The consolidated financial statements and the combined man- agement report are published in line with statutory disclo- sure requirements. The Bayer Group’s sustainability reporting complies with the “comprehensive” option of the G4 Guidelines of the Global Reporting Initiative (GRI) and is aligned to the ten principles of the U.N. Global Compact (UNGC). The detailed GRI content index with the corre- sponding UNGC principles can be found in the “Further Information” section in the augmented version of the An- nual Report. Online we also publish a separate PDF file with a summary of the U.N. Global Compact Progress Report based on the criteria of the Blueprint for Corporate Sustainability Leadership. Our reporting is also aligned to international guidelines and recommendations, including those on the definition and selection of nonfinancial indicators and on reporting such as those of the OECD and the ISO 26000 standards. In selecting and measuring our key data we also take into account the recommendations of the European Federation of Financial Analysts Societies (EFFAS) in the case of nonfinancial indicators, and those of the Greenhouse Gas Protocol regarding greenhouse gas emissions. We also consider the recommendations of the World Business Council for Sustainable Development (WBCSD) and the European Chemical Industry Council (Conseil Européen de l’Industrie Chimique – CEFIC). For 2016 we will again submit a declaration of conformity with the German Sus- tainability Code. Data collection and reporting thresholds We collected the data of all relevant organizational units and companies worldwide that fell within the scope of the Bayer Group’s consolidated financial statements between January 1, 2016, and December 31, 2016. Covestro has established its own corporate organization that functions according to a similar system and comparable processes to those at Bayer. Facts and figures pertaining to Covestro are included in all chapters unless otherwise stated. We mainly use SAP systems to collect financial data worldwide. We use the global SAP HR information system and the associated reporting application – the Sustaina- bility Management Annual Reporting Tool (SMART) – to collect HR indicators and social data. All HSE (health, safety and environmental protection) performance indica- tors for the Group are collated in our Group-wide site information system (BaySIS). The HSE data cover all fully consolidated companies in which Bayer owns at least 50% of the shares. GRI G4-17, G4-22 Data on occupational injuries, transport accidents and environmental incidents are collected at all sites world- wide. Environmentally relevant indicators are measured at all production sites and at relevant research and develop- ment sites. In accordance with IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations), financial indi- cators are given for continuing operations unless other- wise explicitly stated. The same applies to HR indicators and our social data. In the case of HSE indicators, the value shown is the total for the Bayer Group unless other- wise reported. In 2016, the Bayer Group amended its regions. Europe is reported together with the Middle East  About this report Bayer Annual Report 2016 About this Report 29 Augmented Version GRI G4-22 and Africa. Latin America is a separate region. This re- flects the regional responsibilities of the individual mem- bers of the Board of Management of Bayer AG. The prior- year figures are restated accordingly. As the indicators in this report are stated in accordance with commercial rounding principles, totals and percentages may not al- ways be exact. External verification PricewaterhouseCoopers AG Wirtschaftsprüfungsgesell- schaft has audited the consolidated financial statements (including the notes thereto) of Bayer AG, Leverkusen, and the combined management report for the fiscal year from January 1, 2016, to December 31, 2016, and has issued an unqualified opinion. All the online annexes that supplement the management report in the augmented online version of the Bayer Annual Report 2016 (“Annual Report 2016 – Augmented Version”) for the fiscal year from January 1 to December 31, 2016, have been reviewed by PricewaterhouseCoopers AG Wirtschafts- prüfungsgesellschaft on a limited assurance basis. Additional information The integrated Bayer Annual Report 2016 is available in a print version (“Annual Report 2016”) and in an augmented online version (“Annual Report 2016 – Augmented Ver- sion”). The online version contains the notes to the con- solidated financial statements of the Bayer Group, along with additional information. The print version contains numbered online annexes which refer the reader to addi- tional information in the Augmented Version. You can enter these numbers in a search mask on any page of the online Annual Report to directly access the annexes. Both ver- sions of the Annual Report are available in PDF format for download from the Bayer website. For further guidance, the Annual Report contains references to other chapters, to (Bayer) websites and, in the Augmented Version, to GRI G4 Materiality Disclosures. Online annexes Cross-references within the References to websites Group target Annual Report The “Annual Report 2016 – Augmented Version” can be found at www.bayer.com/AR16 The app of the “Annual Report 2016 – Augmented Version” is available on the iTunes and Google Play stores. Please search for “Bayer Integrated Reports.” 30 To our Stockholders Augmented Version Board of Management Bayer Annual Report 2016 Board of Management Erica Mann Consumer Health Johannes Dietsch Finance Werner Baumann Chairman Erica Mann holds a degree in analytical chemistry and a market- ing diploma from her studies in Johannesburg, South Africa. She began her career with Eli Lilly & Company and held positions at Johnson & Johnson, Lederle Labo- ratories and Wyeth before moving into senior management at Pfizer in the United States. She became head of Consumer Care at Bayer HealthCare in 2011. She was appointed to the Bayer Board of Management in January 2016. Johannes Dietsch completed his training with Bayer as a com- mercial assistant and business administrator in 1984. He subse- quently held various managerial positions within the company, including one in Japan. In 2002, Dietsch took over as head of the Finance Department in the Corpo- rate Center. He became Senior Bayer Representative and CFO of Bayer in China in 2011. He was appointed to the Bayer Board of Management in September 2014. Werner Baumann studied econom- ics in Aachen and Cologne, joining Bayer AG in 1988. After holding positions of increasing responsibil- ity in Spain and the United States, he became a member of the Board of Management of Bayer Health- Care. He was appointed to the Bayer Board of Management in 2010, first as Chief Financial Officer and then as Chief Strategy and Portfolio Officer. Baumann has been Chairman of the Bayer Board of Management since May 2016. Bayer Annual Report 2016 To our Stockholders 31 Board of Management Augmented Version Dieter Weinand Pharmaceuticals Dieter Weinand studied pharma- cology, toxicology and biology in New York. After holding positions at various companies in the pharma- ceutical industry including Pfizer and Bristol-Myers Squibb, he was President Global Commercialization & Portfolio Management at Otsuka Pharmaceutical Development & Commercialization Inc. in Princeton. In 2014, Weinand became head of the Pharmaceuticals Division at Bayer. He was appointed to the Bayer Board of Management in January 2016. Dr. Hartmut Klusik * Human Resources · Technology · Sustainability Hartmut Klusik studied chemistry in Marburg. After gaining a Ph.D., he began his professional career at Wolff Walsrode in 1984. He transferred to crop protection production at Bayer in Brazil in 1990. Following assignments in the United States and Australia and after holding positions of in creasing responsibility at Bayer CropScience, he was appointed to the Board of Management of Bayer HealthCare with responsibility for Product Supply. He was appointed to the Bayer Board of Management in January 2016. * Labor Director Kemal Malik Innovation Liam Condon Crop Science Kemal Malik studied medicine and worked in a London hos- pital. After holding different positions of increasing responsibility at Bristol-Myers Squibb, he joined Bayer in 1995. In 2007, Malik became a member of the Executive Committee, head of Global Development and Chief Medi- cal Officer of Bayer Health- Care. He was appointed to the Bayer Board of Management in February 2014. Liam Condon studied interna- tional marketing in Dublin and Berlin. He held various positions of increasing responsibility with the former Schering AG, Berlin, Germany, and with Bayer Health- Care in Europe and Asia, includ- ing Managing Director of Bayer HealthCare China and head of Bayer HealthCare in Germany. Condon became Chief Executive Officer of Bayer CropScience in 2012. He was appointed to the Bayer Board of Management in January 2016. 32 To our Stockholders Augmented Version Report of the Supervisory Board Bayer Annual Report 2016 Report of the Supervisory Board During 2016, the Supervisory Board monitored the conduct of the company’s business by the Board of Management on a regular basis with the aid of detailed written and oral reports received from the Board of Management, and also acted in an advisory capacity. In addition, the Chairman of the Supervisory Board maintained a constant exchange of information with the respective Chairman of the Board of Management and with the other Management Board members. In this way the Supervisory Board was kept continuously informed about the company’s intended busi- ness strategy, corporate planning (including financial, investment and human resources planning), earnings performance, the state of the business and the situation in the company and the Group as a whole. Where Board of Management decisions or actions required the approval of the Supervisory Board, whether by law or under the Articles of Incorporation or the rules of procedure, the draft resolu- tions were inspected by the members at the meetings of the full Supervisory Board, sometimes after preparatory work by the committees, or approved on the basis of documents circulated to the members. The Supervisory Board was involved in decisions of material importance to the company. We discussed at length the business trends described in the reports from the Board of Management and the prospects for the development of the Bayer Group as a whole, the individual organizational units and the principal affiliated companies in Germany and abroad. Changes on the Supervisory Board and the Board of Management The Supervisory Board memberships of Prof. Dr. Ernst-Ludwig Winnacker and Dr. Helmut Panke ended as of midnight on April 29, 2016, the date of the Annual Stockholders’ Meeting. The Annual Stockholders’ Meeting elected Johanna (Hanneke) Faber and Prof. Dr. Wolfgang Plischke to suc- ceed them. The terms of office of the heads of the divisions newly appointed to the Board of Management in connection with the reorganization of the Bayer Group – Dieter Weinand (Pharmaceuticals), Erica Mann (Consumer Health) and Liam Condon (Crop Science) – began with effect from January 1, 2016. Dr. Hartmut Klusik (Human Resources, Technology & Sustainability) also joined the Board of Management effective January 1, 2016. The previous Chairman of the Board of Management, Dr. Marijn Dekkers, resigned his office effective April 30, 2016. The Supervisory Board appointed Werner Baumann as his successor. Work of the Supervisory Board The full Supervisory Board met five times during 2016 and resolved in writing on a special election to the Audit Committee. No member of the Supervisory Board attended only half or fewer than half of its meetings or those of the committees on which he/she served. The average attendance rate by Supervisory Board members at the meetings of the full Supervisory Board and of its com- mittees held in 2016 was approximately 97 percent. A detailed overview of the attendance of the individual members of the Supervisory Board at the meetings of the Supervisory Board and its committees is shown in the “Further Information” section under “Governance Bodies.” The members of the Board of Management regularly attended the meetings of the Supervisory Board. The deliberations of the Supervisory Board focused on questions relating to Bayer’s strategy, portfolio and business activities. The discussions at the respective meetings in 2016 centered on various topics. Bayer Annual Report 2016 To our Stockholders 33 Report of the Supervisory Board Augmented Version Werner Wenning, Chairman of the Supervisory Board of Bayer AG At its February meeting, the Supervisory Board dealt with the departure of Dr. Marijn Dekkers as Chairman of the Board of Management effective April 30, 2016, and the appointment of Werner Baumann as new Chairman of the Board of Management for a duration of five years. The Super- visory Board also discussed the Annual Report 2015, the agenda for the Annual Stockholders’ Meeting 2016, the Bayer Group’s risk management system and the status of the Pharmaceuticals pipeline. At its April meeting, the Supervisory Board examined the business performance to date in 2016 and the imminent Annual Stockholders’ Meeting. At an extraordinary meeting in May, the Supervisory Board dealt in detail with the planned acquisi- tion of Monsanto, including the associated financing. Following up on deliberations at earlier Su- pervisory Board meetings, the strategic aspects of the possible acquisition and the question of Monsanto’s valuation were discussed at length. At its September meeting, the Supervisory Board once again dealt in detail with the acquisition of Monsanto and resolved on the final offer condi- tions for the acquisition. At this meeting, the Supervisory Board also extended the term of office of Kemal Malik on the Board of Management by an additional five years. In the intervals between its meetings, the Supervisory Board was regularly informed in writing about the respective status of the planned acquisition of Monsanto. In addition to the customary reports, the Chairman of the Supervisory Board was also kept constantly informed in detail about all major developments. 34 To our Stockholders Augmented Version Report of the Supervisory Board Bayer Annual Report 2016 At its meeting in December 2016, the Supervisory Board undertook the routine review of the fixed compensation of the members of the Board of Management and the pension amounts of the for- mer members of the Board of Management. Also at this meeting, the Board of Management pre- sented its planning for the business operations in the years 2017 through 2019. The Supervisory Board approved the proposed financing framework for 2017 and also dealt with the strategy of the Bayer Group and possible courses of action with regard to the remaining interest in Covestro. In addition, the Supervisory Board resolved to issue an unqualified declaration of compliance with the German Corporate Governance Code. Committees of the Supervisory Board The Supervisory Board has a Presidial Committee, an Audit Committee, a Human Resources Committee, a Nominations Committee and an Innovation Committee. The current membership of the committees is shown in the “Further Information” section under “Governance Bodies.” The meetings and decisions of the committees, and especially the meetings of the Audit Commit- tee, were prepared on the basis of reports and other information provided by the Board of Man- agement. Reports on the committee meetings were presented at the meetings of the full Super- visory Board. Presidial Committee: This comprises the Chairman and Vice Chairman of the Supervisory Board along with a further stockholder representative and a further employee representative. The Presidial Committee serves primarily as the mediation committee pursuant to the German Co- determination Act. It has the task of submitting proposals to the Supervisory Board on the ap- pointment of members of the Board of Management if the necessary two-thirds majority is not achieved in the first vote at a plenary meeting. Certain decision-making powers in connection with capital measures, including the power to amend the Articles of Incorporation accordingly, have also been delegated to this committee. On a case-by-case basis, furthermore, the Supervisory Board can delegate certain responsibilities to the Presidial Committee. Finally, the Presidial Com- mittee may also undertake preparatory work for full meetings of the Supervisory Board. In 2016, the Presidial Committee was not required to convene in its capacity as the mediation committee. At a meeting in November 2016, it approved the issue of a mandatory convertible bond in connection with the financing of the planned acquisition of Monsanto based on a corre- sponding authorization by the full Supervisory Board. Audit Committee: The Audit Committee comprises three stockholder representatives and three employee representatives. The Chairman of the Audit Committee in 2016, Dr. Klaus Sturany, satis- fies the statutory requirements concerning the expertise in the field of accounting or auditing that a member of the Supervisory Board and the Audit Committee is required to possess. The Audit Committee meets regularly four times a year. Its tasks include in particular oversight of the financial reporting process, the effectiveness and ongoing development of the internal control system, the risk management system, the internal audit system, the compliance system and the audit of the financial statements. The Audit Commit- tee prepares the resolutions of the Supervisory Board concerning the financial statements and management report of Bayer AG and the proposal for the use of the distributable profit, the con- solidated financial statements and management report of the Bayer Group and the agreements with the auditor (particularly the awarding of the audit contract, the determination of the main areas of focus for the audit and the audit fee agreement). The committee submits a proposal to the full Supervisory Board concerning the auditor’s appointment, and takes appropriate measures to determine and monitor the auditor’s independence. The audit focuses particularly on whether the financial statements have been prepared in compliance with the statutory requirements and whether the financial reporting provides a true and fair view of the financial position and results of operations of the company and the Group. The Audit Committee discusses developments in the area of corporate compliance at each of its meetings where necessary. Bayer Annual Report 2016 To our Stockholders 35 Report of the Supervisory Board Augmented Version The Chairman of the Board of Management and the Chief Financial Officer regularly attended the meetings of the Audit Committee. Representatives of the auditor were also present at all the meet- ings and reported in detail on the audit work and the audit reviews of the interim financial reports. The meetings focused on a number of topics. At the February meeting, the Audit Committee discussed the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. It also carefully considered the risk report, which covered the risk management system, operational risks, planning and financial market risks, legal risks, corporate compliance, process and organizational risks, and the internal control system. At this meeting, the Audit Com- mittee also made a recommendation to the full Supervisory Board concerning the resolution to be submitted to the Annual Stockholders’ Meeting on the appointment of the auditor of the financial statements. The April meeting mainly dealt with the yearly reports of the Group Compliance Officer and the Internal Audit department and with determining the main areas of focus for the audit of the 2016 financial statements. At its July meeting, the Audit Committee addressed the audit budget for 2017 and the scope of non-audit-related services by the external auditor. As at each meeting, it also discussed the interim financial report and legal and compliance issues. At its meeting in Oc- tober, the Audit Committee dealt with the regular agenda items and with the tax strategy of the Bayer Group, value management, the audit conducted pursuant to Section 20 of the German Securities Trading Act (WpHG) (EMIR), the new requirements for the Independent Auditor’s Report pursuant to ISA 700 / 701, and the upcoming change of external auditor. Human Resources Committee: On this committee, too, there is parity of representation between stockholders and employees. It consists of the Chairman of the Supervisory Board and three other Supervisory Board members. The Human Resources Committee prepares the personnel decisions of the full Supervisory Board, which resolves on appointments or dismissals of members of the Board of Management. The Human Resources Committee resolves on behalf of the Supervisory Board on the service contracts of the members of the Board of Management. However, it is the task of the full Supervisory Board to resolve on the total compensation of the individual members of the Board of Management and the respective compensation components, as well as to regular- ly review the compensation system on the basis of recommendations submitted by the Human Resources Committee. The Human Resources Committee also discusses the long-term succes- sion planning for the Board of Management. The Human Resources Committee convened on three occasions in 2016. The matters discussed at these meetings concerned the compensation and contracts of the members of the Board of Management, as well as the preparation of the departure of Dr. Marijn Dekkers as Chairman of the Board of Management and the appointment of Werner Baumann as his successor. Nominations Committee: This committee carries out preparatory work when an election of stock- holder representatives to the Supervisory Board is to be held. It suggests suitable candidates for the Supervisory Board to propose to the Annual Stockholders’ Meeting for election. The Nomina- tions Committee comprises the Chairman of the Supervisory Board and the other stockholder representative on the Presidial Committee. During four conference calls in 2016, the members of the Nominations Committee discussed candidates for the special elections to the Supervisory Board that took place at the 2016 Annual Stockholders’ Meeting and for the elections to the Supervisory Board at the 2017 Annual Stock- holders’ Meeting. Innovation Committee: The Innovation Committee is primarily concerned with the innovation strategy and innovation management, the strategy for the protection of intellectual property, and major research and development programs at Bayer. Within its area of responsibility, the commit- tee advises and oversees the management and prepares any Supervisory Board decisions. The Committee comprises the Chairman of the Supervisory Board and five other members of the Su- pervisory Board, with parity of representation between stockholder and employee representatives. 36 To our Stockholders Augmented Version Report of the Supervisory Board Bayer Annual Report 2016 The Chairman of the Board of Management and the member of the Board of Management re- sponsible for Innovation regularly attend the meetings of the Innovation Committee. The Innovation Committee convened twice in 2016. At its February meeting, it dealt with innova- tion management at Bayer and the development of the Bayer Lifescience Center. At its September meeting, it dealt once again with the development of the Bayer Lifescience Center, as well as with digital innovations at Bayer. Corporate governance The Supervisory Board dealt with the principles of corporate governance at Bayer. Among the topics discussed were the scope of dialogue between the Chairman of the Supervisory Board and investors. In December, the Board of Management and the Supervisory Board issued a new declaration concerning the German Corporate Governance Code. Financial statements and audits The financial statements of Bayer AG were prepared according to the requirements of the German Commercial Code and Stock Corporation Act. The consolidated financial statements of the Bayer Group were prepared according to the German Commercial Code and the International Financial Reporting Standards (IFRS). The combined management report was prepared according to the German Commercial Code. The auditor, PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Essen, has audited the financial statements of Bayer AG, the consolidated financial statements of the Bayer Group and the combined management report. The conduct of the audit is explained in the auditor’s reports. The auditor finds that Bayer has com- plied, as appropriate, with the German Commercial Code, the German Stock Corporation Act and/or the International Financial Reporting Standards endorsed by the European Union, and issues an unqualified opinion on the financial statements of Bayer AG and the consolidated finan- cial statements of the Bayer Group. The financial statements of Bayer AG, the consolidated financial statements of the Bayer Group, the combined management report and the audit reports were submitted to all members of the Supervisory Board. They were discussed in detail by the Audit Committee and at a meeting of the full Supervisory Board. The auditor submitted a report on both occasions and was present during the discussions. We examined the financial statements of Bayer AG, the proposal for the use of the distributable profit, the consolidated financial statements of the Bayer Group and the combined management report. We have no objections, thus we concur with the result of the audit. We have approved the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group prepared by the Board of Management. The financial statements of Bayer AG are thus confirmed. We are in agreement with the combined management report and, in particular, with the assessment of the future development of the enterprise. We also concur with the dividend policy and the decisions concerning earnings retention by the company. We assent to the proposal for the use of the distributable profit, which provides for payment of a dividend of €2.70 per share. The Supervisory Board would like to thank the Board of Management and all employees for their dedication and hard work in 2016. Leverkusen, February 21, 2017 For the Supervisory Board: Werner Wenning Chairman Bayer Annual Report 2016 To our Stockholders 37 Investor Information Augmented Version Investor Information > Long-term return on Bayer stock still ahead of the market despite a decline in the share price in 2016 > €4 billion in mandatory convertible notes issued as a financing component for the agreed acquisition of Monsanto > Dividend increase to €2.70 per share proposed Performance of Bayer Stock in 2016 Indexed; 100 = Xetra closing price on December 31, 2015; source: Bloomberg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1 120 110 100 90 80 70 Bayer –12.3% DAX +6.9% DJ EURO STOXX 50 +3.7% The Stock Market in 2016 Stock markets post moderate gains after a turbulent year Fiscal 2016 was characterized by significant price fluctuations. At the beginning of the year, the financial markets were unsettled by growth concerns in China. The decline in oil prices, the Brexit vote in the United Kingdom, the U.S. presidential election and the monetary policy of the central banks caused significant fluctuations on the capital markets over the course of the year. The European Central Bank maintained its zero-interest policy and initially decided to expand its bond purchasing program. With a further interest rate hike, the U.S. Federal Reserve maintained its effort to implement a controlled departure from the phase of extremely low interest rates. The German stock index DAX saw a decline of more than 15 percent in the first two months of 2016, falling below the 9,000-point mark in February. A phase of recovery then set in, followed by a volatile lateral movement that lasted through the beginning of December. After a strong finish in December, the DAX closed the year at 11,481 points – its fifth consecutive profitable year of growth. This equates to growth of about 6.9 percent for 2016. Following a similar path, the European equities index EURO STOXX 50 (performance index) rose 3.7 percent, ending the year at 6,458 points. Share price performance in the United States and Japan varied. The S&P 500 index climbed by 9.5 percent, while the Nikkei 225 was largely unchanged. 38 To our Stockholders Augmented Version Investor Information Bayer Annual Report 2016 Bayer share price declines Including the dividend of €2.50 per share paid at the beginning of May, Bayer stock earned a negative return of minus 12.3 percent in 2016 after several years of what in some cases were substantial gains. Bayer stock ended the year at €99.13, thus underperforming the reference indices. The EURO STOXX Chemicals Index (performance index) climbed by 7.8 percent in 2016, while the EURO STOXX Health Care Index (performance index) rose by 2.4 percent. Bayer Stock Data Earnings per share Core earnings per share from continuing operations 1 Equity per share Dividend per share Year-end price ² High for the year ² Low for the year ² Total dividend payment Number of shares entitled to the dividend (Dec. 31) Market capitalization (Dec. 31) Average daily share turnover on German stock exchanges Price / EPS ² Price / core EPS ² Price / cash flow ² Dividend yield € € € € € € € € million million shares € billion million shares % 2015 4.97 6.82 30.77 2.50 115.80 146.20 108.00 2,067 826.95 95.8 2.3 23.3 17.0 14.0 2.2 2 2016 5.44 7.32 38.57 2.70 99.13 111.25 84.42 2,233 826.95 82.0 2.7 18.2 13.5 9.9 2.7 2015 figures restated 1 For details on the calculation of core earnings per share see Combined Management Report, Chapter A 2.4 2 Xetra closing prices (source: Bloomberg). The calculation is based on the indicator “Net cash provided by (used in) operating activities, continuing operations.” Positive financing environment for Bayer in receptive markets 2016 began very weakly for issuers of corporate bonds. Investor behavior was characterized by uncertainty and reticence until the market environment improved at the end of the first quarter. Thereafter, the bond purchasing program of the European Central Bank also served to further improve financing conditions and costs. The interest levels for many maturities dipped into the negative zone and did not rise again substantially until the fourth quarter, although the absolute level remained at a historic low. Volatility remained very high at times before easing considerably in the second half of the year. Bayer redeemed all bonds maturing in 2016 without refinancing. In November, €4 billion in three- year mandatory convertible notes were issued. This was the largest transaction of this kind to date for a European nonfinancial company. Through this issue, Bayer implemented a major com- ponent of the planned equity financing for the agreed acquisition of Monsanto. Further details of outstanding bonds are given in Note [27] to the consolidated financial statements. Long-term return on Bayer stock still ahead of the market A long-term investor who purchased Bayer shares for €10,000 five years ago and reinvested all dividends would have seen the value of the position grow to €22,546 as of December 31, 2016, giving an average annual return of 17.7 percent. That was above the return on the DAX (plus 14.2 percent) and the EURO STOXX 50 (plus 10.5 percent, performance index) in the same period. Bayer Annual Report 2016 To our Stockholders 39 Investor Information Augmented Version Dividend increase to €2.70 per share The Board of Management and the Supervisory Board will propose to the Annual Stockholders’ Meeting that the dividend be increased by €0.20 to €2.70 per share. Thus we once again intend that our stockholders should participate in last year’s positive business performance. The result- ing payout ratio of 37 percent calculated on core earnings per share is within our target corridor of 30 percent to 40 percent. See Chapter 2.2.1 of the Combined Management Report for core EPS The dividend yield calculated on the share price of €99.13 at year end 2016 amounts to 2.7 per- cent and the total dividend payment to €2,233 million. Dividends Per Share and Total Dividend Payments 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3 3.0 2.5 2.0 1.5 1.35 € 1.40 € 1.40 € 1.50 € 1.65 € 2.25 € 2.10 € 1.90 € 2.70 € 2.50 € 1.0 0.5 0.0 €1,032 million €1,070 million €1.158 million €1,240 million €1,364 million €1,571 million €1,737 million €1,861 million €2,067 milllion €2,233 million Dividend per share (€) Total dividend payment (€ million) Investor relations focused on the acquisition of Monsanto Last year our investor relations (IR) activities focused on the announcement made and the agree- ment reached regarding the acquisition of Monsanto. In this connection, there were many ques- tions from capital market participants pertaining to strategic alignment, financing and value crea- tion. GRI G4-26, G4-27 Bayer’s management and the Investor Relations team last year communicated directly with inves- tors and analysts during roadshows and investor conferences. Our Meet Management conference in September gave investors and analysts an opportunity to engage in direct dialogue with Bayer’s top management. As in previous years, private investors also had an opportunity to find out about our company at various stockholder forums at which the Investor Relations team was present. A sustainable investment We continued our intensive dialogue with sustainability-oriented investors, analysts and rating agencies in 2016. Our discussions focused on business ethics, product stewardship and safety. In 2016, Bayer again qualified for inclusion in major sustainability indices, including the Dow Jones Sustainability World, the FTSE4Good (Europe, Global and Environmental Leaders Europe 40) and the STOXX® Global ESG Leaders. In addition, Bayer was once again evaluated by the CDP as one of the leading international pharmaceutical companies in the areas of climate protection and sus- tainable water management. www.bayer.com/awards 40 To our Stockholders Augmented Version Investor Information Bayer Annual Report 2016 A growing number of stockholders Our ownership structure continues to show the international distribution of our capital stock. The highest proportion of our outstanding shares, almost 29 percent, is held by investors in the United States and Canada, followed by Germany with about 22 percent. Bayer has a 100-percent free float as defined by Deutsche Börse, the operator of the Frankfurt Stock Exchange. The number of Bayer stockholders rose substantially in 2016. At the end of 2016, approximately 360,000 stock- holders were listed in our share register – an increase of more than 20 percent compared with the previous year. Shareholder Composition – Regional Allocation 4.2% Denmark, Finland, Norway, Sweden 2.5% Benelux 4.4% Austria, Switzerland, Liechtenstein 4.5% Other countries 9.6% France, Spain, Italy, Portugal 17.7% U.K. & Ireland Source: IPREO 4 6.1% Not covered by survey 28.6% U.S.A. & Canada 22.4% Germany Bayer Annual Report 2016 A Combined Management Report 41 1.1 Corporate Profile and Structure Augmented Version Combined Management Report of the Bayer Group and Bayer AG as of December 31, 2016 1. Fundamental Information About the Group 1.1 Corporate Profile and Structure > Health care and nutrition: Bayer helping to solve global challenges > Innovations drive the success of the Life Science businesses > New structure supports implementation of corporate strategy 1.1.1 Corporate Profile Bayer is a Life Science company with a more than 150-year history and core competencies in the areas of health care and agriculture. With our innovative products, we are contributing to finding solutions to some of the major challenges of our time. A growing and aging world population re- quires an adequate supply of food and improved medical care. Our research and development activities are therefore focused on improving people’s quality of life by preventing, alleviating and treating diseases. At the same time, we are making an important contribution to providing a relia- ble supply of high-quality food, feed and plant-based raw materials. Our understanding of the biochemical processes in living organisms helps us address these demanding challenges. Our goal is to achieve and maintain leadership positions in our markets. In this way we create value for our customers, stockholders and employees, at the same time strengthening the com- pany’s earning power. We are committed to operating sustainably and addressing our social and ethical responsibilities. We also respect the interests of all our stakeholders. Employees with a passion for innovation enjoy excellent development opportunities at Bayer. All this goes to make up our mission – Bayer: Science for a Better Life. In fulfilling our mission, we are guided by our corporate values. Represented by the acronym LIFE (Leadership, Integrity, Flexibility and Efficiency), these values apply to everyone at Bayer and are firmly integrated into our global performance management system for managerial employees. Our value culture ensures a common identity throughout the enterprise across national boundaries, management hierarchies and cultural differences. 42 A Combined Management Report Augmented Version 1.1 Corporate Profile and Structure Bayer Annual Report 2016 Bayer Worldwide 2016 North America Sales Employees R&D2 €12,806 (12,621)1 million 15,800 (16,000) 1 €1,081 (1,051)1 million Latin America Sales Employees R&D2 €5,108 (5,494)1 million 12,500 (13,000)1 €71 (65)1 million Germany Headquarters Bayer Group Leverkusen Pharmaceuticals Berlin Crop Science Monheim am Rhein Animal Health Monheim am Rhein Covestro Leverkusen Pharmaceuticals Crop Science Cologne Berlin Wuppertal Bergkamen Leverkusen Weimar Consumer Health Darmstadt Bitterfeld-Wolfen Grenzach Monheim am Rhein Frankfurt am Main Dormagen Knapsack Animal Health Monheim am Rhein Kiel Covestro Leverkusen Brunsbüttel Dormagen Uerdingen France Consumer Health Gaillard Crop Science Lyon Sophia Antipolis U.S.A. Pharmaceuticals San Francisco Whippany Berkeley Indianola Consumer Health Memphis Morristown Cleveland Myerstown Crop Science Lubbock Morrisville Raleigh Sacramento Kansas City Animal Health Shawnee Covestro Pittsburgh Baytown Mexico Consumer Health Lerma Brazil Animal Health São Paulo Argentina Consumer Health Pilar 2015 figures in parentheses 1 2015 figures restated 2 Research and development Significant research and development location Significant production location Bayer Annual Report 2016 A Combined Management Report 43 1.1 Corporate Profile and Structure Augmented Version Europe / Middle East / Africa €17,823 (17,707)1 million Sales Employees 59,500 (58,800)1 R&D2 €3,285 (2,944)1 million Asia / Pacific Sales Employees R&D2 €11,032 (10,263)1 million 27,400 (28,800)1 €229 (214)1 million A 1.1.1/1 Finland Netherlands Pharmaceuticals Turku Crop Science Nunhem Norway Belgium Switzerland Pharmaceuticals Oslo Crop Science Ghent Covestro Antwerp Headquarters Consumer Health Basel Italy Pharmaceuticals Garbagnate China Pharmaceuticals Beijing Consumer Health Chengdu Covestro Shanghai Japan Pharmaceuticals Tokyo Osaka Shiga Thailand Covestro Map Ta Phut Indonesia Consumer Health Cimanggis India New Zealand Crop Science Vapi Animal Health Auckland 44 A Combined Management Report Augmented Version 1.1 Corporate Profile and Structure Bayer Annual Report 2016 1.1.2 Corporate Structure Following the stock market flotation of Covestro, we reorganized the Bayer Group effective Janu- ary 1, 2016, and are now focusing on our Life Science activities. These businesses hold leading positions in innovation-driven, rapidly growing markets. Together, the Life Science businesses make up a strong, attractive and balanced portfolio that is resistant to fluctuations in demand and to potential risks. Our operations are managed in three divisions – Pharmaceuticals, Consumer Health and Crop Science – and the Animal Health business unit, which are also reporting seg- ments. Bayer still holds about 64% of Covestro AG. Covestro therefore also remains a fully con- solidated reporting segment. The operational business is supported by the corporate functions – including Technology Services, which was integrated into Bayer AG effective July 1, 2016 – Busi- ness Services and the service company Currenta. The following changes were made to the corporate structure in the past fiscal year: > > In April 2016, Bayer AG deposited shares it held in Covestro AG in Bayer Pension Trust e.V. The number of shares deposited amounted to 10 million, or 4.9%, of the shares outstanding. In May 2016, Crop Science signed an agreement to divest the Consumer business of Environmental Science, which has since been reported retrospectively for 2015 and 2016 under discontinued operations. Environmental Science therefore now comprises only the business for professional users. The divestment was closed at the start of October 2016. A 1.1.2/1 Bayer Group Structure in 2016 Board of Management Pharmaceuticals Consumer Health Crop Science Corporate Functions & Business Services Animal Health Currenta (60%) Covestro (around 64%) In 2016, the Bayer Group comprised 301 consolidated companies in 78 countries throughout the world. Reporting of the regions in the Annual Report has been adjusted to reflect the distribution of re- sponsibilities on the Board of Management. Africa / Middle East is now no longer reported together with Latin America but with Europe. Bayer Annual Report 2016 A Combined Management Report 45 1.1 Corporate Profile and Structure Augmented Version The Pharmaceuticals segment focuses on prescription products, especially for cardiology and women’s healthcare, and on specialty therapeutics in the areas of oncology, hematology and oph- thalmology. The division also comprises the radiology business, which markets diagnostic imaging equipment together with the necessary contrast agents. The Consumer Health segment markets mainly nonprescription (OTC = over-the-counter) prod- ucts in the dermatology, nutritional supplement, analgesic, gastrointestinal, cold, allergy, sinus and flu, foot care and sun protection categories. The Crop Science segment is a world-leading agriculture enterprise with businesses in seeds, crop protection and nonagricultural pest control. The Crop Protection / Seeds operating unit mar- kets a broad portfolio of high-value seeds and innovative pest management solutions, while at the same time providing extensive customer service for sustainable agriculture. The Environmental Science operating unit provides products and services for professional nonagricultural applica- tions, such as vector and pest control and forestry. Vector control: see Glossary The Animal Health segment ranks among the leading international innovators in its field. It devel- ops and markets products and solutions for the prevention and treatment of diseases in compan- ion and farm animals. The corporate functions and Business Services operate as Group-wide competence centers in which business support services are bundled. Currenta is the service company responsible for managing and operating the Chempark sites in Leverkusen, Dormagen and Krefeld-Uerdingen. Covestro is one of the world’s leading suppliers of high-tech polymer materials and develops inno- vative product solutions for a wide variety of everyday uses. 46 A Combined Management Report Augmented Version 1.1 Corporate Profile and Structure Bayer Annual Report 2016 Online Annex: A 1.1.2-1 Product and Activities of the Segments Indication/Application/Business Core activities and markets Main products and brands1 A 1.1.2-1/1 Pharmaceuticals Cardiology Oncology Ophthalmology Hematology Women’s health Hypertension, pulmonary hypertension, heart attack and stroke, thrombosis Liver cancer, renal cell carcinoma, prostate cancer, colorectal cancer, gastrointestinal stromal tumors (GIST) Xarelto™, Adalat™, Aspirin™ Cardio, Adempas™ Nexavar™, Xofigo™, Stivarga™ Age-related macular degeneration (AMD), diabetic macular edema (DME) Eylea™ Hemophilia A Kogenate™ / Kovaltry™ Contraception, gynecological therapy Mirena™ product family, YAZ™ / Yasmin™ / Yasminelle™ Avalox™ / Avelox™, Cipro™, Ciprobay™ Infectious diseases Bacterial infections Radiology Other indications Consumer Health Dermatology Nutrition Analgesics Gastrointestinals Allergy Cough and cold Footcare Suncare Crop Science Fungicides Insecticides Herbicides SeedGrowth Seeds Environmental Science Animal Health Companion animals business Farm animals business Covestro Polyurethanes Contrast agents; diagnostic imaging equipment for use with contrast agents Gadovist™, Ultravist™, Medrad Spectris Solaris™, Medrad Stellant™ Multiple sclerosis Betaferon™ / Betaseron™ Wound care, skin care, skin and intimate health Bepanthen™, Canesten™ Multivitamin products, dietary supplements One A Day™, Elevit™, Berocca™, Supradyn™, Redoxon™ General pain relief Gastric complaints Allergies Cough and cold Footcare Sun protection Aspirin™, Aleve™ MiraLax™, Rennie™, Iberogast™ Claritin™ Aspirin™, Alka-Seltzer™, Afrin™ Dr. Scholl’s™ Coppertone™ Biological and chemical products to protect crop plants from fungal diseases Flint™, Fox™, Luna™, Nativo™, Prosaro™, Serenade™, Xpro™ Biological and chemical products to protect crop plants from harmful insects Belt™, BioAct™, Confidor™, Movento™, Sivanto™ Chemical crop protection products to control weeds Adengo™, Alion™, Basta™, Corvus™, Liberty™ Biological and chemical seed treatments to protect against fungal infection and pests CropStar™, Gaucho™, Poncho™ Seeds and traits for cotton, canola, rice, soybeans, wheat and vegetables Arize™, Credenz™, FiberMax™, InVigor™, Nunhems™, Stoneville™ Products for professional pest control, vector control, forestry, golf courses and parks, railway tracks Esplanade™, Fludora™, Interface™, K-Othrine™, Maxforce™, Pistol™, Signature™ Veterinary medicines and solutions to protect and maintain the health of companion animals, focusing on antiparisitics and anti-infectives Veterinary medicines and solutions to treat and prevent parasitic diseases, anti-infectives, immunostimulants, pharmacological treatments and farm hygiene products Advantage™ product family, Seresto™, Drontal™, Baytril™ Baytril™ Raw materials for flexible and rigid foams and for thermoplastics Diphenylmethane diisocyanate (MDI), toluene diisocyanate (TDI) and polyether polyol product groups Polycarbonates Granules, sheets and films Polycarbonate product group Coatings, Adhesives, Specialties Raw materials for surface coatings and adhesives and specialties Hexamethylene diisocyanate (HDI) product group 1 The order of the products listed is no indication of their significance. Bayer Annual Report 2016 A Combined Management Report 47 1.2 Strategy and Management Augmented Version 1.1.3 Value Creation By delivering innovative products and solutions in its core businesses, Bayer creates value for its stakeholders at all stages of the value chain. We operate production sites worldwide, invest in research and development, work with international and local suppliers and contribute to the eco- nomic development of our target markets. As an employer, we provide jobs in industrialized, emerging and developing economies and create purchasing power through the salaries we pay. We contribute to public finances and thus support public infrastructure through the payment of taxes and other levies. Value Chain Stages Research, development and innovation Procurement and supply chain Production Logistics Distribution and marketing Use A 1.1.3/1 See also A 1.4.2 The value added statement shows the direct financial value our business activities create for our stakeholders. We define value added as the company’s total operating performance in the previous fiscal year less the costs of procured and consumed goods and services, depreciation, amortization, impairment losses and impairment loss reversals. Bayer Group Value Added 2016 €3.7 billion Depreciation, amortization, impairment losses and impairment loss reversals €25.9 billion Material costs / other expenses €47.8 billion Total operating performance2 €18.2 billion Value added A 1.1.3/2 €11.4 billion Employees (62%) €2.2 billion Stockholders1 (12%) €0.7 billion Lenders (4%) €1.6 billion Tax authorities (9%) €2.3 billion Reserves / other3 (13%) 1 Bayer AG dividend proposal for 2016 2 Total operating performance = sales + other operating income + financial income / equity-method income (loss) 3 Includes dividend for minority shareholders of Covestro AG 1.2 Strategy and Management > Corporate strategy targets long-term profitable growth > Group targets include financial and nonfinancial data > Sustainability management integrated in all processes 1.2.1 Group Strategy and Targets Our mission “Bayer: Science For A Better Life” guides our endeavors to address some of today’s most pressing global challenges in health and nutrition through better medicines and a sufficient quantity of high-quality food for a steadily growing and aging population. Together with our part- ners, we are developing innovative solutions to tackle these challenges and thus improve people’s quality of life. 48 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 We want to safeguard our company’s long-term success in balance with ecological responsibility and societal acceptance. Sustainability is embedded in all our business practices as a fundamen- tal condition for achieving this. www.bayer.com/strategy Our diversified portfolio of Life Science businesses delivers profitable growth. We continuously strive to develop our businesses such that they assume leading positions in the respective indus- tries and segments. This development is sustained by our core competencies of innovation, cus- tomer focus, quality, process excellence and portfolio management, and by our people. To advance the consistent implementation of our strategy, we have set ambitious group targets for our company in the areas of growth and profitability, innovation, sustainability and employees. These targets are explained in more detail on the following pages. Strategies of the Segments Pharmaceuticals At Pharmaceuticals, our largest segment in terms of sales, we focus on researching, developing and marketing specialty-focused innovative medicines that provide significant clinical benefit and value, primarily in the therapeutic areas of cardiology, oncology, gynecology, hematology and ophthalmology. In this way, we are addressing the growing requirements of patients, physicians, health care payers and regulatory agencies. We will continue to drive growth with our successfully launched products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™. We are continuing to expand the use of these medicines through comprehensive clinical development programs – some of them in collaboration with other pharmaceutical companies – and to make them available to further patient groups. To drive sustainable growth, we are continually increasing our investment in research and devel- opment, focusing on the areas with the greatest potential for innovation such as cardiology, on- cology and gynecology. We aim to continue supplementing our own innovation strength through targeted external collaborations. In addition, we are expanding and supplementing our develop- ment portfolio through licensing agreements and acquisitions. Moreover, we are seeking to further increase our efficiency as a means of ensuring the availability of resources for investment in innovation. To improve access to our products in developing and emerging countries (Access to Medicine), we are implementing economically feasible concepts and further developing our compounds for the treatment of neglected tropical diseases alongside our philanthropic activities. Bayer Annual Report 2016 A Combined Management Report 49 1.2 Strategy and Management Augmented Version Online Annex: A 1.2.1-1 Target: improving people’s quality of life As an innovation company, we are addressing current challenges by improving people’s quality of life through disease prevention and therapy. Within the scope of our entrepreneurial possibili- ties, we seek to make a responsible contribution to the benefit of society. Our Access to Medi- cine (ATM) activities are aligned to our company’s expertise and our specific product portfolio. Here we distinguish between not-for-profit and economically feasible activities. The former in- clude our efforts in respect of neglected tropical diseases (NTDs). Having signed the London Declaration, Bayer is collaborating with other pharmaceutical companies and stakeholders to help control or if possible eliminate 10 of these tropical diseases by 2020. Each of the compa- nies involved contributes its respective expertise. In this connection, we have been providing the WHO (World Health Organization) free of charge with two of our active ingredients to treat African sleeping sickness and Chagas disease for more than 10 years. In 2016, we supplied one million tablets of Lampit (active ingredient: nifurtimox) for the treatment of Chagas disease and additionally contributed €300,000 for logistics and distribution. Given the gratifying and continuous decline in the number of patients suffering from African sleeping sickness, the 10,000 Germanin ampoules we supplied in 2015 will be sufficient for treatment through 2018. Since 2013, we have also been supporting WHO mobile intervention teams in the Democratic Republic of Congo, the country with the highest incidence of African sleeping sickness. Additionally, we are working with DNDi (Drugs for Neglected Diseases Initiative) to develop a new treatment for river blindness. As part of the TB Drug Accelerator program, Bayer is open- ing parts of its substance library to support the search for new compounds to combat tubercu- losis. In 2016, we formed a collaboration with the University of Dundee, Scotland, and the Uni- versity of Cape Town, South Africa, to study an approach resulting from that program. We are optimizing a special formulation of our active ingredient nifurtimox that will allow more accurate, weight-based dosing in the treatment of Chagas disease, especially for children. The related Phase III study was launched in 2016 in Argentina, Colombia and Bolivia. Improved access to medicines Our family planning programs are economically feasible and facilitate improved access to hor- monal contraceptives for women in developing countries. These programs make our products available to international development partners at preferential prices. In some countries, where sections of the population have no access to innovative medicines via health care systems, we have established patient assistance programs for selected products. These aim particularly to provide access to oncology and cardiovascular products and prod- ucts to treat chronic diseases such as multiple sclerosis and hemophilia. Such programs exist in the United States and China, for example, as well as in a number of countries in South and Southeast Asia and Southeastern Europe. Every two years, the Access to Medicine (ATM) Index analyzes the top 20 research-based pharmaceutical companies in terms of their efforts to improve access to medicines and health care in developing countries. The rating mainly focuses on infectious diseases such as HIV, ma- laria and neglected tropical diseases, indications for which Bayer’s portfolio has a limited offer- ing. In 2016, Bayer placed 12th (10th in the 2014 ranking) with its access programs for hormo- nal contraceptives, its collaboration with the WHO and other development projects. 50 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 Consumer Health The growing and aging world population represents an increasing challenge to public health care systems. For this reason, the issue of self-care is gaining importance for millions of people, as well as for governments, health care systems and health care payers. See also A 1.1.2 Our Consumer Health segment is responding to this change with its mainly nonprescription (OTC) brand products to treat and prevent diseases and to improve well-being, providing consumers with the corresponding self-care solutions. Our strategy is aimed at further building on our strong position in the market for over-the-counter medicines, nutritional supplements and other self-care products in selected categories. Increasing competition for consumer attention combined with ongoing industry and distribution channel consolidation require a stronger focus on brand building, key markets and consumer- centric innovation. In order to drive the organic growth of our core brands, such as Claritin™, Aspirin™, Aleve™, Bepanthen™, Canesten™, Alka-Seltzer™, Dr. Scholl’s™, One a Day™, Coppertone™, Elevit™ and Berocca™, we are investing in product innovation and geographical expansion. We additionally intend to further strengthen our positions in key markets such as the United States, Brazil, Russia and China through product developments, marketing innovations and new digital offerings. We also plan to continue selectively pursuing external growth opportunities that arise from the progressive consolidation of the OTC industry in order to expand our presence in strategic focus categories and markets by way of acquisitions. Crop Science Our Crop Science segment is aligned to the long-term trends of the agricultural markets. Our aim is to help shape the future of the agricultural industry with innovative offerings that enable the production of sufficient high-quality food, animal feed and renewable raw materials for a growing world population despite the limited amount of available arable land. We want to contribute to global food security through an environmentally friendly and sustainable increase in agricultural productivity. Our innovation strength is intended to benefit both our customers and society as a whole and be the source of our long-term growth. Crop Science’s strategy is built on three cor- nerstones: leading the way in innovation, increasing customer centricity and promoting and further developing sustainable farming practices. To lead the way in innovation and develop holistic solutions, we aim to build on our expertise in the integration of seed technology with chemical and biological crop protection. In so doing, we support our customers with improved and innovative solutions tailored to specific local require- ments. Innovative technologies are increasingly being applied in research and development in order to enhance our product portfolio. Examples here include new breeding technologies to im- prove yields or computational life sciences for the collection, processing and analysis of extensive research and development data as the basis for faster and more customer-focused development. See also A 1.3 Bayer Annual Report 2016 A Combined Management Report 51 1.2 Strategy and Management Augmented Version Another major part of our strategy is customer centricity along the entire value chain, which is coupled with the continuous optimization of distribution. We aim to offer our customers integrated solutions for the most important crops. In response to the increasing digitization of agriculture, we plan to develop a proprietary digital platform and specific data models in the area of digital farm- ing so that we can give farmers more customized and sustainable agronomic recommendations for improving their yields. We are also seeking to support smallholder farmers in developing and emerging economies with specially tailored and sustainable solutions that help them optimize their agricultural production methods and improve their standard of living. In line with our commitment to sustainable agriculture, we promote and improve corresponding farming practices. Moreover, we are steadily expanding our successful food chain partnerships. In these projects, Crop Science works with all participants in the food chain to sustainably safeguard and increase yields, and to satisfy the quality criteria in the food chain. With the Bayer Forward Farming initiative, we cooperate with farmers to develop and promote innovative solutions for the respective crops and facilitate sustainable agriculture. We plan to establish model operations known as “ForwardFarms” in all major agricultural markets by 2018. www.bayer.com/ foodchain Cooperation is crucial to the implementation of these strategic priorities. To find innovative and sustainable solutions to the challenges facing the agricultural industry, we maintain numerous collaborations and partnerships with leading research institutes and partners from the public and private sectors. See also A 1.3 On September 14, 2016, as the logical next step in our evolution as a Life Science company, we signed a binding agreement to acquire Monsanto Company. Monsanto’s shareholders approved the merger at an extraordinary shareholders’ meeting held on December 13, 2016. Subject to receipt of the required regulatory approvals, successful closing of the transaction is anticipated by the end of 2017. Together we would be able to offer a broader portfolio of innovative products customized to serve farmers’ many needs and individual requirements. In the medium to long term, the combined enterprise would be able to bring innovations to the market faster and provide its customers with better solutions and an optimized product offering on the basis of agricultural analysis and supporting digital farming applications. Animal Health Driven by an increasing world population and higher incomes, the animal health market remains very attractive. In the companion animals segment, we are benefiting from growing pet ownership rates. In the farm animals segment, moreover, the aspiration to adopt Western lifestyle habits is leading to higher meat consumption. In the companion animals business, Animal Health has a strong position in the field of parasiti- cides. To safeguard and further expand this position, we are focusing on maintaining the strong performance of the Seresto™ collar, opening up new distribution channels and leveraging the brand equity of the Advantage™ product family. 52 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 See also A 1.3 In the farm animals business, we are focusing on parasiticides and anti-infectives for the treatment of infectious diseases. We are striving to develop new options for the prevention and treatment of diseases in livestock. In this connection, we recently launched the innovative, nonantibiotic immunostimulant Zelnate™. Additionally, we strengthened our antiparasitics business in the United States with the acquisition in January 2017 of the Cydectin™ endectocide portfolio. Covestro As a global supplier of high-tech polymer materials and associated application solutions for many areas of modern life, Covestro supplies key industry sectors such as the automotive, construction and electronics industries. Driven by macro trends such as climate change, the diminishing availa- bility of fossil resources, the expanding global population, urbanization and increasing mobility, the company is seeking to achieve profitable growth in the long term. Through its products – along- side polycarbonates especially raw materials for polyurethanes, coatings, adhesives and sealants as well as speciality products – Covestro aims to help master these challenges in line with its vision “To make the world a brighter place.” It operates efficient, safe and environmentally friendly production facilities and processes that are capable of serving the anticipated growth in demand. Covestro intends to further optimize cost structures and efficiency throughout the company. Targets and key performance indicators Our strategy is aimed at achieving economic growth balanced with our responsibility for the envi- ronment and society. We measure our progress in this on the basis of ambitious Group targets along the value chain. These targets are in the areas of growth and profitability, innovation, sus- tainability and employees. In this way, we aim to make clear the challenges we have identified in our core business in the context of sustainable development, and at the same time to highlight the continuous improve- ments we are committed to making throughout the Group. The current status of our progress in these areas is documented in the following table and the respective chapters. Bayer Annual Report 2016 A Combined Management Report 53 1.2 Strategy and Management Augmented Version Bayer Group Targets1 Target Target attainment (as of 2016) New or adjusted target A 1.2.1/1 Growth and Profitability Increase in Group sales (Fx & portfolio adj.); forecast issued in February 2016: low-single-digit percentage increase to more than €47 billion 3.5% increase to €46.8 billion Low- to mid-single-digit percentage increase (Fx & portfolio adj.) to more than €49 billion Increase in EBITDA before special items; forecast issued in February 2016: mid-single-digit percentage increase Increase in core earnings per share; forecast issued in February 2016: mid-single-digit percentage increase 10.2% increase Mid-single-digit percentage increase 7.3% increase Mid-single-digit percentage increase Innovation Group: increase in R&D investment to €4.5 billion (2016) €4.7 billion Increase in R&D investment to €4.8 billion (2017) Pharmaceuticals: transition of 10 new molecular entities (NMEs) into development (2016) 12 new molecular entities (NMEs) transferred Transition of 10 new molecular entities (NMEs) into development (2017) Consumer Health: transition of 20 consumer-validated concepts into early development (2016) 30 new concepts transferred Transition of 25 consumer-validated concepts into early development (2017) Crop Science: transfer of 3 new molecular entities (NMEs), plant traits or biologics into confirmatory technical proof-of-concept field studies (2016) Start of field studies on 4 new molecular entities (NMEs) and 1 new plant trait Transfer of 3 new molecular entities (NMEs), plant traits or biologics into confirmatory technical proof-of- concept field studies See A 1.3 for more information Sustainability Supplier management Evaluation of all strategically important suppliers (2017) Evaluation of all potentially high-risk suppliers with significant Bayer spend (2020) 98% 83% Target unchanged Target unchanged Development and establishment of a new sustainability standard for our supply base (2020) In implementation Target unchanged See A 1.4.2.1 for more information 1 All targets other than “Growth and Profitability” and R&D investment targets do not include Covestro. 54 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 A 1.2.1/1 continued Bayer Group Targets1 Target Target attainment (as of 2016) New or adjusted target Resource efficiency Improvement of 10% in energy efficiency (2020); reference value 2012: 8.86 MWh/t 6.77 MWh/t (24% improvement) Reduction of 15% in specific greenhouse gas emissions (2020); reference value 2012: 1.88 t CO2/t 1.54 t CO2/t (–18%) Establishment of water management at all sites in water-scarce areas (2017) 95% See A 1.4.3.3 for more information Safety Improvement of 10% in energy efficiency (2020); reference value 2015: 143 kWh/€1,000 external sales Reduction of 20% in specific greenhouse gas emissions (2020); new reference value (2015): 54.5 kg CO2/€1,000 external sales Target unchanged Reduction of 35% in occupational safety incident rate (Recordable Incident Rate – RIR) (2020); reference value 2012: 0.50 RIR 0.40 (–20%) Target unchanged Reduction of 30% in process and plant safety incidents (Loss of Primary Containment Incident Rate – LoPC-IR) (2020); reference value 2012: 0.21 LoPC-IR 0.17 (–19%) Target unchanged See A 1.4.3.2 for more information Product stewardship Conclusion of assessment of hazard potential of all substances (>99%) used in quantities exceeding one metric ton per annum (2020) 66% Target unchanged See A 1.4.3.1 for more information Compliance Annual compliance training for virtually 100% of Bayer managers 97% Target unchanged See A 4.2 for more information Employees Continuous improvement in employee engagement; reference value 2012: 85% Increase in the proportion of women in senior management to 35% (2020); reference value 2010: 21% Increase in the proportion of senior managers from outside the European Union, the United States or Canada to 25% (2020); reference value 2013: 18% 87% 31% 21% See A 1.4.1 for more information 1 All targets other than “Growth and Profitability” and R&D investment targets do not include Covestro. Target unchanged Target unchanged Target unchanged Bayer Annual Report 2016 A Combined Management Report 55 1.2 Strategy and Management Augmented Version 1.2.2 Management Systems One of the prime objectives of the Bayer Group is to achieve profitable growth in order to steadily increase the enterprise value and sustain the company as a going concern. Economic planning and management for the company takes place within a framework for the divisions determined by the Board of Management in the course of the strategic management process and translated into specific targets during operational planning. Continuous monitoring of business developments complements the planning and management process, and key management and performance indicators are regularly updated. This process also involves tracking the implementation of the strategic objectives and adopting countermeasures in the event of deviations from the budget. Moreover, the Board of Management uses targets and performance indicators to steer the com- pany’s sustainable alignment. We use the following indicators to plan, manage and monitor the development of our business. Operational management indicators The main parameters in economic management within the Bayer Group at the operational level are figures for sales, earnings and tied-up capital, which therefore also significantly affect short-term variable compensation. See also A 2.4 Growth is measured primarily in terms of the change in sales after adjusting for currency and port- folio effects (Fx & p. adj.) in order to reflect the operational business development of the Group and the divisions. A key measure of profitability at the Group and division levels is EBITDA before special items. The EBITDA margin before special items, which is the ratio of EBITDA before spe- cial items to sales, serves as a relative indicator for the internal and external comparison of opera- tional earning power. Another important profitability indicator for the Bayer Group is core earnings per share, which is the core net income divided by the weighted average number of shares. New value-based indicator: return on capital employed At the strategic level, Bayer introduced the return on capital employed (ROCE) for fiscal 2016. This indicator of value-based performance replaces the cash value added (CVA) and cash flow return on investment (CFROI). The periodic capital return is measured by comparing ROCE with the weighted average cost of capital. This supports the management in evaluating long-term business development. See also A 2.2.3 Management of the Covestro segment The principal indicators used for internal management in the Covestro segment are core volume growth, return on capital employed (ROCE) and free operating cash flow. These indicators also serve as the basis for short-term incentive awards to all Covestro employees. For management at Group level, however, the indicators used by Covestro are converted into those defined for Bayer above. 1.2.3 Sustainability Management To us, sustainability means safeguarding our future viability and, as part of corporate strategy, is integrated into everyday procedures. We underline our mission as a company that acts sustaina- bly through our commitment to the U.N. Global Compact and the Responsible Care™ initiative, and through our active global involvement in leading initiatives such as the World Business Council for Sustainable Development (WBCSD). Bayer is committed to the U.N. Sustainable Development Goals (SDGs) and released a position outlining the company’s stance on these in 2016. Our inno- vations, products and services make a contribution to overcoming some of the biggest global challenges, including the SDGs of zero hunger and good global health care in particular. www.bayer.com/unsdg U.N. Global Compact: see Glossary 56 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 GRI G4-18 www.bayer.com/policies Clear responsibilities and structures defined As part of Bayer’s corporate strategy, sustainability is firmly established at Board level. Responsi- bility for the Group’s sustainable orientation lies with the Board of Management member responsi- ble for Human Resources, Technology and Sustainability in his role as Chief Sustainability Officer, and with the Corporate Health, Safety & Sustainability function introduced in 2016. Operational implementation is effected with the help of nonfinancial targets and performance indicators throughout the value chain, based on a clear definition of responsibilities in the corporate structure and the identification of key areas of activity using a materiality analysis. Corporate policies ensure our sustainability principles are firmly established in business operations and are implemented through management systems, committees and processes. The ongoing review and revision of directives and regular internal audits ensure that our management systems are continuously im- proved and aligned to the specific respective requirements. Covestro has established its own sustainability organization that functions according to a similar system and comparable processes to those at Bayer. The following information in this chapter does not include Covestro, unless otherwise indicated. A 1.2.3/1 Structure of Sustainability Management Sustainability management Organization Major areas of activity Member of the Board of Management responsible for Human Resources, Technology and Sustainability Corporate Health, Safety & Sustainability function Group committees focusing on sustainability and HSEQ issues Product and process innovation Access to Medicine Sustainable food supply Employee relations & development Business ethics Product stewardship Safety Environmental protection / resource efficiency Supplier management Stakeholder engagement / partnering Societal engagement Steering, measurement and documentation Group policies on, for example, – human rights – compliance – sustainable development – responsible marketing Targets / indicators HSEQ management systems and audits Opportunity and risk management Integrated Annual Report with independent auditing Commitment to standards and organizations such as WBCSD, GRI, U.N. Global Compact, Responsible Care GRI G4-18, G4-23, G4-26, G4-27 www.bayer.com/ materiality www.bayer.com/ areas-of-activity Materiality analysis and areas of activity updated We regularly analyze what the major stakeholders expect and require and match this against our own assessment. This enables us to identify at an early stage the latest developments along with sustainability-related opportunities and risks, which we can then incorporate into our strategy. After Covestro became independent and Bayer realigned itself as a Life Science company, we examined our areas of activity in 2016. This involved reviewing the issues in our last materiality analysis and assessing their relevance in view of the reorganization. Selected internal and external stakeholders evaluated the relevance to Bayer of the issues identified in respect of sales, costs, risk and reputation. The results were entered into a materiality matrix in line with the internal and external perspectives. The next step was to condense the issues relevant to Bayer, leading to 11 areas of activity. The Board of Management approved the entire process. The following graphic shows our areas of activity and their assignment to the stages of the value chain. Bayer Annual Report 2016 A Combined Management Report 57 1.2 Strategy and Management Augmented Version A 1.2.3/2 Distribution and marketing Use Areas of Activity Across the Different Stages of the Value Chain Research, development, innovation Leistungskennzahlen Procurement and supply chain Production Logistics Value chain stages Areas of activity Product and process innovation Access to Medicine Sustainable food supply Employee relations & development Business ethics Product stewardship Safety Environmental protection / resource efficiency Supplier management Stakeholder engagement / partnering Societal engagement The content index of the Global Reporting Initiative (GRI) with the corresponding U.N. Global Compact principles and the key GRI aspects assigned to our areas of activity can be found in the augmented version of the Annual Report. There we indicate whether we are able to exert influ- ence within or outside the company. An overview of our areas of activity, their definitions, the corresponding Group targets and the assigned GRI aspects is available on our sustainability website. Stakeholder dialogue promotes acceptance and business success As a company, Bayer is a part of society and of public life. Ongoing and systematic dialogue with our stakeholders is therefore particularly important to us. Their expectations and viewpoints affect public acceptance of Bayer and thus our commercial success. They enable us to recognize trends and developments in society and our markets at an early stage and provide input for the continu- ing development of our business activities, risk management and reporting. We take the wide- ranging requirements of our stakeholders seriously and consider them in our business operations. The open dialogue with them also enables us to build trust in our products and the social value of our services. We distinguish four main stakeholder groups with which we interact. GRI: see Glossary www.bayer.com/ gri GRI G4-26, G4-27 58 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 A 1.2.3/3 GRI G4-24 Stakeholder Dialogue: Our Most Important Interest Groups Partners Customers Suppliers Employees Associations Universities / schools Financial market participants Investors Banks Rating agencies Bayer Social interest groups Regulators General public NGOs Local communities Competitors Lawmakers Politicians Authorities GRI G4-25 Online Annex: A 1.2.3-1 Diverse stakeholders in focus We involve our interest groups, among other means, on the basis of our Stakeholder Engagement Process. This describes how their expectations, regarding a particular project for example, can be charted and dialogue with them steered. The engagement process is regularly reviewed based on social trends. Stakeholder Engagement Process A 1.2.3-1/1 Preparation Controlling Identifi- cation Interaction Charac- terization Strategy development Prioritization Clustering GRI G4-26 Early and open dialogue for new projects To ensure the long-term acceptance and appreciation of our business, we seek to link the in- terests of our stakeholders to our corporate strategy. Bayer approaches key social and political players right from the start of a new project to canvass their support. The open dialogue makes it possible to identify opportunities and risks early on. We use a manual to guide our stakehold- er engagement in strategic decision-making processes such as investment projects and launching new products. The associated internal platform, the Virtual Resource Center, pro- vides corresponding online tools. The concept is currently being applied to various projects at Bayer and undergoing continuous further development based on the practical experience ob- tained. In addition, senior managers are receiving systematic training to improve interaction with critical stakeholders. Bayer Annual Report 2016 A Combined Management Report 59 1.2 Strategy and Management Augmented Version Collaboration formats aimed at specific target groups Bayer’s regular stakeholder activities range from dialogue at local, national and international level and active involvement in committees and specialist workshops all the way through to comprehensive information programs, issue-related multi-stakeholder events and participation in international initiatives and collaborations. Our stakeholder dialogue also involves systematic monitoring. GRI G4-26 Below and in the relevant chapters, we use examples to provide an insight into our engage- ment in 2016 with respect to our four most important stakeholder groups. GRI G4-24 Our partners Customers and suppliers More on this topic can be found in Chapter A 1.4.2.1 and A 1.4.2.3. Employees More information about internal communications can be found in Chapter A 1.4.1. Universities and scientific institutions Bayer’s research and development activities are supported by international collaborations with leading universities, public-sector research institutes and partner companies. More about this can be found in Chapter A 1.3.1. Schools and universities You can find more information on Bayer’s comprehensive activities in dialogue with school and university students in Online Annex A 1.4.1-15 of this Annual Report. Associations Bayer is an active member of, or holds leadership positions in, numerous associations and their committees. Examples include the German Chemical Industry Association (VCI; Vice- Presidency), the German Equities Institute (DAI; Presidency) and the European Chemical Indus- try Council (CEFIC; Executive Director Sustainability). Bayer also currently provides the Chair- man of the Executive Board of econsense, the Forum for Sustainable Development of German Business. Our segments are active members of their respective industry associations and committees. For example, Pharmaceuticals is on the boards of both the European (EFPIA) and the American (PhRMA) pharmaceutical trade associations. Consumer Health has leadership functions in rele- vant industrial and trade associations. The member of the Bayer Board of Management respon- sible for Consumer Health is on the Board of Directors of the WSMI (World Self-Medication In- dustry) federation. Representatives of the segment are on the boards of regional self- medication associations in the United States, Latin America and Europe, where Bayer currently holds the vice-presidency. Crop Science is represented on the boards of the international crop protection association CropLife International, its regional associations CropLife America, Asia, Latin America and Afri- ca & Middle East, the European Crop Protection Association (ECPA) and the presidium of the German agricultural association Industrieverband Agrar. Animal Health is represented on the Board of Directors of the international association Health for Animals and the International Federation of Animal Health (IFAH-Europe) among other or- ganizations. 60 A Combined Management Report Augmented Version 1.2 Strategy and Management Bayer Annual Report 2016 GRI G4-26 www.bayer.com/ pol-involvement www.bayer.de/us- lobbying-disclosure Covestro holds the Presidency of PlasticsEurope, the association of European plastics manu- facturers, and is represented on the Executive Committee of the World Plastics Council. It is also represented on the Executive Committee of CEFIC and the Board of VCI. Financial market players Investors, banks and rating agencies More information on our dialogue with the capital market – stockholders, capital investment companies, institutional investors, banks and rating agencies – can be found in the “Investor In- formation” chapter of this Annual Report. Regulators Legislators, authorities and politicians The framework for the company’s operations is essentially determined by authorities, legislators and politicians. The dialogue with authorities and ministries worldwide includes discussions with political decision-makers and active involvement in specialist committees and cooperation projects. Our active participation in political decision-making processes is explicitly sought by the key players involved. Lobbying In its Corporate Policy “Code of Conduct for Responsible Lobbying,” Bayer sets out binding rules for its involvement in political matters, aiming to ensure transparency in any collaboration with the representatives of political institutions. The Group’s Public and Governmental Affairs Committee established the principles for the alignment of Bayer’s political work. This especially includes developing the company’s political positions as well as determining the position of the Board of Management on important political issues. In 2016, Bayer’s political lobbying focused among other things on social debate regarding good framework conditions for developing inno- vative Life Science technologies and products, evidence-based regulation and the necessary reforms for the regulatory approval of crop protection products and in the area of seeds. A fur- ther focal point was submitting proposals for creating sustainable health care systems and strengthening self-care as a key factor in this process. Bayer also promotes the prevention of additional burdens for innovation and is involved in various policy areas: from energy, chemicals and trade policy to climate protection and sustainability. In addition, the company actively sup- ports the protection of intellectual property – a key prerequisite for continuing to invest signifi- cantly in the development of innovative products. More information on our political principles and positions can be found on the internet. Our liaison offices in Berlin, Brussels, Washington, Moscow, Brasília and Beijing are key touch- points between the company and political stakeholders. Bayer actively participates in existing transparency initiatives. It publishes details of costs, employee numbers and any of the other statistics required in each country, e.g. in the transparency registers of the European institu- tions and the U.S. Congress. Bayer goes far beyond the statutory requirements in doing so. For instance, the Group also publishes data for countries such as Germany where there is no legal requirement to publish such information. In 2016, the costs incurred at the liaison offices for human resources, material and projects totaled approximately: €1.4 million in Berlin, Germany; €1.9 million in Brussels, Belgium; €7.3 million in Washington, United States; €0.2 million in Moscow, Russia; €1.3 million in Brasília, Brazil; and €1.1 million in Beijing, China. According to our corporate policy, we have committed not to make any direct donations to political parties, politicians or candidates for political office. However, some associations to which the Group belongs make donations on their own initiative, in compliance with statutory regulations. Bayer Annual Report 2016 A Combined Management Report 61 1.2 Strategy and Management Augmented Version In the United States, a number of our employees use the Bayer Corporation Political Action Committee (BayPac) to make private donations supporting candidates for parliamentary office. Political action committees in the United States are state-regulated, legally independent em- ployee groups. In the United States, companies are legally prohibited from donating to political candidates in Federal elections directly. In many cases, such direct donations by companies are legally prohibited for elections at state and local level too, but irrespective of the legislation Bayer’s internal regulations do not permit them anyway. Donations through BayPac are there- fore not corporate donations. The BayPac contributions are regularly reported to the U.S. Fed- eral Election Commission and can be viewed on its website. www.fec.gov Social interest groups Nongovernmental organizations, the public, the local community and competitors Bayer is involved in a variety of projects, thematic initiatives and specialist conferences at a na- tional and international level in order to play an active role in the common task of shaping sus- tainable development. Alongside exchange and cooperation with nongovernmental organiza- tions (NGOs) and supranational organizations, this primarily involves dialogue with the public. GRI G4-26 Among other involvement, Bayer is actively engaged in the U.N. Global Compact and its initia- tives, the CEO Water Mandate and Caring for Climate, as well as the Global Compact LEAD network and local networks. We have also acted as an organizational stakeholder in the Global Reporting Initiative since 2004. As a co-initiator of the “Zukunft der Industrie” (Future of Industry) group, Bayer was involved in several events in Germany during the Week of Industry initiative that took place for the first time in 2016. This demonstrated the impressive performance and innovative spirit of industry as well as its vital contribution to the prosperity of German society. Segments develop specific dialogue formats Pharmaceuticals is an active participant in the social dialogue addressing sustainability issues and creates forums to encourage exchange and develop viable problem-solving approaches together with partners. Pharmaceuticals supports the International Dialogue on Population and Sustainable Development conference in close collaboration with various governmental and nongovernmental organizations. Here, approaches for tackling internationally relevant issues in reproductive health are worked on and experiences of implementing the U.N. Millennium Devel- opment Goals are shared. GRI G4-26 As part of their partnership, Consumer Health and the U.S. NGO, the White Ribbon Alliance (WRA), make a joint contribution to the U.N.’s “Every Woman Every Child” campaign. Its goal is to work at local level to reduce the mortality rate of mothers, infants and children. Consumer Health also supports the United Nations Population Fund’s (UNFPA) “Safe Birth” campaign. Crop Science has initiated various dialogue formats to improve knowledge transfer in agricul- ture, highlight the improvements in sustainable agriculture and increase communication with stakeholders such as farmers, public-sector decision-makers and society as a whole. For in- stance, Bayer has joined forces with industry business partners to organize numerous visits to Hof ten Bosch, a farm near Brussels, Belgium, with the goal of providing E.U. representatives, journalists and other stakeholders with a practical example of how digital farming works and can be further expanded. Crop Science sees great potential in digitizing agriculture and is therefore working with partners, for example, to develop digital farming applications for farmers that support them in decision-making processes and help them to optimize their work routines. 62 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 www.bayer.com/ag-edu Crop Science pursues an intensive societal dialogue about the benefits of science and innova- tion in agriculture today. The Agricultural Education program is primarily aimed at encouraging young people to take a greater interest in agriculture and food production. In addition to practi- cal exercises in student laboratories, the program also includes scholarships for agricultural science students and the sharing of ideas about the future of agriculture at international youth conferences such as the Youth Ag-Summit. And AgLearn, a new online offering, offers a practi- cal approach to learning with online experiments relating to plant growth. GRI G4-26 Dialogue with the local community builds trust An important part of our stakeholder dialogue takes place in the direct vicinity of our sites. We are working on being recognized everywhere as a reliable partner and attractive employer that is aware of its social responsibility. The involvement of the local community plays a decisive role, for example, in the success of any investment project. Dialogue with neighbors in the communities surrounding our production sites is anchored in a corporate policy on site management. Community dialogue is jointly maintained by the sites and the relevant country organization. In Germany, dialogue with the local community is han- dled via the Chempark neighborhood offices among other means. For Pharmaceuticals and Consumer Health, exchange with neighbors at the production sites is a particularly high priority as it helps make the operation of the facilities in question transparent. It involves organizing guided tours and dialogue events and providing informational material for various stakeholder and age groups. Regular exchange is also maintained in networks with rep- resentatives of local governments and other resident companies. Crop Science regularly uses forums, print media and personal discussions with citizens’ initiatives, representatives of church communities and the regional press to keep its neighbors continually informed, for instance at the Dormagen, Frankfurt-Hoechst and Knapsack sites in Germany. Close dialogue with stake- holders is also taking place in the communities around sites in other countries, such as in the United States. Covestro initiates dialogue with neighbors, the public and nongovernmental organizations (NGOs) on a case-by-case basis. In the United States, for example, dialogue takes place through the Community Advisory Panels (CAPs). These organize regular meetings, for example with local government or the community, in order to provide information on current issues. Covestro enters into direct dialogue with social interest groups in particular when commission- ing new facilities. 1.3 Focus on Innovation > Excellence in research and development > Groundbreaking technologies in the Life Sciences > Global open innovation network Innovation is a cornerstone of our mission “Science For A Better Life” and a core element of our strategy. We define innovations as new solutions that generate added value for our customers and society. Our activities focus on innovative products based on our strong research and develop- ment competencies. They are accompanied by process, service and business model innovation. Bayer Annual Report 2016 A Combined Management Report 63 1.3 Focus on Innovation Augmented Version With our innovative solutions, we are responding to the global challenges in medical care and the need to safeguard an adequate food supply. Here we focus on three key elements: excellence in research and development, the application of groundbreaking technologies, and open innovation. Excellence in research and development The success of our company is based on excellence in research and development (R&D). The know-how and skills of our employees are our most valuable resource in this endeavor. We devel- op new molecules and technologies in the research-intensive fields of medicine and modern agri- culture and invest continuously in research and development projects. We maintain a global network of research and development locations, where more than 15,000 scientists are employed. The focus of the research projects is determined by the R&D strategies of our segments. In 2016, we increased our research and development investment by 9.8% (Fx adj.) to €4,666 million. We plan to invest around €4.8 billion in research and development in 2017. Group target 2016: increase in R&D invest- ment to €4.5 billion; see also A 1.2.1 Research and Development Expenses in 2016 A 1.3/1 R&D expenses € million 2015 2,450 250 2016 2,787 259 R&D expenses before special items € million 2015 2,402 232 2016 2,736 234 1,082 1,164 1,082 1,156 134 96 140 55 134 96 140 55 4,012 4,405 3,946 4,321 262 261 261 261 4,274 4,666 4,207 4,582 Share of R&D expenses % R&D expenses before special items % of sales R&D employees FTE 2015 57.3 5.8 25.3 3.1 2.2 93.7 6.3 100 2016 59.7 5.6 24.9 3.0 1.2 94.4 5.6 100 2015 15.7 3.8 10.7 9.0 8.7 11.6 2.2 9.1 2016 2015 16.7 8,003 3.9 347 2016 7,934 331 11.7 5,073 5,631 9.2 5.2 285 40 308 9 12.4 13,748 14,213 2.2 9.8 1,005 1,016 14,753 15,229 Pharmaceuticals Consumer Health Crop Science Animal Health Reconciliation Life Sciences Covestro Group 2015 figures restated Patents protect Bayer’s intellectual property Globally reliable protection of intellectual property rights is particularly relevant for an innovation company like Bayer. We therefore endeavor to obtain patent protection for our products and tech- nologies in the major markets depending on the legal framework. At the end of 2016, we owned approximately 50,800 valid patent applications and patents relating to some 5,000 protected inventions worldwide. Online Annex: A 1.3-1 Patent protection is essential Patent terms vary according to the laws of the country granting the patent. In view of the high investment required for product research and development, the European Union (E.U.) member states, the United States, Japan and some other countries extend patent terms or issue sup- plementary protection certificates to compensate for the shortening of the effective patent pro- tection period due to regulatory approval processes for new drugs. www.bayer.com/ political-position-ip The term of a patent is normally 20 years. Since it takes an average of 12 years to develop a new medicine, only eight years of patent protection generally remain following the product’s approval. In most cases it would be impossible to cover the substantial costs incurred in the research and development of innovative medicines or of new indications or dosage forms for existing drugs without this protection. We are therefore committed worldwide to protecting both the international patent system and our own intellectual property. The following table shows the expiration dates for the Bayer Group’s significant patents. 64 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 Pharmaceuticals Patent Expiration Dates A 1.3-1/1 Market Germany France U.K. Italy Spain Japan China Switzer- land Brazil U.S.A. Canada Products Adempas™ Active ingredient 2028e 2028 2023a 2028 2028 2027 2023 2028 2023b 2023a 2023 Production process / intermediate Eylea™ 2030 2030 2030 2030 2030 2030 2030 2030 2030b 2030 2030b Active ingredient 2020a 2025 2020a 2025 2025 Formulation Kogenate™ 2027 2027 2027 2027 2027 2021- 2023d 2028- 2029d 2020 2025 2020b 2027b 2027 2027b Active ingredient – – – – – – – – – – – – Formulation 2017 2017 2017 2017 2017 2020 2017 2017 2020 2016 Kovaltry™ Active ingredient Formulation Production process – 2017 2018 – 2017 2018 – 2017 2018 – 2017 2018 – 2017 2018 – 2020 2018a – 2017 2018 – 2017 2018 – 2020 2023 – 2016 2017 2020 2027 2021 2017 2021 2017 2018 Mirena™ Inserter Nexavar™ 2029 2029 2029 2029 2029 2029 2029 2029 2029b 2029b 2029 Active ingredient Salt form 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 Polymorph 2025 2025 2025 2025 2025 Formulation 2026 2026 2026 2026 2026 Stivarga™ Active ingredient Formulation Production process 2028 2025 2031 2028 2025 2031 2024a 2025 2031 2028 2025 2031 2028 2025 2031 Xarelto™ Active ingredient 2023 2023 2023 2023 2023 Formulation 2024 2024 2024 2024 2024 2021- 2025d - 2025- 2026d 2026- 2027d 2026d 2026d 2031 2022- 2025d 2025- 2028d 2020 - 2021 2022 2025 2020 2020 - - - 2025 2025 2025b 2027 2025 2026 2026 2026b 2026f 2026 2024 2025 2031 2028 2025 2031 2024b 2025b 2031b 2031 2031c 2031 2024 2025 2031 2020 2023 2022 2024e 2020 2024 2024 2024b 2024 2024 Xofigo™ Use Production process 2024 2031 2024 2031 2024 2031 2024 2031 2024 2031 2019a 2031 2019 2031 2024 2031 – 2031b 2020a 2031 2019 2031b a Current expiration date; patent term extension applied for b Patent application pending c Patent term revised d Application-specific term extension(s) e Patent term extension granted f Notice of allowance received Bayer Annual Report 2016 A Combined Management Report 65 1.3 Focus on Innovation Augmented Version Groundbreaking technologies in the Life Sciences With our strategic innovation unit, the Bayer Lifescience Center (BLSC), we focus on new ground- breaking technologies. In May 2016, Bayer and ERS Genomics, Ireland, signed an agreement giving Bayer access to ERS’s CRISPR-Cas9 genome-editing patents. The agreement granted Bayer rights for defined research applications of this technology in selected strategic areas. In August 2016, Casebia Therapeutics, a company established by Bayer and CRISPR Therapeutics in March 2016, launched operations in Cambridge, Massachusetts, and San Francisco, California, United States. The goal of Casebia Therapeutics is to develop new, trend-setting therapeutics to treat blood diseases, blindness and congenital heart disease. In December 2016, Bayer and Ver- sant Ventures established the company BlueRock Therapeutics, which will be active in the area of regenerative medicine. The company plans to develop highly efficient therapies based on induced pluripotent stem cells (iPSCs) to cure various cardiovascular diseases, neurological disorders and diseases of the central nervous system. Global open innovation network Partnerships are integral to our innovation strategy. That is why we work within a network of alli- ances with start-ups, academic institutes, industry, suppliers and other partners. Our open inno- vation network spans all parts of the company along the value chain. Our open innovation portal offers a platform for collaborations in all parts of the company. We also invest in venture capital funds that finance life science start-up companies, among other projects. See the segment sec- tions for details www.innovate.bayer.com Online Annex: A 1.3-2 Scientists from Bayer are involved in constant dialogue with renowned research institutes and support partnership projects in the public and private sectors. In 2016, public funding worth more than €12 million was spent on more than 50 projects worldwide. This is equivalent to roughly 0.3% of our annual R&D expenses. We also participate in industry associations, as- sume professorships at universities worldwide and regularly invite scientists, university and school students to attend events such as symposiums on health topics or research days for school students. We view this as an investment in our own future. GRI G4-26 Pharmaceuticals Pharmaceuticals focuses on indications with high medical need in the areas of cardiovascular disease, oncology, gynecology, ophthalmology and hematology. We conduct research and devel- opment activities at several locations, mainly in Germany, the United States, Japan, China, Finland and Norway. Bayer worldwide; see also A 1.1.1/1 In line with our targets for 2016 we transferred 12 new molecular entities from our research pipe- line into preclinical development in the reporting year. We define a new molecular entity (NME) as a new chemical or biological substance that has not been in development to date. In preclinical trials these substances are examined further in various models with respect to their suitability for clinical trials and linked “first-in-man” studies. In 2016, we conducted clinical trials with several drug candidates from our research and development pipeline. We strengthened products that were already on the market through life cycle management activities to further improve their appli- cation and / or expand their spectrum of indications. Group target 2016: transition of 10 new molecular entities (NMEs) into development; see also A 1.2.1 Progress in clinical Phase II projects The following table shows our most important drug candidates currently in Phase II of clinical testing: 66 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 A 1.3/2 Research and Development Projects (Phase II) 1 Projects Indication Anetumab ravtansine (mesothelin ADC) Cancer Ang2 antibody + aflibercept Serious eye diseases 2 BAY 1142524 (chymase inhibitor) Heart failure BAY 2306001 (IONIS-FXIRx) Copanlisib (PI3K inhibitor) Molidustat (HIF-PH inhibitor) Prevention of thrombosis 3 Recurrent / resistant non-Hodgkin lymphoma (NHL) Renal anemia Neladenoson bialanate (BAY 1067197) Chronic heart failure PDGFR-beta + aflibercept Wet age-related macular degeneration 2 Radium-223 dichloride Radium-223 dichloride Regorafenib Riociguat Riociguat Rivaroxaban Vilaprisan (S-PRM) Vilaprisan (S-PRM) Breast cancer with bone metastases Cancer, various studies Cancer Diffuse systemic sclerosis Cystic fibrosis Secondary prevention of acute coronary syndrome (ACS) 4 Symptomatic uterine fibroids5 Endometriosis 1 As of January 31, 2017 2 Sponsored by Regeneron Pharmaceuticals, Inc. 3 Sponsored by Ionis Pharmaceuticals, Inc. 4 Sponsored by Janssen Research & Development, LLC 5 Based on positive Phase II study data, the decision was taken to initiate Phase III studies. The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. Below are the most significant changes that occurred in 2016 compared with the previous year: In March 2016, we expanded our existing cooperation with Regeneron Pharmaceuticals, Inc., United States, to jointly develop a combination therapy of the angiopoietin2 (Ang2) antibody nesvacumab and aflibercept for the treatment of serious eye diseases. Two ongoing Phase II clini- cal studies are evaluating the combination therapy as a single intravitreal injection in patients with wet age-related macular degeneration or diabetic macular edema. Also in March 2016, the study involving BAY 1007626, or progestin IUS (contraception), was discontinued. Clinical development of roniciclib (cancer) was discontinued. Bayer does not intend to pursue the development of refametinib (cancer) and the project will be returned to Ardea BioSciences, Inc., United States. In May 2016, we terminated our Phase II study investigating riociguat (tradename: Adempas™) in patients with pulmonary hypertension associated with idiopathic interstitial pneumonia (PH-IIP) following the recommendation of an independent data monitoring committee (DMC). We also will not further pursue the development of BAY 98-7196 + anastrozole (intravaginal ring) for the indication endometriosis. Bayer Annual Report 2016 A Combined Management Report 67 1.3 Focus on Innovation Augmented Version In September 2016, our partner Regeneron Pharmaceuticals, Inc., United States, published the first data from a clinical Phase II study investigating the treatment of wet age-related macular degeneration with rinucumab, a PDGFR-(cid:533) antibody, in combination with aflibercept (tradename: Eylea™). Although the study failed to meet its primary endpoint, a statistically significant improve- ment in visual acuity after 12 weeks, Regeneron will, however, continue the study as planned. Further data will be analyzed after 28 weeks and following the conclusion of the trial (after 52 weeks). Bayer will then examine the available data and decide on the next steps. Progress in clinical Phase III projects The following table shows our most important drug candidates currently in Phase III of clinical testing: A 1.3/3 Research and Development Projects (Phase III)1 Projects Indication Amikacin Inhale Pulmonary infection BAY 1841788 (ODM-201, AR antagonist) BAY 1841788 (ODM-201, AR antagonist) Nonmetastatic castration-resistant prostate cancer Metastatic hormone-sensitive prostate cancer Ciprofloxacin DPI Non-cystic fibrosis bronchiectasis Copanlisib (PI3K inhibitor) Various forms of non-Hodgkin lymphoma (NHL) Damoctocog alfa pegol (BAY 94-9027, long-acting rFVIII) Hemophilia A Finerenone (MR antagonist) Diabetic kidney disease Radium-223 dichloride Combination treatment of castration-resistant prostate cancer Regorafenib Rivaroxaban Rivaroxaban Rivaroxaban Rivaroxaban Rivaroxaban Rivaroxaban Tedizolid Vericiguat (BAY 1021189, sGC stimulator) Colon cancer, adjuvant therapy Prevention of major adverse cardiac events (MACE) Anticoagulation in patients with chronic heart failure 2 Long-term prevention of venous thromboembolism Prevention of venous thromboembolism in high-risk patients after discharge from hospital 2 Embolic stroke of undetermined source (ESUS) Peripheral artery disease (PAD) Pulmonary infection Chronic heart failure3 1 As of January 31, 2017 2 Sponsored by Janssen Research & Development, LLC 3 Sponsored by Merck & Co., Inc., United States The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. Below are the most significant changes that occurred in 2016 compared with the previous year: In the first quarter of 2016, we decided to focus our development activities for finerenone on the indication of diabetic kidney disease. A study in the indication of chronic heart failure will therefore not be carried out. 68 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 In May 2016, a clinical Phase III study investigating regorafenib (tradename: Stivarga™) in unre- sectable liver cancer reached its primary endpoint, a statistically significant improvement of overall survival. The study investigated regorafenib in patients with hepatocellular carcinoma whose dis- ease had further progressed during prior treatment with sorafenib (tradename: Nexavar™). Based on these data, we submitted regorafenib for marketing authorization for the treatment of unresec- table liver cancer in Europe, Japan and the United States in the third quarter of 2016. In June 2016, we agreed with Orion Corporation, Espoo, Finland, to expand the global clinical development program for the novel androgen receptor (AR) antagonist BAY-1841788 (ODM-201). A new clinical Phase III study is evaluating BAY-1841788 in men with newly diagnosed metastatic hormone-sensitive prostate cancer (mHSPC) who are starting first-line hormone therapy. In June 2016, we formed a new research partnership with the U.S. National Surgical Adjuvant Breast and Bowel Project (NSABP), a leading clinical trials cooperative group. A clinical Phase III study will investigate regorafenib as a single agent for adjuvant treatment following completion of standard adjuvant chemotherapy in patients with advanced but not yet metastatic colon cancer. In September 2016, a new clinical Phase III trial was initiated to evaluate vericiguat, a soluble guanylate cyclase (sGC) stimulator, in patients suffering from chronic heart failure with reduced ejection fraction. The development and commercialization of vericiguat are part of the worldwide strategic collaboration between Bayer and Merck & Co., Inc., United States (through a subsidiary), in the field of sGC modulation. In February 2017, the Phase III COMPASS study with Bayer’s rivaroxaban in patients with coro- nary or peripheral artery disease showed overwhelming efficacy and met its primary endpoint early. Clinical trials are an essential tool for determining the efficacy and safety / tolerability of new devel- opmental products before they can be used to diagnose or treat diseases. The benefits and risks of new medicinal products must always be scientifically proven and well documented. All clinical trials at Bayer satisfy strict international guidelines and quality standards, as well as the respective applicable national laws and standards. Online Annex: A 1.3-3 Transparency through publication of clinical trials Bayer publishes information about clinical trials in line with the respective applicable national laws and according to the principles of the European (EFPIA) and U.S. (PhRMA) pharmaceutical associations, these principles being defined in a joint position paper. Bayer Annual Report 2016 A Combined Management Report 69 1.3 Focus on Innovation Augmented Version Pharmaceuticals publishes information on its own clinical trials both in the publicly accessible register www.ClinicalTrials.gov and in its own “Trial Finder” database. In the case of approved products, summarized results of Phase II, III and IV clinical trials are accessible online through the “Trial Finder.” Upon request, scientists can receive access to anonymized data at the pa- tient level via the portal www.clinicalstudydatarequest.com. Further information on our globally uniform standards, the monitoring of studies and the role of the ethics committees can be found on the internet. www.bayer.com/ethics- in-rnd Filings and approvals We regularly evaluate our research and development pipeline in order to prioritize the most prom- ising pharmaceutical projects. Following the completion of the required studies with a number of these drug candidates, we submitted applications to one or more regulatory agencies for approv- als or approval expansions. The most important drug candidates in the approval process are: Main Products Submitted for Approval 1 Projects Regorafenib Rivaroxaban 2 Indication Europe, Japan, U.S.A.: second-line treatment for unresectable liver cancer U.S.A.; secondary prophylaxis of acute coronary syndrome (ACS) 1 As of January 31, 2017 2 Submitted by Janssen Research & Development, LLC A 1.3/4 In February 2016, Bayer received approval from the European Commission for Kovaltry™ (Bay 81-89-73) for the treatment of hemophilia A in patients of all age groups. Kovaltry™ is an unmodified recombinant factor VIII product that in clinical trials has demonstrated efficacy and tolerability as an on-demand therapy and for prophylactic use two or three times per week by hemophilia A patients. In March 2016, Kovaltry™ was approved by the U.S. Food and Drug Ad- ministration (FDA) and the Japanese Ministry of Health, Labour and Welfare (MHLW). In March 2016, the Japanese MHLW granted marketing authorization for Xofigo™ (radium-223 dichloride) for the treatment of adult patients with castration-resistant prostate cancer and bone metastases. In May 2016, the U.S. Food and Drug Administration (FDA) approved Gadavist™ / Gadovist™ (active ingredient: gadobutrol) as the first contrast agent for use with magnetic resonance angi- ography (MRA) to evaluate known or suspected supra-aortic or renal artery disease in patients of all ages. In September 2016, the U.S. Food and Drug Administration (FDA) approved our new low-dose levonorgestrel-releasing intrauterine system with the brand name Kyleena™. The new system releases the lowest daily hormone dose in an intrauterine system for up to five years of effective protection against pregnancy. It uses the smallest T-shaped body available today for implantation in the uterus for the purpose of contraception with active ingredient-releasing systems. In October 2016, furthermore, we successfully completed the corresponding decentralized registration pro- cedure for the European Union. On this basis, it is expected that the health authorities of the E.U. member states will grant national marketing authorizations in the coming months. 70 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 In November 2016, an expansion of indications was filed for Stivarga™ (active ingredient: regorafenib) in the United States, Japan and Europe. The filings pertain to the second-line treat- ment of patients with unresectable hepatocellular carcinoma. Stivarga™, an oral multikinase in- hibitor, is already approved under this brand name in numerous countries for the treatment of metastatic colorectal cancer and unresectable or metastatic gastrointestinal stromal tumors. The U.S. Food and Drug Administration (FDA) granted priority review status to regorafenib in the regis- tration process for the expansion of indications (supplemental New Drug Application, sNDA). The Japanese Ministry of Health, Labour and Welfare (MHLW) granted priority review status for the registration filing in January 2017. See also A 1.3 “Global open innovation network” Cooperations We augment our own research capacities through collaborations and strategic alliances with external industrial and academic research partners. In this way we gain access to complementary technologies and external innovation potential. The following table shows examples of the main collaborations: A 1.3/5 Main Cooperations in 2016 Partner Broad Institute Cooperation objective Strategic partnership in the field of genome and drug research in cardiology aimed at using findings from human genetics to develop new cardiovascular therapies and in the field of oncology to identify and develop active ingredients that target tumor-specific gene alterations German Cancer Research Center (DKFZ) Strategic partnership for the development of new therapeutic options in oncology, especially in immunotherapy Evotec AG ImmunoGen Inc. Janssen Research & Development, LLC of Johnson & Johnson Merck & Co., Inc. MorphoSys AG Collaboration to identify development candidates for the treatment of endometriosis and kidney diseases Cooperation in the field of antibody-drug conjugates (ADCs) for novel tumor therapies Development of Xarelto™ (rivaroxaban) Development and marketing collaboration in the field of soluble guanylate cyclase (sGC) modulation Development of antibody-drug conjugates using MorphoSys’s HuCAL technology Orion Corporation Development of ODM-201 for the treatment of patients with prostate cancer Regeneron Pharmaceuticals Inc. Development of Eylea™ (aflibercept) to treat various eye diseases Development of a combination therapy of rinucumab, a PDGFR-beta (beta-type platelet derived growth factor receptor) antibody, and aflibercept for the treatment of wet age-related macular degeneration Development of a combination therapy of the angiopoietin2 (Ang2) antibody nesvacumab and aflibercept for the treatment of serious eye diseases Bayer Annual Report 2016 A Combined Management Report 71 1.3 Focus on Innovation Augmented Version Online Annex: A 1.3-4 A 1.3-4/1 Other Cooperations in 2016 Partner Cooperation objective BioInvent International AB Access to antibody library with in-licensing of antibodies Compugen Ltd. Collaboration for the research and development of new immunotherapy approaches in oncology Dimension Therapeutics, Inc. Development of a novel gene therapy for hemophilia A Inception 4, Inc. Research into new approaches for the treatment of various eye diseases Ionis Pharmaceuticals, Inc. Development of an antisense molecule for the prevention of thrombosis Leica Biosystems Ltd. Development of diagnostic tests in personalized oncology treatment Ludwig Boltzmann Institute Research into lung vascular disease, especially pulmonary hypertension Merck & Co., Inc. Nektar Therapeutics Novartis AG Codevelopment of tedizolid to treat various infections Codevelopment of a targeted antibiotic inhalation therapy for lung infections (amikacin inhale) Development of a targeted antibiotic inhalation therapy for lung infections (ciprofloxacin DPI) OncoMed Pharmaceuticals Inc. Discovery and development of novel anticancer stem cell therapeutics Onyx Pharmaceuticals Inc. of Amgen Inc. Peking University Seattle Genetics Inc. Tsinghua University University of Oxford Codevelopment of Nexavar™ (sorafenib) for various types of cancer Research cooperation and establishment of a research center for joint projects Access to technologies for antibody-drug conjugates (ADCs) for novel tumor therapies Research cooperation and establishment of a research center for joint projects Strategic research alliance for the development of novel gynecological therapies Ventana Medical Systems, Inc. Development of diagnostic tests in personalized oncology treatment Wilmer Eye Institute of Johns Hopkins University Research and development of innovative drug products to treat serious back-of-the-eye diseases Science and cooperation centers In addition to these cooperations, we operate our own science and innovation centers. We co- ordinate primarily our research partnerships in Asia through our innovation centers in Beijing, China; Singapore; and Osaka, Japan. In Berlin, Germany, and San Francisco, California, United States, we operate the CoLaborator™, an incubator model for young life science companies. The objective of the global CoLaborator™ concept is to offer these companies suitable labora- tory and office infrastructure in the direct vicinity of Bayer’s own research facilities and the op- portunity to exchange experiences with Bayer experts. In the area of crowdsourcing, we established another global initiative named Grants4Indications™ in February 2016. This program promotes the exploration of new thera- peutic indications for Bayer’s active ingredients. We are also continuing the Grants4Apps™, Grants4Targets™ and PartnerYourAntibodies™ programs. In 2016, we launched the AACR- Bayer Innovation and Discovery Grants together with the American Association for Cancer Re- search (AACR). The objective is to develop new treatment options for cancers with high medi- cal need. In addition, the East Coast Innovation Center was established in 2016 in Cam- bridge/Boston, Massachusetts, United States. In the area of venture capital, we are active with the “High-Tech Gründerfonds” and Versant Ventures. Further information on this can be found at: www.innovate.bayer.com/ what-we-offer 72 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 Bayer worldwide; see also A 1.1.1/1 See also A 1.1.2 Group target 2016: transition of 20 consumer-validated concepts into early development Bayer worldwide; see also A 1.1.1/1 Consumer Health Our development activities for nonprescription (OTC) products focus primarily on the areas of dermatology, dietary supplements, pain relief, gastrointestinal complaints, allergy relief and cold symptoms, as well as foot and sun care products. Developments aligned to the desires and needs of consumers range from new formulations, delivery forms and solutions for specific cus- tomer requirements to new packaging designs, technical applications (apps, Custom Fit Kiosk for Dr. Scholl’s™ products) and medical devices. Consumer Health maintains a global network of research and development facilities, with sites in the United States, France, Germany and China. Transitioning of current prescription medicines to OTC status (Rx-to-OTC switches) forms an inte- gral part of our innovation strategy designed to offer new self-care solutions to consumers. In 2016, we were able to realize 30 new consumer-validated concepts and thus exceeded the target we had set. In 2016, we introduced a number of new product line extensions for existing brands in various markets, including as follows: The April 2016 expansion of our Claritin™ portfolio in the United States included ClariSpray™, a 24-hour nasal spray for treatment of allergy symptoms. We began marketing Aleve™ Direct Therapy in the United States in June 2016, thereby expanding our range of analgesic products. This medical device for transcutaneous electrical nerve stimula- tion is used to help relieve lower back pain and tension. We expanded our Alka-Seltzer™ product family in the United States in July 2016 to include an- other cold medicine in the Alka-Seltzer Plus™ line. We launched the new 2-phase system for Elevit™ (Elevit™1 and Elevit™2) in Germany in October 2016. These two complementary products for the healthy development of babies are specially tailored to the increased nutrient requirements of women in the conception and pregnancy phases. Crop Science Crop Science maintains a global network of research and development facilities. While research is carried out centrally at a few dedicated sites, development of crop protection products as well as plant breeding and trait development activities take place both at these sites and at numerous field testing and breeding stations in all regions. Our scientists working across the areas of seed traits, seed technology, seed breeding, agricultural chemistry and biologics closely collaborate as part of our integrated research approach. This optimally combines complementary technical ex- pertise from chemical and biological research and development. To develop better agronomic recommendations for farmers, we develop, for example, digital prod- ucts and services that help them with analyses and the evaluation of conditions in the field and provide them with extensive geographical information that enables better decision-making for mastering a variety of challenges. At Crop Protection, we pursue the goal of identifying and developing innovative, safe and sustain- able active ingredients for use as insecticides, fungicides, herbicides and crop efficiency products by foliar and soil application as well as seed treatment. Here, we use research methods such as high-throughput screening and computational life sciences for the identification and optimization of new chemical and microbial leads. In addition, we expand the area of applications for our active ingredients and their performance through new mixtures and through the development of innova- tive formulations. Bayer Annual Report 2016 A Combined Management Report 73 1.3 Focus on Innovation Augmented Version In Seeds we are conducting research to optimize plant traits and are developing new varieties in cotton, oilseed rape / canola, soybeans, rice, wheat and vegetables. Our researchers are working both on increasing the yield potential of crops and on enhancing the quality of the crop. Examples include altering the profile of rapeseed / canola oil or enhancing the properties of cotton fibers. We are also targeting the development of plants that deliver higher yields under occasionally adverse climatic conditions. Further areas of focus include developing new herbicide tolerance and insect resistance traits based on novel modes of action, and improving disease tolerance. Environmental Science further develops substances either from our own agricultural portfolio or from external partners for professional uses in non-agricultural areas. This includes solutions for controlling pests such as cockroaches or rodents in public areas and the food industry, or to control weeds on roads or railways. In the area of vector control, we develop solutions with re- sistance-breaking properties for controlling mosquitoes that can transmit malaria, dengue fever or Zika. Research and development pipeline Our product pipeline contains numerous new crop protection products, seed varieties and en- hanced products (life cycle management). We estimate the combined peak sales potential of products with launch dates between 2015 and 2020 to be more than €5 billion. In 2016, we launched confirmatory technical proof-of-concept field studies for four active ingredients and one new crop trait, thus exceeding our Group target. A new plant trait is a specific characteristic that has not yet been available or offered at Bayer for the crop plant in question. The following table shows selected new products that are expected to be launched by 2020. Product Innovation Pipeline 1 Market launch Product group Indication / crop Product / plant trait A 1.3/6 2017 2017 2017 2017 2017 2018 2018 2019 2019 2019 2019 2019 2019 2020 Biological crop protection Insecticide BioAct™ Liquid Seeds Seeds Seeds Seeds Seeds Seeds Cotton Rice Rice Soybeans Glytol TwinLink Plus™ (dual herbicide tolerance and insect resistance) Pest resistance and disease tolerance (native traits) Flood tolerance (native trait) Balance™ GT (dual herbicide tolerance) Oilseed rape / canola Dual herbicide tolerance Rice Salt tolerance (native trait) Chemical crop protection Insecticide Chemical crop protection Fungicide Tetraniliprole Tiviant™ Seeds Seeds Seeds Seeds Seeds Oilseed rape / canola Herbicide tolerance Oilseed rape / canola New oil profile (native trait) Rice Soybeans Dual disease tolerance (native trait) Triple herbicide tolerance Oilseed rape / canola Dual herbicide tolerance 1 Planned market launch of selected new products As of January 30, 2017 Group target 2016: transfer of 3 new molec- ular entities (NMEs), plant traits or biologics into confirmatory tech- nical proof-of-concept field studies; see also A 1.2.1 74 A Combined Management Report Augmented Version 1.3 Focus on Innovation Bayer Annual Report 2016 New products and registrations In 2016, Crop Science received marketing authorization in certain countries for new mixtures and formulations, as well as for expanded indications for existing products. For example, we were granted authorization to market the herbicide indaziflam and its core brand AlionTM in Brazil and the new herbicide mixture DiFlexxTM Duo in corn in the United States. The herbicide active ingredi- ent triafamone and its CouncilTM formulations were approved in Japan. We also received further marketing authorizations and the approval of expanded indications for the biological fungicide SerenadeTM ASO in various countries and for the nematicide VelumTM prime in southern Europe and Africa. In July 2016, furthermore, the European Commission approved the dual herbicide tolerance trait Balance™ GT in soybeans for food and feed uses. Balance™ GT is owned by MS Technologies and is being codeveloped through a joint development agreement between that company and Bayer. The launch of soybeans with this new trait is planned for 2017, pending approval by the regulatory authorities. Major success can be achieved with vegetables and many broad-acre crops using conventional and molecular plant breeding methods. As vegetables are intended especially to be marketed and eaten fresh, merchants and consumers have particularly strict requirements and expectations regarding their taste, appearance, nutrient content and shelf life. We continuously launch new vegetable seed varieties with these quality traits. In addition, we launch numerous new broad-acre crop varieties every year. Environmental Science expanded its product range for forestry in Indonesia, Argentina and Brazil by launching the herbicide Esplanade™ F. Furthermore, the two new products DerigoTM and PistolTM Flexx supplemented our portfolio for vegetation control in noncrop areas. We are continu- ously expanding our range of products for the maintenance of golf courses by developing and introducing various innovative solutions such as the nematicide IndemifyTM and the fungicide ExterisTM in the United States. We are also supporting professional pest control around the world by expanding the MaxforceTM range of insecticides. Cooperations Crop Science is part of a global network of partners from diverse segments of the agricultural industry and academic research. Crop Science: Important Cooperations A 1.3/7 Partner CSIRO Elemental Enzymes GRDC IVCC Targenomix Embrapa Cooperation objective Increase in wheat yields by means of native plant traits – discovery, validation and integration Use of microbes to improve soil health and thereby increase crop productivity Herbicide Innovation Partnership for the discovery and development of innovative weed management solutions Joint development of new substances to control mosquitoes that transmit diseases such as malaria and dengue fever Development and application of systems biology approaches to achieve a better understanding of metabolic processes in plants Cooperation on several R&D objectives in various areas of relevance for agriculture in Brazil, e.g. Asian soybean rust Jülich Research Center Planetary Resources International Research collaboration focused on phenotyping for plant breeding, research into plant traits and the development of biologicals Decision-making aids for farmers that enable more targeted deployment of crop protection products in fields using satellite technology See also A 1.3 “Global open innovation network” Bayer Annual Report 2016 A Combined Management Report 75 1.3 Focus on Innovation Augmented Version Online Annex: A 1.3-5 We formed new partnerships in 2016: in April 2016, Crop Science announced a five-year re- search partnership with the Institute of Geography and the Department of Informatics of the University of Hamburg that is aimed at jointly developing new digital solutions for agriculture based on geoinformatics methods and models. These enable the IT-based visualization of the consequences of agricultural processes using relevant geobasic data such as soil, climate, land relief and usage parameters. In September 2016, Crop Science announced a five-year research partnership with the Jülich Research Center in Germany that is focused on phenotyping for plant breeding, research into plant traits and the development of biologicals. In October 2016, Bayer and the Chinese Academy of Agricultural Sciences announced a research collaboration aimed at better understanding the genetic factors that impact wheat yields so that these can be increased. In our open innovation initiatives Grants4Targets and Grants4Traits, we invite partners from ac- ademic research institutes, start-ups and other companies to join us and together drive innova- tion in the areas of crop protection and trait development. By investing in venture capital funds, furthermore, we support up-and-coming companies in agricultural technologies. We have de- veloped various venture capital funds with partners such as Flagship Ventures, Trendlines and Finistere Ventures LLC. Animal Health At Animal Health we focus our research and development activities on antiparasitics, antibiotics, medicines to treat noninfectious disorders and nonantibiotic alternatives for infectious diseases. We endeavor to improve the health and well-being of companion and farm animals through inno- vations that also include digital solutions. Here Animal Health also pursues the “one health” con- cept: we offer animal health products that reduce the risk of transmission of disease pathogens to humans, such as endoparasiticides for cats and dogs or ectoparasiticides to protect especially against fleas and ticks. Through our initiative focusing on companion vector-borne diseases (CVBD) and with the leading global scientists who participate in this initiative, we are setting trends in the establishment of scientific principles and the fight against vector-borne diseases. Our central research activities are conducted through the Life Sciences platform in conjunction with the research and development department at Pharmaceuticals and in close collaboration with Crop Science. New products and registrations In January 2017, the European regulatory authorities approved a new product to protect honey bees against the Varroa mite. Before the product can be marketed, this decision must be imple- mented in national law. Cooperations Animal Health reinforces its business by continually identifying further product development candi- dates through new and existing collaborations. In May 2016, we entered into an agreement with BioNTech AG, Germany, to develop novel mRNA vaccines and therapeutics specifically for veterinary medicine applications. Also in May 2016, we signed a global license agreement with TransferTech Sherbrooke, Quebec, Canada, to advance a novel vaccine candidate developed at Université de Sherbrooke. The new vaccine is intended to help protect dairy cattle from mastitis caused by the bacterium Staphylo- coccus aureus. www.cvbd.org 76 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Covestro Innovation is a core element of Covestro’s strategy. The company is accounting for current and future needs and trends through systematic innovation management, a strong global presence with major innovation centers and pronounced customer centricity. With the objective of maintaining and building on its own competitive position, Covestro continu- ously works to achieve innovations and improvements in products and in production and pro- cessing techniques, as well as with respect to business models and processes. The main goals here are to improve the performance of products and processes, increase their cost efficiency and open up new areas of application. The focus in the Polyurethanes Business Unit (BU) is partly on increasing the flame retardance and insulation properties of the materials it supplies. The business unit is also researching alternatives to petrochemical raw materials. The Polycarbonates BU focuses mainly on reducing the weight of the relevant materials, increasing their energy efficiency and safety, and expanding design options. The Coatings, Adhesives, Specialties BU concentrates on further developing its own technology platforms and the related products in order, for example, to increase their efficiency and sustaina- bility. Cooperation is integral to the innovation management concept of Covestro. The company closely cooperates with customers, scientific institutions, start-up companies and academic spin-offs. 1.4 Sustainable Conduct 1.4.1 Commitment to Employees and Society > Attracting, developing and retaining the best managers and employees > Corporate culture: dialogue, diversity, innovation > Creating attractive working conditions > Wide-ranging societal engagement Our business success is based to a large extent on the knowledge, skills, commitment and satis- faction of our employees. As a modern international employer, we offer our employees attractive conditions and wide-ranging individual development opportunities. The key to this is our highly effective system of vocational and ongoing training, which we are continuously extending. Along- side professional training, we focus on conveying our corporate values (LIFE) and establishing a dialogue-oriented corporate culture based on trust, respect for diversity and equality of oppor- tunity. That plays a part in employee satisfaction – along with our responsible approach to struc- turing working conditions, which includes fair and respectful treatment at work, a transparent, competitive and equitable compensation system, company pension plans, the ability to combine working with family commitments, flexible worktime arrangements and a working environment that fosters health. Bayer Annual Report 2016 A Combined Management Report 77 1.4 Sustainable Conduct Augmented Version Our global human resources strategy is designed to help us meet business needs in the future as well. It is adopted by the primary decision-making body of Bayer’s HR function, the HR Leader- ship Team, which also sets binding policies and defines priorities for all regions and organizational units. The HR Leadership Team is led by the Head of Human Resources & Organization. Our Group-wide Employee Survey, which is normally conducted about every two years, and our insti- tutionalized feedback discussions and analyses aim to achieve a steady rise in satisfaction with Bayer as an employer. They enable us to monitor the effectiveness of our activities and make any necessary improvements. Focal areas include strengthening our innovation culture, which provides a trustful basis that encourages creativity, experimentation, collaboration and customer focus in all areas. In the most recent Employee Survey we received an employee satisfaction rating of 87%, thereby achieving our Group target. GRI G4-26 Group target: continuous improvement in employee satisfaction; see also A 1.2.1 As well as promoting our competitiveness, our forward-looking human resources strategy reflects our social responsibility to provide secure employment and stable incomes, and to foster social integration. We are also committed to supporting the general well-being of our employees with a wide range of projects and initiatives in the central areas of health, education and meeting basic social needs. Employee data Slight reduction in Group headcount On December 31, 2016, Bayer employed approximately 115,200 people worldwide (2015: 116,600), a slight decrease from the prior year. In Germany we had some 37,000 employees (2015: approximately 36,600), which was 32.1% of the total Group workforce (2015: 31.4%). There was a reduction in the number of employees in the Asia / Pacific, Latin America and North America regions, but a slight increase in the Europe / MiddleEast / Africa region. While the head- count in the Consumer Health, Crop Science, Covestro and Pharmaceuticals segments de- creased, there was an increase in the number of employees included in the Reconciliation and at Animal Health. The breakdown by function shows fewer employees working in sales and more in R&D. The proportion of women in the workforce was unchanged from the previous year at 37%. Similarly, in 2016 there was no significant change in the age structure compared with the previous year. On the reporting date, our employees had worked for the Bayer Group for an average of eleven years. The level of voluntary fluctuation (employee-driven terminations) was 4.6% in 2016 (2015: 5.0%), slightly below the previous year’s figure. The overall fluctuation rate was 12.3%, a decrease of 1.6 percentage points compared with the previous year. This figure includes all employer- and employee-driven terminations, retirements and deaths. This shows that we were again successful in retaining staff in the company for long periods. Our workforce only includes a small number of employees on temporary contracts and hardly any temporary employees from staffing agencies. 78 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Employee Data Total 2015 2016 116,600 115,200 by Region 10.9% Latin America 23.8% Asia / Pacific 13.7% North America by Segment 51.6% Europe / Middle East / Africa 2016 Europe / Middle East /Africa North America Asia / Pacific Latin America 2015 2016 58,800 16,000 28,800 13,000 59,500 15,800 27,400 12,500 13.5% Covestro 34.8% Pharmaceuticals 2016 2016 17.6% Reconciliation 3.5% Animal Health 19.5% Crop Science by Function 8.3% General administration 13.2% R&D 34.9% Marketing and distribution by Gender 37.4% Women 2016 Pharmaceuticals Consumer Health Crop Science Animal Health Reconciliation Life Sciences 11.1% Consumer Covestro Health Production Marketing and distribution 43.6% Production R&D General administration 2015 40,500 13,500 23,300 3,800 19,700 100,800 15,800 2016 40,100 12,800 22,400 4,000 20,300 99,600 15,600 2015 2016 50,600 50,200 41,700 14,700 40,200 15,200 9,600 9,600 Women 2015 2016 2015 62.6 % Men Europe / Middle East /Africa 22,100 22,300 36,700 37,200 North America 6,200 6,200 9,700 9,600 Asia / Pacific Latin America Total 10,400 10,000 18,500 17,400 4,900 4,600 8,100 7,900 43,600 43,100 73,000 72,100 A 1.4.1/1 Change in % – 1.2 Change in % + 1.2 – 1.3 – 4.9 – 3.8 Change in % – 1.0 – 5.2 – 3.9 + 5.3 + 3.0 – 1.2 – 1.3 Change in % – 0.8 – 3.6 + 3.4 0.0 Men 2016 by Age Group in % Fluctuation in % 30 30 28 27 23 24 30 25 20 15 10 5 15 14 0.1 0.1 4 5 In % Women Men Total Voluntary 2015 2016 5.8 4.5 5.0 5.2 4.3 4.6 Total 2016 12.9 12.0 12.3 2015 13.9 13.9 13.9 < 20 20 – 29 30 – 39 40 – 49 50 – 59 > 60 2015 2016 2015 figures restated; values rounded to the nearest hundred; number of employees in full-time equivalents (FTE) Bayer Annual Report 2016 A Combined Management Report 79 1.4 Sustainable Conduct Augmented Version Online Annex: A 1.4.1-1 A 1.4.1-1/1 Employees 1 by Employment Status, Region and Gender 2016 Europe / Middle East / Africa North America Asia / Pacific Latin America Total Permanent employees Temporary employees Women 21,200 6,100 9,700 4,400 Men 35,800 9,500 16,900 7,000 Total Women 57,000 15,600 26,600 11,400 1,100 100 300 200 Men 1,400 100 500 900 41,400 69,200 110,600 1,700 2,900 Total 2,500 200 800 1,100 4,600 1 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTE) and rounded to the nearest hundred. Part-time employees are included on a prorated basis in line with their contractual working hours. The next table contains further information on the breakdown of employee fluctuation by region, gender and age. A 1.4.1-1/2 Employee Fluctuation 1 by Region, Gender and Age Group % Women < 30 2 30 – 49 >= 50 3 Men < 30 2 30 – 49 >= 50 3 Total Europe / Middle East / Africa North America Asia / Pacific Latin America 2015 2016 2015 2016 2015 2016 2015 2016 2015 8.3 20.4 7.0 5.5 8.0 9.4 17.8 9.2 6.2 7.3 28.7 17.9 6.1 5.2 8.1 6.2 5.8 8.1 15.7 36.1 14.1 13.2 13.2 35.8 10.0 12.8 14.2 15.5 22.8 13.7 16.5 14.3 25.6 11.1 15.8 14.8 22.2 24.9 20.4 29.1 23.6 31.3 21.7 17.2 23.1 17.6 21.0 16.1 18.9 18.6 27.6 16.5 13.8 18.3 19.2 29.1 17.4 12.9 19.2 31.4 16.0 19.4 19.2 15.9 22.7 14.5 14.3 17.4 28.3 13.8 20.5 16.8 13.9 24.5 12.6 9.1 13.9 30.7 12.3 8.7 13.9 Total 2016 12.9 20.0 12.2 9.8 12.0 23.8 10.7 9.3 12.3 1 The data include all employer- and employee-driven terminations, retirements and deaths. 2 The comparatively high proportion of employees in the < 30 age group is due to the inclusion of employees on temporary contracts (working for 2 – 6 months of the year) and other short-term employees. It does not include apprentices. 3 The fluctuation rates for the >= 50 age group are mainly due to retirements. At our significant locations of operation, we use temporary personnel from staffing agencies on a small scale, primarily in response to short-term personnel requirements, fluctuations in order levels, temporary projects or long-term illness. In Germany, temporary staff make up 2.4% of the total workforce. At our significant locations of operation, the average is 3.5 %. Significant locations of operation: see Glossary Attracting, developing and retaining the best managers and employees Employer branding targets both current and prospective employees Innovations, changing customer requirements and a strong competitive environment are just some of the reasons why we welcome open-minded employees who question the status quo. A profes- sional approach to attracting suitable talents is key to this. In 2016, we established our uniform employer brand “Passion to Innovate | Power to Change” around the world. This expresses what we expect of our employees and, at the same time, what we as a company offer them. We use our employer branding internally to enhance employee identification and externally to position the company on the employment market. In total, the Bayer Group hired 12,012 new employees in 2016. 80 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Online Annex: A 1.4.1-2 New Hires 1 by Region and Gender North America Asia / Pacific Latin America 2016 2015 2016 2015 2016 Europe / Middle East / Africa 2015 2,513 1,179 1,221 114 3,480 1,815 1,452 212 2016 2,318 1,147 1,058 113 3,057 1,634 1,246 177 2015 1,024 308 515 201 754 220 366 168 1,406 1,008 503 597 307 316 478 214 1,569 1,265 937 611 21 2,762 1,709 1,009 45 697 543 24 2,026 1,114 888 23 666 375 286 5 1,082 611 452 19 599 318 278 3 986 523 437 26 A 1.4.1-2/1 Total 2016 4,936 2,383 2,245 308 7,076 3,587 3,049 440 2015 5,772 2,798 2,634 341 8,729 4,638 3,509 583 Women < 30 30 – 49 >= 50 Men < 30 30 – 49 >= 50 Total 5,994 5,375 2,430 1,762 4,330 3,291 1,748 1,584 14,502 12,012 2015 figures restated The figures also include the discontinued operations. 1 Converted into full-time equivalents (FTE) Our excellent reputation as an employer is shown by numerous external surveys, awards and accolades. www.bayer.com/career www.bayer.com/training High level of vocational and ongoing training Vocational training plays a key role at Bayer in order to meet the need for skilled employees. We provide sound training in more than 20 different occupations and offer more vocational training places than required to meet our needs. In Germany alone, around 1,145 young people embarked on a vocational training course at Bayer in 2016. In addition, Bayer offers trainee programs in Germany in areas such as financial management, human resources and engineering. Furthermore we give young people an opportunity to gain an early insight into a practical work environment. Overall, we provided some 2,800 professional internships for students around the world in 2016.(cid:3) Significant locations of operation: see Glossary A key aim of our personnel development strategy is to create an environment where all employees have the opportunity to develop their full potential. In the spirit of “lifelong learning”, we help em- ployees in all fields broaden their knowledge and skills and keep up with the latest changes throughout their working lives. Support ranges from knowledge sharing and peer learning to pro- grams that take up new trends and perspectives. On average, employees at our significant loca- tions of operation received 22.1 hours of vocational and ongoing training in 2016. Online Annex: A 1.4.1-3 At the heart of our ongoing training concept is the Group-wide Bayer Academy, which bundles our extensive continuing education offerings for employees and which was once again honored with the renowned Brandon Hall Group Excellence Award in bronze in 2016. Alongside system- atic development of managerial employees, it offers continuous professional training through various functional academies. In 2016, the average cost of training per employee was approxi- mately €409. The next table contains a further breakdown of vocational and ongoing training. Bayer Annual Report 2016 A Combined Management Report 81 1.4 Sustainable Conduct Augmented Version Training Activities in Hours in 2016 by Employee Group and Gender 1 Employee group Senior management Junior management Specialists Overall average A 1.4.1-3/1 Women Men Total 24.3 30.9 20.2 23.7 16.7 28.5 15.8 19.6 18.6 29.5 17.5 21.2 The figures also include the discontinued operations. 1 Selected training activities in the countries covered by the global training system, in which we generated approximately 72% of our sales in 2016; the gender-specific averages assume 50% women and 50% men for the United States and Japan as statutory regulations preclude differentiation by gender in these countries. Development Dialogue and feedback on performance The aim of the Development Dialogue is to define possible perspectives for further career devel- opment as a basis for a development plan that fosters employees’ personal strengths and ad- dresses areas in which they would like to develop further. Some 31,000 Development Dialogues were held and documented in 2016. Specific and differentiated feedback forms the basis for positive personal development. Bayer encourages a culture of candid feedback to help employees achieve their individual goals within the framework of corporate targets. This is supported by our Group-wide performance manage- ment system, which includes obligatory feedback discussions where employees receive meaning- ful feedback from their supervisors on fulfillment of their professional and behavioral objectives. This assessment also determines the level of their variable compensation. In 2016, this system covered about 63% of our total workforce. Of the participants 45% were female and 55% male. Development Dialogues were held in 2016. of all Bayer employees take part in performance feedback. Wide-ranging career opportunities Thanks to our wide-ranging business activities, we offer employees throughout the Group good opportunities for development. Vacancies throughout the Bayer Group, from nonmanagerial right up to senior management level, are advertised via a globally accessible platform. In 2016, around 11,700 vacancies in 63 countries were posted here. International assignments are also an im- portant element in employee development. Around 1,000 employees around the world participat- ed in international assignments in 2016. Bayer employees on international assignments Corporate culture: dialogue, diversity, innovation Ethical standards established Fairness and respect are central elements of our corporate culture. That includes observing Group- wide standards of conduct and protecting employees from discrimination, harassment and retalia- tion. These standards are set forth in the corporate policy on Fairness and Respect at Work. Communication at all levels We involve our employees in business processes through active dialogue and further develop employee communication formats. The previously separate intranet sites for different countries and companies have been combined in a single platform covering all employee needs. Informing staff promptly and extensively about upcoming changes, in compliance with the applicable nation- al and international regulations, is very important to us. We engage in open and trustful dialogue with employee representatives. 82 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 GRI G4-26 Online Annex: A 1.4.1-4 The main dialogue formats are regular employee assemblies, information events for managers and the European Forum, where employee representatives from all European sites engage in discussion with the Board of Management on issues of central relevance to the company. Our employees actively use opportunities to discuss company-specific issues and scope for optimization via various communication channels. For example, Bayer fosters a culture of inno- vation at the workplace through two platforms for employee suggestions: the Bayer Ideas Pool and the Ideas Forum. The suggestions made by employees on improving processes, occu- pational safety and health protection are rewarded and utilized. In total, 3,408 ideas were sub- mitted in 2016. Around 45% of the suggestions for improvement evaluated in 2016 were im- plemented. In the first year of implementation alone, those improvements that led to quantifiable benefits generated savings of more than €13 million. In 2016, Bayer distributed bo- nuses of around €1.7 million for the implemented proposals. Another example of employee par- ticipation is the Board of Management's appeal to all employees to submit suggestions on im- proving the Group-wide performance management system via the “WeSolve” platform. Diversity and internationality are hallmarks of Bayer A diverse employee structure is vital for our company’s competitiveness. By embracing diversity we improve our understanding of changing markets and consumer groups, gain access to a broader pool of talented people and benefit from the enhanced innovative and problem-solving abilities that are demonstrably associated with high cultural diversity. Mutual understanding and a gender and cultural balance, especially at management level, are important success factors. We have an inclusive approach: diversity is integrated into all relevant human resources processes and driven forward by the management. Online Annex: A 1.4.1-5 Bayer has officially adopted the United Nations’ Women’s Empowerment Principles, a set of seven principles that sum up how women can be strengthened in the workplace, on the em- ployment market and in the community. The company is also a founding member of the Ger- man “Chefsache” network sponsored by the German Chancellor Angela Merkel. Its members are committed to working together to develop practically oriented strategies to drive diversity and gender balance in their organizations. Overall, the Bayer Group employs people from around 150 different nations. Around 21% of our senior managers come from outside Western Europe, the United States and Canada. We aim to increase this to 25% by 2020 in accordance with our Group target. At our significant locations of operation we hired 390 employees for senior management, 70% of whom are employed in their country of origin. Group-wide, Bayer had raised the proportion of women at senior management level to around 29% by the end of 2016 (2015: 28%). Without Covestro the proportion was 31%. Our aim is to raise this to 35% by 2020. Online Annex: A 1.4.1-6 Of the members of our Group Leadership Circle – the senior management level below the Board of Management – in which 31 nationalities are currently represented, around 67% come from the country in which they are employed. The proportion of women also increased in the Group Leadership Circle. By year-end 2016, it was made up of 84% men (2010: 93%) and 16% women (2010: 7%). Diversity: see Glossary Group target 2020: increase in the propor- tion of senior managers from outside the Euro- pean Union, the United States or Canada to 25%; see also A 1.2.1 Group target 2020: increase the proportion of women in senior management to 35%; see also A 1.2.1 Bayer Annual Report 2016 A Combined Management Report 83 1.4 Sustainable Conduct Augmented Version The next table shows the proportion of men and women in various employee categories. A 1.4.1-6/1 A 1.4.1-6/2 Bayer Group Workforce Structure 1 Senior management Junior management Skilled employees Total Apprentices 2015 3,100 11,300 29,200 43,600 800 Women 2016 3,300 11,400 28,400 43,100 800 2015 8,000 16,600 48,400 73,000 1,800 Men 2016 8,100 16,600 47,400 72,100 1,800 2015 11,100 27,900 77,600 Total 2016 11,400 28,000 75,800 116,600 115,200 2,600 2,600 2015 figures restated 1 Number of employees converted into full-time equivalents (FTE) and rounded to the nearest hundred Proportion of Women in the Workforce 2016 % 63 37 71 29 Total (115,200 FTEs) Senior management (11,400 FTEs) Women Men Creating attractive working conditions Competitive compensation and variable pay Our compensation system combines a basic salary reflecting performance and responsibility with elements based on the company’s success, plus extensive additional benefits. Adjustments based on continuous benchmarking make our compensation internationally competitive. We attach great importance to equal pay for men and women, providing fair and competitive compensation and informing our employees transparently about the overall structure of their com- pensation. Online Annex: A 1.4.1-7 Binding and transparent compensation structures At Bayer, individual salaries are based on each employee’s personal and professional abilities and the level of responsibility assigned to them. At managerial level, this is based on uniform evaluation of all positions throughout the Group using the internationally recognized Hay meth- od. In areas of the Group and jobs that fall within the scope of a binding collective bargaining agreement, there are no differences in pay based on gender either. This also applies for the compensation of apprentices. In the Emerging Markets and developing countries, too, com- pensation levels are aligned to local market conditions. In the majority of cases, full- and part- time employees at our significant locations of operation receive the same rates of pay. The situ- ation differs with regard to employees on temporary contracts as they are not entitled to long- term compensation components such as pension plans in some countries. Our compensation concept also includes variable one-time payments. More than €1,400 million is earmarked for bonus awards to employees for 2016 under the Group-wide short-term incentive (STI) program. In many countries, employee stock programs enable our staff to purchase Bayer shares at a discount. We also offer senior managers throughout the Group “Aspire,” a uniform long-term compensation program based on the development of the share price. Our personnel expenses for continuing operations amounted to €11,357 million in 2016 (2015: €11,176 million). The change was mainly due to salary adjustments and higher employee bonus- es, which together outweighed currency effects. Significant locations of operation: see Glossary Short-term incentive program: see Glossary See also Note 12 to B Consolidated Financial Statements 84 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 See also Note 25 to B Consolidated Financial Statements Alongside attractive compensation for their work, Bayer contributes to the financial security of its present and former employees after their retirement. The present value of total pension obligations at the end of 2016 was €28,995 million. Personnel expenses in 2016 included pension expenses of €1,064 million. Payments of €1,131 million were made in 2016 to current retirees. Personnel Expenses and Pension Obligations € million Personnel expenses of which pension expenses Pension obligations 1 Pension benefits paid 2012 9,194 681 2013 9,430 897 2014 9,693 834 22,588 20,682 27,771 887 925 942 2015 11,176 1,060 26,809 997 2015 figures restated; figures for 2012–2014 as last reported 1 Present value of defined benefit obligations for pensions and other post-employment benefits A 1.4.1/2 2016 11,357 1,064 28,995 1,131 Work-life balance Present and future employees attach great importance to achieving a balance between employ- ment and their personal and family lives. In many countries our commitment in this area goes well beyond the statutory requirements. We offer our employees flexible working hours and support in child care and caring for close relatives. In 2015, Bayer introduced uniform conditions for short-term mobile working in Germany through a new General Works Agreement with the Works Council. In addition, employees in Germany can convert part of their salary into free time through the “BayZeit” long-term account. There are simi- lar programs in other countries as well. In 2016, the Bayer Group had some 10,700 part-time employees, in particular in Europe. This figure represents 9% of the total headcount. Online Annex: A 1.4.1-8 Percentage of Part-Time Employees by Region and Gender % Europe / Middle East / Africa North America Asia / Pacific Latin America Total 2015 figures restated Women 2016 23.8 1.3 2.6 0.1 13.5 2015 23.0 1.2 2.1 0.1 12.7 2015 11.6 0.2 0.1 0.0 6.0 Men 2016 12.2 0.1 0.2 0.0 6.5 A 1.4.1-8/1 Total 2016 16.7 0.6 1.1 0.1 9.1 2015 16.0 0.6 0.8 0.0 8.5 Bayer enables both men and women to take parental leave. Since national parental leave regula- tions vary widely from country to country, we only compile data for our significant locations of operation. These represent a selection of countries in which we generate around 81% of our sales. 1,621 women and 687 men at these locations took parental leave in 2016. By the end of the year, around 1,583 employees on parental leave had returned to work. Bayer Annual Report 2016 A Combined Management Report 85 1.4 Sustainable Conduct Augmented Version Online Annex: A 1.4.1-9 The next table shows the number of employees who have returned after the standard statutory parental leave program of up to three years per child and Bayer’s more far-reaching “Family & Career” model (up to six years), using Germany as an example. By the end of 2016, 70.4% had returned to work. 50.6% of women and 94.2% of men who took parental leave in 2014 re- turned to work. Employees Returning from Parental Leave using Germany as an Example A 1.4.1-9/1 Employees who have taken parental leave since 2014 Still on parental leave / with a dormant employment contract Returned by 2016 Terminated 1 Women Men Total % Absolute % Absolute % Absolute 54.5 1,101 45.5 918 100.0 2,019 43.5 50.6 5.9 479 557 65 4.8 94.2 1.0 44 865 9 25.9 70.4 3.7 523 1,422 74 1 Includes employees who have left the company due to employer- and employee-driven terminations, severance agreements and expiration of contracts The General Works Agreement on caring for close relatives helps Bayer employees in Germany to combine working with their role as carers. Online Annex: A 1.4.1-10 Our employees can take up to 10 days’ paid leave to provide emergency care for family mem- bers. For longer periods, they are entitled to work part-time. During this time, their salary is topped up by drawing funds from their long-term account. Alternatively, employees who need to care for close relatives full-time can take unpaid leave for up to six months (up to one year in exceptional cases). Initiatives to promote health and ensure safe working conditions Our occupational health management activities include many regular preventive programs, ranging from ergonomic workplaces and stress management to incentive systems to promote healthy behavior. Online Annex: A 1.4.1-11 The “Healthy at Bayer” initiative helps employees in Germany take action at work to promote their health, with offerings ranging from preventive check-ups through programs to encourage healthy eating to exercise at sports clubs supported by Bayer. Health management also in- cludes support for treating illnesses and reintegration measures. We have activities and programs to enhance the health and vitality of our employees in many countries. One example is “B Well” in the United States, where individual health targets are de- fined and programs are specially designed to achieve them. The health and personal develop- ment of employees in Mexico is supported by “Vive con Bien Estar,” a broadly based initiative by the Human Resources, Medical Services, Security and Communications units. We aim to provide employees in all countries with access to affordable and targeted health offer- ings such as regular medical check-ups, sports programs, rehabilitation and on-site medical care. We also ensure safe working conditions and thus an environment where our employees can work without fear and undertake international business travel without risk. Our employee representa- tives are included in operational health management and are actively involved in its development. 86 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Online Annex: A 1.4.1-12 Binding agreements at Group level The Bayer European Forum – which brings together management and employee representa- tives – has signed the Luxembourg Declaration on Workplace Health Promotion in the E.U. This involves a network of around 200 companies which aims to identify and share best practices and encourages joint measures by employers, employees and society to improve health and well-being at the workplace. Group-wide initiatives in Germany include the General Works Agreements on lifetime working and demographic change and on addressing demographic change at nonmanagerial level at Bayer. These agreements contain measures to reduce the workload of shift workers who work regular night shifts from the age of 55 and of all other nonmanagerial employees in Germany from the age of 57. Further, they include measures to ease the return to work of nonmanagerial employees after long-term illness, and an extensive health screening program for all employees. More than 98% of those who were eligible took part in the program to reduce the workload of older employees in 2016. % of Bayer employees have a company pension plan. Social responsibility for employees worldwide More than 70% of Bayer employees worldwide are included in a Bayer pension plan. The benefits provided depend on the legal, fiscal and economic conditions in each country, employee compen- sation and years of service. Nearly all employees worldwide either have statutory health insurance or can obtain health insurance through the company. Health Insurance and Pension Coverage % Europe / Middle East / Africa North America Asia / Pacific Latin America Total 2015 figures restated 1 Government or employer- / employee-funded 2 Programs to supplement statutory pension plans A 1.4.1/3 Health insurance 1 Pension plans ² 2015 2016 2015 98 93 95 95 96 98 99 96 99 98 85 99 39 54 72 2016 86 100 39 57 74 Our social responsibility is also reflected in our approach to restructuring, which includes efforts to take account of our employees’ interests. In Germany, which remains Bayer’s largest operational base with 37,000 employees, business-related dismissals are excluded through the end of 2020 for a large proportion of employees under an agreement with the employee representatives. In 2016, the working conditions for around 61% of our employees worldwide were governed by collective or company agreements. At various country companies, the interests of the workforce are represented by elected employee representatives who have a right to be consulted on certain personnel-related decisions. The contractually agreed working hours of our employees do not exceed 48 hours a week in any country. Bayer Annual Report 2016 A Combined Management Report 87 1.4 Sustainable Conduct Augmented Version Online Annex: A 1.4.1-13 Percentage of Collective Agreements by Region 1 % Europe / Middle East / Africa North America Asia / Pacific Latin America Total 2015 84 5 44 53 60 2015 figures restated 1 Percentage of employees covered by collective agreements, especially on compensation and working conditions A 1.4.1-13/1 2016 84 5 45 52 61 Our understanding of our role as a socially responsible company includes a commitment to help- ing disadvantaged people. We employ some 2,600 people with disabilities in 29 countries. That is around 2% of our total workforce. 36% are female and 64% male. Most employees with disabili- ties work for our companies in Germany, where they made up 5.1% of the workforce in 2016. Global respect for human rights Bayer fully supports human rights and has set out its stance in a binding global policy. We are committed to respecting and fostering human rights within our sphere of influence and to report- ing transparently on the results of our activities in this area. Alongside working conditions in the Bayer Group, this centers on our expectation that human rights will be respected at all stages in the supply chain, as detailed in our Supplier Code of Conduct. In addition, our LIFE values and Corporate Compliance Policy commit all employees around the world to fair and lawful conduct toward staff, colleagues, business partners and customers. We are a founding member of the U.N. Global Compact and respect the Universal Declaration of Human Rights and a range of glob- ally recognized declarations applicable for multinational corporations. Online Annex: A 1.4.1-14 These include, in particular, the OECD Guidelines for Multinational Enterprises, the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and the core labor standards of the International Labour Organization (ILO). We also observe the U.N. Guid- ing Principles on Business and Human Rights. In 2016, around 87% of our employees received training in the main aspects of our Human Rights Position, in training sessions totaling 220,000 hours. That included training for internal and exter- nal security staff. The compliance organizations at Group and country level monitor compliance with the relevant corporate policies. If there are signs of violation, employees can contact their Compliance Officer at any time, anonymously if required. Alternatively, they can contact the Group-wide compliance hotline. Societal engagement Bayer’s societal engagement focuses on people working innovatively in the areas of education & science and health & social needs who are committed to achieving a lasting improvement in living conditions. This also extends to a further focus area – sports & culture – although our involvement in professional soccer does not form part of our social sponsorship activities. people with disabilities work for the Bayer Group. See also A 1.4.2.1 ILO core labor stand- ards: see Glossary See also A 4.2 88 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 See also A 1.2.1-1 Our Access to Medicine (ATM) activities give patients in developing countries and the Emerging Markets access to our products. Bayer’s foundation work centers on two globally active foundations that are linked to the company – the Bayer Science & Education Foundation for Life Sciences, education and medicine, and the Bayer Cares Foundation for social innovations and social commitment. An interdisciplinary com- mittee chaired by the member of the Bayer Board of Management responsible for Innovation holds responsibility for the strategic orientation and coordination of our societal engagement. The Group-wide donation allocation and management policies form the basis for our foundation and donation activities. A large number of the initiatives are implemented in collaboration with partner organizations such as non-governmental organizations. An independent panel made up of internal and external judges decides how foundation funding is allocated. Covestro is responsible for its own social commitment activities. Donations are allocated on the basis of internal Covestro regu- lations. In 2016, we invested (incl. Covestro) a total of around €48 million (2015: €51 million) in charitable activities worldwide. This was aimed at improving the quality of life at the company’s various loca- tions and contributing to solving social challenges. Online Annex: A 1.4.1-15 Societal Engagement in 2016 €20 million Sports and culture €48 million total A 1.4.1-15/1 €14 million Health and basic social needs €14 million Education and science For Bayer, pioneering achievements in science and society are fundamental to progress and success. For that reason, promoting cutting-edge research and supporting education and so- cial innovation are key objectives of the Bayer foundations. Selected activities from the three key areas of health and basic social needs, education and science, and sports and culture are set out below. Activities focusing on health and basic social needs Encouraging social innovation In 2016, the Bayer Cares Foundation gave the former Aspirin Social Award a new strategic ori- entation. Now called the Aspirin Social Innovation Award, the accolade has an international reach for the first time, focusing on social innovation in the areas of health and nutrition. All five award-winners received €20,000 of funding to expand their charitable business initiatives. Supporting creative voluntary work Last year, the Bayer Cares Foundation provided first-time funding for 73 volunteering projects of employees in 37 countries within the framework of the Bayer Volunteering Program. In Ger- many, an additional 26 projects of individuals not working at Bayer were also supported. The total funding amounts to around €341,000. All the projects offer innovative approaches to help solve social problems in the areas of health, nutrition and education in the catchment areas of the company’s sites. Bayer Annual Report 2016 A Combined Management Report 89 1.4 Sustainable Conduct Augmented Version Rapid assistance in the event of natural disasters In 2016, Bayer was once again active in supporting people experiencing acute hardship as a result of natural disasters. For example, we provided medicines worth €250,000 free of charge to assist in the medical care of the victims of a severe earthquake in Ecuador. Activities focusing on education and science Award-winning pioneering achievements The Bayer Science & Education Foundation’s Otto Bayer Award 2016 worth €75,000 went to Dr. Dirk Trauner from the University of Munich (LMU Munich). Working in the field of photo- pharmacology and chemical optogenetics, he is developing novel switches that use light to precisely control all kinds of processes in cells. This may open up new chemotherapeutic treatment opportunities, for example to cure blindness and cancer. In 2016, the Bayer Early Excellence in Science Award worth €10,000 to each recipient went to three young researchers from Germany and Switzerland for their successful work in the fields of medicine, biology and chemistry. Getting young people excited about science The Bayer Science & Education Foundation helped talented young individuals in 2016 by awarding 245 scholarships worth a total of more than €1 million to students, postgraduates and apprentices in the fields of natural, life and agricultural science and medicine. This funding is intended in particular to facilitate research projects abroad. For the first time ever, youngsters from India and Africa joined children from German and U.S. schools at the Science Teens camp in the United States. Bayer was once again involved in the student support programs geared to national requirements in over 20 countries. To this end, our country organizations cooperated with universities, museums and other educational institutions. In Germany, the focus in 2016 was on promoting innovative teaching projects, with total fund- ing of some €550,000 for 37 specific measures at schools and other educational institutions in 18 towns and cities. The three Baylab student laboratories offered school classes a profession- al infrastructure that was used by over 7,500 schoolchildren and teachers in 2016 as a sup- plement to normal tuition. Education program for refugee children In 2016, the Science4Life Academy founded in 2015 by the Bayer Science & Education Foun- dation along with the Berlin Senate and other educational organizations produced scientific teaching materials geared specifically to the needs of refugee children and tested them at pilot schools in Berlin. The next steps are to evaluate the results and pass these on to all Germany’s Federal states. In addition, the funding is to be used for a dictionary for refugee children. Activities focusing on sports and culture We continued our recreational, disabled and competitive sports activities in 2016. The Bayer sports clubs again made a key contribution to the broad range of sporting activities around the German sites in North Rhine-Westphalia. The 23 clubs have a total of around 45,000 members. In 2016, the major clubs also became more intensely involved as professional service providers for the company’s occupational health management. 90 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Bayer once again expanded its cultural activities in 2016, among other things by extending the stART program for talented young artists with the stARTacademy. A total of around 120 music, dance, theater and art events took place in 2016, including an art exhibition with selected works from the Bayer Collection. 1.4.2 Responsibility in Value Creation > Sustainability criteria consistently anchored in the supply chain > Strengthening efficiency and flexibility in production and logistics > Ethical action shapes dialogue and partnership with our customers We aim to offer our customers innovative products and high-quality solutions. This requires us to efficiently and responsibly steer processes at all value creation stages: in procurement, in produc- tion, in logistics and in distribution. Our supply chain is designed at both a global and regional level according to clear, sustainability- oriented criteria and standards. We not only examine and evaluate our suppliers’ sustainability performance, but also offer them support through partnership-based cooperation and training measures. In this way, we are able to implement our requirements together with our suppliers in the face of serious challenges such as eliminating child labor. We continuously work at our production sites to react more rapidly to market developments and to achieve our ambitious quality and safety objectives through increased flexibility and the ex- pansion of capacities. To achieve this, we invest continuously in our global production network. We steer our logistics services in equal measure according to quality, safety and environmental aspects. Our partnership with our customers is shaped by responsibility. We integrate them at an early stage into our processes and address their needs with regard to the use of our products. We systematically analyze their satisfaction with our performance and safeguard our long-term busi- ness success by deriving optimization measures from this analysis. 1.4.2.1 Procurement and Supplier Management The procurement organization supplies the company with goods and services around the world. We exert influence on society and the environment as a result of our procurement activities and supplier relationships. Not just economic, but also ethical, ecological and social principles are therefore anchored in our Procurement policy, which is binding for all employees. Procurement (excluding Covestro) has been organized since 2016 as a corporate function that acts centrally on behalf of all segments. Synergies can be leveraged by pooling know-how and procurement volumes. Our procurement activities are directed by the Procurement Leadership Team, which acts as the highest decision-making body for procurement issues. The team is led by the Head of Procurement, who reports directly to the Chief Financial Officer. Covestro has its own procurement organization. Unless explicitly stated otherwise, all information hereafter with the exception of the Group targets includes Covestro. www.covestro.com/en/ company/procurement/ overview Procurement operates according to uniformly established procurement and supplier management processes. Long-term contracts and active supplier management for strategically important goods and services are important elements here. Thus we not only minimize procurement-specific risks such as supply bottlenecks or significant price fluctuations, but also safeguard the company’s competitiveness and ensure smooth production processes. Bayer Annual Report 2016 A Combined Management Report 91 1.4 Sustainable Conduct Augmented Version We procured goods and services in 152 countries during the reporting period. Procurement spend from transactions with approximately 110,900 suppliers amounted to some €21.8 billion. In 2016, our procurement spend in Germany, the United States and Switzerland accounted for nearly 68% of our expenditures in OECD countries, which in turn made up about 54% of the Bayer Group’s global procurement spend. Brazil, India and China together accounted for about 66% of expendi- tures in the non-OECD countries or about 13% of the total spend. The following table contains information about Bayer’s procurement volumes and supplier shares based on the regional origin of goods and services. billion € Bayer’s procurement spend in 2016 Online Annex: A 1.4.2.1-1 Procurement Spend and Number of Suppliers in OECD and Non-OECD Countries in 2016 A 1.4.2.1-1/1 OECD countries Germany United States Switzerland Other Total Non-OECD countries China India Brazil Other Total Spend Suppliers € billion % Number % 5.3 5.3 1.2 5.7 17.5 1.9 0.5 0.5 1.5 4.4 24.2 24.2 5.6 26.0 80.0 8.7 2.3 2.2 6.9 20.1 22,108 11,540 1,789 42,649 78,086 3,432 3,785 2,546 23,052 32,815 19.9 10.4 1.6 38.5 70.4 3.1 3.4 2.3 20.8 29.6 Bayer purchases locally wherever possible in order to adequately react to the requirements of our sites and strengthen regional economies. In 2016, this applied to 71% of our procurement spend at our main business locations, and also 71% of procurement spend in all countries worldwide. The following table shows the main procurement products in 2016. Local procurement: see Glossary Online Annex: A 1.4.2.1-2 Main Procurement Products A 1.4.2.1-2/1 Pharmaceuticals Consumer Health Crop Science Animal Health Covestro Zetia (finished product), cell media culture (raw material), Betaferon (interferon- beta-1b) (bulk product) and Eylea protein (bulk product), packaging materials Active ingredients (e.g. naproxen sodium, loratadine, paracetamol), vitamins (e.g. vitamin C and B), auxiliaries, finished products (e.g. Canesten, Dr. Scholl’s, Berocca), packaging materials Active ingredients (e.g. mancozeb), adjuvants and solvents (e.g. rapeseed oil, toluene, ammonia), complex intermediates (e.g. pyridine polyfluoride), packaging materials Active ingredients (e.g. moxidectin, praziquantel and permethrin), finished products, packaging materials (e.g. Seresto tins) Key basic raw materials are benzene and phenol, propylene oxide, toluene, acetone and hexamethylenediamine The use of renewable raw materials plays only a subordinated role at Bayer for portfolio reasons. We primarily use renewable raw materials when it makes technical, economic and ecological sense to do so. 92 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Online Annex: A 1.4.2.1-3 At Pharmaceuticals, a number of hormones are synthesized through certain sterols and phy- tosterols that result as byproducts during the production of plant oils from soybeans, oilseed rape / canola or sunflowers, as well as during wood processing. We additionally purchase vari- ous steroids that are manufactured from diosgenin or its intermediate stages. This substance is usually obtained from yam grown in countries such as China. We also use raw materials such as water, glucose, yeast, soybean starch, castor oil and corn steep water in our fermentation processes. For some products, Consumer Health uses extracts of plant leaves. We take great care with the cultivation and extraction of the raw materials for manufacturing plant-based pharmaceuti- cals. The controlled, integrated cultivation and extraction of plant-based raw materials take place according to local regulations, e.g. the GACP (Good Agricultural and Collection Practice) guidelines of the European Medicines Agency. Crop Science processes soy, e.g. in the production of crop protection products. To support the maintenance of sustainability criteria in soy cultivation, Crop Science is a member of the Round Table for Responsible Soy (RTRS) and, starting in 2017, intends to purchase RTRS certificates corresponding to the soybean consumption in its production. In addition, we cooperate with farmers to support the certification of their soybean production in accordance with international standards. We use a small amount of palm oil derivatives in some of our Life Science products. As the production of palm oil is often associated with social and ecological problems, Bayer takes part in the Round Table for Sustainable Palm Oil (RSPO). In 2017, we plan to purchase so-called RSPO credits, which promote the sustainable production of palm oil, according to the quanti- ties used by us. Covestro is developing processes for the replacement of raw materials derived from crude oil. In 2016, for example, it launched the commercial production of a curing agent for polyurethane coatings and adhesives based on renewable raw materials. The product is 70% based on raw materials derived from biomass that does not compete with food production. Bayer sustainability requirements defined in its Supplier Code of Conduct Bayer regards adherence to sustainability standards within its supply chain as a crucial factor in the value chain and an important lever for minimizing risks. A four-step process is thus established throughout the Group to improve sustainability practices in the supply chain comprising the ele- ments awareness-raising, supplier nomination, sustainability performance evaluation and devel- opment. It is defined in a special instruction and centrally steered by a sustainability team whose management reports to the Procurement Leadership Team. Our sustainability requirements are established in Bayer’s Supplier Code of Conduct. Based on the principles of the U.N. Global Compact and our Human Rights Position, it establishes the basic foundation for this cooperation. For this reason, not just economic standards, but also ethical and environmental, social and governance (ESG) standards apply for the selection and evaluation of new and existing suppliers. The Code of Conduct is integrated into electronic ordering systems and contracts throughout the Bayer Group. Furthermore, our standard supply contracts contain clauses that authorize Bayer to verify suppliers’ compliance with our sustainability requirements. Bayer Annual Report 2016 A Combined Management Report 93 1.4 Sustainable Conduct Augmented Version Evaluating the sustainability performance of our suppliers Bayer verifies the observance of the Code requirements by our suppliers through online assess- ments and on-site audits. Suppliers are selected for these evaluations based on a combination of country and material risks as well as strategic importance in accordance with our Group targets. By 2017, Bayer plans to evaluate all strategically important suppliers according to sustainability- relevant criteria (target attainment as of 2016: 98%). This group includes suppliers with a major influence on business in terms of, for example, procurement spend and long-term collaboration prospects (3-5 years). By 2020, we also aim to evaluate all those suppliers with a significant pro- curement spend (> €1 million p.a.) that are regarded as potentially high-risk suppliers (target at- tainment as of 2016: 83%). Bayer carries out the online assessments together with an established provider of sustainability performance evaluations (EcoVadis). The assessment criteria comprise the areas environment, labor practices and human rights, ethics and sustainable procurement. On-site audits are carried out by independent external auditors. Audits are based on the criteria of the Together for Sustain- ability (TfS) initiative and the Pharmaceutical Supply Chain Initiative (PSCI). In both initiatives, Bayer works together with other companies to standardize sustainability assessments and audits of suppliers in the same industry and to leverage synergies by sharing information. In line with our Group target, we plan to develop and introduce a sustainability standard for our suppliers by 2020. In addition, Bayer auditors evaluate suppliers with regard to sustainability aspects focusing on health, safety and environmental protection. Group target 2017: evaluation of all strategi- cally important suppliers Group target 2020: evaluation of all poten- tially high-risk suppliers with significant Bayer spend; see also A 1.2.1 www.tfs-initiative.com www.pscinitiative.org Group target 2020: development and establishment of a new sustainability standard for our supply base; see also A 1.2.1 Online Annex: A 1.4.2.1-4 Supplier Assessments and Audits Sustainability assessments 1 via the EcoVadis platform Sustainability audits ² by external auditors Sustainability / HSE ³ audits by Bayer auditors A 1.4.2.1-4/1 2015 2016 521 71 107 795 73 168 1 Initial and re-assessments of suppliers working for Bayer; initiated by Bayer and shared as part of the TfS initiative 2 Initial and follow-up audits of suppliers working for Bayer; initiated by Bayer and shared as part of the TfS and PSCI initiatives 3 Health, safety, environmental protection Within the scope of the TfS initiative, a total of 1,773 supplier assessments using EcoVadis and 241 audits – performed, for example, in Poland, Mexico and South Korea – were successfully completed in 2016. In the same year, 51 shared audits were carried out through PSCI, for ex- ample in China, India, Israel and Brazil. Verifying the requirements with new suppliers Our Life Science businesses undertake separate evaluations of suppliers with regard to the contract manufacturing of quality-relevant goods and services. These evaluations cover the ar- eas of health, safety and environmental protection among others and are performed prior to the commencement of business operations. Furthermore, the Life Science businesses obligate potentially risky, newly selected suppliers with a prospective annual procurement spend in excess of €1 million to undergo an EcoVadis sustainability assessment or an on-site audit. The relevant suppliers evaluated in this way in 2016 met our sustainability requirements. 94 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 The online assessments and on-site audits are analyzed and documented so that – in the event of unsatisfactory results – specific improvement measures can be defined with the suppliers. In 2016, this applied above all to the categories Ethics, Sustainable Procurement and Health and Safety. In 2016, 24 suppliers (3% of those evaluated) posted a critical result (assessment level low). These suppliers were requested by Bayer to rectify the identified weaknesses on the basis of specific action plans. Overall some 400 of our suppliers improved their sustainability performance in 2016. Online Annex: A 1.4.2.1-5 Online Supplier Assessments by Category Environment Labor practices and human rights Fair business practices Sustainable procurement 4% 3% 7% 9% 78% 87% 87% 84% A 1.4.2.1-5/1 18% 10% 6% 7% Valuation levels: Low Medium High Number of suppliers assessed: 795 0 10 20 30 40 50 60 70 80 90 100 Improvement measures in the supply chain taking effect We monitor the implementation of the improvements demanded by us through re-assessments or follow-up audits. Numerous suppliers also voluntary undergo a re-assessment in order to improve their results. In 2016, 583 suppliers underwent a re-assessment through the EcoVadis platform, of whom approximately 67% improved their sustainability performance. Nine follow-up audits verified the rectification of previously identified deficiencies. In 2016, Bayer was not prompted to end any supplier relationship due solely to sustainability performance. Conflict minerals: see Glossary Additional verification processes were established for the fulfillment of further international regula- tions. This applies, for example, to regulations that require companies to disclose the origin of certain raw materials such as so-called conflict minerals. Online Annex: A 1.4.2.1-6 Target: elimination of conflict raw materials International regulations such as the Dodd-Frank Act in the United States obligate companies to disclose the origin of certain raw materials. The purpose of this is to rule out that minerals from conflict regions such as the Democratic Republic of the Congo or its neighboring coun- tries find their way into products through the supply chain. Bayer has questioned about 150 of its first-tier suppliers who could potentially be impacted by this issue. Nearly 65% of them con- firmed to us that they do not procure potential conflict minerals. It was agreed with the remain- ing suppliers during verification processes that they must ensure compliance with the require- ments. GRI G4-26 Training measures and dialogue on the issue of sustainability We support our procurement employees in the implementation of our procurement processes and sustainability requirements with targeted Group-wide training measures. In the reporting period, 244 procurement employees completed training courses explaining the EcoVadis sustainability assessment process. We also offer our suppliers a wide range of development and dialogue op- portunities in order to familiarize them with Bayer’s sustainability requirements. Bayer Annual Report 2016 A Combined Management Report 95 1.4 Sustainable Conduct Augmented Version Online Annex: A 1.4.2.1-7 In 2016, Crop Science used its Supplier Days in India and China as an important dialogue plat- form for sustainability requirements. Covestro also carried out a Supplier Day in India for its strategically important suppliers. In addition, we offered further Supplier Days, training and workshops in China and India in cooperation with our industry initiatives PSCI and TfS. The Supplier Academy developed by TfS in 2016 and the sustainability webinars developed by PSCI itself offer further training components for suppliers. Tackling child labor in the seed supply chain A key challenge for sustainable supplier management in the Group is to counter child labor in the seed supply chain of the Crop Science segment. Our position on this is unequivocal and includes a strict ban on child labor. We therefore also obligate our suppliers along our value chain to strictly refrain from employing children. For many years, Bayer has taken systematic action to prevent child labor in the cotton, rice and vegetable seed supply chain in India, Bangladesh and the Phil- ippines through its Child Care Program and conducts inspections locally. In 2016, Bayer for the first time also inspected external producers of vegetable seed in China and Thailand. No cases of child labor were identified. In addition, Bayer continues to raise awareness of the issue among its suppliers and their local environment and clearly communicates its requirements. www.bayer.com/ child-care Online Annex: A 1.4.2.1-8 Bonuses and sanctions for suppliers Crop Science’s comprehensive activities in its Child Care Program include the observation and monitoring of the seed produced through wage labor in India. To this end, the corporate auditor EY (formerly Ernst & Young), India, carries out unannounced visits to farms in four Indian dis- tricts, among other measures. Suppliers who can verify that they strictly observe our ban on child labor receive a bonus along with training in raising agricultural efficiency. Graduated sanc- tions are applied for noncompliance. These range from written warnings to termination of the contract in the case of repeated noncompliance. Supporting school education is a key element Bayer regards school attendance not only as essential for children’s development but also as an effective tool for preventing child labor. We therefore also visit the parents of children we find working in the fields to convince them of the importance of school education. We promote this in India with the “Learning for Life” initiative within our Child Care Program, which focuses both on fostering scientific knowledge and on general vocational training. This covers everything from reintegrating children into the regular school system to vocational training measures. Be- tween 2005 and the end of 2016, “Learning for Life” reached more than 6,200 children and young people. Thanks to a stringent monitoring system, which is supported by local educational initiatives, there are now only very few instances of child labor among our contractors, which we nonetheless closely track and immediately put a stop to. The Child Care Program Advisory Council, comprised of international experts and recognized professionals, supports Bayer in the protection of children’s rights and the objective of seed pro- duction without child labor. We measure the success of our comprehensive program using the indicator “Child labor incidence as a percentage of total monitorings of laborers.” 96 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Online Annex: A 1.4.2.1-9 The table informs about the development of the indicator that Bayer uses in the evaluation of child labor cases. Child Labor Incidence in the Production of Cotton and Vegetable Seed for Bayer in Relation to the Total Number of Monitorings 1 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 A 1.4.2.1-9/1 0 0 0 , 4 1 1 0 0 0 , 0 5 0 0 0 , 4 0 1 0 0 0 , 5 6 0 0 0 , 9 0 1 0 0 0 , 1 0 1 0 0 0 , 1 9 0 0 0 , 6 8 0 0 0 , 5 8 0 0 0 , 0 8 0 0 0 , 7 6 0 0 0 , 4 6 % n i e c n e d c n i i r o b a l d l i h C 0.30 0.25 0.20 0.15 0.10 0.05 0 0 0 0 , 0 4 Number of monitorings of laborers (cotton) Number of monitorings of laborers (vegetables) 2 Child labor incidence in relation to number of monitorings (cotton) Child labor incidence in relation to number of monitorings (vegetables) 2 1 The figures cover several growing cycles per cultivation year. In India the cultivation year runs from the middle of one year to the middle of the next, depending on climatic conditions and the various seed types. Cumulated depiction on the basis of control inspections performed (at least 3 per cultivation season for vegetables and up to 6 per season for cotton). 2 Vegetable seed included in field monitoring from 2010 / 2011 onward; for vegetables, cultivation areas and number of monitorings refer to a combination of various seed types. Each type of seed has its own monitoring intensity. See also A 1.4.3.2 and A 1.4.3.3 1.4.2.2 Production and Logistics Production according to high quality, safety and environmental standards Bayer operates production facilities at more than 140 sites in 39 countries. The safe and respon- sible operation of our facilities and the comprehensive safety of our employees and the people who live near our sites are of utmost importance to Bayer. Bayer also places great importance on protecting the environment and using materials and energy efficiently. We use our HSEQ man- agement systems to steer these processes. Our commitment to environmental protection, health and safety extends beyond the scope of legal requirements. For capital expenditure projects ex- ceeding €10 million, it particularly includes factoring in environmental aspects and performing a voluntary ecological assessment. In the case of acquisitions, we examine whether the applicable environmental and occupational safety regulations and fundamental employee rights are complied with at the production sites in question. Group policies additionally stipulate that new production sites must not be set up in areas that are statutorily protected with regard to natural characteris- tics, biodiversity or other factors. Online Annex: A 1.4.2.2-1 Few sites close to protected areas In an updated comparison of the geographical coordinates of our production sites against those of internationally recognized protected areas (ASEAN Heritage, Barcelona Convention, UNESCO-MAB Biosphere Reserve, Wetlands and World Heritage Convention and Ramsar Convention), we identified three sites that are within a radius of three kilometers from such are- as. These are the Blesbokspruit protected areas in South Africa, Moreton Bay in Australia and Reserva Costa Atlantica de Tierra del Fuego (Atlantic Coast of “Land of Fire”) in Argentina. None of the sites examined is directly located in any of the named protected areas. Bayer Annual Report 2016 A Combined Management Report 97 1.4 Sustainable Conduct Augmented Version Pharmaceuticals and Consumer Health Both segments operate their own production sites around the world at which active ingredients are manufactured and at which formulation and packaging services are performed for the product portfolio. Bayer worldwide: see also A 1.1.1/1 Both Pharmaceuticals and Consumer Health continuously invest in their global production net- works. Production capacities for the manufacture of hemophilia A products are being established at the Wuppertal and Leverkusen sites in Germany through the perennial and currently biggest capital expenditure program of Pharmaceuticals with a total volume of €720 million. The Beijing site in China is also being considerably expanded with a capital expenditure volume of some €100 million. Consumer Health’s biggest investment project, also with a volume of around €100 million, comprises the modification and expansion of its production sites in China. Strategic Investments in Property, Plant and Equipment at Pharmaceuticals and Consumer Health A 1.4.2.2/1 million € is being invested in production capacities for hemophilia medicines. 2016 Pharmaceuticals Production capacities for new rFactor VIII therapies in Wuppertal and Leverkusen, Germany Expansion of R&D laboratory capacities in Wuppertal, Germany Modernization of research facilities in Berlin, Germany Modernization of site infrastructure in Wuppertal and Leverkusen, Germany Expansion of production capacities in Beijing, China Expansion of Quality Control Biologics in Berkeley, California, United States Consumer Health Reconstruction and expansion of production site in Majinpu, China 2015 Pharmaceuticals Production capacities for new rFactor VIII therapies in Wuppertal, Germany Expansion of R&D laboratory capacities in Wuppertal, Germany Modernization of research facilities in Berlin, Germany Modernization of site infrastructure in Wuppertal and Leverkusen, Germany Expansion of production capacities in Beijing, China Expansion of Quality Control Biologics in Berkeley, California, United States Consumer Health – Crop Science The products of Crop Science are mainly produced at the segment’s own production sites. Nu- merous decentralized formulation and filling sites enable the company to quickly react to the needs of local markets. At these sites the active ingredients are processed according to local requirements and application areas. Packaging of the products also takes place in these facilities. Production of seeds takes place at locations close to our customers in Europe, Asia, and North and South America at our own farms or under contract. Bayer worldwide: see also A 1.1.1/1 We invested some €2.4 billion overall in property, plant and equipment between 2013 and 2016 to satisfy increased demand for crop protection products and seed. In addition to the expansion of production capacities, this included expansion of our research and development facilities. Here the focus was on the United States and Germany and on our network of breeding stations for various crops in Europe, North and Latin America. billion € was invested by Crop Science between 2013 and 2016 in the production of crop protection products and seed. 98 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 A 1.4.2.2/2 Strategic Investments in Property, Plant and Equipment at Crop Science 2016 2015 Capacity expansions for herbicides in the United States and Germany Construction of a production facility for insecticides in Dormagen, Germany Expansion of production capacities for fungicides in Dormagen, Germany Expansion of R&D facilities in Monheim, Germany Establishment of breeding stations for various plant species worldwide Expansion of R&D facilities in Raleigh, North Carolina, United States Capacity expansions for herbicides in the United States and Germany Construction of production facilities for insecticides in Vapi, India, and Dormagen, Germany Expansion of production capacities for fungicides in Dormagen, Germany Expansion of R&D facilities in Monheim, Germany Establishment of breeding stations for various plant species worldwide Expansion of R&D facilities in Raleigh, North Carolina, United States Animal Health We procure the active ingredients for our Animal Health products both from internal sources within Bayer and external suppliers worldwide. Our globally marketed animal health products are mainly manufactured at the sites in Kiel, Germany, and Shawnee, Kansas, United States. Covestro(cid:3) Covestro’s network includes eight world-scale production sites. We also operate several produc- tion facilities in selected countries for the formulation and supply of customized polycarbonate granule compounds and the manufacture of semi-finished products (polycarbonate sheets). Covestro also operates regional production facilities for derivatives of the Coatings, Adhesives, Specialties Business Unit and for functional films made of polycarbonate or thermoplastic polyure- thane. Covestro continuously invests in its global production network: Strategic Investments in Property, Plant and Equipment at Covestro A 1.4.2.2/3 2016 2015 Capacity expansion of MDI facility in Brunsbüttel, Germany Start-up of a production line for CO2-based polyols in Dormagen, Germany Continuation and finalization of capital expenditure projects from 2014 – Doubling of production capacity for polycarbonate in Shanghai, China – Doubling of production capacity for the aliphatic isocyanate HDI in Shanghai, China Construction of a production line for CO2-based polyols in Dormagen, Germany Continuation of capital expenditure projects from 2014 – Doubling of production capacity for polycarbonate in Shanghai, China – Doubling of production capacity for the aliphatic isocyanate HDI in Shanghai, China Bayer worldwide: see also A 1.1.1/1 See also A 1.4.3 Efficient logistics concept implemented Logistics at Bayer comprises not just the transport and warehousing of goods, but in fact the entire steering and monitoring of all flows of goods and logistics data for the Bayer Group. We work continuously to develop logistics concepts that account for safety, environmental and cost aspects in equal measure. Areas of focus in the ecological field include the reduction of energy consumption and CO2 emissions, for example by minimizing air transport or using logistic con- cepts that include rail- and waterways. Bayer Annual Report 2016 A Combined Management Report 99 1.4 Sustainable Conduct Augmented Version With an agile corporate structure, we operate according to management systems and directives with global validity. We use both internal capacities and external logistics partners for storage and transport services. Bayer selects these according to strict safety, environmental and quality crite- ria. Alongside the Corporate Supply Chain unit, each segment maintains its own logistics activities that are aligned toward the unique circumstances of the respective business model and products. 1.4.2.3 Marketing and Distribution Our marketing and distribution activities are primarily geared toward acquiring new clients and retaining existing customers over the long term. In this area too, responsible practices are a top priority for Bayer. Close distribution network and intensive customer dialogue To consolidate and further build on our position in the different markets, we continuously work to optimize our market- and customer-specific distribution network and customer dialogue. Depend- ing on market conditions, we supply our customers in the health care sector, in agriculture, in industry and in the private sector through wholesalers, specialist retailers or direct sales organiza- tions. We have established our distribution channels at the international, regional and local levels in accordance with demand. A high level of customer satisfaction is essential for our long-term success. We therefore system- atically analyze both the diverse needs and satisfaction of, as well as complaints made by, our customers in the respective segments. We foster partnership and dialogue with our customers with the help of a variety of distribution tools and marketing formats. Online Annex: A 1.4.2.3-1 Pharmaceuticals and Consumer Health Numerous distribution channels in the health care sector The products of Pharmaceuticals are primarily distributed through wholesalers, pharmacies and hospitals. The products of Consumer Health are generally sold in pharmacies, with supermarket chains, online specialists and other large retailers also playing a significant role in certain mar- kets such as the United States. Broad range of customer dialogue Our customer environment includes in equal measure patients, consumers, physicians, phar- macists, caretakers, patient organizations, health policy decision-makers and opinion leaders, partners from research and development, and health authorities and health care payers. Our activities with all customer groups ultimately focus on the health and well-being of patients and consumers. Owing to the heterogeneity of these groups we take specific steps in each case when entering into dialogue with our customers. Market research provides us with information on our customers’ needs and positions that we use as a basis for further activities. Through surveys with respect to various indications, thera- peutic areas and regions, we regularly assess the satisfaction of our customers. Different legal requirements apply for prescription medicines than for nonprescription medicines or medical devices with regard to the collection of customer satisfaction data. Taking account of these requirements, the Pharmaceuticals and Consumer Health segments conduct primary market and data research. Systematic internet analyses additionally give us a better under- standing of our stakeholders’ opinions, interests and networks. 100 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Pharmaceuticals, for example, engages in dialogue with patient organizations and groups so as to improve disease awareness and market access for innovative therapies. Consumer Health has now successfully introduced its excellence program to improve customer orientation in 22 countries, with more to follow in 2017. With this program we aim to make Bayer the leading health care company in the areas of market development strategies, distribu- tion and trading. Crop Science User-oriented distribution system at Crop Protection We market our crop protection products in more than 120 countries, mainly through wholesal- ers or directly through retailers. Our seeds are sold to growers, seedling companies, specialist retailers and the processing industry. Plant traits developed using modern breeding methods are either incorporated into proprietary seed varieties or licensed to other seed companies. We market our Environmental Science range of pest and weed control products through wholesal- ers and specialist retailers to professional users in the green industry, forestry, industrial vegeta- tion management and pest control, as well as in the area of public health to combat malaria and dengue fever, for example. The latter is mainly transacted through tendering by govern- ment agencies and NGOs. Marketing to customers through new technologies The customers of Crop Science vary according to product, region and culture. This results in different customer wishes and trends such as industrialization 4.0 with new technologies like digital farming and also rising demands with respect to food safety and quality. We want to focus more strongly on our customers and their special needs and offer them tai- lored solutions. As a result, we realigned our Marketing organization in 2016. Through our local- ly aligned marketing activities (“field marketing”) in particular, we want to improve both the speed and content of our customer relations. In addition, we want to determine customer satis- faction through surveys every two years depending on the country organization. In 2016, we conducted such surveys in Japan and Hungary. www.forward farming.com Crop Science is intensifying its direct cooperation with farmers through the Bayer Forward Farming initiative. Our solutions for sustainable agriculture in practice are demonstrated at Bayer ForwardFarms. Since the program was launched, Crop Science has been successively expanding this type of cooperation worldwide. Animal Health Depending on national regulatory frameworks, we market our animal health products through veterinarians and other distribution channels such as pharmacies or retail stores. Depending on the respective market segment, Animal Health conducts studies on customer satisfaction and customer retention. Performance indicators are developed from long-term studies in order to measure customer satisfaction. Covestro Covestro’s products are mainly supplied to the automotive and transportation, construction, wood processing and furniture, and electrical / electronics industries. Covestro markets its products mostly through regional and local distribution channels. Three globally established supply chain centers for Covestro’s most important regions pool all information streams from order acceptance to dispatch planning, delivery and complaint acceptance. They serve as the central link to the customers and aim to ensure the rapid and smooth processing of orders. Covestro systematically analyzes customer satisfaction worldwide through the regular evalua- tion of complaints and assessments by customers. Corrective and prevention measures are de- rived from this. Bayer Annual Report 2016 A Combined Management Report 101 1.4 Sustainable Conduct Augmented Version Commitment to ethical conduct In the development, sale and marketing of our products, we do not tolerate bribery or any other form of improper exertion of influence on our business partners. The corresponding rules of con- duct are established in our Corporate Policy “Responsible Marketing & Sales.” Furthermore, we are committed to ethical advertising and communication for all our products and services. Our minimum standards are derived from laws and other statutory regulations, industry codes and internal rules. As part of our compliance management system, we register and investigate any suspected viola- tion of our responsible marketing principles. This applies to complaints both from within the com- pany and as notified to us from outside. Compliance: see Glossary Our corporate policy and the respective training programs are implemented decentrally in the segments. See also A 3.2.1 and A 4.2 Online Annex: A 1.4.2.3-2 Pharmaceuticals and Consumer Health The marketing and distribution of pharmaceuticals, medical devices and nonprescription (over- the-counter = OTC) medications are strictly regulated and subject to relevant laws that we are committed to observing. Also applicable at Bayer at the global or regional levels are industry codes adopted by relevant associations of the pharmaceuticals and medical devices industries. In many countries, furthermore, these standards are further concretized by local codes – all of which apply to prescription pharmaceuticals and many of which additionally apply to nonpre- scription medicines. All codes of the International Federation of Pharmaceutical Manufacturers & Associations (IFP- MA) serve as a binding minimum global standard for all pharmaceutical products marketed by Bayer. In addition, Bayer observes the codes of the European Federation of Pharmaceutical In- dustries and Associations (EFPIA) for dealings with health care professionals and patient organ- izations. The WHO’s Ethical Criteria for Medicinal Drug Promotion, together with national ethical standards that are usually also enshrined in industry codes at the local level, represent the min- imum global standard for the advertising of human pharmaceutical products at Bayer. All the aforementioned codes contain provisions governing, among other issues, advertising material standards, the distribution of samples, cooperation with medical and pharmaceutical specialist groups in connection with speaker and consultancy contracts, and scientific studies. Adherence to these codes is designed to ensure the independence of both health care profes- sionals and patient organizations. Based on the new EFPIA transparency code and the corre- sponding local interpretations, Pharmaceuticals discloses any grants to health care profession- als and organizations annually for the preceding calendar year. Bayer compliance rules supplement codes The most important internal Bayer corporate policy is our Anti-Corruption Procedure. The key requirements and the minimum global standard for compliant and ethical conduct are summa- rized in the Anti-Corruption Compliance Manual, which applies worldwide at Pharmaceuticals and Consumer Health. Principles for ethically and legally acceptable advertising for pharmaceu- ticals and medical devices are set out in a further Bayer corporate policy. Should several regu- lations be relevant, Bayer principally applies the more stringent standards. 102 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Training measures on product-related communication and anti-corruption are fundamental ele- ments of the system at Bayer. The principles communicated in these training courses provide an overview of globally applicable minimum requirements for cooperation with key stakeholders in the health care industry, such as physicians, hospitals or patient organizations. The courses explain general compliance principles and also give specific instructions in relation to nonrecip- rocal benefits and the exchange of services with health care professionals. Crop Science Crop Science follows the guidelines of its Product Stewardship Policy with regard to the distri- bution and use of its crop protection products. This policy, which also satisfies the require- ments of the Corporate Policy “Responsible Marketing & Sales,” is based on the International Code of Conduct issued by the Food and Agriculture Organization of the United Nations (FAO). We carry out training courses on this topic worldwide and make available corresponding mate- rials to the employees online. Responsible business practices in marketing and sales are addressed at Crop Science in com- pliance training courses and are also an integral element of marketing and sales excellence training measures. Animal Health In the marketing and use of its products, Animal Health not only observes statutory regulations, but also further-reaching Group-wide policies and voluntary industry-wide commitments. Where several regulations are applicable, Animal Health principally observes the more stringent re- quirements. Most of our companion and farm animal products are subject to the provisions of drug advertising law. Covestro In the marketing of its products, Covestro consistently observes its Responsible Marketing & Sales Policy. The importance of observing antitrust law and preventing corruption is regularly emphasized in training programs, internal communications and discussions with management. 1.4.3 Safety for People and the Environment > High level of product stewardship and risk prevention determines our activities > Occupational health and transportation safety further improved > More efficient use of energy and water (cid:3) We are fully aware of our stakeholders’ high expectations regarding our products and processes. The quality and safety of our products, the safe and responsible operation of our facilities and the comprehensive protection of our employees and the people who live near our sites are of the utmost importance to us. Bayer also considers environmental protection and the responsible use of natural resources to be extremely important. Responsibility for health, safety, environmental protection and quality (HSEQ) lies with the Group Board of Management. Group-wide HSEQ management systems are in place and incorporated into the business processes. Responsibility for steering and control lies with the two new corpo- rate functions, “Health, Safety & Sustainability” and “Quality,” which stipulate responsibilities and framework conditions, among other things, through corporate policies, targets and key perfor- mance indicators (KPIs). Operational responsibility lies with the corresponding line organizations of the segments, which steer HSEQ independently with management systems, committees and working groups. All rele- vant HSEQ performance indicators from our production sites are compiled in a Group-wide Bayer site information system (BaySIS). The continuous review and revision of policies by the corporate Bayer Annual Report 2016 A Combined Management Report 103 1.4 Sustainable Conduct Augmented Version functions, regular mandatory internal audits and external certification processes ensure that the systems at all production sites effectively meet the specific requirements in each case. The excellent performance of our HSEQ management systems for the areas of health, safety, environmental protection and quality also reduces running costs by avoiding damage and disrup- tions to work and production. Standards and certifications Bayer’s HSEQ management systems are based on recognized international standards. Regular upkeep of the management systems and appropriate training and certification also underpin our commitment to the chemical industry’s Responsible Care™ initiative and in particular the guide- lines of the Responsible Care Global Charter. With regard to HSE management system coverage based on energy consumption, around 95% of all our production sites had an HSE management system audited by Bayer in 2016. Some 97% of our business activities were certified externally to at least one internationally recognized stand- ard. A Group-wide certification plan aims to achieve virtually complete coverage in accordance with external standards in both environmental and occupational safety management by 2017. One hundred percent coverage is not feasible owing to the frequent changes in our site portfolio. A 1.4.3/1 Standards and Certifications in % of business activities based on energy consumption 2012 2013 2014 2015 2016 Certification to external standards ISO 14001 certification / EMAS validation OHSAS 180011 certification ISO 500012 certification Degree of coverage with certification to at least one of the above standards HSE management systems internally audited by Bayer 84 30 – 89 99 84 30 – 90 99 91 34 40 95 94 93 80 47 93 96 94 86 49 97 95 1 The rise in 2015 is due to the increased OHSAS 18001 certification of Covestro sites. 2 Group values determined from 2014 onward Quality management The Quality function ensures uniform quality standards across all segments and functions along with the continuous improvement of all quality-related processes. The quality requirements derived from regulatory requirements, permits and authorizations, relevant standards of nongovernmental organizations and industry associations and customer expectations are regularly reviewed and integrated into an internal quality management system. Our segments have quality management systems based on sector-specific international stand- ards. Group-wide, coverage with this kind of certification is over 98% based on energy consump- tion. Online Annex: A 1.4.3-1 Pharmaceuticals and Consumer Health The quality management system of these two segments forms the basis for the highest possi- ble safety standards in the manufacturing of pharmaceuticals and medical devices, which are subject to strict quality requirements. It is therefore based on internationally recognized stand- ards such as ISO (e.g. ISO 9001, 17025 and 13485) and ICH (International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use), as well as on rules for good working practice (GxP) in the development and manufacture of pharmaceuticals (e.g. Good Manufacturing Practices (GMP)), Good Distribution Practices (GDP) and Good Clinical Practices (GCP). Compliance with the relevant standards is regularly audited by internal experts, regulatory authorities and external consultants. These audits also cover our suppliers and institutes sub-contracted by us. GxP: see Glossary 104 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Crop Science Product manufacture at Crop Science is performed according to ISO 9001. Compliance with manufacturing standards and registered product specifications is regularly monitored by exter- nal auditors. All our products are approved/authorized by the relevant national authorities and thus fulfill the respective requirements with regard to quality and user safety. Animal Health Our veterinary medicine products also comply with stringent GxP quality standards stipulated in relevant statutory requirements applying to development, approval, manufacture, marketing and safety monitoring. According to this, safety is to be ensured for the animals to be treated, peo- ple and the environment alike. Within the scope of the statutory approval procedures and, if re- quired, re-registrations, Animal Health carries out studies in order to verify the quality, efficacy and safety of its products. Regular official inspections and internal audits check compliance with legal requirements. The audits also cover institutes subcontracted by us, service providers and suppliers. Covestro Covestro’s quality management system is certified to the international standard ISO 9001. Over 99% of reporting production and nonproduction sites worldwide are certified. 1.4.3.1 Product Stewardship We consider product stewardship to mean that our products satisfy the highest quality standards and are safe for people, animals and the environment when properly used. All substances and finished products undergo extensive testing and evaluation in the interest of product safety. We assess possible health and environmental risks along the entire value chain and implement the appropriate measures to mitigate risks based on this. We strictly observe the legal requirements, and our voluntary commitment and internal standards go beyond these in many areas. This is steered by the Corporate Health, Safety & Sustainability function, which is responsible for implementing the related policies and maintaining the HSE man- agement systems. https://echa.europa.eu/ regulations/reach Implementing statutory requirements Extensive legal regulations apply to all Bayer products. Chemical substances are subject to the European chemicals regulation REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) and the CLP regulation (Regulation on Classification, Labelling and Packaging of Sub- stances and Mixtures). The classification and labeling of chemicals enables users in the European Union to become informed about the risks associated with chemicals. Online Annex: A 1.4.3.1-1 Requirements of the REACH and CLP regulations met The registration obligation under REACH applies irrespective of marketing activities for all sub- stances that we produce or import in quantities of more than one metric ton. There is also an authorization procedure that limits the use of particularly hazardous substances or can lead to their replacement or ban. To fulfill the requirements of REACH, we have approved Group-wide and segment-specific policies. Bayer Annual Report 2016 A Combined Management Report 105 1.4 Sustainable Conduct Augmented Version Already registered substances are also regularly evaluated by the authorities. For Bayer sub- stances this can result in additional testing requirements, new risk management measures or inclusion in the REACH authorization procedure. To date, one Bayer substance has required authorization. The authorities enforce the implementation of REACH through regular inspec- tions. So far none of the inspections at Bayer has resulted in complaints. We also require our suppliers to confirm conformity with REACH for all substances they supply to us. In the European Union, the Globally Harmonized System (GHS) for the classification and label- ing of chemicals is implemented through the CLP regulation. The purpose of the GHS is to achieve a globally standardized system for classifying chemicals and labeling them appropriate- ly on packaging and in safety data sheets. Bayer assesses all its marketed products and im- plements the GHS worldwide. Before any product is introduced to the market, we assess it to determine whether it is safe. Furthermore, the end products from our Life Science segments – such as pharmaceuticals, crop protection products and biocides – are subject to specific approval / authorization procedures. Biocides: see Glossary Voluntary commitment by Bayer Since 1994, Bayer has supported the voluntary Responsible Care™ initiative of the chemical in- dustry and the associated Responsible Care™ Global Charter. We cover all main elements of the charter at all Group sites with our HSEQ management systems. We are also actively involved in the further development of scientific risk assessment through our work in associations and initia- tives. www.icca-chem.org/ responsible-care Online Annex: A 1.4.3.1-2 Comprehensive support for association activities International associations such as the European and international chemical industry associa- tions (CEFIC,(cid:3031)ICCA) and the OECD (Organisation for Economic Cooperation and Development), as well as initiatives such as ECETOC (European Centre for Ecotoxicology and Toxicology of Chemicals), work to evolve the scientific assessment of chemicals, develop new test methods and oversee the implementation of statutory regulations. Bayer actively supports these efforts through its activities in the associations. We are also involved, for example, in the ICCA Long- Range Research Initiative and in the WHO and E.U. action plans for improving health and envi- ronmental protection. In addition, we support the Global Product Strategy (GPS), a voluntary commitment of the chemical industry initiated by the International Council of Chemical Associa- tions (ICCA). Its objective is to improve knowledge about chemical products, especially in Emerging Markets and developing countries, and thus increase safety in the handling of these products. We continuously evaluate our substances’ properties already at the research and development stage. The development of products with undesirable properties is discontinued in application of the precautionary principle. Online Annex: A 1.4.3.1-3 We accept the precautionary principle as explained in Principle 15 of the Rio Declaration of the United Nations and communiqué COM (2000) 1 of the European Commission as a possible consumer protection and risk management tool. It is applied whenever there is no final scien- tific certainty in a given area and evidence also exists that people or the environment could suf- fer significant or irreversible damage. In our view, the focus should not be unilaterally on hazard potential, but rather on a balanced benefit-risk evaluation. 106 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Group target 2020: assessment of the hazard potential of all substances > 1 metric ton p.a.; see also A 1.2.1 In Europe we operate under strict legal requirements. We voluntarily apply comparable standards around the world, independent of the respective national legislation. In this way we are ensuring that substance assessments comparable to those established under REACH will also be applied at all non-European Bayer sites. We support this through our Group target for product steward- ship: by 2020, we will assess the hazard potential of all substances of our Life Sciences (> 99%) used in quantities exceeding one metric ton per annum. By the end of 2016 we had assessed 66% of these substances. The applicable assessment steps and measures are established in our Corporate Policy “Substance Information and Availability.” We carry out risk assessments for chemicals according to recognized scientific methods such as those described in the Guidance on Information Requirements and Chemical Safety Assessment of the ECHA (European Chemicals Agency). Should the analysis reveal that it is not safe to use a certain chemical, we take the steps to mitigate risks. Product information for safe use We pay special attention to our customers in the safe handling and use of our products. Bayer compiles safety data sheets for all products regardless of whether or not these are legally re- quired. We offer suitable packaging information for all end consumer products, an example being package inserts for pharmaceuticals. Online Annex: A 1.4.3.1-4 Continuous examination and communication Risk mitigation measures can range from revised application recommendations to the substitu- tion of a substance. In this case, the use of the substitute must be economically and technically feasible. The substitution of chemicals is basically a continuous task for the chemical and pharmaceutical industry in order to generate new or substantially improved products and pro- cesses. This is integral to our commitment to Responsible Care. Safety data sheets are the central means of communication for safety-relevant information about substances and mixtures in the supply chain. Targeting professional users, they contain information on the substance’s properties and on its safe use. In addition, technical information is provided for professional use. In accordance with the respective product safety and information obligations, all segments com- pile product information both for raw materials and for intermediates or end products. IT systems enable worldwide access to this information, including as regards product labeling. Risk assessment of products on the market Our stewardship also involves the monitoring of all products that are already available on the mar- ket. We have established processes throughout the company aimed at addressing inquiries on product safety or problems with our products. This feedback is consistently accounted for in our risk assessment, which also covers substances that are regarded as potentially high-risk by regu- latory authorities and independent institutions. Responsible use of biotechnology We currently use biotechnological methods in pharmaceutical product development and production and in the area of crop protection. At Pharmaceuticals, the products involved include Betaferon™ / Betaseron™, Eylea™ and Kogenate™, while at Animal Health this concerns Zelnate™ – a nonantibiotic immunostimulant product. Further biotechnologically manufactured active ingredients are undergoing clinical development. Plant biotechnology can improve and secure crop yields and the stress tolerance of plants. Bayer Annual Report 2016 A Combined Management Report 107 1.4 Sustainable Conduct Augmented Version For Bayer, safety is a priority in the use of biotechnology. In addition to legal and regulatory re- quirements, Bayer has formulated a corporate policy on the responsible use of gene technology. We provide our stakeholders with comprehensive information about our products and services in accordance with our Corporate Policy “Responsible Marketing & Sales.” Online Annex: A 1.4.3.1-5 Activities of the segments Pharmaceuticals, Consumer Health and Animal Health have established strict safety measures for handling biological agents in the global “Biological Safety” and the “Requirements for the safe handling of biological agents” procedural instructions. Crop Science has established the necessary requirements for the responsible use of biotech- nology in both the Product Stewardship Policy and the Seeds Stewardship Directives. Further- more, Crop Science maintained its focus on the conscientious use of plant biotechnology products through its membership of the Excellence Through Stewardship (ETS) organization. Audits by ETS-certified auditors are required to maintain ETS membership, and in 2016 Crop Science completed eight audits in Europe, the United States and Africa. Our commitment to preserving biodiversity We take into account influences on biodiversity throughout the entire value chain and have estab- lished our principles in our own position. There we commit ourselves to the United Nations Con- vention on Biological Diversity and the associated Nagoya Protocol, which regulates access to genetic resources and the balanced and fair sharing of the arising benefits. Crop Science commits itself through an internal policy to ensure that Bayer only acquires and uses genetic resources in harmony with international and national legislation. Online Annex: A 1.4.3.1-6 Biodiversity strengthens the resilience of ecosystems and is a key condition for the mainte- nance of sustainable agriculture. With its products and services, Crop Science contributes to this. Our goal is to help our customers to integrate responsible crop protection methods into agricultural operations and to preserve soil and water quality and the habitats of insects, polli- nators and birds. We work together with farmers on solutions for producing more food through sustainable agriculture without, for example, increasing the use of crop protection products. Various ecological enhancement measures are undertaken to support resilient ecosystems, such as enhancing the biodiversity of pollinators by planting flowering strips and the more ex- tensive cultivation of slopes to protect against erosion. These can help farmers improve, for ex- ample, soil fertility and water regulation in their fields, or boost the pollination activities of in- sects and thus increase their yields and biodiversity. At the Bayer ForwardFarms, the host farmers and the company demonstrate to the public how sustainable agriculture and ecological enhancement measures work in practice. www.forward farming.com In addition, as a member of the Association of Research-Based Pharmaceutical Companies, Bayer supports the association’s position on the U.N. Convention on Biological Diversity. Among other things, a corresponding policy, which applies to all sites of Pharmaceuticals and Consumer Health, takes into account that both segments concentrate on the chemical synthe- sis of substances using state-of-the-art technologies in medicinal, combinatorial and computa- tional chemistry. If natural substances are used during research into new pharmaceuticals, they are first checked with respect to compliance with the Convention on Biological Diversity. 108 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 www.animalstudies. bayer.com 3Rs principle: see Glossary www.etoxproject.eu/ www.imi-marcar.eu/ project.html www.imi.europa.eu/ content/k4dd Innovative Medicines Initiative (IMI): see Glossary Commitment to animal welfare Animal studies are legally required and essential from a scientific viewpoint to assess the safety and efficacy of our products. We aim to minimize the use of study animals and to employ alterna- tive methods whenever possible. We respect all legal requirements pertaining to animal welfare, compliance with which is verified through both regulatory authorities and internal audits. Bayer’s principles on animal welfare and animal studies apply in countries without special legislation. Bayer’s Global Animal Welfare Committee monitors compliance with these guidelines within the Bayer Group and in external studies. Our principles also apply to both the research institutes we commission and our suppliers, whose compliance with our animal welfare requirements we regu- larly monitor. Online Annex: A 1.4.3.1-7 Commitment to reducing animal studies Based on the performance indicators of our Animal Welfare Committee, we each year analyze the development of animal numbers, the distribution according to species and the burden placed on our test animals, as well as evaluate studies and discuss possible steps in accord- ance with the 3Rs principle (replace, reduce, refine). We are able to demonstrate that since 2005, the number of study animals used per €1 million research budget (including animals in Bayer studies performed by contract research organizations) has declined from 96 animals to around 27 animals in 2016. Bayer participates in several consortia and projects that aim to reduce the number of animals used in studies or improve the studies’ validity. We participate, for example, in the Center for Alternatives to Animal Testing (CAAT), and scientists from Pharmaceuticals are involved in the leadership of the eTOX project and in the MARCAR and K4DD projects within the scope of the Innovative Medicines Initiative (IMI). Employees from Crop Science are represented on the Board of Administration and the Scientific Committee of the European Centre for Ecotoxicology and Toxicology of Chemicals (ECETOC). In Germany, we are active in the Centre for Documen- tation and Evaluation of Alternative Methods to Animal Experiments. Protection against product counterfeiting Counterfeit medicines and crop protection products harbor substantial risks for patients and con- sumers. Product counterfeiting can only be addressed internationally through a joint approach by industry, associations, governmental agencies and nongovernmental organizations. Bayer consist- ently advocates the strengthening and expansion of existing laws and provisions aimed at the identification and confiscation of illegal products. We want to additionally protect customers and products through extensive measures of our own. www.bayer.com/ counterfeits Online Annex: A 1.4.3.1-8 Combating counterfeit medications Through the “Beware of Counterfeits” campaign, Bayer informs patients on the internet about the risks of counterfeit pharmaceuticals and provides patients with tips on how they can pro- tect themselves. Through the use of various technological means in production, we constantly strive to ensure that patients, too, can distinguish between original and counterfeit products. We support the establishment of a Europe-wide system for the identification of original phar- maceuticals that satisfies the requirements of the E.U. Falsified Medicine Directive. In addition, Bayer participates in the Pharmaceutical Industry Initiative to Combat Crime of Interpol to coun- teract pharmaceutical counterfeiting. In 2016, a research project (ALPhA) supported by the German Ministry of Education and Research with Bayer’s participation was completed. This es- tablished the need for a minimum harmonization of criminal conduct definitions and penalties at the E.U. level in criminal law relating to medicine. Close cooperation between all stakeholders is necessary in the future to achieve practical success in fighting counterfeiting and prevent the sale of counterfeit pharmaceuticals on the internet. Bayer is intensively involved in such allianc- es and has been a partner to the “Innovation Power for Safety in Industry” initiative since 2016. Bayer Annual Report 2016 A Combined Management Report 109 1.4 Sustainable Conduct Augmented Version Combating illegal crop protection products To protect against the import of counterfeit and illegal crop protection products into the E.U., Crop Science intensively advocates the uniform interpretation and implementation of existing E.U. regulations in all E.U. member states. We support regulatory authorities worldwide through chemical analysis to identify counterfeit products. In addition, we conduct our own inspections in the market in all countries and actively support initiatives by associations. In 2016, we re- viewed our strategy to protect against illegal crop protection products and rolled the revised version out worldwide. As part of our product stewardship programs, we provide information material about the risks of counterfeit and illegal crop protection products and train customers, dealers, farmers and regulatory authorities. We document all indications of suspicious and potentially counterfeit or illegal Crop Science products. We work constantly to counterfeit-proof our products through the use of security features. In 2016, we identified patent and trademark violations in China, In- dia and Brazil, and successfully defended our rights. Pharmaceuticals and Consumer Health Benefit-risk management for pharmaceuticals and medicinal products The Pharmaceuticals and Consumer Health segments continuously assess the medical benefit- risk profile of their pharmaceuticals and medicinal products throughout their entire product life cycle. The efficacy, safety and tolerability of pharmaceuticals are studied in Phases I-III of preclini- cal and clinical development. The documentation submitted to the regulatory authorities contains the results of these studies and a comprehensive benefit-risk assessment. It is essential for a new pharmaceutical or medicinal product to satisfy regulatory safety requirements if it is to receive marketing authorization. According to these regulations, the segments continue to compile safety- relevant information in a dedicated database following market launch. This information is continu- ously assessed and the benefit-risk balance regularly evaluated by medical experts of various disciplines in the global Pharmacovigilance Department. In this process, Bayer works closely with the regulatory and supervisory authorities at international and national levels. Further safety- relevant information is compiled using Post-Authorization Safety Studies (PASS) conducted after approval. The results are entered into the PASS registry in compliance with E.U. pharmacovigi- lance legislation. Online Annex: A 1.4.3.1-9 Responsibility of safety management teams The Pharmaceuticals and Consumer Health segments have a global pharmaceutical monitoring system in which experts from various disciplines work together in safety management teams (SMTs). These teams evaluate the benefit and safety data and other relevant product infor- mation so as to identify potential safety concerns at an early stage or detect possible changes in the benefit-risk ratio. In addition to internal safety data from clinical trials, post-marketing studies and spontaneous adverse event reports, the company uses external databases and information from scientific publications to conduct assessments. SMTs produce detailed safety risk management plans that are updated as soon as relevant new benefit-risk data become available. Implementation of risk mitigation activities is coordinated by local SMTs in the country organizations. All processes are documented, regularly updated and integrated into the quality management system. Should risks be identified, Bayer immediately undertakes steps to safeguard the health of pa- tients and consumers in coordination with the authorities. These measures range from updating product information for patients, consumers and physicians through patient education bro- chures and further training measures for medical specialists to direct communication with med- ical experts (Direct Healthcare Professional Communication, DHPC) and even product with- drawals if necessary. The most important regulatory authorities for Bayer are: – the U.S. Food and Drug Administration (FDA) – the European Medi- cines Agency (EMA) – the Pharmaceuticals and Medical Devices Agency Japan (PMDA) – the China Food and Drug Administration (CFDA) Pharmacovigilance: see Glossary 110 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Analysis of residues of pharmaceuticals in the environment Active pharmaceutical ingredients can enter the environment through human or animal excreta, through improper disposal or during production. Surface waters are particularly relevant here. Pharmaceuticals and Consumer Health carry out their own ecotoxicological investigations of pharmaceutical residues and degradation products to assess the potential environmental impact of these products. In connection with the approval process for human and veterinary pharmaceu- ticals in Europe and the United States, an environmental risk assessment takes place for all new active ingredients. Based on currently available information, the existing concentrations of individ- ual active pharmaceutical ingredients in drinking water do not have any relevant adverse effects on human health. This subject is dealt with in particular by a WHO report on pharmaceuticals in drinking water published in 2012 that comes to the conclusion that traceable effects on human health through the current extent of exposure via drinking water are highly improbable. We are following the discussion and actively participating in the stakeholder dialogue. Bayer complies worldwide with all statutory requirements regarding wastewater thresholds at its production sites. In line with the regulatory requirements, these are reviewed by supervisory au- thorities and external consultants and also at regular intervals through audits by internal experts. To further reduce or completely avoid traces of pharmaceuticals entering the environment, we are taking our own measures in production. In addition, as part of the Eco-Pharmaco-Stewardship initiative of European pharmaceutical associations, we have adopted their methods for the risk assessment of pharmaceutical traces in production wastewater. Bayer has reviewed its production sites according to these methods and, where necessary, taken site-specific measures aimed at a further reduction. We are also participating actively in various research projects to develop reduc- tion measures. www.medicinesforeurope .com/key- topics/#section-5 Online Annex: A 1.4.3.1-10 Participation in extensive research projects Bayer coordinates the “Intelligence-led Assessment of Pharmaceuticals in the Environment” project in Europe, which seeks new ways to improve environmental risk assessment. The goal is to develop models and methods for determining possible environmental risks of pharmaceu- tical substances in early development stages and to prioritize for further environmental assess- ment existing substances that previously have not been evaluated. In Germany, Bayer, as member of the steering committee, participated in the “Risk Manage- ment of Emerging Compounds and Pathogens in the Water Cycle” initiative sponsored by the German Ministry for Education and Research (BMBF). At the conclusion of the initiative in 2016, the results were presented and, overall, Germany’s flowing waters were attested to be in good condition. Within the scope of the precautionary principle, however, further-reaching purification of wastewater is recommended for the future. Bayer is also involved in the stakeholder dialogue initiated by the German government in 2016 on the issue of micropollutant strategy. This dialogue process is aimed at developing a strategy to prevent the water-polluting effects of certain chemicals, including active pharmaceutical in- gredients. The results and recommended measures are expected to be summarized in a posi- tion paper in the summer of 2017. Bayer Annual Report 2016 A Combined Management Report 111 1.4 Sustainable Conduct Augmented Version Crop Science Focusing on product safety Product safety and environmental compatibility play a central role in the development of crop protection products and technologies so that they are harmless to people and animals and can be used without constituting an unjustifiable ecological burden. For this they require official authoriza- tion, which is regulated by numerous international and national laws and provisions. The require- ments for marketing authorization, particularly as pertains to the environment, have risen sharply in recent years. Crop Science satisfies all the regulatory requirements of the countries in which our products are sold. In tests required by law, Crop Science already examines the products during the development phase with regard to their mode of action, their (eco)toxicological properties and the extent of potential remaining trace concentrations in plants and the environment. Each new crop protection active ingredient and each new technology must undergo these studies and tests to ensure that the active ingredient can be applied effectively as a product and that its use or that of the relevant technology is safe for people, animals and the environment. Furthermore, Bayer has made a voluntary commitment to market only those crop protection prod- ucts whose active ingredients are registered in at least one OECD country. In its sale and applica- tion of crop protection products and technologies, Crop Science observes the International Code of Conduct on Pesticide Management of the United Nations Food and Agriculture Organization (FAO). We implement all major aspects of responsible product handling in our Product Steward- ship Program, which is based on the principles of our Product Stewardship Policy. Online Annex: A 1.4.3.1-11 Model projects for water protection in agriculture The targeted use of crop protection products that minimize discharge outside of the treated crops is very important to Crop Science. Through best management practices, Crop Science supports agriculture in safe and environmentally friendly land cultivation and the disposal of re- sidual liquids following the application of crop protection products. In the area of water pollution mitigation, we give recommendations and advice to our custom- ers particularly with regard to biological remediation systems such as Phytobac™. These sys- tems are intended to prevent point source discharges of crop protection active ingredients into water bodies that are generated during the filling and cleaning of spraying devices or the dis- posal of residual liquids. The system is now being tested in numerous E.U. countries and of- fered commercially by suppliers. In Europe, around 4,100 remediation systems are currently in operation. www.bayer.com/ phytobac Erosion and runoff processes on agricultural land can also lead to substance emissions into ad- jacent water systems. In this context, we are collaborating with external partners on the devel- opment of a web-based geoinformation system for water protection in agriculture. This enables the visualization of site-related risks by means of high-resolution risk maps supplemented with proposals for proven procedures. It is planned for this system to be used as an advisory tool for water protection in agriculture. To more effectively account for increasing demands with regard to environmental protection and occupational health and safety, Crop Science and its external partner agrotop GmbH have developed a closed, contamination-preventing discharge system for liquid crop protection products. It consists of sealed canisters that enable partial and full discharge and completely clean themselves. 112 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 www.beecare.bayer.com Bayer Bee Care: strengthening bee health As a Life Science company, we know how important healthy bees are as pollinators for sustaina- ble food production and are aware of the key role they play in ecosystems. Promoting the health of pollinators and sustainable agriculture is of tremendous importance for our business. Within our Bee Care Program, we combine all activities in the area of pollinator health and safety. We operate Bee Care Centers in Germany and the United States for this purpose and have also established a global Bee Care network. Online Annex: A 1.4.3.1-12 Objectives of the Bee Care Program Health problems among bees and other pollinators are caused by a number of complex factors. These include pests, parasites, disease, extreme environmental and weather conditions, the availability of food, and certain agricultural and beekeeping practices. Bayer is involved in nu- merous projects and partnerships to more closely study these factors and strengthen bee health. Within the framework of the Bee Care Program, we proactively approach numerous stakeholder groups – including industry partners, scientists, farmers, beekeepers, governmental agencies, nongovernmental organizations, investors and representatives of the food value chain. Our goal is together to seek opportunities for cooperating in the field of bee and general pollinator health and to make our activities more transparent. For example, in 2016 we participated in a round of discussions in London on bee protection organized by Hermes Investment Management. Activities to effectively protect bees In North America, Bayer has launched a public appeal to create new foraging habitat for bees as part of its “Feed a bee” initiative. In addition, in the United States, through the partnership with the bee research society “Apis m.,” important stimulus was gained in 2016 for implement- ing research projects whose results benefit beekeeping (Healthy Hives 2020 program). In Germany, Bayer looks at how insect biodiversity-enhancing measures work and is conduct- ing a major, multi-year study on this subject in agriculturally oriented regions. In South America, we finance projects studying the attractiveness of various crops so as to better understand the relationship between pollinators and local crops and to optimize the use of crop protection products. In connection with research into controlling the Varroa mite, a dangerous parasite for honey bees, Bayer has developed a plastic strip treated with an active ingredient that protects bee- hives from mite infestation. The product is expected to be available to beekeepers by 2017 to combat the Varroa mite. We do everything possible to minimize risks to bees – through extensive safety testing, risk as- sessment, product stewardship measures and the development of bee-friendly crop protection products and processes. Ongoing re-evaluation of neonicotinoids We are convinced that neonicotinoids are user-safe insecticides with a positive environmental profile, and are not dangerous to bees when used responsibly and according to labeling in- structions. This was confirmed by risk evaluations performed during marketing authorization re- views by the responsible authorities of countries outside Europe. In Europe, however, Bayer products that contain two of our neonicotinoid compounds have been prohibited since 2013 from use in crops that are attractive to bees. The European Commission has recently instructed the European Food Safety Authority (EFSA) to examine all newly available data and reports from the past two years. The results are expected for the beginning of 2017. Neonicotinoids: see Glossary Bayer Annual Report 2016 A Combined Management Report 113 1.4 Sustainable Conduct Augmented Version Bayer has brought the restriction on neonicotinoid use in the E.U. before the Court of Justice of the European Union in order to clarify the legal basis of the Commission’s decision. This deci- sion is based on an assessment by the EFSA that in turn is based on neither a validated nor an officially recognized risk assessment system. With a view to future investment decisions, the company is primarily asking that the court clarify the regulatory framework. Involving customers and partners The application of crop protection products requires the greatest possible care. We therefore support our customers and partners worldwide in the proper and safe handling of our seed and crop protection products. Targeted training measures particularly for farmers and dealers are de- signed to improve safety for users and thus also the environment and consumers. The objective is to increase the scope of our training activities worldwide. Online Annex: A 1.4.3.1-13 Training for farmers and Bayer employees We continued our training activities worldwide in 2016. Farmers were taught how to use crop protection products effectively and safely, and thus increase the yield and quality of their harvested goods. Subsequently, new marketing possibililties can arise that offer smallholder farmers in particular the chance to generate higher profits. Safe use training offerings are an important aspect here. In 2016, around 950,000 farmers worldwide were trained in the safe use of crop protection products. The majority of these train- ing measures took place as part of customer events since safety training is an integral part of our business activity. We also conducted safe use training courses in numerous countries in 2016 in cooperation with partners such as local, regional and international associations. Bayer focuses on training activities in countries where there are no statutory requirements as regards certification in the safe handling of crop protection products. We therefore establish plans of action with our regional organizations for the respective prioritized countries that are then implemented locally. Our product stewardship measures also include internal employee training measures. Our Product Stewardship Policy provides information on all principles for the responsible handling of our products, combined with specific instructions for use for our employees and those who work with our products. Users of our products can contact Crop Science through a range of communication channels should they have complaints or feedback or wish to report any incidents. These include direct contact with our sales staff; our standard hotline, which is printed on all our product packaging; and, in Germany for example, the “Agrar Telefon” expert hotline. Animal Health Safety standards for animal health products In line with the statutory requirements, strict safety and quality standards also apply to animal health products, animal feed and feed additives. Within the scope of the approval / authorization procedures, Animal Health carries out detailed studies in order to ensure the safety of its products for the treated animals, people and the environment alike. A particular focus lies on monitoring veterinary pharmaceutical safety and on activities aimed at responsible product use. 114 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Online Annex: A 1.4.3.1-14 Safety and control system for animal health products We continuously compile all safety-relevant information such as reports of suspected adverse effects of pharmaceuticals in our own global safety database. This information is evaluated and reported to the responsible authorities in accordance with national regulations. In this process, Animal Health works closely with the responsible regulatory and supervisory authorities at the national and supranational levels. This includes especially the European Medicines Agency (EMA) and the national agencies in the EEA, the U.S. Food and Drug Administration (FDA), the Environmental Protection Agency (EPA) and the responsible authorities in other countries. Responsible use of antibacterial active ingredients We work together with veterinarians, pharmacists, farmers and private animal-owners world- wide to promote the correct handling of our products. We participate in the “European Platform for the responsible use of medicines in animals” and engage in dialogue with stakeholders from academia, politics and society. In line with our “Prudent Use Policy,” we support the responsible use of antibiotics, in particular of fluoroquinolones. We are convinced that effective antibacterial active ingredients are essen- tial for the treatment of infectious diseases in animals. Animal Health promotes their proper use, for example through strict guidelines. We also work intensively on the development of alterna- tive strategies to antimicrobial treatment. Since 2015, we have been marketing Zelnate™, a nonantibiotic immunostimulant. Covestro Comprehensive assessment of health, safety and environmental risks The safe handling and use of our products are of utmost importance. Besides statutorily required safety information, therefore, Covestro provides additional information such as safety summaries within the scope of the Global Product Strategy (GPS) of the International Council of Chemical Associations (ICCA). Covestro complies with all regulatory requirements for the protection of consumer health, including the use of the chemical bisphenol A. The company makes available both GPS information and product safety assessments through the “Product Safety First” inter- net portal. Online Annex: A 1.4.3.1-15 As a contribution to the safe handling of chemicals, risk assessments are conducted according to recognized scientific principles. Here Covestro makes use, for example, of the Guidance on Information Requirements and Chemical Safety Assessment of the ECHA (European Chemicals Agency). On the basis of a hazard assessment and an exposure assessment, it is determined what additional information is required to describe the risk posed by a product. All product groups undergo a multi-stage product safety assessment. 1.4.3.2 Safety Safety management and the continuous development of a safety culture are a cornerstone of corporate responsibility in the Bayer Group. Preventing accidents and incidents in day-to-day work, when operating production facilities, and on work-related travel and transportation routes where people or the environment may suffer harm or damage has top priority for us. Responsibility for safety is defined through appropriate directives such as our Corporate Policy “Safety at the Bayer Group.” Our safety management is based on four pillars: www.productsafetyfirst. covestro.com Bayer Annual Report 2016 A Combined Management Report 115 1.4 Sustainable Conduct Augmented Version Safety Pillars Act SAFE, Respect LIFE ! A 1.4.3.2/1 Occupational Health & Safety Process & Plant Safety Transportation Safety Product Stewardship Behavioral Safety Occupational health and safety Safeguarding the occupational health and safety of our employees, and of the employees of con- tractors and suppliers on our company premises and under the supervision of Bayer, is one of our core tasks. This entails preventing work-related accidents and occupational illnesses, assessing potential hazards, ensuring comprehensive risk management and creating a healthy working envi- ronment. The rate of occupational injuries has been falling for several years. Intensive training once again contributed to this success in 2016. The basis of our reporting on occupational injuries is the Recordable Incident Rate (RIR), which covers all injuries to employees requiring medical treatment that goes beyond simple first aid. This includes injuries both with and without lost workdays. In 2016, the RIR rate dropped to 0.39 cases per 200,000 hours worked, corresponding to 489 occupational injuries worldwide. This means that, in statistical terms, one recordable incident occurred for almost every 516,000 hours worked. We were also able to improve with respect to our Group target (RIR excl. Covestro). The Lost Time Recordable Incident Rate (LTRIR), which exclusively records reportable injuries with lost workdays, was higher than in the previous year. Online Annex: A 1.4.3.2-1 Occupational illnesses are included in both parameters (LTRIR and RIR), regardless of whether or not they are listed in national registers of occupational diseases. As lists of occupational dis- eases are not globally standardized and in many countries do not exist at all, we document all occupational illnesses, provided they have been diagnosed and recognized by a physician. 14 new cases of occupational illnesses were reported throughout the Bayer Group in 2016. Most of these were related to the musculoskeletal system and were caused, for example, by com- puter work or lifting. Bayer universally and regularly subjects all workplaces to a risk assessment and a hazard anal- ysis. These analyses are used to derive risk mitigation measures that, in conjunction with tar- geted studies, are designed to prevent occupational illnesses from arising. In accordance with our occupational health and safety policy, we offer our employees regular medical examinations – in some cases on a mandatory basis – in all countries in which this is legally permissible. The focus here is on the risks that exist at each workplace. Furthermore, all respective country- specific provisions for mandatory examinations are complied with. Regrettably, four people lost their lives in work-related accidents in 2016. Two Bayer employees were killed in traffic accidents and two contractor employees died after falling from heights, in- cluding from scaffolding. All the fatalities occurred in India. See also A 1.4.1 Group target 2020: reduction of 35% in occupational safety incident rate (RIR); see also A 1.2.1 116 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Recordable Occupational Injuries Occupational injuries without lost workdays (RIR 1) Occupational injuries without lost workdays (RIR 1) Life Sciences Occupational injuries with lost workdays (LTRIR 2) Fatal injuries (total) of which Bayer employees of which contractor employees 3 A 1.4.3.2/2 2012 2013 2014 2015 2016 0.49 0.50 0.27 2 2 – 0.47 0.49 0.26 2 1 1 0.43 0.44 0.22 4 3 1 0.42 0.43 0.21 2 2 – 0.39 0.40 0.23 4 2 2 1 RIR = Recordable Incident Rate 2 LTRIR = Lost Time Recordable Incident Rate 3 Employees working for third parties whose accidents occurred on our company premises and under Bayer supervision Online Annex: A 1.4.3.2-2 Recordable Incident Rate (RIR) by Region Europe / Middle East / Africa North America Asia / Pacific Latin America Total 2015 figures restated 2012 0.58 0.53 0.21 0.42 0.49 2013 0.75 0.49 0.20 0.31 0.47 2014 0.68 0.64 0.14 0.25 0.43 A 1.4.3.2-2/1 2015 0.62 0.58 0.12 0.32 0.42 2016 0.46 0.65 0.14 0.38 0.39 As in previous years, we hardly recorded any accidents involving contact with chemicals in 2016. A significant proportion of our accidents and injuries have behavior-linked causes. Our Behavioral Safety Program launched by the Group Board of Management is addressing this problem. Online Annex: A 1.4.3.2-3 Behavioral Safety Program heightens safety awareness This initiative focuses on safety-conscious conduct by our employees. To prevent behavior- related accidents, we introduced an extensive Behavioral Safety Program in 2015. To this end, the existing safety culture was recorded and evaluated in all fields of work, primarily, however, in the production units. We evaluated 54 sites of the Crop Science, Pharmaceuticals and Con- sumer Health segments around the world in 2016 and, based on the results of these evalua- tions, drew up plans of action. Intensive training measures are in place to prevent accidents and injuries in the future before they happen. Initial behavioral improvements have been identi- fied in areas in which the program has already been implemented. Specific training goals are designed to help reduce the Recordable Incident Rate. Process and plant safety We aim to design and operate our processes and facilities in such a way that they do not pose any inappropriate risks to employees, the environment or the community. To improve the safety of our production facilities and processes worldwide, Bayer is continually working to further develop the safety culture, the expertise of employees and the relevant standards for assessing risks. The corresponding Corporate Policy “Process and Plant Safety” updated in 2016 specifies globally harmonized procedures and standards. This is regularly reviewed to take into account changes in legislation, new procedures and additional quality assurance processes. Bayer Annual Report 2016 A Combined Management Report 117 1.4 Sustainable Conduct Augmented Version Online Annex: A 1.4.3.2-4 In a key move to maintain and improve safety awareness, the globally binding training program TOPPS (Top Performance in Process and Plant Safety) has been further extended. Participation in this program is compulsory for all Bayer employees who are able to influence process and plant safety at production and auxiliary facilities and is documented in the Bayer training sys- tem. This rule has become an integral part of the Group’s HSEQ management systems. TOPPS training documentation for face-to-face training and web-based training is available in several languages. The central Bayer competence center for process and plant safety in Leverkusen, Germany, the regional centers in Asia and the United States, and plant safety experts at all production sites work together in a global network. Online Annex: A 1.4.3.2-5 Our experts work in international working groups such as the European Chemical Industry Council (CEFIC) on developing a global reporting standard for key performance indicators in plant safety and are also heavily involved in sharing experiences in this area, both nationally and internationally, at an industrial level. A globally standardized KPI – Loss of Primary Containment (LoPC) – applies as an early indicator for plant safety incidents and is integrated into Group-wide safety reporting. LoPC refers to the leakage of chemical substances or energy in amounts above defined thresholds from their primary containers, such as pipelines, pumps, tanks or drums. The LoPC Incident Rate (LoPC-IR) indi- cates the number of LoPC incidents per 200,000 hours worked. In 2016, the LoPC-IR was 0.32 (2015: 0.22). Bayer’s LoPC reporting is based on the standards of the European Chemical Indus- try Council (CEFIC), which apply throughout Europe. Online Annex: A 1.4.3.2-6 The causes of every reported LoPC incident are analyzed to further improve safety at existing plants. The results of the cause analyses are publicized across the Group. The LoPC-IR param- eter and the globally established training program for process and plant safety are helping us to improve employees’ safety awareness. The reporting threshold was set at such a low level that even material and energy leaks that have no impact on employees, neighbors or the environment are systematically recorded and reported. This approach supports our commitment to maintain the integrity of our facilities. Rate of Plant Safety Incidents (LoPC-IR) Loss of Primary Containment Incident Rate (LoPC-IR) 1 LoPC-IR 1 Life Sciences 1 Number of LoPC incidents per 200,000 working hours A 1.4.3.2/3 2012 0.38 0.21 2013 0.35 0.16 2014 0.23 0.13 2015 0.22 0.11 2016 0.32 0.17 Group target 2020: reduction of 30% in process and plant safety incidents; see also A 1.2.1 118 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 As part of its Group-wide crisis management, Bayer operates a global early warning system – the Bayer Emergency Response System. Online Annex: A 1.4.3.2-7 A corporate policy provides a globally applicable standard procedure for recording and report- ing unusual incidents such as hazards to the safety of our employees, plants or facilities, and regulates the Bayer Group’s crisis management. The handling of such incidents is the respon- sibility of the local crisis organization/emergency response team. For this purpose, organiza- tional precautions with defined responsibilities and procedures have been implemented at the sites/in the countries. Depending on the situation, these involve business partners and the local community around the sites. Transportation safety Great importance is attached to transportation safety within the Bayer safety culture. This applies both to the transportation of our products on public routes, particularly of hazardous goods, and to processes such as loading, unloading, classification, labeling, packaging and selecting the right logistics partners. These are decided on using a defined procedure, and their fulfillment of safety and quality standards is assessed. The implementation of a dedicated corporate policy ensures that all materials are handled in line with applicable regulations and the potential hazard they pose. As part of our voluntary Responsible Care activities, transportation safety instructions are also drawn up for nonhazardous materials and corresponding distribution safety audits performed. Our transportation safety management is an integral part of HSE management and is implemented by a network of experts and users with practical experience. Online Annex: A 1.4.3.2-8 Details are specified in the corporate policies “Health, Safety, Environment and Quality (HSEQ) Audits” and “Transportation Safety.” A globally aligned transportation safety committee acts as a forum for exchanging information and standardizing procedures between the segments. In 2016, the panel focused on issues such as training in transportation safety, the review of inter- nal process instructions and the evaluation, selection and auditing of our logistics service pro- viders. In total, well over three million transport movements took place in 2016. Bayer aims to minimize the number of incidents through preventive measures. Despite our extensive safety precautions and training activities, residual risks can result in transport incidents. These include accidents that cause personal injury or significant damage to property and environmental impact resulting from the release of substances or leakage of hazardous goods. They are recorded in detail and as- sessed based on defined criteria. The 12 transport incidents in 2016 were mainly traffic accidents. Online Annex: A 1.4.3.2-9 Transport Incidents by Means of Transport Road Rail Sea Total A 1.4.3.2-9/1 2012 2013 2014 2015 2016 6 0 0 6 8 0 3 11 11 1 0 12 11 1 0 12 12 0 0 12 Bayer Annual Report 2016 A Combined Management Report 119 1.4 Sustainable Conduct Augmented Version The following table provides an overview of the transport incidents in 2016. Transport Incidents 2016 1 Crop Science, Belford Roxo, Brazil, February 13, 2016 During transportation, a truck loaded with Bayer product tipped over, causing a product spill. This was cleaned up and disposed of in a professional manner. Covestro, Verona, Italy, March 18, 2016 During transportation, the packaging of a pallet was damaged, leading to leakage of a product. The product was cleaned up and disposed of in a professional manner. Covestro, Erftstadt, Germany, April 12, 2016 During an evasive maneuver, a tank trailer loaded with a Covestro product tipped over on a highway. No product leaked out. A 1.4.3.2-9/2 Personal injury No No Yes Crop Science, Thane, India, June 13, 2016 A truck loaded with Bayer product was involved in a traffic accident. A passer-by died as a result of the accident. Yes Covestro, Le Muy, France, June 27, 2016 A truck loaded with Covestro product collided with other vehicles at the tail end of a traffic jam. A driver from a transport company died as a result of the accident. No product leaked out. Covestro, São Paulo, Brazil, July 5, 2016 During transportation, drums containing product were damaged. These and the product that had leaked into the catchment space were cleaned up and disposed of in a professional manner. Covestro, Springfield, Missouri, United States, July 10, 2016 A truck trailer overturned during transportation. Around 2,500 kg of granules escaped. The content of the container and the released granules were taken up and disposed of in a professional manner. The driver suffered minor injuries. Covestro, Oldenburg, Germany, August 17, 2016 During loading at a logistics service provider, a product container was damaged. The material that had leaked inside the truck and the residual amount still in the container were taken up and disposed of in a professional manner. Pharmaceuticals, Leverkusen, Germany, October 27, 2016 A truck loaded with Bayer product collided with a mobile sign truck. A highway maintenance worker died as a result. Covestro, Tashkent, Uzbekistan, November 3, 2016 During transportation, two product containers were damaged. The material that had leaked inside the tank and the residual amount still in the containers were taken up and disposed of in a professional manner. One of the customer’s employees suffered a slight injury. Crop Science, Belford Roxo, Brazil, November 19, 2016 Following a collision with another vehicle, a truck loaded with Bayer product tipped over, spilling the content of one container on the road. This was cleaned up and disposed of in a professional manner. Crop Science, Villefranche, France, November 22, 2016 While loading a truck, a container of product was damaged by a forklift truck. The product was cleaned up and disposed of in a professional manner. Yes No Yes No Yes Yes No No 1 Standard practice at Bayer is to record every fatality reported to us relating to our business activities. A difference between the number of fatalities in Table A 1.4.3.2/2 and Table A 1.4.3.2-9/2 may occur because for occupational injuries, by definition, we show only fatalities of Bayer and contractor employees who were under immediate Bayer supervision. 1.4.3.3 Environmental Protection We meet our responsibility to protect the environment in many different ways. We are continuously working to reduce the environmental impact of our business activities and develop product solu- tions that benefit the environment. For us, an efficient approach to raw materials and energy makes both ecological and economic sense. Our measures help reduce environmental impact and at the same time cut the costs associated with materials, energy, emissions and disposal. We use many means to make our production processes more resource-friendly and lower the emissions they generate. In line with our claim we are also committed to minimizing wastewater pollution. Systematic waste management and recycling activities reduce the amount of materials to be disposed of. 120 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Responsibilities and framework conditions are stipulated at Group level, e.g. by corporate policies, targets and key performance indicators (KPIs). We use certified HSEQ management systems to control operational implementation. Our environmental standards apply worldwide. Energy consumption Total energy consumption slightly higher than last year In 2016, the Group’s total energy consumption rose by 1.6% to 84.5 petajoules. In calculating the total energy consumption, we differentiate between primary energy consumption – mainly of fossil fuels for our own generation of electricity and steam – and secondary energy consumption, which reflects the purchase of electricity, steam and refrigeration energy and the use of process heat. Primary energy consumption rose in 2016 by 1.0% and secondary energy consumption by 2.2%. This increase in energy requirements is due to increased production activities at the Leverkusen and Krefeld-Uerdingen sites in Germany. Energy Consumption in the Bayer Group 1 TJ 2012 2013 2014 2015 2016 A 1.4.3.3/1 Primary energy consumption for the in-house generation of electricity & steam Natural gas Coal Liquid fuels Waste Other 2 Secondary energy consumption Electricity 3 Steam Steam from waste heat (process heat) Refrigeration energy Total energy consumption Total energy consumption Life Sciences 49,047 30,411 15,954 656 1,005 1,021 34,137 25,849 (121) 9,144 (735) 83,184 28,481 47,582 29,796 15,094 416 1,282 994 33,266 25,560 (801) 9,146 (639) 80,848 27,972 45,572 31,580 12,611 421 833 127 39,745 27,177 3,579 9,639 (650) 85,317 26,288 42,996 28,813 12,755 350 1,523 (445) 40,186 25,977 4,694 9,974 (459) 83,182 24,677 43,424 27,552 13,420 465 1,800 187 41,070 28,070 3,576 10,010 (586) 84,494 26,243 1 Energy consumption is netted which may result in negative values. 2 E.g. hydrogen 3 The proportion of primary energy sources used in generating the electricity consumed depends on the respective national electricity mix. Energy efficiency target of Life Science areas achieved and newly formulated We measure energy efficiency based on the relationship between energy consumption in mega- watt hours (MWh) and manufactured sales volume (in metric tons). With a reduction of 0.5%, the manufactured sales volume of the Life Sciences was about the same level as the previous year, while energy consumption rose by around 6.3%, mainly at our service company Currenta, which serves among other functions as the energy provider for Bayer and third parties. As a result, our energy efficiency deteriorated by around 6.8% compared with the previous year. Energy Efficiency in MWh/t Energy efficiency of Life Sciences A 1.4.3.3/2 2012 8.86 2013 8.54 2014 7.62 2015 6.34 2016 6.77 Group target 2020: improvement of 10% in energy efficiency; see also A 1.2.1 In line with our Group target, we are endeavoring to improve energy efficiency by 10% by 2020 compared to 2012. With an increase in energy efficiency of almost 24% compared with the base year 2012, we had achieved this target by the end of 2016. On account of Covestro becoming legally independent, the magnitude of our manufactured sales volume and also our energy requirement has significantly fallen. For that reason, when calculating Bayer Annual Report 2016 A Combined Management Report 121 1.4 Sustainable Conduct Augmented Version our energy efficiency in the future we want to use a more appropriate reference value for our product portfolio. With effect from reporting year 2017, we shall indicate energy efficiency for our Life Science areas Pharmaceuticals, Consumer Health, Crop Science and Animal Health as the relationship between the energy we use and our external sales, instead of the manufactured sales volume. For that reason, we have adjusted our previous target so that it is now to improve our energy efficiency by 10% by 2020 compared with the base year of 2015. Combined heat and power processes account for high proportion of in-house energy generation Around 90% of our own energy generation comes from highly efficient combined heat and power processes. In addition, we purchase electricity on the market – through energy exchanges, for example. The electricity and heat generated and purchased are used in our own production facili- ties and third-party facilities (especially of Lanxess Deutschland GmbH as the other shareholder of our service company Currenta). The proportion of renewable energies is determined by the energy mix of our energy suppliers. We comment in detail on these issues in our CDP Report. CDP: see Glossary www.bayer.com/ CDP-Climate Air emissions At Bayer, air emissions are caused mainly by the generation and consumption of electricity, steam and process heat. Thanks to the various measures in our Bayer Climate Program – such as intro- ducing energy management systems and production / process innovations – we have achieved a significant reduction in emissions over the past 10 years, which goes hand in hand with an im- provement in energy efficiency. We have documented our successful reduction of greenhouse gas (GHG) emissions in the CDP reports and in 2016 received an excellent rating, the leadership sta- tus with the highest score of A. As a Life Science company too, we want to continue helping to protect the climate on several levels. This includes reducing our production-related emissions with ambitious targets relating to energy efficiency and cutting specific greenhouse gas emissions. In the future, we will be focusing more on lowering emissions in nonproduction areas. These include our vehicle fleet (Sustainable Fleet initiative), looking into increased use of electric vehicles (electric mobility programs), further developing our information and communication technologies (Green IT) in terms of environmental aspects and investigating potential ways to lower greenhouse gas emissions along the value chain. Online Annex: A 1.4.3.3-1 We are also working further to reduce our CO2 emissions in connection with our global fleet of over 25,000 vehicles. At an average level of 145 g/km for the just over 5,000 vehicles newly registered in 2016, these remained at approximately the same level as in 2015 (141 g/km). Our goal is to reduce average CO2 emissions to 110 g/km for new vehicles registered in 2020. To achieve this, we shall implement further measures in 2017 such as pilot projects on e-mobility. Transparency on greenhouse gas emissions Bayer reports all Group greenhouse gas emissions in line with the requirements of the Greenhouse Gas Protocol (GHG Protocol). Direct emissions from our own power plants, waste incineration plants and production facilities (Scope 1) and indirect emissions from the procurement of electrici- ty, steam and refrigeration energy (Scope 2) are determined at all production locations and rele- vant research and administrative sites. GHG Protocol: see Glossary Since 2015, we have reported in line with the updated GHG Protocol guideline for Scope 2, which states that indirect emissions must be reported according to both the location-based and the market-based methods. 122 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Group Greenhouse Gas Emissions 1 Million metric tons of CO2 equivalents Total direct emissions 2 of which from Life Sciences 3 Total indirect emissions to the location-based method 4 according of which from Life Sciences 3 Total indirect emissions to the market-based method 4 according of which from Life Sciences 3 Total greenhouse gas emissions according to the market-based method 5 of which from Life Sciences 3 Specific greenhouse gas emissions from Life Sciences (t CO2e / t) according to the market-based method 5,6 3 2012 4.24 0.75 4.71 0.88 4.72 0.93 8.96 1.68 2013 4.09 0.73 4.85 0.89 4.91 0.93 9.00 1.66 2014 4.02 0.69 5.03 0.90 5.53 0.96 9.55 1.65 A 1.4.3.3/3 2016 4.30 0.73 5.00 0.88 5.57 0.93 9.87 1.66 2015 4.41 0.91 4.94 0.88 5.30 0.92 9.71 1.83 1.88 1.83 1.72 1.69 1.54 1 Portfolio-adjusted in accordance with the GHG Protocol 2 In 2016, 84.21% of emissions were CO2 emissions, 15.38% N2O emissions, just under 0.37% partially fluorinated hydrocarbons and 0.04% methane. 3 Excluding Currenta 4 Typically, CO2 in incineration processes accounts for over 99% of all greenhouse gas emissions. When determining indirect emissions, our calculations are therefore limited to CO2 and indicate direct emissions in CO2 equivalents. 5 The market-based method of the new Scope 2 GHG Protocol most reliably reflects the indirect emissions and the success of emissions reduction measures, so we used emissions volumes calculated using this method when calculating the total and specific greenhouse gas emissions. 6 Specific Group emissions are calculated from the total volume of direct emissions, indirect emissions calculated using the market- based method of the new Scope 2 GHG Protocol and emissions from the vehicle fleet, divided by the manufactured sales volume of the segments in metric tons. Quantities attributable to the supply of energy to external companies are deducted from the direct and indirect emissions. In line with the GHG Protocol, in our energy balance we include all greenhouse gas (GHG) emis- sions from the conversion of primary energy sources into electricity, steam or refrigeration energy, even though a significant proportion of our direct emissions comes from the generation of energy that is delivered to other companies. Consequently, our absolute figures for greenhouse gas emis- sions are higher than the actual emissions resulting from Bayer’s business activities alone. In 2016, we recorded a slight increase of 1.7% in total GHG emissions in the Group, although those of the Life Sciences without Currenta fell by 9.5%. Direct emissions diminished across the Group by 2.4%, mainly due to the sale of the chemical park infrastructure at the site in Institute, West Virginia, United States. Indirect emissions (market-based method) rose by 5.1%. This was essentially due to enhanced energy requirements as a result of increased production activities at the Chempark Leverkusen, Dormagen and Krefeld-Uerdingen sites in Germany. We were again able to reduce the specific greenhouse gas emissions (total emissions divided by the manufac- tured sales volume) of our Life Sciences (here excluding Currenta). With a reduction of 18% com- pared with 2012 levels, we have already achieved our previous Group target of reducing specific greenhouse gas emissions by 15% by the year 2020. As with the calculation method for our energy efficiency, we are also intending to change our re- porting of specific greenhouse gas emissions from 2017 onward. We are planning to indicate these as the relationship between the greenhouse gas emissions of our Life Sciences and our external sales instead of the manufactured sales volume. We have thus adjusted our Group target accordingly and are looking to achieve a 20% reduction in specific greenhouse gas emissions by 2020 compared with 2015. This new target more adequately reflects our contribution to climate protection and takes into account our new corporate orientation as a Life Science company. Group target 2020: reduction of 15% in specific greenhouse gas emissions; see also A 1.2.1 Bayer Annual Report 2016 A Combined Management Report 123 1.4 Sustainable Conduct Augmented Version The reporting of all relevant indirect emissions from the value chain is bindingly regulated by the GHG Protocol Corporate Value Chain (Scope 3) Accounting & Reporting Standard. Following a thorough examination, Bayer has identified nine essential Scope 3 categories, which we report on in detail in the CDP Report. www.bayer.com/ CDP-Climate In 2016, the Bayer Group was involved in European emissions trading with 18 plants in total. The greenhouse gas emissions of these plants amounted to approximately 2.32 million metric tons of CO2 equivalents. Other direct emissions into the air reduced Emissions of ozone-depleting substances (ODS) fell by 23.0% in 2016. Emissions of volatile or- ganic compounds (VOCs) excluding methane decreased by 30.5%. Online Annex: A 1.4.3.3-2 The main source of both types of emissions is the Crop Science site in Vapi, India, which accounts for 96.0% of ODS emissions and 48.0% of VOC emissions at Bayer. The project ini- tiated at this site four years ago to reduce these emissions continues to have an impact. Group-wide VOC emissions fell by 30.5% compared with the previous year, and ODS emis- sions by 23.0%. Another subproject was implemented at Vapi in 2016: a central waste air treatment facility brings together the many different sources of emissions at the site, which in the future will lead to a further significant reduction in these emissions. Through the optimized operation of the power plants at the German sites in Leverkusen and Krefeld-Uerdingen, total emissions of sulfur dioxides fell by 15.3%. Particulate emissions also declined, in this case by 29.1%, caused by the reduction at the Covestro site in Baytown, Tex- as, United States. Nitrogen oxide emissions were 2.2% lower. Carbon monoxide emissions in- creased by 7.4%, on the other hand. This is the result of an improved analysis method at the German sites in Dormagen and Krefeld-Uerdingen. Other Direct Air Emissions 1,000 metric tons ODS 1 VOC 2 CO NOX SOX Particulates 1 Ozone-depleting substances (ODS) in CFC-11 equivalents 2 Volatile organic compounds (VOC) excluding methane A 1.4.3.3-2/1 2012 2013 2014 2015 2016 0.0163 0.0157 0.0148 0.0117 0.0090 2.60 1.00 3.07 1.85 0.18 2.27 0.94 2.51 1.32 0.16 2.12 0.91 2.36 1.22 0.25 1.61 0.93 2.42 1.17 0.23 1.12 1.00 2.36 0.99 0.16 Higher number of environmental incidents The number of environmental incidents – i.e. incidents that result in the release of substances into the environment – increased from two to three in 2016. Factors that determine whether there is a reporting obligation include, in particular, the nature and quantity of the substance, the amount of damage caused and any consequences for nearby residents. In accordance with our internal voluntary commitment, we report any leakage of substances with a high hazard potential from a quantity of 100 kg upward. A 1.4.3.3/4 Number of Environmental Incidents 2012 2013 2014 2015 2016 5 10 4 2 3 0 6 12 124 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Online Annex: A 1.4.3.3-3 Environmental Incidents 2016 Pharmaceuticals, Wuppertal, Germany, April 18, 2016 A large volume of wastewater flowed into a nearby river on account of a leak at a sewer shaft. The leak could be repaired. Pharmaceuticals, Karachi, Pakistan, June 23, 2016 During transfer from a main container to a day tank, 2,000 l of diesel accidentally leaked into a drain. Covestro, Antwerp, Belgium, July 28, 2016 An unintentional leak of solvent occurred upon starting a pump. The contaminated soil was taken up and disposed of in a professional manner after consultation with the relevant authorities. A 1.4.3.3-3/1 Personal injury No No No The following incident was registered and analyzed but does not count as an environmental incident under Bayer criteria. Incident Not Considered an Environmental or Transport Incident under Bayer Criteria Description Comments A 1.4.3.3-3/2 Animal Health, Kiel, Germany, April 3, 2016 Spillage of liquid waste in a storeroom A waste container fell down causing the spillage of a flammable liquid product. This was cleaned up and disposed of in a professional manner. Due to the small quantity involved, the incident was not recorded as an environmental incident but as a plant safety incident (LoPC). Use of water and emissions into water Effective water management at sites in water-scarce areas Clean water in sufficient quantities is essential for supplying our production sites and the sur- rounding areas. In the future too, industrial water usage must not lead to local problems such as a shortage of water for the people living in the area. Our Water Position commits us to compliance with international and local legislation to protect water resources and use them efficiently. Group target 2017: establishment of water management at all sites in water-scarce areas; see also A 1.2.1 We used the WBCSD Global Water Tool™ to identify all Bayer sites that are located in regions affected or threatened by water shortage. In line with our Group target, these sites are to establish a water management system that takes the local conditions sufficiently into account by 2017. This involves analyzing their water usage, quality and discharge data annually along with site-specific initiatives using a method developed at Bayer. During the evaluation in 2015, specific measures were agreed to initiate more effective water management at the sites where there is room for im- provement. The analysis in the reporting year revealed that the proportion of sites examined that have effective water management has increased from around 58% (2015) to 95% (2016). Online Annex: A 1.4.3.3-4 This has been achieved, for example, by establishing measures to control water consumption more closely and make greater use of rainwater. In addition, the efficiency of treatment cycles in production processes has been further improved and measures have been taken to recycle wa- ter. Employee training and awareness campaigns encouraging economical water usage have also proved productive. Bayer Annual Report 2016 A Combined Management Report 125 1.4 Sustainable Conduct Augmented Version Bayer supports the CEO Water Mandate of the U.N. Global Compact with the goal of working with key stakeholders to develop sustainable strategies for water usage. In our annual response to the CDP Water Disclosure, we report in detail on our water usage, the company-specific water footprint and the associated opportunities and risks. This represents a progress report for the CEO Water Mandate. Water use In 2016, total water use in the Group fell by 4.8% to around 330 million cubic meters. Some 79% of all water used by Bayer is cooling water that is only heated and does not come into contact with products. It can be returned to the water cycle without further treatment in line with the rele- vant official permits. At our production facilities, we endeavor to use water several times and to recycle it. Water is currently recycled at 36 sites, accounting for 42% of the total water use. The various forms of recycling include closed cooling cycles, reuse of treated wastewater and recircu- lation of steam condensates as process water. A total of around 11.8 million cubic meters of wa- ter was reused in 2016. CDP: see Glossary www.bayer.com/ CDP-Water Online Annex: A 1.4.3.3-5 Water Use in the Bayer Group in 2016 (million m³) A 1.4.3.3-5/1 Sources of water Water usage 1 Water discharged 1 Surface water 187 (57%) Cooling water 260 (79%) Boreholes / springs Drinking water supplies 124 (37%) 13 (4%) of which recycled / reused 12 (4%) Other sources 6 (2%) Production ² 70 (21%) Once-through cooling water 248 (77%) Losses due to evaporation 12 (4%) from cooling water circuits Process wastewater with subsequent treatment 47 (15%) Process wastewater without subsequent treatment 13 (4%) 1 The differences between volumes of water consumed and water discharged can be explained, for example, by unquantified losses due to evaporation, leaks, quantities of water used as raw materials in products and volumes of condensate generated through the use of steam as a source of energy. 2 Sum from production processes, sanitary wastewater and rinsing and cleaning processes in production The amounts of water from each source have remained at a comparable level since 2012. Online Annex: A 1.4.3.3-6 Net Water Intake by Source million m³ Water consumption of which from surface water of which from boreholes / springs of which from public drinking water supplies of which from other sources, e.g. rainwater A 1.4.3.3-6/1 2012 2013 2014 2015 2016 384 248 123 7 6 361 226 120 9 6 350 223 112 9 6 346 212 118 10 6 330 187 124 13 6 126 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 A 1.4.3.3/5 Process Wastewater Volume million m3 2012 2013 2014 2015 2016 65 63 66 61 60 0 40 80 Wastewater treatment benefits environment All wastewater is subject to strict controls before it is discharged into the various disposal chan- nels. The total quantity of wastewater, including process and sanitary wastewater, was 60 million cubic meters in 2016, which is 3.1% down on 2015. 78.5% of Bayer’s wastewater worldwide was purified in wastewater treatment plants (Bayer or third-party facilities). Following careful analysis, the remaining volume was categorized as environmentally safe according to official provisions. Part of it was used to water gardens and agricultural land. The goal is to minimize our emissions into wastewater. For this reason, in 2016, alternative means were applied, for example, for the disposal of 0.148 million cubic meters of product- containing wastewater such as incineration, distillation or chemical treatment. Discharges of phosphorus into wastewater fell by 14.2%, due among other reasons to reduced production volumes at the Kaohsiung site in Taiwan. All other emissions into water were lower than last year or at the same level. Emissions into Water 1,000 metric tons Phosphorus Nitrogen TOC 1 Heavy metals Inorganic salts COD 2 2012 0.15 0.70 1.42 2013 0.11 0.69 1.53 2014 0.10 0.76 1.20 2015 0.10 0.56 1.16 A 1.4.3.3/6 2016 0.09 0.57 1.14 0.0098 0.0091 0.0063 0.0064 0.0054 1,048 4.25 946 4.58 845 3.59 927 3.48 931 3.42 1 Total organic carbon 2 Chemical oxygen demand; calculated value based on TOC figures (TOC x 3 = COD) Waste and recycling Systematic waste management minimizes material consumption and disposal volumes. Safe disposal channels with separation according to the type of waste and economically expedient recycling processes serve this purpose. Production fluctuations and building refurbishment / land remediation work also influence waste volumes and recycling paths. Higher volumes of waste In 2016, the total volume of waste generated rose by 1.9% and the volume of nonhazardous waste by 3.1%, in particular due to demolition work at the Crop Science site in Institute, West Virginia, United States. With regard to hazardous waste generated, the volume from the power plant at the Chempark Leverkusen site rose by 1% owing to the recent categorization of fluidized bed ash as hazardous waste. Waste Generated 1 1,000 metric tons Total waste generated Hazardous waste 2 of which hazardous waste from production 2012 1,014 603 397 2013 2014 2015 2016 899 467 417 896 487 442 940 541 488 958 547 507 A 1.4.3.3/7 1 Waste generated by Bayer only 2 Definition of hazardous waste in accordance with the local laws in each instance Bayer Annual Report 2016 A Combined Management Report 127 1.4 Sustainable Conduct Augmented Version The volume of waste disposed of rose by 2.2% in total. The volume proportions for the three main types of disposal (landfill, incineration and recycling) have remained similar over the past five years. Online Annex: A 1.4.3.3-7 Recycling refers to processes that reutilize waste in some way. In 2016, the volume of recycled waste was 290,000 metric tons. Expressed as a proportion of the total waste disposed of, this represented a level of 30%. The amount of recycled waste depends on site-specific conditions such as changes to the product portfolio, other production volumes, variations in the intensity of construction measures and recycling projects. Waste by Means of Disposal 1,000 metric tons Total volume of waste disposed of 1 Volume removed to landfill Volume incinerated Volume recycled Others ² Total volume of hazardous waste disposed of 3 Volume removed to landfill Volume incinerated / recycled A 1.4.3.3-7/1 2012 1,021 360 341 301 19 603 175 428 2013 2014 2015 2016 915 293 351 249 22 467 53 414 898 248 363 260 27 487 65 422 949 248 371 296 34 541 75 466 969 267 336 290 76 547 67 480 1 Bayer serves as a certified waste disposal plant operator at various sites. At these locations, Bayer disposes not only of its own waste but also of waste from third parties (companies not belonging to the Bayer Group). For that reason, the volume of waste disposed of differs slightly from the volume of waste generated by Bayer. 2 E.g. passed on to third parties (e.g. providers / waste disposal companies) 3 Waste generated by Bayer only; definition of hazardous waste in accordance with the local laws in each instance In 2016, the waste incineration plants operated by Currenta generated approximately 675,000 metric tons of steam from the incineration of around 230,000 metric tons of hazardous waste from the Chempark sites and some external production companies. Compared to using fossil energy sources, this reduced CO2 emissions in 2016 by approximately 160,000 metric tons. Recycling potential realized In addition to satisfying economic and environmental criteria, the recycling and treatment of our materials also has to comply with legal requirements. This results in restrictions, in particular in the areas of pharmaceuticals and crop protection. Throughout the Group, we make use of opportuni- ties for recycling within the framework of legal regulations. Online Annex: A 1.4.3.3-8 Pharmaceuticals, Consumer Health and Animal Health Production-related recycling takes place in line with the requirements of the relevant production site. When determining the best means of disposal, recycling options are explicitly included, and are to be considered preferable to landfilling or incineration. The disposal of pharmaceuti- cal products is subject to strict safety criteria, so no recycling is possible for the portfolios of these segments. Packaging materials are recycled in line with national regulations as part of the country-specific infrastructure for waste disposal. 128 A Combined Management Report Augmented Version 1.4 Sustainable Conduct Bayer Annual Report 2016 Crop Science Material-based recycling is important in Crop Science’s active ingredient and intermediate product manufacture. Solvents, catalysts and intermediates are repeatedly processed and re- turned to the production process. Since these are recycling steps that are closely linked with the process, there is no global regulation. Material-based recycling is regulated separately at each production site. In the global process development of active ingredients and intermedi- ates, material recycling is considered an important development criterion. In accordance with Crop Science’s global Environment Policy, all Crop Science sites are obliged to prevent, recycle and reduce waste and dispose of it safely and in line with good environmental practices. Crop Science does not take back crop protection products it has sold, except in the case of production defects. Packaging materials are disposed of or recycled in line with national legisla- tion. In many countries with no legal regulation, the industry has set up a returns system in col- laboration with other providers. Returns of obsolete stocks of crop protection products are limited to justifiable individual cas- es. However, the crop protection product industry has set up voluntary initiatives in various countries for the proper disposal of obsolete stocks. As part of its activities in the CropLife as- sociation, Crop Science is working with the United Nations’ Food and Agriculture Organization (FAO) and the World Bank to support the proper collection and disposal of obsolete stocks in Africa. Covestro Covestro supports the reuse and processing of its materials. For example, some waste with a high calorific value generated by production processes can undergo thermal recycling to pro- duce steam for the company’s own production facilities. In parallel to this, Covestro is endeavoring to reduce the amount of waste resulting from prod- uct usage. Examples include its involvement in associations such as PlasticsEurope. Covestro continues to support, for example, the “Zero Pellet Loss” initiative, with the goal of preventing the loss of plastic pellets on the way from production to the finished article delivered to the cus- tomer. Bayer Annual Report 2016 A Combined Management Report 129 2.1 Overview of Business Performance Augmented Version 2. Report on Economic Position 2.1 Overview of Business Performance 2.1.1 Target Attainment 2016 A 2.1.1/1 Group targets 2016: growth and profitability; see also A 1.2.1 Forecast 2016 1 Adjusted forecast 2016 2 Target attainment Group sales Low-single-digit percentage increase 3 Unchanged 3.5% increase 3 More than €47 billion €46 – 47 billion €46.8 billion EBITDA before special items Mid-single-digit percentage increase High-single-digit percentage increase 10.2% increase Core earnings per share Mid-single-digit percentage increase High-single-digit percentage increase 7.3% increase 1 Issued in February 2016 2 Issued in October 2016 3 Currency- and portfolio-adjusted 2.1.2 Economic Position of the Bayer Group The Bayer Group had a very successful year in 2016 – both strategically and operationally. We achieved a new record in terms of operating performance. Sales improved by 3.5% on a curren- cy- and portfolio-adjusted basis and EBITDA before special items increased by a substantial 10.2%. Pharmaceuticals again showed a convincing performance, with pleasing sales and earn- ings growth. This was chiefly attributable to the continued strong development of our key growth products Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™. Consumer Health increased sales but earnings declined. Despite a persistently difficult market environment, sales and EBITDA before special items of Crop Science were constant. Animal Health posted sales gains but earnings were at the prior-year level. Overall, sales and earnings of our Life Science busi- nesses continued to develop positively. Covestro saw strong earnings growth due to lower raw material costs, while sales were level year on year. Core earnings per share of the Bayer Group increased by 7.3%. We thus met our full-year forecasts for these key data, some of which were raised in October 2016. 2.1.3 Key Events On September 14, 2016, Bayer signed a definitive merger agreement with Monsanto Company, headquartered in St. Louis, Missouri, United States, for US$128 per share. This represents a transaction value of around US$66 billion. At a special meeting on December 13, 2016, Monsan- to’s stockholders approved the company’s merger with a wholly owned subsidiary of Bayer AG. The agreed acquisition reinforces our leadership position as a Life Science company and is a major strategic step forward for our Crop Science business. The transaction is subject to custom- ary closing conditions, including receipt of required approvals from the relevant antitrust and other authorities. We expect closing of the transaction by the end of 2017. Record operating performance 130 A Combined Management Report Augmented Version 2.1 Overview of Business Performance Bayer Annual Report 2016 2.1.4 Economic Environment See also A 2.2.2 Global economy remains weak The global economy grew somewhat more slowly in 2016 than in the previous year. The pace of growth in the United States was much slower, especially as a result of restrained investment activity. The economy in Europe also clouded somewhat, despite low interest rates. This was due particularly to the uncertainty surrounding the schedule and shape of the United Kingdom’s exit from the European Union. The Emerging Markets once again registered solid growth that was down only slightly against the previous year. Economic Environment World European Union of which Germany United States Emerging Markets ² A 2.1.4/1 1 Growth 2015 1 Growth 2016 + 2.8% + 2.2% + 1.5% + 2.6% + 4.0% + 2.5% + 1.9% + 1.8% + 1.6% + 3.8% 2015 figures restated 1 Real GDP growth, source: IHS Global Insight 2 Including about 50 countries defined by Global Insight as Emerging Markets in line with the World Bank As of February 2017 Currency development Sales and EBITDA before special items of the Bayer Group in 2016 were impacted by negative currency effects of approximately €900 million (–1.9%) and about €15 million (–0.1%), respectively. Sales and EBITDA before special items of our Life Science businesses included negative currency effects of around €750 million (–2.1%) and about €10 million (+0.1%), respectively. Currency Development Life Sciences € million CAD CNY GBP JPY RUB USD All currencies Source: Bloomberg, annual average closing rates A 2.1.4/2 Delta Fx effect on sales Delta Fx effect on clean EBITDA Of which delta Fx effect from hedging (75) (133) (123) 228 (73) 9 (755) (15) 26 10 43 (85) 162 8 37 80 54 (36) (31) 171 329 2015 1.42 6.97 0.73 2016 1.47 7.36 0.82 134.28 120.06 67.23 1.11 73.79 1.11 While hedging transactions had a negative effect on earnings of €308 million in 2015, they made a positive contribution of €21 million in 2016. This represents a year-on-year increase of €329 million in the effect of hedging transactions on earnings. Sales, on the other hand, were impacted by con- version to currencies which appeared weaker. The margin for our Life Science businesses gained 0.6 percentage points from these opposing effects. Bayer Annual Report 2016 A Combined Management Report 131 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group 2.2.1 Earnings Performance of the Bayer Group Bayer Group Summary Income Statements See also A 2.4 A 2.2.1/1 Q4 2015 Q4 2016 Change % 2015 2016 Change % € million Net sales Cost of goods sold Selling expenses Research and development expenses 11,285 11,820 (5,397) (3,320) (5,395) (3,537) (1,256) (1,313) General administration expenses (566) (685) Other operating income (+) and expenses (–) EBIT 1 Financial result Income before income taxes Income taxes Income after income taxes (total) of which attributable to non-controlling interest of which attributable to Bayer AG stockholders (net income) 175 921 (164) 757 (166) 583 (30) 613 (101) 789 (252) 537 (119) 507 54 + 4.7 0.0 + 6.5 + 4.5 + 21.0 – 14.3 + 53.7 – 29.1 – 28.3 – 13.0 46,085 46,769 (21,040) (20,295) (12,272) (12,474) (4,274) (2,092) (166) 6,241 (1,005) 5,236 (1,223) 4,098 (4,666) (2,256) (36) 7,042 (1,155) 5,887 (1,329) 4,826 (12) 295 + 1.5 – 3.5 + 1.6 + 9.2 + 7.8 – 78.3 + 12.8 + 14.9 + 12.4 + 8.7 + 17.8 453 – 26.1 4,110 4,531 +10.2 2015 figures restated 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” Group sales up 3.5% (Fx & portfolio adj.) Sales of the Bayer Group rose by 3.5% (Fx & portfolio adj.) to €46,769 million (reported: +1.5%) in 2016, including €4,809 million in Germany. Our Life Science businesses contributed to this per- formance, growing sales by 4.7% (Fx & portfolio adj.) to €34,943 million. Sales of Pharmaceuticals advanced by an encouraging 8.7% (Fx & portfolio adj.) to €16,420 mil- lion. This development continued to be driven primarily by our key growth products. Consumer Health also raised sales by 3.5% (Fx & portfolio adj.) to €6,037 million. Despite a weak market environment, Crop Science posted sales of €9,915 million to match the prior-year level (Fx & port- folio adj.: +0.1%). Sales of Animal Health rose by 4.8% (Fx & portfolio adj.) to €1,523 million. Covestro sales were level year on year at €11,826 million (Fx & portfolio adj.: 0.0%). Changes in Sales % Volume Price Currency Portfolio Total 2015 figures restated Life Sciences 2015 + 5.1 + 0.6 + 5.0 + 5.0 + 15.7 2016 + 3.9 + 0.8 – 2.2 0.0 + 2.5 2015 + 4.4 – 1.7 + 5.8 + 3.6 + 12.1 A 2.2.1/2 Group 2016 + 4.2 – 0.7 – 2.0 0.0 + 1.5 132 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group The cost of goods sold fell by 3.5% to €20,295 million in 2016, mainly due to lower raw material costs at Covestro. The ratio of the cost of goods sold to total sales therefore declined year on year to 43.4% (2015: 45.7%). The selling expenses of €12,474 million (+ 1.6%) amounted to 26.7% of sales (2015: 26.6%). Research and development (R&D) expenses rose by 9.2% to €4,666 million, mainly due to higher R&D investment at Pharmaceuticals. The ratio of R&D ex- penses to sales was 10.0% (2015: 9.3%). General administration expenses climbed by 7.8% to €2,256 million, due especially to the establishment of administrative functions at Covestro. The ratio of general administration expenses to total sales therefore increased to 4.8% (2015: 4.5%). The substantially lower balance of other operating expenses and other operating income of minus €36 million (2015: minus €166 million) resulted mainly from positive effects from derivatives to hedge planned sales. EBITDA before special items considerably improved EBITDA before special items of the Bayer Group moved forward by 10.2% to €11,302 million (2015: €10,256 million). Pharmaceuticals improved EBITDA before special items by 13.8% to €5,251 million (2015: €4,616 million). This substantial increase in earnings was largely due to the good development of business, particularly for our key growth products. Consumer Health saw a decline in EBITDA before special items by 3.1% to €1,411 million. Favorable business develop- ment and cost synergies only partly offset the higher cost of goods sold and negative currency effects of about €65 million. EBITDA before special items of Crop Science came in at the prior- year level, up 0.6% to €2,421 million. A positive currency effect of about €140 million and higher selling prices stood against lower volumes, higher research and development expenses and higher impairment losses on trade accounts receivable in particular. EBITDA before special items of Ani- mal Health was also level with the previous year with a change of 0.6%, while Covestro registered a substantial 19.6% increase in EBITDA before special items to €1,984 million. Depreciation, amortization and special items Depreciation, amortization and impairment losses were 12.3% higher in 2016 at €3,743 million (2015: €3,332 million), comprising €2,235 million (2015: €1,802 million) in amortization and im- pairments on intangible assets and €1,508 million (2015: €1,530 million) in depreciation and im- pairments on property, plant and equipment. A total of €566 million (2015: €136 million) in impair- ments constituted special items. EBITDA for the reporting year amounted to €10,785 million. In 2016, the following special effects were taken into account in calculating EBIT and EBITDA before special items: A 2.2.1/3 + % growth in EBITDA before special items See also A 2.4 Special Items Reconciliation 1 € million Before special items Pharmaceuticals Consumer Health Crop Science Animal Health Reconciliation Restructuring Litigations Revaluation of other receivables EBIT Q4 2015 EBIT Q4 2016 EBIT 2015 EBIT 2016 EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 1,037 (190) (55) 301 (19) (9) (9) – – 1,376 7,060 8,130 1,916 (310) (199) (39) (5) (34) (34) – – (299) (237) 222 (64) (109) (76) (32) (1) (558) (292) (143) (7) (88) (83) (5) – (136) (52) 295 (8) (9) (9) – – 2,179 (152) (38) (37) (4) (34) (34) – – 10,256 11,302 (241) (234) 222 (30) (109) (76) (32) (1) (167) (115) (141) (6) (88) (83) (5) – Bayer Annual Report 2016 A Combined Management Report 133 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Special Items Reconciliation 1 € million Total special items Life Sciences Covestro Total special items of which cost of goods sold of which selling expenses of which research and development expenses of which general administration expenses of which other operating income / expenses After special items EBIT Q4 2015 EBIT Q4 2016 28 (144) (116) (169) (118) (51) (43) 265 921 (587) – (587) (193) (221) (18) (69) (86) 789 A 2.2.1/3 (continued) EBIT 2016 EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 90 (128) (38) (144) (107) (9) (43) (265) – (265) (53) (39) (17) (69) (392) (291) (683) (363) (183) (23) (517) – (517) (93) (99) (50) (203) (185) EBIT 2015 (487) (332) (819) (440) (198) (1,088) – (1,088) (412) (317) (67) (84) (203) (185) 89 6,241 (90) 7,042 265 1,878 (87) 1,914 89 (90) 9,573 10,785 2015 figures restated 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” EBIT EBIT increased by 12.8% in 2016 to €7,042 million, including special charges of €1,088 million (2015: €819 million). These mainly comprised €561 million for impairment losses on intangible assets, charges of €242 million in connection with efficiency improvement programs and €100 million in costs for the integration of acquired businesses. Further special charges of €94 million were related to provisions for litigations, while €86 million were connected with the agreed acquisition of Monsanto. EBIT before special items rose by 15.2% to €8,130 million (2015: €7,060 million). See also A 2.4 + growth in EBIT % Net income increased by 10.2% Including a financial result of minus €1,155 million (2015: minus €1,005 million), income before income taxes was €5,887 million (2015: €5,236 million). The financial result comprised items in- cluding net interest expense of €548 million (2015: €455 million), interest cost of €294 million (2015: €287 million) for pension and other provisions, and currency hedging costs of €193 million (2015: €254 million). After tax expense of €1,329 million (2015: €1,223 million), income after in- come taxes was €4,826 million (2015: €4,098 million). Including income after income taxes from discontinued operations and income attributable to noncontrolling interest, net income for 2016 amounted to €4,531 million (2015: €4,110 million; + 10.2%). Core earnings per share increased by 7.3% Earnings per share (total) rose by 9.5% to €5.44, while core earnings per share from continuing operations increased by 7.3% to €7.32. In November 2016, Bayer placed €4 billion in mandatory convertible notes without granting subscription rights to existing stockholders of the company. According to IAS 33.23, the weighted average number of shares increases as soon as the notes contract is signed, and this increase must be taken into account in calculating undiluted and dilut- ed earnings per share. The new weighted average number of shares is based on the minimum conversion price of €90, which determines the maximum conversion ratio. See also A 2.2.4 134 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Core Earnings per Share 1 € million EBIT (as per income statements) Amortization and impairment losses / loss reversals on intangible assets Impairment losses / loss reversals on property, plant and equipment Special items (other than amortization and impairment losses / loss reversals) Core EBIT Financial result (as per income statements) Special items in the financial result Income taxes (as per income statements) Special items in income taxes Tax effects related to amortization, impairment losses / loss reversals and special items Income after income taxes attributable to noncontrolling interest (as per income statements) Above-mentioned adjustments attributable to noncontrolling interest Core net income from continuing operations Shares Q4 2015 Q4 2016 921 529 55 38 789 724 14 265 1,543 1,792 (164) (120) (166) (39) (149) 30 (39) 896 (252) (61) (119) – (294) (54) (3) A 2.2.1/4 2016 7,042 2,235 35 517 9,829 (1,155) (105) (1,329) – 2015 6,241 1,802 115 683 8,841 (1,005) (150) (1,223) (39) (755) (838) 12 (39) (295) (13) 6,094 1,009 5,642 Weighted average number of shares 826,947,808 849,167,808 826,947,808 832,502,808 € Core earnings per share from continuing operations Core earnings per share from discontinued operations Core earnings per share from continuing and discontinued operations 1.08 – 1.08 1.19 0.10 1.29 6.82 0.13 6.95 7.32 0.41 7.73 2015 figures restated 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” Online Annex: A 2.2.1-1 Group targets 2016: growth and profitability; see also A 1.2.1 Development in the fourth quarter of 2016 Group sales in the fourth quarter of 2016 rose by 4.8% (Fx & portfolio adj.) to €11,820 million (reported: + 4.7%). Germany accounted for €1,103 million of this figure. Sales of Pharmaceuticals improved by 7.1% (Fx & portfolio adj.) to €4,275 million (reported: + 7.3%), due especially to the strong business development of our key growth products. Con- sumer Health increased sales by 4.4% (Fx & portfolio adj.) to €1,539 million (reported: + 2.2%). Sales of Crop Science were down slightly year on year, falling by 1.6% (Fx & portfolio adj.) to €2,404 million (reported: + 0.0%). Animal Health posted a 3.1% gain in sales to €329 million. Sales of the Life Science businesses amounted to €8,823 million overall (Fx & portfolio adj.: + 3.6%). Business at Covestro expanded by 8.6% (Fx & portfolio adj.) to €2,997 million (report- ed: + 8.0%). EBITDA before special items of the Bayer Group improved by 13.7% to €2,179 million in the fourth quarter of 2016 (Q4 2015: €1,916 million). At Pharmaceuticals, EBITDA before special items climbed by 12.2% to €1,217 million (Q4 2015: €1,085 million). This increase in earnings was due to the very good development of business, particularly for our key growth products. EBITDA before special items of Consumer Health receded by 3.4% to €372 million. At Crop Science, EBITDA before special items edged ahead by 1.2% to €351 million (Q4 2015: €347 million). EBITDA before special items of Covestro moved forward by a substantial 45.1% to €373 million (Q4 2015: €257 million). Bayer Annual Report 2016 A Combined Management Report 135 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version EBIT of the Bayer Group declined by 14.3% to €789 million in the fourth quarter of 2016 (Q4 2015: €921 million) after special charges of €587 million (Q4 2015: €116 million). These mainly comprised €330 million for impairment losses on intangible assets as well as charges of €104 million in connection with efficiency improvement programs and charges of €85 million re- lated to litigations. Also included were costs of €34 million in connection with the agreed acqui- sition of Monsanto and €30 million for the integration of acquired businesses. EBIT before spe- cial items advanced by 32.7% to €1,376 million (Q4 2015: €1,037 million). Bayer Group Quarterly Sales, EBIT and EBITDA before Special Items € millions Sales EBIT EBITDA before special items Q1 2016 11,854 2,320 3,387 2015 11,793 1,925 2,922 2015 12,003 1,823 2,888 Q2 2016 11,833 2,138 3,054 2015 11,004 1,572 2,530 Q3 2016 11,262 1,795 2,682 2015 11,285 921 1,916 Q4 2016 11,820 789 2,179 2015 46,085 6,241 10,256 A 2.2.1-1/1 Total 2016 46,769 7,042 11,302 After a financial result of minus €252 million (Q4 2015: minus €164 million), income before in- come taxes was €537 million (Q4 2015: €757 million). The financial result mainly comprised net interest expense of €147 million (Q4 2015: €46 million), interest cost of €85 million (Q4 2015: €67 million) for pension and other provisions, and currency hedging gains of €39 million (Q4 2015: currency hedging losses of €67 million). Net interest expense in the prior year includ- ed interest income of €109 million in connection with a litigation (DOW). After income tax ex- pense of €119 million, income from discontinued operations after taxes and noncontrolling in- terest, net income in the fourth quarter of 2016 came to €453 million (Q4 2015: €613 million). Earnings per share decreased to €0.53 (Q4 2015: €0.74). Core earnings per share from contin- uing operations rose to €1.19 (Q4 2015: €1.08). Cash inflows from operating activities (total) climbed by a substantial 45.6% to €2,732 million (Q4 2015: €1,877 million) and resulted mainly from the significant increase in EBIT and a tangi- ble decrease in additional cash tied up in working capital. In the fourth quarter of 2016, we paid income taxes amounting to €119 million (Q4 2015: €166 million). Net financial debt fell by €4 billion in the fourth quarter of 2016 to €11.8 billion (September 30, 2016: €15.8 billion), largely as a result of cash inflows from operating activities and the issuance of mandatory con- vertible notes. The net defined benefit liability for post-employment benefits decreased by €3.4 billion against September 30, 2016, to €11.1 billion, due primarily to a rise in long-term capital market interest rates for high-quality corporate bonds. 136 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group 2.2.2 Business Development by Segment Pharmaceuticals Market growth below the prior-year level In 2016, growth in the pharmaceuticals market slowed to 6% (2015: 10%). Growth in demand weakened particularly in the United States, but also in Europe and Japan. The pace of growth held steady in Asian and Latin American markets. Key Data – Pharmaceuticals Change % A 2.2.2/1 Change % € million Sales Change in sales Volume Price Currency Portfolio Sales by region Europe / Middle East / Africa North America Asia / Pacific Latin America EBITDA 1 Special items EBITDA before special items 1 EBITDA margin before special items 1 EBIT Special items EBIT before special items 1 Net cash provided by operating activities Q4 2015 Q4 2016 Reported Fx & p adj. 2015 2016 Reported Fx & p adj. 3,986 4,275 + 7.3 + 7.1 15,308 16,420 + 7.3 + 8.7 + 9.2% – 0.6% + 0.2% 0.0% 1,618 972 1,121 275 949 (136) 1,085 27.2% 569 (190) 759 + 7.2% – 0.1% + 0.2% 0.0% 1,684 1,107 1,203 281 1,065 (152) 1,217 28.5% 606 (310) 916 Reported Fx adj. + 6.0 + 12.6 + 3.6 + 8.0 + 4.1 + 13.9 + 7.3 + 2.2 + 12.2 + 12.2 + 6.5 + 20.7 + 9.1% 0.0% + 4.6% – 0.4% 5,981 3,937 4,319 1,071 4,375 (241) 4,616 30.2% 3,028 (299) 3,327 + 9.0% – 0.3% – 1.4% 0.0% 6,417 4,194 4,775 1,034 5,084 (167) 5,251 32.0% 3,389 (558) 3,947 Reported Fx adj. + 9.7 + 6.7 + 8.6 + 11.0 + 7.3 + 6.5 + 10.6 – 3.5 + 16.2 + 13.8 + 11.9 + 18.6 911 1,326 + 45.6 3,157 3,368 +6.7 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” + % growth in sales at Pharmaceuticals (Fx & portfolio adj.) Significant increase in sales Sales of Pharmaceuticals rose by an encouraging 8.7% (Fx & portfolio adj.) to €16,420 million in 2016, driven mainly by our key growth products. Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™ posted total combined sales of €5,413 million (2015: €4,231 million). The Pharmaceu- ticals business expanded noticeably in all regions. Bayer Annual Report 2016 A Combined Management Report 137 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Best-Selling Pharmaceuticals Products Q4 2015 Q4 2016 Reported Fx adj. Change % A 2.2.2/2 Change % 2016 Reported Fx adj. € million Xarelto™ of which U.S.A. Eylea™ of which U.S.A.1 Kogenate™ / Kovaltry™ of which U.S.A. Mirena™ product family of which U.S.A. Nexavar™ of which U.S.A. Betaferon™ / Betaseron™ of which U.S.A. YAZ™ / Yasmin™ / Yasminelle™ of which U.S.A. Adalat™ of which U.S.A. Aspirin™ Cardio of which U.S.A. Glucobay™ of which U.S.A. Avalox™ / Avelox™ of which U.S.A. Gadavist™ / Gadovist™ of which U.S.A. Xofigo™ of which U.S.A. Ultravist™ of which U.S.A. Stivarga™ of which U.S.A. 650 122 354 0 286 92 226 141 231 84 190 84 168 25 152 1 131 0 142 1 85 (2) 79 21 69 47 83 2 77 43 836 161 426 0 288 106 268 178 224 80 185 94 159 21 147 0 135 0 123 1 81 1 88 24 90 59 80 2 77 42 + 28.6 + 32.0 + 20.3 . + 0.7 + 15.2 + 18.6 + 26.2 – 3.0 – 4.8 – 2.6 + 11.9 – 5.4 – 16.0 – 3.3 . + 3.1 . – 13.4 . – 4.7 . + 11.4 + 14.3 + 30.4 + 25.5 – 3.6 . . – 2.3 + 9.7 + 27.9 + 32.6 + 20.9 . + 0.4 + 13.7 + 17.2 + 23.4 – 3.7 – 6.6 – 2.9 + 10.2 – 4.5 – 14.7 0.0 . + 5.8 . – 9.8 . – 0.2 . + 11.0 + 14.5 + 29.7 + 25.7 – 1.9 – 2.5 – 2.2 – 6.9 2015 2,252 393 1,228 0 1,155 370 968 639 892 324 824 394 706 134 633 4 524 0 523 2 379 2 290 86 257 182 318 6 313 181 Total best-selling products Proportion of Pharmaceuticals sales Total best-selling products in U.S.A. 2,923 73% 661 3,207 75% 769 Fx adj. = currency-adjusted 1 Marketing rights owned by Regeneron Pharmaceuticals Inc., U.S.A. + 10.0 11,262 12,342 74% 2,717 75% 2,896 Sales by product > Sales of Xarelto™ increased substantially in 2016, due particularly to expanded volumes in + Europe and Japan. We also posted significant gains for our license revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson. > We once again recorded strong growth with our eye medicine Eylea™, due especially to the successful development of business in Europe, Canada and Japan. > Sales of the blood-clotting medicines Kogenate™ / Kovaltry™ increased slightly, mainly because of the successful introduction of Kovaltry™ in the United States. > The considerable increase in sales of the hormone-releasing intrauterine devices of our Mirena™ product family (Mirena™, Jaydess™ / Skyla™ and Kyleena™) resulted particularly from the positive development in prices in the United States and from the introduction of the new low-dose product Kyleena™. > We registered a slight decline in sales of our cancer drug Nexavar™ that was chiefly attributable to higher competitive pressure in the United States. 2,928 489 1,625 0 1,166 394 1,043 701 870 312 734 386 678 128 624 1 538 0 515 3 353 5 346 104 331 225 316 6 275 142 + 30.0 + 24.4 + 32.3 . + 1.0 + 6.5 + 7.7 + 9.7 – 2.5 – 3.7 – 10.9 – 2.0 – 4.0 – 4.5 – 1.4 . + 2.7 . – 1.5 . – 6.9 . + 19.3 + 20.9 + 28.8 + 23.6 – 0.6 . – 12.1 – 21.5 +9.6 + 30.8 + 24.5 + 33.0 . + 1.1 + 6.0 + 8.8 + 9.3 – 1.6 – 4.0 – 9.9 – 2.1 + 0.1 – 4.4 + 2.7 . + 7.4 . + 3.3 . – 2.0 . + 19.7 + 20.5 + 29.3 + 23.6 + 3.5 + 1.2 – 11.7 – 22.0 +11.3 % growth in sales of our key growth products (Fx adj.) 138 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group > The decline in sales of our multiple sclerosis treatment Betaferon™ / Betaseron™ resulted mainly from weaker business performance in Europe and the United States. > Currency-adjusted sales of our YAZ™ / Yasmin™ / Yasminelle™ line of oral contraceptives were level with the previous year. Higher demand in China and Russia stood against weaker business development in Europe, Brazil and the United States. > Sales of Adalat™, our product to treat hypertension and coronary heart disease, rose slightly compared with the previous year; this was due especially to expanded volumes in China. > The increase in sales of Aspirin™ Cardio for the secondary prevention of heart attacks was owed mostly to an improved business situation in China and Latin America. > Business with our diabetes treatment Glucobay™ expanded; here we benefited from continuing high demand in China. > Sales of our antibiotic Avalox™ / Avelox™ fell slightly. The weak development of business in Canada and Europe was only partly offset by higher demand in China. > We once again posted strong growth in sales of our MRI contrast agent Gadavist™ / Gadovist™ that was attributable particularly to the significant expansion of volumes in Japan and the United States. > Sales of our cancer drug Xofigo™ advanced substantially, due particularly to the positive development of business in the United States and Europe. > Our X-ray contrast agent Ultravist™ posted an increase in sales that resulted mainly from higher volumes in Latin America and Europe. > Sales of our cancer drug Stivarga™ were well below the prior-year level, due especially to stronger competition in the United States. > Sales of Adempas™ to treat hypertension came in at €254 million (2015: €181 million; Fx adj. +39.3%) and included the proportionate recognition of the one-time payment resulting from the sGC collaboration with Merck & Co., United States, as was previously the case. Business developed especially positively in the United States. Earnings In 2016, we raised EBITDA before special items by 13.8% to €5,251 million. The substantial growth in earnings was largely attributable to our very good business development. Significantly higher investments in research and development and negative currency effects of around €65 million had an opposing effect. EBIT of Pharmaceuticals increased by 11.9% to €3,389 million, including special charges of €558 million (2015: €299 million). These resulted particularly from charges of €401 million associ- ated with Essure™, mainly for impairment losses on intangible assets. Further charges were asso- ciated with accounting measures of €88 million in connection with litigations and charges of €69 million for efficiency enhancement programs. A 2.2.2/3 Special Items 1 Pharmaceuticals € million Restructuring Litigations Integration costs Impairment losses / impairment loss reversals Divestments Revaluation of other receivables Total special items EBIT Q4 2015 EBIT Q4 2016 (132) (2) – (43) – (13) (190) (51) (89) – (170) – – (310) EBIT 2015 (174) (16) (2) (43) 3 (67) (299) EBIT 2016 EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 (69) (88) – (401) – – (558) (120) (2) – (1) – (13) (136) (51) (89) – (12) – – (152) (158) (16) (2) (1) 3 (67) (241) (67) (88) – (12) – – (167) 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Annual Report 2016 A Combined Management Report 139 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Online Annex: A 2.2.2-1 The development of Pharmaceuticals in 2016 is shown in the following graphics (A 2.2.2-1/1, A 2.2.2-1/2 and A 2.2.2-1/3). Pharmaceuticals Quarterly Sales Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 figures restated Pharmaceuticals Quarterly EBIT Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 A 2.2.2-1/2 € million Pharmaceuticals Quarterly EBITDA before Special Items 747 698 772 988 Q1 2015 2016 Q2 2015 2016 940 1,097 Q3 2015 2016 569 606 Q4 2015 2016 0 200 400 600 800 1,000 1,200 0 200 400 600 800 1,000 1,200 1,400 1,600 2015 figures restated A 2.2.2-1/1 € million 3,562 3,889 3,890 4,104 3,870 4,152 3,986 4,275 A 2.2.2-1/3 € million 1,085 1,261 1,193 1,352 1,253 1,421 1,085 1,217 140 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Consumer Health Market growth weaker than in the prior year In 2016, global development of the Consumer Health market was below the prior-year level at 4% (2015: 5%). Reasons for this included particularly the low rate of transitioning prescription medi- cines to over-the-counter status (Rx-to-OTC switch), a weaker cold season and reduced demand in the Emerging Markets. Key Data – Consumer Health € million Sales Changes in sales Volume Price Currency Portfolio Sales by region Europe / Middle East / Africa North America Asia / Pacific Latin America EBITDA 1 Special items EBITDA before special items 1 Change % A 2.2.2/4 Change % Q4 2015 Q4 2016 Reported Fx & p adj. 1,506 1,539 + 2.2 + 4.4 2015 6,076 2016 Reported Fx & p adj. 6,037 – 0.6 + 3.5 + 6.8% + 3.0% – 1.2% + 0.2% + 1.5% + 2.9% – 2.2% 0.0% 490 630 188 198 333 (52) 385 499 649 194 197 334 (38) 372 + 3.0% + 3.1% + 2.7% + 34.3% 1,955 2,635 738 748 1,222 (234) 1,456 24.0% 768 (237) 1,005 + 0.6% + 2.9% – 4.1% 0.0% 1,918 2,627 781 711 1,296 (115) 1,411 23.4% 695 (292) 987 + 2.7 + 1.6 + 3.2 + 18.7 + 1.8 + 3.0 + 3.2 – 0.5 + 0.3 – 3.4 – 64.9 + 7.2 + 1.5 – 0.1 + 8.1 + 17.1 – 1.9 – 0.3 + 5.8 – 4.9 + 6.1 – 3.1 – 9.5 – 1.8 EBITDA margin before special items 1 25.6% 24.2% EBIT Special items EBIT before special items 1 Net cash provided by operating activities 194 (55) 249 140 68 (199) 267 221 + 57.9 816 874 +7.1 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” + % growth in sales at Consumer Health (Fx & portfolio adj.) Sales up year on year Sales of Consumer Health rose by 3.5% (Fx & portfolio adj.) in 2016 to €6,037 million. We achieved significant gains in Latin America and Asia / Pacific on a currency-adjusted basis, and Europe / Middle East / Africa contributed to sales growth with a slight increase. Sales in North America came in at the prior-year level. Bayer Annual Report 2016 A Combined Management Report 141 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Best-Selling Consumer Health Products € million Claritin™ 1 Aspirin™ Aleve™ Bepanthen™ / Bepanthol™ Canesten™ Alka-Seltzer™ product family Dr. Scholl’s™ 1 One A Day™ Coppertone™ 1 Elevit™ Total Proportion of Consumer Health sales Q4 2015 Q4 2016 Reported 134 128 105 85 66 81 62 65 8 43 777 52% – 9.0 – 1.6 + 9.5 + 5.9 – 3.0 + 7.4 – 11.3 + 3.1 + 112.5 + 11.6 + 1.8 122 126 115 90 64 87 55 67 17 48 791 51% Change % Fx adj. – 12.6 + 0.5 + 8.6 + 6.2 + 10.0 + 7.7 – 11.7 + 1.7 + 96.0 + 10.4 + 2.2 Fx adj. = currency-adjusted 1 Trademark rights and distribution only in certain countries outside the European Union A 2.2.2/5 Change % 2015 2016 Reported Fx adj. 627 473 413 355 267 251 253 211 217 162 605 463 416 362 269 253 235 222 219 182 3,229 53% 3,226 53% – 3.5 – 2.1 + 0.7 + 2.0 + 0.7 + 0.8 – 7.1 + 5.2 + 0.9 + 12.3 – 0.1 – 2.6 + 2.4 + 2.1 + 9.2 + 13.4 + 2.2 – 6.9 + 5.3 + 1.4 + 17.2 + 3.2 Sales by product > Business with our antihistamine Claritin™ receded overall. Sales in Asia / Pacific were down against the strong prior year due to intensified competition and to price controls for prescription medicines in Japan. The gratifying increase in the United States due to a product line extension with ClariSpray™ only partly offset this effect. > Sales of our analgesic Aspirin™ increased moderately. The gains in the United States and Latin America more than offset declines in Europe that resulted from a weak cold season. Including business with Aspirin™ Cardio, which is reported under Pharmaceuticals, sales climbed by 5.0% (Fx adj.) to €1,001 million (2015: €997 million). > We registered a slight increase in sales of our analgesic Aleve™ that resulted from very favorable development in the United States, where we benefited from the addition of Aleve Tens™ to our product portfolio. > Sales of our Bepanthen™ / Bepanthol™ wound healing and skin care products advanced strongly, especially in Europe and particularly in France, Germany and Russia. > We achieved significant growth with our skin and intimate health brand Canesten™ thanks to expanded volumes in all regions. Business developed especially well in Germany, due primarily to Canesten Gyn™. > The Alka-Seltzer™ family of products to treat gastrointestinal complaints and cold symptoms registered slight growth that was mainly attributable to a product line extension in the United States. > Sales of our Dr. Scholl’s™ foot care products declined due to higher competitive pressure and a weak market environment in the United States. > We recorded pleasing sales development in the United States with our One A Day™ vitamin product, largely as the result of product line extensions and the expansion of our distribution channels. > Sales of our sunscreen product Coppertone™ were up slightly against the previous year. Higher demand in Asia / Pacific and Latin America more than offset declines in the United States. > Business with our prenatal vitamin Elevit™ saw particularly strong development. We posted double-digit-percentage growth rates in Asia / Pacific and Europe / Middle East / Africa. 142 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Earnings In 2016, EBITDA before special items declined by 3.1% to €1,411 million. Earnings were dimin- ished by a higher cost of goods sold and negative currency effects of approximately €65 million. These factors were partly compensated by the positive development of sales and cost synergies. EBIT of Consumer Health decreased by 9.5% to €695 million due to special charges of €292 million (2015: €237 million). These included €160 million for impairment losses on intangible assets (Triderm™ and Citracal™), €100 million for the integration of acquired businesses and €32 million for efficiency enhancement measures. A 2.2.2/6 Special Items 1 Consumer Health € million Restructuring Integration costs Impairment losses / impairment loss reversals Revaluation of other receivables Total Special Items EBIT Q4 2015 EBIT Q4 2016 (4) (50) (9) (30) – (160) (1) (55) – (199) EBIT 2015 (5) (225) – (7) (237) EBIT 2016 (32) (100) (160) – (292) EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 (1) (50) – (1) (52) (8) (30) – – (2) (225) – (7) (15) (100) – – (38) (234) (115) 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” Online Annex: A 2.2.2-2 The development of Consumer Health in 2016 is shown in the following graphics (A 2.2.2-2/1, A 2.2.2-2/2 and A 2.2.2-2/3). Quarterly Sales Consumer Health Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2015 figures restated A 2.2.2-2/1 € million 1,556 1,520 1,590 1,553 1,424 1,425 1,506 1,539 Bayer Annual Report 2016 A Combined Management Report 143 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Consumer Health Quarterly EBIT Consumer Health Quarterly EBITDA before Special Items A 2.2.2-2/2 A 2.2.2-2/3 € million € million Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 174 243 191 190 209 194 194 68 Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 369 383 362 328 340 328 385 372 0 50 100 150 200 250 0 100 200 300 400 2015 figures restated Crop Science Persistently weak market environment Overall, the global seed and crop protection market contracted slightly by around 1% in 2016 (2015: –2%). Whereas there was a small increase in demand for high-quality seed, sales of crop protection products decreased worldwide. Positive growth momentum in 2016 came from the North America and Eastern Europe regions. Market volumes decreased in Latin America, due especially to macroeconomic developments, unfavorable weather conditions and high inventories of crop protection products, particularly in Brazil. Key Data – Crop Science € million Sales Change in sales Volume Price Currency Portfolio Sales by region Europe / Middle East / Africa North America Asia / Pacific Latin America EBITDA 1 Special items EBITDA before special items 1 Change % A 2.2.2/7 Change % Q4 2015 Q4 2016 Reported Fx & p adj. 2015 2016 Reported Fx & p adj. 2,405 2,404 0.0 – 1.6 10,128 9,915 – 2.1 + 0.1 + 5.8% – 0.4% + 5.1% + 0.7% – 0.4% – 1.2% + 1.6% 0.0% 470 438 365 431 527 384 1,132 1,062 642 295 347 314 (37) 351 + 1.3% + 0.4% + 6.9% + 0.7% – 1.3% + 1.4% – 2.3% + 0.1% Reported Fx adj. Reported Fx adj. + 1.8 + 3.9 + 2.7 – 6.9 – 8.3 + 20.3 + 5.2 – 6.2 – 51.1 + 1.2 – 68.8 + 1.1 . – 7.0 + 18.5 + 2.5 – 8.6 3,368 2,570 1,530 2,660 2,628 222 2,406 23.8% 2,094 222 1,872 3,290 2,616 1,548 2,461 2,280 (141) 2,421 24.4% 1,755 (143) 1,898 – 2.3 + 1.8 + 1.2 – 7.5 – 13.2 + 0.6 – 16.2 + 1.4 749 2,071 + 176.5 EBITDA margin before special items 1 14.4% 14.6% EBIT Special items EBIT before special items 1 Net cash provided by operating activities 491 301 190 175 153 (39) 192 622 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” 144 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Sales level year on year Crop Science posted sales of €9,915 million (Fx & portfolio adj. +0.1%) in 2016. At Crop Protection / Seeds, we matched the prior-year level despite a persisting weak market environment, particularly in Latin America. Environmental Science posted gratifying sales growth. Since the conclusion in May 2016 of an agreement to divest the consumer business of Environ- mental Science, these activities are reported retrospectively for 2015 and 2016 under discontin- ued operations. Environmental Science therefore now comprises only the business for profession- al users. The divestment was closed at the start of October 2016. Sales by Business Unit € million Crop Protection / Seeds Crop Protection Herbicides Fungicides Insecticides SeedGrowth Seeds Environmental Science 1 Q4 2015 Q4 2016 Reported Fx & p adj. Change % 2,230 2,009 2,224 1,965 650 677 430 252 221 175 599 679 386 301 259 180 – 0.3 – 2.2 – 7.8 + 0.3 – 10.2 + 19.4 + 17.2 + 2.9 – 1.8 – 3.1 – 8.5 – 0.9 – 11.4 + 18.7 + 10.4 + 1.1 A 2.2.2/8 Change % 2015 9,548 8,271 2,830 2,911 1,596 934 1,277 580 2016 Reported Fx & p adj. 9,317 7,961 2,693 2,961 1,357 950 1,356 598 – 2.4 – 3.7 – 4.8 + 1.7 – 0.2 – 1.5 – 2.2 + 4.0 – 15.0 – 13.3 + 1.7 + 6.2 + 3.1 + 4.1 + 8.3 + 4.5 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted 1 Environmental Science now comprises only the business for professional users. The key data and prior-year figures are restated accordingly. Sales by region > Sales in the Europe / Middle East / Africa region improved by 1.8% (Fx adj.) to €3,290 million. SeedGrowth registered gains, due particularly to higher demand for products to treat cereal seed. We also slightly expanded business at Herbicides, while sales at Insecticides and Fungicides came in at the prior-year level. Sales of vegetable seed developed positively, as did sales at Environmental Science. In the North America region, we posted a 3.9% (Fx adj.) increase in sales to €2,616 million. Sales at SeedGrowth developed very positively thanks to increased demand for products to treat corn and cereal seed. Sales at Fungicides increased as well. We also achieved strong, double-digit-percentage growth with soybean seeds. By contrast, we registered a substantial decline in sales of Insecticides resulting from weak demand. Sales at Environmental Science increased slightly. > > Sales in Asia / Pacific increased by 2.7% (Fx adj.) year on year to €1,548 million. Our Fungicides business saw positive development particularly in Australia and India. Sales of vegetable seeds increased by a double-digit percentage. Business at Herbicides receded slightly, as did sales of Environmental Science. > Sales in Latin America declined by 6.9% (Fx adj.) to €2,461 million. Business was held back by the persisting weak market environment in Brazil, particularly at Insecticides, Herbicides and SeedGrowth. Lower pest pressure had an additional negative impact on Insecticides. We recorded gains in sales at Fungicides and Seeds. Business at Environmental Science expanded by a double-digit percentage. Earnings In 2016, EBITDA before special items of Crop Science was level year on year at €2,421 million (2015: €2,406 million; +0.6%). A positive currency effect of around €140 million and higher selling prices compensated lower volumes, increased spending on research and development and higher impairment losses recognized on inventories and receivables. Bayer Annual Report 2016 A Combined Management Report 145 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version EBIT decreased by 16.2% to €1,755 million, including special charges of €143 million (2015: special gains of €222 million), primarily in connection with the agreed acquisition of Monsanto and efficiency improvement measures. Special Items 1 Crop Science € million Restructuring Litigations Acquisition costs Divestments Revaluation of other receivables Total EBIT Q4 2015 EBIT Q4 2016 – 303 – – (2) 301 (5) 4 (34) (4) – (39) EBIT 2015 – 285 – (50) (13) 222 EBIT 2016 EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 (51) (1) (86) (5) – (143) – 303 – (6) (2) 295 (3) 4 (34) (4) – (37) – 285 – (50) (13) 222 (49) (1) (86) (5) – (141) A 2.2.2/9 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” Online Annex: A 2.2.2-3 The development of Crop Science in 2016 is shown in the following graphics (A 2.2.2-3/1, A 2.2.2-3/2 and A 2.2.2-3/3). Crop Science Quarterly Sales Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 A 2.2.2-3/1 € million 3,006 2,936 2,636 2,518 2,081 2,057 2,405 2,404 0 500 1,000 1,500 2,000 2,500 3,000 3,500 2015 figures restated Crop Science Quarterly EBIT Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 A 2.2.2-3/2 A 2.2.2-3/3 Crop Science Quarterly EBITDA before Special Items € million 885 955 561 512 187 135 491 153 Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 € million 1,021 1,089 722 663 316 318 347 351 0 200 400 600 800 1,000 0 200 400 600 800 1,000 2015 figures restated 146 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Animal Health Ongoing market growth In 2016, the Animal Health market continued to develop positively with growth of 5% (2015: 5%). The dynamic performance in the first half of the year was driven especially by the market for com- panion animal parasiticides in the United States and Europe. In the second half of the year, the market environment for the farm animal business clouded slightly. Key Data – Animal Health € million Sales Change in sales Volume Price Currency Portfolio Sales by region Europe / Middle East / Africa North America Asia / Pacific Latin America EBITDA 1 Special items EBITDA before special items 1 Change % A 2.2.2/10 Change % Q4 2015 Q4 2016 Reported Fx & p adj. 319 329 + 3.1 + 3.1 2015 1,490 2016 Reported Fx & p adj. 1,523 + 2.2 + 4.8 + 2.7% + 0.3% + 3.0% 0.0% – 1.0% + 4.1% 0.0% 0.0% 91 122 67 39 33 (8) 41 84 129 79 37 34 (4) 38 + 4.0% + 0.5% + 8.6% 0.0% + 2.6% + 2.2% – 2.6% 0.0% Reported Fx adj. Reported Fx adj. – 7.7 + 5.7 + 17.9 – 5.1 + 3.0 – 7.3 + 78.6 – 9.1 + 97.7 – 3.3 + 4.1 + 13.4 – 2.6 447 587 285 171 317 (30) 347 445 621 300 157 343 (6) 349 23.3% 22.9% + 3.8 + 6.0 + 5.6 + 1.8 – 0.4 + 5.8 + 5.3 – 8.2 + 8.2 + 0.6 + 23.2 + 0.6 313 (7) 320 254 (64) 318 348 193 – 44.5 EBITDA margin before special items 1 12.9% 11.6% EBIT Special items EBIT before special items 1 Net cash provided by operating activities 14 (19) 33 43 25 (5) 30 85 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” + % growth in sales at Animal Health (Fx & portfolio adj.) Sales growth particularly in the United States Sales of Animal Health in 2016 increased by 4.8% (Fx & portfolio adj.) to €1,523 million. The North America and Asia / Pacific regions developed especially positively due to higher demand. We also registered currency-adjusted sales growth in Europe / Middle East / Africa and Latin America. Best-Selling Animal Health Products Change % A 2.2.2/11 Change % € million Q4 2015 Q4 2016 Reported Fx adj. 2015 2016 Reported Fx adj. Advantage™ product family Seresto™ Drontal™ product family Baytril™ Total Proportion of Animal Health sales Fx adj. = currency-adjusted 105 15 30 33 183 57% 102 28 31 34 195 59% – 2.9 + 86.7 + 3.3 + 3.0 + 6.6 + 0.3 + 75.3 + 2.6 – 0.9 + 6.8 547 113 122 120 902 61% 535 174 128 113 950 62% – 2.2 + 54.0 + 4.9 – 5.8 + 5.3 + 0.1 + 55.4 + 7.2 – 5.0 + 7.3 Bayer Annual Report 2016 A Combined Management Report 147 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Sales by product > Currency-adjusted sales of our Advantage™ family of flea, tick and worm control products were level with the previous year. Positive development in Europe / Middle East / Africa and Asia / Pacific stood against slight declines in North America. > We achieved very strong sales growth with our Seresto™ flea and tick collar that resulted + % growth in sales of Seresto™ (Fx adj.) chiefly from increased demand in the United States and Europe. > Business with our Drontal™ line of wormers benefited particularly from higher volumes in the United States and Asia / Pacific. > Sales of our antibiotic Baytril™ fell in North America because of a difficult market environment and generic competition. Gains in Asia / Pacific and Latin America were not sufficient to offset this development. Earnings In 2016, EBITDA before special items was steady year on year, increasing 0.6% to €349 million. Positive earnings contributions from volume and price increases stood against higher selling expenses and an increased cost of production. A negative currency effect of around €10 million additionally diminished earnings. EBIT of Animal Health increased by a substantial 23.2% to €313 million, including special charges of €7 million (2015: €64 million). Special Items 1 Animal Health € million Restructuring Total special items EBIT Q4 2015 EBIT Q4 2016 (19) (19) (5) (5) EBIT 2015 (64) (64) EBIT 2016 EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 (7) (7) (8) (8) (4) (4) (30) (30) (6) (6) 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” A 2.2.2/12 Online Annex: A 2.2.2-4 The development of Animal Health in 2016 is shown in the following graphics (A 2.2.2-4/1, A 2.2.2-4/2 and A 2.2.2-4/3). Animal Health Quarterly Sales Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 0 50 100 150 200 250 300 350 400 450 500 2015 figures restated A 2.2.2-4/1 € million 0.386 0.408 0.428 0.426 0.357 0.360 0.319 0.329 148 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Animal Health Quarterly EBIT Animal Health Quarterly EBITDA before Special Items A 2.2.2-4/2 A 2.2.2-4/3 € million € million Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 65 114 105 93 70 81 14 25 Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 102 122 120 100 84 89 41 38 0 20 40 60 80 100 120 0 20 40 60 80 100 120 2015 figures restated Covestro Positive development in main customer industries In 2016, Covestro’s main customer industries (automotive, construction, electrical and electronics, and furniture) continued to develop positively. Key Data – Covestro € million Sales Change in sales Volume Price Currency Portfolio Sales by region Europe / Middle East / Africa North America Asia / Pacific Latin America EBITDA 1 Special items EBITDA before special items 1 EBITDA margin before special items 1 EBIT Special items EBIT before special items 1 Net cash provided by operating activities Change % A 2.2.2/13 Change % Q4 2015 Q4 2016 Reported Fx & p adj. 2015 2016 Reported Fx & p adj. 2,774 2,997 + 8.0 + 8.6 11,982 11,826 – 1.3 0.0 + 1.8% – 12.4% + 4.7% 0.0% + 4.0% + 4.6% – 0.6% 0.0% 1,132 672 798 172 129 (128) 257 9.3% (79) (144) 65 603 1,104 671 1,038 184 373 – 373 12.4% 203 – 203 678 + 2.6% – 7.7% + 7.9% 0.0% + 5.3% – 5.3% – 1.3% 0.0% Reported Fx adj. Reported Fx adj. – 3.3 – 5.3 + 9.8 – 1.8 – 2.5 – 0.1 + 30.1 + 7.0 + 189.1 + 45.1 . . – 2.6 – 1.6 + 32.2 + 12.2 4,928 2,885 3,377 792 1,368 (291) 1,659 13.8% 635 (332) 967 4,761 2,740 3,619 706 1,984 – 1,984 16.8% 1,304 – – 3.4 – 5.0 + 7.2 – 10.9 + 45.0 + 19.6 + 105.4 1,304 + 34.9 + 12.4 1,452 1,824 + 25.6 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Annual Report 2016 A Combined Management Report 149 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Sales level year on year Sales of Covestro were level year on year in 2016, at €11,826 million (Fx & portfolio adj. 0.0%). Selling prices receded overall, due primarily to lower raw material prices. Volumes were above the level of the prior year overall. Sales by Business Unit € million Polyurethanes Polycarbonates Coatings, Adhesives, Specialties Other Covestro business Total Fx & p adj. = currency- and portfolio-adjusted Change % Q4 2015 Q4 2016 Reported Fx & p adj. 1,382 1,541 + 11.5 759 477 156 832 481 143 2,774 2,997 + 9.6 + 0.8 – 8.3 + 8.0 + 12.2 + 10.7 + 0.8 – 9.0 + 8.6 A 2.2.2/14 Change % 2016 Reported Fx & p adj. 5,926 3,297 2,039 564 – 2.6 + 4.0 – 2.5 – 11.5 – 1.3 – 1.2 + 5.8 – 1.8 – 11.5 0.0 2015 6,084 3,169 2,092 637 11,982 11,826 Sales by business unit > At Polyurethanes, lower selling prices overall were not fully offset by higher volumes and led to a 1.2% (Fx & portfolio adj.) decline in sales to €5,926 million. > Polycarbonates(cid:3)improved sales by 5.8% (Fx & portfolio adj.) to €3,297 million, with appreciable volume growth more than compensating for lower selling prices. > Sales of Coatings, Adhesives, Specialties fell by 1.8% (Fx & portfolio adj.) to €2,039 million, primarily because of lower selling prices. Earnings In 2016, EBITDA before special items increased by a substantial 19.6% to €1,984 million. Positive earnings contributions from reductions in raw material prices and higher volumes outweighed lower selling prices and a negative currency effect of around €20 million. Compared with the previous year, Covestro more than doubled EBIT to €1,304 million (+105.4%). No special items were recorded (2015: special charges of €332 million). Special Items 1 Covestro € million Restructuring Revaluation of other receivables Total special items EBIT Q4 2015 (143) (1) (144) EBIT Q4 2016 EBIT 2015 EBIT 2016 EBITDA Q4 2015 EBITDA Q4 2016 EBITDA 2015 EBITDA 2016 – – – (329) (3) (332) – – – (127) (1) (128) – – – (288) (3) (291) – – – 1 For definition see Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” A 2.2.2/15 150 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Online Annex: A 2.2.2-5 The development of Covestro in 2016 is shown in the following graphics (A 2.2.2-5/1, A 2.2.2-5/2 and A 2.2.2-5/3). Covestro Quarterly Sales Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 A 2.2.2-5/1 € million 3,014 2,850 3,185 2,975 3,009 3,004 2,774 2,997 0 500 1,000 1,500 2,000 2,500 3,000 3,500 2015 figures restated Covestro Quarterly EBIT Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 A 2.2.2-5/2 A 2.2.2-5/3 Covestro Quarterly EBITDA before Special Items € million € million 219 336 278 367 217 398 (79) 203 Q1 2015 2016 Q2 2015 2016 Q3 2015 2016 Q4 2015 2016 424 504 506 543 472 564 257 373 (100) 0 100 200 300 400 0 100 200 300 400 500 600 2015 figures restated Business Development by Region Online Annex: A 2.2.2-6 Business Development by Region Europe / Middle East / Africa Change in % A.2.2.2-6/1 North America Change in % € million Q4 2015 Q4 2016 Reported Fx adj. Q4 2015 Q4 2016 Reported Fx adj. Pharmaceuticals Consumer Health Crop Science Animal Health Life Sciences (incl. reconciliation) Covestro Group (incl. reconciliation) 2015 figures restated 1,618 1,684 490 470 91 499 431 84 2,943 1,132 2,962 1,104 4,075 4,066 + 4.1 + 1.8 – 8.3 – 7.7 + 0.6 – 2.5 – 0.2 +6.0 +2.7 – 7.0 – 3.3 + 2.3 – 2.6 + 0.9 972 630 438 122 2,163 672 1,107 649 527 129 2,413 671 + 13.9 + 3.0 + 20.3 + 5.7 + 11.6 – 0.1 + 12.6 + 1.6 + 18.5 + 4.1 + 10.1 – 1.6 2,835 3,084 + 8.8 + 7.3 Bayer Annual Report 2016 A Combined Management Report 151 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Business Development by Region Asia / Pacific Change in % € million Q4 2015 Q4 2016 Re- ported Pharmaceuticals 1,121 1,203 Fx adj. + 3.6 + 3.2 + 2.5 Q4 2015 275 198 Q4 2016 281 197 1,132 1,062 + 7.3 + 3.2 + 5.2 + 17.9 + 13.4 39 37 188 365 67 194 384 79 A.2.2.2-6/1 (continued) Group Change in % Q4 2015 3,986 1,506 2,405 319 Q4 2016 Re- ported Fx adj. 4,275 1,539 2,404 + 7.3 + 2.2 – 329 + 3.1 + 7.1 + 4.4 – 1.6 + 3.1 Latin America Change in % Re- ported + 2.2 – 0.5 – 6.2 – 5.1 Fx adj. + 8.0 + 18.7 – 8.6 – 2.6 1,745 798 1,862 1,038 + 6.7 + 3.5 1,660 1,586 + 30.1 + 32.2 172 184 – 4.5 + 7.0 – 2.7 + 12.2 8,511 2,774 8,823 2,997 + 3.7 + 8.0 + 3.6 + 8.6 2,543 2,900 + 14.0 + 12.5 1,832 1,770 – 3.4 – 1.3 11,285 11,820 + 4.7 + 4.8 Consumer Health Crop Science Animal Health Life Sciences (incl. reconciliation) Covestro Group (incl. reconciliation) 2015 figures restated Business Development by Region € million Pharmaceuticals Consumer Health Crop Science Animal Health Life Sciences (incl. reconciliation) Covestro Group (incl. reconciliation) 2015 figures restated 2015 5,981 1,955 3,368 447 2016 6,417 1,918 3,290 445 12,779 4,928 13,062 4,761 17,707 17,823 Business Development by Region Europe / Middle East / Africa Change in % Reported Fx adj. + 7.3 – 1.9 – 2.3 – 0.4 + 2.2 – 3.4 + 0.7 + 9.7 + 1.5 + 1.8 + 3.8 + 5.1 – 3.3 2015 3,937 2,635 2,570 587 9,736 2,885 2016 4,194 2,627 2,616 621 10,066 2,740 + 2.8 12,621 12,806 Asia / Pacific Change in % Latin America Change in % A.2.2.2-6/2 North America Change in % Reported Fx adj. + 6.5 – 0.3 + 1.8 + 5.8 + 3.4 – 5.0 + 1.5 + 6.7 – 0.1 + 3.9 + 6.0 + 4.1 – 5.3 + 2.0 A.2.2.2-6/2 (continued) Group Change in % Re- ported Fx adj. € million Pharmaceuticals 2015 4,319 2016 Re- ported Fx adj. 2015 4,775 + 10.6 + 8.6 1,071 2016 1,034 Re- ported Fx adj. 2015 2016 – 3.5 + 11.0 15,308 16,420 + 7.3 + 8.7 Consumer Health 738 781 Crop Science 1,530 1,548 Animal Health 285 300 + 5.8 + 1.2 + 5.3 + 8.1 + 2.7 + 5.6 748 711 2,660 2,461 171 157 – 4.9 – 7.5 – 8.2 + 17.1 6,076 – 6.9 + 1.8 10,128 1,490 6,037 9,915 1,523 – 0.6 – 2.1 + 2.2 + 3.5 + 0.2 + 4.8 Life Sciences (incl. reconciliation) Covestro Group (incl. reconciliation) 2015 figures restated 6,886 3,377 7,413 3,619 + 7.7 + 7.2 + 7.0 + 9.8 4,702 4,402 – 6.4 + 1.2 34,103 34,943 792 706 – 10.9 – 1.8 11,982 11,826 + 2.5 – 1.3 + 4.7 – 10,263 11,032 + 7.5 + 7.9 5,494 5,108 – 7.0 + 0.8 46,085 46,769 + 1.5 + 3.5 152 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group 2.2.3 Value-Based Performance New value-based indicator: ROCE Starting with fiscal 2016, Bayer decided to replace its previous value-based metrics – cash value added (CVA) and cash flow return on investment (CFROI) – by the return on capital employed (ROCE). The change was made in light of the much lower complexity and greater external popu- larity of the ROCE. Using this indicator therefore increases transparency and facilitates both com- munication and external comparability. The ROCE indicates the capital return over a specified period, setting economic profit against the capital used to generate it (capital employed). The ROCE is compared to the weighted average cost of capital (WACC), which corresponds to the return expected by the providers of equity and debt. If the ROCE is in line with the WACC, the expected return for the period has been achieved. If it exceeds the WACC, return expectations have been exceeded, and therefore value has been created. Calculation of ROCE ROCE is the ratio of net operating profit after tax (NOPAT) to the average capital employed. NOPAT is determined by deducting from EBIT the income taxes thereon, which are based on a historical average tax rate of 24%. The capital employed is an indicator of the capital used in the company’s operations. Based on carrying amounts, it is calculated by subtracting from operational assets the liability items that are largely non-interest-bearing, such as trade accounts payable, or would distort the operational capital base. To reflect the change in the capital employed during the year, an average figure is determined from the amounts at the end of the previous year and the end of the year under report. For the components of the capital employed, see also Chapter 2.4. Calculating the cost of capital In 2016, the capital cost rate (WACC = weighted average cost of capital) for the Bayer Group was applied uniformly for the Life Sciences for the first time. The WACC is based on an after-tax ap- proach and was calculated at the beginning of the year as the weighted average of the equity and debt cost rates. The cost of equity is the return expected by stockholders, computed from capital market information. The debt capital cost rate we use to calculate the WACC is based on the financing terms for ten-year Eurobonds issued by industrial companies with an “A–” credit rating. The WACC for 2016 was 7.5% for the Bayer Group and for the Life Sciences. Covestro, however, determined a WACC of 6.9% for its business. In the context of impairment testing, moreover, individual capital cost factors are used for the reporting segments which explicitly take account of segment-specific parameters (see Note [4]). See also A 2.4 % Capital cost rate for the Bayer Group in 2016 ROCE in 2016 of Value-based business development Bayer’s ROCE in 2016 amounted to 11.0%, exceeding the cost of capital by 3.5 percentage points. It is thus an indicator for value creation. Also when measured in terms of the previous value-based steering parameters, Bayer showed positive value creation with a CFROI of 11.8%, which exceeded the cost of capital, and a positive CVA of €2,761 million. % All segments except Consumer Health exceeded the WACC in 2016 despite negative special items in all of the Life Science segments (see also Chapter 2.2.2). In Consumer Health, the acqui- sition of the consumer care business of Merck & Co., Inc., United States, in 2014 led to a signifi- cant increase in the capital employed. This, together with the integration costs and special charg- es incurred in 2016, is currently diminishing ROCE as an indicator of periodic capital return. Bayer Annual Report 2016 A Combined Management Report 153 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Value-Based Performance by Segment Pharmaceuticals Consumer Health Crop Science Animal Health Life Sciences 1 Covestro Group € million EBIT Taxes 2 NOPAT Average capital employed ROCE WACC 2015 2016 3,028 3,389 (727) (813) 2,301 2,576 2015 768 (184) 584 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 695 2,094 1,755 (167) (503) (421) 528 1,591 1,334 254 (61) 193 313 5,606 5,738 635 1,304 6,241 7,042 (75) (1,346) (1,377) 238 4,260 4,361 (152) 483 (313) (1,498) (1,690) 991 4,743 5,352 15,969 15,859 14,761 15,220 9,749 10,316 404 375 40,975 42,306 6,822 6,471 47,797 48,777 14.4% 16.2% 4.0% 3.5% 16.3% 12.9% 47.8% 63.5% 10.4% 10.3% 7.1% 15.3% 9.9% 11.0% 7.9% 7.5% 7.9% 7.5% 7.3% 7.5% 7.9% 7.5% 7.6% 7.5% 6.9% 6.9% 7.6% 7.5% A 2.2.3/1 2015 figures restated 1 including Reconciliation 2 24% on EBIT; based on historical average of tax rates 2.2.4 Asset and Financial Position of the Bayer Group Financial management of the Group The financial management of the Bayer Group is conducted by Bayer AG. Capital is a global re- source, 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, commodity price and default risks helps to reduce the volatility of our earnings. See also A 1.2.2 The contracted rating agencies assess Bayer as follows: Rating S & P Global Ratings Moody’s A 2.2.4/1 Long-term rating Short-term rating A– A3 A–2 P–2 These credit ratings reflect the company’s high solvency and ensure access to a broad investor base for financing purposes. As a result of the agreed acquisition of Monsanto, both S&P Global Ratings and Moody’s are reviewing the possibility of a downgrade. Bayer continues to aim for an investment-grade credit rating after the successful closing of the Monsanto acquisition and is aiming for the single “A” rating category in the long term. As a matter of principle, we pursue a prudent debt management strategy to ensure flexibility, drawing on a balanced financing portfolio. This is fundamentally based on bonds in various cur- rencies, 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 policies. See also A 3.2.2 154 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Liquidity and Capital Expenditures of the Bayer Group Bayer Group Summary Statements of Cash Flows € million 2015 2016 Change % A 2.2.4/2 Net cash provided by (used in) operating activities, continuing operations Net cash provided by (used in) operating activities, discontinued operations Net cash provided by (used in) operating activities (total) Net cash provided by (used in) investing activities (total) Net cash provided by (used in) financing activities (total) Change in cash and cash equivalents due to business activities Cash and cash equivalents at beginning of period Change due to exchange rate movements and to changes in scope of consolidation Cash and cash equivalents at end of period 2015 figures restated 6,836 54 6,890 (2,762) (3,974) 154 1,853 (148) 1,859 8,259 830 9,089 (8,729) (350) 10 1,859 30 1,899 + 20.8 . + 31.9 . + 91.2 – 93.5 + 0.3 . + 2.2 A 2.2.4/3 Cash Inflows from Operating Activities (Total) € million 9,089 6,890 Net cash provided by operating activities The net cash provided by operating activities (total) rose by 31.9% to €9,089 million due to a sig- nificant improvement in EBIT, a sharp decrease in additional cash tied up in working capital, and the cash inflow from the sale of the Diabetes Care business. The net cash provided by operating activities in continuing operations increased by 20.8% to €8,259 million. 31.9% 2015 2016 See also A 1.4.2.2 Net cash used in investing activities The net cash outflow for investing activities in 2016 amounted to €8,729 million. Cash outflows for property, plant and equipment and intangible assets were 2.4% higher at €2,578 million (2015: €2,517 million) and included €835 million (2015: €777 million) at Pharmaceuticals, €215 million (2015: €148 million) at Consumer Health, €757 million (2015: €721 million) at Crop Science, €37 million (2015: €41 million) at Animal Health and €415 million (2015: €508 million) at Covestro. Cash outflows for noncurrent and current financial assets, especially for the short-term investment of the cash inflows from the mandatory convertible notes, amounted to €6,335 million (2015: €370 million). Inflows from interest and dividends totaled €89 million (2015: €106 million). Net cash provided by (used in) financing activities In 2016 there was a net cash outflow of €350 million for financing activities, including net loan repayments of €730 million (2015: €2,929 million). Net interest payments were 21.8% higher at €794 million (2015: €652 million). The cash outflow for dividends amounted to €2,126 million (2015: €1,869 million). The net cash inflow from the issuance of the mandatory convertible notes amounted to €3,952 million, reported as a €3,300 million capital contribution and a €652 million borrowing. In 2015, the stock market flotation of Covestro resulted in a cash inflow of €1,490 million. Bayer Annual Report 2016 A Combined Management Report 155 2.2 Earnings; Asset and Financial Position of the Bayer Group Augmented Version Liquid assets and net financial debt Net Financial Debt1 € million See also A 2.4 A 2.2.4/4 Dec. 31, 2015 Dec. 31, 2016 Change % Bonds and notes / promissory notes 15,547 15,991 of which hybrid bonds 2 Liabilities to banks Liabilities under finance leases Liabilities from derivatives 3 Other financial liabilities Receivables from derivatives 3 Financial liabilities Cash and cash equivalents Current financial assets 4 Net financial debt 4,525 2,779 474 753 369 (350) 19,572 (1,859) (264) 4,529 1,837 436 587 730 (313) 19,268 (1,899) (5,591) + 2.9 + 0.1 – 33.9 – 8.0 – 22.0 + 97.8 – 10.6 – 1.6 + 2.2 . 17,449 11,778 – 32.5 1 Net financial debt is not defined in the International Financial Reporting Standards and is calculated as shown in this table. 2 Classified as debt according to IFRS 3 These include the market values of interest-rate and currency hedges of recorded transactions. 4 These include short-term loans and receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as available-for-sale financial assets that were recorded as current on initial recognition. In 2016, net financial debt of the Bayer Group decreased by €5,671 million. Cash inflows from operating activities and the issuance of the mandatory convertible notes were set against cash outflows for dividends and negative currency effects. Net financial debt includes three subordinated hybrid bonds with a total volume of €4,529 million, 50% of which is treated as equity by Moody’s and S & P Global Ratings. The hybrid bonds thus have a more limited effect on the Group’s rating-specific debt indicators than senior debt. On November 22, 2016, Bayer issued €4,000 million in mandatory convertible notes. After de- ducting transaction costs and recognition of deferred taxes, €3,491 million was allocated to capi- tal reserves and €652 million to other financial liabilities. 156 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.2 Earnings; Asset and Financial Position of the Bayer Group Asset and Capital Structure of the Bayer Group Bayer Group Summary Statements of Financial Position € million Noncurrent assets Current assets Assets held for sale Total current assets Total assets Equity Noncurrent liabilities Current liabilities Provisions directly related to assets held for sale Total current liabilities Liabilities Total equity and liabilities A 2.2.4/5 Dec. 31, 2015 Dec. 31, 2016 Change % 50,096 23,624 197 23,821 73,917 25,445 31,492 16,868 112 16,980 48,472 73,917 51,791 30,437 10 30,447 82,238 31,897 31,804 18,537 + 3.4 + 28.8 – 94.9 + 27.8 + 11.3 + 25.4 + 1.0 + 9.9 – – 100.0 18,537 50,341 82,238 + 9.2 + 3.9 + 11.3 A 2.2.4/6 Total Assets € billion 73.9 82.2 11.3% 2015 2016 Increases in total assets and equity Total assets as of December 31, 2016, rose by €8.3 billion to €82.2 billion. The increase of €1.7 billion in noncurrent assets to €51.8 billion mainly resulted from an increase in deferred taxes, while other intangible assets declined. Total current assets rose by €6.6 billion to €30.4 billion, primarily due to cash inflows from the issuance of the mandatory convertible notes. Equity ad- vanced by €6.5 billion to €31.9 billion. Net income of €4.5 billion (2015: €4.1 billion) and an in- crease of €3.5 billion in the capital reserves resulting from the issuance of the mandatory converti- ble notes were set against a negative effect of €0.8 billion (2015: positive effect of €0.8 billion) – recognized outside profit or loss – from changes in post-employment benefit obligations, and the dividend payment of €2.1 billion (2015: €1.9 billion). The equity ratio (equity coverage of total assets) as of December 31, 2016, was 38.8% (2015: 34.4%). Liabilities rose by €1.9 billion com- pared with December 31, 2015, to €50.3 billion. Trade accounts payable and other liabilities in- creased, while financial liabilities declined. The net defined benefit liability for pensions and other post-employment benefits increased by €0.3 billion to €11.1 billion. Losses of €0.8 billion from the reevaluation of the net obligations for defined benefit plans for pensions and other post- employment benefits stood against the contribution by Bayer AG of 4.9% of the outstanding Covestro shares with a value of €0.3 billion to Bayer Pension Trust e.V. and the contribution by Covestro of bonds with a value of €0.5 billion. Bayer Annual Report 2016 A Combined Management Report 157 2.3 Earnings; Asset and Financial Position of Bayer AG Augmented Version Online Annex: A 2.2.4-1 Ratios Cost of sales ratio (%) R & D expense ratio (%) Return on sales in (%) EBIT margin (%) EBITDA margin before special items (%) Asset intensity (%) Reinvestment ratio (%) Liability structure (%) Gearing Free operating cash flow (€ million) Inventory turnover Receivables turnover Payables turnover Equity ratio (%) Return on equity (%) Return on assets (%) 2015 figures restated 1 Property, plant and equipment Cost of goods sold Sales Research and development expenses Sales Income after income taxes Sales EBIT Sales EBITDA before special items Sales Property, plant and equipment + intangible assets Total assets Capital expenditures1 Depreciation1 Current liabilities Liabilities Net debt + pension provisions Equity Net operating cash flow less cash outflows for property, plant and equipment and intangible assets Cost of goods sold Inventories Sales Trade accounts receivable Cost of goods sold Trade accounts payable Equity Total assets Income after income taxes Average equity Income before income taxes and interest expense Average total assets A 2.2.4-1/1 2016 43.4 10.0 10.3 15.1 24.2 2015 45.7 9.3 8.9 13.5 22.3 59.1 52.3 153.0 153.5 35.0 1.1 36.8 0.7 4,325 5,681 2.5 4.6 3.5 34.4 17.9 8.2 2.4 4.3 3.2 38.8 16.8 8.5 2.3 Earnings; Asset and Financial Position of Bayer AG As the parent company of the Bayer Group, Bayer AG – represented by its Board of Management – performs the principal management functions for the entire Group. These include strategic plan- ning, resource allocation, executive management and financial management. With the reorganiza- tion at the beginning of 2016, the three divisions at Bayer AG also assumed responsibility for managing the operational business. The financial statements of Bayer AG are prepared in accord- ance with the German Commercial Code (HGB) and Stock Corporation Act (AktG). Bayer AG performs important management functions for the Group. 158 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.3 Earnings; Asset and Financial Position of Bayer AG 2.3.1 Earnings Performance of Bayer AG Bayer AG Summary Income Statements according to the German Commercial Code € million Net sales Cost of goods sold Gross profit Selling expenses Research and development expenses General administration expenses Other operating income Other operating expenses Operating income Income from investments in affiliated companies – net Interest expense / income – net Other financial income – net Non-operating income Income taxes Income after taxes / net income Withdrawal from other retained earnings / allocation to other retained earnings Distributable profit A 2.3.1/1 2016 390 (353) 37 (39) (46) (666) 48 (227) (893) 4,647 54 163 4,864 (371) 3,600 (1,367) 2,233 2015 86 (88) (2) (3) – (324) 13 (86) (402) 2,444 (484) 409 2,369 (606) 1,361 706 2,067 Significant improvement in net income The former subsidiaries Bayer HealthCare AG and Bayer Technology Services GmbH were merged into Bayer AG with effect from January 1, 2016. For this reason the operating result, in particular, has only limited comparability with the prior year with respect to both its total amount and the individual components. It came in well below the 2015 level, at minus €893 million. Taking into account the 2015 operating results of the two merged companies totaling minus €199 million, the reference figure for 2015 was minus €601 million. On this basis the operating result therefore declined by €292 million in 2016. Of the latter amount, €198 million was attributable to the first- time recognition by Bayer AG of provisions for impending losses from sales and licensing agree- ments transferred to Bayer AG effective January 1, 2017, with the businesses leased from Bayer Pharma AG and Bayer CropScience AG. The provisions for the same purpose established by the two subsidiaries were correspondingly reversed and recognized in profit or loss. Other compo- nents of the decline in earnings were expenses for various projects, also in connection with the planned acquisition of Monsanto Company, which increased by €74 million. Income from investments in affiliated companies increased by €2,203 million to €4,647 million. Bayer Pharma AG made the largest contribution to the operating result with significantly improved income of €3,011 million (2015: €1,793 million). The growth in earnings was due to substantial sales increases for the high-margin products Xarelto™ and Adempas™ along with higher income from investments in affiliated companies, lower net interest expense and an improvement in the currency position. Income of Bayer CropScience AG came in slightly ahead of 2015 at €1,017 million (2015: €964 million) despite the absence of the prior year’s one-time gains from a patent litigation. Earnings growth was due to an improvement in the gross operating result and a substantial net exchange gain. Significant effects of profit-and-loss transfer agreements were the transfer of a €50 million (€2015: €118 million) loss from Bayer Business Services GmbH and in- come of €204 million (2015: €149 million) from Siebte Bayer VV GmbH, which receives regular dividend income from a U.S. subsidiary that handles export business in the United States for Bayer Health Care LLC. Apart from profit and loss transfers there was also income of €329 million in 2016 from investments in affiliated companies, including €91 million from Covestro AG, and gains of €130 million from retirements of such investments. Bayer Annual Report 2016 A Combined Management Report 159 2.3 Earnings; Asset and Financial Position of Bayer AG Augmented Version Bayer AG had net interest income of €54 million in 2016, a significant improvement from the net interest expense of €484 million in the previous year. This was almost entirely due to a gain from the measurement of pension provisions and other noncurrent provisions for personnel commit- ments. Interest-related actuarial gains and fund asset growth overcompensated the expenses for the unwinding of discount on these provisions by €303 million. The net expenses in 2015 amount- ed to €276 million. Of the remaining €249 million (2015: €208 million) balance of interest expenses and income, €53 million (2015: minus €29 million) was attributable to Group companies and €196 million (2015: €179 million) to third parties, with the creditors of the bonds and commercial paper programs accounting for €189 million (2015: €228 million). Other financial income and expenses yielded a positive balance of €163 million (2015: €409 million). The decrease was mainly due to the absence of the one-time gain of €217 million incurred in the prior year from the settlement by Covestro Deutschland AG of compensation claims with respect to pension entitlements of former employees. Gains from charging on to other subsidiaries the pension expenses for retirees who remained with Bayer AG following the hive- downs of operating businesses in 2002 and 2003 were substantially lower at only €4 million (2015: €178 million). The decrease was due to the decline in pension expenses, the interest por- tion of which was reflected in interest expense while the remainder was reflected in other financial income and expenses. Fees for granted credit facilities, which in 2016 pertained mainly to the financing of the planned acquisition of Monsanto, amounted to €57 million (2015: €22 million). Set against this was the result of the translation of foreign currency receivables and payables and the measurement of the relevant derivatives. This amounted to €179 million (2015: €6 million). Income before income taxes greatly exceeded the prior-year level at €3,971 million (2015: €1,967 million). Tax expense nonetheless declined from €606 million to €371 million due to the absence of the previous year’s tax effects resulting from the formation of the Covestro Group and a higher proportion of tax-free income from investments in affiliated companies. After deduction of taxes, net income was €3,600 million (2015: €1,361 million). An allocation of €1,367 million was made to other retained earnings, giving a distributable profit of €2,233 million. Distributable profit of € million The Board of Management and Supervisory Board will propose to the Annual Stockholders’ Meet- ing on April 28, 2017, that the distributable profit be used to pay a dividend of €2.70 per share (826,947,808 shares) on the capital stock of €2,117 million entitled to the dividend. 2.3.2 Asset and Financial Position of Bayer AG Bayer AG Summary Statements of Financial Position according to the German Commercial Code A 2.3.2/1 € million ASSETS Noncurrent assets Intangible assets, property, plant and equipment Financial assets Current assets Receivables from subsidiaries Remaining receivables, inventories, other assets Cash and cash equivalents, marketable securities Total assets Dec. 31, 2015 Dec. 31, 2016 31 43,737 43,768 3,159 380 629 4,168 47,936 58 49,112 49,170 4,055 2,818 803 7,676 56,846 160 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.3 Earnings; Asset and Financial Position of Bayer AG Bayer AG Summary Statements of Financial Position according to the German Commercial Code A 2.3.2/1 (continued) € million EQUITY AND LIABILITIES Equity Provisions Other liabilities Bonds and notes, liabilities to banks Payables to subsidiaries Remaining liabilities Total equity and liabilities Dec. 31, 2015 Dec. 31, 2016 15,032 2,356 7,203 22,752 593 30,548 47,936 16,565 1,905 6,673 31,146 557 38,376 56,846 Significant increase in total assets – higher financial debt The asset and liability structure of Bayer AG is dominated by its role in managing the subsidiaries and financing corporate activities as the parent company of the Bayer Group. This is primarily reflected in the high level of investments in affiliated companies and of the receivables from, and payables to, Group companies. Total assets of Bayer AG rose by €8.9 billion in 2016 to €56.8 billion. Of the increase, noncurrent assets accounted for €5.4 billion and current assets for €3.5 billion. Property, plant and equipment and intangible assets increased – mainly due to the mergers effected at the start of the year – by €26 million to €58 million, but remained of secondary importance. Financial assets increased by €5.4 billion to €49.1 billion, principally as a result of capital increases at subsidiaries. Investments in affiliated companies continued to account for by far the largest item in total assets, amounting to 84.8% (2015: 89.5%). See also A 2.3.2/1 A 2.3.2/2 Total Assets € billion 47.9 56.8 18.6% 2015 2016 Receivables from subsidiaries amounted to €4.1 billion (2015: €3.2 billion), while payables to sub- sidiaries totaled €31.2 billion (2015: €22.8 billion). These amounts accounted for 7.2% of total assets and 54.9% of total equity and liabilities, respectively. The other receivables reflected in current assets (including deferred charges) increased to €2.8 billion (2015: €0.4 billion), mainly due to investments of €1.9 billion in commercial paper. Cash and cash equivalents also rose due to higher bank deposits, increasing by €174 million to €803 million. Bayer AG had equity of €16.6 billion (2015: €15.0 billion). The increase represents the excess of the €3,600 million net income for 2016 over the €2,067 million dividend payment for 2015. The equity ratio declined to 29.1% (2015: 31.4%) due to the disproportionate growth in total assets. Provisions were lower by €0.5 billion at €1.9 billion. The main reason for the decrease was a €665 million decline in pension provisions to €897 million. This was largely the result of higher fund assets, but was also partly attributable to changes in actuarial assumptions regarding the future development of employee compensation and pensions and to a higher discount rate. Provi- sions for taxes decreased by €123 million to €541 million, while miscellaneous provisions rose by €337 million to €467 million. The main factors here were impending losses from the businesses taken over from Bayer Pharma AG and Bayer CropScience AG by way of business leases as of January 1, 2017, and higher personnel commitments resulting from the mergers with Bayer HealthCare AG and Bayer Technology Services GmbH. Other liabilities rose by €7.8 billion to €38.4 billion (net of deductible receivables). Financial debt, in particular, increased by €6.2 billion, partly due to the financing for the planned acquisition of Monsanto Company. Whereas external debt in the form of bonds and commercial paper was re- duced by €0.6 billion and €0.3 billion, respectively, borrowings from Group companies increased by €7.0 billion. Total financial debt at year end 2016 was €36.5 billion (2015: €30.3 billion). After deduction of cash and cash equivalents of €0.8 billion (2015: €0.6 billion), net debt rose by €6.0 billion to €35.7 billion (2015: €29.7 billion). Bayer Annual Report 2016 A Combined Management Report 161 2.4 Alternative Performance Measures Used by the Bayer Group Augmented Version 2.4 Alternative Performance Measures Used by the Bayer Group The Combined Management Report and the consolidated financial statements of the Bayer Group are prepared according to the applicable financial reporting standards. In addition to the disclo- sures and metrics required by these standards, Bayer publishes alternative performance measures (APMs) that are not defined or specified in these standards and for which there are no generally accepted reporting formats. Bayer determines APMs to enable the comparison of performance indicators over time and against those of other companies in its industry sector. These APMs are calculated by making certain adjustments to items in the statement of financial position or the income statement prepared according to the applicable financial reporting standards. Such ad- justments may result from differences in calculation or measurement methods, nonuniform busi- ness activities or special factors affecting the information value of these items. The APMs deter- mined in this way apply to all periods and are used both internally for business management purposes and externally by analysts, investors and rating agencies to assess the company’s per- formance. Bayer determines the following APMs: See also “About this Report” and Note 2 to B Consolidated Financial Statements > Change in sales (reported, currency-adjusted, currency- and portfolio-adjusted) > EBIT > EBITDA > EBIT before special items > EBITDA before special items > EBITDA margin before special items > Core earnings per share > Net financial debt > Return on capital employed (ROCE) > Net operating profit after tax (NOPAT) > Capital employed > Total operating performance > Value creation > Cost of materials / other expenses > Other balance sheet and financial indicators Online Annex A 2.4-1 In addition to the alternative performance measures listed, it is possible to determine balance sheet and financial indicators which help to analyze the Bayer Group’s sales, earnings and fi- nancial position. Some customary indicators and the associated calculation methods are shown in Graphic 2.2.4-1/1. See also A 2.2.4 The (reported) change in sales is a relative indicator. It shows the percentage by which sales var- ied from the previous year. The currency-adjusted or currency- and portfolio-adjusted change in sales shows the percentage change in sales excluding the impact of exchange rate effects and disregarding the acquisitions and divestments material to each business entity. Exchange rate effects are generally calculated on the basis of the functional currency valid in the respective country. Exceptions exist in Brazil and Argentina, primarily at Crop Protection, where the respective functional currencies are restat- ed in U.S. dollars for business reasons. 162 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.4 Alternative Performance Measures Used by the Bayer Group EBIT (earnings before interest and taxes) serves to present a company’s operating result while eliminating the effects of differences among local taxation systems and different financing activi- ties. EBIT is calculated as follows: A 2.4/1 Reconciliation to EBIT Income before income taxes + / – Financial result (net income / loss from investments accounted for using the equity method, financial income and expenses) = EBIT EBITDA stands for earnings before interest, taxes, depreciation and amortization. This perfor- mance indicator neutralizes the effects of the financial result along with distortions of operational performance that result from divergent depreciation and amortization methods and the exercise of measurement discretion. EBITDA is EBIT plus the amortization of intangible assets and the depre- ciation of property, plant and equipment, plus impairment losses and minus impairment loss rever- sals, recognized in profit or loss during the reporting period. A 2.4/2 Reconciliation to EBITDA EBIT + / – Depreciation and amortization / impairment losses / impairment loss reversals on property, plant, equipment and intangible assets (as per Statements of Cash Flows) = EBITDA EBIT before special items and EBITDA before special items show the development of the opera- tional business irrespective of the effects of special items, i.e. special effects for the company with regard to their nature and magnitude. These may include litigations, restructuring, integration costs, impairment losses and impairment loss reversals. EBIT before special items and EBITDA before special items are each determined by adding special charges and subtracting special gains. The EBITDA margin before special items is a relative indicator used by Bayer for internal and ex- ternal comparisons of operational performance. It is the ratio of EBITDA before special items to net sales. See also A 2.2.1 Core earnings per share (core EPS) is an APM based on the earnings per share (EPS) for the Group as defined in IAS 33. Core earnings per share are determined by neutralizing effects of the purchase price allocations for acquisitions and other special factors to enable a comparison of performance over time. In an intermediate step, further APMs – core EBIT and core net income – are calculated. Core earnings per share are then calculated by dividing core net income per share by the weighted average number of shares in circulation during the year. Bayer Annual Report 2016 A Combined Management Report 163 2.4 Alternative Performance Measures Used by the Bayer Group Augmented Version Reconciliation to Core Earnings per Share EBIT (as per Income Statements) + / – Amortization / impairment losses / impairment loss reversals on intangible assets + / – Impairment losses / impairment loss reversals on property, plant and equipment + / – Special items (excluding depreciation and amortization / impairment losses / impairment loss reversals) A 2.4/3 = Core EBIT + / – Financial result (as per Income Statements) + / – Special items in the financial result + / – Income taxes (as per Income Statements) + / – Special items in income taxes + / – Tax effects relating to depreciation and amortization / impairment losses / impairment loss reversals and special items + / – Income after income taxes attributable to noncontrolling interest (as per Income Statements) + / – Portion of the above-mentioned adjustments attributable to noncontrolling interest = Core earnings from continuing operations / Weighted average number of shares = Core earnings per share from continuing operations (core EPS) As core earnings per share are calculated for each interim reporting period, core earnings per share for the fiscal year or for each interim reporting period up to the respective closing date may deviate from the cumulated core earnings per share for the individual interim reporting periods. See also A 2.2.3 Core earnings per share from continuing or discontinued operations are similarly determined. Core earnings per share form the basis of the Bayer Group’s dividend policy. Net financial debt is an important financial management indicator for the Bayer Group and is used both internally and externally in assessing its liquidity, capital structure and financial flexibility. This metric is calculated as follows: See also A 2.2.4 A 2.4/4 Reconciliation to Net Financial Debt Bonds and notes / promissory notes + Liabilities to banks + Liabilities under finance leases + Liabilities from derivatives 1 + Other financial liabilities – Receivables from derivatives 1 = Financial liabilities – Cash and cash equivalents – Current financial assets 2 = Net financial debt 1 These include the market values of interest-rate and currency hedges of recorded transactions. 2 These include short-term loans and receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as available-for-sale financial assets that were recorded as current on initial recognition. The return on capital employed (ROCE) is the ratio of net operating profit after tax (NOPAT) to the average capital employed. NOPAT represents the operating result after taxes and is calculated by subtracting income taxes from EBIT. Income taxes are calculated by multiplying EBIT by a uniform tax rate of 24%, which is based on a historical average of tax rates. The capital employed by Bayer is the total carrying amount of operational noncurrent and current assets, minus liabilities that are largely non-interest-bearing in character or would distort the capital base. An average value, calculated from the values at the end of the prior year and of the reporting year, is used to depict the change in capital employed during the year. The components of the capital employed are as follows: 164 A Combined Management Report Bayer Annual Report 2016 Augmented Version 2.4 Alternative Performance Measures Used by the Bayer Group Components of capital employed € million Goodwill Other intangible assets Property, plant and equipment Other financial assets 1 Inventories Trade accounts receivable Other receivables 1 Deferred tax assets 1 Claims for income tax refunds Gross capital employed Other provisions 1 Trade accounts payable Other liabilities 1 Financial liabilities 1 Deferred tax liabilities 1 Income tax liabilities Capital employed Average capital employed 2016 A 2.4/5 Dec. 31, 2015 Dec. 31, 2016 16,054 15,171 12,369 67 8,493 9,888 2,042 1,295 509 65,888 (6,713) (5,909) (2,272) (13) (804) (1,320) 48,857 16,312 13,567 13,114 58 8,408 10,969 1,701 2,596 676 67,401 (7,039) (6,410) (2,695) – (1,252) (1,307) 48,698 48,777 2015 figures restated 1 Selected items of the component: nonoperative or non-interest-bearing items eliminated within capital employed The total operating performance is the sum of net sales, other operating income, financial income and the net income / loss from investments accounted for using the equity method. It is divided between depreciation, amortization, impairment losses and impairment loss reversals, the cost of materials / other expenses and value added. Value added is defined as the sum of EBIT plus per- sonnel expenses and tax expenses not related to income taxes, and the financial result plus interest expense. The cost of materials / other expenses includes all expenses except deprecia- tion, amortization, impairment losses and impairment loss reversals as well as those incorporated in the value added. Bayer Annual Report 2016 A Combined Management Report 165 3.1 Future Perspectives Augmented Version 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook Economic Outlook World European Union of which Germany United States Emerging markets ² A 3.1.1/1 1 Growth 2016 Growth(cid:3031) 1 forecast 2017 + 2.5% + 1.9% + 1.8% + 1.6% + 3.8% + 2.8% + 1.6% + 1.9% + 2.3% + 4.0% Growth 2016 restated 1 Real growth of gross domestic product, source: IHS Global Insight 2 Including about 50 countries defined by IHS Global Insight as emerging markets in line with the World Bank As of February 2017 Slight increase in the pace of global economic development The global economy will probably grow somewhat more quickly overall in 2017 than in the previ- ous year. In the United States, particularly, we expect better economic development than in 2016. Private consumption will likely remain a key growth driver, as employment and disposable income will probably continue to increase. Positive stimulus will presumably also come from corporate investment. We expect a slight decline in growth in the European Union. Against the background of important elections in a number of countries, uncertainty over the future political development in Europe in particular is likely to hamper growth. In addition, there are unknowns associated with the United Kingdom’s exit from the European Union. On the other hand, we expect the expan- sionary monetary policy of the European Central Bank to have a continued positive impact. Eco- nomic output in the Emerging Markets will probably pick up overall compared with the previous year. We expect strong growth in China but at a slightly slower pace. Supported by rising raw material prices, Brazil and Russia will likely return to the growth zone after severe recession. Moderate to declining industry forecasts Economic Outlook for the Segments Pharmaceuticals market Consumer health market Seeds and crop protection market Animal health market A 3.1.1/2 1 Growth 2016 Growth 1 forecast 2017 + 6% + 4% – 1% + 5% + 4% + 3-4% + 1% + 5% 1 Bayer’s estimate; except pharmaceuticals. Source for pharmaceuticals market: IMS Health. IMS Market Prognosis. Copyright 2016. All rights reserved; currency-adjusted; 2017 data provisional As of February 2017 166 A Combined Management Report Augmented Version 3.1 Future Perspectives Bayer Annual Report 2016 We expect growth in the pharmaceuticals market to decline to 4% in 2017. This expectation is based on the assumption of continued positive stimulus from the United States. We anticipate low-single-digit percentage growth in Europe. We also anticipate that growth of the consumer health market in 2017 will be roughly level with the previous year, at 3 to 4%. We expect similar market conditions to 2016. We predict that the environment for the world seed and crop protection market will remain volatile in 2017 after a weak prior year. Growth stimuli are expected to come from Latin America, the Asia / Pacific region and Eastern Europe. In North America and Western Europe, on the other hand, the pace of growth will presumably lag behind global development. Overall we anticipate a slight recovery in the market as a whole. Based on the continued positive development of innovative products in the animal health market, we expect the growth trend to continue in 2017. In the companion animals business, a positive performance is expected particularly in the United States and Europe. In the farm animals busi- ness, we expect the pace of growth in the Emerging Markets to pick up again slightly. For 2017, Covestro expects a continuation of the growth trend in its main customer industries construction, electrical engineering & electronics, and furniture. However, growth in the automo- tive industry will likely be far weaker than in the previous year. 3.1.2 Corporate Outlook The following forecast is based on the current business development, taking into account the potential risks and opportunities. It is based on the exchange rates at the closing date on Decem- ber 31, 2016, including rates of US$1.05 to the euro. A 1% appreciation (depreciation) of the euro against all other currencies would decrease (increase) sales on an annual basis by some €300 million and EBITDA before special items by about €80 million. Sales to rise to more than €49 billion in 2017 after €46.8 billion in 2016 See also A 2.4 The Board of Management expects the positive development of the Bayer Group to continue in fiscal 2017. Sales of the Bayer Group including Covestro are targeted to increase to more than €49 billion. This corresponds to a low- to mid-single-digit percentage increase on a currency- and portfolio-adjusted basis. EBITDA before special items is forecast to grow by a mid-single-digit percentage. We aim to grow core earnings per share from continuing operations by a mid-single- digit percentage as well. It should be noted that only 64% of Covestro will be reflected for the full year 2017. In addition, it should be noted that the weighted average number of shares has in- creased following the placement of the mandatory convertible notes in November 2016. Sales and earnings forecast by segment We plan sales of approximately €37 billion for the Life Science businesses. This corresponds to a mid-single-digit percentage increase on a currency- and portfolio-adjusted basis. EBITDA before special items is targeted to rise by a mid- to high-single-digit percentage. At Pharmaceuticals, we expect sales of more than €17 billion. This corresponds to a mid-single- digit percentage increase on a currency- and portfolio-adjusted basis. We plan to raise sales of our key growth products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™ to more than €6 billion. We expect a high-single-digit percentage increase in EBITDA before special items. We aim to improve the EBITDA margin before special items. In the Consumer Health segment, we expect sales to come in at more than €6 billion. In line with anticipated market development, we plan to grow sales by a low- to mid-single-digit percentage on a currency- and portfolio-adjusted basis. We expect EBITDA before special items to increase by a low- to mid-single-digit percentage. Bayer Annual Report 2016 A Combined Management Report 167 3.2 Opportunity and Risk Report Augmented Version Net financial debt is targeted to improve to around €10 billion. For Crop Science we are assuming sales of more than €10 billion. This corresponds to a low- single-digit percentage increase on a currency- and portfolio-adjusted basis. We expect EBITDA before special items to be at the prior-year level. In the Animal Health segment, we expect a currency- and portfolio-adjusted increase in sales by a low- to mid-single-digit percentage. We plan to raise EBITDA before special items by a high- single-digit percentage. For the Reconciliation, we expect sales of around €1 billion in 2017. We plan EBITDA before spe- cial items in the region of minus €0.2 billion. For 2017, Covestro is budgeting a sales increase. EBITDA after adjustment for special items should be on or above the prior-year level. Development of further key data In 2017, we expect to take special charges in EBITDA in the region of €0.5 billion for the Bayer Group as a whole. Most of this amount is accounted for by costs in connection with the agreed acquisition of Monsanto and with restructuring and efficiency improvement measures. We aim to increase research and development spending to €4.8 billion. Capital expenditures will amount to about €2.5 billion for property, plant and equipment and around €0.4 billion for intangible assets. Depreciation and amortization are estimated at about €2.9 billion, including €1.4 billion in amorti- zation of intangible assets. We also predict a financial result of around minus €1.4 billion. The effective tax rate is likely to be about 23%. Excluding capital and portfolio measures, net financial debt is targeted to be around €10 billion at the end of 2017. Outlook for Bayer AG On the basis of the business operating leases with Bayer Pharma AG and Bayer CropScience AG that came into effect at the start of 2017, the operational business of these two entities has been transferred to Bayer AG. As a result, the sales of these two entities now accrue to Bayer AG, for which we are predicting sales of more than €14 billion. The budgeted positive earnings of the Pharmaceuticals and Crop Science segments in 2017 will also accrue directly to Bayer AG as a result of the business operating leases. In addition, the earnings of most major Bayer subsidiaries in Germany are transferred directly to Bayer AG under profit and loss transfer agreements. Also, specific intra-company dividend measures ensure the availability of sufficient distributable income. Business development at Bayer AG is subject in principle to the same risks and opportunities as that of the Bayer Group. On account of the interdependencies between Bayer AG and its subsidi- aries, the outlook for the Bayer Group thus largely also reflects the expectations for Bayer AG. Therefore, the forecast for the Bayer Group outlined above applies equally to Bayer AG. In the coming year, based on these factors, we expect Bayer AG to report a distributable profit that will again enable our stockholders to adequately participate in the Bayer Group’s earnings. 3.2 Opportunity and Risk Report 3.2.1 Group-wide Opportunity and Risk Management System As a global enterprise with a diversified portfolio, the Bayer Group is constantly exposed to a wide range of internal or external developments and events that could significantly impact the achieve- ment of our financial and nonfinancial objectives. Rooted in our strategy and planning processes, opportunity and risk management is an integral part of corporate management at Bayer. We re- gard opportunities as positive deviations, and risks as negative deviations, from projected or tar- get values for potential future developments. Opportunity and risk management at Covestro has a similar structure to that of Bayer. 168 A Combined Management Report Augmented Version 3.2 Opportunity and Risk Report Bayer Annual Report 2016 Structure of opportunity and risk management The opportunities and risks the Bayer Group encounters vary in terms of their nature, the organi- zational level concerned and the time horizon. Different processes, methods and IT systems are therefore employed to identify, evaluate, manage and monitor risks and report on them. The prin- ciples underlying the various systems are documented in Group policies. While there are still named owners and coordinators at the management level, overall responsibility for the effective- ness and appropriateness of the systems lies with the Chief Financial Officer. Corporate Governance A 3.2.1/1 Corporate Governance Business processes Opportunity management Risk management Strategy & planning processes Internal control and monitoring systems Internal control system (process risks) Compliance management system (compliance risks) Risk early warning system (Risks that could endanger the company’s existence) Identification • Evaluation • Management • Monitoring • Reporting Process-independent monitoring From identification to monitoring Bayer continuously identifies opportunities and risks by observing macroeconomic, industry- specific, regional and local developments and analyzing trends. The opportunities and risks identi- fied are then evaluated. We attempt to avoid or mitigate risks by taking appropriate countermeas- ures, or to transfer them to third parties (such as insurers) to the extent possible and economically acceptable. We consciously accept and bear manageable and controllable risks that stand in a reasonable relation to the anticipated opportunities – as an aspect of general entrepreneurial risk. We have established and documented specific processes to manage financial opportunities and risks. One component is financial planning, which serves as the basis for determining the liquidity risk and the future foreign currency and interest-rate risks and includes all Group companies that are relevant from a cash flow perspective. Financial planning covers a twelve-month planning horizon and is regularly updated. Opportunity management We identify opportunities as part of the annual strategic planning cycle, during which the seg- ments analyze internal and external factors that may positively affect the development of our business. These may be factors of a social, economic or environmental nature. The core phase of our strategic planning process normally takes place in the first half of the year and starts with a comprehensive analysis of the markets. The segments build on this by analyzing their respec- tive market environments to identify their opportunities. They base these analyses on different time periods to take into account the fact that trends may affect developments over the short, medium or long term. Bayer Annual Report 2016 A Combined Management Report 169 3.2 Opportunity and Risk Report Augmented Version Risk management To enable the Board of Management and the Supervisory Board to monitor material business risks as required by law, the Bayer Group has implemented an internal control system, a compliance management system and a risk early warning system. Covestro’s risk management also compris- es these three components. ICS-related matters are regularly reported to the Chief Financial Officer of Covestro AG, who also chairs Covestro’s Compliance Committee and Corporate Risk Committee. The three systems in place at Bayer are described on the next page. Internal control system for (Group) accounting and financial reporting (Report pursuant to Sections 289, Paragraph 5 and 315, Paragraph 2, No. 5 of the German Commercial Code) As part of the comprehensive risk management system, Bayer has an internal control system (ICS) in place for the (Group) accounting and financial reporting process. This process comprises de- fined structures and workflows implemented throughout the organization. The purpose of our ICS is to ensure proper and effective accounting and financial reporting in accordance with Section 289, Paragraph 5 and Section 315, Paragraph 2, No. 5 of the German Commercial Code. The ICS is designed to guarantee timely, uniform and accurate accounting for all business processes and transactions based on applicable statutory regulations, accounting and financial reporting stand- ards and the internal Group policies that are binding upon all consolidated companies. Risks are identified and evaluated, and steps are taken to counter them. Mandatory ICS standards such as system-based and manual reconciliation processes and functional separation have been derived from these frameworks and promulgated throughout the Group by the Risk Management function on behalf of the Chief Financial Officer of Bayer AG. The management of each Group company holds responsibility for implementing the ICS standards at the local level. Using Bayer’s shared service centers, the Group companies prepare their financial statements locally and transmit them with the aid of a standard Group data model that is based on the Group accounting policy. This ensures the regulatory compliance of the consolidated financial statements. The Board of Man- agement has confirmed the effective functioning of the internal control system for accounting and financial reporting and the relevant criteria for the 2016 fiscal year. However, it should be noted that an internal control system, irrespective of its design, cannot provide absolute assurance that material misstatements in the financial reporting will be avoided or identified. Compliance management system Our compliance management system is aimed at ensuring lawful, responsible and sustainable conduct by our employees. It is designed to identify potential violations in advance and systemati- cally prevent their occurrence. The compliance management system thus contributes significantly to the integration of compliance into our operating units and their processes. Bayer has imple- mented an integrated compliance management system for material risk areas worldwide to strengthen the systematic and preventive identification and evaluation of risks. Risks are identified both from the bottom up via the country organizations and from the top down via the global func- tions, taking global, local and business-specific aspects into account. Additionally, compliance risks are identified by performing a trend analysis based on compliance cases reported from around the world. The findings are discussed by the local business units, the local compliance functions and representatives of the central functions at a round table and are entered into a Group-wide compliance risk management database. Risk early warning system We have established a process known as BayRisk as an early warning system pursuant to Section 91, Paragraph 2 of the German Stock Corporation Act to identify at an early stage any develop- ments that are material and / or could endanger the company’s continued existence. The process owner is the risk management department, which reports directly to the Chief Financial Officer. This establishes a consistent framework and uniform standards for the risk early warning system throughout the Group. The segments, service companies and central functions are included in this system so that corporate risks are captured as fully as possible. The early identification, evalua- tion, management and reporting of risks is the responsibility of named risk officers. See also A 4.2 170 A Combined Management Report Augmented Version 3.2 Opportunity and Risk Report Bayer Annual Report 2016 The BayRisk database maps the Group’s risks – together with the respective countermeasures – that exceed defined, annually updated financial value thresholds as well as risks that are materially relevant for the company but from a financial point of view may not be directly or reliably quantifi- able, if at all. The risk portfolio is reviewed three times a year. Significant changes are documented and reported to the Chief Financial Officer. A report on the risk portfolio is submitted to the Super- visory Board once a year. Process-independent monitoring The effectiveness of our management systems is audited and evaluated at regular intervals by Internal Audit, which has an independent and objective audit function focused on compliance with laws and internal policies. Risks in the areas of occupational health and safety, plant safety, envi- ronmental protection and product quality are assessed by dedicated HSEQ audits. During the audit of the annual financial statements, the external auditor assesses the fundamental suitability of the early warning system to identify at an early stage any risks that could endanger the company’s continued existence. A report on the internal control and monitoring systems and their effectiveness is presented annually to the Supervisory Board. Any weaknesses identified in the internal control system must be reported to the Board of Management and the Supervisory Board. The audit outcomes are used in the continuous improvement of our management and business processes. 3.2.2 Opportunity and Risk Status We classify the risks identified by the risk early warning system as high, medium or low – depend- ing on the potential loss or damage and the probability of occurrence – according to the following matrix. Risk Rating Matrix According to Financial Criteria Cumulative impact (€ million) > 1,250 500 – 1,250 < 500 H = high risk, M = medium risk, L = low risk A 3.2.2/1 Likelihood of occurrence Low Medium High H M L H M L H H L Here we report the risks classified as “medium” or “high” along with the material opportunities identified by our opportunity management. In addition, we report significant risks that from a fi- nancial point of view may not be directly or reliably quantifiable, if at all. Comparable risks existing in different parts of the company are aggregated in some cases. The order in which the risks are listed does not imply any order of importance. The opportunities and risks described may apply to all segments unless otherwise indicated. The impact on the Bayer Group of risks attaching to Covestro is affected by the size of Bayer’s shareholding. Comprehensive information on Covestro’s opportunity and risk status is provided in the current opportunity and risk report forming part of the management report of Covestro AG. Bayer Annual Report 2016 A Combined Management Report 171 3.2 Opportunity and Risk Report Augmented Version Corporate environment Ethical conduct is a matter of essential importance for society. The Bayer Group is dedicated to sustainable development in all areas of its commercial activity. This voluntary commitment is re- flected in our responsible corporate governance. See also A 1.2 Opportunities arising from macrotrends The increase in quality of life and life expectancy is leading to a heightened focus on the medical care needs of elderly patients. Our concentration on certain partly age-related diseases such as cancer or chronic cardiovascular disorders harbors opportunities for us. In response to the grow- ing demand for innovative health care products to treat age-related diseases, Bayer’s Pharmaceu- ticals segment is concentrating its research and development activities on relevant therapeutic areas such as oncology and cardiology. The opportunities for our agricultural businesses arise from global population growth and the in- creasing demand for food. In addition, consumer behavior in some regions is shifting toward high- er demand for food products of animal origin. Agricultural productivity therefore needs to increase in view of declining per-capita acreages, the challenges presented by climate change, and in- creasing pesticide resistance. We expect the demand for high-value seed and crop protection products to rise in light of the need to produce sufficient food and animal feed to meet the grow- ing demand in spite of limited acreages. In response, Crop Science is developing processes to more effectively protect plants against climatic and environmental stress and raise crop yields, for example. Economic environment There is a risk that our growth could be impeded by increasing global cost pressure on health care systems. The prices of pharmaceutical products are subject to regulatory monitoring and control in many markets, and government reimbursement systems often favor less expensive generic medicines over branded products. In addition, in some markets, major health care providers can exert substantial pressure on prices. Price controls and pricing pressure reduce earnings from our pharmaceutical products and may occasionally make the market launch of a new product unprof- itable. As a result, it may be necessary to choose indirect marketing options in order to provide access to pharmaceuticals. We expect the current extent of regulatory controls and pricing pres- sure to persist or increase. A further factor is that our Life Science businesses operate in highly competitive markets. Corporate mergers, along with business practices such as aggressive pric- ing strategies – not only in the field of generic competition – may adversely affect our earnings. However, the pressure on health care systems also presents us with opportunities in the area of nonprescription medicines. Patients are sometimes directed toward non-reimbursable, non- prescription medicines, some of which are manufactured in Bayer’s Consumer Health segment. Moreover, the consumption of health products is increasing due to the aging population. Modern agricultural methods, the application of certain classes of crop protection products and the use of genetic engineering are repeatedly the subject of intense public debate. This political opinion-forming may yield legislative and regulatory decisions that significantly limit the use of our products or even result in voluntary or mandated product withdrawals. In addition, decisions by the European Union, for example, also affect agricultural imports from other parts of the world and therefore our business in those regions. For these reasons we are engaged in a constant dialogue with interest groups and regulators to promote a scientifically founded, rational and responsible discussion and decision-making process. 172 A Combined Management Report Augmented Version 3.2 Opportunity and Risk Report Bayer Annual Report 2016 In the Crop Science segment, risks may arise from seasonal fluctuations in the weather, market volatility for agricultural products and our customers’ financial situations, for example. These may adversely affect both our crop protection and our seeds businesses. The current global consolidation process in the seeds and crop protection industry could greatly alter our future competitive environment. We are responding to this trend with acquisitions, col- laborations and the expansion of in-house research and development capacities. Negative economic developments generally have an adverse effect on the sales markets for Covestro’s products, usually leading to lower sales volumes and a drop in the company’s operational earnings. The extent of these effects on volumes and the operating result also depend on capacity utilization in the industry, which in turn varies according to the supply-demand ratio for industry-specific products. A decline in demand leads to lower sales volumes and ultimately to lower capacity utilization, which adversely impacts margins. See also A 3.1 Further opportunities and risks may arise if the future economic development of our markets var- ies from our estimates. If macroeconomic development is out of line with forecasts, this may posi- tively or negatively impact our sales and earnings expectations. See also A 1.3 Continuous analysis of the economic and regulatory environment and of economic forecasts ena- bles us to pursue the opportunities we identify and address risks. We also closely monitor political developments in key markets. Innovation We believe that our innovation strength holds opportunities both for the continued development of our brands and for the expansion of the research pipeline in all of our businesses. In the Pharma- ceuticals segment, opportunities are inherent in the digitization taking place along the entire value chain – from new, time-saving and efficiency-enhancing research and development methods to new technologies that give us access to innovative business models. In Consumer Health, digital platforms for products and services are opening up new potential for us alongside the conven- tional business with nonprescription medicines. In the Crop Science segment, the digitization of agriculture presents a major opportunity for achieving greater efficiency and sustainability. We also rely on networking, both within the company and with external partners, to boost our innovation strength. This stimulates the development of new products in the long term. Despite all our efforts, we cannot assure that all of the products we are currently developing or will develop in the future will achieve planned approval / registration or commercial success. For example, a drug candidate may fail to meet trial endpoints. The Bayer Group seeks to counter this risk by way of holistic portfolio management in order to estimate the probability of success and prioritize its development projects. There is steady growth in public and regulatory expectations with regard to the safety and efficacy of chemical, biological and pharmaceutical products so we continue to anticipate increasing regu- latory requirements for clinical or (eco)toxicological studies, for example. This leads to higher product development costs and longer timeframes. Projects are set up to coordinate the proper implementation of new regulatory requirements. Bayer Annual Report 2016 A Combined Management Report 173 3.2 Opportunity and Risk Report Augmented Version Acquisitions Where it appears strategically advantageous, we supplement our organic growth by acquiring companies or parts of companies. The integration of new businesses has contributed to our suc- cess in the past and will result in opportunities in the future as well. However, failure to successful- ly integrate a newly acquired business or unexpectedly high integration costs, for example, could jeopardize the achievement of qualitative or quantitative targets and adversely impact earnings. In the course of due diligence and throughout the subsequent integration process, we seek to identi- fy and classify the potential risks of an acquisition target such as compliance with applicable envi- ronmental regulations and occupational health and safety standards at production sites. See also A 1.2 In connection with the acquisition of Monsanto, the merger agreement provides for payment by Bayer of a US$2 billion reverse break fee including, in particular, in the event that the necessary antitrust approvals are not granted by June 14, 2018, and Bayer or Monsanto therefore terminates the merger agreement. Further risks that may arise in connection with the agreed acquisition of Monsanto are described in Chapter 3.2.3. See also A 3.2.3 Collaborations We have collaborations in place along the value chain of our products. Suboptimum performance by collaboration partners may affect the development, manufacture or marketing of our products and services and adversely impact our business. In some countries, for example, the marketing rights for certain pharmaceutical products are held by third parties. Inadequate performance by these marketing partners could adversely affect the development of our sales and costs. There- fore, we have established an Alliance Management unit to monitor the most important collabora- tions and provide relevant support to the operational functions. Patent protection Patents protect our intellectual property. The Bayer Group, now as in the past, has a portfolio that largely consists of patent-protected products. When our products are successfully commercial- ized, some of the profits can be used to continue investing in research and development. Due to the long period of time between the patent application and the market launch of a product, Bayer generally only has a few years in which to earn an adequate return on its investment in research and development. This makes effective and reliable patent protection all the more important. Ge- neric manufacturers, in particular, attempt to contest patents prior to their expiration. Sometimes a generic version of a product may even be launched “at risk” prior to the issuance of a final pa- tent decision. We are currently involved in legal proceedings to enforce patent protection for our products. When a patent defense is unsuccessful, or if one of our patents expires, our prices are likely to come under pressure because of increased competition from generic products entering the market. Legal action by third parties for alleged infringement of patent or proprietary rights by Bayer may impede or even halt the development or manufacturing of certain products or require us to pay monetary damages or royalties to third parties. Our patents department regularly re- views the patent situation in collaboration with the respective operating units and monitors for potential patent infringements so that legal action can be taken if necessary. Products and product stewardship Bayer evaluates the potential health and environmental risks of a product along the entire value chain. Despite extensive studies prior to approval or registration, it is possible that products could be partially or completely withdrawn from the market due to the occurrence of unexpected side effects or other factors. Such a withdrawal may be voluntary or result from legal or regulatory measures. Furthermore, the presence of traces of unwanted genetically modified organisms in agricultural products and / or foodstuffs cannot be entirely excluded. Potential payments of dam- ages in connection with the above risks may have a substantial negative impact on our earnings. Our businesses counter these risks through their organizational and operational structure in the areas of pharmaceutical and crop protection product safety and testing. In addition, Crop Science has a comprehensive stewardship program in place. Stewardship refers to the responsible and ethical management of products over their entire life cycles. See also Note 32 to B Consolidated Financial Statements See also A 1.4.3.1 174 A Combined Management Report Augmented Version 3.2 Opportunity and Risk Report Bayer Annual Report 2016 Another risk we face is that of illegal trading in counterfeit medicines and crop protection products by criminal third parties. In most cases, the composition and the quality of counterfeit products do not correspond to those of the original products. In addition, the fact that no local regulatory au- thority is involved in assuring the quality of the manufacturing or distribution process precludes any official product recall. Products originating from illegal third-party manufacturing not only en- danger patients, users, animals and the environment, but also jeopardize the good reputation of our company and products and undermine our competitive position. Bayer actively assists au- thorities’ efforts to combat product counterfeiting by adopting preventive measures and prosecut- ing offenders. Procurement and production Our Supplier Code of Conduct includes legal and ethical standards to which Bayer attaches the utmost importance. Violations of the Code may also harm our company’s reputation. On the basis of supplier assessments and audits, we verify whether our partners along the supply chain actually comply with our Code of Conduct. We attach great importance not only to product safety but also to protecting our employees and the environment. Risks associated with the manufacturing, filling, storage or shipping of products are mitigated by means of integrated HSEQ management. The materialization of such risks may result in personal injury, property and environmental damage, loss of production, business inter- ruptions and / or liability for compensation payments. Despite all precautions, operations at our sites may be disrupted by natural disasters, fires or explosions, sabotage or supply shortages for our principal raw materials or intermediates. This also applies to external partners along the value chain. Disruption may also result from possible regulatory or legislative changes in the respective countries. If we are unable to meet demand for our products, sales may undergo a structural decline. We counter this risk by distributing produc- tion for certain products among multiple sites or by building up safety stocks. Furthermore, an emergency response system based on the respective Corporate Policy has been implemented at all our production sites as a mandatory component of our HSEQ management. Employees Skilled and dedicated employees are essential for the company’s success. There is keen competi- tion among companies for highly qualified personnel, particularly in countries with full employment and in the emerging economies of Asia and Latin America. If we are unable to recruit a sufficient number of employees in these countries and retain them within Bayer, this could have significant adverse consequences for the company’s future development. Based on our analysis of future requirements, we design appropriate employee recruitment and development measures. In addi- tion, our employee diversity policy enables us to tap the full potential of the employment market. In times of considerable strategic and organizational change at Bayer, deliberate and transparent change management forms an integral part of our human resources management, enabling us to constantly motivate our employees. See also A 1.4.2.1, A 1.4.2.2 www.bayer.com/ en/supplier-code-of- conduct.aspx See also A 1.4.1 Bayer Annual Report 2016 A Combined Management Report 175 3.2 Opportunity and Risk Report Augmented Version Information technology Business and production processes and the internal and external communications of the Bayer Group are increasingly dependent on global IT systems. A significant technical disruption or failure of IT systems could severely impair our business and production processes. Technical precautions such as data recovery and continuity plans are defined and continuously evolved in close cooper- ation with our internal IT organization. The confidentiality of internal and external data is of funda- mental importance to Bayer. A loss of data confidentiality, integrity or authenticity could lead to manipulation and / or the uncontrolled outflow of data and know-how. We have measures in place to counter this risk, including an authorization system. Furthermore, a committee has been estab- lished to determine the fundamental strategy, architecture and safety measures for the Bayer Group. Through these measures, we aim to provide optimum protection based on state-of-the-art technology. Law and compliance The Bayer Group is exposed to risks from legal disputes or proceedings to which we are currently a party or which could arise in the future, particularly in the areas of product liability, competition and antitrust law, anticorruption law, patent law, tax law and environmental protection. Investiga- tions of possible legal or regulatory violations, such as potential infringements of antitrust law or certain marketing and / or distribution methods, may result in the imposition of civil or criminal penalties – including substantial monetary fines – and / or other adverse financial consequences, harm Bayer’s reputation and ultimately hamper our commercial success. Bayer has established a global compliance management system to ensure the observance of laws and regulations. Tax risks Bayer AG and its subsidiaries operate worldwide and are thus subject to many different local tax laws and regulations. Bayer Group companies are regularly audited by the tax authorities in vari- ous countries. Amendments to tax laws and regulations, legal judgments and their interpretation by the tax authorities, and the findings of tax audits in these countries may result in higher tax expense and payments, thus also influencing the level of tax receivables, tax liabilities and de- ferred tax assets and liabilities. Financial opportunities and risks The Bayer Group sees financial opportunities in the market prices it can command, and is ex- posed to financial risks in the form of liquidity, credit and market price risks, as well as risks result- ing from pension obligations. Liquidity risk Liquidity risks result from the possible inability of the Bayer Group to meet current or future pay- ment obligations due to a lack of cash or cash equivalents. The liquidity risk is determined and managed by the Finance department as part of our same-day and medium-term liquidity planning. The Bayer Group holds sufficient liquidity to ensure the fulfillment of all planned payment obliga- tions at maturity. In addition, a reserve is maintained for unbudgeted shortfalls in cash receipts or unexpected disbursements. The amount of this liquidity reserve is regularly reviewed and adjusted as necessary according to circumstances. Liquidity is mainly ensured through overnight and term deposits. Credit facilities also exist with banks. These include, in particular, an undrawn €3.5 billion syndicated credit facility. Additionally, credit facilities totaling €1.5 billion are available to the Covestro Group. See also A 3.2.1, A 4.2 and Note 32 to B Consolidated Financial Statements See also A 3.2.3 and Note 30.2 to B Consolidated Financial Statements 176 A Combined Management Report Augmented Version 3.2 Opportunity and Risk Report Bayer Annual Report 2016 See also Note 22 to B Consolidated Financial Statements Credit risks Credit risks arise from the possibility that the value of receivables or other financial assets of the Bayer Group may be impaired because counterparties cannot meet their payment or other per- formance obligations. The maximum default risk is reduced by existing collateral, especially our global credit insurance programs. See also Note 30.3 to B Consolidated Financial Statements Positive and negative fair values of derivative financial instruments may be netted when certain conditions are fulfilled. To manage credit risks from trade receivables, the respective invoicing companies appoint credit managers who regularly analyze customers’ creditworthiness. Some of these receivables are collateralized, and the collateral is used according to local conditions. It includes credit insurance, advance payments, letters of credit and guarantees. We generally agree reservation of title with our customers. Credit limits are set for all customers. All credit limits for debtors where total exposure is €10 million or more are evaluated by local credit management and submitted to the Group-wide risk committee of the Finance function. Credit risks from financial transactions are managed centrally in the Finance department. To minimize risks, financial trans- actions are only conducted within predefined exposure limits and with banks and other partners that preferably have investment-grade ratings. All risk limits are based on methodical models, and adherence to them is continuously monitored. Opportunities and risks resulting from market price changes Opportunities and risks resulting from fluctuating exchange and interest rates in the market are managed by the Finance function. Risks are avoided or mitigated through the use of derivative financial instruments. The type and level of currency and interest-rate risks are explained using sensitivity analyses based on hypothetical changes in risk variables (such as interest curves) to determine the potential effects of market price fluctuations on equity and earnings. The assump- tions used in the sensitivity analyses reflect our view of the changes in currency exchange and interest rates that are reasonably possible over a one-year period. These assumptions are regular- ly reviewed. Foreign currencies Foreign currency opportunities and risks for the Bayer Group result from changes in exchange rates and the related changes in the value of financial instruments (including receivables and payables) and of anticipated payment receipts and disbursements in the functional currency. Receivables and payables in liquid currencies from operating activities and financial items are generally fully exchange-hedged through forward exchange contracts and cross-currency inter- est-rate swaps. Anticipated exposure from planned payment receipts and disbursements in the future is hedged according to the rules agreed between the Board of Management, the Finance function and the operating units. Hedging takes place through forward exchange contracts and currency options. Sensitivities were determined on the basis of a hypothetical adverse scenario in which the euro depreciates by 10% against all other currencies compared with the year-end exchange rates. In this scenario, the estimated hypothetical loss of cash flows from derivative and nonderivative financial instruments would have diminished earnings and equity (other comprehensive income) as of December 31, 2016, by €380 million (December 31, 2015: €303 million). Of this amount, €174 million is related to the U.S. dollar, €58 million to the Chinese renminbi, €57 million to the Japanese yen and €33 million to the Canadian dollar. Currency effects on anticipated exposure are not taken into account. Derivatives used to hedge anticipated currency exposure that are designated for hedge accounting would have diminished other comprehensive income by €365 million. Bayer Annual Report 2016 A Combined Management Report 177 3.2 Opportunity and Risk Report Augmented Version Interest rates Interest-rate opportunities and risks result for the Bayer Group through changes in capital market interest rates, which in turn could lead to changes in the fair value of fixed-rate financial instru- ments and changes in interest payments in the case of floating-rate instruments. Interest-rate opportunities and risks are managed over a target duration established by management for Bayer Group debt. This target duration is subject to regular review. Interest-rate swaps are concluded to achieve the target structure for Bayer Group debt. A sensitivity analysis based on our net floating- rate receivables and payables position at year end 2016, taking into account the interest rates relevant for our receivables and payables in all principal currencies, produced the following result: a hypothetical increase of one percentage point in these interest rates (assuming constant curren- cy exchange rates) as of January 1, 2016, would have raised our interest expense for the year ended December 31, 2016, by €31 million (December 31, 2015: €29 million). Financial risks associated with pension obligations The Bayer Group has obligations to current and former employees related to pensions and other post-employment benefits. Changes in relevant measurement parameters such as interest rates, mortality and salary increase rates may raise the present value of our pension obligations. This may lead to increased costs for pension plans or diminish equity due to actuarial losses being recognized as other comprehensive income in the statement of comprehensive income. A large proportion of our pension and other post-employment benefit obligations is covered by plan as- sets including fixed-income securities, shares, real estate and other investments. Declining or even negative returns on these investments may adversely affect the future fair value of plan as- sets. Both these effects may negatively impact the development of equity and / or earnings and / or may necessitate additional payments by our company. We address the risk of market-related fluctuations in the fair value of our plan assets through balanced strategic investment, and we constantly monitor investment risks in regard to our global pension obligations. 3.2.3 Planned Acquisition of Monsanto On September 14, 2016, Bayer signed a definitive merger agreement with Monsanto Company, St. Louis, Missouri, United States, under which Bayer will acquire all outstanding shares of Mon- santo Company. On December 13, 2016, the shareholders of Monsanto Company approved the transaction by the necessary majority. In order to prepare the future integration of the Monsanto business, Bayer has initiated a project which will carefully plan the integration process in all busi- ness areas so that integration can be achieved after all regulatory approvals have been received. This process will include risk management applying our existing methods. The integration process will start after the transaction is closed, which we currently expect before the end of 2017. Bayer is experienced in successfully integrating acquisitions from a business, geographical and cultural perspective, and in so doing remains committed to its strong culture of innovation, sustainability and social responsibility. Opportunities Following the successful integration of the Monsanto business, we see additional opportunities for combining our complementary innovative expertise. The range and depth of our research and development activities should make it possible to opti- mize the various technologies so that we can accelerate the time-to-market of enhanced innova- tions. This optimized product offering to customers in the agriculture sector should contribute to improving their yields and productivity and contribute to greater sustainability in farming. See also Note 25 to B Consolidated Financial Statements See also A 1.2.1 for Crop Science strategy 178 A Combined Management Report Augmented Version 3.2 Opportunity and Risk Report Bayer Annual Report 2016 Risks On account of the magnitude and importance of the acquisition, material risks related to the transaction are listed below. These risks have not been selected on the basis of the BayRisk pro- cess described in Chapter 3.2.1 because Bayer and Monsanto remain separate, independent companies. Instead they have been identified and estimated by the central risk management func- tion based on the information available. The list of risks therefore makes no claim to complete- ness, nor does the order in which they are listed imply any order of importance. Requirements for closing At the present time the possibility cannot be excluded that the planned acquisition will be delayed or not take place at all. The transaction is still subject to the customary requirements for closing, including clearance by the relevant antitrust and other authorities. The necessary approvals may be refused or could be tied to certain divestment actions or other commitments required by regu- lators of Bayer and / or Monsanto. Such measures could adversely affect our current or future business, financial position, share price or dividend payments. Furthermore, Bayer may not be able to effect commitments in a timely manner, or at all, or on economically viable terms. The merger agreement also provides for payment by Bayer of a US$2 billion reverse break fee including, in particular, in the event that the necessary antitrust approvals are not granted by June 14, 2018, and Bayer or Monsanto therefore terminates the merger agreement. Strategic or operational objectives may not be met Our strategic, synergistic and other operational objectives regarding the acquisition and integra- tion of the Monsanto business are based on assumptions and estimates we have made that may prove inaccurate, including Monsanto’s earning potential and cost structure, the synergy and innovation potentials of both companies and future economic developments and market changes. In addition, difficulties may arise in connection with the acquisition and integration of the Monsan- to business that adversely impact our current business or may prevent the expected benefits of the acquisition from being fully realized. These include the retention of key employees, important customers, suppliers, partners, licensors or contacts to other stakeholders, unexpected challeng- es in developing and successfully executing a strategy for the combined business, and risks re- sulting from management being distracted from the operational business by the agreed transac- tion. Combining businesses, processes and workforces as intended while retaining multiple corporate locations could be more complex than expected, partly in view of different corporate cultures and divergent internal control and compliance systems. The achievement of expectations in terms of the tax and accounting treatment of the transaction will be subject to a future detailed review. In light of this, unexpectedly high transaction and integration costs along with further risks and / or charges cannot be ruled out. It is also possible that we may be forced to recognize an impairment loss on the intangible assets of Monsanto and the goodwill of Crop Science if unfore- seen difficulties were to arise during the integration, if the Monsanto business were to fail to de- velop as expected or if other business developments affecting Crop Science were to occur that have not been anticipated. Bayer Annual Report 2016 A Combined Management Report 179 3.2 Opportunity and Risk Report Augmented Version Changes in risk profile We believe we may face increased or additional risks as a consequence of acquiring and integrat- ing the Monsanto business. However, these risks cannot yet be definitively identified at the pre- sent time. Among the possible consequences of taking over the Monsanto business are potential downgrades in sustainability ratings and increased exposure to public criticism. Risks from the financing of the planned acquisition We are also exposed to certain risks from the financing of the planned acquisition. These mainly result from the need to refinance the original acquisition financing, the increase in debt and the possible credit rating downgrade by the rating agencies. Risks also arise from the development of the USD / EUR exchange rate and the interest rate level, as well as from potential difficulties in refinancing the transaction with equity capital to the extent planned. 3.2.4 Overall Assessment of Opportunities and Risks by the Board of Management In the opinion of the Board of Management, based on the current evaluations, none of the risks described above endanger the company’s continued existence. Nor could we identify any risk interdependencies that could combine to endanger the company’s continued existence. We note a tendency for risks to shift toward a higher evaluation level. This is partly due to the increased sales and earnings expectations for our products. Based on our product portfolio, our know-how and our innovation strength, we are convinced that we can take advantage of the opportunities resulting from our entrepreneurial activity and successfully master the challenges resulting from the risks stated above. No risks that could endanger the company’s existence 180 Augmented Version A Combined Management Report Bayer Annual Report 2016 4.1 Declaration by Corporate Management pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code The Board of Manage- ment and the Superviso- ry Board have compiled a complete Corporate Governance Report, which is available on the Bayer AG website at www.bayer.com/ en/Corporate- Governance.aspx See also C Governance Bodies The declaration issued in December 2016 con- cerning the German Corporate Governance Code is published on the Bayer website along with previous declarations: www.bayer.com/ corp-gov 4. Corporate Governance Report > Conformance with the recommendations of the German Corporate Governance Code > Comprehensive compliance system ensures ethical behavior > New, simplified compensation structure for the Board of Management in effect Corporate governance comprises the entire system of managing and supervising an enterprise. The Board of Management and the Supervisory Board of Bayer AG are committed to a responsi- ble and transparent style of management and supervision aimed at increasing the company’s value over the long term. The Corporate Governance Report conforms with the recommendations of the German Corporate Governance Code and includes all the information and explanations required by Section 289, Paragraph 4; Section 289a; and Section 315, Paragraphs 4 and 5, of the German Commercial Code. 4.1 Declaration by Corporate Management pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code The declaration on corporate governance for Bayer AG and the Bayer Group pursuant to Section 289a of the German Commercial Code forms part of the Combined Management Report. The information provided pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code is unaudited pursuant to Section 317, Paragraph 2, Sentence 3, of the German Commercial Code. Declaration concerning the German Corporate Governance Code pursuant to Section 161 of the German Stock Corporation Act In 2016, the Board of Management and the Supervisory Board of Bayer AG again issued a decla- ration that they fully complied with the recommendations of the German Corporate Governance Code in the past and intend to maintain full compliance in the future. Information on corporate governance practices Objectives for the composition of the Supervisory Board The Supervisory Board should be composed in such a way that its members together possess the necessary expertise, skills and professional experience to properly perform their duties. In view of Bayer AG’s global operations, the Supervisory Board has set itself the goal of always having several members with international business experience or an international background. A further objective concerning the composition of the Supervisory Board is that, absent special circum- stances, a member should not hold office beyond the end of the next Annual Stockholders’ Meet- ing following his or her 72nd birthday. With a view to avoiding potential conflicts of interest, the Supervisory Board has set itself the goal that more than half of the stockholder representatives be independent. In addition, the Supervisory Board aims for at least three quarters of its total mem- bership (stockholder and employee representatives) to be independent. The Supervisory Board assesses the independence of its members according to the recommendation contained in Sec- tion 5.4.2 of the the German Corporate Governance Code. In assessing independence, the Su- pervisory Board also considers the criteria given in the recommendation of the European Commis- Bayer Annual Report 2016 A Combined Management Report 4.1 Declaration by Corporate Management pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code 181 Augmented Version sion of February 15, 2005.1 Finally, the Supervisory Board has set a standard limit on the duration of any person’s membership of the Supervisory Board in line with the recommendation in Section 5.4.1, Paragraph 2 of the Code. Absent special circumstances, no person should remain a mem- ber of the Supervisory Board for more than three full terms of office. For members of the Supervi- sory Board serving at the time the standard limit was introduced (September 2015) who have already exceeded this limit or will exceed it by the end of their current term of office, the limit will be applied with effect from the conclusion of their current term of office. The stated objectives refer to the Supervisory Board as a whole unless otherwise determined. However, since the Supervisory Board can only nominate candidates for election as stockholder representatives, it can only take the objectives into account in these nominations. The objective for Supervisory Board elections held after January 1, 2016, is that neither women nor men ac- count for less than 30% of the membership. Implementation status of the objectives The Supervisory Board has several members with international business experience or an interna- tional background. The objective that a member should step down from the Supervisory Board at the Annual Stockholders’ Meeting following his or her 72nd birthday – absent special circum- stances – is being met. Two members of the Supervisory Board were previously members of the company’s Board of Management: Werner Wenning was Chairman of the Board of Management until 2010, and Prof. Dr. Wolfgang Plischke was a member of the Board of Management until 2014. However, neither Werner Wenning nor Prof. Dr. Wolfgang Plischke has any personal or business relationship with the company or a governance body of the company that in the opinion of the Supervisory Board gives rise to a material conflict of interest of a more than temporary na- ture. There are no indications of any possible lack of independence in the case of the other Supervisory Board members. Thus the Supervisory Board considers all of its members to be independent. The proportion of women is currently 25% on the Supervisory Board as a whole and 30% among the stockholder representatives. The election of new employee representatives to the Supervisory Board with effect from the end of the 2017 Annual Stockholders’ Meeting and the election of stockholder representatives by the 2017 Annual Stockholders’ Meeting will result in an increase in the proportion of women on the Supervisory Board as a whole to at least 30%. Objectives regarding the proportion of women on the Board of Management and the first two management levels The Supervisory Board aims to ensure that there is at least one woman serving on the company’s Board of Management. This corresponded to a share of 12.5% for the eight-member Board that existed at the beginning of the year, or about 14.3% for the seven-member Board now serving. The Board of Management has set objectives of 20% women on the first management level and 28% women on the second management level. These objectives are to be attained by June 30, 2017. In the future, there should be at least one woman on the Board of Management. Securities transactions by members of governance bodies Members of the Board of Management or Supervisory Board and persons with whom they have close relationships are legally obligated to report own-account transactions in shares or debt se- curities of Bayer AG, associated derivatives or other associated financial instruments to Bayer AG and the German Federal Financial Supervisory Authority (BaFin) as soon as the total volume of their transactions within a calendar year has reached the €5,000 threshold. The transactions re- ported to Bayer AG in 2016 were duly published and can be viewed on the company’s website. https://www.bayer.com/ en/disclosure-of- securities- transactions.aspx 1 Annex 2 to the recommendation of the European Commission of February 15, 2005, on the role of nonexecutive or supervisory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC) 182 Augmented Version A Combined Management Report Bayer Annual Report 2016 4.1 Declaration by Corporate Management pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code The Board of Management and Supervisory Board members’ total holdings in Bayer AG shares or associated financial instruments, as reported to the company, on the closing date for the financial statements were equivalent to less than 1% of the issued shares. Description of the procedures of the Board of Management and Supervisory Board and the composition and procedures of their committees Online Annex: A 4.1-1 Duties and activities of the Board of Management The Board of Management runs the Company on its own responsibility with the goal of sustain- ably increasing the company’s enterprise value and achieving defined corporate objectives. The Board of Management performs its tasks according to the law, the Articles of Incorporation and the Board’s rules of procedure, and works with the company’s other governance bodies in a spirit of trust. The Board of Management of Bayer AG defines the long-term goals and the strategies for the company and the Group and sets forth the principles and directives for the resulting corporate policies. It coordinates and monitors the most important activities, defines the portfolio, devel- ops and deploys managerial staff, allocates resources and decides on the Group’s financial steering and reporting. The members of the Board of Management bear joint responsibility for running the business as a whole. However, the individual members manage the areas assigned to them on their own re- sponsibility within the framework of the decisions made by the full Board. The allocation of functions among the members of the Board of Management is defined in a written schedule. The full Board of Management makes decisions on all matters of fundamental importance and in cases where a decision of the full Board is prescribed by law or otherwise mandatory. The rules of procedure of the Board of Management contain a list of topics that must be dealt with and resolved by the full Board. Meetings of the Board of Management are held regularly. They are convened by the Chairman of the Board of Management. Any member of the Board of Management may also demand that a meeting be convened. The Board of Management makes decisions by a simple majority of the votes cast, except where unanimity is required by law. In the event of a tie, the Chairman has the casting vote. According to the Board of Management’s rules of procedure and the functional responsibilities assigned to its members, the Chairman bears particular responsibility for leading and coordi- nating the Board’s work. He represents the company and the Group in dealings with third par- ties and the workforce on matters relating to more than one part of the company or the Group. He also bears special responsibility for certain functions. Effective January 1, 2016, the Board of Management was enlarged by three members as part of the Bayer Group’s sole focus on the Life Science business and the associated reorganiza- tion. In addition to the function of Board Chairman and the three functions newly created as of January 1, 2016, each of which has special responsibility for one of the operating divisions, there were initially four further functions: Strategy and Portfolio Management; Finance; Human Resources, Technology and Sustainability (the incumbent also serving as Labor Director); and Innovation. With the appointment of the new Chairman of the Board of Management effective May 1, 2016, the Strategy and Portfolio Management function was allocated to the Chairman. A Deal Committee was established within the Board of Management to make the final decisions on corporate acquisitions, divestments or licensing transactions above a defined medium size. There are no other committees within the Board of Management. Bayer Annual Report 2016 A Combined Management Report 4.1 Declaration by Corporate Management pursuant to Section 289a and Section 315, Paragraph 5, of the German Commercial Code 183 Augmented Version Supervisory Board: oversight and control functions The role of the 20-member Supervisory Board is to oversee and advise the Board of Manage- ment. Under the German Codetermination Act, half the Supervisory Board’s members are elected by the stockholders, and half by the company’s employees. The Supervisory Board is directly involved in decisions on matters of fundamental importance to the company, regularly conferring with the Board of Management on the company’s strategic alignment and the im- plementation status of the business strategy. The Chairman of the Supervisory Board coordinates its work and presides over the meetings. Through regular discussions with the Board of Management, the Supervisory Board is kept constantly informed of business policy, corporate planning and strategy. The Supervisory Board approves the annual budget and financial framework. It also approves the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group along with the com- bined management report, taking into account the reports by the auditor. Committees of the Supervisory Board The Supervisory Board has the following committees: Presidial Committee: This comprises the Chairman and Vice Chairman of the Supervisory Board along with a further stockholder representative and a further employee representative. The Presidial Committee serves primarily as the mediation committee pursuant to the German Codetermination Act. It has the task of submitting proposals to the Supervisory Board on the appointment of members of the Board of Management if the necessary two-thirds majority is not achieved in the first vote at a plenary meeting. Certain decision-making powers in connec- tion with capital measures, including the power to amend the Articles of Incorporation accord- ingly, have also been delegated to this committee. In addition, the Supervisory Board may as- sign specific responsibilities to the Presidial Committee on a case-by-case basis. The Presidial Committee may also make preparations for Supervisory Board meetings. Audit Committee: The Audit Committee comprises three stockholder representatives and three employee representatives. The Chairman of the Audit Committee in 2016, Dr. Klaus Sturany, meets the statutory requirements concerning the expertise in the field of accounting or auditing that a member of the Supervisory Board and the Audit Committee is required to possess. The Audit Committee meets regularly four times a year. Its principal tasks are to oversee the finan- cial reporting process, the effectiveness and ongoing development of the internal control sys- tem, the risk management system, the internal audit system, the compliance system and the audit of the financial statements. It prepares the decisions of the Supervisory Board pertaining to the financial statements, the management report, the proposal for the use of the distributa- ble profit, the consolidated financial statements, the Group management report and the agree- ments with the external auditor, including, in particular, the audit contract, the definition of audit priorities and the fee agreement. The Audit Committee submits a proposal to the Supervisory Board concerning the auditor’s appointment and takes appropriate steps to ascertain and oversee the auditor’s independence. In particular, it verifies whether the financial statements were prepared in accordance with the statutory requirements and give a true and fair view of the net assets, financial position and results of operations of the company and the Group. At each of its meetings, the Audit Committee discusses new developments in the area of compli- ance where necessary. The Chairman of the Board of Management and the Chief Financial Of- ficer regularly attended the meetings. Representatives of the auditor also attended all of the meetings, reporting in detail on the audit work and the audit reviews of the quarterly financial reports. Human Resources Committee: On this committee, too, there is parity of representation be- tween stockholders and employees. It consists of the Chairman of the Supervisory Board and three other Supervisory Board members. The Human Resources Committee prepares the per- sonnel decisions of the full Supervisory Board, which resolves on appointments or revocations of appointments of members of the Board of Management. The Human Resources Committee 184 A Combined Management Report Bayer Annual Report 2016 Augmented Version 4.2 Compliance resolves on behalf of the Supervisory Board on the service contracts of the members of the Board of Management. However, it is the task of the full Supervisory Board to resolve on the to- tal compensation of the individual members of the Board of Management and the respective compensation components, as well as to regularly review the compensation system on the ba- sis of recommendations submitted by the Human Resources Committee. The Human Re- sources Committee also discusses the long-term succession planning for the Board of Man- agement. Nominations Committee: This committee carries out preparatory work when an election of stockholder representatives to the Supervisory Board is to be held. It suggests suitable candi- dates for the Supervisory Board to propose to the Annual Stockholders’ Meeting for election. The Nominations Committee comprises the Chairman of the Supervisory Board and the other stockholder representative on the Presidial Committee. Innovation Committee: The Innovation Committee is primarily concerned with the innovation strategy and innovation management, the strategy for protection of intellectual property, and Bayer’s major research and development projects. Within its area of responsibility, the commit- tee advises and oversees the management and prepares any Supervisory Board decisions. The committee comprises the Chairman of the Supervisory Board and five other members, with parity of representation between stockholder and employee representatives. The Chairman of the Board of Management and the member of the Board of Management responsible for inno- vation regularly attend the meetings of the Innovation Committee. The Report of the Supervisory Board in this Annual Report provides details about the work of the Supervisory Board and its committees. 4.2 Compliance www.bayer.com/ compliance www.covestro.com/en/ company/corporate- compliance Bayer manages its businesses responsibly and in compliance with the statutory and regulatory requirements of the countries in which it operates. We define compliance as legally and ethically impeccable conduct by all employees in their daily work, because the way they carry out their duties affects our company’s reputation. We do not tolerate any violation of laws, codes of con- duct or internal regulations. Compliance is essential for our long-term economic success. Covestro has established its own compliance organization and an internal audit department with systems and processes similar to those at Bayer. This chapter does not include compliance infor- mation for Covestro. Global Corporate Compliance Policy The Board of Management is unreservedly committed to compliance, and Bayer will forgo any business transaction that would violate the compliance principles in force throughout the Bayer Group. These principles are enshrined in our Corporate Compliance Policy, which was revised in 2016. The new version is currently being rolled out to Bayer companies in all countries. Online Annex: A 4.2-1 In our Corporate Compliance Policy we commit ourselves to the following principles: > Antitrust: fair competition in our markets > Anticorruption: integrity in our business dealings at all times > Corporate responsibility: sustainability, safety and product stewardship > Foreign trade law: observance of relevant trade controls > > Accurate books and records: complete and detailed recording of our business activities and Insider trading: safeguarding of equal opportunity in securities trading financial transactions Bayer Annual Report 2016 A Combined Management Report 185 4.2 Compliance Augmented Version Intellectual property: safeguarding our own intellectual property and respecting that of others > Fairness and respect at work: treating one another with fairness and respect > > Avoiding conflicts of interest: separation of business and personal interests > Privacy: precautions to protect and secure personal data Every employee is required to observe these rules and to immediately report any violation of the Corporate Compliance Policy. This general reporting requirement does not apply in France due to peculiarities of national law. Bayer’s senior managers serve as role models and therefore have a vital part to play in implement- ing the Corporate Compliance Policy. They may lose their entitlement to variable compensation components and be subject to further disciplinary measures if violations of applicable law or inter- nal regulations have occurred in their sphere of responsibility. Compliant and lawful conduct also factors into the performance evaluations of all managerial employees. Adherence to the Corporate Compliance Policy is among the subjects covered in all audits con- ducted by Bayer’s Internal Audit. The planning of these audits follows a function- and risk-based approach that also takes a corruption perceptions index into account. The largest companies, which together account for about 80% of Group sales, are generally subjected to on-site audits at three-year intervals. A total of 171 compliance audits were completed in 2016, of which 36 were preventive or incident-related audits. The head of Internal Audit and the Group Compliance Officer regularly attend the meetings of the Audit Committee of the Supervisory Board, presenting a summary of conducted audits and their outcomes at least once a year. Established compliance organization The Bayer Group’s compliance organization is headed by the Group Compliance Officer, who regularly reports directly to the Chairman of the Board of Management and to the Audit Commit- tee of the Supervisory Board. A central compliance department supports the Group Compliance Officer in steering and implementing the Group-wide compliance activities. This department is staffed with specialized compliance business partners whose responsibilities include establishing business- and industry-specific standards in the divisions, Group functions and service compa- nies. In addition, at least one compliance business partner is available at each site to answer questions from all employees regarding lawful and ethical behavior in business-related situations. Corruption Perceptions Index: see Glossary The mission and goals of Bayer’s compliance organization are set forth in a Compliance Charter. This relies on early prevention and forms the basis for proactive, risk-based collaboration within the company. For compliance to continue developing as a permanent, active part of Bayer’s cor- porate culture, it needs to remain firmly anchored in all units and in all work processes. The Group-wide compliance management system is based on partnerships with the operational busi- ness and features dialogue, transparency and continuous improvement. It also includes the sys- tematic punishment of compliance violations. See also A 3.2.1 Compliance violations can be reported – anonymously if desired – via a compliance hotline that has been set up worldwide and which is also accessible to the general public. In 2016 the compli- ance organization received a total of 220 reports in this way (including 159 anonymous reports), with 9 reports coming from Germany and 211 from other countries. Alternatively, suspected com- pliance violations may also be reported to the respective compliance functions in Germany or the country organizations, or to Internal Audit. All cases are recorded according to uniform criteria throughout the Group and dealt with under the rules set forth in Bayer’s Policy on the Manage- ment of Compliance Incidents. 186 A Combined Management Report Bayer Annual Report 2016 Augmented Version 4.2 Compliance Online Annex: A 4.2-2 Where an investigation confirms that a compliance violation has occurred, the company has a graduated set of measures at its disposal. These include a verbal warning or written reprimand, transfer to a different unit, cancellation of a planned promotion, a reduction in the short-term incentive payment, downgrading to a lower collectively agreed pay rate or managerial contract level, and ordinary or extraordinary termination. Bayer also reserves the right to assert further claims against the employee for cost reimbursement or damages and/or initiate criminal pro- ceedings. The action taken in a particular case depends on the gravity of the compliance viola- tion and on applicable law. Group target: annual compliance training for close to 100% of Bayer managers; see also A 1.2.1 Comprehensive compliance training and communications Group-wide training programs tailored to requirements and target groups, along with extensive communications activities, help to further raise the employees’ awareness for compliance issues and the risks involved. At the same time, this training familiarizes them both with the Corporate Compliance Policy and with statutory regulations. We have set a Group target requiring all Bayer’s managerial employees worldwide to complete at least one compliance training program each year. In 2016, this was achieved by 33,659 employees or around 97% of Bayer managers. Online Annex: A 4.2-3 The aim of these targeted training programs is to ensure that employees do not overstep boundaries out of ignorance or uncertainty. Our compliance training programs reflect the main compliance risk areas and are available in various formats to meet the training needs of differ- ent employee groups. Some take the form of web-based training (WBT) programs, while others involve face-to-face training sessions or workshops. See also A 1.4.2.3 In 2016, we implemented a new global web-based training program in 44 countries on the sub- ject of “Fairness and respect at work.” This program, currently available in 9 languages, has al- ready been completed by 32,141 employees. New hires and employees switching to different areas of responsibility within Bayer regularly undergo training according to their functions. In view of the particularly strict compliance rules in health care, we offer special training pro- grams for the employees working with stakeholders in this field. In 2016, compliance was again the subject of wide-ranging internal communications activities, one area of focus being the presentation and global distribution of the newly updated Corpo- rate Compliance Policy. Employees were given additional information on various compliance- related topics, with a focus on “fairness and respect in the workplace.” Bayer Annual Report 2016 A Combined Management Report 187 4.3 Compensation Report Augmented Version The compensation of the Board of Management is linked to the sustained growth of corporate value. 4.3 Compensation Report The Compensation Report describes the essential features of the compensation packages for the members of the Board of Management and the Supervisory Board of Bayer AG and explains the compensation the individual members were granted or received for the 2016 fiscal year. The re- port complies with the requirements of the applicable financial reporting standards for publicly traded companies (German Commercial Code [HGB], German Accounting Standards [DRS] and the International Financial Reporting Standard [IFRS]) as well as with the recommendations con- tained in the current version of the German Corporate Governance Code. 4.3.1 Compensation of the Board of Management Adjustment of the compensation system effective January 1, 2016 The compensation system for the Board of Management of Bayer AG is aligned to the corporate strategy and geared toward performance-driven, sustainable corporate governance and an ap- propriate compensation structure and level. The compensation structure in the Bayer Group is, in principle, the same for the Board of Management as for all other managerial employees. The na- ture and appropriateness of the compensation system for the members of the Board of Manage- ment are determined by the full Supervisory Board on the proposal of the Human Resources Committee of the Supervisory Board, regularly reviewed and adjusted as necessary. All of the assessment criteria recommended in Section 4.2.2 of the German Corporate Governance Code are taken into account. An independent compensation consultant has confirmed that the com- pensation is appropriate and on a customary level. Upon conducting a comprehensive review of the compensation system at the end of 2015, the Supervisory Board identified a need for adjustments, mainly in light of the Group’s new divisional structure, which came into effect on January 1, 2016, the enlargement of the Board of Manage- ment by three new members with operational responsibilities, and the target positioning in relation to the other DAX companies. The adjusted compensation system for the members of the Board of Management was approved by a large majority at the Annual Stockholders’ Meeting on April 29, 2016. Compensation structure simplified to enhance transparency Under the new compensation structure for the Board of Management of Bayer AG, the previous ratio of the non-performance-related components (about 30%) to the performance-related variable components (about 70%) is basically unchanged. The compensation components under the new system are as follows, assuming 100% target attainment by a member of the Board of Management: Compensation Structure Based on 100% Target Attainment A 4.3.1/1 Non-performance-related compensation ~ 30% Fixed annual compensation 1 Performance-related compensation ~ 40% Long-term stock-based cash compensation via Aspire 2.0 ~ 30% Short-term annual variable cash compensation 1 Excluding fringe benefits and pension entitlements The structure of the non-performance-related components is the same as before. The adjust- ments mainly concern the performance-related variable components. These now comprise a vari- 188 A Combined Management Report Augmented Version 4.3 Compensation Report Bayer Annual Report 2016 The compensation structure provides for both non-performance- related and perfor- mance-related compo- nents. able annual cash payment (STI = short-term incentive) based on target attainment, which is paid out entirely in cash in the following year, and a long-term variable cash payment (LTI = long-term incentive). The system for the new LTI program was also adjusted and is based on stockholder return. The individual performance-related components are capped upon payment. There is also a cap on the total cash compensation. This amounts to 1.8 times the respective target compensa- tion and is determined annually when the fixed compensation is set. The members of the Board of Management also receive pension entitlements for themselves and their surviving dependents. Non-performance-related components Fixed annual compensation The level of the non-performance-related, fixed annual compensation takes into account the func- tions and responsibilities assigned to the members of the Board of Management as well as market conditions. The fixed annual compensation is regularly reviewed by the Supervisory Board in light of the consumer price indexes and adjusted if necessary. It is paid out in twelve monthly install- ments. Fringe benefits This component mainly includes perquisites such as a company car with driver or the use of the company carpool, payments toward the cost of security equipment, and the reimbursement of the cost of annual health screening examinations. Fringe benefits are reported at cost or the amount of the pecuniary advantage gained. Performance-related components Short-term variable cash compensation The short-term variable cash compensation (STI) depends on the company’s business success in the respective year. The level of the STI is determined by the target attainment for three subcom- ponents – the Group component, the divisional component and the individual performance com- ponent – each of which is given a one-third weighting in the performance evaluation. The perfor- mance evaluation takes into account both positive and negative developments. As part of the adjustment of the compensation system starting in 2016, the individual target parameters for the STI were adjusted to the new organizational structure of the Group and the payment of the STI was simplified. The entire amount of the STI is now paid out in cash in the second quarter of the following year. The previous 50:50 split of the STI into a cash payment and a grant of virtual Bayer shares blocked for three years has been abolished. The STI continues to be capped at a total of 200%. The individual target parameters of the three subcomponents of the STI for 2016 are calculated as follows: > The Group component continues to be based on the core earnings per share of the Group and remains capped at 200%. > The divisional component is incentivized based on the average performance of the divisions and remains capped at 300%. For the members of the Board of Management with functional responsibility, this component is based on the average performance of the divisions, weighted as follows: Pharmaceuticals 50%, Consumer Health 20%, Crop Science (including Animal Health) 30%. For the Board members with divisional responsibility, however, this one-third of the STI is incentivized entirely on the basis of the respective division’s earnings. Covestro is not included in the divisional component as it has become legally and economically independent. The assessment of divisional performance comprises a 70% component linked to the attainment of financial targets in relation to the EBITDA margin before special items and divisional sales growth, and a 30% component based on the attainment of qualitative goals in areas such as innovative progress, safety, compliance and sustainability. > The target attainment criteria for the individual performance component have been made more precise. Now, 50% of this component relates to the duties and resulting personal targets of the respective member of the Board of Management and 50% to his or her individual contribution Bayer Annual Report 2016 A Combined Management Report 189 4.3 Compensation Report Augmented Version to the attainment of the Group targets. The individual targets for the members of the Board of Management are determined annually by the Supervisory Board, which also assesses their attainment. A 4.3.1/2 Short-Term Variable Cash Compensation (STI) Components STI Group component Divisional component Individual component 1/3 of STI target value 1/3 of STI target value 1/3 of STI target value Based on Group target attainment (core earnings per share) Based on the attainment of financial (70%) and qualitative (30%) targets by the divisions Based on individual performance (50%) and individual contribution to Group targets (50%) Board members with functional responsibility Board members with divisional responsibility Average performance of the Pharmaceuticals (50%), Consumer Health (20%) and Crop Science (30%) divisions Performance of the respective division (100%) Long-term stock-based cash compensation (LTI) Members of the Board of Management are eligible to participate in the annual tranches of the long-term stock-based compensation program “Aspire” on condition that they purchase a certain number of Bayer shares – determined for each individual according to specific guidelines – as a personal investment and hold them for as long as they continue in the service of the Bayer Group. A new version of Bayer’s “Aspire” program (Aspire 2.0) was introduced in fiscal 2016 as part of the adjustment of the compensation system for the Board of Management. The target amounts for the new Aspire 2.0 tranche issued in 2016 are based on a contractually agreed target percentage of the fixed annual compensation. The starting value is also partly determined by the individual STI payment factor for the Board member concerned for the year prior to the issuance of the respec- tive tranche. The cash payment amounts are determined after four years based on the average share price calculated over the last 30 trading days of the fiscal year, the performance of Bayer stock relative to the EUROSTOXX 50 and the dividends paid in the meantime (total stockholder return approach). The cap for Aspire 2.0 is 250%, compared to 300% under the predecessor program. Thus the new compensation system maintains consistency between the Board of Man- agement and other management levels, except that for the Board of Management an additional performance measure has been included in the LTI program in the form of the comparison to the EUROSTOXX 50 mentioned above. The payments made under the tranches of the Aspire program issued in the years up to 2015 continue to be based until their expiration on the Aspire Target Opportunity, which is a contractu- ally agreed percentage of fixed annual compensation. Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50 benchmark index, participants are granted an award of between 0% and a maximum 300% of their individual Aspire Target Op- portunity at the end of the respective performance periods. The payout / perfor- mance matrix according to the absolute and relative development of Bayer’s share price is explained at www.investor.bayer.com /en/stock/stock- programs/aspire/ 190 A Combined Management Report Augmented Version 4.3 Compensation Report Bayer Annual Report 2016 Tranches of the Aspire Program 2012 2013 2014 2015 2016 2017 2018 2019 2012 – 2015 2013 – 2016 2014 – 2017 2015 – 2018 2016 – 2019 Performance periods A 4.3.1/3 Aspire tranches issued under the former compensation system Aspire 2.0 tranche When a member of the Board of Management retires, current Aspire tranches may be shortened, thus reducing their value, depending on the duration of the member’s active service on the Board of Management during the first year of the tranche. Share Ownership Guidelines As a condition for receiving payments under the LTI program, members of the Board of Manage- ment must meet certain requirements regarding their personal investment in Bayer stock. Starting in 2016, they are required to build a position in Bayer shares to the value of 75% of their fixed annual compensation within four years and hold these shares until the end of their service on the Board of Management. The Board of Management members must provide documentary evidence of their compliance with this obligation, first at the end of the four-year position-building period and then yearly thereafter. In the event of significant changes in fixed annual compensation, the value to which shares must be held is adjusted accordingly. Pension entitlements (retirement and surviving dependents’ pensions) The annual pension entitlement for members of the Board of Management is based on contribu- tions. Each year Bayer provides a hypothetical contribution amounting to 42% (33% up to 2015) of the respective fixed annual compensation. This percentage is comprised of a basic contribution of 6% and a matching contribution of 36% (27% up to 2015), which is four times (three times up to 2015) the member’s personal contribution of 9%. The increase in the matching contribution effective from 2016 was made to bring the contribution-based company pension plan into line with market conditions. The total annual contribution is converted into a pension module accord- ing to the annuity table for the applicable tariff of the Rheinische Pensionskasse VVaG pension fund. The annual pension entitlement upon retirement is the total amount of the accumulated pension modules including an investment bonus. The investment bonus is determined annually based on the net return on the assets of the Rheinische Pensionskasse VVaG minus the minimum return on the contributions that is guaranteed under the tariff and approved by the German Finan- cial Supervisory Authority (BaFin). Future pension payments are annually reviewed and adjusted to take into account the development of consumer prices. In addition, special individual arrangements exist for the following members of the Board of Man- agement: > Werner Baumann – has been granted a vested entitlement to an annual pension of €200 thousand starting on his 60th birthday. This is subject to a prorated reduction in the event that his term of office ends prior to his 60th birthday under certain conditions. > Dr. Marijn Dekkers – is entitled to receive either a lifelong monthly annuity or a capital sum after leaving the Bayer Group, though not before the age of 60. He has opted for payment of a lifelong monthly annuity. > Kemal Malik – has been granted a vested entitlement to an annual pension of €80 thousand starting on his 65th birthday. This is subject to a prorated reduction in the event that his term of office ends prior to his 65th birthday under certain conditions. Bayer Annual Report 2016 A Combined Management Report 191 4.3 Compensation Report Augmented Version > Erica Mann – has the option to receive either a lifelong monthly annuity or a capital sum when her pension benefits fall due. Certain assets are administered by Bayer Pension Trust e.V. under a contractual trust arrangement (CTA) to cover pension entitlements resulting from direct commitments in Germany. This provides substantial additional security – beyond the benefits from the Pension Insurance Association – for the respective pension entitlements of the members of the Board of Management in Germany. Benefits upon termination of service on the Board of Management Post-contractual noncompete agreements Post-contractual noncompete agreements exist with the members of the Board of Management, providing for compensatory payments to be made by the company for the two-year duration of these agreements. The compensatory payment amounts to 100% of the average fixed compensa- tion for the twelve months preceding their departure. Change of control Agreements exist with the members of the Board of Management providing for severance indem- nity in certain circumstances in the event of a change in control. The amount of any possible sev- erance indemnity in the case of early termination of service on the Board of Management as a result of a change in control is limited to the value of three years’ compensation in line with the recommendation in Section 4.2.3 of the German Corporate Governance Code. Such payments do not exceed the compensation payable for the remaining term of the service contract. Unfitness for work In the event of temporary unfitness for work, members of the Board of Management continue to receive the contractually agreed compensation. Bayer AG may early terminate the service contract if the Board member has been continuously unfit for work for at least 18 months and is likely to be permanently incapable of fully performing his or her duties (permanent incapacity to work). A disa- bility pension is paid in the event of contract termination before the age of 60 due to permanent incapacity to work. For the members appointed to the Board of Management prior to 2013, the disability pension, like the retirement pension, amounts to at least 15% of the final fixed compen- sation and can increase with continuing service on the Board of Management up to a maximum of 60%. For members of the Board of Management appointed in 2013 or thereafter, the amount of the disability pension under the service contract corresponds to the entitlement accrued on the date of contract termination, taking into account a fictitious period of service between that date and the member’s 55th birthday, where applicable. Compensation of the Board of Management in 2016 The aggregate compensation for the members of the Board of Management in 2016 totaled €28,445 thousand (2015: €17,918 thousand), comprising €7,049 thousand (2015: €4,662 thousand) in non-performance-related components and €21,396 thousand (2015: €13,256 thousand) in performance-related components. The pension service cost amounted to €2,887 thousand (2015: €1,847 thousand). Compensation structure adapted to new organi- zational structure Changes in the membership of the Board of Management in 2016 were as follows: > > Effective January 1, 2016, Dr. Hartmut Klusik succeeded Michael König as the member of the Board of Management responsible for Human Resources, Technology and Sustainability. In addition to the existing functions, three further functions were created effective January 1, 2016, which bear special responsibility for the newly defined operating divisions of the Group. The following new members were appointed to the Board of Management: > Dieter Weinand, responsible for the Pharmaceuticals Division > Erica Mann, responsible for the Consumer Health Division > Liam Condon, responsible for the Crop Science Division > The Board of Management service contract of Dr. Marijn Dekkers was early terminated by mutual agreement effective April 30, 2016. 192 A Combined Management Report Augmented Version 4.3 Compensation Report Bayer Annual Report 2016 > Werner Baumann was appointed Chairman of the Board of Management of Bayer AG in succession to Dr. Dekkers effective May 1, 2016. As of December 31, 2016, the Board of Management of Bayer AG consisted of seven members. The following table shows the total compensation of the individual members of the Board of Man- agement who served in 2015 and / or 2016 according to the German Commercial Code: A 4.3.1/4 Board of Management Compensation (German Commercial Code) Fixed annual compensation Fringe benefits Short-term variable cash compensa- tion1 Long-term variable cash compensation based on virtual Bayer shares 2 (50% STI) Long-term stock-based cash compensation 3 (Aspire) € thousand No. of shares Aggregate compensation Pension 4 service cost € thousand 2015 2016 2015 2016 2015 2016 2015 2015 2016 2015 2016 2015 2016 2015 2016 Serving members of the Board of Management as of December 31, 2016 Werner Baumann (Chairman) 5 Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand Former members 906 1,285 – 725 – 725 – – 800 750 750 775 750 800 Dr. Marijn Dekkers6 1,374 475 Michael König 725 – 47 – 44 – 40 – – 40 36 47 44 83 140 35 182 34 1,237 2,329 10,377 1,237 – 1,106 – – 917 978 7,698 917 – 1,053 – – 917 1,050 7,698 917 – – 798 1,274 – – – – 99 1,995 475 16,739 1,995 – 917 – 7,698 917 Total 4,455 6,385 207 664 5,983 9,063 50,210 5,983 – – – – – – – – – – 262 1,983 3,689 5,644 227 – 1,624 – 3,574 – 210 1,522 2,813 3,333 220 – 1,522 – 3,465 – 210 1,573 2,809 3,433 222 – – 1,522 1,623 – – 3,252 3,731 – – 398 210 964 5,802 2,013 – 2,805 – 967 211 764 330 318 316 318 219 240 382 – 1,290 12,333 17,918 28,445 1,847 2,887 1 In line with the change in the compensation system for the members of the Board of Management, the entire amount of the STI is paid out in cash, starting with the STI for 2016. The 50:50 split of the STI into a cash payment and a grant of virtual Bayer shares blocked for three years was last made for 2015. 2 The long-term variable cash compensation based on virtual Bayer shares was discontinued as of 2016. 3 Fair value at grant date; the figure for 2016 includes the new Aspire 2.0 tranche. For Dr. Marijn Dekkers, 4/12 of the grant amount for Aspire 2.0 is shown. 4 Including company contribution to Bayer-Pensionskasse VVaG, Rheinische Pensionskasse VVaG and to a pension fund outside Germany 5 The increased variable compensation for Werner Baumann in 2015 resulted mainly from his temporary duties as head of Bayer HealthCare in addition to his primary responsibilities as a member of the Board of Management. 6 Dr. Marijn Dekkers additionally received a severance payment of €4,341 thousand. This puts him in the same position as if he had held office until December 31, 2016, and had then retired. Fixed annual compensation The fixed annual compensation of the members of the Board of Management was adjusted in 2016. The total fixed annual compensation of all the members was €6,385 thousand (2015: €4,455 thousand). Short-term variable cash compensation The total short-term variable cash compensation for all the members of the Board of Management in 2016 totaled €9,063 thousand (2015: €5,983 thousand) after deduction of the solidarity contri- bution. Provisions of €8,588 thousand (2015: €5,983 thousand) were established for payment of this compensation component to the members of the Board of Management serving as of De- cember 31, 2016. The solidarity contribution is made by all employees of the companies covered by the respective agreements with the employee representatives to help safeguard jobs at the German sites. For 2016 it amounted to 0.27% (2015: 0.20%) of each person’s STI award. Bayer Annual Report 2016 A Combined Management Report 193 4.3 Compensation Report Augmented Version See also description of the new compensation system Long-term variable cash compensation based on virtual Bayer shares This compensation component was not present in 2016 following the adjustment of the compen- sation system for the Board of Management effective January 1, 2016. The conversion of 50% of the STI into virtual Bayer shares took place for the last time in 2015 and was based on an average price of €119.17. The aggregate compensation for 2015 according to the German Commercial Code includes long-term variable cash compensation of €5,983 thou- sand based on virtual Bayer shares. The aggregate compensation for 2016 according to the IFRS also includes a change of minus €1,275 thousand (2015: €556 thousand) in the value of existing entitlements. Provisions of €7,777 thousand (2015: €18,663 thousand) existed as of December 31, 2016, for the future cash disbursements to currently serving members of the Board of Management based on the virtual Bayer shares granted in previous years. This amount also contains the dividends attributable to the respective prior years. Long-term stock-based cash compensation (Aspire) The long-term stock-based cash compensation under the Aspire program is included in the aggregate compensation according to the German Commercial Code at its fair value of €12,333 thousand (2015: €1,290 thousand) at the respective grant date. The aggregate compensation according to the IFRS includes the fair value of the partial entitle- ment earned in the respective year. Grants of stock-based compensation with a four-year perfor- mance period are therefore expensed at their respective fair values over four years starting with the grant year. The stock-based compensation according to the IFRS also includes the change in the value of existing entitlements under ongoing Aspire tranches granted in prior years. A 4.3.1/5 Board of Management Compensation – Aspire Program (IFRS) € thousand Stock-based compensation entitlements earned in the respective year1 Change in value of existing entitlements2 Total Serving members of the Board of Management as of December 31, 2016 Former members Werner Baumann (Chair- man) Liam Condon Johannes Dietsch3 Dr. Hartmut Klusik Kemal Malik3 Erica Mann Dieter Weinand Dr. Marijn Dekkers Michael König3 Total 2016 715 506 413 414 431 848 369 1,521 – 5,217 2015 2016 2015 2016 2015 597 (120) 71 595 668 – (83) – 423 – 225 (57) 21 356 246 – (47) – 367 – 263 (98) 48 333 311 – (165) – 683 – – (69) – 300 – 980 (284) 108 1,237 1,088 265 2,330 – (923) 24 – 289 272 4,294 2,602 1 The newly earned entitlements are derived from the 2013 – 2016 (2015: 2012 – 2015) tranches of the Aspire program because this compensation was or is being earned over a four-year period. They are stated at their prorated fair values in 2015 and 2016, respectively. 2 This line shows the change in the value of the entitlements already earned in 2013, 2014 and 2015 (2015: 2012, 2013 and 2014). 3 The Aspire entitlements earned in 2015 and 2016 and the value changes for Liam Condon, Johannes Dietsch, Dr. Hartmut Klusik, Kemal Malik, Erica Mann, Dieter Weinand and Michael König relate in part to Aspire tranches granted to them before they joined the Board of Management but not yet fully earned. Provisions of €7,288 thousand (2015: €7,110 thousand) were established for the Aspire entitle- ments of the members of the Board of Management serving as of December 31, 2016. Of this amount, €302 thousand relates to the tranches issued up to 2015 and €2,314 thousand to the 2016 tranche. 194 A Combined Management Report Augmented Version 4.3 Compensation Report Bayer Annual Report 2016 Pension entitlements The pension service cost recognized for the members of the Board of Management in 2016 according to the German Commercial Code was €2,887 thousand (2015: €1,847 thousand), while the current service cost for pension entitlements recognized according to the IFRS was €3,902 thousand (2015: €2,891 thousand). The following table shows the service cost and the settlement or present value of the pension obligations attributable to the individual members of the Board of Management. Pension Entitlements (German Commercial Code and IFRS) German Commercial Code A 4.3.1/6 IFRS Pension service cost 1 Settlement value of pension obligation as of December 312 Current service cost for pension entitlements Present value of defined benefit pension obligation as of December 31 € thousand 2015 2016 2015 2016 2015 2016 2015 2016 Serving members of the Board of Management as of December 31, 2016 Werner Baumann (Chairman) Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand Former members Dr. Marijn Dekkers 3 Michael König 4 Total 227 – 220 – 222 – – 967 211 764 330 318 316 318 219 240 382 – 1,847 2,887 7,022 – 2,681 – 516 – – 7,452 2,151 2,854 4,533 1,990 7,199 468 385 – 355 – 372 – – 11,014 2,371 23,604 – – 26,647 1,418 361 2,891 1,054 10,131 12,429 487 431 399 438 288 322 483 – 3,902 – 3,995 – 1,700 – – 3,860 4,882 6,782 2,507 7,232 735 14,106 3,559 33,491 _ – 38,427 1 Including company contribution to Bayer-Pensionskasse VVaG, Rheinische Pensionskasse VVaG and a pension fund outside Germany 2 The pension obligations of foreign subsidiaries and Bayer pension funds are included at present value according to IFRS. 3 Dr. Marijn Dekkers stepped down from the Board of Management as of midnight on April 30, 2016. 4 Michael König stepped down from the Board of Management as of midnight on December 31, 2015. The difference between the pension service cost according to the German Commercial Code and the service cost for pension entitlements according to the IFRS arises from the difference in the valuation principles used in calculating the settlement value according to the German Commercial Code and the present value of the defined benefit pension obligation according to the IFRS. Benefits upon termination of service on the Board of Management It was agreed with Dr. Marijn Dekkers that he be granted benefits of €4,341 thousand according to the German Commercial Code and €4,542 thousand according to the IFRS in light of the mutu- ally agreed early termination effective April 30, 2016, of his service contract, which originally ran until December 31, 2016. These comprise the fixed compensation, the short-term variable com- pensation components, Aspire and the pension service cost, each for the period May 1, 2016, through December 31, 2016. Dr. Dekkers’ entitlements under the company pension plan and the Aspire program were set at the levels they would have reached if he had been eligible to partici- pate until December 31, 2016. The fixed compensation and the short-term variable compensation component, together amounting to €1,900 thousand, were paid in May 2016. The payments from the Aspire tranches will be made upon expiration of each tranche based on the respective Aspire program parameters. The post-contractual noncompete agreement with Dr. Marijn Dekkers was rescinded without compensation when his service contract was extended in June 2014 in line with previous practice in a similar case. Bayer Annual Report 2016 A Combined Management Report 195 4.3 Compensation Report Augmented Version It was agreed with Michael König that he be granted benefits of €1,131 thousand in connection with the mutually agreed early termination effective December 31, 2015, of his service contract, which originally ran until March 31, 2016. These benefits comprise fixed compensation, short-term variable compensation components, Aspire and the pension service cost – each for the period January 1 through March 31, 2016 –, along with the fair value of the accelerated vested portions of the existing Aspire tranches. The fixed compensation and the short-term variable compensation component, together amounting to €375 thousand, were paid in the first half of 2016. The pay- ments from the Aspire tranches will be made upon expiration of each tranche based on the re- spective Aspire program parameters. In addition, a two-year noncompete agreement ending on December 31, 2017, exists with Michael König under his service contract. The resulting compen- satory payment of €725 thousand per year is being made to him in monthly installments. The aggregate Board of Management compensation according to the IFRS is shown in the follow- ing table: Board of Management Compensation according to IFRS € thousand Fixed annual compensation Fringe benefits Total short-term non-performance-related compensation Short-term performance-related cash compensation A 4.3.1/7 2016 6,385 664 7,049 9,063 2015 4,455 207 4,662 5,983 Total short-term compensation 10,645 16,112 Stock-based compensation earned (virtual Bayer shares) Change in value of existing entitlements to stock-based compensation (virtual Bayer shares) Stock-based compensation (Aspire) earned in the respective year Change in value of existing entitlements to stock-based compensation (Aspire) Total stock-based compensation (long-term incentive) Service cost for pension entitlements earned in the respective year Total long-term compensation Severance indemnity in connection with the termination of a service contract 5,983 556 2,330 272 9,141 2,891 12,032 1,131 – (1,275) 5,217 (923) 3,019 3,902 6,921 4,542 Aggregate compensation (IFRS) 23,808 27,575 4.3.2 Disclosures Pursuant to the Recommendations of the German Corporate Governance Code In accordance with the recommendations of the German Corporate Governance Code, the follow- ing tables show the compensation – including fringe benefits – granted for 2016, indicating the target values and the maximum and minimum achievable values for the variable compensation components, along with the allocation of compensation. 196 A Combined Management Report Augmented Version 4.3 Compensation Report Bayer Annual Report 2016 A 4.3.2/1 Compensation and Benefits Granted for 2016 Serving members of the Board of Management as of December 31, 2016 Werner Baumann (Chairman) Liam Condon (Crop Science) Johannes Dietsch (Finance) Joined Jan. 1, 2010 Joined Jan. 1, 2016 Joined Sept. 1, 2014 € thousand Target value 2015 Target value 2016 Min. 2016 Max.1 2016 Target value 2015 Target value 2016 Fixed annual compensation 906 1,285 1,285 1,285 Fringe benefits 47 47 47 47 Total fixed annual compensation 953 1,332 1,332 1,332 Short-term variable cash compensation2 Long-term variable cash compensation (virtual Bayer shares)2 849 1,475 0 2,950 2015 (Jan. 1, 2016 – Dec. 31, 2018)(cid:3031) 849 Long-term stock-based compensation (Aspire)3 2015 (Jan. 1, 2015 – Dec. 31, 2018)(cid:3031) 362 – – 2016 (Jan. 1, 2016 – Dec. 31, 2019)(cid:3031) 1,983 – – 0 –– –– 4,957 Total 3,013 4,790 1,332 9,239 Service cost / benefit expense 227 764 764 764 Total compensation 3,240 5,554 2,096 10,003 – – – – – – – – Compensation and Benefits Granted for 2016 Min. 2016 Max.1 2016 800 44 844 800 44 844 Target value 2015 Target value 2016 725 44 769 750 83 833 Min. 2016 Max.1 2016 750 83 833 750 83 833 0 1,600 679 750 0 1,500 – – 0 844 330 – – 679 290 – – 4,059 – 1,522 6,503 2,417 3,105 330 220 318 – – 0 833 318 – – 3,805 6,138 318 800 44 844 800 – – 1,624 3,268 330 3,598 1,174 6,833 2,637 3,423 1,151 6,456 A 4.3.2/1 (continued) Serving members of the Board of Management as of December 31, 2016 Dr. Harmut Klusik (Human Resources, Technology & Sustainability) Kemal Malik (Innovation) Joined Jan. 1, 2016 Joined Feb. 1, 2014 Erica Mann (Consumer Health) Joined Jan. 1, 2016 Target value 2015 Target value 2016 Min. 2016 Max.1 2016 Target value 2015 Target value 2016 Min. 2016 Max.1 2016 Target value 2015 Target value 2016 Min. 2016 Max.1 2016 – – – – – – – – – – – 750 140 750 140 750 140 725 40 775 35 775 35 775 35 890 890 890 765 810 810 810 750 0 1,500 679 775 0 1,550 – – – 1,522 3,162 – – – 0 890 – – – 679 290 – – – 3,805 6,195 1,573 3,158 2,413 – – – 0 810 – – – 3,932 6,292 316 316 316 222 318 318 318 3,478 1,206 6,511 2,635 3,476 1,128 6,610 – – – – – – – – – – – 750 182 750 182 750 182 932 932 932 750 0 1,500 – – – 1,522 3,204 – – – 0 932 – – – 3,806 6,238 219 219 219 3,423 1,151 6,457 € thousand Fixed annual compensation Fringe benefits Total fixed annual compensation Short-term variable 2 cash compensation Long-term variable cash compensation (virtual Bayer shares) 2 2015 (Jan. 1, 2016 – Dec. 31, 2018)(cid:3031) 2016 (Jan. 1, 2017 – Dec. 31, 2019)(cid:3031) Long-term stock-based 3 compensation (Aspire) 2015 (Jan. 1, 2015 – Dec. 31, 2018)(cid:3031) 2016 (Jan. 1, 2016 – Dec. 31, 2019)(cid:3031) Total Service cost / benefit expense Total compensation Bayer Annual Report 2016 A Combined Management Report 197 4.3 Compensation Report Augmented Version Compensation and Benefits Granted for 2016 Serving members of the Board of Management as of December 31, 2016 Dieter Weinand (Pharmaceuticals) A 4.3.2/1 (continued) Former members Dr. Marijn Dekkers Michael König € thousand Fixed annual compensation Fringe benefits Total fixed annual compensation Short-term variable cash compensation 2 Long-term variable cash compensation (virtual Bayer shares) 2 2015 (Jan. 1, 2016 – Dec. 31, 2018)(cid:3031) 2016 (Jan. 1, 2017 – Dec. 31, 2019)(cid:3031) Long-term stock-based compensation (Aspire) 3 2015 (Jan. 1, 2015 – Dec. 31, 2018)(cid:3031) 2016 (Jan. 1, 2016 – Dec. 31, 2019)(cid:3031) Total Service cost/benefit expense Total compensation Joined Jan. 1, 2016 Stepped down April 30, 2016 Stepped down Dec. 31, 2015 Target value 2015 Target value 2016 Min. 2016 Max.1 2016 Target value 2015 Target value 2016 Min. 2016 Max.1 2016 Target value 2015 Target value 2016 Min. 2016 Max.1 2016 – – – – – – – – – – – 800 34 834 800 800 34 834 800 1,374 34 40 834 1,414 0 1,600 1,477 475 99 574 475 – – – 1,623 3,257 240 – – – 0 834 240 – – – 1,477 550 – – – 4,058 964 6,492 4,918 2,013 240 967 382 3,497 1,074 6,732 5,885 2,395 475 99 574 0 – – – 0 475 99 574 950 – – – 2,410 725 36 761 679 679 290 574 382 956 3,934 2,409 382 211 4,316 2,620 – – – – – – – _ _ – _ – – – – – – – _ – – – – – – – – – – _ _ – _ 1 The maximum achievable variable compensation shown here does not yet take into account the caps applicable. Payments in a single year are limited to 1.8 times the target compensation (see Chapter 4.3.1 “Compensation structure”). 2 Following the change in the compensation system for the Board of Management effective January 1, 2016, the entire amount of the STI for 2016 will be paid out in cash in the second quarter of 2017. The 50:50 split of the STI into a cash payment and a grant of virtual Bayer shares was made for the last time for 2015. 3 The Aspire tranche for 2016 is subject to the new system for Bayer’s Aspire program (see Chapter 4.3.1). The cap for this new long-term compensation program is 250%. Allocation of Compensation for 2015 and 2016 A 4.3.2/2 Serving members of the Board of Management as of December 31, 2016 Werner Baumann (Chairman) Liam Condon (Crop Science) Johannes Dietsch (Finance) Dr. Hartmut Klusik (Human Resources, Technology & Sustainability) Joined Jan. 1, 2010 Joined Jan. 1, 2016 Joined Sept. 1, 2014 Joined Jan. 1, 2016 € thousand Fixed annual compensation Fringe benefits Total Short-term variable cash compensation for 2015 1 for 2016 Long-term cash compensation (virtual Bayer shares) 2015 906 47 953 2016 1,285 47 1,332 1,237 – – 2,329 2011 (Jan. 1, 2012 – Dec. 31, 2014) 1,307 – 2012 (Jan. 1, 2012 – Dec. 31, 2015) – 1,747 Long-term stock-based cash compensation (Aspire) 2011 (Jan. 1, 2011 – Dec. 31, 2014) 2 2012 (Jan. 1, 2012 – Dec. 31, 2015) Total Service cost(cid:3031)/(cid:3031)benefit expense3 Total compensation 769 – 4,266 227 4,493 – 789 6,197 764 6,961 2015 2016 2015 2016 2015 2016 – – – – – – – – – – – – 800 44 844 – 1,106 – – – – 1,950 330 2,280 725 44 769 917 – – – 297 – 1,983 220 2,203 750 83 833 – 978 – – – 301 2,112 318 2,430 – – – – – – – – – – – – 750 140 890 – 1,053 – – – – 1,943 316 2,259 198 A Combined Management Report Augmented Version 4.3 Compensation Report Bayer Annual Report 2016 Allocation of Compensation for 2015 and 2016 Serving members of the Board of Management as of December 31, 2016 A 4.3.2/2 (continued) Former members Kemal Malik (Innovation) Erica Mann (Consumer Health) Dieter Weinand (Pharmaceuticals) Dr. Marijn Dekkers Michael König Joined Feb. 1, 2014 Joined Jan. 1, 2016 Joined Jan. 1, 2016 Stepped down April 30, 2016 Stepped down Dec. 31, 2015 2015 2016 2015 2016 2015 2016 2016 2015 2016 € thousand Fixed annual compensation Fringe benefits Total Short-term variable cash compensation for 2015 1 for 2016 Long-term cash compensation (virtual Bayer shares) 2011 (Jan. 1, 2012 – Dec. 31, 2014) 2012 (Jan. 1, 2012 – Dec. 31, 2015) Long-term stock-based cash compensation (Aspire) 2011 (Jan. 1, 2011 – Dec. 31, 2014) 2 2012 (Jan. 1, 2012 – Dec. 31, 2015) 725 40 765 917 – – – 384 – 775 35 810 – 1,050 – – – 364 Total Service cost / benefit expense 3 Total compensation 2,066 2,224 222 318 2,288 2,542 – – – – – – – – – – – – 750 182 932 – 798 – – – – 1,730 219 1,949 – – – – – – – – – – – – 2015 1,374 40 1,414 800 34 834 – 1,995 1,274 – 475 99 574 – 475 2,841 – – 3,039 725 36 761 – 917 – – 1,459 – 2,108 7,709 240 967 – 1,495 5,583 382 191 – 1,869 211 2,348 8,676 5,965 2,080 – – – – – – – – – – – – – – – – 1 The increased variable compensation for Werner Baumann in 2015 resulted mainly from his temporary duties as head of Bayer HealthCare in addition to his primary responsibilities as a member of the Board of Management. 2 The payments to Johannes Dietsch, Michael König and Kemal Malik from the 2011 Aspire tranche related to vesting periods that began before they joined the Board of Management. The tranches were not yet fully vested at the dates on which they joined the Board of Management. The same applies to the payments in 2016 from the 2012 Aspire tranche for Johannes Dietsch and Kemal Malik. 3 The total service cost is the service cost in accordance with HGB plus contributions to pension funds. 4.3.3 Compensation of the Supervisory Board The Supervisory Board is compensated according to the relevant provisions of the Articles of Incorporation. The members of the Supervisory Board receive fixed annual compensation of €120,000 plus reim- bursement of their expenses. In accordance with the recommendations of the German Corporate Governance Code, additional compensation is paid to the Chairman and Vice Chairman of the Supervisory Board and for chairing and membership of committees. The Chairman of the Supervisory Board receives fixed annual compensation of €360,000, the Vice Chairman €240,000. These amounts also cover membership and chairmanship of committees. The other members receive additional compensa- tion for committee membership. The chairman of the Audit Committee receives an additional €120,000, the other members of the Audit Committee €60,000 each. The chairmen of the re- maining committees receive €60,000 each, the other members of those committees €30,000 each. No additional compensation is paid for membership of the Nominations Committee. A Supervisory Board member who is a member of more than two committees receives compensa- tion only for the two committees with the highest compensation. If changes are made to the Supervisory Board and / or its committees during the year, members receive compensation on a prorated basis. The members of the Supervisory Board also receive an attendance fee of €1,000 each time they personally attend a meeting of the Supervisory Board or a committee. The atten- dance fee is limited to €1,000 per day. Bayer Annual Report 2016 A Combined Management Report 199 4.3 Compensation Report Augmented Version The members of the Supervisory Board have given a voluntary pledge that they will each purchase Bayer shares for 25% of their pretax fixed compensation, including any additional compensation for committee membership, and hold these shares for as long as they remain members of the Supervisory Board. This does not apply to members who are prevented from purchasing shares due to a service or employment contract with a company or who transfer at least 85% of their fixed compensation to the Hans Böckler Foundation in accordance with the rules of the German Trade Union Confederation or whose service or employment contract with a company requires them to transfer such compensation to that company. If less than 85% of the fixed compensation is transferred, the voluntary pledge applies to the portion not transferred. By voluntarily pledging to invest in and hold Bayer shares, the Supervisory Board members reinforce their interest in the long-term, sustainable success of the company. Compensation of the Supervisory Board in 2016 The following table shows the components of each Supervisory Board member’s compensation for 2016. The members of the Supervisory Board have pledged to purchase Bayer shares. Compensation of the Members of the Supervisory Board of Bayer AG in 2016 Fixed compensation Attendance fee € thousand 2015 2016 2015 2016 2015 Members of the Supervisory Board serving as of December 31, 2016 Dr. Paul Achleitner Dr. Simone Bagel-Trah Dr. Clemens Börsig André van Broich Thomas Ebeling Johanna W. (Hanneke) Faber 1 Dr. Thomas Fischer Reiner Hoffmann Yüksel Karaaslan Petra Kronen Frank Löllgen Prof. Dr. Wolfgang Plischke1 Sue H. Rataj Petra Reinbold-Knape Michael Schmidt-Kiessling Dr. Klaus Sturany Werner Wenning (Chairman) Heinz Georg Webers Prof. Dr. Otmar D. Wiestler 2 Oliver Zühlke (Vice Chairman) Members who left the Supervisory Board in 2015 and 2016 Dr. Helmut Panke 3 Prof. Dr. Dr. Ernst-Ludwig Winnacker 3 Peter Hausmann 4 Thomas de Win 5 Total 180 120 120 129 120 – 180 180 135 150 19 – 120 130 120 240 360 60 49 195 180 137 125 119 180 120 120 150 120 81 180 127 150 150 173 162 120 180 120 240 360 120 150 240 59 59 – – 5 4 4 6 4 – 9 5 6 6 1 – 5 5 5 9 11 3 3 9 8 6 5 4 5 5 5 5 4 2 9 5 5 4 8 5 5 5 4 9 9 5 4 9 4 2 – – 185 124 124 135 124 – 189 185 141 156 20 – 125 135 125 249 371 63 52 204 188 143 130 123 A 4.3.3/1 Total 2016 185 125 125 155 124 83 189 132 155 154 181 167 125 185 124 249 369 125 154 249 63 61 – – 3,168 3,361 123 118 3,291 3,479 1 Member of the Supervisory Board since April 30, 2016 2 Prof. Wiestler has received compensation for his membership of the Supervisory Board since September 1, 2015. Previously, his office as Chairman of the Management Board of the German Cancer Research Center precluded his acceptance of this compensation. 3 Member of the Supervisory Board until April 29, 2016 4 Member of the Supervisory Board until June 30, 2015 5 Vice Chairman and member of the Supervisory Board until June 30, 2015 200 A Combined Management Report Augmented Version 4.4 Takeover-Relevant Information Bayer Annual Report 2016 In addition to their compensation as members of the Supervisory Board, those employee repre- sentatives who are employees of Bayer Group companies receive compensation unrelated to their service on the Supervisory Board. The total amount of such compensation in 2016 was €939 thousand (2015: €741 thousand). No compensation was paid or benefits granted to members of the Supervisory Board for person- ally performed services such as consultancy or agency services. The company has purchased insurance for the members of the Supervisory Board to cover their personal liability arising from their service on the Supervisory Board. 4.3.4 Further Information Advances or loans to Members of the Board of Management or Supervisory Board There were no advances or loans to members of the Board of Management or the Supervisory Board outstanding as of December 31, 2016, nor at any time during 2016 or 2015. Pension payments to former members of the Board of Management or their surviving dependents We currently pay retired members of the Board of Management a monthly pension equal to a maximum of 80% of the fixed compensation received immediately prior to retirement. The pen- sions paid to former members of the Board of Management or their surviving dependents are reassessed annually and adjusted, taking into account the development of consumer prices. The pensions paid to former members of the Board of Management or their surviving dependents in 2016 totaled €12,800 thousand (2015: €13,416 thousand). These benefits are paid in addition to any amounts they receive under previous employee pension arrangements. The present value of the defined benefit pension obligation for former members of the Board of Management and their surviving dependents according to the IFRS amounted to €188,850 thousand (2015: €172,767 thousand), while the settlement value of the pension obligation according to the German Com- mercial Code amounted to €149,948 thousand (2015: €148,632 thousand). 4.4 Takeover-Relevant Information Explanatory report pursuant to Sections 289, Paragraph 4 and 315, Paragraph 4 of the German Commercial Code (HGB) The capital stock of Bayer AG amounted as of December 31, 2016, to €2,117 million, divided into 826,947,808 no-par registered shares. The capital stock and the number of shares were thus unchanged from the end of the previous year. Each share confers one voting right. A small num- ber of shares may be subject to temporary trading restrictions, such as retention periods, in con- nection with employee stock participation programs. We received no notifications in 2016 of direct or indirect holdings of shares in Bayer AG that exceed 10% of the capital stock. The company thus is not in possession of any notifications of holdings that exceed 10% of the capital stock. The appointment and dismissal of members of the Board of Management are subject to the provi- sions of Sections 84 and 85 of the German Stock Corporation Act, Section 31 of the German Codetermination Act and Section 6 of the company’s Articles of Incorporation. Pursuant to Sec- tion 84, Paragraph 1 of the German Stock Corporation Act, the members of the Board of Man- agement are appointed and dismissed by the Supervisory Board. Since Bayer AG falls within the scope of the German Codetermination Act, the appointment or dismissal of members of the Board of Management requires a majority of two thirds of the votes of the members of the Supervisory Board on the first ballot pursuant to Section 31, Paragraph 2 of that act. If no such majority is achieved, the appointment is resolved pursuant to Section 31, Paragraph 3 of the Codetermina- tion Act on a second ballot by a simple majority of the votes of the members of the Supervisory Board. If the required majority still is not achieved, a third ballot is held. Here again, a simple ma- See also www.bayer.com/ ownership-structure Bayer Annual Report 2016 A Combined Management Report 201 4.4 Takeover-Relevant Information Augmented Version jority of the votes suffices, but in this ballot the Chairman of the Supervisory Board has two votes pursuant to Section 31, Paragraph 4 of the Codetermination Act. Under Section 6, Paragraph 1 of the Articles of Incorporation of Bayer AG, the number of members of the Board of Management is determined by the Supervisory Board but must be at least two. The Supervisory Board may ap- point one member of the Board of Management to be the Chairman of the Board of Management pursuant to Section 84, Paragraph 2 of the German Stock Corporation Act and Section 6, Para- graph 1 of the Articles of Incorporation. Any amendments to the Articles of Incorporation are made pursuant to Section 179 of the German Stock Corporation Act and Sections 10 and 17 of the Articles of Incorporation. Under Sec- tion 179, Paragraph 1 of the German Stock Corporation Act, amendments to the Articles of Incor- poration require a resolution of the Stockholders’ Meeting. Pursuant to Section 179, Paragraph 2 of the German Stock Corporation Act, this resolution must be passed by a majority of three quar- ters of the voting capital represented at the meeting, unless the Articles of Incorporation provide for a different majority. However, where an amendment relates to a change in the object of the company, the Articles of Incorporation may only specify a larger majority. Section 17, Paragraph 2 of the Articles of Incorporation of Bayer AG utilizes the scope for deviation pursuant to Sec- tion 179, Paragraph 2 of the German Stock Corporation Act and provides that resolutions may be passed by a simple majority of the votes cast or, where a capital majority is required, by a simple majority of the capital represented. Pursuant to Section 10, Paragraph 9 of the Articles of Incorpo- ration, the Supervisory Board may resolve on amendments to the Articles of Incorporation that relate solely to their wording. Provisions of the Articles of Incorporation concerning Authorized Capital I and Authorized Capital II are entered in the commercial register of Bayer AG. With the approval of the Supervisory Board and until April 28, 2019, the Board of Management may use the Authorized Capital I to increase the capital stock by up to a total of €530 million. New shares may be issued against cash contri- butions and / or contributions in kind, but capital increases against contributions in kind may not exceed a total of €423 million. If the Authorized Capital I is used to issue shares in return for cash contributions, stockholders must normally be granted subscription rights. The Board of Manage- ment may only exclude stockholders’ subscription rights to a volume of shares issued out of the Authorized Capital I that did not represent more than 20% of the existing capital stock at the time the respective resolution was adopted by the Annual Stockholders’ Meeting on April 29, 2014. Absent a further resolution on the exclusion of stockholders’ subscription rights, the Board of Management also may only exclude stockholders’ subscription rights to a volume of shares issued under other authorizations regarding capital measures (Authorized Capital II, bonds with warrants or convertible notes, purchase and disposal of own shares) that did not represent more than 20% of the existing capital stock at the time the respective resolution was adopted by the Annual Stockholders’ Meeting on April 29, 2014. With the approval of the Supervisory Board and until April 28, 2019, the Board of Management is authorized to increase the capital stock by up to €212 million in one or more installments by issu- ing shares out of the Authorized Capital II against cash contributions. The stockholders must nor- mally be granted subscription rights. However, the Board of Management is authorized, with the approval of the Supervisory Board, to exclude subscription rights for stockholders provided the volume of shares issued out of the Authorized Capital II against cash contributions does not ex- ceed 10% of the capital stock existing at the time this authorization is registered or at the time the new shares are issued and the issue price of the new shares is not significantly below the market price of the already listed shares. Conditional capital of €212 million exists in connection with an authorization – valid through April 28, 2019 – to issue bonds with warrants or convertible notes, profit-sharing rights or profit partici- pation bonds (collectively referred to as “bonds”) with a total face value of €6 billion, €4 billion of which has already been used for mandatory convertible notes. The Board of Management may, with the consent of the Supervisory Board and under certain conditions, exclude the bond sub- scription rights that would otherwise be granted to stockholders. One of the conditions is that the 202 A Combined Management Report Augmented Version 4.4 Takeover-Relevant Information Bayer Annual Report 2016 total volume of shares required to service the bonds exceed neither 10% of the capital stock that existed at the time the respective resolution was adopted by the Annual Stockholders’ Meeting on April 29, 2014 nor 10% of the capital stock existing at the time this authorization is exercised. Any other shares issued without granting subscription rights to the stockholders in direct or anal- ogous application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act shall be credited against this 10% limit. Further, by resolution of the Annual Stockholders’ Meeting on April 29, 2014, the Board of Man- agement is authorized to purchase and dispose of own shares representing up to 10% of the capital stock existing at the time the resolution was adopted. The authorization to purchase own shares also includes the purchase of own shares using put or call options (derivatives) up to a volume of 5% of the capital stock existing at the time the resolution was adopted or at the time the authorization is exercised. This authorization also expires on April 28, 2019. A material agreement that is subject to the condition precedent of a change of control pertains to the undrawn €3.5 billion syndicated credit facility arranged by Bayer AG and its U.S. subsidiary Bayer Corporation. This facility is available until December 2020. The participating banks are enti- tled to terminate the credit facility in the event of a change of control at Bayer and demand repay- ment of any loans that may have been granted under this facility up to that time. A similar clause is contained in the agreement on a syndicated credit facility granted to Bayer subsidiary Bayer World Investments B.V., Netherlands, in 2014 and guaranteed by Bayer AG. The facility still amounts to US$900 million (as of December 31, 2016) and matures in May 2018. A similar clause is also con- tained in the agreement on a syndicated credit facility in the original amount of US$56.9 billion granted to Bayer US Finance II LLC in September 2016, which is also guaranteed by Bayer AG. This as yet undrawn facility serves to finance the planned acquisition of Monsanto. Pursuant to the agreement, this credit facility was reduced in November 2016 by the US$4.2 billion net proceeds from the issuance of mandatory convertible notes, to US$52.7 billion. The mandatory convertible notes were issued by Bayer Capital Corporation B.V., guaranteed by Bayer AG and mature in No- vember 2019. The terms on which holders may convert the notes into shares before the maturity date are more favorable in the event of a change of control than they would be otherwise. The terms of the nominal €3.4 billion (as of December 31, 2016) in notes issued by Bayer in the years 2006 to 2014 under its existing Debt Issuance Programme also contain a change-of-control clause. Holders of these notes have the right to demand the redemption of their notes by Bayer AG in the event of a change of control if Bayer AG’s credit rating is downgraded within 120 days after such change of control becomes effective. The terms of the US$7 billion bond in 144A / Reg S format issued in October 2014 also contain a clause to this effect. The outstanding amount of this bond is US$6.5 billion. Agreements exist for the members of the Board of Management in compliance with Section 4.2.3 of the German Corporate Governance Code to cover the eventuality of a takeover offer being made for Bayer AG. Under these agreements, payments promised in the event of early termination of the service contract of a Board of Management member due to a change of control are limited to the value of three years’ compensation and may not compensate more than the remaining term of the contract. Bayer Annual Report 2016 B Consolidated Financial Statements 203 Bayer Group Consolidated Income Statements Augmented Version Consolidated Financial Statements Full Consolidated Financial Statements Bayer Group Consolidated Income Statements € million Net sales Cost of goods sold Gross profit Selling expenses Research and development expenses General administration expenses Other operating income Other operating expenses EBIT 1 Equity-method loss Financial income Financial expenses Financial result Income before income taxes Income taxes Income from continuing operations after income taxes Income from discontinued operations after income taxes Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders (net income) € Earnings per share From continuing operations Basic Diluted From discontinued operations Basic Diluted From continuing and discontinued operations Basic Diluted B 1 Note 2015 2016 [7] 46,085 46,769 [8] [9] [10] [11] [13.1] [13] [14] [6.3] [15] [16] [16] [16] [16] (21,040) (20,295) 25,045 26,474 (12,272) (12,474) (4,274) (2,092) 1,109 (1,275) 6,241 (9) 371 (1,367) (1,005) 5,236 (1,223) 4,013 85 4,098 (12) 4,110 4.87 4.87 0.10 0.10 4.97 4.97 (4,666) (2,256) 898 (934) 7,042 (26) 151 (1,280) (1,155) 5,887 (1,329) 4,558 268 4,826 295 4,531 5.12 5.12 0.32 0.32 5.44 5.44 2015 figures restated 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” 204 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Comprehensive Income € million Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Remeasurements of the net defined benefit liability for post-employment benefit plans Income taxes Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans Other comprehensive income that will not be reclassified subsequently to profit or loss Changes in fair values of derivatives designated as cash flow hedges [30.3] Reclassified to profit or loss Income taxes Other comprehensive income from cash flow hedges Changes in fair values of available-for-sale financial assets Reclassified to profit or loss Income taxes Other comprehensive income from available-for-sale financial assets Changes in exchange differences recognized on translation of operations outside the eurozone Reclassified to profit or loss Other comprehensive income from exchange differences Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that may be reclassified subsequently to profit or loss [14] [20] [14] Effects of changes in scope of consolidation Total other comprehensive income 1 of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Total comprehensive income of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders 2015 figures restated 1 Total changes recognized outside profit or loss Note [15] [25] [14] 2015 4,098 (12) 4,110 1,216 (430) B 2 2016 4,826 295 4,531 (1,036) 228 786 (808) 786 (266) 304 (25) 13 (5) 1 (2) (6) 748 – 748 (20) 735 – 1,521 33 1,488 5,619 21 5,598 (808) 58 3 (16) 45 65 – (8) 57 703 (58) 645 (14) 733 – (75) (10) (65) 4,751 285 4,466 Bayer Annual Report 2016 B Consolidated Financial Statements 205 Bayer Group Consolidated Statements of Financial Position Augmented Version Bayer Group Consolidated Statements of Financial Position € million Noncurrent assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Other receivables Deferred taxes Current assets Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale and discontinued operations Total assets Equity Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to noncontrolling interest Noncurrent liabilities Provisions for pensions and other post-employment benefits Other provisions Financial liabilities Income tax liabilities Other liabilities Deferred taxes Current liabilities Other provisions Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Liabilities directly related to assets held for sale and discontinued operations Total equity and liabilities B 3 Note Dec. 31, 2015 Dec. 31, 2016 [17] [17] [18] [19] [20] [23] [14] [21] [22] [20] [23] [6.3] [24] [25] [26] [27] [29] [14] [26] [27] [28] [29] [6.3] 16,096 15,178 12,375 246 1,092 430 4,679 16,312 13,567 13,114 584 1,281 583 6,350 50,096 51,791 8,550 9,933 756 2,017 509 1,859 197 23,821 73,917 2,117 6,167 15,981 24,265 1,180 25,445 10,873 1,740 16,513 475 1,065 826 31,492 5,045 3,421 5,945 923 1,534 112 8,408 10,969 6,275 2,210 676 1,899 10 30,447 82,238 2,117 9,658 18,558 30,333 1,564 31,897 11,134 1,780 16,180 423 957 1,330 31,804 5,421 3,401 6,410 884 2,421 – 16,980 73,917 18,537 82,238 206 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Bayer Group Consolidated Statements of Changes in Equity Bayer Group Consolidated Statements of Changes in Equity € million Dec. 31, 2014 Equity transactions with owners Capital increase Dividend payments Other changes Other comprehensive income Income after income taxes Dec. 31, 2015 Equity transactions with owners Capital increase 1 Dividend payments Other changes Other comprehensive income Income after income taxes Dec. 31, 2016 B 4 Capital stock Capital reserves Retained earnings incl. net income Exchange differences Fair-value measurement of securities 2,117 6,167 12,974 (1,172) 30 (1,861) 582 776 4,110 16,581 (2,067) 129 (781) 4,531 18,393 (155) 705 (622) 53 614 45 (6) 24 57 81 2,117 6,167 3,491 2,117 9,658 1 The capital increase resulted from the issuance of mandatory convertible notes in the amount of €4,000 million on November 22, 2016. After deduction of €48 million in transaction costs and recognition of €191 million in deferred taxes, €3,491 million was allocated to capital reserves and €652 million to financial liabilities. B 4 continued Equity 20,218 (1,869) 1,477 1,521 4,098 Cash flow hedges Revaluation surplus Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest (36) 26 20,106 112 (5) (1,861) 422 1,488 4,110 (8) 1,055 33 (12) 21 24,265 1,180 25,445 3,491 (2,067) 178 (65) 4,531 30,333 (4) 17 (58) 157 (10) 295 1,564 3,491 (2,125) 335 (75) 4,826 31,897 13 (23) 45 22 € million Dec. 31, 2014 Equity transactions with owners Capital increase Dividend payments Other changes Other comprehensive income Income after income taxes Dec. 31, 2015 Equity transactions with owners Capital increase Dividend payments Other changes Other comprehensive income Income after income taxes Dec. 31, 2016 Bayer Annual Report 2016 B Consolidated Financial Statements 207 Bayer Group Consolidated Statements of Cash Flows Augmented Version Bayer Group Consolidated Statements of Cash Flows € million Income after income taxes Income taxes Financial result Income taxes paid Depreciation, amortization and impairments Change in pension provisions (Gains) losses on retirements of noncurrent assets Decrease (increase) in inventories Decrease (increase) in trade accounts receivable (Decrease) increase in trade accounts payable Changes in other working capital, other noncash items Net cash provided by (used in) operating activities from continuing operations Net cash provided by (used in) operating activities from discontinued operations Net cash provided by (used in) operating activities Cash outflows for additions to property, plant, equipment and intangible assets Cash inflows from sales of property, plant, equipment and other assets Cash inflows from divestments Cash inflows from (outflows for) noncurrent financial assets Cash outflows for acquisitions less acquired cash Interest and dividends received Cash inflows from (outflows for) current financial assets Net cash provided by (used in) investing activities Capital contributions Proceeds from shares of Covestro AG Dividend payments Issuances of debt Retirements of debt Interest paid including interest-rate swaps Interest received from interest-rate swaps Cash outflows for the purchase of additional interests in subsidiaries Net cash provided by (used in) financing activities [35] Change in cash and cash equivalents due to business activities Cash and cash equivalents at beginning of year Change in cash and cash equivalents due to changes in scope of consolidation Change in cash and cash equivalents due to exchange rate movements Cash and cash equivalents at end of year 2015 figures restated B 5 2016 4,558 1,329 1,155 (2,092) 3,743 (285) (44) (3) (552) 452 (2) 2015 4,013 1,223 1,005 (1,699) 3,332 (221) (105) (191) (1,059) 400 138 6,836 8,259 Note [33] 54 6,890 (2,517) 193 2 (26) (176) 106 (344) [34] (2,762) – 1,490 (1,869) 830 9,089 (2,578) 111 (18) (690) 2 89 (5,645) (8,729) 3,300 – (2,126) 16,620 15,190 (19,549) (15,920) (812) 160 (14) (3,974) 154 1,853 5 (153) 1,859 (853) 59 – (350) 10 1,859 3 27 1,899 208 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Notes to the Consolidated Financial Statements of the Bayer Group 1. Key data by segment and region Key Data by Segment € million Net sales (external) Change 1 Currency-adjusted change 1 Intersegment sales Net sales (total) Other operating income EBIT 1 EBIT before special items 1 EBITDA before special items 1 ROCE 1 Net cash provided by operating activities Equity-method income (loss) Equity-method investments Assets Capital expenditures Additions to noncurrent assets from acquisitions Depreciation, amortization and impairments of which impairment losses of which impairment loss reversals Research and development expenses Number of employees (as of Dec. 31) 2 Pharmaceuticals Consumer Health Crop Science Animal Health B 1/1 2015 2016 15,308 + 13.3% + 8.7% 38 16,420 + 7.3% + 8.7% 29 2015 6,076 + 43.1% + 40.4% 2 2016 2015 6,037 – 0.6% + 3.5% 5 10,128 + 9.2% + 2.4% 34 15,346 16,449 6,078 6,042 10,162 154 3,028 3,327 4,616 207 3,389 3,947 5,251 14.4% 16.2% 3,157 3,368 1 3 – 3 108 768 1,005 1,456 4.0% 816 – 11 101 695 987 1,411 3.5% 874 2 11 643 2,094 1,872 2,406 2016 9,915 2015 1,490 – 2.1% + 13.1% + 0.2% + 4.5% 2016 1,523 + 2.2% + 4.8% 10 36 9,951 301 1,755 1,898 2,421 20 1,510 1,533 4 254 318 347 10 313 320 349 16.3% 12.9% 47.8% 63.5% 749 2,071 348 193 (1) 4 (1) 15 22,389 22,173 16,560 16,558 14,230 14,868 764 851 (145) (3) 1,347 62 (1) 1,695 464 – 182 149 454 25 – 220 (1) 601 175 – 735 98 534 35 – 773 (10) 525 52 – – – 791 43 – 63 34 – 678 134 – – 838 39 – 30 1 (1) 699 140 2,450 2,787 250 259 1,082 1,164 40,504 40,093 13,513 12,821 23,268 22,399 3,804 3,957 Liabilities 8,385 8,941 1,596 1,614 5,344 5,897 2015 figures restated 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents Bayer Annual Report 2016 B Consolidated Financial Statements 209 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Key Data by Segment All Other Segments Reconciliation Corporate Functions and Consolidation Life Sciences Covestro € million 2015 2016 2015 2016 2015 2016 2015 2016 2015 Group 2016 Net sales (external) 1,097 1,042 4 6 34,103 34,943 11,982 11,826 46,085 46,769 B 1/1 continued Change 1 Currency-adjusted change 1 Intersegment sales Net sales (total) Other operating income EBIT 1 EBIT before special items 1 EBITDA before special items 1 ROCE 1 Net cash provided by operating activities Equity-method income (loss) Equity-method investments – 1.3% – 5.0% – 42.9% + 50.0% + 15.7% + 2.5% + 2.8% – 1.3% + 12.1% + 1.5% – 0.8% – 4.2% – 42.9% – + 10.7% + 4.7% – 5.1% 0.0% + 6.2% + 3.5% 2,249 3,346 2,124 3,166 (2,407) (2,403) (2,279) (2,273) 64 (499) (472) 77 (364) (344) – – 1,042 5,606 6,093 – – 787 5,738 6,826 64 75 – – 12,046 11,901 46,085 46,769 67 635 967 111 1,304 1,304 1,109 6,241 7,060 898 7,042 8,130 (466) (338) 8,597 9,318 1,659 1,984 10,256 11,302 – – 10.4% 10.3% 7.1% 15.3% 9.9% 11.0% 27 503 287 (574) 5,384 6,435 1,452 1,824 6,836 8,259 – – – – – 1 (7) 325 – 19 (6) 354 (9) 227 (20) 230 (9) 246 (26) 584 69 (39) 43 238 – 91 (50) 18 224 – Assets 2,324 2,632 8,263 15,986 64,557 73,055 9,360 9,183 73,917 82,238 Capital expenditures 311 307 Additions to noncurrent assets from acquisitions Depreciation, amortization and impairments of which impairment losses of which impairment loss reversals – – 195 206 4 – 7 – 5 – 6 – – 18 2,040 2,208 514 419 2,554 2,627 – 6 – – 102 (14) 27 – 129 (14) 2,599 3,063 733 680 3,332 3,743 160 699 (1) (1) 69 – 13 229 712 – (1) (1) Liabilities 4,814 5,616 23,915 23,724 44,732 46,491 3,740 3,850 48,472 50,341 Research and development expenses Number of employees (as of Dec. 31) 2 32 39 64 16 4,012 4,405 262 261 4,274 4,666 19,015 19,494 709 828 100,813 99,592 15,770 15,578 116,583 115,170 2015 figures restated 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents 210 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 2015 figures restated 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents B 1/2 (continued) 28,818 27,407 Key Data by Region € million Net sales (external) – by market Change1 Currency-adjusted change 1 Net sales (external) – by point of origin Change 1 Currency-adjusted change 1 Interregional sales Other operating income EBIT 1 Assets Capital expenditures Depreciation, amortization and impairments Liabilities Research and development expenses Number of employees (as of Dec. 31) 2 Key Data by Region € million Net sales (external) – by market Change 1 Currency-adjusted change 1 Net sales (external) – by point of origin Change 1 Currency-adjusted change 1 Interregional sales Other operating income EBIT1 Assets Capital expenditures Depreciation, amortization and impairments Liabilities Research and development expenses B 1/2 Europe / Middle East / Africa North America Asia / Pacific 2015 17,707 + 5.0% + 5.6% 18,528 + 5.4% + 6.1% 10,340 580 4,119 2016 17,823 + 0.7% + 2.8% 18,808 + 1.5% + 3.5% 10,745 331 4,673 2015 12,621 + 28.0% + 10.8% 12,332 + 27.3% + 9.5% 3,994 109 1,483 2016 12,806 + 1.5% + 2.0% 12,375 + 0.3% + 0.8% 4,280 223 1,128 2015 10,263 + 13.2% + 1.4% 10,022 + 13.6% + 1.5% 828 107 547 34,145 39,146 20,522 21,088 9,492 1,442 1,874 29,116 2,944 58,839 1,549 1,997 30,506 3,285 59,483 587 834 13,461 1,051 15,961 628 1,181 13,478 1,081 15,788 402 496 3,583 214 Latin America Reconciliation 2015 2016 2015 2015 5,494 + 3.2% + 7.7% 5,203 + 3.4% + 8.7% 582 313 591 2016 5,108 – 7.0% + 0.8% 4,800 – 7.7% + 0.6% 530 218 440 5,079 5,823 123 122 1,486 65 151 80 1,599 71 – – – – – – – – – – – – (15,744) (16,467) – (499) 4,679 – 6 – (364) 6,350 – 6 826 1,330 – – – – 46,085 + 12.1% + 6.2% 46,085 12.1% 6.2% – 1,109 6,241 73,917 2,554 3,332 48,472 4,274 2016 11,032 + 7.5% + 7.9% 10,786 + 7.6% + 8.1% 912 126 1,165 9,831 299 479 3,428 229 Total 2016 46,769 + 1.5% + 3.5% 46,769 1.5% 3.5% – 898 7,042 82,238 2,627 3,743 50,341 4,666 Number of employees (as of Dec. 31) 2 12,965 12,492 116,583 115,170 2015 figures restated 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents Bayer Annual Report 2016 B Consolidated Financial Statements 211 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 2. General information The consolidated financial statements of the Bayer Group as of December 31, 2016, were prepared by Bayer Aktiengesellschaft (Bayer AG) according to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), London, United Kingdom, and the inter- pretations of the IFRS Interpretations Committee (IFRS IC), both as endorsed by the European Union and in effect at the end of the reporting period. The applicable further requirements of Section 315a of the German Commercial Code were also taken into account. Bayer AG is a global enterprise based in Germany. Its registered office is at Kaiser-Wilhelm-Allee 1, 51368 Leverkusen. Its material business activities in the fields of health care, agriculture and high-tech polymer materi- als took place in the reporting period in the Pharmaceuticals, Consumer Health, Crop Science, Animal Health and Covestro segments. The activities of each segment are outlined in Note [5]. The declarations required under Section 161 of the German Stock Corporation Act concerning the German Corporate Governance Code have been issued and made available to stockholders. The Board of Management of Bayer AG prepared the consolidated financial statements of the Bayer Group on February 14, 2017. They were discussed by the Audit Committee of the Supervisory Board of Bayer AG at its meeting on February 20, 2017, and approved by the Supervisory Board at its plenary meeting on February 21, 2017. In the income statement and statement of comprehensive income, statement of financial position, state- ment of cash flows and statement of changes in equity, certain items are combined for the sake of clarity. These are explained in the Notes. The income statement is prepared using the cost-of-sales method. As- sets and liabilities are classified by maturity. They are regarded as current if they mature within one year or within the normal business cycle of the company or the Group, or are held for sale. The normal business cycle is defined for this purpose as beginning with the procurement of the resources necessary for the production process and ending with the receipt of cash or cash equivalents as consideration for the sale of the goods or services produced in that process. Inventories and trade accounts receivable and payable are always presented as current items. Deferred tax assets and liabilities and pension provisions are always presented as noncurrent items. The consolidated financial statements of the Bayer Group are drawn up in euros. Amounts are stated in millions of euros (€ million) except where otherwise indicated. The financial statements of the individual consolidated companies are prepared as of the closing date of the Group financial statements. 3. Effects of new financial reporting standards Financial reporting standards applied for the first time in 2016 The first-time application of the following amended financial reporting standards had no impact, or no material impact, on the presentation of Bayer’s financial position or results of operations, or on earnings per share. In May 2014, the IASB published amendments to IAS 16 (Property, Plant and Equipment) and IAS 38 (Intangible Assets) entitled “Clarification of Acceptable Methods of Depreciation and Amortisation.” These amendments clarify that revenue-based depreciation of property, plant and equipment or amortization of intangible assets is inappropriate. In May 2014, the IASB published amendments to IFRS 11 (Joint Arrangements) entitled “Accounting for Acquisitions of Interests in Joint Operations.” The amendments clarify the accounting for the acquisition of an interest in a joint operation in which the activity constitutes a business. 212 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group In December 2014, the IASB published its Disclosure Initiative containing amendments to IAS 1 (Presenta- tion of Financial Statements), which are intended to clarify the disclosure requirements. They relate to ma- teriality, line-item aggregation, subtotals, the structure of the Notes to the financial statements, the identifi- cation of significant accounting policies and the separate disclosure of the other comprehensive income of associates and joint ventures. In December 2014, the IASB published amendments to IFRS 10 (Consolidated Financial Statements), IFRS 12 (Disclosure of Interests in Other Entities) and IAS 28 (Investments in Associates and Joint Ven- tures) entitled “Investment Entities: Applying the Consolidation Exception.” The amendments largely clarify which subsidiaries an investment entity must consolidate and which must be recognized at fair value through profit or loss. Changes in accounting methods The legal and economic independence of Covestro results in changes to the global annual impairment tests for Covestro. In the future, from the perspective of the Bayer Group, the strategic business entities of Covestro will be subjected to impairment testing as a group of cash-generating units because the goodwill of Covestro will be monitored by Bayer Group management at this aggregated level from now on. Published financial reporting standards that have not yet been applied The IASB and the IFRS Interpretations Committee have issued the following standards, amendments to standards, and interpretations whose application was not yet mandatory for the 2016 fiscal year and is conditional upon their endorsement by the European Union. In July 2014, the IASB published the most recent version of IFRS 9 (Financial Instruments). The new standard contains revised rules for the classification and measurement of financial assets and liabilities, impairments of financial assets, and hedge accounting. IFRS 9 defines three instead of four measurement categories for capitalized financial instruments, with classification to be based partly on the company’s business model and partly on the characteristics of the contractual cash flows from the respective financial asset. In the case of equity instruments that are not held for trading, an entity may irrevocably opt at initial recognition either to account for such instruments at fair value through profit or loss or to recognize future changes in their fair value outside profit or loss in the statement of comprehensive income and not subse- quently reclassify these changes in fair value, even upon their derecognition. The new impairment model is based on the principle of accounting for an expected loss from the date of first-time recognition of a financial asset, before a loss event occurs. The aim of the revisions regarding hedge accounting is to achieve a more objective presentation of risk management in the financial state- ments. This also involved the revision of IFRS 7, leading to a requirement for additional disclosures in the Notes. IFRS 9 is to be applied for annual periods beginning on or after January 1, 2018. It was endorsed by the European Union in November 2016. The evaluation of this standard’s impact on the presentation of Bayer’s financial position and results of operations has not yet been completed. No decision has yet been made on whether to exercise the options the standard provides for facilitating the transition and for ac- counting for financial instruments recognized from January 1, 2018, onward. Based on current knowledge, the effects of applying the final version of IFRS 9 on the allocation of financial instruments to measurement categories and thus on the results of operations are estimated to be immaterial. Bayer Annual Report 2016 B Consolidated Financial Statements 213 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version In May 2014, the IASB issued IFRS 15 (Revenue from Contracts with Customers). IFRS 15 is the new standard for revenue recognition. It clarifies that the expected consideration for goods or services must be recognized as revenue when the goods or intangible assets are transferred or the services are ren- dered to the customer. This principle is applied in five steps. In step 1, the contract with the customer is identified. In step 2, the distinct performance obligations in the contract are identified. In step 3, the transaction price is determined. In step 4, this transaction price is allocated to the distinct performance obligations. Finally, in step 5, revenue is recognized when the identified distinct performance obligations are satisfied, either over time or at a point in time. IFRS 15 replaces IAS 11 (Construction Contracts), IAS 18 (Revenue), IFRIC 13 (Customer Loyalty Programmes), IFRIC 15 (Agreements for the Construction of Real Estate), IFRIC 18 (Transfers of Assets from Customers) and SIC-31 (Revenue-Barter Transactions Involving Advertising Services). The new standard is to be applied for annual periods beginning on or after January 1, 2018. Bayer currently plans to implement IFRS 15 on the basis of the modified retrospective method, accounting for the aggregate amount of any transition effects by way of an adjustment to retained earnings as of Jan- uary 1, 2018, and presenting the comparative period in line with previous rules. All of the established busi- ness models for the Bayer Group’s Life Science divisions were examined in the course of the implementa- tion project. The analysis did not yet cover all material consolidated companies. Based on current knowledge, Bayer does not expect the new standard to materially affect the timing of revenue recognition for the transactions concerned or their components. The evaluation of certain individual licensing agree- ments has not yet been completed. IFRS 15 clarifies the allocation of individual topics to (new) line items in the statement of financial position and to functional cost items in the income statement, and whether gross or net amounts are to be pre- sented. Determination of the effects on the level of sales or selling expenses has not yet been completed. Based on current knowledge, however, we do not anticipate any material effects on these items. Overall, we do not currently expect any material effects on the presentation of Bayer’s financial position or results of operations as a whole, or on earnings per share. In September 2014, the IASB published amendments to IFRS 10 (Consolidated Financial Statements) and IAS 28 (Investments in Associates and Joint Ventures) entitled “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture.” The amendments clarify that in a transaction involving an as- sociate or joint venture the extent of gain or loss recognition depends on whether the assets sold or con- tributed constitute a business. An amendment issued in December 2015 indefinitely defers the effective date of the September 2014 amendments, which were originally intended to be applied for annual periods beginning on or after January 1, 2016. The IASB is to set a new effective date. In January 2016, the IASB issued IFRS 16 (Leases), the new standard for lease accounting. IFRS 16 intro- duces a uniform lease accounting model for lessees, requiring recognition of assets and liabilities for all leases with a term of more than 12 months unless such leases are immaterial. It will eliminate the current requirement for lessees to classify lease contracts as either operating leases – without recognizing the respective assets or liabilities – or as finance leases. The new standard is to be applied for annual periods beginning on or after January 1, 2019. It has not yet been endorsed by the European Union. Bayer is cur- rently evaluating the impact the standard will have on the presentation of its financial position and results of operations. In January 2016, the IASB published amendments to IAS 12 (Income Taxes) under the title “Recognition of Deferred Tax Assets for Unrealised Losses.” These amendments clarify the accounting for deferred tax assets related to debt instruments measured at fair value. The amendments are to be applied for annual periods beginning on or after January 1, 2017. They have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial posi- tion and results of operations. 214 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group In January 2016, the IASB published amendments to IAS 7 (Statement of Cash Flows) under its Disclosure Initiative. The following changes in liabilities arising from financing activities must be disclosed in the future: a) changes from financing cash flows; b) changes arising from obtaining or losing control of subsidiaries or other businesses; c) the effect of changes in foreign exchange rates; d) changes in fair values; e) other changes. The amendments are to be applied for annual periods beginning on or after January 1, 2017. They have not yet been endorsed by the European Union. In April 2016, the IASB issued Clarifications to IFRS 15 (Revenue from Contracts with Customers). These amendments address three topics: identifying performance obligations, principal versus agent considera- tions, and licensing. They also provide some transition relief for modified contracts and completed con- tracts. The amendments are to be applied for annual periods beginning on or after January 1, 2018. They have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amend- ments will have on the presentation of its financial position and results of operations. In June 2016, the IASB published an amendment to IFRS 2 (Share-based Payment) under the title “Classi- fication and Measurement of Share-based Payment Transactions.” This amendment provides guidance on certain accounting issues relating to cash-settled share-based payments. For example, the fair value of the equity instruments is not to be adjusted for service conditions or non-market-based performance condi- tions. Instead, these are to be taken into account by adjusting the number of equity instruments expected to vest. The amendment is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendment will have on the presentation of its financial position and results of operations. In December 2016, the IASB published an amendment to IAS 40 (Investment Property) under the title “Transfers of Investment Property.” This specifies that a property may only be transferred to or from the investment property classification when there has been an actual change in use and not when there is a mere change of intent concerning the property. The amendment is to be applied for annual periods begin- ning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendment will have on the presentation of its financial position and results of operations. In December 2016, the IASB published “Annual Improvements to IFRS Standards 2014-2016 Cycle” as part of its annual improvements project. The amendments relate to IFRS 1 (First Time Adoption of IFRS), IFRS 12 (Disclosure of Interest in Other Entities) and IAS 28 (Investments in Associates and Joint Ventures). They mainly contain clarifications on the scope of application and other matters. The amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after January 1, 2018, those to IFRS 12 for annual periods beginning on or after January 1, 2017. They have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations. In December 2016, the IASB published the IFRIC Interpretation 22 (Foreign Currency Transactions and Advance Consideration) relating to IAS 21 (The Effects of Changes in Foreign Exchange Rates). The Inter- pretation clarifies that the assets, income and expenses accounted for following a foreign currency trans- action are to be translated at the same exchange rate as any related receipts or payments of advance consideration. IFRIC 22 is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the Interpretation will have on the presentation of its financial position and results of operations. Bayer Annual Report 2016 B Consolidated Financial Statements 215 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 4. Basic principles, methods and critical accounting estimates The financial statements of the consolidated companies are prepared according to uniform accounting policies and measurement principles. The consolidated financial statements of the Group are based on the principle of the historical cost of acquisition, construction or production, with the exception of the items reflected at fair value, such as financial assets held for trading or available for sale, and derivatives. In preparing the consolidated financial statements, the management has to make certain assumptions and estimates that may substantially impact the presentation of the Group’s financial position and / or results of operations. Such estimates, assumptions or the exercise of discretion mainly relate to the useful life of noncurrent assets, the discounted cash flows used for impairment testing and purchase price allocations, and the recognition of provisions, including those for litigation-related expenses, pensions and other benefits, tax- es, environmental compliance and remediation costs, sales allowances, product liability and guarantees. Essential estimates and assumptions that may affect reporting in the various item categories of the finan- cial statements are described in the following sections of this Note. Estimates are based on historical ex- perience and other assumptions that are considered reasonable under given circumstances. They are continually reviewed but may vary from the actual values. Changes in accounting policies or measurement principles in light of new or revised standards are applied retrospectively, except as otherwise provided in the respective standard. The income statement for the previous year and the opening statement of financial position for that year are adjusted as if the new ac- counting policies and / or measurement principles had always been applied. Consolidation The consolidated financial statements include subsidiaries, joint arrangements and associates. Subsidiaries are companies over which Bayer AG is currently able to exercise power by virtue of existing rights. Power means the ability to direct the activities that significantly influence a company’s profitability. Control is therefore only deemed to exist if Bayer AG is exposed, or has rights, to variable returns from its involvement with a company and has the ability to use its power over that company to affect the amount of that company’s returns. The ability to control another company generally derives from Bayer AG’s direct or indirect ownership of a majority of the voting rights. In the case of structured entities, however, control is based on contractual agreements. Inclusion of an entity’s accounts in the consolidated financial state- ments begins when the Bayer Group is able to exercise control over the entity and ceases when it is no longer able to do so. Joint operations and joint ventures are based on joint arrangements. A joint arrangement is deemed to exist if the Bayer Group through a contractual agreement jointly controls activities managed with a third party. Joint control is only deemed to exist if decisions regarding the relevant activities require the unani- mous consent of the parties sharing control. 216 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. The Bayer Group recog- nizes the share of assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with its rights and obligations. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint ventures are accounted for using the equity method. Associates over which Bayer AG exerts significant influence, generally through an ownership interest be- tween 20% and 50%, are also accounted for using the equity method. The carrying amount of a company accounted for using the equity method is adjusted annually by any change in its equity corresponding to Bayer’s percentage interest in the company. Differences arising upon first-time inclusion using the equity method are accounted for according to full-consolidation principles. Bayer’s share of changes in these companies’ equities recognized in profit or loss – including impairment losses recognized on goodwill – are reflected in equity-method income / loss. Companies that do not have a material impact on the Group’s financial position or results of operations, either individually or in aggregate, are accounted for at cost of acquisition less any impairment losses. Foreign currency translation The financial statements of the individual companies for inclusion in the consolidated financial statements are prepared in their respective functional currencies. A company’s functional currency is that of the eco- nomic environment in which it primarily generates and expends cash. The majority of consolidated compa- nies carry out their activities autonomously from a financial, economic and organizational point of view, and their functional currencies are therefore the respective local currencies. In the consolidated financial statements, the assets and liabilities of companies outside the eurozone at the start and end of the year are translated into euros at closing rates. All changes occurring during the year and all income and expense items and cash flows are translated into euros at average monthly rates. Equi- ty components are translated at the historical exchange rates prevailing at the respective dates of their first-time recognition in Group equity. The exchange differences arising between the resulting amounts and those obtained by translating at clos- ing rates are recognized outside profit or loss as “Exchange differences on translation of operations out- side the eurozone” (in other comprehensive income) or “Exchange differences” (in the tables in the Notes). When a company is deconsolidated or the net investment in a foreign operation is reduced, such exchange differences are reclassified from equity to profit or loss. Bayer Annual Report 2016 B Consolidated Financial Statements 217 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The exchange rates for major currencies against the euro varied as follows: Exchange Rates for Major Currencies €1/ BRL CAD CHF CNY GBP JPY MXN RUB USD Brazil Canada Switzerland China United Kingdom Japan Mexico Russia United States Closing rate Average rate B 4/1 2015 4.31 1.51 1.08 7.06 0.73 131.07 18.91 80.67 1.09 2016 3.43 1.42 1.07 7.35 0.86 123.36 21.78 64.30 1.05 2015 3.64 1.42 1.07 6.97 0.73 134.28 17.56 67.23 1.11 2016 3.84 1.47 1.09 7.36 0.82 120.06 20.62 73.79 1.11 In 2016, as in prior years, the rules of IAS 29 (Financial Reporting in Hyperinflationary Economies) were relevant for Bayer S.A., Venezuela. Gains and losses incurred upon adjusting the carrying amounts of nonmonetary assets and liabilities and of items in the income statement for inflation are recognized in other operating income and expenses. Starting in January 2016, foreign currency translation and valuation were switched to the “hyperinflation- adjusted” SIMADI exchange rate. This is determined internally because reliable exchange rates are not available externally. It was initially based on the official SIMADI rate and has subsequently been adjusted in line with published inflation rates. The exchange rate thus calculated was VEF 2,737 to the U.S. dollar at the end of December 2016. The resulting U.S. dollar amounts were then translated at the dollar / euro closing-date rate. Foreign currency measurement In the separate financial statements of the individual consolidated companies, monetary items, such as receivables and liabilities, that are denominated in currencies other than the respective functional currency are measured at closing rates. Related exchange differences are recognized in profit or loss as exchange gains or losses under other financial income or expenses. Net sales and other operating income All revenues derived from the selling of products or rendering of services or from licensing agreements are recognized as sales. Other operational revenues are recognized as other operating income. Sales are rec- ognized in profit or loss when the significant risks and rewards of ownership of the goods have been trans- ferred to the customer, the company retains neither continuing managerial involvement to the degree usu- ally associated with ownership nor effective control over the goods sold, the amount of revenue and costs incurred or to be incurred can be measured reliably, and it is sufficiently probable that the economic bene- fits associated with the transaction will flow to the company. Sales are stated net of sales taxes, other taxes and sales deductions at the fair value of the consideration received or to be received. Sales deductions are estimated amounts for rebates, cash discounts and product returns. They are deducted at the time the sales are recognized, and appropriate provisions are recorded. Sales deductions are estimated primarily on the basis of historical experience, specific contrac- tual terms and future expectations of sales development. It is unlikely that factors other than these could materially affect sales deductions in the Bayer Group. Adjustments to provisions made in prior periods for rebates, cash discounts or product returns were of secondary importance for income before income taxes in the years under report. 218 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Provisions for rebates in 2016 amounted to 4.2% of total net sales (2015: 3.8%). In addition to rebates, Group companies offer cash discounts for prompt payment in some countries. Provisions for cash dis- counts as of December 31, 2016 and December 31, 2015 were less than 0.1% of total net sales for the respective year. Sales are reduced by the amount of the provisions for expected returns of defective goods or of saleable products that may be returned under contractual arrangements. The net sales are reduced on the date of sale or on the date when the amount of future returns can be reasonably estimated. Provisions for product returns in 2016 amounted to 0.4% of total net sales (2015: 0.4%). If future product returns cannot be rea- sonably estimated and are significant to a sales transaction, the revenues and the related cost of sales are deferred until a reasonable estimate can be made or the right to return the goods has expired. Some of the Bayer Group’s revenues are generated on the basis of licensing agreements under which third parties have been granted rights to products and technologies. Payments received, or expected to be received, that relate to the sale or out-licensing of technologies or technological expertise are recognized in profit or loss as of the effective date of the respective agreement if all rights relating to the technologies and all obligations resulting from them have been relinquished under the contract terms. However, if rights to the technologies continue to exist or obligations resulting from them have yet to be fulfilled, the pay- ments received are deferred accordingly. Upfront payments and similar nonrefundable payments received under these agreements are recorded as other liabilities and recognized in profit or loss according to the degree of performance over the estimated performance period stipulated in the agreement. License agreements and research and development collaboration agreements may be multiple-deliverable arrangements with varying consideration terms, such as upfront payments and milestone or similar pay- ments. Such agreements therefore have to be assessed to determine whether the revenues allocated to individual deliverables must be recognized at different points in time and therefore form separate units of account. To qualify as a separate unit of account for revenue recognition purposes, a deliverable must have value to the licensee on a standalone basis. If this is not the case, the agreement as a whole or a combination of individual deliverables that has value on a standalone basis forms a unit of account. If necessary goods have yet to be delivered or necessary services provided for a unit of account and such delivery or provision is probable, nonrefundable (royalty) payments already received are recognized through profit or loss over the periods in which these goods are delivered or these services are provided. Income may also arise from the exchange of intangible assets. The amount recognized is generally based on the fair value of the assets given up, calculated using the discounted cash flow method. If the assets given up are internally generated, the gain from the exchange generally equals their fair value. Research and development expenses For accounting purposes, research expenses are defined as costs incurred for current or planned investi- gations undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development expenses are defined as costs incurred for the application of research findings or specialist knowledge to plans or designs for the production, provision or development of new or substantially im- proved products, services or processes, respectively, prior to the commencement of commercial produc- tion or use. Bayer Annual Report 2016 B Consolidated Financial Statements 219 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Research and development expenses are incurred in the Bayer Group for in-house research and develop- ment activities as well as numerous research and development collaborations and alliances with third par- ties. Research and development expenses mainly comprise the costs for active ingredient discovery, clinical studies, research and development activities in the areas of application technology and engineering, field trials, regulatory approvals and approval extensions. Research costs cannot be capitalized. The conditions for capitalization of development costs are closely defined: an intangible asset must be recognized if, and only if, there is reasonable certainty of receiving future cash flows that will cover an asset’s carrying amount. Since our own development projects are often subject to regulatory approval procedures and other uncertainties, the conditions for the capitalization of costs incurred before receipt of approvals are not normally satisfied. In the case of research and development collaborations, a distinction is generally made between payments on contract signature, upfront payments, milestone payments and cost reimbursements for work per- formed. If an intangible asset (such as the right to the use of an active ingredient) is acquired in connection with any of these payment obligations, the respective payment is capitalized even if it is uncertain whether further development work will ultimately lead to the production of a saleable product. Reimbursements of the cost of research or development work are recognized in profit or loss, except where they are required to be capitalized. Income taxes Income taxes comprise the taxes levied on taxable income in the individual countries along with changes in deferred tax assets and liabilities that are recognized in profit or loss. The income taxes recognized are reflected at the amounts likely to be payable under the statutory regulations in force, or already enacted in relation to future periods, at the end of the reporting period. Complex tax regulations may give rise to uncertainties with respect to their interpretation and the amounts and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate adjustments to tax income and expense in future periods. The Group establishes provisions for taxes, based on rea- sonable estimates, for liabilities to the tax authorities of the respective countries that are uncertain as to their amount and the probability of their occurrence. The amount of such provisions is based on various factors, such as experience with previous tax audits and differing legal interpretations by the taxable entity and the responsible tax authority. In compliance with IAS 12 (Income Taxes), deferred taxes are recognized for temporary differences be- tween the carrying amounts of assets and liabilities in the statement of financial position prepared accord- ing to IFRS and their tax bases. Deferred taxes are also recognized for consolidation measures and for loss carryforwards, interest carryforwards and tax credits that are likely to be usable. Deferred tax assets relating to deductible temporary differences, tax credits, loss carryforwards and inter- est carryforwards are recognized where it is sufficiently probable that taxable income will be available in the future to enable them to be used. Deferred tax liabilities are recognized on temporary differences taxable in the future. Deferred taxes are calculated at the rates which – on the basis of the statutory regulations in force, or already enacted in relation to future periods, as of the closing date – are expected to apply in the individual countries at the time of realization. Deferred tax assets and deferred tax liabilities are offset if they relate to income taxes levied by the same taxation authority and Bayer has a legal right to settle on a net basis. Material effects of changes in tax rates or tax law on deferred tax assets and liabilities are gen- erally accounted for in the period in which the changes are enacted. Such effects are recognized in profit or loss except where they relate to deferred taxes that were recognized outside profit or loss, in which case they are recognized in other comprehensive income. 220 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Deferred and current taxes are recognized in profit or loss unless they relate to items recognized outside profit or loss in other comprehensive income, in which case they, too, are recognized in other comprehen- sive income. The probability that deferred tax assets resulting from temporary differences, loss carryforwards or interest carryforwards can be used in the future is the subject of forecasts by the individual consolidated compa- nies regarding their future earnings situation and other parameters. Deferred tax liabilities are recognized on planned dividend payments by subsidiaries. Where no dividend payment is planned for the foreseeable future, no deferred tax liability is recognized on the difference be- tween the proportionate net assets according to IFRS and the tax base of the investment in the subsidiary. Goodwill In a business combination, goodwill is capitalized at the acquisition date. It is measured at its cost of ac- quisition, which is the excess of the acquisition price for shares in a company over the acquired net assets. The net assets are the balance of the fair values of the acquired identifiable assets and the assumed liabili- ties and contingent liabilities. Goodwill is not amortized, but tested annually for impairment. Details of the annual impairment tests are given under “Procedure used in global impairment testing and its impact.” Once an impairment loss has been recognized on goodwill, it is not reversed in subsequent periods. Other intangible assets An “other intangible asset” is an identifiable nonmonetary asset without physical substance, other than goodwill (such as a patent, a trademark or a marketing right). It is capitalized if the future economic bene- fits attributable to the asset will probably flow to the company and the cost of acquisition or generation of the asset can be reliably measured. Other intangible assets are recognized at the cost of acquisition or generation. Those with a determinable useful life are amortized accordingly on a straight-line basis over a period of up to 30 years, except where their actual depletion demands a different amortization pattern. Determination of the expected useful lives of such assets and the amortization patterns is based on estimates of the period for which they will gener- ate cash flows. An impairment test is performed if there is an indication of possible impairment. Other intangible assets with an indefinite life (such as the Bayer Cross trademark) and intangible assets not yet available for use (such as research and development projects) are not amortized, but tested annually for impairment. Property, plant and equipment Property, plant and equipment is depreciated by the straight-line method over an asset’s useful life, except where depreciation based on actual depletion is more appropriate. Bayer Annual Report 2016 B Consolidated Financial Statements 221 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The following depreciation periods are applied throughout the Group: Useful Life of Property, Plant and Equipment Buildings Outdoor infrastructure Storage tanks and pipelines Plant installations Machinery and equipment Furniture and fixtures Vehicles Computer equipment Laboratory and research facilities B 4/2 20 to 50 years 10 to 20 years 10 to 20 years 6 to 20 years 6 to 12 years 4 to 10 years 5 to 8 years 3 to 5 years 3 to 5 years When assets are sold, closed down or scrapped, the difference between the net proceeds and the net carrying amount of the assets is recognized as a gain or loss in other operating income or expenses, re- spectively. Investment property comprises land and buildings not being used for operational or administrative purpos- es. It is measured using the cost model. The fair value of the investment property reported in the Notes is determined using the discounted cash flow method, comparisons with the current market values of similar properties, or reports from external experts. Financial assets Financial assets comprise loans and receivables, acquired equity and debt instruments, cash and cash equivalents, and derivatives with positive fair values. Regular-way purchases and sales of financial assets are generally posted on the settlement date. Financial assets are initially recognized at fair value plus transaction costs. The transaction costs incurred for the purchase of financial assets held at fair value through profit or loss are expensed immediately. If there are substantial and objective indications of a decline in the value of loans and receivables, held- to-maturity financial assets or available-for-sale financial assets, an impairment test is performed. Indica- tions of possible impairment include a high probability of insolvency, a significant deterioration in credit standing, a material breach of contract, operating losses reported by a company over several years, a reduction in market value, the financial restructuring of the debtor, or the disappearance of an active market for the asset. Financial assets are derecognized when contractual rights to receive cash flows from the financial assets expire or the financial assets are transferred together with all material risks and benefits. Inventories In accordance with IAS 2 (Inventories), inventories encompass assets consumed in production or in the rendering of services (raw materials and supplies), assets in the production process for sale (work in process), goods held for sale in the ordinary course of business (finished goods and goods purchased for resale), and advance payments on inventories. Inventories are recognized at their cost of acquisition or production – calculated by the weighted-average method – or at their net realizable value, whichever is lower. The net realizable value is the estimated selling price in the ordinary course of business less esti- mated cost to complete and selling expenses. 222 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Cash and cash equivalents Cash and cash equivalents comprise cash, checks received and balances with banks and companies. Cash equivalents are highly liquid short-term financial investments that are subject to an insignificant risk of changes in value, are easily convertible into a known amount of cash and have a maturity of three months or less from the date of acquisition or investment. Provisions for pensions and other post-employment benefits Within the Bayer Group, post-employment benefits are provided under defined contribution and / or defined benefit plans. In the case of defined contribution plans, the company pays contributions to publicly or privately administered pension plans on a mandatory, contractual or voluntary basis. Once the contribu- tions have been paid, the company has no further payment obligations. The regular contributions consti- tute expenses for the year in which they are due and as such are included in the functional cost items, and thus in EBIT. All other post-employment benefit systems are defined benefit plans, which may be either unfunded, i.e. financed by provisions, or funded, i.e. financed through pension funds. The present value of provisions for defined benefit plans and the resulting expense are calculated in ac- cordance with IAS 19 (Employee Benefits) by the projected unit credit method. The future benefit obliga- tions are valued by actuarial methods and spread over the entire employment period on the basis of spe- cific assumptions regarding beneficiary structure and the economic environment. These relate mainly to the discount rate, future salary and pension increases, variations in health care costs, and mortality rates. The discount rates used are calculated from the yields of high-quality corporate bond portfolios in specific currencies with cash flows approximately equivalent to the expected disbursements from the pension plans. The uniform discount rate derived from this interest-rate structure is thus based on the yields, at the closing date, of a portfolio of AA-rated corporate bonds whose weighted residual maturities approximately correspond to the duration necessary to cover the entire benefit obligation. The fair value of plan assets is deducted from the present value of the defined benefit obligation for pen- sions and other post-employment benefits to determine the net defined benefit liability. The obligations and plan assets are valued at regular intervals of not more than three years. Comprehensive actuarial valuations for all major plans are performed annually as of December 31. Plan assets in excess of the benefit obliga- tion are reflected in other receivables, subject to the asset ceiling specified in IAS 19 (Employee Benefits). The balance of all income and expenses relating to defined benefit plans, except the net interest on the net liability, is recognized in EBIT. The net interest is reflected in the financial result under other financial income and expenses. The effects of remeasurements of the net defined benefit liability are reflected in the statement of compre- hensive income as other comprehensive income. They consist of actuarial gains and losses, the return on plan assets and changes in the effects of the asset ceiling, less the respective amounts included in net interest. Deferred taxes relating to the effects of remeasurements are also recognized in other comprehen- sive income. Bayer Annual Report 2016 B Consolidated Financial Statements 223 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Other provisions Other provisions are recognized for present legal and constructive obligations arising from past events that will probably give rise to a future outflow of resources, provided that a reliable estimate can be made of the amount of the obligations. If the projected obligation declines as a result of a change in the estimate, the provision is reversed by the corresponding amount and the resulting income recognized in the operating expense item(s) in which the original charge was recognized. To enhance the information content of the estimates, certain provisions that could have a material effect on the financial position or results of operations of the Group are tested for their sensitivity to changes in the underlying parameters. To reflect uncertainty about the likelihood of the assumed events actually occurring, the impact of a five-percentage-point change in the probability of occurrence is examined in each case. This analysis has not shown other provisions to be materially sensitive. Provisions for environmental protection are recorded if future cash outflows are likely to be necessary to ensure compliance with environmental regulations or to carry out remediation work, such costs can be reliably estimated and no future benefits are expected from such measures. Provisions for environmental protection mainly relate to the rehabilitation of contaminated land, recultivation of landfills, and redevelop- ment and water protection measures. Estimating the future costs of environmental protection and remediation involves many uncertainties, par- ticularly with regard to the status of laws, regulations and the information available about conditions in the various countries and at the individual sites. Significant factors in estimating the costs include previous experiences in similar cases, the conclusions in expert opinions obtained regarding the Group’s environ- mental programs, current costs and new developments affecting costs, management’s interpretation of current environmental laws and regulations, the number and financial position of third parties that may become obligated to participate in any remediation costs on the basis of joint liability, and the remediation methods likely to be deployed. Changes in these assumptions could impact future reported results of the Group. Taking into consideration experience gained to date regarding environmental matters of a similar nature, provisions are believed to be adequate based upon currently available information. Given the difficulties inherent in estimating liabilities in the businesses in which the Group operates, especially those for which the risk of environmental damage is greater in relative terms (Crop Science and Covestro), it remains pos- sible that material additional costs will be incurred beyond the amounts accrued. It may transpire during remediation work that additional expenditures are necessary over an extended period and that these ex- ceed existing provisions and cannot be reasonably estimated. Provisions for restructuring only cover expenses that arise directly from restructuring measures, are nec- essary for restructuring and are not related to future business operations. Such expenses include sever- ance payments to employees and compensation payments in respect of rented property that can no long- er be used. Restructuring measures may include the sale or termination of business units, site closures, relocations of business activities or fundamental reorganizations of business units. Trade-related provisions are recorded mainly for the granting of rebates or discounts, product returns, obligations in respect of services already received but not yet invoiced, and impending losses or onerous contracts. 224 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group As a global enterprise with a diverse business portfolio, the Bayer Group is exposed to numerous legal risks for which provisions for litigations must be established under certain conditions – particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law and environmental protection. Litigations and other judicial proceedings often raise complex issues and are subject to many uncertainties and complexities including, but not limited to, the facts and circumstances of each particular case, the jurisdiction in which each suit is brought and differences in applicable law. The outcomes of currently pending and future proceedings generally cannot be predicted. It is particularly difficult to assess the likely outcomes of class actions for damages or mass compensation claims in the United States, which may give rise to significant financial risks for the Bayer Group. As a result of a judgment in court proceedings, regu- latory decisions or the conclusion of a settlement, the Bayer Group may incur charges for which no ac- counting measures have yet been taken for lack of reasonable estimability or which exceed presently es- tablished provisions and the insurance coverage. The Bayer Group considers the need for accounting measures in respect of pending or future litigations, and the extent of any such measures, on the basis of the information available to its legal department and in close consultation with legal counsel acting for the Bayer Group. Where it is more likely than not that such a litigation will result in an outflow of resources that is already reasonably estimable, a provision for litigation is recorded in the amount of the present value of the ex- pected cash outflows. Such provisions cover the estimated payments to the plaintiffs, court and procedur- al costs, attorney costs and the cost of potential settlements. It is frequently impossible to reliably determine the existence of a present obligation or reasonably estimate the probability that a potential outflow of resources will result from a pending or future litigation. The status of the material “legal risks” is described in Note [32]. Due to the special nature of these litigations, provi- sions generally are not established until initial settlements allow an estimate of potential amounts or judg- ments have been issued. Provisions for legal defense costs are established if it is probable that material costs will have to be incurred for external legal counsel to defend the company’s legal position. Internal and external legal counsel evaluates the current status of the Bayer Group’s material legal risks at the end of each reporting period. The need to establish or adjust a provision and the amount of the provi- sion or adjustment are determined on this basis. Adjusting events are reflected up to the date of prepara- tion of the consolidated financial statements. The measurement of provisions in the case of class actions or mass compensation claims is mainly based on any settlements reached during the past year and on pending or anticipated future claims. Provisions for personnel commitments mainly include those for variable one-time payments under short- term incentive programs and for stock-based compensation. Also reflected here are commitments for service awards, early retirements and pre-retirement part-time working arrangements. Provisions for sever- ance payments resulting from restructuring are reflected in provisions for restructuring. Miscellaneous provisions include those for other liabilities, contingent liabilities from business combinations, and asset retirement obligations (other than those included in provisions for environmental protection). Financial liabilities Financial liabilities comprise primary financial liabilities and negative fair values of derivatives. Liabilities for contingent consideration arising from business combinations are measured at fair value. Changes in fair value are recognized through profit or loss as of the respective closing date. Bayer Annual Report 2016 B Consolidated Financial Statements 225 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Financial liabilities are derecognized when the contractual obligation is discharged or canceled, or has expired. An assessment of the mandatory convertible notes issued in 2016 was performed to determine whether these should be accounted for entirely as debt or split into an equity component and a debt component. The assessment identified Bayer’s right to early conversion of the notes as an important criterion in this regard, and the economic substance of this right was examined. The early conversion right has economic substance with respect to maintaining the current credit rating if early conversion can prevent a rating downgrade. In this event, future savings of credit interest would more than offset the cost of early conver- sion by Bayer. On the basis of this assessment, the mandatory convertible notes are accounted for as a hybrid financial instrument. The directly attributable costs along with the debt component, which corresponds to the pre- sent value of the future interest payments, are deducted from the proceeds of the issue. The debt compo- nent is included in financial liabilities. The remaining amount is the equity component, which is reflected in capital reserves. Other receivables and liabilities Accrued items and other nonfinancial assets and liabilities are carried at amortized cost. They are amor- tized to income by the straight-line method or according to performance of the underlying transaction. Grants and subsidies from third parties that serve to promote investment are reflected in the statement of financial position under other liabilities and amortized to income over the useful lives of the respective in- vestments or in line with the terms of the grant or subsidy. Derivatives The Bayer Group uses derivatives to mitigate the risk of changes in exchange rates, interest rates or prices and to hedge stock-based compensation programs. The instruments used include forward exchange con- tracts, interest-rate swaps and stock options. Derivatives are recognized at the trade date. Contracts concluded in order to receive or deliver nonfinancial items for the company’s own purposes are not accounted for as derivatives but treated as pending transactions. Where embedded derivatives are identified that are required to be separated from the pending transactions, they are accounted for sepa- rately. To take advantage of market opportunities or cover possible peak demand, a nonmaterial volume of transactions may be entered into for which the possibility of immediate resale cannot be excluded. Such transactions are allocated to separate portfolios upon acquisition and accounted for as derivatives accord- ing to IAS 39. Derivatives are carried at fair value. Positive fair values at the end of the reporting period are reflected in financial assets, negative fair values in financial liabilities. Changes in the fair values of these derivatives are recognized directly in profit or loss except where hedge accounting is used. Changes in the fair values of the effective portion of derivatives designated as cash flow hedges are initially recognized outside profit or loss in accumulated other comprehensive income. They are reclassified to profit or loss when the underlying transaction is realized. If such a derivative is sold or ceases to qualify for hedge accounting, the change in its value continues to be recognized in accumulated other comprehen- sive income until the forecasted transaction is realized. If the forecasted transaction is no longer expected to occur, the amount previously recognized in accumulated other comprehensive income has to be reclas- sified to profit or loss. The ineffective portion of gains or losses on derivatives designated as cash flow hedges is recognized either in other operating income or expenses or in the financial result, depending on the type of underlying transaction. 226 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Changes in the fair values of derivatives designated as fair-value hedges and the adjustments in the carry- ing amounts of the underlying transactions are recognized in profit or loss. Changes in the fair values of forward exchange contracts and currency options serving as hedges of items in the statement of financial position are reflected in other financial income and expenses as exchange gains or losses, while changes in the values of interest-rate swaps and interest-rate options are recognized in interest income or expense. Changes in the fair values of commodity futures and options, and of forward exchange contracts used to hedge forecasted sales transactions in foreign currencies, are recognized in other operating income or expenses. Changes in the fair values of stock options or forward stock transac- tions used to hedge stock-based employee compensation are initially recognized outside profit or loss and subsequently reclassified to profit or loss in the functional costs over the periods of the Aspire programs. The income and expense reflected in the financial result pertaining to the derivatives and the underlying transactions are shown separately. Income and expense are not offset. Acquisition accounting Acquired businesses are accounted for using the acquisition method, which requires that the assets ac- quired and liabilities assumed be recorded at their respective fair values on the date Bayer obtains control. Ancillary acquisition costs are recognized as expenses in the periods in which they occur. The application of the acquisition method requires certain estimates and assumptions to be made, espe- cially concerning the fair values of the acquired intangible assets, property, plant and equipment and the liabilities assumed at the acquisition date, and the useful lives of the acquired intangible assets, property, plant and equipment. Measurement is based to a large extent on anticipated cash flows. If actual cash flows vary from those used in calculating fair values, this may materially affect the Group’s future results of operations. In particu- lar, the estimation of discounted cash flows from intangible assets under development, patented and non- patented technologies and brands is based on assumptions concerning, for example: > The outcomes of research and development activities regarding the efficacy of a crop protection or seed product, compound, results of clinical trials, etc. > The probability of obtaining regulatory approvals in individual countries > Long-term sales projections > Possible selling price erosion due to offerings of unpatented products following patent expirations > The behavior of competitors (launch of competing products, marketing initiatives, etc.) For significant acquisitions, the purchase price allocation is carried out with assistance from independent third-party valuation specialists. The valuations are based on the information available at the acquisition date. In step acquisitions, the fair values of the acquired entity’s assets and liabilities are measured in accord- ance with IFRS 3 (Business Combinations) at the date on which control is obtained. Any resulting adjust- ments to the fair value of the existing interest are recognized in profit or loss. The carrying amount of the assets and liabilities already recognized in the statement of financial position is then adjusted accordingly. Bayer Annual Report 2016 B Consolidated Financial Statements 227 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Divestment accounting Divestments of shares in subsidiaries that result in a loss of control are generally accounted for in profit or loss. When shares in a subsidiary are gradually divested in several tranches, a reduction in the majority share- holding without the loss of control is reflected outside profit or loss and results in an increase in the equity attributable to noncontrolling stockholders. If Bayer AG loses control of an entity but retains significant influence, the entity is accounted for as an associate using the equity method. If Bayer can no longer exert significant influence following a loss of control, the remaining interest is immediately classified as an availa- ble-for-sale financial asset and recognized at fair value outside profit or loss. Procedure used in global impairment testing and its impact Impairment tests are performed not only on individual items of intangible assets, property, plant and equipment, but also at the level of cash-generating units or groups of cash-generating units. A cash- generating unit is the smallest identifiable group of assets that generates cash inflows that are largely inde- pendent of the cash inflows from other assets or groups of assets. The Bayer Group regards its strategic business entities or groups of strategic business entities, as well as certain product families, as cash- generating units and subjects them to global impairment testing. The strategic business entities constitute the second financial reporting level below the segments. Cash-generating units and unit groups are globally tested if there is an indication of possible impairment. Those to which goodwill is allocated are tested at least annually. Impairment testing involves comparing the carrying amount of each cash-generating unit, unit group or item of intangible assets, property, plant or equipment to the recoverable amount, which is the higher of its fair value less costs of disposal or value in use. If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized for the difference. In this case an impairment loss is first recognized on any goodwill allocated to the cash-generating unit or unit group. Any remaining part of the impairment loss is then allocated among the other noncurrent nonfinancial assets of the cash-generating unit or unit group in proportion to their carrying amounts. The resulting expense is reflected in the functional item of the income statement in which the depreciation or amortization of the respective assets is recognized. The same applies to income from impairment loss reversals. The recoverable amount is generally determined on the basis of the fair value less costs of disposal, taking into account the present value of the future net cash flows as market prices for the individual units are not normally available. These are forecasted on the basis of the Bayer Group’s current planning, the planning horizon normally being three to five years. Forecasting involves making assumptions, especially regarding future selling prices, sales volumes, costs, market growth rates, economic cycles and exchange rates. These assumptions are based on internal estimates along with external market studies. Where the recov- erable amount is the fair value less costs of disposal, the cash-generating unit or unit group is measured from the viewpoint of an independent market participant. Where the recoverable amount is the value in use, the cash-generating unit, unit group or individual asset is measured as currently used. In either case, net cash flows beyond the planning period are determined on the basis of long-term business expectations using the respective individual growth rates derived from market information. The fair value less costs of disposal is determined on the basis of unobservable inputs (Level 3). 228 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group The net cash inflows are discounted at a rate equivalent to the weighted average cost of equity and debt capital. To allow for the different risk and return profiles of the Bayer Group’s principal businesses, the after-tax cost of capital is calculated separately for each reporting segment, and a segment-specific capital structure is defined by benchmarking against comparable companies in the same industry sector. The cost of equity corresponds to the return expected by stockholders, while the cost of debt is based on the con- ditions on which comparable companies can obtain long-term financing. Both components are derived from capital market information. The growth rates applied for impairment testing in 2016 and 2015 and the capital cost factors used to discount the expected cash flows are shown in the following table: Impairment Testing Parameters % Pharmaceuticals Radiology Consumer Health Crop Protection Seeds Environmental Science Animal Health Covestro B 4/3 Growth rate After-tax cost of capital 2015 2016 2015 2016 0.0 0.0 0.0 2.3 1.9 1.8 0.0 1.8 0.0 0.0 0.0 2.1 1.7 2.4 0.0 1.8 6.2 6.2 6.2 6.3 6.3 6.3 6.2 6.1 5.5 5.5 5.2 5.3 5.3 5.3 5.3 5.4 In light of the legal and economic independence of Covestro, its strategic business entities were impair- ment-tested as a group of cash-generating units from the point of view of the Bayer Group. No impairment losses were recognized on goodwill on the basis of the global annual impairment testing of the cash-generating units and unit groups in 2016 or 2015. Impairment losses on intangible assets, prop- erty, plant and equipment – net of €1 million (2015: €1 million) in impairment loss reversals – totaled €711 million (2015: €229 million). Details are provided in Notes [17] and [18]. Although the estimates of the useful lives of certain assets, assumptions concerning the macroeconomic environment and developments in the industries in which the Bayer Group operates, and estimates of the discounted future cash flows are believed to be appropriate, changes in assumptions or circumstances could require changes in the analysis. This could lead to the recognition of additional impairment losses in the future or – except in the case of goodwill – to reversals of previously recognized impairment losses if developments are contrary to expectations. The sensitivity analysis for cash-generating units and unit groups to which goodwill is allocated was based on a 10% reduction in future cash flows, a 10% increase in the weighted average cost of capital or a one- percentage-point reduction in the long-term growth rate. Bayer concluded that no impairment loss would need to be recognized on goodwill in any cash-generating unit or unit group under these conditions. Bayer Annual Report 2016 B Consolidated Financial Statements 229 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 5. Segment reporting At Bayer, the Board of Management – as the chief operating decision-maker – allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach) and based on the Group accounting policies outlined in Note [4]. In 2015, the Bayer Group comprised three subgroups, with operations subdivided into strategic business entities known as divisions (HealthCare), business groups (CropScience) and business units (Covestro; formerly MaterialScience). On December 31, 2015, there were four reportable segments. In September 2015, it was decided to introduce a new organizational structure effective January 1, 2016, in line with Bayer’s focus on the Life Science businesses. The former Bayer HealthCare subgroup was dissolved, and the Radiology business is now assigned to the Pharmaceuticals segment. The Consumer Health segment consists entirely of the consumer care business. Animal Health is a reportable segment. The Bayer Crop- Science subgroup became the Crop Science segment. Covestro remains a reportable segment. In the Crop Science segment, the Crop Protection / Seeds and Environmental Science operating segments were combined, mainly in light of the comparable nature of their products for the agricultural industry, such as in the area of crop protection and the related comparable production processes and comparable distri- bution methods, including via wholesalers in particular. The segments’ activities are as follows: Activities of the Segments Segment Activities B 5/1 Pharmaceuticals Development, production and marketing of prescription products, especially for cardiology and women’s health care; specialty therapeutics in the areas of oncology, hematology and ophthalmology; diagnostic imaging equipment and the necessary contrast agents Consumer Health Development, production and marketing of mainly nonprescription (OTC = over-the-counter) products in the dermatology, dietary supplement, analgesic, gastrointestinal, cold, allergy, sinus and flu, foot care and sun protection categories Crop Science 1 Development, production and marketing of a broad portfolio of products in seeds and plant traits, crop protection and nonagricultural pest control Animal Health Development, production and marketing of prescription and nonprescription veterinary products Covestro Development, production and marketing of raw materials for polyurethanes; polycarbonate granules and sheets; raw materials for coatings, adhesives and sealants; and by-products of polyether production and of chlorine production and use 1 Following the signing of a sales agreement with SBM Développement SAS, Lyon, France, the Consumer business of the Environmental Science unit was no longer reported under continuing operations in 2016. Business activities that cannot be allocated to any other segment are reported under “All other segments.” These primarily include the services provided by the service areas: Business Services, Technology Services and Currenta. The items in “Corporate Functions and Consolidation” mainly comprise the Bayer holding companies and the Bayer Lifescience Center, which focuses on the development of crucial, cross-species innovations. They also include the increase or decrease in expenses for Group-wide long-term stock-based compensa- tion arising from fluctuations in the performance of Bayer stock, and the consolidation of intersegment sales (2016: €2.3 billion; 2015: €2.4 billion). 230 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group In Table B 1/2 “Key Data by Region” as of December 31, 2016, the Europe region is combined with the Middle East and Africa. Latin America is a separate region. The regional breakdown is in line with the inter- nal regional responsibilities of the individual members of the Bayer AG Board of Management. The prior- year figures are restated accordingly. The reconciliation in the table “Key Data by Region” eliminates inter- regional items and transactions and reflects income, expenses, assets and liabilities not allocable to geo- graphical areas. The segment data are calculated as follows: > Tables B 1/1 “Key Data by Segment” and B 1/2 “Key Data by Region” and the present chapter contain supplementary performance indicators that are not subject to requirements of the financial reporting standards governing the preparation of the Combined Management Report and the consolidated financial statements. The most important of these indicators are EBIT, EBITDA, EBIT before special items, EBITDA before special items, and the return on capital employed. These supplementary indicators are defined, and their calculation explained, in Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group” of the Combined Management Report in the Bayer Annual Report 2016. > The intersegment sales reflect intra-Group transactions effected at transfer prices fixed on an arm’s- length basis. > The net cash provided by operating activities is the cash flow from operating activities as defined in IAS 7 (Statement of Cash Flows). > The segment assets comprise all assets serving the respective segment, stated as of December 31, including material participating interests of direct relevance to business operations. > Starting in 2016, the cash flow return on investment (CFROI) was replaced by the return on capital employed (ROCE) as a value-based indicator. Both CFROI and ROCE constitute alternative performance measures. > The equity items reflect the earnings and carrying amounts of investments accounted for using the equity method. > Since the financial management of Group companies is carried out centrally by Bayer AG, financial liabilities are not directly allocated among the segments. Consequently, the liabilities shown for the individual segments do not include financial liabilities. These are included in the reconciliation. > The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTE), with part-time employees included on a pro-rated basis in line with their contractual working hours. The figures do not include apprentices. Reconciliations The reconciliations of EBITDA before special items, EBIT before special items and EBIT to Group income before income taxes and of the assets and liabilities of the segments to the assets and liabilities, respec- tively, of the Group are given in the following tables. Bayer Annual Report 2016 B Consolidated Financial Statements 231 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million EBITDA before special items of segments EBITDA before special items of Corporate Functions and Consolidation EBITDA before special items1 2015 2016 10,722 11,640 (466) (338) 10,256 11,302 Depreciation, amortization and impairment losses / loss reversals before special items of segments (3,190) (3,166) B 5/2 Depreciation, amortization and impairment losses / loss reversals before special items of Corporate Functions and Consolidation Depreciation, amortization and impairment losses / loss reversals before special items EBIT before special items of segments EBIT before special items of Corporate Functions and Consolidation EBIT before special items1 Special items of segments Special items of Corporate Functions and Consolidation Special items1 EBIT of segments EBIT of Corporate Functions and Consolidation EBIT1 Financial result Income before income taxes (6) (3,196) 7,532 (472) 7,060 (792) (27) (819) 6,740 (499) 6,241 (1,005) 5,236 2015 figures restated 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” (6) (3,172) 8,474 (344) 8,130 (1,068) (20) (1,088) 7,406 (364) 7,042 (1,155) 5,887 B 5/3 Reconciliation of Segments’ Assets to Group Assets € million Assets of the operating segments Corporate Functions and Consolidation assets Nonallocated assets Assets of discontinued operations Group assets Reconciliation of Segments’ Liabilities to Group Liabilities € million Liabilities of the operating segments Corporate Functions and Consolidation liabilities Nonallocated liabilities Liabilities directly related to discontinued operations Group liabilities 2015 2016 65,654 66,252 181 7,899 183 507 15,479 – 73,917 82,238 B 5/4 2016 26,617 1,996 21,728 – 2015 24,557 2,645 21,158 112 48,472 50,341 The reconciliation of segment sales to Group sales is apparent from the table of key data by segment in Note [1]. 232 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Information on geographical areas The following table provides a regional breakdown of external sales by market and of intangible assets, property, plant and equipment: Information on Geographical Areas € million Germany United States China Switzerland Other Total 2015 figures restated B 5/5 Net sales (external) – by market Intangible assets and property, plant and equipment 2015 4,925 11,168 4,212 691 25,089 46,085 2016 4,809 11,310 4,603 662 25,385 46,769 2015 12,385 14,420 3,260 5,298 8,286 43,649 2016 12,468 14,297 2,938 5,047 8,243 42,993 Information on major customers Revenues from transactions with a single customer in no case exceeded 10% of Bayer Group sales in 2016 or 2015. GRI G4-17 6. Scope of consolidation; subsidiaries and affiliates 6.1 Changes in the scope of consolidation Changes in the scope of consolidation in 2016 were as follows: Change in Number of Consolidated Companies Bayer AG and consolidated companies December 31, 2015 Changes in scope of consolidation Additions Retirements December 31, 2016 B 6.1/1 Total 307 1 2 (9) Germany Other countries 68 – – (4) 64 239 1 2 (5) 237 301 The decrease in the total number of consolidated companies in 2016 was primarily due to mergers among Group companies. Bayer Pearl Polyurethane Systems LLC, United Arab Emirates, is fully consolidated because the Bayer Group holds a majority of the voting rights. Pure Salt Baytown LLC, United States, is fully consolidated as a structured entity. The Bayer Group guar- antees the liabilities of Pure Salt Baytown LLC to banks. These liabilities, which are reflected in full in the consolidated statement of financial position, amounted to €12 million as of December 31, 2016 (2015: €17 million). The above table includes one joint operation, LyondellBasell Covestro Manufacturing Maasvlakte V.O.F., Netherlands, as of December 31, 2016 (2015: one). Pursuant to IFRS 11, Bayer’s share of this company’s assets, liabilities, revenues and expenses are included in the consolidated financial statements in accord- ance with Bayer’s rights and obligations. The main purpose of LyondellBasell Covestro Manufacturing Maasvlakte V.O.F., Netherlands, is the joint production of propylene oxide (PO) for Covestro and its partner Lyondell. Bayer Annual Report 2016 B Consolidated Financial Statements 233 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version In conjunction with the acquisition of the consumer care business of Merck & Co., Inc., United States, Bayer entered into a strategic collaboration with that company. This collaboration is included in the consol- idated financial statements as a joint operation. Bayer and Merck & Co., Inc., have mutually agreed to collaborate on the development, production, life-cycle management and marketing of active ingredients and products in the field of soluble guanylate cyclase (sGC) modulation. GRI G4-17 Five (2015: four) associates and six (2015: three) joint ventures were accounted for in the consolidated financial statements using the equity method. Details of these companies are given in Note [19]. Flagship Ventures V Agricultural Fund, L.P., United States, was included in the consolidated financial statements for the first time in 2015 and classified as an associate. Bayer has no control over this associ- ate despite owning 99.9% of the capital, but is able to significantly influence its financial and operating policy decisions. Bayer Trendlines AG Innovation Fund, Limited Partnership, Israel, was included in the consolidated finan- cial statements for the first time in 2016 and classified as an associate. Bayer is a limited partner and has no control over this entity due to contractual restrictions, despite owning 100% of the capital. Nanjing Baijingyu Pharmaceutical Co., Ltd., China, was classified as an associate in view of Bayer’s repre- sentation on its executive committee and supervisory board. This enables Bayer to significantly influence its financial and operating policy decisions despite owning only 15% of its voting rights and capital. A total of 72 (2015: 71) subsidiaries, including one (2015: one) structured entity and 12 (2015: 12) associ- ates or joint ventures that in aggregate are immaterial to the Bayer Group’s financial position and results of operations are neither consolidated nor accounted for using the equity method, but are recognized at cost. The immaterial subsidiaries accounted for less than 0.2% of Group sales, less than 0.2% of equity and less than 0.2% of total assets. Details of subsidiary and affiliated companies pursuant to Section 313 of the German Commercial Code can be accessed at www.bayer.com/owner16. The following domestic subsidiaries availed themselves in 2016 of certain exemptions granted under Section 264, Paragraph 3, and Section 264b of the German Commercial Code regarding the publication of legal-entity financial statements: German Exempt Subsidiaries Company name Adverio Pharma GmbH AgrEvo Verwaltungsgesellschaft mbH Alcafleu Management GmbH & Co. KG Bayer 04 Immobilien GmbH Bayer 04 Leverkusen Fußball GmbH Bayer Altersversorgung GmbH Bayer Animal Health GmbH Bayer Beteiligungsverwaltung Goslar GmbH Bayer Business Services GmbH Bayer Chemicals Aktiengesellschaft Bayer Consumer Care Deutschland GmbH Bayer CropScience Aktiengesellschaft Bayer CropScience Biologics GmbH B 6.1/2 Place of business Bayer’s interest (%) Schönefeld Frankfurt am Main Schönefeld Leverkusen Leverkusen Leverkusen Leverkusen Leverkusen Leverkusen Leverkusen Berlin Monheim am Rhein Wismar 100.0 100.0 99.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 234 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group German Exempt Subsidiaries Company name Bayer CropScience Deutschland GmbH Bayer Direct Services GmbH Bayer Gastronomie GmbH Bayer Gesellschaft für Beteiligungen mbH Bayer Innovation GmbH Bayer Intellectual Property GmbH Bayer Real Estate GmbH Bayer Schering Pharma AG Bayer Vital GmbH Bayer Weimar GmbH und Co. KG Bayer-Handelsgesellschaft mit beschränkter Haftung BGI Deutschland GmbH Chemion Logistik GmbH Dritte Bayer Real Estate VV GmbH & Co. KG Erste Bayer Real Estate VV GmbH & Co. KG Erste K-W-A Beteiligungsgesellschaft mbH Fünfte Bayer Real Estate VV GmbH & Co. KG GP Grenzach Produktions GmbH Hild Samen GmbH Intendis GmbH Intraserv GmbH & Co. KG Jenapharm GmbH & Co. KG KOSINUS Grundstücks-Verwaltungsgesellschaft mbH & Co. Gamma OHG KVP Pharma+Veterinär Produkte GmbH MENADIER Heilmittel GmbH Schering-Kahlbaum Gesellschaft mit beschränkter Haftung Sechste Bayer Real Estate VV GmbH & Co. KG Siebte Bayer VV GmbH Steigerwald Arzneimittelwerk GmbH TECTRION GmbH TravelBoard GmbH Vierte Bayer Real Estate VV GmbH & Co. KG Zweite Bayer Real Estate VV GmbH & Co. KG Zweite K-W-A Beteiligungsgesellschaft mbH B 6.1/2 (continued) Place of business Bayer’s interest (%) Langenfeld Leverkusen Leverkusen Leverkusen Leverkusen Monheim am Rhein Leverkusen Berlin Leverkusen Weimar Leverkusen Leverkusen Leverkusen Schönefeld Schönefeld Leverkusen Schönefeld Grenzach-Wyhlen Marbach am Neckar Berlin Schönefeld Jena Schönefeld Kiel Berlin Berlin Schönefeld Leverkusen Darmstadt Leverkusen Leverkusen Schönefeld Schönefeld Leverkusen 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 6.2 Business combinations and other acquisitions Business combinations and other acquisitions in 2016 Adjustments to purchase prices and purchase price allocations effected in 2016 relating to previous years’ transactions totaled minus €5 million. Adjustments to purchase price allocations and other adjustments increased the total carrying amount of goodwill by €9 million. The changes in goodwill mainly resulted from the following purchase price allocation adjustment: On July 1, 2015, Crop Science completed the acquisition of all the shares of SeedWorks India Pvt. Ltd., based in Hyderabad, India. The company is specialized in the breeding, production and marketing of hybrid seeds of tomato, hot pepper, okra and gourds. It has research and seed processing locations in Bangalore and Hyderabad, respectively. The purchase of SeedWorks India is intended to further strengthen Crop Sci- ence’s vegetable seed business in India. A purchase price of €80 million was agreed, pertaining mainly to patents, research and development projects and goodwill. Bayer Annual Report 2016 B Consolidated Financial Statements 235 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Improved information obtained about the acquired assets in the first quarter of 2016 in the course of the global purchase price allocation led to decreases of €23 million in intangible assets and €8 million in de- ferred tax liabilities and a corresponding increase of €13 million in goodwill in the opening statement of financial position. In addition, the purchase price declined by €2 million to €78 million following completion of the final purchase price negotiations. On February 12, 2016, Bayer and CRISPR Therapeutics AG, Basel, Switzerland, established the joint ven- ture Casebia Therapeutics LLP, Ascot, United Kingdom. Its purpose is the development and commerciali- zation of new methods to treat blood disorders, blindness and heart diseases. Capital contribution liabili- ties of US$255 million to Casebia Therapeutics LLP were recognized in the statement of financial position as of December 31, 2016. These liabilities mature on December 31, 2020, at the latest. US$45 million was already paid in 2016, and a further US$60 million was paid on January 3, 2017. On December 9, 2016, Bayer and Versant Ventures, San Francisco, United States, established the joint venture BlueRock Therapeutics LP, San Francisco, United States. The company will be active in the field of next-generation regenerative medicine. Its goal is to develop induced pluripotent stem cell (iPSC) therapies to cure a range of diseases. As of December 31, 2016, Bayer had capital contribution obligations of US$150 million pertaining to the establishment of the joint venture. This amount should be paid by De- cember 31, 2020, at the latest. Acquisitions after the end of the reporting period On January 3, 2017, Bayer acquired the Cydectin™ portfolio in the United States from Boehringer Ingel- heim Vetmedica Inc., St. Joseph, United States. The acquisition comprises the CYDECTIN Pour-On, CY- DECTIN Injectable and CYDECTIN Oral Drench endectocides for cattle and sheep. The acquisition is in- tended to strengthen the antiparasitics portfolio in the United States through the addition of endectocides. An initial purchase price of approximately €150 million was agreed, which is subject to the usual price adjustment mechanisms. The purchase price was provisionally allocated mainly to trademarks and good- will. The purchase price allocation currently remains incomplete pending compilation and review of the relevant financial information. Planned acquisitions On September 14, 2016, Bayer signed a definitive merger agreement with Monsanto Company, St. Louis, Missouri, United States, which provides for Bayer’s acquisition of all outstanding shares in Monsanto Company against a cash payment of US$128 per share. At the time this corresponded to an expected transaction volume of approximately US$66 billion, comprising an equity value (purchase price) of approx- imately US$56 billion and net debt to be assumed in an amount of US$10 billion, which includes pension obligations as of May 31, 2016, as well as liabilities for payments under stock-based compensation pro- grams. Bayer thus has a contingent financial commitment in the amount of approximately US$56 billion to acquire Monsanto’s entire outstanding capital stock. The agreed transaction has been partially hedged against the euro / U.S. dollar currency risk using derivatives contracts. The transaction brings together two different, but highly complementary businesses. Monsanto is a leading global provider of agricultural products, including seeds and seed technologies, herbicides, and digital platforms to give farmers agronomic recommendations. The combined business will offer a comprehensive set of solutions to meet growers’ current and future needs, including enhanced solutions in high-quality seeds and traits, digital farming, and crop protection. The combination also brings together both compa- nies’ leading innovation capabilities and R&D technology platforms. Syndicated bank financing of US$56.9 billion was committed by Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC and JP Morgan upon the signing of the merger agreement. The bank fi- nancing was subsequently syndicated to more than 20 other partner banks of Bayer. 236 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Bayer intends to finance the transaction with a combination of debt and equity. The planned equity com- ponent amounts to approximately US$19 billion in total. As the first part of the equity component, Bayer placed €4 billion in mandatory convertible notes on November 22, 2016, excluding subscription rights for existing stockholders of the company. The remainder of the equity component is expected to be raised by way of a rights issue. The net proceeds from the issuance of the mandatory convertible notes were used for the early replacement of a portion of the undrawn syndicated bank credit facility. Details of the manda- tory convertible notes issue are provided in Note [24]. The stockholders of Monsanto Company approved the merger with the requisite majority on December 13, 2016. The transaction remains subject to customary closing conditions, including relevant antitrust and other regulatory approvals. Closing of the transaction is currently expected by the end of 2017. The merger agreement provides for payment by Bayer of a US$2 billion reverse break fee including, in particular, in the event that the necessary antitrust approvals are not granted by June 14, 2018, and Bayer or Monsanto therefore terminates the merger agreement. Acquisitions in 2015 In 2015, the following acquisitions were accounted for in accordance with IFRS 3: On March 2, 2015, Covestro successfully completed the acquisition of all the shares of Thermoplast Com- posite GmbH, Germany, a technology leader specializing in the production of thermoplastic fiber compo- sites. The aim of the acquisition is to expand the range of polycarbonate materials for major industries to include composites made from continuous fiber-reinforced thermoplastics. A purchase price of €18 million was agreed, including a variable component of €4 million. The purchase price mainly pertained to patents and goodwill. In connection with the acquisition of the consumer care business of Merck & Co., Inc., Whitehouse Sta- tion, New Jersey, United States, in 2014, the production facilities at the Pointe-Claire site in Canada were acquired on July 1, 2015. Of the agreed €67 million purchase price, €61 million pertains to property, plant and equipment. The global purchase price allocation for the consumer care business acquired from Merck & Co., Inc. in 2014 was completed in September 2015. This resulted in an €821 million increase in deferred tax assets due to temporary differences between the carrying amounts of intangible assets in the IFRS financial statements and those reported for tax purposes, along with a corresponding decline in goodwill in the statement of financial position. These adjustments were effected retroactively as of the date of acquisition pursuant to IFRS 3.45 ff. In addition, the purchase price was reduced by €8 million in 2015 on the basis of agreed purchase price adjustment mechanisms. Settlements were reached in August 2015 in the court proceedings initiated by former minority stockhold- ers of Bayer Pharma AG (formerly Bayer Schering Pharma AG). The additional payment made as a result represents a subsequent purchase price adjustment according to the March 31, 2004, version of IFRS 3 in effect at the acquisition date. The goodwill was increased by €261 million in 2013 based on the status of the proceedings at that time. Following the settlements in August 2015, it was possible to finally determine the goodwill arising from the acquisition. It was therefore necessary to reduce the goodwill amount by €115 million in 2015 as a result of the proceedings. Both the increase and the reduction were recognized outside profit or loss against the liability resulting from the minority stockholders’ compensation claim. The global purchase price allocation for Dihon Pharmaceutical Group Co. Ltd., Kunming, Yunnan, China, acquired in 2014, was completed in October 2015. The main outcomes were increases in the amounts recognized for trademarks (€18 million), other provisions (€19 million) and other liabilities (€27 million). The purchase price was reduced by €43 million in 2015 due to adjustment mechanisms. Bayer Annual Report 2016 B Consolidated Financial Statements 237 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 6.3 Divestments, material sale transactions and discontinued operations Divestments and discontinued operations in 2016 The effects of divestments and discontinued operations in 2016 and those from previous years on the consolidated financial statements were as follows: The sale of the Diabetes Care business to Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, for around €1 billion was completed on January 4, 2016. The sale includes the leading Contour™ portfolio of blood glucose monitoring meters and strips, as well as other products such as Breeze™2, Elite™ and Microlet™ lancing devices. The sale of the Diabetes Care business also comprises further significant obligations by Bayer that will be fulfilled over a period of up to two years subsequent to the date of divestment. The sale proceeds will be recognized accordingly over this period and reported as income from discontinued operations. Deferred income has been recognized in the statement of financial position and will be dissolved as the obligations are fulfilled. Of this, an amount of €497 million was recognized in sales in 2016. The €71 million outflow of net assets is reflected accordingly in the cost of goods sold. The obligations to be fulfilled over a period of up to two years after the divestment of the Diabetes Care business are also reported as discontinued operations in the income statement and the statement of cash flows. These resulted in sales of €76 million in 2016. This information is provided from the standpoint of the Bayer Group and does not present these activities as a separate entity. It is therefore not possible to compare these sales against the proceeds from operational product sales achieved in 2015. The items in the statement of financial position pertaining to the Diabetes Care business are shown in the segment reporting under “All Other Segments.” In addition to the aforementioned deferred income (€469 million), the statement of financial position includes other receivables (net: €66 million), deferred tax assets (net: €73 million), income tax liabilities (€65 million) and miscellaneous provisions (€9 million). The sale of the Consumer business (CS Consumer) of Bayer’s Environmental Science unit to SBM Dé- veloppement SAS, Lyon, France, was completed on October 4, 2016. The Consumer business encom- passes the Bayer Garden and Bayer Advanced businesses in Europe and North America. These activities are reported as discontinued operations in the income statement and the statement of cash flows. The effects of these and other, smaller divestments made in 2016 were as follows: Divested Assets and Liabilities € million Goodwill Patents and technologies Other intangible assets Inventories Provisions for pensions and other post-employment benefits Other provisions Divested net assets B 6.3/1 2015 2016 – – – – – – – 36 4 16 184 (28) (97) 115 238 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group The income statements for the discontinued operations are given below: Income Statements for Discontinued Operations € million Net sales Cost of goods sold Gross profit Selling expenses Research and development expenses General administration expenses Other operating income / expenses EBIT 1 Financial result Income before income taxes Income taxes Income after income taxes Diabetes Care CS Consumer 2015 947 (380) 567 (386) (48) (36) (20) 77 – 77 3 80 2016 573 (146) 427 (9) (1) (12) (4) 401 – 401 (76) 325 2015 239 (118) 121 (95) (7) (6) (4) 9 – 9 (4) 5 2016 195 (121) 74 (83) (11) (9) (55) (84) – (84) 27 (57) 2015 1,186 (498) 688 (481) (55) (42) (24) 86 – 86 (1) 85 1 For definition see Combined Management Report, Chapter 2.4 “Alternative Performance Measures Used by the Bayer Group.” The discontinued operations affected the Bayer Group statements of cash flows as follows: Statements of Cash Flows for Discontinued Operations € million Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Change in cash and cash equivalents Diabetes Care CS Consumer 2015 43 (4) (39) – 2016 788 – (788) – 2015 2016 2015 11 (2) (9) – 42 – (42) – 54 (6) (48) – B 6.3/2 Total 2016 768 (267) 501 (92) (12) (21) (59) 317 – 317 (49) 268 B 6.3/3 Total 2016 830 – (830) – As no cash is assigned to discontinued operations, the balance of the cash provided is deducted again in financing activities. Divestments and material sale transactions in 2015 On March 2, 2015, Animal Health completed the sale of two equine products, Legend / Hyonate and Mar- quis, to Merial, Inc., Duluth, Georgia, United States. A purchase price of €120 million was agreed. The one-time payment was accounted for as deferred income. The purchase prices for Legend / Hyonate and Marquis are being reflected in sales and earnings over a four-year and a three-year period, respectively, as Bayer has entered into further significant obligations. Bayer Annual Report 2016 B Consolidated Financial Statements 239 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Notes to the Income Statements 7. Net sales Net sales are derived primarily from product deliveries. Total reported net sales for 2016 amounted to €46,769 million, rising by €684 million, or 1.5%, compared to 2015. The increase resulted from the following factors: Factors in Sales Development Volume Price Currency Portfolio Total B 7/1 2016 % + 4.2 – 0.7 – 2.0 – + 1.5 € million 1,936 (348) (913) 9 684 Breakdowns of net sales by segment and region are given in the table in Note [1]. 8. Selling expenses Selling expenses comprise all expenses incurred in the reporting period for the sale, storage and transpor- tation of saleable products, advertising, the provision of advice to customers, and market research. Selling expenses were comprised as follows: Selling Expenses € million Internal and external sales force Advertising and customer advice Physical distribution and warehousing of finished products Commission and licensing expenses Other selling expenses Total 2015 figures restated B 8/1 2016 4,828 2,970 1,421 1,514 1,741 2015 4,761 2,986 1,255 1,396 1,874 12,272 12,474 9. Research and development expenses Research and development expenses and their accounting treatment are defined in Note [4]. Breakdowns of research and development expenses by segment and region are given in Note [1]. 240 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 10. Other operating income Other operating income was comprised as follows: Other Operating Income € million Gains on retirements of noncurrent assets Reversals of impairment losses on receivables Reversals of unutilized provisions Gains from derivatives Miscellaneous operating income Total of which special items 2015 figures restated B 10/1 2016 66 20 131 259 422 898 115 2015 137 32 25 272 643 1,109 336 Income from reversals of unutilized provisions include an amount of €104 million from the reversal of provi- sions for the YasminTM / YAZTM litigation. Miscellaneous operating income included a €32 million gain incurred by Bayer 04 Leverkusen Fußball GmbH from the sale of transfer rights and a payment of €32 million received from insurers (Covestro seg- ment). A reimbursement payment relating to the termination of a contract accounted for income of €27 million (Covestro segment). In the Crop Science segment, milestone payments led to income of €21 million. In the Pharmaceuticals segment, a €14 million compensation payment was received in con- nection with the closure of the production site in Putuo, China. Income of €19 million resulted from the reimbursement of indirect taxes paid in previous years (Covestro segment). A €10 million gain was incurred on the sale of the BAYQUIK™ technology to Chemetics, Inc., Canada (Other segments). In 2015, gains from retirements of noncurrent assets included an amount of €53 million from the sale of trademark rights for the Biovital™, Benerva™, Bactine™ and ProPlus™ brands (Consumer Health segment). Miscellaneous operating income in 2015 included €314 million in claims against Dow AgroSciences LLC, United States, for damages and royalty payments resulting from the infringement of Bayer’s rights to the Liberty Link™ weed control system (Crop Science segment). 11. Other operating expenses Other operating expenses were comprised as follows: Other Operating Expenses € million Losses on retirements of noncurrent assets Impairment losses on receivables Expenses related to significant legal risks Losses from derivatives Miscellaneous operating expenses Total of which special items 2015 figures restated B 11/1 2016 (22) (171) (262) (181) (298) (934) (205) 2015 (32) (183) (151) (626) (283) (1,275) (247) Of the impairment losses on receivables, €115 million pertained to past-due receivables in Brazil. In 2015, impairment losses of €91 million were recognized on receivables from the Venezuelan exchange control Bayer Annual Report 2016 B Consolidated Financial Statements 241 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version authority because the authority did not allocate U.S. dollars at the subsidized exchange rate with respect to the full amounts of older receivables. The €262 million in expenses for significant legal risks mainly included accounting measures taken in con- nection with legal proceedings relating to the products Xarelto™, Essure™ and Cipro™/Avelox™. In 2015, the €151 million in expenses for significant legal risks mainly included accounting measures taken in con- nection with legal proceedings relating to the products Luna™, LL Rice™ and Xarelto™. Miscellaneous operating expenses included €48 million (2015: €51 million) in donations to charitable caus- es (all segments). Expenses of €34 million pertained to provisions established for environmental protection measures in the United States (Crop Science segment). As in the previous year, the remaining amount of miscellaneous operating expenses comprised a large number of individually immaterial items at the subsidiaries. 12. Personnel expenses and employee numbers Personnel expenses for continuing operations rose in 2016 by €181 million to €11,357 million (2015: €11,176 million). The change was mainly due to compensation adjustments and increases in employee bonuses, which together offset opposing currency effects. Personnel Expenses € million Salaries Social expenses and expenses for pensions and other benefits of which for defined contribution pension plans of which for defined benefit and other pension plans Total 2015 figures restated B 12/1 2016 9,171 2,186 581 483 2015 8,991 2,185 557 503 11,176 11,357 The personnel expenses shown here do not contain the interest portion of the allocation to personnel- related provisions – mainly for pensions and other post-employment benefits – which is included in the financial result under other financial expenses (Note [13.3]). 242 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group The average numbers of employees, classified by corporate function, were as shown in the table below: Employees Production Marketing and distribution Research and development General administration Total Apprentices 2015 figures restated B 12/2 2016 50,326 40,756 15,016 9,590 2015 51,280 42,212 14,462 9,376 117,330 115,688 2,332 2,393 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTE), with part-time employees included on a pro-rated basis in line with their contractual working hours. The figures do not include apprentices. 13. Financial result The financial result for 2016 was minus €1,155 million (2015: minus €1,005 million), comprising an equity- method loss of €26 million (2015: €9 million), financial expenses of €1,280 million (2015: €1,367 million) and financial income of €151 million (2015: €371 million). Details of the components of the financial result are provided below. 13.1 Income (loss) from investments in affiliated companies The net income (loss) from investments in affiliated companies was comprised as follows: Income (Loss) from Investments in Affiliated Companies € million Net loss from investments accounted for using the equity method (equity-method loss) Expenses Impairment losses on investments in affiliated companies Income Impairment loss reversals on investments in affiliated companies Income / losses from investments in affiliated companies and from profit and loss transfer agreements (net) Gains from the sale of investments in affiliated companies Total B 13.1/1 2016 (26) (2) – – 6 (22) 2015 (9) (1) – 3 31 24 The main components of the loss (2015: income) from investments in affiliated companies were the €24 million (2015: €23 million) equity-method loss from the associate PO JV, LP, United States, and the minus €2 million (2015: €14 million) aggregate of the equity-method income and losses of the remaining joint ventures and associates accounted for using the equity method. Further details of the companies accounted for using the equity method are given in Note [19]. Bayer Annual Report 2016 B Consolidated Financial Statements 243 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 13.2 Net interest expense The net interest expense was comprised as follows: Net Interest Expense € million Expenses Interest and similar expenses Interest expenses for derivatives (held for trading) Income Interest and similar income Interest income from derivatives (held for trading) Total B 13.2/1 2015 2016 (752) (25) 297 25 (455) (684) (3) 137 2 (548) Interest and similar expenses included interest expense of €42 million (2015: €49 million) relating to nonfi- nancial liabilities. Interest and similar income included interest income of €10 million (2015: €133 million) from nonfinancial assets. 13.3 Other financial income and expenses Other financial income and expenses were comprised as follows: Other Financial Income and Expenses € million Expenses Interest portion of interest-bearing provisions Exchange loss Miscellaneous financial expenses Income Miscellaneous financial income Total B 13.3/1 2015 2016 (287) (254) (48) 15 (574) (294) (193) (104) 6 (585) The interest portion of noncurrent provisions comprised €276 million (2015: €276 million) in interest ex- pense for pension and other post-employment benefit provisions plus €18 million (2015: €11 million) in effects of interest expense and interest-rate fluctuations for other provisions and corresponding overfund- ing. The interest expense for pension and other post-employment benefit provisions included €736 million (2015: €712 million) for the unwinding of discount on the present value of the defined benefit obligation and €460 million (2015: €436 million) in interest income from plan assets. The miscellaneous financial expenses included €51 million in commitment fees and other fees related to the syndicated bank financing for the planned acquisition of Monsanto. 244 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 14. Taxes The breakdown of tax expense by origin was as follows: Tax Expense by Origin € million Taxes paid or accrued Current income taxes Germany Other countries Other taxes Germany Other countries Deferred taxes from temporary differences from tax loss carryforwards and tax credits Total 2015 figures restated 2015 Of which income taxes B 14/1 2016 Of which income taxes (1,140) (1,114) (44) (221) (934) (991) (86) (204) (2,519) (2,254) (2,215) (1,925) 1,056 (25) 1,031 (1,488) 577 19 596 (1,619) 1,031 (1,223) 596 (1,329) The other taxes mainly include land, vehicle and other indirect taxes. They are reflected in the respective functional cost items. The deferred tax assets and liabilities were allocable to the following items in the statements of financial position: Deferred Tax Assets and Liabilities € million Intangible assets Property, plant and equipment Financial assets Inventories Receivables Other assets Provisions for pensions and other post-employment benefits Other provisions Liabilities Tax loss and interest carryforwards Tax credits of which noncurrent Set-off Total B 14/2 Dec. 31, 2015 Dec. 31, 2016 Deferred tax assets Deferred tax liabilities Deferred tax assets Deferred tax liabilities 1,411 1,910 1,478 1,766 253 18 943 98 28 3,601 1,025 714 393 191 8,675 7,398 (3,996) 4,679 678 183 63 580 14 1,213 90 91 – – 4,822 4,750 (3,996) 826 264 240 1,267 71 39 3,637 1,083 793 473 177 9,522 7,868 (3,172) 6,350 692 224 32 547 13 983 112 133 – – 4,502 3,662 (3,172) 1,330 Bayer Annual Report 2016 B Consolidated Financial Statements 245 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Deferred taxes on remeasurements, recognized outside profit or loss, of the net liability for defined benefit pension and other post-employment benefits increased equity by €228 million (2015: diminished equity by €430 million). Deferred taxes on changes, recognized outside profit or loss, in fair values of available-for- sale financial assets and derivatives designated as cash flow hedges diminished equity by €24 million (2015: diminished equity by €27 million). These effects on equity are reported in the statement of compre- hensive income. The use of tax loss carryforwards reduced current income taxes in 2016 by €152 million (2015: €136 mil- lion). The use of tax credits reduced current income taxes by €18 million (2015: €21 million). Of the total tax loss and interest carryforwards of €5,447 million, including interest carryforwards of €118 million (2015: €5,497 million, including interest carryforwards of €72 million), an amount of €2,269 million, including interest carryforwards of €0 million (2015: €1,812 million, including interest carryforwards of €0 million) is expected to be usable within a reasonable period. The decrease in tax loss and interest car- ryforwards was mainly due to the favorable overall business development. Deferred tax assets of €473 million (2015: €393 million) were recognized for the amount of tax loss and interest carryforwards expected to be usable. The use of €3,178 million of tax loss and interest carryforwards, including interest carryforwards of €118 million (2015: €3,685 million, including interest carryforwards of €72 million) was subject to legal or eco- nomic restrictions. Consequently, no deferred tax assets were recognized for this amount. If these tax loss and interest carryforwards had been fully usable, deferred tax assets of €294 million (2015: €322 million) would have been recognized. Tax credits of €177 million were recognized in 2016 (2015: €191 million) as deferred tax assets. The use of €38 million (2015: €41 million) of tax credits was subject to legal or economic restrictions. Consequently, no deferred tax assets were recognized for this amount. Unusable tax credits, tax loss carryforwards and interest carryforwards will expire as follows: Expiration of Unusable Tax Credits, Tax Loss Carryforwards and Interest Carryforwards B 14/3 € million Within one year Within two years Within three years Within four years Within five years Thereafter Total Tax credits Tax loss and interest carryforwards Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2016 4 – 4 – 26 6 40 4 – 4 – 29 – 37 17 70 25 32 234 3,307 3,685 4 1 31 132 31 2,979 3,178 In 2016, subsidiaries that reported losses for 2016 or 2015 recognized net deferred tax assets totaling €2,575 million (2015: €2,455 million) from temporary differences and tax loss carryforwards. These assets were considered to be unimpaired because the companies concerned were expected to generate taxable income in the future. Deferred tax liabilities of €41 million were recognized in 2016 (2015: €35 million) for planned dividend pay- ments by subsidiaries. Deferred tax liabilities were not recognized for temporary differences on €20,069 million (2015: €12,087 million) of retained earnings of subsidiaries because these earnings are to be rein- vested for an indefinite period. 246 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group The reported tax expense of €1,329 million for 2016 (2015: €1,223 million) differed by €128 million (2015: €119 million) from the expected tax expense of €1,457 million (2015: €1,342 million) that would have re- sulted from applying an expected weighted average tax rate to the pre-tax income of the Group. This aver- age rate, derived from the expected tax rates of the individual Group companies, was 24.7% in 2016 (2015: 25.6%). The effective tax rate was 22.6% (2015: 23.4%). The reconciliation of expected to reported income tax expense and of the expected to the effective tax rate for the Group was as follows: Reconciliation of Expected to Actual Income Tax Expense Expected income tax expense and expected tax rate 1,342 25.6 1,457 2015 € million % € million Reduction in taxes due to tax-free income Income related to the operating business Income from affiliated companies and divestment proceeds First-time recognition of previously unrecognized deferred tax assets on tax loss and interest carryforwards Use of tax loss and interest carryforwards on which deferred tax assets were not previously recognized Increase in taxes due to non-tax-deductible expenses Expenses related to the operating business Impairment losses on investments in affiliated companies New tax loss and interest carryforwards unlikely to be usable Existing tax loss and interest carryforwards on which deferred tax assets were previously recognized but which are unlikely to be usable Tax income (-) and expenses (+) relating to other periods Tax effects of changes in tax rates Other tax effects (155) (10) (30) (6) 148 7 81 16 (95) (25) (50) (3.0) (0.2) (0.6) (0.1) 2.8 0.1 1.5 0.3 (1.8) (0.5) (0.7) (161) (2) (27) (19) 153 2 45 6 (80) (4) (41) B 14/4 2016 % 24.7 (2.7) – (0.5) (0.3) 2.6 – 0.8 0.1 (1.4) (0.1) (0.6) Actual income tax expense and effective tax rate 1,223 23.4 1,329 22.6 2015 figures restated 15. Income / losses attributable to noncontrolling interest Income attributable to noncontrolling interest amounted to €468 million (2015: €115 million). Losses at- tributable to noncontrolling interest amounted to €173 million (2015: €127 million). Bayer Annual Report 2016 B Consolidated Financial Statements 247 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 16. Earnings per share Earnings per share from continuing operations are determined according to IAS 33 (Earnings per Share) by dividing net income (income after income taxes attributable to Bayer AG stockholders) minus income from discontinued operations after income taxes (attributable to Bayer AG stockholders) by the weighted aver- age number of shares. Earnings per share for continuing and discontinued operations are calculated by divid- ing net income by the weighted average number of shares. In November 2016, Bayer placed €4.0 billion in mandatory convertible notes without granting subscription rights to existing stockholders of the company. According to IAS 33.23, the weighted average number of shares increases as soon as the notes contract is signed, and this increase must be taken into account in calculating undiluted and diluted earnings per share. The new weighted average number of shares is based on the minimum conversion price of €90, which determines the maximum conversion ratio. Undiluted and diluted earnings per share are not adjusted for financing expenses incurred in connection with the manda- tory convertible notes because the interest component was recognized outside profit or loss when the notes were placed. Further details of the mandatory convertible notes are provided in Note [24]. Because the undiluted and diluted earnings per share were determined for each interim reporting period, earnings per share for the full year or year to date may differ from the sum of the earnings per share for the respective interim reporting periods. Earnings per Share € million Income from continuing operations after income taxes Income from discontinued operations after income taxes Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders (net income) Weighted average number of shares Earnings per share (€) From continuing operations Basic Diluted From discontinued operations Basic Diluted From continuing and discontinued operations Basic Diluted 2015 figures restated B 16/1 2016 4,558 268 4,826 295 4,531 2015 4,013 85 4,098 (12) 4,110 Shares Shares 826,947,808 832,502,808 4.87 4.87 0.10 0.10 4.97 4.97 5.12 5.12 0.32 0.32 5.44 5.44 248 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Notes to the Statements of Financial Position 17. Goodwill and other intangible assets Changes in intangible assets in 2016 were as follows: Changes in Intangible Assets € million Cost of acquisition or generation, December 31, 2015 Changes in scope of consolidation Acquisitions Capital expenditures Retirements Transfers Transfers (IFRS 5) Inflation adjustment (IAS 29) Exchange differences December 31, 2016 Accumulated amortization and impairment losses, December 31, 2015 Changes in scope of consolidation Retirements Amortization and impairment losses in 2016 Amortization Impairment losses Impairment loss reversals Transfers Transfers (IFRS 5) Exchange differences December 31, 2016 Carrying amounts, December 31, 2016 Carrying amounts, December 31, 2015 Patents and technol- ogies Marketing and distribution rights Trade- marks Acquired goodwill Production rights R&D projects Other rights and advance payments B 17/1 Total 16,096 13,069 10,952 1,944 2,172 – 9 – – – – 3 204 – 1 55 (6) 5 (5) – 43 – – 3 (47) – (8) – 145 – – 47 (14) 50 (15) – 32 – – 5 (25) 3 (16) – (1) 16,312 13,162 11,045 2,044 2,138 946 – (23) 96 (108) (43) – – 19 887 2,600 47,779 – – 157 (80) (15) (11) – 15 – (13) 363 (280) – (55) 3 457 2,666 48,254 – – – – – – – – – – – 8,277 3,083 1,134 2,021 225 1,765 16,505 – (2) 1,007 708 299 – – (5) 35 – (38) 604 393 211 (1) – (8) 33 – (14) 144 137 7 – – (15) 19 – (25) 48 28 20 – – (16) (1) – (106) 109 – 109 – – – 7 (1) (66) 160 129 31 – – (11) 13 (1) (251) 2,072 1,395 677 (1) – (55) 106 9,312 3,673 1,268 2,027 235 1,860 18,375 16,312 3,850 7,372 16,096 4,792 7,869 776 810 111 151 652 721 806 29,879 835 31,274 The capitalized patents and technologies include an amount pertaining to the active ingredient alemtuzumab (product name: Lemtrada™) for the treatment of multiple sclerosis. Bayer gave back the worldwide distribution rights for alemtuzumab to Genzyme Corp., United States, in 2009 and in return received global co-promotion rights and an entitlement to royalties and revenue-based milestone pay- ments. Genzyme Corp. received marketing approval for alemtuzumab in Europe in 2013 and in the United States in 2014. Bayer has decided not to exercise its co-promotion rights. Impairment losses of €676 million were recognized on intangible assets, net of €1 million in impairment loss reversals. In the Pharmaceuticals reporting segment, the current assessment of the market environ- ment and lower revenue expectations led to impairment losses of €391 million on intangible assets in con- Bayer Annual Report 2016 B Consolidated Financial Statements 249 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version nection with the product Essure™. In addition, impairment losses of €56 million were recognized on re- search and development projects, mainly in the oncology area. In the Consumer Health reporting segment, impairment losses of €132 million on a dermatology product trademark in Russia and €28 million on a nutritional supplement trademark in the United States were recognized due to a weaker market environ- ment. In the Crop Science reporting segment, recent research findings necessitated impairment losses of €20 million on production rights in the Environmental Science unit, and a €20 million impairment loss was also recognized on a research and development project in Crop Protection due to a delayed market intro- duction. The remaining impairment losses pertained to intangible assets in the Crop Science (€11 million), Pharma- ceuticals (€9 million), Covestro (€9 million) and Consumer Health (€1 million) segments. A €1 million im- pairment loss in the Animal Health segment was reversed. Details of acquisitions and divestments are provided in Notes [6.2] and [6.3]. The impairment testing pro- cedure for goodwill and other intangible assets is explained in Note [4]. Changes in intangible assets in 2015 were as follows: Changes in Intangible Assets (Previous Year) Patents and technol- ogies Marketing and distribution rights Trade- marks Acquired goodwill Production rights R&D projects Other rights and advance payments B 17/2 Total 15,347 12,827 10,242 1,808 2,168 882 3,189 46,463 – (5) – – – (34) 7 781 4 39 77 (33) 40 (2) – – 53 – (35) – (14) – 117 706 – – 52 (55) 75 (33) – 97 – – – – (2) – – 6 16,096 13,069 10,952 1,944 2,172 – 26 107 (7) (113) – – 51 946 1 (20) 152 (966) – (20) – 264 2,600 5 93 388 (1,096) – (103) 7 2,022 47,779 € million Cost of acquisition or generation, December 31, 2014 Changes in scope of consolidation Acquisitions Capital expenditures Retirements Transfers Transfers (IFRS 5) Inflation adjustment (IAS 29) Exchange differences December 31, 2015 250 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Changes in Intangible Assets (Previous Year) B 17/2 (continued) Patents and technol- ogies Marketing and distribution rights Trade- marks Acquired goodwill Production rights R&D projects Other rights and advance payments Total € million Accumulated amortization and impairment losses, December 31, 2014 Changes in scope of consolidation Retirements Amortization and impairment losses in 2015 Amortization Impairment losses Impairment loss reversals Transfers Transfers (IFRS 5) Exchange differences December 31, 2015 Carrying amounts, December 31, 2015 Carrying amounts, December 31, 2014 7,428 2,588 1,039 1,911 153 2,344 15,463 – – – – – – – – – – – 4 (17) 801 801 – – – (1) – (31) 447 422 25 – 1 – 62 8,277 78 3,083 16,096 4,792 7,869 15,347 5,399 7,654 – (55) 148 147 1 – 1 (25) 26 1,134 810 769 – – 106 106 – – (2) – 6 2,021 151 257 – (7) 66 – 66 – – – 13 225 721 729 – 4 (949) (1,059) 183 161 22 – – (19) 1,751 1,637 114 – – (45) 206 391 1,765 16,505 835 31,274 845 31,000 Changes in the carrying amounts of goodwill for the reporting segments in 2016 and 2015 were as follows: B 17/3 Goodwill by Reporting Segment € million Carrying amounts, January 1, 2015 Change in scope of consolidation Acquisitions Retirements Impairment losses in 2015 Transfers Transfers (IFRS 5) Inflation adjustment (IAS 29) Exchange differences Pharma- ceuticals Consumer Health Crop Science Animal Health Covestro Bayer Group 7,215 5,698 2,137 54 243 15,347 – (133) – – – – 1 234 – 71 – – – (34) 6 446 – 50 – – – – – 90 – – – – – – – – – 7 – – – – – 11 – (5) – – – (34) 7 781 Bayer Annual Report 2016 B Consolidated Financial Statements 251 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Goodwill by Reporting Segment € million Pharma- ceuticals Consumer Health Crop Science Animal Health Covestro Bayer Group Carrying amounts, December 31, 2015 7,317 6,187 2,277 54 261 16,096 B 17/3 (continued) Change in scope of consolidation Acquisitions Retirements Impairment losses in 2016 Transfers Transfers (IFRS 5) Inflation adjustment (IAS 29) Exchange differences Carrying amounts, December 31, 2016 2015 figures restated – (3) – – – – – – (1) – – – – 3 – 13 – – – – – 84 7,398 84 6,273 31 2,321 – – – – – – – 2 – – – – – – – 3 – 9 – – – – 3 204 56 264 16,312 Goodwill and other intangible assets with an indefinite useful life that are of material significance for the Bayer Group are allocated to the following cash-generating units or unit groups as of the end of the report- ing period: Intangible Assets with an Indefinite Useful Life Reporting segment Pharmaceuticals Consumer Health Crop Science Crop Science Cash-generating unit / unit group Pharmaceuticals Consumer Care Crop Protection Seeds B 17/4 Goodwill (€ million) Material intangible assets with indefinite useful life (€ million) 6,114 6,273 1,291 540 454 22 63 129 In the case of research and development projects, the point in time from which a capitalized asset can be expected to generate an economic benefit for the company cannot be determined. Such assets are there- fore classified as having an indefinite useful life. Development projects were capitalized at a total amount of €652 million as of the end of 2016 (2015: €721 million). Another intangible asset classified as having an indefinite useful life is the Bayer Cross, which was reac- quired for the North America region in 1994, having been awarded to the United States and Canada under the reparations agreements at the end of the First World War. The period for which the Bayer Group will derive an economic benefit from this name cannot be determined as Bayer intends to make continuous use of it. The Bayer Cross is capitalized at €108 million. 252 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 18. Property, plant and equipment Changes in property, plant and equipment in 2016 were as follows: Changes in Property, Plant and Equipment € million Cost of acquisition or construction, December 31, 2015 Changes in scope of consolidation Acquisitions Capital expenditures Retirements Transfers Transfers (IFRS 5) Inflation adjustment (IAS 29) Exchange differences December 31, 2016 Accumulated depreciation and impairment losses, December 31, 2015 Changes in scope of consolidation Retirements Depreciation and impairment losses in 2016 Depreciation Impairment losses Impairment loss reversals Transfers Transfers (IFRS 5) Exchange differences December 31, 2016 Carrying amounts, December 31, 2016 Carrying amounts, December 31, 2015 Plant installations and machinery Furniture, fixtures and other equipment Construction in progress and advance payments Land and buildings B 18/1 Total 9,685 19,418 2,142 2,295 33,540 – – 248 (69) 407 (14) 3 86 10,346 – – 369 (262) 698 (4) 1 115 20,335 – – 206 (158) 82 (1) – 26 – – 1,441 (9) (1,187) (1) – 12 – – 2,264 (498) – (20) 4 239 2,297 2,551 35,529 5,255 14,303 1,578 – (49) 334 314 20 – 5 (2) 49 5,592 4,754 4,430 – (245) 936 927 9 – (4) (1) 122 15,111 5,224 5,115 – (139) 235 234 1 – – (1) 12 1,685 612 564 29 – (6) 5 – 5 – (1) – – 27 2,524 2,266 21,165 – (439) 1,510 1,475 35 – – (4) 183 22,415 13,114 12,375 Impairment losses totaling €35 million were recognized on property, plant and equipment in the reporting segments Consumer Health (€14 million), Pharmaceuticals (€8 million), Covestro (€4 million), Crop Science (€1 million), Animal Health (€1 million) and All Other Segments (€7 million). In 2016, borrowing costs of €31 million (2015: €33 million) were capitalized as components of the cost of acquisition or construction of qualifying assets, applying an average interest rate of 2.5% (2015: 2.5%). Capitalized property, plant and equipment included assets with a total net value of €471 million (2015: €533 million) held under finance leases. The cost of acquisition or construction of these assets as of the closing date totaled €867 million (2015: €915 million). They comprised plant installations and machinery with a carrying amount of €191 million (2015: €220 million), buildings with a carrying amount of €146 million (2015: €168 million) and other property, plant and equipment with a carrying amount of €134 million (2015: €145 million). For information on the liabilities arising from finance leases, see Note [27]. Bayer Annual Report 2016 B Consolidated Financial Statements 253 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version In 2016, rental payments of €429 million (2015: €263 million) were made for assets leased under operating leases as defined in IAS 17 (Leases). Lease payments of €3 million are expected to be received in 2017 from operating leases – as defined in IAS 17 (Leases) – pertaining to property, plant and equipment, excluding the investment property stated below. Lease payments totaling €4 million are expected to be received between 2018 and 2021 and lease payments totaling €0 million after 2021. Investment property The fair values of investment property are mainly determined using the income approach based on internal valuations for buildings and developed sites, and using the market comparison approach for undeveloped sites. The total carrying amount of investment property as of December 31, 2016, was €136 million (Decem- ber 31, 2015: €164 million). The fair value of this property was €507 million (2015: €484 million). The rental income from investment property was €18 million (2015: €13 million), and the operating expenses directly allocable to this property amounted to €11 million (2015: €8 million). A further amount of €3 million (2015: €1 million) in operating expenses was directly allocable to investment property from which no rental income was derived. Changes in property, plant and equipment in 2015 were as follows: Changes in Property, Plant and Equipment (Previous Year) € million Cost of acquisition or construction, December 31, 2014 Changes in scope of consolidation Acquisitions Capital expenditures Retirements Transfers Transfers (IFRS 5) Inflation adjustment (IAS 29) Exchange differences December 31, 2015 Accumulated depreciation and impairment losses, December 31, 2014 Changes in scope of consolidation Retirements Depreciation and impairment losses in 2015 Depreciation Impairment losses Impairment loss reversals Transfers Transfers (IFRS 5) Exchange differences December 31, 2015 Carrying amounts, December 31, 2015 Carrying amounts, December 31, 2014 Plant installations and machinery Furniture, fixtures and other equipment Construction in progress and advance payments Land and buildings B 18/2 Total 9,088 18,144 2,009 2,078 31,319 – 33 230 (167) 273 1 7 220 9,685 3 2 390 (429) 797 (64) 2 573 1 1 239 (185) 56 (4) 1 24 – – 1,309 (58) (1,126) – – 92 4 36 2,168 (839) – (67) 10 909 19,418 2,142 2,295 33,540 4,940 13,426 1,482 – (101) 317 294 23 – – 1 98 5,255 4,430 4,148 1 (397) 945 892 53 (1) (1) (57) 387 14,303 5,115 4,718 1 (156) 232 230 2 – 1 (3) 21 1,578 564 527 43 – (72) 38 – 38 – – – 20 29 2,266 2,035 19,891 2 (726) 1,532 1,416 116 (1) – (59) 526 21,165 12,375 11,428 254 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 19. Investments accounted for using the equity method Five (2015: four) associates and six (2015: three) joint ventures were accounted for in the consolidated financial statements using the equity method. Associates and Joint Ventures Accounted for Using the Equity Method B 19/1 Place of business Bayer’s interest (%) Company name Associates Bayer Trendlines AG Innovation Fund, L.P.1 Flagship Ventures V Agricultural Fund, L.P.1 Nanjing Baijingyu Pharmaceutical Co., Ltd. Paltough Industries (1998) Ltd. PO JV, LP Joint ventures Bayer Zydus Pharma Private Limited BlueRock Therapeutics GP LLC BlueRock Therapeutics LP Casebia Therapeutics LLC Misgav, Israel Cambridge, U.S.A. Nanjing, China Kibbutz Ramat Yochanan, Israel Wilmington, U.S.A. Mumbai, India San Francisco, U.S.A. San Francisco, U.S.A. Cambridge, U.S.A. DCSO Deutsche Cyber-Sicherheitsorganisation GmbH Berlin, Germany DIC Covestro Polymer Ltd. Tokyo, Japan 1 For information concerning the interest in this company see Note [6.1] 100 99.9 15 25 39.4 50 50 50 50 25 50 In 2000, Bayer acquired the polyols business and parts of the propylene oxide (PO) production operations of Lyondell Chemicals with the objective of ensuring access to patented technologies and safeguarding the long-term supply of PO, a starting product for polyurethane. As part of this strategy, a company was es- tablished to produce PO (PO JV, LP, United States, in which Covestro holds a 39.4% interest). Covestro benefits from fixed long-term supply quotas / volumes of PO from this company’s production. The two following tables contain summarized data from the income statements and statements of financial position of the associated company PO JV, LP, United States, which is accounted for using the equity method, and show the respective amounts recognized in the consolidated financial statements of the Bayer Group. Bayer Annual Report 2016 B Consolidated Financial Statements 255 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Income Statement Data PO JV, LP, Wilmington, U.S.A. € million Net sales Net loss after taxes Share of net loss after taxes Share of total comprehensive income after taxes Data from the Statements of Financial Position of PO JV, LP, Wilmington, U.S.A. € million Noncurrent assets Equity Share of equity Other Carrying amount 2015 1,695 (56) (23) (23) B 19/2 2016 1,659 (53) (24) (24) B 19/3 Dec. 31, 2015 Dec. 31, 2016 475 475 201 (3) 198 469 469 202 (4) 198 The item “Other” mainly comprises differences arising from adjustments of data to Bayer’s uniform ac- counting policies, along with purchase price allocations and their amortization in profit or loss. In December 2015, Bayer and CRISPR Therapeutics AG, Switzerland, agreed to establish a company to develop and commercialize new, breakthrough therapeutics for blood disorders, blindness and congenital heart diseases. The joint venture Casebia Therapeutics, established at the beginning of 2016, has access to gene-editing technology from CRISPR Therapeutics in specific disease areas, as well as access to pro- tein engineering expertise and relevant disease know-how through Bayer. The two following tables contain summarized data from the income statements and statements of financial position of the joint venture Casebia Therapeutics LLC, United States, which is accounted for using the equity method, and show the respective amounts recognized in the consolidated financial statements of the Bayer Group. Income Statement Data of Casebia Therapeutics LLC, Cambridge, U.S.A. € million Net sales Net loss after taxes Share of net loss after taxes Share of total comprehensive income after taxes B 19/4 2015 2016 – – – – – (8) (4) (4) 256 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Data from the Statements of Financial Position of Casebia Therapeutics LLC, Cambridge, U.S.A. B 19/5 € million Noncurrent assets Current assets Noncurrent liabilities Current liabilities Equity Share of equity Other Carrying amount Dec. 31, 2015 Dec. 31, 2016 - - - - - - - - 68 4 - 3 69 38 242 280 The item “Other” comprises Bayer’s outstanding capital contribution obligation. The following table contains a summary of the aggregated income statement data and aggregated carrying amounts of the individually nonmaterial associates accounted for using the equity method. Income Statement Data and Carrying Amount of Associates Accounted for Using the Equity Method B 19/6 € million Income after taxes Share of income after taxes Share of total comprehensive income after taxes Carrying amount 2015 2016 12 1 1 37 11 3 3 49 The following table contains a summary of the aggregated income statement data and aggregated carrying amounts of the individually nonmaterial joint ventures that are accounted for using the equity method. Income Statement Data and Carrying Amount of Joint Ventures Accounted for Using the Equity Method B 19/7 € million Income after taxes Share of income after taxes Share of total comprehensive income after taxes Carrying amount 2015 2016 6 3 3 11 – (1) (1) 57 Bayer Annual Report 2016 B Consolidated Financial Statements 257 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 20. Other financial assets The other financial assets were comprised as follows: Other Financial Assets € million Loans and receivables Available-for-sale financial assets of which debt instruments of which equity instruments Held-to-maturity financial investments Receivables from derivatives Receivables under lease agreements Total B 20/1 Dec. 31, 2015 Dec. 31, 2016 Total 65 1,177 1,092 85 73 526 7 1,848 Of which current 21 266 262 4 6 463 – 756 Total 2,140 4,629 4,371 258 65 714 8 Of which current 2,087 3,517 3,514 3 8 663 – 7,556 6,275 Loans and receivables included €1,770 million in bank deposits and €305 million in commercial paper. The debt instruments categorized as available-for-sale financial assets included capital of €612 million (2015: €610 million) provided to Bayer-Pensionskasse VVaG (Bayer-Pensionskasse) for its effective initial fund, and jouissance right capital (Genussrechtskapital) of €154 million (2015: €153 million), also provided to Bayer-Pensionskasse. Also reported in this category were investments of €3,513 million (2015: €119 million) in money market funds. The equity instruments categorized as available-for-sale financial assets included the €98 million interest held in CRISPR Therapeutics AG, Switzerland, along with €32 million (2015: €40 million) in instruments whose fair value could not be determined from a stock exchange or other market price or by discounting reliably determinable future cash flows. These equity instruments were recognized at cost. Further information on the accounting for receivables from derivatives is given in Note [30]. Receivables under lease agreements relate to finance leases where Bayer is the lessor and the economic owner of the leased assets is the lessee. These receivables comprised expected lease payments of €39 million (2015: €38 million), including €31 million (2015: €31 million) in interest. Of the expected lease pay- ments, €1 million (2015: €1 million) is due within one year, €2 million (2015: €2 million) within the following four years and €36 million (2015: €35 million) in subsequent years. 258 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 21. Inventories Inventories were comprised as follows: Inventories € million Raw materials and supplies Work in process, finished goods and goods purchased for resale Advance payments Total B 21/1 Dec. 31, 2015 Dec. 31, 2016 2,296 6,241 13 8,550 2,396 5,991 21 8,408 Impairment losses recognized on inventories were reflected in the cost of goods sold. They were comprised as follows: Impairments of Inventories € million Accumulated impairment losses, January 1 Changes in scope of consolidation Impairment losses in the reporting period Impairment loss reversals or utilization Exchange differences Transfers (IFRS 5) Accumulated impairment losses, December 31 B 21/2 2016 (427) – (321) 346 (18) 4 (416) 2015 (477) (5) (216) 246 21 4 (427) 22. Trade accounts receivable Trade accounts receivable less impairment losses amounted to €10,969 million (2015: €9,933 million) on the closing date and were comprised as follows: Trade Accounts Receivable € million Trade accounts receivable (before impairments) Accumulated impairment losses Carrying amount, December 31 of which noncurrent Changes in impairment losses on trade accounts receivable were as follows: Impairments of Trade Accounts Receivable € million Accumulated impairment losses, January 1 Impairment losses in the reporting period Impairment loss reversals or utilization Exchange differences Accumulated impairment losses, December 31 B 22/1 2015 2016 10,181 11,377 (248) 9,933 46 (408) 10,969 144 B 22/2 2016 (248) (165) 35 (30) (408) 2015 (233) (84) 46 23 (248) Bayer Annual Report 2016 B Consolidated Financial Statements 259 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Trade accounts receivable amounting to €10,954 million (2015: €9,858 million) were not individually impaired. Of this amount, €1,161 million (2015: €1,251 million) was past due or due immediately on the closing date. The amounts of impaired and past-due trade accounts receivable are summarized in the following table: Impaired and Past-Due Trade Accounts Receivable Of which neither impaired nor past due at the closing date B 22/3 Of which impaired at the closing date Of which unimpaired but past due at the closing date Carrying amount € million December 31, 2016 December 31, 2015 up to 3 months 3 – 6 months 6 – 12 months more than 12 months 10,969 9,933 9,793 8,607 780 823 162 202 125 109 94 117 15 75 The gross carrying amount of individually impaired trade accounts receivable was €192 million (2015: €245 million). The impairment losses recognized on these assets totaled €177 million (2015: €170 million), re- sulting in a net carrying amount of €15 million (2015: €75 million). The unimpaired receivables were deemed to be collectible on the basis of established credit management processes and individual assessments of customer risks. Recognized impairment losses included an ap- propriate allowance for the default risk as of the end of the reporting period. Receivables from government health service institutions, especially in Greece, Italy, Portugal and Spain, are under special observation in view of the government debt crisis. Although there were no material defaults on such receivables in 2016 or 2015, it is possible that future developments in these countries could result in payment delays and / or defaults. This could necessitate the recognition of impairment losses due to new occurrences. Trade accounts receivable from government health service institutions in the above countries at the end of 2016 totaled €134 million (2015: €168 million). An excess-of-loss policy exists for the Pharmaceuticals, Consumer Health and Animal Health segments as part of a global credit insurance program. More than 80% of the receivables of these segments are insured up to a maximum total annual compensation payment of €150 million (2015: €100 million). A global ex- cess-of-loss policy has also existed for the Crop Science segment since January 2016. In this global credit insurance program, more than 80% of this segment’s receivables are insured up to a maximum total annual compensation payment of €300 million. A further €743 million (2015: €559 million) of receivables was secured by advance payments, letters of credit or guarantees or by liens on land, buildings or harvest yields. 260 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 23. Other receivables Other receivables were comprised as follows: Other Receivables € million Other tax receivables Deferred charges Reimbursement claims Net defined benefit asset Receivables from employees Miscellaneous receivables Total B 23/1 Dec. 31, 2015 Dec. 31, 2016 Total 746 384 97 30 39 1,151 2,447 Of which current Total Of which current 658 348 81 – 36 894 2,017 764 549 120 26 50 1,284 2,793 746 358 104 – 49 953 2,210 The reimbursement claims of €120 million (2015: €97 million) mainly consisted of receivables from insur- ance companies in connection with product liability claims. Miscellaneous receivables included a €441 million (2015: €423 million) receivable from Dow AgroSciences LLC, United States, for damages and royalty payments resulting from the infringement of Bayer’s rights to the Liberty Link™ weed control system. Of the €690 million (2015: €565 million) in financial receivables included in other receivables, €612 million (2015: €460 million) was neither impaired nor past due. Receivables of €50 million (2015: €65 million) were due immediately or up to three months past due. Receivables of €27 million (2015: €39 million) were more than three months past due. Other receivables are stated net of impairment losses totaling €56 million (2015: €55 million), of which €52 million (2015: €52 million) related to a receivable from the Venezuelan exchange control authority reflecting the right to receive U.S. dollars at a preferential rate. 24. Equity The foremost objectives of our financial management are to help bring about a sustained increase in Bayer’s value for the benefit of all stakeholders, and to ensure the Group’s creditworthiness and liquidity. The pursuit of these goals means reducing our cost of capital, optimizing our capital structure, improving our financing cash flow and effectively managing risk. The rating agencies commissioned by Bayer assess Bayer’s creditworthiness as follows: Rating S & P Global Ratings Moody’s B 24/1 Long-term rating Short-term rating A– A3 A–2 P–2 Bayer Annual Report 2016 B Consolidated Financial Statements 261 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version These ratings reflect the company’s good creditworthiness and ensure access to a broad investor base for financing. Both S & P Global Ratings and Moody’s are currently considering a rating downgrade in view of the agreed acquisition of Monsanto Company. Bayer will continue to target an investment-grade rating after the successful closing of the Monsanto acquisition. We remain committed to the single “A” credit rating category over the long term. Apart from utilizing cash inflows from our operating business to reduce net financial debt, we are imple- menting our financial strategy by way of vehicles such as the subordinated hybrid bonds issued in July 2014 and April 2015, the mandatory convertible notes issued in November 2016, the authorized and con- ditional capital created by resolutions of the Annual Stockholders’ Meeting, and a potential share buyback program. Bayer’s Articles of Incorporation do not stipulate capital ratios. The changes in the various components of equity during 2015 and 2016 are shown in the consolidated statements of changes in equity. Capital stock The capital stock of Bayer AG on December 31, 2016 amounted to €2,117 million (2015: €2,117 million), divided into 826,947,808 (2015: 826,947,808) registered no-par shares, and was fully paid in. Each no-par share confers one voting right. Authorized and conditional capital The authorized and conditional capital was comprised as follows: Authorized and Conditional Capital B 24/2 Capital Authorized capital I Authorized capital II Conditional capital Resolution Amount / shares Expires Purpose April 29, 2014 €530 million April 28, 2019 April 29, 2014 €212 million April 28, 2019 April 29, 2014 €212 million / up to 82,694,750 shares April 28, 2019 Increase the capital stock by issuing new no-par shares against cash contributions and / or contributions in kind, the latter not to exceed €423 million Increase the capital stock by issuing new no-par shares against cash contributions Increase the capital stock by granting no-par shares to the holders of bonds with warrants or convertible notes, profit participation certificates or income bonds; the authorizations to issue such instruments are limited to a total nominal amount of €6 billion. Capital increases are effected by issuing new registered no-par shares. Stockholders must normally be granted subscription rights. However, subscription rights may be excluded under certain conditions stated in the authorization resolutions. Absent a further resolution of the Annual Stockholders’ Meeting on the exclusion of stockholders’ subscription rights, the Board of Management will only use the existing authori- zations to increase the capital stock out of the authorized or conditional capital – while excluding stock- holders' subscription rights – up to a total amount of 20% of the capital stock that existed when the re- spective resolutions were adopted by the Annual Stockholders’ Meeting on April 29, 2014. All issuances or sales of no-par shares or of bonds with warrants or conversion rights or obligations that are effected while excluding stockholders’ subscription rights also count toward this 20% limit. Details of the authorized and conditional capital are provided in the Notice of the Annual Stockholders’ Meeting of April 29, 2014, and on the Bayer website. 262 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group On November 22, 2016, Bayer placed mandatory convertible notes in the amount of €4,000 million without granting subscription rights to existing stockholders of the company. The notes, denominated in units of €100,000, were issued by Bayer Capital Corporation B.V. under the subordinated guarantee of Bayer AG. At maturity, the outstanding amount of the notes will be mandatorily converted into registered no-par shares of Bayer AG. After deduction of €48 million in transaction costs and recognition of €191 million in deferred taxes, €3,491 million were allocated to capital reserves and €652 million to financial liabilities. The deferred taxes result from temporary differences in accounting for the liability component and were recog- nized outside profit or loss in equity. The issuance of the mandatory convertible notes constitutes a utiliza- tion of conditional capital. The authorized capital has not been utilized so far. Accumulated comprehensive income Accumulated comprehensive income comprises retained earnings and accumulated other comprehensive income. The retained earnings include prior years’ undistributed income of consolidated companies and all remeasurements of the net liability for defined benefit pension and other post-employment benefit plans that are recognized outside profit or loss. The accumulated other comprehensive income comprises ex- change differences, the changes in fair values of cash flow hedges and available-for-sale financial assets, and the revaluation surplus. In 2016, an amount of €4 million (2015: €5 million) corresponding to the annu- al amortization / depreciation of the respective assets was transferred from the revaluation surplus to re- tained earnings. The reserves for exchange differences included an amount of minus €51 million (2015: minus €45 million) attributable to associates and joint ventures accounted for using the equity method. Dividend Under the German Stock Corporation Act (AktG), the dividend payment is determined by the distributable profit reported in the annual financial statements of Bayer AG, which are prepared according to the Ger- man Commercial Code. Retained earnings were diminished by payment of the dividend of €2.50 per share for 2015. The proposed dividend for the 2016 fiscal year is €2.70 per share, which would result in a total dividend payment of €2,233 million. Payment of the proposed dividend is contingent upon approval by the stockholders at the Annual Stockholders’ Meeting and therefore is not recognized as a liability in the con- solidated financial statements. Noncontrolling interest In April 2016, Bayer AG contributed 10 million shares it held in Covestro AG – equivalent to 4.9% of the outstanding shares – to Bayer Pension Trust e.V. Bayer therefore currently holds 64.2% of the shares in the capital stock of Covestro AG. Bayer Annual Report 2016 B Consolidated Financial Statements 263 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The changes in noncontrolling interest in equity during 2015 and 2016 are shown in the following table: Components of Noncontrolling Interest in Equity € million January 1 Changes in equity not recognized in profit or loss Remeasurements of the net pension liability Changes in fair value of cash flow hedges Changes in fair value of securities Exchange differences on translation of operations outside the eurozone Other changes in equity Dividend payments Income after income taxes December 31 B 24/3 2015 112 2016 1,180 10 – – 23 1,055 (8) (12) (27) – – 17 157 (58) 295 1,180 1,564 The reserves for exchange differences included an amount of minus €28 million (2015: minus €20 million) attributable to associates and joint ventures accounted for using the equity method. Noncontrolling interest mainly pertained to the following companies: Material Noncontrolling Interests Interest held Equity attributable to noncontrolling interest Dividends paid to noncontrolling interest Current assets Noncurrent assets Current liabilities Noncurrent liabilities Sales Income after income taxes Total comprehensive income Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities * Including direct and indirect subsidiaries B 24/4 Covestro AG * Bayer CropScience Limited, India % € million € million € million € million € million € million € million € million € million € million € million € million 2015 30.9 1,092 0 4,237 6,294 4,564 2,355 2016 35.8 1,472 52 4,268 5,966 2,474 3,544 12,082 11,904 352 558 1,473 (380) (645) 806 747 1,786 (1,042) (1,122) 2015 31.4 73 3 52 304 11 92 465 6 15 44 53 (79) 2016 31.4 85 3 55 352 11 97 484 44 47 – (4) (9) 264 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 25. Provisions for pensions and other post-employment benefits Provisions were established for defined benefit obligations pertaining to pensions and other post- employment benefits. The net liability was accounted for as follows: Net Defined Benefit Liability Reflected in the Statement of Financial Position Pensions Other post-employment benefits B 25/1 Total € million Dec 31, 2015 Dec 31, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015 Dec 31, 2016 Provisions for pensions and other post- employment benefits (net liability) 10,454 10,736 of which Germany of which other countries Net defined benefit asset of which Germany of which other countries Net defined benefit liability of which Germany of which other countries 8,972 1,482 29 23 6 9,176 1,560 25 23 2 10,425 10,711 8,949 1,476 9,153 1,558 419 – 419 1 – 1 418 – 418 398 – 398 1 – 1 397 – 397 10,873 11,134 8,972 1,901 30 23 7 9,176 1,958 26 23 3 10,843 11,108 8,949 1,894 9,153 1,955 The expenses for defined benefit plans for pensions and other post-employment benefits comprised the following components: Expenses for Defined Benefit Plans € million Current service cost Past service cost of which plan curtailments Plan settlements Plan administration cost paid out of plan assets Net interest Total Germany Other countries 2016 350 26 – – 3 204 583 2015 99 (3) (2) – 1 52 149 2016 102 (5) 1 (9) 1 52 141 2015 362 27 – – – 204 593 B 25/2 Pension plans Other post-employment benefit plans 2015 461 24 (2) – 1 256 742 Total 2016 452 21 1 (9) 4 256 724 Other countries 2015 17 – – – – 20 37 2016 16 (1) – – – 20 35 In addition, a total of minus €1,036 million in effects of remeasurements of the net defined benefit liability was recognized in 2016 outside profit or loss (2015: €1,216 million). Of this amount, minus €1,063 million (2015: €1,185 million) related to pension obligations, €34 million (2015: €53 million) to other post- employment benefit obligations, and minus €7 million (2015: minus €22 million) to the effects of the asset ceiling. Bayer Annual Report 2016 B Consolidated Financial Statements 265 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The net defined benefit liability developed as follows: Changes in Net Defined Benefit Liability € million Germany January 1, 2016 Acquisitions Divestments / changes in the scope of consolidation Current service cost Past service cost (Gains) / losses from plan settlements Net interest Net actuarial (gain) loss of which due to changes in financial assumptions of which due to changes in demographic assumptions of which due to experience adjustments Return on plan assets excluding amounts recognized as interest income Remeasurement of asset ceiling Employer contributions Employee contributions Payments due to plan settlements Benefits paid out of plan assets Benefits paid by the company Plan administration cost paid from plan assets Reclassification to current assets / liabilities held for sale December 31, 2016 Other countries January 1, 2016 Acquisitions Divestments / changes in the scope of consolidation Current service cost Past service cost (Gains) / losses from plan settlements Net interest Net actuarial (gain) loss of which due to changes in financial assumptions of which due to changes in demographic assumptions of which due to experience adjustments Return on plan assets excluding amounts recognized as interest income Remeasurement of asset ceiling Employer contributions Employee contributions Payments due to plan settlements Benefits paid out of plan assets Benefits paid by the company Plan administration costs paid out of plan assets Reclassification to current assets / liabilities held for sale Exchange differences December 31, 2016 of which other post-employment benefits Total, December 31, 2016 B 25/3 Defined benefit obligation Fair value of plan assets Effects of the asset ceiling Net defined benefit liability 19,148 10,199 – (4) 350 26 – 452 1,610 1,563 1 46 39 – (219) (440) – – (2) 248 669 878 39 – (219) (3) – 20,962 11,809 – – – – – – – (8,949) – 2 (350) (26) – (204) (1,610) (1,563) (1) (46) 669 – 878 – – – 440 (3) – (9,153) 7,660 5,799 (32) (1,893) – (4) 118 (6) (9) 284 515 650 (89) (46) 12 (83) (295) (87) – – (72) 8,033 867 28,995 1 (3) – – 215 (3) 427 152 12 (84) (295) – (1) – (96) 6,127 471 17,936 (7) – (7) (49) – (49) 1 1 (118) 6 9 (72) (515) (650) 89 46 427 (7) 152 – (1) – 87 (1) – (31) (1,955) (396) (11,108) 266 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Changes in Net Defined Benefit Liability (Previous Year) € million Germany January 1, 2015 Acquisitions Divestments / changes in the scope of consolidation Current service cost Past service cost (Gains) / losses from plan settlements Net interest Net actuarial (gain) loss of which due to changes in financial assumptions of which due to changes in demographic assumptions of which due to experience adjustments Return on plan assets excluding amounts recognized as interest income Remeasurement of asset ceiling Employer contributions Employee contributions Payments due to plan settlements Benefits paid out of plan assets Benefits paid by the company Plan administration cost paid from plan assets Reclassification to current assets / liabilities held for sale December 31, 2015 Other countries January 1, 2015 Acquisitions Divestments / changes in the scope of consolidation Current service cost Past service cost (Gains) / losses from plan settlements Net interest Net actuarial (gain) loss of which due to changes in financial assumptions of which due to changes in demographic assumptions of which due to experience adjustments Return on plan assets excluding amounts recognized as interest income Remeasurement of asset ceiling Employer contributions Employee contributions Payments due to plan settlements Benefits paid out of plan assets Benefits paid by the company Plan administration costs paid out of plan assets Reclassification to current assets / liabilities held for sale Exchange differences December 31, 2015 of which other post-employment benefits Total, December 31, 2015 Defined benefit obligation Fair value of plan assets Effects of the asset ceiling – – – – – – – (9) – – B 25/4 Net defined benefit liability (10,314) – (4) (362) (27) – (204) 1,393 1,371 – 22 (262) – 387 – – – 433 – 11 (8,949) (1,881) (4) – (116) 3 – (72) 318 310 79 (71) (211) (22) 148 – – – 60 (1) 12 (128) (1,894) (418) (10,843) 20,339 10,025 – 21 362 27 – 425 (1,393) (1,371) – (22) 37 – (215) (433) (22) – 17 221 (262) 387 37 – (215) – 11 19,148 10,199 7,432 5,560 – – 4 – 116 (3) – 287 (318) (310) (79) 71 11 – (289) (60) – (20) 501 7,661 836 26,809 215 – (211) 148 11 – (289) – (1) (8) 374 5,799 418 15,998 (22) – (1) (32) – (32) Bayer Annual Report 2016 B Consolidated Financial Statements 267 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The benefit obligations pertained mainly to Germany (72%; 2015: 71%), the United States (14%; 2015: 15%) and the United Kingdom (7%; 2015: 7%). In Germany, current employees accounted for about 46% (2015: 44%), retirees or their surviving dependents for about 47% (2015: 49%) and former employees with vested pension rights for about 7% (2015: 7%) of entitlements under defined benefit plans. In the United States, current employees accounted for about 25% (2015: 26%), retirees or their surviving de- pendents for about 53% (2015: 61%) and former employees with vested pension rights for about 22% (2015: 13%) of entitlements under defined benefit plans. The actual return on the assets of defined benefit plans for pensions or other post-employment benefits amounted to €1,519 million (2015: minus €34 million) and €40 million (2015: minus €3 million), respectively. The following table shows the defined benefit obligations for pensions and other post-employment benefits along with the funded status of the funded obligations. Defined Benefit Obligation and Funded Status € million Defined benefit obligation of which unfunded of which funded Funded status of funded obligations Overfunding Underfunding Pension obligation Other post- employment benefit obligation 2015 2016 2015 2016 2015 B 25/5 Total 2016 25,973 28,128 1,126 1,231 24,847 26,897 61 74 9,328 9,506 836 101 735 1 318 867 125 742 1 272 26,809 28,995 1,227 1,356 25,582 27,639 62 75 9,646 9,778 Pension and other post-employment benefit obligations Group companies provide retirement benefits for most of their employees, either directly or by contributing to privately or publicly administered funds. The way these benefits are provided varies according to the legal, fiscal and economic conditions of each country, the benefits generally being based on employee compensation and years of service. The obligations relate both to existing retirees’ pensions and to pen- sion entitlements of future retirees. Bayer has set up funded pension plans for its employees in various countries. The most appropriate in- vestment strategy is determined for each defined benefit pension plan based on the risk structure of the obligations (especially demographics, the current funded status, the structure of the expected future cash flows, interest sensitivity, biometric risks etc.), the regulatory environment and the existing level of risk tolerance or risk capacity. A strategic target investment portfolio is then developed in line with the plan’s risk structure, taking capital market factors into consideration. Further determinants are risk diversification, portfolio efficiency and the need for both a country-specific and a global risk / return profile centered on ensuring the payment of all future benefits. As the capital investment strategy for each pension plan is developed individually in light of the plan-specific conditions listed above, the investment strategies for different pension plans may vary considerably. For example, the proportion of plan assets invested in equi- ties is greater with the non-German pension plans than with the plans domiciled in Germany. The invest- ment strategies are generally aligned less toward maximizing absolute returns and more toward the maxi- mum probability of being able to finance pension commitments over the long term. For plan assets, stress scenarios are simulated and other risk analyses (such as value at risk) undertaken with the aid of risk man- agement systems. 268 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Bayer-Pensionskasse VVaG (Bayer-Pensionskasse), Leverkusen, Germany, is by far the most significant of the pension plans. It has been closed to new members since 2005. This legally independent fund is regarded as a life insurance company and therefore is subject to the German Insurance Supervision Act. The benefit obligations covered by Bayer-Pensionskasse comprise retirement, surviving dependents’ and disability pensions. It constitutes a multi-employer plan, to which the active members and their employers contrib- ute. The company contribution is a certain percentage of the employee contribution. This percentage is the same for all participating employers, including those outside the Bayer Group, and is set by agreement between the plan’s executive committee and its supervisory board, acting on a proposal from the respon- sible actuary. It takes into account the differences between the actuarial estimates and the actual values for the factors used to determine liabilities and contributions. Bayer may also adjust the company contribu- tion in agreement with the plan’s executive committee and its supervisory board, acting on a proposal from the responsible actuary. The plan’s liability is governed by Section 1, Paragraph 1, Sentence 3 of the Ger- man Law on the Improvement of Occupational Pensions. This means that if the pension plan exercises its right under the articles of association to reduce benefits, each participating employer has to make up the resulting difference. Bayer is not liable for the obligations of participating employers outside the Bayer Group, even if they cease to participate in the plan. Pension entitlements for people who joined Bayer in Germany in 2005 or later are granted via Rheinische Pensionskasse VVaG, Leverkusen. Future pension payments from this plan are based on contributions and the return on plan assets; a guaranteed interest rate applies. Another important pension provision vehicle is Bayer Pension Trust e.V. (BPT). This covers further retire- ment provision arrangements of the Bayer Group, such as deferred compensation, pension obligations previously administered by Schering Altersversorgung Treuhand e.V., and components of other direct commitments. The defined benefit pension plans in the United States have been frozen for some years, and no significant new entitlements can be earned under these plans. The assets of all the U.S. pension plans are held by a mas- ter trust for reasons of efficiency. The applicable regulatory framework is based on the Employee Retirement Income Security Act (ERISA), which includes a statutory 80% minimum funding requirement to avoid bene- fit restrictions. The actuarial risks, such as investment risk, interest-rate risk and longevity risk, remain with the company. The defined benefit pension plans in the United Kingdom have been closed to new members for some years. Plan assets in the U.K. are administered by independent trustees, who are legally obligated to act solely in the interests of the beneficiaries. A technical assessment is performed every three years in line with U.K. regulations. This serves as the basis for developing a plan to cover any potential financing re- quirements. Here, too, the actuarial risks remain with the company. The other post-employment benefit obligations outside Germany mainly comprised health care benefit payments for retirees in the United States. Bayer Annual Report 2016 B Consolidated Financial Statements 269 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The fair value of the plan assets to cover pension and other post-employment benefit obligations was as follows: Fair Value of Plan Assets as of December 31 B 25/6 Pension obligations Other post-employment benefit obligations Germany Other countries Other countries € million 2015 2016 2015 2016 2015 2016 Plan assets based on quoted prices in active markets Real estate and special real estate funds Equities and equity funds Callable debt instruments Noncallable debt instruments Bond funds Derivatives Cash and cash equivalents Other Plan assets for which quoted prices in active markets are not available Real estate and special real estate funds Equities and equity funds Callable debt instruments Noncallable debt instruments Bond funds Derivatives Other – – 2,105 2,919 – 112 – 556 199 1,855 182 752 215 1,861 263 736 3,543 3,754 1,744 1,823 18 158 – 11 243 – (5) 84 4 (3) 114 6 19 130 – 121 90 – 8 – 5,936 7,483 4,815 5,015 368 517 90 1,555 1,832 – (2) 271 4,263 563 115 1,525 1,870 – 1 252 4,326 83 59 2 – 60 – 362 566 124 72 – – 72 – 373 641 – – – – – – 50 50 418 22 149 – 128 104 – 17 – 420 – – – – – – 51 51 471 Total plan assets 10,199 11,809 5,381 5,656 The fair value of plan assets in Germany included real estate leased by Group companies, recognized at a fair value of €82 million (2015: €61 million), and Bayer AG shares and bonds held through investment funds, recognized at their fair value of €41 million (2015: €48 million) and €3 million (2015: €3 million), respectively. In April 2016, Bayer AG contributed 10 million shares it held in Covestro AG – equivalent to 4.9% of the outstanding shares – to BPT. This equity position had a market value of €652 million as of December 31, 2016. In 2016, Covestro placed short-term securities with a volume of €450 million into Metzler Trust e.V. In 2015, Bayer placed short-term securities with a volume of €300 million into BPT. The other plan assets comprised mortgage loans granted, other receivables and qualified insurance policies. Risks The risks from defined benefit plans arise partly from the defined benefit obligations and partly from the investment in plan assets. The risks lie in the possibility that higher direct pension payments will have to be made to the beneficiaries and / or that additional contributions will have to be made to plan assets in order to meet current and future pension obligations. 270 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Demographic / biometric risks Since a large proportion of the defined benefit obligations comprises lifelong pension payments to retirees or surviving dependents’ pensions, longer claim periods or earlier claims may result in higher benefit obli- gations, higher benefit expense and / or higher pension payments than previously anticipated. Investment risks If the actual return on plan assets were below the return anticipated on the basis of the discount rate, the net defined benefit liability would increase, assuming there were no changes in other parameters. This could happen as a result of a drop in share prices, increases in market rates of interest, default of individu- al debtors or the purchase of low-risk but low-interest bonds, for example. Interest-rate risk A decline in capital market interest rates, especially for high-quality corporate bonds, would increase the defined benefit obligation. This effect would be at least partially offset by the ensuing increase in the mar- ket values of the debt instruments held. Measurement parameters and their sensitivities The following weighted parameters were used to measure the obligations for pensions and other post- employment benefits as of December 31 of the respective year: Parameters for Benefit Obligations % Pension obligations Discount rate of which U.S.A. of which U.K. Germany Other countries 2015 2016 2015 2016 2015 2.40 1.80 3.85 4.00 3.80 3.35 3.20 3.25 3.70 2.65 3.50 3.35 2.75 4.00 3.80 3.10 2.15 B 25/7 Total 2016 2.15 3.70 2.65 2.95 1.95 Projected future salary increases Projected future benefit increases 3.00 1.75 2.75 1.50 Other post-employment benefit obligations Discount rate – – 4.45 4.35 4.45 4.35 In Germany the Heubeck 2005 G mortality tables were used, in the United States the RP-2014 Mortality Tables, and in the United Kingdom 95% of S1NXA. The following weighted parameters were used to measure the expense for pension and other post- employment benefits in the respective year: Parameters for Benefit Expense % Pension obligations Discount rate Projected future salary increases Projected future benefit increases Other post-employment benefit obligations Germany Other countries 2015 2016 2015 2016 2015 2.20 3.00 1.75 2.40 3.00 1.75 3.70 3.65 3.30 3.85 3.35 3.20 2.55 3.15 2.10 B 25/8 Total 2016 2.75 3.10 2.15 Discount rate – – 3.95 4.45 3.95 4.45 Bayer Annual Report 2016 B Consolidated Financial Statements 271 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The parameter sensitivities were computed by expert actuaries based on a detailed evaluation similar to that performed to obtain the data presented in Table B 25/4. Altering individual parameters by 5 percent- age points (mortality by 10% per beneficiary) while leaving the other parameters unchanged would have impacted pension and other post-employment benefit obligations as of year end 2016 as follows: Sensitivity of Benefit Obligations € million Pension obligations Germany Other countries B 25/9 Total Increase Decrease Increase Decrease Increase Decrease 0.5%-pt. change in discount rate (1,752) 2,014 (478) 539 (2,230) 2,553 0.5%-pt. change in projected future salary increases 0.5%-pt. change in projected future benefit increases 10% change in mortality Other post-employment benefit obligations 0.5%-pt. change in discount rate 10% change in mortality 135 (125) 50 (47) 185 (172) 1,107 (670) (1,009) 752 – – – – 139 (195) (48) (24) (94) 209 53 27 1,246 (865) (1,103) 961 (48) (24) 53 27 Sensitivity of Benefit Obligations (prior year) Germany Other countries B 25/10 Total € million Pension obligations Increase Decrease Increase Decrease Increase Decrease 0.5%-pt. change in discount rate (1,544) 1,767 (450) 504 (1,994) 2,271 0.5%-pt. change in projected future salary increases 0.5%-pt. change in projected future benefit increases 10% change in mortality Other post-employment benefit obligations 0.5%-pt. change in discount rate 10% change in mortality 121 (113) 47 (44) 168 (157) 1,006 (597) – – (919) 669 – – 127 (173) (46) (21) (96) 185 51 24 1,133 (770) (1,015) 854 (46) (21) 51 24 272 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Provisions are also set up for the obligations, mainly of U.S. subsidiaries, to provide post-employment benefits in the form of health care cost payments for retirees. The valuation of health care costs was based on the assumption that they will increase at a rate of 6.8%, which should gradually decline to 5.0% by 2023 (assumption in 2015: 7.0%, which should gradually decline to 5.0% by 2023). The following table shows the impact on other post-employment benefit obligations and total benefit expense of a one- percentage-point change in the assumed cost increase rates: Sensitivity to Health Care Cost Increases € million Impact on other post-employment benefit obligations Impact on benefit expense B 25/11 Increase of one percentage point 2015 2016 79 5 77 4 Decrease of one percentage point 2015 (68) (4) 2016 (66) (3) Payments made and expected future payments The following payments or asset contributions correspond to the employer contributions made or expected to be made to funded benefit plans: Employer Contributions Paid or Expected € million Pension obligations Other post-employment benefit obligations Total Germany 2017 expected 74 – 74 2016 878 – 878 2015 148 – 148 2015 387 – 387 B 25/12 Other countries 2016 151 1 152 2017 expected 123 1 124 Bayer has currently committed to make deficit contributions for its U.K. pension plans of approximately GBP 16 million annually through 2019. For its U.S. pension plans, Bayer made payments of US$50 million in 2016 and expects to make payments of US$50 million in 2017, the latter amount being subject to change depending on future circumstances. Pensions and other post-employment benefits payable in the future from funded and unfunded plans are estimated as follows: B 25/13 Future Benefit Payments Payments out of plan assets Payments by the company € million Germany Other post- employment benefits Pensions Other countries Other countries 2017 2018 2019 2020 2021 223 226 230 236 242 297 305 312 321 331 9 9 9 9 9 Other post- employment benefits Pensions Other countries Other countries 76 77 78 83 91 35 38 42 43 45 Total 563 572 584 597 613 Total Germany 529 540 551 566 582 452 457 464 471 477 2022-2026 1,310 1,715 46 3,071 2,454 477 252 3,183 The weighted average term of the pension obligations is 18 years (2015: 17.3 years) in Germany and 13.3 years (2015: 13.4 years) in other countries. The weighted average term of the obligations for other post-employment benefits in other countries is 11.5 years (2015: 11.5 years). Bayer Annual Report 2016 B Consolidated Financial Statements 273 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 26. Other provisions Changes in the various provision categories in 2016 were as follows: Changes in Other Provisions € million December 31, 2015 Additions Utilization Reversal Reclassification to current liabilities Interest cost Exchange differences December 31, 2016 Environ- mental protec- tion Other Taxes Restruc- turing Trade- related commit- ments Litigations Personnel commit- ments Miscella- neous 65 18 (32) (12) – – 2 41 272 67 (23) (5) – 4 6 306 113 (121) (29) – – 7 321 276 2,113 4,679 (4,019) (477) (12) – 91 2,375 663 240 (280) (123) – – 12 512 3,099 3,109 (2,503) (457) (1) 18 25 3,290 267 382 (230) (48) – – 15 386 B 26/1 Total 6,785 8,608 (7,208) (1,151) (13) 22 158 7,201 The provisions recognized in the statement of financial position as of December 31, 2016, were expected to be utilized as follows: Expected Utilization of Other Provisions € million 2017 2018 2019 2020 2021 2022 or later Total Environ- mental protec- tion Restruc- turing Trade- related commit- ments Litigations 69 31 21 11 4 185 321 93 79 71 11 6 16 2,241 66 28 5 6 29 276 2,375 280 152 3 1 4 72 512 Personnel commit- ments Miscella- neous 2,451 270 147 90 186 57 359 3,290 6 1 1 24 84 386 Other Taxes 17 – – – 1 23 41 B 26/2 Total 5,421 481 214 215 102 768 7,201 The provisions were partly offset by claims for refunds in the amount of €110 million (2015: €97 million), which were recognized as receivables. These claims mainly related to product liability. Restructuring Provisions for restructuring included €179 million (2015: €180 million) for severance payments and €97 million (2015: €126 million) for other restructuring expenses, which mainly comprised other costs re- lated to the closure of production facilities. 274 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group In the Pharmaceuticals segment, restructuring took place mainly in the areas of marketing and supply network opti- mization as part of the Continuous Efficiency Program. Provisions were established for this restructuring primarily in Japan, France and the United States. Provisions for the above and other restructuring measures in Pharma- ceuticals as of December 31, 2016, totaled €66 million. Of this amount, severance payments accounted for €62 million and other restructuring expenses for €4 million. In the Consumer Health segment, the restructuring initiated in prior years to integrate the acquired busi- nesses continued. Provisions for restructuring in this segment totaled €8 million as of December 31, 2016. Of this amount, severance payments accounted for €7 million and other restructuring expenses for €1 million. In the Crop Science segment, restructuring took place mainly in connection with the “Advancing our lead- ership strategy” program, which aims to increase customer focus, promote innovation and improve effi- ciency. The restructuring initiated in the United States in prior years, involving the closure of several car- bamate production facilities and a formulation plant, continued in addition. Provisions for the above and other restructuring measures in Crop Science as of December 31, 2016, totaled €104 million. Of this amount, severance payments accounted for €53 million and other restructuring expenses for €51 million. Provisions for restructuring in the Animal Health segment as of December 31, 2016, totaled €8 million. Of this amount, severance payments accounted for €5 million and other restructuring expenses for €3 million. Provisions for restructuring at Covestro mainly existed for the closure of an MDI production facility at the site in Tarragona, Spain. The restructuring provisions at Covestro as of December 31, 2016, totaled €66 million. Of this amount, severance payments accounted for €31 million and other restructuring ex- penses for €35 million. Restructuring continued in the central functions, particularly in France, to enhance their efficiency. Also included here are provisions for the residual costs for the closure of a Covestro production facility at the Belford Roxo site in Brazil. The restructuring provisions in the central functions as of December 31, 2016, totaled €24 million. Of this amount, severance payments accounted for €21 million and other restructuring expenses for €3 million. Litigations The legal risks currently considered to be material, and their development, are described in Note [32]. Personnel commitments Stock-based compensation programs Bayer offers stock-based compensation programs collectively to different groups of employees. As re- quired by IFRS 2 (Share-based Payment) for compensation systems involving cash settlement, awards to be made under the stock-based programs are covered by provisions in the amount of the fair value of the obligations existing as of the date of the financial statements vis-à-vis the respective employee group. All resulting valuation adjustments are recognized in profit or loss. Bayer Annual Report 2016 B Consolidated Financial Statements 275 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The following table shows the changes in provisions for the various programs: Changes in Provisions for Stock-Based Compensation Programs € million December 31, 2015 Additions Utilization Reversal Exchange differences December 31, 2016 Aspire I Aspire II Aspire 2.0 Aspire I Covestro Aspire II Covestro Covestro Prisma 125 61 (54) (71) – 61 339 204 (149) (194) 3 203 – 90 – (7) 2 85 22 5 (8) (2) – 17 59 13 (23) (2) 1 48 – 15 – – – 15 B 26/3 Total 545 388 (234) (276) 6 429 The value of the Aspire tranches that were fully earned at the end of 2016, resulting in payments at the beginning of 2017, was €241 million (2015: €230 million). The net expense for all stock-based compensation programs in 2016 was €118 million (2015: €248 mil- lion), including €5 million (2015: €6 million) for the BayShare program, €2 million (2015: €0 million) for Covestro’s stock participation program and €1 million income from (2015: €8 million expense for) grants of virtual Bayer shares. The fair value of the obligations under the Aspire I, Aspire II and Aspire 2.0 programs (excluding Aspire programs for Covestro) was calculated using the Monte Carlo simulation method based on the following key parameters: Parameters for Monte Carlo Simulation Dividend yield Risk-free interest rate Volatility of Bayer stock Volatility of EURO STOXX 50 Correlation between Bayer stock price and the EURO STOXX 50 B 26/4 2015 1.96% 2016 2.90% (0.159)% (0.670)% 25.61% 19.08% 0.83 22.78% 11.66% 0.67 Long-term incentive program for members of the Board of Management and other senior executives (Aspire I) From 2005 through 2015, members of the Board of Management and other senior executives were entitled to participate in Aspire I on the condition that they purchased a certain number of Bayer shares – deter- mined for each individual according to specific guidelines – and retained them for the full term of the pro- gram. A percentage of the executive’s annual base salary – according to his or her position – was defined as a target for variable payments (Aspire target opportunity). Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50 index over a four-year performance period, participants receive a payment of up to 300% of their individual Aspire target opportunity at the end of the period. The prices used to determine the amount of the payment are the averages of the official closing prices of Bayer shares over the last 30 stock-exchange trading days of the respective year. The tranche issued in 2012 expired at the end of 2015, and the maximum payment of 300% was made at the beginning of 2016. The tranche issued in 2013 expired at the end of 2016, and a payment of 270% was made at the beginning of 2017. Long-term incentive program for middle management (Aspire II) From 2005 through 2015, other senior managers were offered Aspire II, which is similar to Aspire I but did not require a personal investment in Bayer shares. The amount of the payment is based entirely on the absolute performance of Bayer stock over a four-year period. The maximum payment is 250% of each manager’s Aspire target opportunity. The prices used to determine the amount of the payment are the aver- ages of the official closing prices of Bayer shares over the last 30 stock-exchange trading days of the respec- 276 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group tive year. The tranche issued in 2012 expired at the end of 2015, and the maximum payment of 250% was made at the beginning of 2016. The tranche issued in 2013 expired at the end of 2016, and a payment of 220% was made at the beginning of 2017. Long-term incentive program Aspire 2.0 Since 2016, Aspire has been offered to all eligible employees in a new, standardized format named Aspire 2.0. For the Board of Management, there is an additional hurdle in the form of a comparison between the performance of Bayer stock and that of the EURO STOXX 50. Aspire 2.0 is also based on a target value, which is a percentage of each employee’s annual base salary, the percentage varying according to his or her position. This target value is multiplied by the employee’s STI payment factor for the previous year to give the Aspire grant value. The STI payment factor reflects the employee’s individual performance and the business performance under the global short-term incentive program (STI). The Aspire grant value is con- verted into virtual Bayer shares by dividing it by the share price at the start of the program. The program’s performance is based on these virtual shares. The fair value of the obligations is determined from the price of Bayer stock at year end and the dividends paid up to that time. The payment made at the end of each tranche is determined by multiplying the number of virtual shares by the Bayer share price at that time and adding an amount equivalent to the dividends paid during the period of the tranche. The maximum pay- ment for Aspire 2.0 is 250% of the Aspire grant value. Special arrangement for Covestro employees concerning the Aspire programs The compensation programs described above were modified for Covestro employees in December 2015 in light of the legal carve-out of the Covestro companies and the subsequent stock exchange listing of Covestro AG. The arrangement for the 2012 tranches of both Aspire programs was the same as for Bayer employees. Based on the development of Bayer’s share price, the maximum payment amounts were reached for both programs (Aspire I and Aspire II). Payments of 300% and 250%, respectively, were therefore made at the beginning of 2016. Valuation for the other three Aspire tranches issued in 2013, 2014 and 2015, respectively, was based on the average price of Bayer shares on the last 30 trading days of 2015 (€119.17). This price was fixed in advance as the end price. Thus the amounts of the payments from the three remaining tranches – where these were fully vested – were already finally determined at the end of 2015. A payment of at least 100% is guaranteed. The tranches issued in 2013 expired at the end of 2016, and payments of 300% (Aspire I) and 250% (Aspire II) were made at the beginning of 2017. Long-term incentive program for members of the Board of Management and other senior executives of Covestro (Prisma) Effective January 1, 2016, Covestro established a new long-term compensation program named Prisma for the 2016-2019 performance period. Senior executives and other managers are eligible to participate. A percentage of the executive’s annual base salary – according to his or her position – is defined as a target for variable payments (Prisma target opportunity). Depending on the performance of Covestro stock includ- ing dividends paid (total shareholder return) – both in absolute terms and relative to the STOXX Europe 600 Chemicals index – over a four-year performance period, participants are granted a payment of up to 200% of their individual Prisma target opportunity at the end of the period. Payment for the performance period ending December 31, 2019, will be made in January 2020 according to the performance of Covestro stock over the period. This will be determined by comparing the average stock price on the last 30 trading days of 2019 to the price at the start of the performance period. The fair value of the obligations was calculated using the Monte Carlo simulation method based on parameters applicable at the closing date. Bayer Annual Report 2016 B Consolidated Financial Statements 277 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version BayShare 2016 All management levels and nonmanagerial employees are offered an annual stock participation program known as BayShare, under which Bayer subsidizes their personal investments in the company’s stock. The discount under this program in 2016 was 20% (2015: 20%) of the subscription amount. Employees stated a fixed amount that they wished to invest in shares. The maximum subscription amount in Germany was set at €2,500 (2015: €2,500) or €5,000 (2015: €5,000), depending on the employee’s position. The shares thus acquired must be retained until December 31, 2017. In 2016, employees purchased a total of about 259,000 shares (2015: 208,000 shares) under the BayShare program. Stock participation program at Covestro in 2016 The stock participation program at Covestro named Covestment allowed employees of Covestro AG and participating Group companies in Germany to invest a fixed amount of their compensation – plus a subsidy from the company – in Covestro shares. The subsidy, which will be reassessed annually, was 30% in 2016. The total amount for which shares could be purchased was capped at €1,200 or €3,600, depending on the employee’s position. The shares were purchased at the volume-weighted average price of Covestro shares on four trading days in November 2016. Employees purchased a total of about 126,000 shares under the Covestment program. These shares must be retained until December 31, 2017. 27. Financial liabilities Financial liabilities were comprised as follows: Financial Liabilities € million Bonds and notes / promissory notes Liabilities to banks Liabilities under finance leases Liabilities from derivatives Other financial liabilities Total B 27/1 Dec. 31, 2015 Dec. 31, 2016 Total 15,547 2,779 474 765 369 Of which current 1,235 1,174 59 598 355 Total 15,991 1,837 436 587 730 Of which current 2,010 820 59 309 203 19,934 3,421 19,581 3,401 A breakdown of financial liabilities by contractual maturity is given below: Maturities of Financial Liabilities € million 2016 2017 2018 2019 2020 2021 or later Total Dec. 31, 2015 € million Dec. 31, 2016 B 27/2 3,421 2,245 2,828 2,066 45 9,329 19,934 2017 2018 2019 2020 2021 2022 or later Total 3,401 3,241 2,456 44 2,714 7,725 19,581 278 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group In addition to promissory notes in the amount of €45 million (2015: €120 million), the Bayer Group has issued the following bonds and notes: B 27/3 Nominal volume Dec. 31, 2015 € million Dec. 31, 2016 € million Bonds and Notes Effective interest rate Stated rate Floating 1 Floating 1 DIP bond 2014 / 2016 Bayer AG, Germany 1.253% 5.774% 5.541% 2.086% 3.811% 2.517% 3.093% 1.333% 6.061% 1.125% DIP bond 2014 / 2018 5.625% DIP bond 2006 / 2018 5.625% DIP bond 2006 / 2018 (increase) 1.875% DIP bond 2014 / 2021 3.750% Hybrid bond 2014 / 2024 7 / 2074 2.375% Hybrid bond 2015 / 2022 7 / 2075 3.000% Hybrid bond 2014 / 2020 7 / 2075 Bayer Capital Corporation B.V., Netherlands 1.250% DIP bond 2014 / 2023 5.625% Mandatory Convertible Notes 8 2016 / 2019 Bayer Corporation, U.S.A. EUR 500 million EUR 750 million GBP 250 million GBP 100 million EUR 750 million EUR 1,500 million EUR 1,300 million EUR 1,750 million EUR 500 million EUR 4,000 million 6.670% 6.650% Notes 1998 / 2028 US$350 million 0.858% 1.493% 3.654% 0.629% Floating 2 Floating 3 Floating 4 Floating 5 1.615% 2.564% 3.096% 3.579% Floating 6 1.076 % 1.782 % Bayer Holding Ltd., Japan 0.816% DIP bond 2012 / 2017 1.459% DIP bond 2010 / 2017 3.575% DIP bond 2008 / 2018 0.594% DIP bond 2013 / 2019 Bayer Nordic SE, Finland Floating 2 DIP bond 2013 / 2016 Floating 3 DIP bond 2014 / 2017 Bayer U.S. Finance LLC, U.S.A. Floating 4 Notes 2014 / 2016 Floating 5 Notes 2014 / 2017 1.500% Notes 2014 / 2017 2.375% Notes 2014 / 2019 3.000% Notes 2014 / 2021 3.375% Notes 2014 / 2024 Covestro AG, Germany Floating 6 DIP bond 2016 / 2018 1.000% DIP bond 2016 / 2021 1.750% DIP bond 2016 / 2024 Total JPY 30 billion JPY 10 billion JPY 15 billion JPY 10 billion EUR 200 million EUR 500 million US$500 million US$400 million US$850 million US$2,000 million US$1,500 million US$1,750 million EUR 500 million EUR 500 million EUR 500 million 1 Floating-rate coupon comprising three-month EURIBOR plus 22 basis points 2 Floating-rate coupon comprising three-month EURIBOR plus 35 basis points 3 Floating-rate coupon comprising three-month EURIBOR plus 22 basis points 4 Floating-rate coupon comprising three-month USD-LIBOR plus 25 basis points 5 Floating-rate coupon comprising three-month USD-LIBOR plus 28 basis points 6 Floating-rate coupon comprising three-month EURIBOR plus 60 basis points 7 Date of first option to early redeem the bond at par 8 The mandatory convertible notes were allocated to capital reserves and to other financial liabilities. 500 748 339 137 753 1,493 1,289 1,743 497 – 342 229 76 115 76 200 500 459 367 779 1,826 1,372 1,587 – – – – 749 292 117 755 1,494 1,290 1,745 497 – 351 243 81 122 81 – 500 – 379 806 1,889 1,419 1,642 500 497 497 15,427 15,946 Debt Issuance Programme An important means of external financing are the bonds issued under the Debt Issuance Programme (DIP), previ- ously known as the multi-currency European Medium Term Notes (EMTN) program. The Debt Issuance Pro- gramme allows bonds in different currencies and with different maturities to be placed flexibly with investors. Bayer Annual Report 2016 B Consolidated Financial Statements 279 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Hybrid bonds The hybrid bonds issued by Bayer AG are subordinated, and 50% of their amount is treated by Moody’s and S & P Global Ratings as equity. They therefore have a more limited effect on the Group’s rating- relevant debt indicators than senior borrowings. Mandatory convertible notes On November 22, 2016, Bayer Capital Corporation B.V. placed subordinated mandatory convertible notes in the amount of €4,000 million, which will be converted into no-par shares of Bayer AG at maturity. The notes represented the first part of the equity component of the financing for the planned acquisition of Monsanto Company. After deducting transaction costs of €48 million and recognition of deferred taxes of €191 million, €3,491 million were allocated to capital reserves and €652 million to other financial liabilities. Bayer AG guarantees all the notes and bonds issued by subsidiaries (except Covestro companies). Lease liabilities Lease payments totaling €609 million (2015: €646 million), including €173 million (2015: €172 million) in interest, are to be made under finance leases to the respective lessors in future years. The liabilities under finance leases mature as follows: B 27/4 Lease Liabilities € million Maturity 2016 2017 2018 2019 2020 2021 or later Total Lease payments Interest component 86 76 68 60 60 296 646 27 23 20 18 15 69 172 Dec. 31, 2015 € million Dec. 31, 2016 Liabilities under finance leases 59 53 48 42 45 227 474 Lease payments Interest component Liabilities under finance leases 88 76 68 59 57 261 609 29 24 21 17 15 67 173 59 52 47 42 42 194 436 Maturity 2017 2018 2019 2020 2021 2022 or later Total Other information As of December 31, 2016, the Group had undrawn credit facilities at its disposal totaling €55 billion (2015: €6.2 billion), including €50 billion in bridge financing for the planned acquisition of Monsanto Company and €1.5 billion in facilities available to Covestro. Further information on the accounting for liabilities from derivatives is given in Note [30]. 280 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 28. Trade accounts payable Trade accounts payable comprised €6,403 million (2015: €5,937 million) due within one year and €7 million (2015: €8 million) due after one year. 29. Other liabilities Other liabilities comprised: Other Liabilities € million Other tax liabilities Deferred income Liabilities to employees Liabilities for social expenses Accrued interest on liabilities Miscellaneous liabilities Total B 29/1 Dec. 31, 2015 Dec. 31, 2016 Total 435 1,148 217 174 189 436 Of which current 428 204 210 165 180 347 Total 544 1,463 229 168 186 788 Of which current 527 651 219 157 181 686 2,599 1,534 3,378 2,421 Deferred income included an upfront payment, originally amounting to US$1 billion, in connection with the strategic pharmaceutical collaboration agreed between Bayer and Merck & Co., Inc., United States, in the field of soluble guanylate cyclase (sGC) modulation. This deferred income is being amortized over a period of 13.5 years as the obligations are satisfied. The remaining amount deferred at the end of 2016 was €660 million (2015: €719 million). The amount amortized in 2016 was €59 million (2015: €59 million). Deferred income also included the proceeds from the sale of the Diabetes Care business at the beginning of 2016. The original sale proceeds of around €1 billion are being realized over a period of up to 24 months as the obligations are satisfied. €469 million remained deferred at the end of 2016. The deferred income included €62 million (2015: €62 million) in grants and subsidies received from gov- ernments, of which €15 million (2015: €7 million) was reversed and recognized in profit or loss. The miscellaneous liabilities included €271 million (2015: €125 million) from derivatives. 30. Financial instruments The system used by the Bayer Group to manage credit risks, liquidity risks and the different types of mar- ket price risk (interest-rate and currency risks), together with its objectives, methods and procedures, is outlined in the Opportunity and Risk Report, which forms part of the Combined Management Report. 30.1 Financial instruments by category The following table shows the carrying amounts and fair values of financial assets and liabilities for each financial instrument category and a reconciliation to the corresponding line item in the statements of finan- cial position. Since the line items “Other receivables,” “Trade accounts payable” and “Other liabilities” con- tain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables or ad- vance payments for services to be received in the future), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” Bayer Annual Report 2016 B Consolidated Financial Statements 281 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Carrying Amounts and Fair Values of Financial Instruments Carried at amortized cost Carried at fair value 1] [Fair value for information Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobserv- able inputs (Level 3) Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount € million Trade accounts receivable Loans and receivables Other financial assets Loans and receivables Available-for-sale financial assets Held-to-maturity financial assets Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Other receivables Loans and receivables Available-for-sale financial assets Nonfinancial assets Cash and cash equivalents Loans and receivables Total financial assets of which loans and receivables 10,969 10,969 2,245 2,148 32 65 633 633 1,899 1,899 15,746 15,649 523 520 3 3,985 [2,145] 3,283 [68] 269 433 [633] 523 [1,899] 3,985 of which available-for-sale financial assets 32 520 3,283 Financial liabilities Carried at amortized cost 18,994 18,994 587 [16,040] [3,362] Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Trade accounts payable Carried at amortized cost Nonfinancial liabilities Other liabilities Carried at amortized cost Carried at fair value (nonderivative) Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Nonfinancial liabilities Total financial liabilities of which carried at amortized cost of which derivatives that qualify for hedge accounting of which derivatives that do not qualify for hedge accounting 6,035 6,035 840 840 25,869 25,869 312 275 252 [840] 165 87 839 477 362 2 2 2 2 1 The exemption provisions under IFRS 7.29(a) were applied for information on specific fair values. B 30.1/1 Dec. 31, 2016 Non- financial assets / liabilities Carrying amount in the state- ment of financial position 10,969 10,969 7,556 2,148 4,629 65 269 445 2,103 2,793 2,103 375 375 2,259 2,259 633 57 2,103 1,899 1,899 21,114 15,649 4,686 19,581 18,994 312 275 6,410 6,035 375 3,378 840 8 165 106 2,259 26,735 25,869 477 381 803 [16] 794 9 57 57 860 851 25 8 17 25 17 282 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Carried at amortized cost Carried at fair value [Fair value for information1] Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobserv- able inputs (Level 3) Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount € million Trade accounts receivable Loans and receivables Other financial assets Loans and receivables Available-for-sale financial assets Held-to-maturity financial assets Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Other receivables Loans and receivables Available-for-sale financial assets Nonfinancial assets Cash and cash equivalents Loans and receivables Total financial assets of which loans and receivables of which available-for-sale financial assets Financial liabilities Carried at amortized cost Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Trade accounts payable Carried at amortized cost Nonfinancial liabilities Other liabilities Carried at amortized cost Carried at fair value (nonderivative) Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Nonfinancial liabilities Total financial liabilities of which carried at amortized cost of which derivatives that qualify for hedge accounting of which derivatives that do not qualify for hedge accounting 9,933 9,933 185 72 40 73 506 506 1,859 1,859 12,483 12,370 40 19,169 19,169 5,680 5,680 606 606 25,455 25,455 509 [64] [74] 125 384 [506] [1,859] 509 363 363 363 363 765 [15,440] [4,121] 470 295 117 [606] 93 24 882 563 319 791 [18] 774 17 59 59 850 833 45 37 8 45 8 1 The exemption provisions under IFRS 7.29(a) were applied for information on specific fair values. B 30.1/2 Dec. 31, 2015 Non- financial assets / liabilities Carrying amount in the state- ment of financial position 9,933 9,933 1,848 72 1,177 73 125 401 1,882 2,447 1,882 265 265 1,831 1,831 506 59 1,882 1,859 1,859 14,205 12,370 1,236 19,934 19,169 470 295 5,945 5,680 265 2,599 606 37 93 32 1,831 26,382 25,455 563 327 Bayer Annual Report 2016 B Consolidated Financial Statements 283 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The loans and receivables reflected in other financial assets and the liabilities measured at amortized cost also include receivables and liabilities under finance leases in which Bayer is the lessor or lessee and which are therefore measured in accordance with IAS 17. Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of loans and receivables, held-to-maturity financial investments and of financial liabilities carried at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price is available, however, this is deemed to be the fair value. The fair values of available-for-sale financial assets correspond to quoted prices in active markets (Level 1), are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are de- termined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments are determined to allow for the con- tracting party’s credit risk. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps are determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into ac- count any foreign currency translation as of the closing date. Fair values estimated using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain available-for-sale debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as available-for-sale financial assets by the discounted cash flow method. Here the credit spreads of comparable issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. 284 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Embedded derivatives are separated from their respective host contracts. Such host contracts are general- ly sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. The changes in the amount of financial assets and liabilities recognized at fair value based on unobserva- ble inputs (Level 3) for each financial instrument category were as follows: Development of Financial Assets and Liabilities (Level 3) Available- for-sale financial assets Derivatives (net) Liabilites measured at fair value (non- derivative) 2015 Total Available- for-sale financial assets Derivatives (net) Liabilites carried at fair value (non- derivative) € million Carrying amounts of net assets / (net liabilities), Jan. 1 Gains (losses) recognized in profit or loss of which related to assets / liabilities recognized in the statements of financial position Gains (losses) recognized outside profit or loss Additions of assets / (liabilities) Settlements of (assets) / liabilities Transfers (IFRS 5) Transfers to a different fair-value hierarchy Net carrying amounts of assets / (liabilities), Dec. 31 803 22 22 19 11 (22) – – 833 6 (12) (17) – – 9 6 – 9 (31) 778 833 (3) (3) – (4) 1 – – 7 2 19 7 (12) 6 – 18 18 9 46 (23) – (32) 9 (17) (17) – – – – – (37) 23 – – – 6 – – (37) 805 851 (8) (8) 835 B 30.1/3 2016 Total 805 24 1 9 46 (17) – (32) The changes recognized in profit or loss were included in other operating income / expenses, interest income or exchange gains / losses. Bayer Annual Report 2016 B Consolidated Financial Statements 285 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Income, expense, gains and losses on financial instruments can be assigned to the following categories: Income, Expense, Gains and Losses on Financial Instruments € million Interest income Interest expense Income / expenses from affiliated companies Changes in fair value Impairment losses Impairment loss reversals Exchange gains / losses Gains / losses from retirements Other financial income / expenses Net result Held-to- maturity financial investments Available- for-sale financial assets Loans and receivables Liabilities carried at amortized cost Held for trading 44 – – – (171) 26 355 – (1) 253 – – – – – – – – – – 21 – – – (2) – – 6 – 25 2 (3) – (77) – – (103) – – (181) 62 (642) – – – – (374) – (34) (988) Income, Expense, Gains and Losses on Financial Instruments (Previous Year) € million Interest income Interest expense Income / expenses from affiliated companies Changes in fair value Impairment losses Impairment loss reversals Exchange gains / losses Gains / losses from retirements Other financial income / expenses Net result Held-to- maturity financial investments Available- for-sale financial assets Loans and receivables Held for trading 55 – – – (93) 32 450 – (1) 443 1 – – – – – – – – 1 22 – 3 – (1) – – 31 13 68 25 (25) – 147 – – (235) – – (88) Liabilities carried at amortized cost 86 (703) – – – – (679) – (12) (1,308) B 30.1/4 2016 Total 129 (645) – (77) (173) 26 (122) 6 (35) (891) B 30.1/5 2015 Total 189 (728) 3 147 (94) 32 (464) 31 – (884) The interest expense of €642 million (2015: €703 million) from nonderivative financial liabilities also includ- ed the income and expense from interest-rate swaps that qualified for hedge accounting. Interest income from financial assets not measured at fair value through profit or loss amounted to €65 million (2015: €73 million). Interest income from interest-rate derivatives that qualified for hedge accounting was €62 million (2015: €86 million). The changes in fair values of financial assets held for trading related mainly to forward commodity contracts and embedded derivatives. 286 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Derivatives that form part of a master netting arrangement, constitute a financial asset or liability and can only be netted in the event of breach of contract by, or insolvency of, one of the contracting parties do not satisfy, or only partially satisfy, the criteria for offsetting in the statement of financial position according to IAS 32. The volume of such derivatives with positive fair values was €630 million (2015: €415 million), and the volume with negative fair values was €762 million (2015: €761 million). Included here is an amount of €362 million (2015: €256 million) in positive and negative fair values of derivatives concluded with the same contracting party. 30.2 Maturity analysis The liquidity risks to which the Bayer Group was exposed from its financial instruments at the end of the reporting period comprised obligations for future interest and repayment installments on financial liabilities and the liquidity risk arising from derivatives, as shown in the table in Note [30.3]. In addition, loan commitments existed for an as yet unpaid €1,213 million (2015: €1,213 million) portion of the effective initial fund of Bayer-Pensionskasse VVaG, which may result in further payments by Bayer AG (€1,005 million) and / or Covestro AG (€208 million) in subsequent years. Maturity Analysis of Financial Instruments B 30.2/1 € million Financial liabilities Bonds and notes / promissory notes Liabilities to banks Remaining liabilities Trade accounts payable Other liabilities Accrued interest on liabilities Remaining liabilities Liabilities from derivatives Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Receivables from derivatives Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Loan commitments Financial guarantees Dec. 31, 2016 Carrying amount 2017 2018 2019 2020 2021 after 2021 15,991 2,261 2,160 2,367 1,837 1,166 6,035 884 293 6,028 186 662 477 381 269 445 – – 181 626 178 374 210 467 1,213 14 998 303 4 1 3 39 382 2 1 5 231 157 3 23 2 – – 4 4 2 – – 295 – 61 1 1 2 2 2 3 1 – – Interest and repayment 2,916 8,093 – 58 – – 1 – 1 2 1 – – 9 268 – 2 25 – 1 – 1 – 3 Bayer Annual Report 2016 B Consolidated Financial Statements 287 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Maturity Analysis of Financial Instruments B 30.2/2 € million Financial liabilities Bonds and notes / promissory notes Liabilities to banks Remaining liabilities Trade accounts payable Other liabilities Accrued interest on liabilities Remaining liabilities Liabilities from derivatives Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Receivables from derivatives Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting Loan commitments Financial guarantees Dec. 31, 2015 Carrying amount 15,547 2,779 843 5,680 189 454 563 327 125 401 – – 2016 2017 2018 2019 2020 after 2020 Interest and repayment 1,475 1,221 440 5,673 180 420 397 312 66 379 1,213 14 2,334 298 79 1,704 1,387 69 3 1 5 11 8 26 2 – – 3 2 2 122 1 13 3 – – 2,282 38 60 2 1 1 50 3 2 2 – – 277 – 61 – 1 1 – 1 2 2 – – 9,845 10 307 – 4 25 – 2 1 4 – 2 30.3 Information on derivatives Asset and liability fair values and future cash flows are exposed to currency, interest-rate and commodity price risks. Derivatives are used to reduce this risk. In some cases they are designated as hedging instru- ments in a hedge accounting relationship. Currency risks Foreign currency receivables and liabilities are hedged using foreign exchange derivatives without the ex- istence of a hedge accounting relationship. A bond of Bayer AG denominated in British pounds was swapped on the issuance date into a fixed-rate euro bond by means of a cross-currency interest-rate swap, which was designated as a cash flow hedge. Cross-currency interest-rate swaps used to hedge intra-Group loans were also designated as cash flow hedges. Fluctuations in future cash flows resulting from forecasted foreign currency transactions and procurement activities are avoided partly through derivatives contracts, most of which are designated as cash flow hedges. Foreign currency risks related to the planned acquisition of Monsanto Company were partially hedged with currency derivatives, which were designated as cash flow hedges. 288 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Interest-rate risk The interest-rate risks from fixed-interest borrowings are managed in part using interest-rate swaps. Two interest-rate swaps in the total amount of €200 million were designated as fair value hedges for the €750 million DIP bond issued in 2014 and maturing in 2021. Losses of €1 million were recorded on fair-value hedging instruments in 2016 (2015: €26 million). Gains of €1 million were recorded on the underlying hedged items (2015: €25 million). Commodity price risks Hedging contracts are also used to partly reduce exposure to fluctuations in future cash outflows and inflows resulting from price changes on procurement and selling markets. Hedging of obligations under stock-based employee compensation programs A portion of the obligations to make variable payments to employees under stock-based compensation programs (Aspire) is hedged against share price fluctuations using derivatives contracts that are settled in cash at maturity. These derivatives are designated as cash flow hedges. Further information on cash flow hedges Accumulated other comprehensive income from cash flow hedges increased in 2016 by €44 million (2015: decreased by €203 million) due to changes in the fair values of derivatives net of tax. Total changes of €3 million in the fair values of derivatives were expensed in 2016 (2015: €304 million). The respective pro- rated deferred tax income of €2 million (2015: €88 million) was likewise recognized through profit or loss. No material ineffective portions of hedges required recognition through profit or loss in 2016 or 2015. The income and expense from cash flow hedges recognized in accumulated other comprehensive income mainly comprised gains of €204 million (2015: €91 million) and losses of €143 million (2015: €90 million) from the hedging of forecasted transactions in foreign currencies and the planned acquisition of Monsanto Company. Of these gains and losses, a net amount of minus €91million (2015: minus €5 million) will be reclassifiable to profit or loss within one year, and a net amount of €2 million (2015: €6 million) in subse- quent years. Bayer Annual Report 2016 B Consolidated Financial Statements 289 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The fair values of existing contracts in the major categories at the end of the reporting period are indicated in the following table together with the included volumes of cash flow hedges. Fair Values of Derivatives € million Currency hedging of recorded transactions Forward exchange contracts of which cash flow hedges Cross-currency interest-rate swaps of which cash flow hedges Currency hedging of forecasted transactions Forward exchange contracts of which cash flow hedges Currency options of which cash flow hedges Interest-rate hedging of recorded transactions Interest-rate swaps of which fair value hedges Commodity price hedging Forward commodity contracts Commodity option contracts Hedging of stock-based employee compensation programs Share price options of which cash flow hedges Share price forwards of which cash flow hedges Total of which current derivatives for currency hedging for interest-rate hedging 2 for commodity price hedging for hedging of stock-based employee compensation programs B 30.3/1 Dec. 31, 2015 Dec. 31, 2016 Notional 1 amount Positive fair value Negative fair value Notional 1 amount Positive fair value Negative fair value 22,275 19,896 – 2,379 2,362 4,082 3,627 3,255 455 368 200 200 200 91 86 5 80 30 30 50 50 26,728 25,022 24,931 – 91 – 337 336 – 1 – 99 86 78 13 13 13 13 13 14 12 2 21 21 21 – – 484 435 420 1 14 – (753) (283) – (470) (470) 22,645 20,454 – 2,191 2,146 (100) 17,799 (99) (90) (1) (1) – – – (12) (10) (2) (2) – – (2) (2) (867) (692) (680) – (12) – 3,805 3,672 13,994 13,698 200 200 200 168 167 1 532 152 152 380 380 41,344 38,349 38,111 – 168 70 299 296 – 3 3 317 48 43 269 161 14 14 14 5 4 1 48 48 48 – – 683 635 597 3 5 30 (587) (273) – (314) (312) (206) (145) (138) (61) (5) – – – (4) (4) – (22) – – (22) (22) (819) (514) (510) – (4) – 1 The notional amount is reported as gross volume, which also contains economically closed hedges. 2 The portion of the fair value of long-term interest-rate swaps that relates to current interest payments is classified as current. 290 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 31. Contingent liabilities and other financial commitments Contingent liabilities The following warranty contracts, guarantees and other contingent liabilities existed at the end of the reporting period: Contingent Liabilities € million Warranties Guarantees Other contingent liabilities Total B 31/1 Dec. 31, 2015 Dec. 31, 2016 99 123 562 784 100 264 444 808 The guarantees mainly comprise a declaration issued by Bayer AG to the trustees of the U.K. pension plans guaranteeing the pension obligations of Bayer Public Limited Company and Bayer CropScience Limited. Under the declaration, Bayer AG – in addition to the two companies – undertakes to make further payments into the plans upon receipt of a payment request from the trustees. The net liability with respect to these defined benefit plans as of December 31, 2016, rose to €264 million (2015: €123 million) due to the sharp drop in interest rates. Other financial commitments The other financial commitments were as follows: Other Financial Commitments € million Operating leases Orders already placed under purchase agreements Capital contribution commitments Definitive merger agreement with Monsanto Company, St. Louis, Missouri, U.S.A. 1 Unpaid portion of the effective initial fund Potential payment obligations under R&D collaboration agreements Revenue-based milestone payment commitments Total 1 The contingent financial commitment of around US$56 billion was translated at the closing rate. B 31/2 Dec. 31, 2015 Dec. 31, 2016 891 690 391 – 1,213 2,887 2,241 8,313 1,101 722 182 53,000 1,213 2,444 1,839 60,501 On September 14, 2016, Bayer signed a definitive merger agreement with Monsanto Company, St. Louis, Missouri, United States, which provides for Bayer’s acquisition of all outstanding shares in Monsanto Company against a cash payment of US$128 per share. Bayer thus has a contingent financial commitment in the amount of approximately US$56 billion to acquire Monsanto’s entire outstanding capital stock. Fur- ther details of this planned acquisition are given in Note [6.2]. Bayer Annual Report 2016 B Consolidated Financial Statements 291 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The nondiscounted future minimum lease payments relating to operating leases totaled €1,101 million (2015: €891 million). The maturities of the respective payment obligations were as follows: Operating Leases Maturing in 2016 2017 2018 2019 2020 2021 or later Total Dec. 31, 2015 Maturing in € million 195 155 110 94 79 258 891 2017 2018 2019 2020 2021 2022 or later Total B 31/3 Dec. 31, 2016 € million 237 192 161 138 102 271 1,101 Financial commitments resulting from orders already placed under purchase agreements related to planned or ongoing capital expenditure projects totaled €722 million (2015: €690 million). The Bayer Group has entered into cooperation agreements with third parties under which it has agreed to fund various research and development projects or has assumed other payment obligations based on the achievement of certain milestones or other specific conditions. If all of these payments have to be made, their maturity distribution as of December 31, 2016, was expected to be as set forth in the following table. The amounts shown represent the maximum payments to be made, and it is unlikely that they will all fall due. Since the achievement of the conditions for payment is highly uncertain, both the amounts and the dates of the actual payments may vary considerably from those stated in the table. Potential Payment Obligations Under R&D Collaboration Agreements Maturing in Dec. 31, 2015 Maturing in 2016 2017 2018 2019 2020 2021 or later Total € million 262 229 2017 2018 96 2019 240 2020 78 2021 1,982 2022 or later 2,887 Total B 31/4 Dec. 31, 2016 € million 233 151 333 66 28 1,633 2,444 In addition to the above commitments, there were also revenue-based milestone payment commitments totaling €1,839 million (2015: €2,241 million), of which €1,834 million (2015: €2,237 million) was not ex- pected to fall due until 2022 (2015: 2021) or later. These commitments are also highly uncertain. 32. Legal risks 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, anticorruption, patent dis- putes, tax assessments and environmental matters. The outcome of any current or future proceedings cannot normally be predicted. It is therefore possible that legal or regulatory judgments or future settle- ments 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. 292 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Product-related litigation Yasmin™ / YAZ™: Most of the lawsuits and claims concerning Bayer’s drospirenone-containing oral contra- ceptives in the United States have been resolved. Claimants allege that users have suffered personal inju- ries, some of them fatal, from the use of Yasmin™ and / or YAZ™ or their generic versions, and seek com- pensatory and punitive damages, claiming, in particular, that Bayer had not adequately warned of the alleged risks. As of January 23, 2017, lawsuits and claims of approximately 100 claimants remain pending against Bayer in the United States. Without admission of liability, Bayer is considering about a dozen of the lawsuits and claims for possible settlement after a case-specific analysis of medical records. A few U.S. State Attorney Generals are investigating alleged violations of consumer protection statutes, including off-label promotion and failure to warn. One Attorney General has filed an action against Bayer. As of January 23, 2017, 13 lawsuits seeking class action certification had been served upon Bayer in Canada. In two of these lawsuits a class has been certified. Two motions for certification of a class action are pending in Israel. Bayer believes that it has meritorious defenses and will continue to defend itself vigorously against all claims that are not considered for settlement. Mirena™: As of January 23, 2017, lawsuits from approximately 2,600 users of Mirena™, a levonorgestrel- releasing intrauterine system providing long-term contraception, had been served upon Bayer in the United States (excluding lawsuits no longer pending). Plaintiffs allege personal injuries resulting from the use of Mirena™, including perforation of the uterus, ectopic pregnancy or idiopathic intracranial hypertension, and seek compensatory and punitive damages. Plaintiffs claim, inter alia, that Mirena™ is defective and that Bayer knew or should have known of the risks associated with it and failed to adequately warn its users. Additional lawsuits are anticipated. Most of the cases pending in U.S. federal courts have been consolidat- ed in a multidistrict litigation proceeding for common pre-trial management. In July 2016, the multidistrict litigation court granted summary judgment dismissing approximately 1,230 cases pending before that court. Plaintiffs have appealed the decision. As of January 23, 2017, five Canadian lawsuits relating to Mirena™ seeking class action certification had been served upon Bayer. Bayer believes it has meritorious defenses and intends to defend itself vigorously. Xarelto™: As of January 23, 2017, U.S. lawsuits from approximately 16,400 recipients of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, had been served upon Bayer. Plaintiffs allege personal injuries from the use of Xarelto™, including cerebral, gastrointestinal or other bleeding and death, and seek compensatory and punitive damages. They claim, amongst other things, that Xarelto™ is defec- tive and that Bayer knew or should have known of these risks associated with the use of Xarelto™ and failed to adequately warn its users. Additional lawsuits are anticipated. Cases pending in U.S. federal courts have been consolidated in a multidistrict litigation for common pre-trial management. As of January 23, 2017, ten Canadian lawsuits relating to Xarelto™ seeking class action certification had been served upon Bayer. Bayer believes it has meritorious defenses and intends to defend itself vigorously. Bayer Annual Report 2016 B Consolidated Financial Statements 293 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Essure™: As of January 23, 2017, U.S. lawsuits from approximately 3,700 users of Essure™, a medical device offering permanent birth control with a nonsurgical procedure, had been served upon Bayer. Plain- tiffs allege personal injuries from the use of Essure™, including hysterectomy, perforation, pain, bleeding, weight gain, nickel sensitivity, depression and unwanted pregnancy. Additional lawsuits are anticipated. As of January 23, 2017, two Canadian lawsuits relating to Essure™ seeking class action certification had been served upon Bayer. Bayer believes it has meritorious defenses and intends to defend itself vigorously. In connection with the above-mentioned proceedings, Bayer is insured against statutory product liability claims against Bayer to the extent customary in the respective industries and has, based on the infor- mation currently available, taken appropriate accounting measures for anticipated defense costs. However, the accounting measures relating to Yasmin™ / YAZ™ and Essure™ claims exceed the available insurance coverage. Concerning Yasmin™ / YAZ™, the accounting measures include costs for agreed and anticipat- ed future settlements based on the information currently available and based on the number of pending and estimated future claims alleging venous clot injuries. Patent disputes Beyaz™ / Safyral™: Beyaz™ and Safyral™ are Bayer’s oral contraceptives containing folate. In 2015, a U.S. federal court ruled in favor of Bayer regarding both the validity of its patent and the infringement thereof by Watson Laboratories, Inc. (“Watson”). Watson had filed Abbreviated New Drug Applications with a Paragraph IV certification (“ANDA IV”) seeking approval of generic versions of both Beyaz™ and Safyral™ in the United States. In May 2016, the U.S. Court of Appeals for the Federal Circuit invalidated the patent claims asserted by Bayer and reversed the judgment by the U.S. federal court. Bayer petitioned the U.S. Supreme Court to review the decision by the U.S. Court of Appeals for the Federal Circuit. In January 2017, the U.S. Supreme Court denied Bayer’s petition. The decision by the U.S. Court of Appeals for the Federal Circuit against Bayer is now final. In 2015, Bayer filed two lawsuits against Lupin Ltd. and Lupin Pharmaceuticals, Inc. (together “Lupin”) in a U.S. federal court for infringement of the same patent. Prior to this in 2015, Bayer had received two notices of an ANDA IV application by Lupin seeking approval to market generic versions of Safyral™ and Beyaz™ in the United States. In view of the May 2016 decision by the U.S. Court of Appeals for the Federal Circuit, the U.S. federal court ruled in favor of Lupin in No- vember 2016. This decision is now also final. Betaferon™ / Betaseron™: In 2010, Bayer filed a complaint against Biogen Idec MA Inc. in a U.S. federal court seeking a declaration by the court that a patent issued to Biogen in 2009 is invalid and not infringed by Bayer’s production and distribution of Betaseron™, Bayer’s drug product for the treatment of multiple sclerosis. Biogen is alleging patent infringement by Bayer through Bayer’s production and distribution of Betaseron™ and Extavia™ and has sued Bayer accordingly. Bayer manufactures Betaseron™ and distrib- utes the product in the United States. Extavia™ is also a drug product for the treatment of multiple sclero- sis; it is manufactured by Bayer, but distributed in the United States by Novartis Pharmaceuticals Corpora- tion, another defendant in the lawsuit. In March 2016, the U.S. federal court decided a disputed issue regarding the scope of the patent in Biogen’s favor. Bayer disagrees with the decision, which may be ap- pealed at the conclusion of the proceedings in the U.S. federal court. Damoctocog alfa pegol (BAY 94-9027, long-acting rFVIII): In 2013, Bayer filed a lawsuit against Nektar Therapeutics in the district court of Munich, Germany. In this proceeding, Bayer claims rights to certain European patent applications based on a past collaboration between Bayer and Nektar in the field of he- mophilia. The European patent applications with the title “Polymer-factor VIII moiety conjugates” are part of a patent family registered in the name of Nektar comprising further patent applications and patents in other countries including the United States. However, Bayer believes that the patent family does not include any valid patent claim relevant for Bayer’s drug candidate BAY 94-9027 for the treatment of hemophilia A. 294 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Nexavar™: In 2015, Bayer filed patent infringement lawsuits in a U.S. federal court against Mylan Pharma- ceuticals Inc. and Mylan Inc. (together “Mylan”). In 2014 and 2015, Bayer had received notices of an ANDA IV application pursuant to which Mylan seeks approval of a generic version of Bayer’s cancer drug Nexavar™ in the United States. In November 2016, Bayer received another notice of such an ANDA IV application by Teva Pharmaceuticals USA, Inc. In December 2016, Bayer filed a patent infringement lawsuit against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries LTD in the same U.S. federal court. Stivarga™: In December 2016, Bayer filed patent infringement lawsuits in a U.S. federal court against Apo- tex, Inc. and Apotex Corp. (together “Apotex”) and against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries LTD (together “Teva”). In November 2016, Bayer had received notices of an ANDA IV application pursuant to which Apotex and Teva each seek approval of a generic version of Bayer’s cancer drug Stivarga™ in the United States. Xarelto™: In 2015, Bayer and Janssen Pharmaceuticals, Inc. filed a patent infringement lawsuit in a U.S. federal court against Aurobindo Pharma Limited, Aurobindo Pharma USA, Inc. (together “Aurobindo”), Breckenridge Pharmaceutical Inc. (“Breckenridge”), Micro Labs Ltd., Micro Labs USA Inc. (together “Micro Labs”), Mylan Pharmaceuticals Inc., Mylan Inc. (together “Mylan”), Prinston Pharmaceutical Inc. (“Prinston”), Sigmapharm Laboratories, LLC (“Sigmapharm”), Torrent Pharmaceuticals, Limited and Torrent Pharma Inc. (together “Torrent”). Earlier in 2015, Bayer had received notices of an ANDA IV application by Aurobindo, Breckenridge, Micro Labs, Mylan, Prinston, Sigmapharm and Torrent, each seeking approval to market a generic version of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, in the United States. In January 2016, Bayer received another notice of such an ANDA IV application by InvaGen Pharmaceuticals, Inc. (“InvaGen”). In February 2016, Bayer and Janssen Pharmaceuticals, Inc. filed a patent infringement lawsuit against InvaGen in the same U.S. federal court. Bayer believes it has meritorious defenses in the above ongoing patent disputes and intends to defend itself vigorously. Further legal proceedings Trasylol™ / Avelox™: A qui tam complaint relating to marketing practices for Trasylol™ (aprotinin) and Avelox™ (moxifloxacin) filed by a former Bayer employee is pending in the United States District Court in New Jersey. The U.S. government has declined to intervene at the present time. Newark Bay Environmental Matters: In the United States, Bayer is one of numerous parties involved in a series of claims brought by federal and state environmental protection agencies. The claims arise from operations by entities which historically were conducted near Newark Bay or surrounding bodies of water, or which allegedly discharged hazardous waste into these waterways or onto nearby land. Bayer and the other potentially responsible parties are being asked to remediate and contribute to the payment of past and future remediation or restoration costs and damages. In August 2016, Bayer learned that two major potentially responsible parties had filed for protection under Chapter 11 of the U.S. Bankruptcy Code. While Bayer remains unable to determine the extent of its liability for these matters, this development is likely to adversely affect the share of costs potentially allocated to Bayer. Bayer Annual Report 2016 B Consolidated Financial Statements 295 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version In the Lower Passaic River matter, a group of more than sixty companies including Bayer is investigating contaminated sediments in the riverbed under the supervision of the United States Environmental Protec- tion Agency (EPA) and other governmental authorities. Future remediation will involve some form of dredg- ing, the nature and scope of which are not yet defined, and potentially other tasks. The cost of the investi- gation and the remediation work may be substantial if the final remedy involves extensive dredging and disposal of impacted sediments. In the Newark Bay matter, an unaffiliated party is currently conducting an investigation of sediments in Newark Bay under EPA supervision. The investigation is in a preliminary stage. Bayer has contributed to certain investigation costs in the past and may incur costs for future inves- tigation and remediation activities in Newark Bay. Bayer has also been notified by governmental authorities acting as natural resource trustees that it may have liability for natural resource damages arising from the contamination of the Lower Passaic River, Newark Bay and surrounding water bodies. Bayer is currently unable to determine the extent of its liability. 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 provid- ing 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 de- fenses and intends to defend itself vigorously. Covestro U.S. Lawsuit: In September 2016, Covestro LLC – along with three other defendants – was served with a lawsuit filed by a law firm in a California federal court. The parties recently agreed to change the venue to a federal court in the District of Columbia. The aim of the lawsuit is to recover financial dam- ages in the form of statutory fines allegedly owed by the defendants to the United States Environmental Protection Agency for the companies’ failure to disclose health risk information associated with the manu- facture and handling of TDI, MDI and PMDI. Under the pertinent statutes, the U.S. government was afford- ed an opportunity to intervene and prosecute the claims, but it has declined to do so. Accordingly, the law firm is prosecuting the claims on the government’s behalf. Violations of the Toxic Substances Control Act (“TSCA”) and False Claims Act (“FCA”) are asserted. Covestro will defend itself vigorously and regards the claims asserted against the company as meritless. Tax proceedings: Stamp taxes in Greece: In 2014, 2016 and 2017, a Greek administrative court of first instance dismissed Bayer’s lawsuits against the assessment of stamp taxes and contingent penalties in the total amounts of approximately €130 million on certain intra-Group loans to a Greek subsidiary. Bayer is convinced that the decisions are wrong and has appealed or will do so in due course. Bayer believes it has meritorious argu- ments to support its legal position and intends to defend itself vigorously. 296 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Notes to the Statements of Cash Flows The statement of cash flows shows how cash inflows and outflows during the fiscal year affected the cash and cash equivalents of the Bayer Group. Cash flows are classified by operating, investing and financing activities in accordance with IAS 7 (Statement of Cash Flows). Effects of changes in the scope of consoli- dation are stated separately. Of the cash and cash equivalents, an amount of €15 million (2015: €17 million) had limited availability due to foreign exchange restrictions. Past experience has shown such restrictions to be of short duration. The above amount included €1 million (2015: €3 million) of exchange-restricted cash in Venezuela. The conver- sion of cash from Venezuelan bolivars (VEF) into U.S. dollars is subject to a government approval process. The cash flows reported by consolidated companies outside the eurozone are translated at average monthly exchange rates, with the exception of cash and cash equivalents, which are translated at closing rates. The “Change in cash and cash equivalents due to exchange rate movements” is reported in a sepa- rate line item. 33. Net cash provided by (used in) operating activities Following the switch to a different value management concept, the gross cash flow is no longer used as an indicator. The previous disclosure of “income taxes paid or accrued” is replaced by “income taxes paid.” This has also resulted in amendments to “Changes in other working capital, other noncash items.” The transfers of bonds with a total value of €450 million (2015: €300 million) to pension funds and of Covestro shares with a value of €337 million to Bayer Pension Trust e.V. were noncash transactions and therefore did not result in operating cash outflows. 34. Net cash provided by (used in) investing activities The net cash outflow for investing activities in 2016 amounted to €8,729 million (2015: €2,762 million). Additions to property, plant and equipment and intangible assets in 2016 resulted in a cash outflow of €2,578 million (2015: €2,517 million). Cash inflows from sales of property, plant and equipment and intan- gible assets amounted to €111 million (2015: €193 million). The net cash outflow for noncurrent and current financial assets amounted to €6,335 million (2015: €370 million). The transfers of bonds in the total amount of €450 million (2015: €300 million) to pension funds were non- cash transactions and therefore did not result in investing cash inflows. Bayer Annual Report 2016 B Consolidated Financial Statements 297 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version 35. Net cash provided by (used in) financing activities In 2016 there was a net cash outflow of €350 million (2015: €3,974 million) for financing activities. Net loan repayments amounted to €730 million (2015: €2,929 million). Cash outflows for dividend payments amounted to €2,126 million (2015: €1,869 million). Net interest pay- ments – including payments for and receipts from interest-rate swaps – rose to €794 million (2015: €652 million). The net inflow of €3,952 million from the mandatory convertible notes is reflected as a capital con- tribution of €3,300 million and a borrowing of €652 million. In 2015, the proceeds from the stock market flotation of Covestro AG accounted for a €1,490 million cash inflow. The transfer of Covestro shares with a value of €337 million to Bayer Pension Trust e.V. was a noncash transaction and therefore did not result in a financing cash inflow. 298 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group Other Information 36. Audit fees The following fees for the services of the worldwide network of PricewaterhouseCoopers (PwC), including PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (PwC AG WPG), were recog- nized as expenses: Audit Fees € million Financial statements auditing Audit-related services and other audit work Tax consultancy Other services Total B 36/1 PwC of which PwC AG WPG 2015 17 9 3 7 36 2016 16 2 3 7 28 2015 2016 7 9 – 5 21 7 1 – 5 13 The fees for the auditing of financial statements mainly comprised those for the audits of the consolidated financial statements of the Bayer Group and the financial statements of Bayer AG and its subsidiaries. The decrease in fees for audit-related services and other audit work mainly resulted from the absence of fees related to the carve-out and stock market flotation of Covestro, which took place in 2015. The Independent Auditor’s Report on the consolidated financial statements for fiscal 2016 was signed by Dr. Peter Bartels and Eckhard Sprinkmeier. Eckhard Sprinkmeier is the responsible audit partner. Dr. Peter Bartels signed the Independent Auditor’s Report for the first time for the year ended December 31, 2012, and Eckhard Sprinkmeier for the year ended December 31, 2014. PwC has served as the auditor of Bayer’s consolidated financial statements since the merger of Price Waterhouse Deutschland and Coopers & Lybrand Deutsche Revision in 1998. The predecessor firm of Coopers & Lybrand Deutsche Revision had already audit- ed Bayer’s consolidated financial statements for some years prior to that date. 37. Related parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, and post-employment benefit plans, as well as the corporate offic- ers of Bayer AG whose compensation is reported in Note [38] and in the Compensation Report, which forms part of the Combined Management Report. Bayer Annual Report 2016 B Consolidated Financial Statements 299 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version Transactions with nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, and post-employment benefit plans are carried out on an arm’s-length basis. The following table shows the volume of transactions with related parties included in the consolidated financial statements of the Bayer Group at amortized cost or using the equity method, and with post- employment benefit plans: Related Parties € million Nonconsolidated subsidiaries Joint ventures Associates Post-employment benefit plans 2015 B 37/1 2016 Sales of goods and services Purchases of goods and services Receiv- ables Liabilities Sales of goods and services Purchases of goods and services Receiv- ables Liabilities 21 25 36 – 4 – 645 11 4 – – 822 22 1 4 68 4 24 34 – 5 – 557 9 4 3 – 823 19 243 6 63 Goods and services in the amount of €524 million (2015: €609 million) were purchased from the associate PO JV, LP, Wilmington, United States, mainly in the course of day-to-day business operations. Liabilities rose mainly with respect to Casebia Therapeutics Limited Liability Partnership, Ascot, United Kingdom, the newly established joint venture with CRISPR Therapeutics AG, Basel, Switzerland. Intercompany profits and losses for companies accounted for in the consolidated financial statements using the equity method were immaterial in 2016 and 2015. Bayer AG has undertaken to provide jouissance right capital (Genussrechtskapital) in the form of an inter- est-bearing loan with a nominal volume of €150 million (2015: €150 million) for Bayer-Pensionskasse VVaG. The entire amount remained drawn as of December 31, 2016. The carrying amount as of December 31, 2016, was €154 million (2015: €153 million). Loan capital was first provided to Bayer-Pensionskasse VVaG in 2008 for its effective initial fund. This capital had a nominal volume of €595 million as of December 31, 2016 (2015: €595 million). The carrying amount as of December 31, 2016, was €612 million (2015: €610 million). The outstanding receivables, comprised of different tranches, are each subject to a five-year interest-rate adjustment mechanism. Interest income of €18 million was recognized for 2016 (2015: €22 million). 300 B Consolidated Financial Statements Bayer Annual Report 2016 Augmented Version Notes to the Consolidated Financial Statements of the Bayer Group 38. Total compensation of the Board of Management and the Supervisory Board, advances and loans The compensation of the Board of Management comprises short-term payments, stock-based payments and post-employment benefits. The following table shows the individual components of the Board of Management’s compensation accord- ing to IFRS: Board of Management Compensation according to IFRS € thousand Fixed annual compensation Fringe benefits Total short-term non-performance-related compensation Short-term performance-related cash compensation Total short-term compensation Stock-based compensation (virtual Bayer shares) earned in the respective year Change in value of existing entitlements to stock-based compensation (virtual Bayer shares) Stock-based compensation (Aspire) earned in the respective year Change in value of existing entitlements to stock-based compensation (Aspire) Total stock-based compensation (long-term incentive) Service cost for pension entitlements earned in the respective year Total long-term compensation Severance indemnity in connection with the termination of a service contract Aggregate compensation (IFRS) B 38/1 2016 6,385 664 7,049 9,063 2015 4,455 207 4,662 5,983 10,645 16,112 5,983 556 2,330 272 9,141 2,891 12,032 1,131 – (1,275) 5,217 (923) 3,019 3,902 6,921 4,542 23,808 27,575 In addition to the above compensation, actuarial losses of €3,196 thousand (2015: gains of €2,309 thou- sand) incurred in connection with pension obligations to the currently serving members of the Board of Management were recognized outside profit or loss. These changes mainly resulted from the decline (2015: slight increase) in the level of interest rates. Further details are provided in the Compensation Report, which forms part of the Combined Management Report. In addition to the provisions of €6,575 thousand (2015: €5,983 thousand) for the short-term variable cash compensation, an amount of €7,777 thousand (2015: €18,663 thousand) was recognized in the statement of financial position for future payments of stock-based compensation based on virtual shares to the members of the Board of Management serving as of December 31, 2016. An amount of €7,288 thousand (2015: €7,110 thousand) was recognized in the statement of financial posi- tion for future payments of stock-based compensation based on the Aspire program to the members of the Board of Management serving as of December 31, 2016. The present value of the defined benefit pension obligation for the members of the Board of Management serving as of December 31, 2016, was €38,427 thousand (2015: €33,491 thousand). Pension payments to former members of the Board of Management and their surviving dependents in 2016 amounted to €12,800 thousand (2015: €13,416 thousand). The defined benefit obligation for former members of the Board of Management and their surviving dependents amounted to €188,850 thousand (2015: €172,767 thousand). Bayer Annual Report 2016 B Consolidated Financial Statements 301 Notes to the Consolidated Financial Statements of the Bayer Group Augmented Version The compensation of the Supervisory Board amounted to €3,479 thousand (2015: €3,291 thousand). In addition to their compensation as members of the Supervisory Board, those employee representatives who are employees of Bayer Group companies receive compensation unrelated to their service on the Supervisory Board. The total amount of such compensation in 2016 was €939 thousand (2015: €741 thousand). Pension obligations for employee representatives on the Supervisory Board amounted to €4,399 thousand (2015: €3,756 thousand). There were no advances or loans to members of the Board of Management or the Supervisory Board out- standing as of December 31, 2016, or at any time during 2016 or 2015. 39. Events After the End of the Reporting Period Acquisition of Cydectin™ On January 3, 2017, Bayer acquired the Cydectin™ portfolio in the United States from Boehringer Ingel- heim Vetmedica Inc., St. Joseph, United States. A payment of €158 million was made on January 3, 2017, in connection with the acquisition. Leverkusen, February 14, 2017 Bayer Aktiengesellschaft The Board of Management 302 A Combined Management Report Augmented Version Responsibility Statement Bayer Annual Report 2016 Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for financial reporting, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Bayer Group, and the combined management report includes a fair review of the development and performance of the business and the position of the Bayer Group and Bayer AG, together with a description of the principal opportunities and risks associated with the expected development of the Bayer Group and Bayer AG. Leverkusen, February 14, 2017 Bayer Aktiengesellschaft The Board of Management Werner Baumann Chairman Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand Bayer Annual Report 2016 Independent Auditor’s Report 303 Augmented Version Independent Auditor’s Report To Bayer AG, Leverkusen Report on the Audit of the Consolidated Financial Statements Audit Opinion on the Consolidated Financial Statements We have audited the consolidated financial statements of Bayer AG, Leverkusen, and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 2016, and the consolidated income statement, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from Janu- ary 1, to December 31, 2016, and notes to the consolidated financial statements, including a summary of significant accounting policies. According to § (Article) 322 Abs. (paragraph) 3 Satz (sentence) 1 zweiter Halbsatz (second half sentence) HGB (“Handelsgesetzbuch”: German Commercial Code), we state that, in our opinion, based on the find- ings of our audit, the accompanying consolidated financial statements comply, in all material respects, with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a Abs. 1 HGB, and give a true and fair view of the net assets and financial position of the Group as at December 31, 2016, as well as the results of operations for the financial year from January 1 to December 31, 2016, in accordance with these requirements. According to § 322 Abs. 3 Satz 1 erster Halbsatz HGB, we state that our audit has not led to any reservations with respect to the propriety of the consolidated financial statements. Basis for Audit Opinion on the Consolidated Financial Statements We conducted our audit in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW), and additionally considered the International Standards on Auditing (ISA). Our respon- sibilities under those provisions and standards, as well as supplementary standards, are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements” section of our report. We are independent of the Group entities in accordance with the provisions under German com- mercial law and professional requirements, and we have fulfilled our other German ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the financial year from January 1 to December 31, 2016. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon, and we do not provide a separate audit opinion on these matters. In our view, the key audit matters were as follows: 1 Change in segment reporting Impairment of goodwill and intangible assets with indefinite useful lives 2 3 Financial instruments – Issuance of mandatory convertible notes 4 Financial instruments – Accounting treatment of hedging transactions 304 Augmented Version Independent Auditor’s Report Bayer Annual Report 2016 5 Accounting treatment of the discontinued operation “Diabetes Care” 6 Accounting treatment of legal risks stemming from product-related disputes 7 Adjusting EBITDA and earnings per share for non-recurring items Our presentation of these key audit matters has been structured as follows: 1 Matter and issue 2 Audit approach and findings 3 Reference to further information 1 1 Change in segment reporting As part of the organizational and strategic restructuring of the Bayer Group following the spin-off of the former MaterialScience subgroup, which has been listed under the name Covestro AG since the 2015 financial year, the Bayer Group’s internal reporting structure was reorganized. Since the internal reporting structure is used as a basis for determining the reportable segments under IFRS 8, the revised reporting structure consequently resulted in a change in the Bayer Group’s segment reporting. From our point of view, this matter was of particular importance because, in the context of capital market communications, segment reporting has a special significance and the change in the segment structure also affects other accounting-related areas. 2 During our audit we, among other procedures, considered the internal reporting and its sub- categorization of the individual reporting units and the changes in presentation, and reconciled this struc- ture to the presentation used in the segment reporting. Moreover, we examined the method applied for the reallocation of goodwill and questioned the decision-makers on the Board of Management about the allo- cation of resources. We were able to satisfy ourselves that the changes in segment reporting applied by management were consistent with the reorganization of the internal reporting structure. 3 The Company’s disclosures about the change of the internal reporting structure in connection with the organizational and strategic restructuring of the Bayer Group are contained in section 5 of the notes to the consolidated financial statements. 2 Impairment of goodwill and intangible assets with indefinite useful lives 1 An amount of EUR 16,312 million (20% of consolidated total assets) is reported under the line item "Goodwill" in the consolidated financial statements. Intangible assets with indefinite useful lives amount- ing to EUR 760 million (1% of consolidated total assets) are reported under “Other intangible assets.” The Company allocates goodwill to strategic business units or groups of strategic business units within the Bayer Group. As part of the regular impairment testing of goodwill and intangible assets with indefinite useful lives the carrying amounts of the Company’s strategic business units or intangible assets with indefinite useful lives are compared against their respective recoverable amount. In general, the recovera- ble amount is calculated on the basis of the fair value less costs to sell. This is based on the present value of future cash flows since, as a rule, market values are not available for the individual business units. The present value is calculated using discounted cash flow models on the basis of the Bayer Group’s three-year operating plan prepared by management and approved by the Supervisory Board and extrapolated on the basis of assumptions about long-term growth rates. The discount rate used is the weighted average cost of capital for the relevant reporting segment. The result of this measurement de- pends to a large extent on management’s assessment of future cash inflows of the respective strategic business unit and the discount rate used, and is therefore subject to considerable uncertainty. Against this background and due to the underlying complexity of the measurement models, this matter was of particular importance during our audit. Bayer Annual Report 2016 Independent Auditor’s Report 305 Augmented Version 2 As part of our audit, we, among other things, reviewed the method used for performing impairment tests and assessed the calculation of the weighted average cost of capital. We satisfied ourselves as to the appropriateness of the future cash inflows used in the measurement by, inter alia, comparing this data with the current budgets in the three-year plan prepared by management and approved by the Superviso- ry Board, and reconciling them against general and sector-specific market expectations. We also satisfied ourselves that the costs of the corporate functions reported in the “Corporate Functions and Consolida- tion” segment in the segment reporting were properly taken into consideration when testing the respec- tive strategic business units for impairment. With the knowledge that even relatively small changes in the discount rate applied can have material effects on the recoverable amount calculated in this way, we also focused our testing in particular on the parameters used to determine the discount rate applied, and evaluated the measurement model. Furthermore, due to the materiality of goodwill, we also performed our own sensitivity analyses for the strategic business units (comparison of carrying and recoverable amounts) and determined that the respective goodwill was sufficiently covered by the discounted future cash flows. Overall, we consider the measurement inputs and assumptions used by management to be in line with our expectations. 3 The Company’s disclosures pertaining to goodwill and intangible assets with indefinite useful lives are contained in sections 4 and 17 of the notes to the consolidated financial statements. 3 1 Financial instruments – Issuance of mandatory convertible notes On November 22, 2016, the Bayer Group placed mandatory convertible notes amounting to EUR 4.0 billion, excluding the pre-emptive subscription rights of the Company’s existing shareholders. The manda- tory convertible notes are issued in denominations of EUR 100,000 by Bayer Capital Corporation B.V. under the subordinate guarantee of Bayer AG. The notes carry a fixed coupon of 5.625% p.a. until maturi- ty. The coupon is payable annually in arrears on the respective coupon payment date. At maturity in 2019, the notes will automatically convert into ordinary shares of Bayer AG (these shares will either already exist or will stem from a conditional capital increase). The conversion ratio will be calculated on the basis of the share price on the conversion date. Both the “Minimum Conversion Price” and the “Maximum Conversion Price” were fixed upon conclusion of the agreement. In addition to the mandatory conversion upon maturi- ty, the issuer may exercise its right to early conversion at any time during the “Conversion Period.” In the case of an early conversion, the issuer must deliver shares at the “Maximum Conversion Ratio.” Upon initial recognition, the present value of the coupon payments (taking into account the expected coupon payment dates) was recognized as a financial liability, and the difference to the fair value of the instrument as a whole was recognized as equity. Of the mandatory convertible notes, EUR 3.3 billion was recognized as capital reserves and EUR 0.7 billion as financial liabilities. Since the classification of mandatory convertible notes as debt or partially as equity and partially as debt impacts the Bayer Group’s capital structure (and thus the credit quality as well as the cost of capital for new loans), this matter was of particular importance during our audit. 306 Augmented Version Independent Auditor’s Report Bayer Annual Report 2016 2 As part of our audit, we critically assessed the terms and conditions for the issuance of the mandatory convertible notes and evaluated whether the mandatory convertible bond constitutes a contract within the meaning of IAS 32.13 that must be recognized in Bayer AG’s consolidated financial statements as a finan- cial liability and as an equity instrument in accordance with IAS 32.28. For the equity component, we, inter alia, assessed to what extent the requirements under IAS 32.16 were met and whether the substance of the contractual terms and conditions of the mandatory convertible notes suffice to classify the notes as equity (IAS 32.16 in conjunction with IFRIC Update, January 2014). We evaluated the obligation to make ongoing coupon payments in accordance with IAS 32.16 in conjunction with IAS 32.19 in order to deter- mine to what extent Bayer AG does not have a right to avoid delivering cash to settle a contractual obliga- tion, thus giving rise to a financial liability. Ultimately, the mandatory convertible notes represent a com- pound financial instrument that must be broken down into an equity component and a liability component upon initial recognition. Therefore, the obligation to make ongoing coupon payments must be classified as a financial liability whereas the obligation to redeem, i.e. convert, the notes must be classified as an equity component. 3 The Company’s disclosures pertaining to the accounting treatment of the mandatory convertible notes are contained in sections 24 and 27 of the notes to the consolidated financial statements. 4 1 Financial instruments – Accounting treatment of hedging transactions The companies of the Bayer Group use a number of different derivative financial instruments to hedge against currency, commodity price and interest rate risks associated with ordinary business activities. Management’s hedging policy is documented in corresponding internal guidelines and serves as the basis for these transactions. Currency risks arise primarily from revenue, sales and procurement transactions (in particular commodities) and financing denominated in foreign currencies. Interest rate hedges are entered into for the purpose of achieving a sensible ratio of variable and fixed interest rate exposures. Derivative financial instruments are recognized at fair value as of the balance sheet date. The positive fair value of the derivative financial instruments used as hedges amounts to EUR 683 million as of the balance sheet date and the negative fair value amounts to EUR 819 million. If the financial instruments used by the Bayer Group are effective hedges of future cash flows in the context of hedging relationships in accordance with the requirements of IAS 39, the effective portion of the changes in fair value are recognized over the dura- tion of the hedging relationships directly in equity until the maturity of the hedged cash flows. As of the balance sheet date, a cumulative EUR 61 million were recognized outside profit or loss as expenses and income before taxes on income. We believed that these matters were of particular importance due to the high complexity and number of transactions as well as the extensive accounting and reporting require- ments under IAS 39. 2 As a part of our audit and together with the help of our internal specialists from Corporate Treasury Solutions, we, among other things, assessed the contractual and financial parameters and reviewed the accounting treatment, including the effects on equity and profit or loss, of the various hedging transac- tions. Together with these specialists, we also assessed the Company’s internal control system with regard to derivative financial instruments, including the internal activities to monitor compliance with the hedging policy. Furthermore, we also used market data to review the measurement method applied to measure the fair value of the financial instruments. In addition, we also obtained bank confirmations in order to assess the completeness of and to examine the fair values of the recorded transactions. With regard to the ex- pected cash flows and the assessment of the effectiveness of hedges, we essentially retrospectively as- sessed past hedge levels. We verified that hedges were accounted for and measured in accordance with the provisions of IAS 39. 3 The Company’s disclosures pertaining to the accounting treatment of hedging transactions are con- tained in sections 4 and 30 of the notes to the consolidated financial statements. Bayer Annual Report 2016 Independent Auditor’s Report 307 Augmented Version 5 1 Accounting treatment of the discontinued operation “Diabetes Care” During the financial year, as part of optimizing its portfolio and on the basis of a share and asset pur- chase agreement dated June 10, 2015 with Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, the Company disposed of its global Diabetes Care business for approximately EUR 1 billion on January 4, 2016. The business will continue to operate as an independent enterprise under the name Ascensia Diabe- tes Care (“ADC”). Until such a time that ADC has established its own, appropriate and functioning infra- structure, Bayer Group companies – for a transition period of up to two years – will act, among other things, as a distributor for ADC in various countries and provide ADC with accounting services. The Diabe- tes Care business generated revenue of EUR 573 million in financial year 2016. The business activities of the Diabetes Care business were presented as a discontinued operation in the consolidated financial statements of Bayer AG in accordance with the provisions of IFRS 5. The assets, liabilities, expenses and income from this discontinued operation are calculated and allocated in accordance with the share and asset purchase agreement. In our view, this matter was of particular importance during our audit due to the complexity of the underlying agreement and the inherent risk that not all of the assets and liabilities transferring to ADC as part of the sale would be identified. 2 As part of our audit, we, among other things, conducted an in-depth review of the provisions of the underlying share and asset purchase agreement. We assessed the Bayer Group’s plan for identifying and recognizing the assets and liabilities that will transfer to ADC in accordance with the share and asset pur- chase agreement, and reconciled this with the underlying agreement. In identifying those assets and liabili- ties that are assigned to the Diabetes Care business and that will transfer to ADC in 2016 in accordance with the share and asset purchase agreement, we reviewed whether management’s actions were in line with the underlying plan and whether all of the relevant assets and liabilities had been identified. We also assessed and reviewed the determination of the income and expenses that are to be assigned to the dis- continued operation “Diabetes Care” and that must be recognized separately in the income statement and in the notes to the financial statements in accordance with IFRS 5. We found that the assets, liabilities, income and expenses of the discontinued operation “Diabetes Care” were appropriately recognized in the consolidated financial statements in accordance with the provisions of IFRS 5. The Company’s disclosures pertaining to the discontinued operation “Diabetes Care” are contained in 3 section 6.3 of the notes to the consolidated financial statements. 6 1 Accounting treatment of legal risks stemming from product-related disputes Bayer Group entities are involved in court and out-of-court proceedings with authorities, peers and other parties. This gives rise to legal risks, in particular in the area of product liability, competition and anti- trust law, patent law, tax law and environmental protection. As of January 23, 2017, 100 claims had been asserted against Bayer Group in the United States of Ameri- ca both in and out-of-court, with regard to Yasmin™/YAZ™ products. Several attorneys general in U.S. states are reviewing allegations that consumer protection provisions had been violated and one attorney general has brought legal action against Bayer Group. Furthermore, class action lawsuits are pending in Canada and Israel and claims are known to have been asserted in other countries. Against the background of the pending and expected product liability lawsuits in connection with Mirena™, as of January 23, 2017, approximately 2,600 (previous year: 3,500) users of Mirena™ had brought action against the Bayer Group in the United States of America. Furthermore, as of January 23, 2017, approximately 16,400 (previous year: 4,300) users of Xarelto™ had asserted claims for compensatory and punitive damages against the Bayer Group in the United States of America. As of January 23, 2017, in Canada 10 lawsuits had also been brought against the Bayer Group in connection with Xarelto™; in each of those lawsuits, the plaintiffs were applying for class action status. As of January 23, 2017, approximately 3,700 users of Essure™ had brought action against the Bayer Group in the United States of America, and two lawsuits had been filed in Canada; in each of those lawsuits, the plaintiffs were applying for class action status. 308 Augmented Version Independent Auditor’s Report Bayer Annual Report 2016 The evaluation whether or not a provision should be recognized to cover the risks stemming from a pend- ing legal dispute, and if so, in what amount, is shaped to a high degree by estimates and assumptions made by management. In the light of this background and due to the high monetary amount of the assert- ed claims, we considered the aforementioned product-related disputes of the Bayer Group to be of par- ticular importance. 2 As part of our audit, we, among other things, assessed the process established by the Company to ensure that a legal dispute is recorded, its outcome is assessed, and the dispute is accounted for. Fur- thermore, we also hold regular meetings with the Company's legal department in order to receive updates on current developments and the reasons for the corresponding assessments. The development of materi- al legal disputes, including management’s assessments as to their potential outcome, is provided to us by the company in writing. As of the balance sheet date, we also obtained external legal confirmations that 1 support management’s risk assessments with regard to the product-related disputes discussed under above. In connection with these product-related disputes, we reviewed management’s assessments on the basis of the grounds of the claims asserted against the Bayer Group, and we agree with the assessments taken by management. 3 The Company’s disclosures relating to the aforementioned legal disputes are contained in section 32 of the notes to the consolidated financial statements. 7 1 Adjusting EBITDA and earnings per share for non-recurring items For the Bayer Group’s management and analysis purposes, EBITDA (earnings before interests, taxes, depreciation and amortization) is used and adjusted for special items (by their nature and amount of spe- cific effects). Adjustments to EBITDA in the amount of EUR 517 million have been reported in the consoli- dated financial statements of the Bayer AG. The adjusted EBITDA is used for capital market communica- tion as a core financial performance indicator. Furthermore, the adjusted EBITDA is used as a target achievement measure for the annual performance-related remuneration of the Bayer Group’s employees. The adjustments to EBITDA were of particular importance during our audit, because the applied adjust- ments are based on the Bayer Group’s internal accounting guidelines and there is a risk of bias in man- agement’s judgment. 2 We reviewed the calculation of underlying EBITDA and critically assessed the special items identified by the management. Based on the knowledge obtained during the audit and the information provided to us by management, we examined at the same time whether the adjustments had been applied in accordance with the definition and approach presented in the segment reporting disclosures. We were able to satisfy ourselves that the adjustments applied to EBITDA by management were in line with the segment reporting disclosures and had been applied consistently. 3 The Company’s disclosures about the adjustments to and determination of EBITDA are presented under section 5 of the notes to the consolidated financial statements. Bayer Annual Report 2016 Independent Auditor’s Report 309 Augmented Version Other Information Management is responsible for the other information. The other information comprises > the Corporate Governance Report according to section 3.10 of the German Corporate Governance Code, the Corporate Governance Statement pursuant to § 289a HGB and § 315 Abs. 5 HGB, as well as > > other parts of the annual report of Bayer AG, Leverkusen, for the financial year ended on December 31, 2016, which were not subject of our audit. Our audit opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be mate- rially misstated. If, based on the work we have performed, we conclude that there is a material misstate- ment of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation of the consolidated financial statements, which comply with IFRS, as adopted by the EU, and the additional German legal requirements applicable under § 315a Abs. 1 HGB, and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. Furthermore, management is responsible for such internal control as management determines is necessary to enable the preparation of consolidated financial state- ments that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the prepa- ration of the consolidated financial statements. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objective is to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our audit opinion on the consolidated financial statements. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW), under additional consideration of the ISA, will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence economic deci- sions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW), under additional consideration of the ISA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: 310 Augmented Version Independent Auditor’s Report Bayer Annual Report 2016 > Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. > Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. > Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. > Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or the group management report or, if such disclosures are inadequate, to modify our audit opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. > Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the net assets and financial position as well as the results of operations of the Group in accordance with IFRS, as adopted by the EU, and the additional German legal requirements applicable under § 315a Abs. 1 HGB. > Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an audit opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our report on the audit of the consolidated financial statements unless law or regulation precludes public disclosure about the matter. Bayer Annual Report 2016 Independent Auditor’s Report 311 Augmented Version Other Legal and Regulatory Requirements Report on the Audit of the Group Management Report Audit Opinion on the Group Management Report We have audited the group management report of Bayer AG, Leverkusen, which is combined with the Company’s management report, for the financial year from January 1 to December 31, 2016. In our opinion, based on the findings of our audit, the accompanying group management report as a whole provides a suitable view of the Group’s position. In all material respects, the group management report is consistent with the consolidated financial statements, complies with legal requirements and suitably pre- sents the opportunities and risks of future development. Our audit has not led to any reservations with respect to the propriety of the group management report. Basis for Audit Opinion on the Group Management Report We conducted our audit of the group management report in accordance with § 317 Abs. 2 HGB and Ger- man generally accepted standards for the audit of management reports promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Responsibilities of Management and Those Charged with Governance for the Group Management Report Management is responsible for the preparation of the group management report, which as a whole pro- vides a suitable view of the Group’s position, is consistent with the consolidated financial statements, complies with legal requirements, and suitably presents the opportunities and risks of future development. Furthermore, management is responsible for such policies and procedures (systems) as management de- termines are necessary to enable the preparation of a group management report in accordance with the German legal requirements applicable under § 315 Abs. 1 HGB and to provide sufficient and appropriate evidence for the assertions in the group management report. The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the prepa- ration of the group management report. Auditor’s Responsibilities for the Audit of the Group Management Report Our objective is to obtain reasonable assurance about whether the group management report as a whole provides a suitable view of the Group’s position as well as, in all material respects, is consistent with the consolidated financial statements as well as the findings of our audit, complies with legal requirements, and suitably presents the opportunities and risks of future development, and to issue an auditor’s report that includes our audit opinion on the group management report. As part of an audit, we examine the group management report in accordance with § 317 Abs. 2 HGB and German generally accepted standards for the audit of management reports promulgated by the IDW. In this connection, we draw attention to the following: > The audit of the group management report is integrated into the audit of the consolidated financial statements. > We obtain an understanding of the policies and procedures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an audit opinion on the effectiveness of these policies and procedures (systems). 312 Augmented Version Independent Auditor’s Report Bayer Annual Report 2016 > We perform audit procedures on the prospective information presented by management in the group management report. Based on appropriate and sufficient audit evidence, we hereby, in particular, evaluate the material assumptions used by management as a basis for the prospective information and assess the reasonableness of these assumptions as well as the appropriate derivation of the prospective information from these assumptions. We are not issuing a separate audit opinion on the prospective information or the underlying assumptions. There is a significant, unavoidable risk that future events will deviate significantly from the prospective information. > We are also not issuing a separate audit opinion on individual disclosures in the group management report; our audit opinion covers the group management report as a whole. Responsible Auditor The auditor responsible for the audit is Eckhard Sprinkmeier. Essen, February 15, 2017 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dr. Peter Bartels Wirtschaftsprüfer (German Public Auditor) Eckhard Sprinkmeier Wirtschaftsprüfer (German Public Auditor) Bayer Annual Report 2016 Independent Practitioner’s Limited Assurance Report on the Sustainability Information 313 Augmented Version Independent Practitioner’s Limited Assurance Report on the Sustainability Information To Bayer AG, Leverkusen PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft has performed a moderate assurance en- gagement on the German version of the augmented online version of the Annual Report of Bayer AG and issued an independent assurance report, authoritative in German language, which has been translated as follows: We have been engaged to perform a limited assurance engagement on the sustainability information marked with “limited assurance” in the online annexes of the augmented online version of the Annual Re- port of Bayer AG, Leverkusen, (hereafter: the “Company”) for the period 1 January 2016 to 31 December 2016 (“Annual Report 2016 – Augmented Version”; hereafter: “Online Version”). Management’s Responsibility The Company’s Management is responsible for the preparation and presentation of the Online Version in accordance with the criteria as set out in the G4 Sustainability Reporting Guidelines of the Global Report- ing Initiative (GRI) (hereafter the “GRI Criteria”) and for the selection of the information to be assessed. This responsibility includes the selection and application of appropriate methods to prepare the Online Version as well as the use of assumptions and estimates for individual sustainability disclosures which are reasonable in the circumstances. Furthermore, the responsibility includes designing, implementing and maintaining systems and processes relevant for the preparation of the Sustainability Report, which is free of material misstatements due to intentional or unintentional errors. Audit Firm’s Independence and Quality Control We have complied with the German professional provisions regarding independence as well as other ethi- cal requirements. The audit firm applies the national legal requirements and professional standards – in particular the Profes- sional Code for German Public Auditors and German Chartered Auditors (“Berufssatzung für Wirtschaftsprüfer und vereidigte Buchprüfer”: “BS WP/vBP”) as well as the Institut der Wirtschaftsprüfer (“Institute of Public Auditors in Germany; IDW”): Requirements to quality control for audit firms (“Entwurf eines IdW Qualitätssicherungsstandards 1 “Anforderungen an die Qualitätssicherung in der Wirtschaftsprüferpraxis” (IdW EQS 1)”) – and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Practitioner’s Responsibility Our responsibility is to express an opinion on the sustainability information marked with “limited assurance” in the Online Version based on our work performed. Within the scope of our engagement we did not perform an audit on external sources of information or expert opinions, referred to in the Online Version. We conducted our work in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (Revised): “Assurance Engagements other than Audits or Reviews of Historical Financial Information” published by IAASB. This Standard requires that we plan and perform the assurance engagement to obtain limited assurance whether any matters have come to our attention that cause us to believe that the sus- tainability information marked with “(cid:284)” in the Online Version has not been prepared, in all material re- spects, in accordance with the GRI Criteria. 314 Augmented Version Independent Practitioner’s Limited Assurance Report on the Sustainability Information Bayer Annual Report 2016 In a limited assurance engagement the evidence-gathering procedures are more limited than for a reason- able assurance engagement and therefore significantly less assurance is obtained than in a reasonable assurance engagement. The procedures selected depend on the practitioner’s judgement. This includes the assessment of the risks of material misstatements of the sustainability information marked with “limited assurance” in the Online Version with regard to the GRI Criteria. Within the scope of our work we performed amongst others the following procedures: > Obtaining an understanding of the structure of the sustainability organization and of the stakeholder > engagement Inquiries of personnel involved in the preparation of the Online Version regarding the preparation process, the underlying internal control system and selected sustainability information > Site visits as part of the inspection of processes and analysis of selected data at the following Bayer sites: Pharmaceuticals, Bergkamen, Germany; Consumer Health, Myerstown, USA; Crop Science, Frankfurt, Germany; Crop Science, Kansas City, USA; as well as the Covestro site Baytown, USA; and the Currenta sites Leverkusen, Dormagen, Krefeld-Uerdingen, Germany; > Analytical procedures on selected sustainability information of the Online Version > Comparison of selected sustainability information with corresponding data in the consolidated financial statements and in the group management report > Assessment of the presentation of selected sustainability information in the Online Version regarding the sustainability performance Conclusion Based on our limited assurance engagement, nothing has come to our attention that causes us to believe that the sustainability information marked with “limited assurance” in the Online Version of the Company for the period 1 January 2016 to 31 December 2016 has not been prepared, in all material respects, in ac- cordance with the GRI Criteria. Emphasis of Matter – Recommendations Without qualifying our conclusion above, we make the following recommendations for the further develop- ment of the Company’s sustainability management and sustainability reporting: > Further alignment of the sustainability reporting in consideration of the changing focus topics of a life science company; > Further development and formalization of internal controls and systems for non-financial indicators particularly at decentralized level, as well as increasing implementation of automated system interfaces and controls Restriction on Use and Distribution We issue this report on the basis of the engagement agreed with the Company. The review has been per- formed for purposes of the Company and is solely intended to inform the Company about the results of the review. The report is not intended for any third parties to base any (financial) decision thereon. We do not assume any responsibility towards third parties. Essen, February 21, 2017 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Hendrik Fink Wirtschaftsprüfer (German Public Auditor) ppa. Juliane v. Clausbruch Bayer Annual Report 2016 C Further Information 315 Governance Bodies Augmented Version Further Information Governance Bodies Supervisory Board Members of the Supervisory Board held offices as members of the supervisory board or a comparable supervising body of the corporations listed (as at December 31, 2016, or the date on which they ceased to be members of the Supervisory Board of Bayer AG) and as shown attended the meetings of the Supervisory Board and committees to which he or she belonged: Werner Wenning Leverkusen, Germany (born October 21, 1946) Chairman of the Supervisory Board effective October 2012 Chairman of the Supervisory Board of Bayer AG Memberships on other supervisory boards: • Bayer Pharma AG (until January 2017) Attendance at Supervisory Board and committee meetings: 10 of 12 Dr. Paul Achleitner Munich, Germany (born September 28, 1956) Member of the Supervisory Board effective April 2002 Chairman of the Supervisory Board of Deutsche Bank AG Memberships on other supervisory boards: • Daimler AG • Deutsche Bank AG (Chairman) Memberships in comparable supervising bodies of German or foreign corporations: • Henkel AG & Co. KGaA (Member of the Shareholders’ Committee) Attendance at Supervisory Board and committee meetings: 13 of 13 Memberships on other supervisory boards: • E.ON SE (Chairman) (until June 2016) • Henkel Management AG • Siemens AG (Vice Chairman) Memberships in comparable supervising bodies of German or foreign corporations: • Henkel AG & Co. KGaA (Member of the Shareholders’ Committee) Attendance at Supervisory Board and committee meetings: 19 of 19 Oliver Zühlke Solingen, Germany (born December 11, 1968) Vice Chairman of the Supervisory Board effective July 2015 Member of the Supervisory Board effective April 2007 Chairman of the Bayer Central Works Council Dr. rer. nat. Simone Bagel-Trah Düsseldorf, Germany (born January 10, 1969) Member of the Supervisory Board effective April 2014 Chairwoman of the Supervisory Board of Henkel AG & Co. KGaA and Henkel Management AG and of the Shareholders’ Commit- tee of Henkel AG & Co. KGaA Memberships on other supervisory boards: • Henkel AG & Co. KGaA (Chairwoman) • Henkel Management AG • Heraeus Holding GmbH Memberships in comparable supervising bodies of German or foreign corporations: • Henkel AG & Co. KGaA (Chairwoman of the Shareholders’ Committee) Attendance at Supervisory Board meetings: 5 of 5 Dr. Clemens Börsig Frankfurt am Main, Germany (born July 27, 1948) Member of the Supervisory Board effective April 2007 Member of various supervisory boards Memberships on other supervisory boards: • Daimler AG • Linde AG Memberships in comparable supervising bodies of German or foreign corporations: • Emerson Electric Co. • Istituto per le Opere di Religione (Member of the Board of Superintendence) (until May 2016) Attendance at Supervisory Board meetings: 5 of 5 André van Broich Dormagen, Germany (born June 19, 1970) Member of the Supervisory Board effective April 2012 Chairman of the Works Council of the Dormagen site Memberships on other supervisory boards: • Bayer CropScience AG (until January 2017) Attendance at Supervisory Board and committee meetings: 7 of 7 316 C Further Information Augmented Version Governance Bodies Bayer Annual Report 2016 Chairman of the Works Council of the Berlin site Member of the Supervisory Board effective April 2016 Memberships on other supervisory boards: • Bayer Pharma AG (Vice Chairman) (until January 2017) Attendance at Supervisory Board and committee meetings: 8 of 8 Independent consultant Memberships in comparable supervising bodies of German or foreign corporations: • Evotec AG (Chairman) Attendance at Supervisory Board and committee meetings: 6 of 6 Thomas Ebeling Muri bei Bern, Switzerland (born February 9, 1959) Member of the Supervisory Board effective April 2012 Chief Executive Officer of ProSiebenSat.1 Media SE Memberships in comparable supervising bodies of German or foreign corporations: • Lonza Group AG Attendance at Supervisory Board meetings: 5 of 5 Johanna W. (Hanneke) Faber Amstelveen, Netherlands (born April 19, 1969) Petra Kronen Krefeld, Germany (born August 22, 1964) Member of the Supervisory Board effective July 2000 Chairwoman of the Central Works Council of Covestro Member of the Supervisory Board effective April 2016 Chairwoman of the Works Council of Covestro of the Uerdingen site Chief E-Commerce and Innovation Officer and Member of the Executive Committee of Koninklijke Ahold Delhaize N.V. Attendance at Supervisory Board meetings: 3 of 3 Dr.-Ing. Thomas Fischer Krefeld, Germany (born August 27, 1955) Member of the Supervisory Board effective October 2005 Chairman of the Managerial Employees Committee of Covestro Deutschland AG Memberships on other supervisory boards: • Covestro AG • Covestro Deutschland AG Attendance at Supervisory Board and committee meetings: 9 of 9 Reiner Hoffmann Wuppertal, Germany (born May 30, 1955) Member of the Supervisory Board effective October 2006 Chairman of the German Trade Union Confederation Attendance at Supervisory Board meetings: 5 of 5 Yüksel Karaaslan Hohen Neuendorf, Germany (born March 1, 1968) Memberships on other supervisory boards: • Covestro AG (Vice Chairwoman) • Covestro Deutschland AG (Vice Chairwoman) Attendance at Supervisory Board and committee meetings: 7 of 8 Frank Löllgen Cologne, Germany (born June 14, 1961) Member of the Supervisory Board effective November 2015 North Rhine District Secretary of the German Mining, Chemical and Energy Industrial Union Memberships on other supervisory boards: • IRR-Innovationsregion Rheinisches Revier GmbH • Evonik Industries AG Attendance at Supervisory Board and committee meetings: 8 of 8 Dr. rer. nat. Helmut Panke Munich, Germany (born August 31, 1946) Member of the Supervisory Board until April 2016 Member of various supervisory boards Memberships in comparable supervising bodies of German or foreign corporations: • Microsoft Corporation • Singapore Airlines Limited Member of the Supervisory Board effective April 2012 Attendance at Supervisory Board and committee meetings: 4 of 4 Chairman of the Bayer Group Works Council Vice Chairman of the Bayer Central Works Council Prof. Dr. Wolfgang Plischke Aschau im Chiemgau, Germany (born September 15, 1951) Sue H. Rataj Sebastopol, U.S.A. (born January 8, 1957) Member of the Supervisory Board effective April 2012 Member of the Board of Directors of Cabot Corporation, Boston, U.S.A. Member of the Board of Directors of Agilent Technologies Inc., Santa Clara, U.S.A. Attendance at Supervisory Board meetings: 5 of 5 Petra Reinbold-Knape Gladbeck, Germany (born April 16, 1959) Member of the Supervisory Board effective April 2012 Member of the Executive Committee of the German Mining, Chemical and Energy Industrial Union Memberships on other supervisory boards: • Lausitz Energie Bergbau AG (formerly Vattenfall Europe Mining AG) (Vice Chairwoman) • Lausitz Energie Kraftwerk AG (formerly Vattenfall Europe Generation AG ) Memberships in comparable supervising bodies of German or foreign corporations: • MDSE Mitteldeutsche Sanierungs- und Entsorgungs- gesellschaft mbH (until August 2016) Attendance at Supervisory Board and committee meetings: 8 of 8 Michael Schmidt-Kießling Schwelm, Germany (born March 24, 1959) Member of the Supervisory Board effective April 2012 Chairman of the Works Council of the Elberfeld site Attendance at Supervisory Board meetings: 4 of 5 Dr. Klaus Sturany* Ascona, Switzerland (born October 23, 1946) Member of the Supervisory Board effective April 2007 Member of various supervisory boards Memberships on other supervisory boards: • Hannover Rück SE (Vice Chairman) Memberships in comparable supervising bodies of German or foreign corporations: • Sulzer AG (until April 2016) Attendance at Supervisory Board and committee meetings: 9 of 9 Heinz Georg Webers Bergkamen, Germany (born December 27, 1959) Member of the Supervisory Board effective July 2015 Chairman of the Bayer European Forum Chairman of the Works Council of the Bergkamen site Memberships on other supervisory boards: • Bayer Pharma AG (until January 2017) Attendance at Supervisory Board meetings: 5 of 5 Prof. Dr. Dr. h.c. Otmar D. Wiestler Berlin, Germany (born November 6, 1956) Member of the Supervisory Board effective October 2014 President of the Helmholtz Association of German Research Centres Attendance at Supervisory Board and committee meetings: 7 of 7 Prof. Dr. Dr. h.c. mult. Ernst-Ludwig Winnacker Munich, Germany (born July 26, 1941) Member of the Supervisory Board until April 2016 Professor-Emeritus of Ludwig- Maximilians University Munich Memberships on other supervisory boards: • Medigene AG (until August 2016) • Wacker Chemie AG Attendance at Supervisory Board and committee meetings: 3 of 3 Bayer Annual Report 2016 C Further Information 317 Governance Bodies Augmented Version Board of Management Standing committees of the Supervisory Board of Bayer AG (as at December 31, 2016) Members of the Board of Management held offices as members of the supervisory board or a comparable supervising body of the corporations listed (as at December 31, 2016): Presidial Committee / Mediation Committee Wenning (Chairman), Achleitner, Reinbold-Knape, Zühlke Audit Committee Sturany* (Chairman), Fischer, Löllgen, Plischke, Wenning, Zühlke Human Resources Committee Wenning (Chairman), Achleitner, Karaaslan, Kronen Nominations Committee Wenning (Chairman), Achleitner Innovation Committee Plischke (Chairman), van Broich, Reinbold-Knape, Wenning, Wiestler, Zühlke * Expert member pursuant to Section 100, Paragraph 5 of the German Stock Corporation Act (AktG) Werner Baumann (born October 6, 1962) Chairman (effective May 2016) Member of the Board of Management effective January 1, 2010, appointed until April 30, 2021 Dr. Hartmut Klusik (born July 30, 1956) Member of the Board of Management effective January 1, 2016, appointed until December 31, 2018 Labor Director • Bayer HealthCare AG • Bayer CropScience AG (Chairman) (until April 2016) (Chairman) (until July 2016) • Bayer Pharma AG (until April 2016) Liam Condon (born February 27, 1968) Member of the Board of Management effective January 1, 2016, appointed until December 31, 2018 Johannes Dietsch (born January 2, 1962) Member of the Board of Management effective September 1, 2014, appointed until August 31, 2017 • Bayer Business Services GmbH (Chairman) • Bayer CropScience AG (Chairman) (May 2016 until February 2017) • Covestro AG • Covestro Deutschland AG • Bayer Pharma AG (Chairman) (until February 2017) • Bayer Technology Services GmbH (Chairman) (until July 2016) • Currenta Geschäftsführungs- GmbH (Chairman) Kemal Malik (born September 29, 1962) Member of the Board of Management effective February 1, 2014, appointed until January 31, 2022 Erica Mann (born October 11, 1958) Member of the Board of Management effective January 1, 2016, appointed until December 31, 2018 Dieter Weinand (born August 16, 1960) Member of the Board of Management effective January 1, 2016, appointed until December 31, 2018 • Board of Directors of HealthPrize Technologies LLC Chairman of the Board of Management until April 2016 Dr. Marijn Dekkers (born September 22, 1957) • Board of Directors of General Electric Company • Chairman of Unilever N.V. 318 Augmented Version Organization Chart Organization Chart C 1 Werner Baumann Chairman Johannes Dietsch Finance Hartmut Klusik * Human Resources, Technology & Sustainability Kemal Malik Innovation A. Bouchon Bayer Lifescience Center M. Lessl Corporate Innova tion and Research & Development M. Arnold Corporate Office M. Baum Risk Management T.-P. Hausner Strategy B.-P. Bier Accounting & Taxes O. Maier 1 Investor Relations V. Hahn Regional Coordination A. Günther Human Resources & Organization P.-G. Heiden Corporate Quality R. Heumann Corporate Supply Chain M. Preuss Communications and Public Affairs G. Harnier Law, Patents & Compliance G. Hilken Currenta F. Rittgen Mergers, Licencing & Acquisitions R. Schwarz Internal Audit M. Vehreschild Country & Functional Excellence D. Hartert Business Services P. Müller Finance G. Schildmeyer Corporate Controlling T. Udesen Procurement A. Knors Engineering & Technology K. van Laak Corporate Health, Safety & Sustainability C. Pörtner Corporate Technology & Manufacturing Chairman Finance Innovation … Human Resources, Technology & Sustainability Graphic C 1 continued Labor Director 1 From March 1, 2017 2 Europe / Middle East / Africa 3 Asia / Pacific As of March 1, 2017 4 Until March 31, 2017; J. Koelink from April 1, 2017 * Labor Director 1 From March 1, 2017 2 Europe / Middle East / Africa 3 Asia / Pacific 4 Until March 31, 2017; J. Koelink from April 1, 2017 C Further InformationBayer Annual Report 2016 Organization Chart Augmented Version 319 C 1 C 1 continued Dieter Weinand Pharmaceuticals Erica Mann Consumer Health Liam Condon Crop Science C. Brunn Commercial Operations Americas N. Bartner Commercial Operations North America J. Applegate Environmental Science A. Busch Drug Discovery W. Carius Product Supply M. Devoy Chief Medical Officer R. Franzen Commercial Operations EMEA 2 S. Guth Strategic Marketing W. Jiang Commercial Operations China & APAC 3 R. LaCaze Oncology J. Möller Development H. Prinz Commercial Operations Japan J. Triana Finance S. Davies Division Operations O. Mauroy-Bressier Finance J. Ohle Commercial Operations International J. O’Mullane Innovation & Development F. Reiff Strategic Marketing D. Backhaus Product Supply M. Dawkins Post Merger Integration M. Kremer Crop Strategies & Portfolio Management T. Menne Digital Farming B. Naaf Business Affairs & Communications R. Spoor 4 Product Supply A. Percy Research & Development L. Yuen Commercial Operations China M. Reichardt Agricultural Commercial Operations M. A. Schulz Finance F. Terhorst Pre-Merger Planning D. Ehle Animal Health As of March 1, 2017 C Further InformationBayer Annual Report 2016 320 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 G4 Content Index of the Global Reporting Initiative (GRI) with the 10 Principles of the U.N. Global Compact For fiscal 2016, we are once again applying the GRI G4 Guidelines in accordance with the “comprehensive” option. Where there is insufficient information for a particular GRI indicator, we have explained this. In addition, the detailed GRI Content Index includes the corresponding principles of the UNGC and the assignment of our areas of activity to the GRI aspects. Moreover, we indicate whether our scope to exercise influence lies within or outside the company (GRI G4-19, G4-20, G4-21). For the implementation of the GRI Materiality Disclosure Service the GRI had access to the “Annual Report 2016 – Aug- mented Version.” The correct positioning of the “G4 Materiality Disclosures” (G4-17 – G4-27) was confirmed by the GRI. M GRI aspect limitation G4-20 G4-21 within out- side GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity General Standard Disclosures Strategy and Analysis G4–1 Statement from the most senior decision-maker 1-7 Key impacts, risks and opportunities concerning sustainability 41, 47-57, 62, 92, 95, 171, 173, 179 G4–2 Organizational Profile G4–3 Name of the organization 44 G4–4 Primary brands, products and services 41, 44-46 Location of the organization’s headquarters G4–5 42 G4–6 Countries with significant operations 42-44 Nature of ownership and legal form G4–7 40, 44 G4–8 Markets served Scale of the organization G4–9 6 G4–10 Employees by employment type, gender and region 42-43, 52, 99-100 Cover 3 (front inside cover), 42-43, 77, 96, 203, 205 77-79, 84 Bayer Annual Report 2016 C Further Information 321 GRI Content Index Augmented Version GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity General Standard Disclosures 3 G4–11 Percentage of employees covered by collective bargaining agreements 86 GRI aspect limitation G4-20 G4-21 within out- side G4–12 Description of the supply chain 90-91 Significant changes during the reporting period G4–13 5, 44, 129, 144 G4–14 Implementation of the precautionary principle 105 External initiatives that the organization endorses G4–15 Significant memberships in industry and business associations G4–16 28, 55-56, 61, 87, 93, 103, 105, 125 55, 59, 82, 92, 105, 117 Identified Material Aspects and Boundaries Entities included in the consolidated financial statements G4–17 G4–18 Process for defining the report content G4–19 Material Aspects identified G4–20 Aspect Boundaries within the organization G4–21 Aspect Boundaries outside the organization 28, 232- 233 56-57; www.bayer.com/ materiality 320-333; www.bayer.com/ areas-of-activity, www.bayer.com/ gri 320-333; www.bayer.com/ areas-of-activity, www.bayer.com/ gri 320-333; www.bayer.com/ areas-of-activity, www.bayer.com/ gri Restatements of information provided in previous reports G4–22 28-29 Significant changes in the Scope and Aspect Boundaries 56-57; www.bayer.com/ areas-of-activity G4–23 Stakeholder Engagement G4–24 Stakeholder groups engaged 58-59 G4–25 Identification and selection of stakeholders 58 Approach to stakeholder engagement and frequency G4–26 39, 56-62, 65, 77, 82, 94 Key topics and concerns raised through stakeholder engagement and response 39, 56-57; www.bayer.com/ en/corporate- governance.aspx G4–27 322 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 GRI aspect limitation G4-20 G4-21 within out- side GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity General Standard Disclosures Report Profile G4– 28 Reporting period 28 G4–29 Date of most recent previous report Annual Report: 2016-02-26 G4–30 Reporting cycle Annually Contact point for questions regarding the report G4–31 “In accordance” option with GRI and Content Index chosen G4–32 Cover 5 (back inside cover) 28, 320-333 G4–33 External verification of the report 29, 303-314 Governance Governance structure, incl. committees of the highest governance body G4–34 Process for delegating authority for economic, environmental and social topics Executive-level position with responsibility for economic, environ- mental and social topics G4–35 G4–36 Processes for consultation between stakeholders and the highest governance body G4–37 30-32, 34-36, 182-184 56, 182, 185 30-31, 56, 88, 102, 168, 170, 182-183 39, Cover 5 (back inside cover); www.bayer.com/e n/corporate- governance.aspx Composition of the highest governance body and its committees 32, 181 G4–38 Independence of the Chair of the highest governance body G4–39 Nomination and selection processes for the highest governance body and its committees G4–40 32, 183 35, 180-181, 184 G4–41 Process for avoiding conflicts of interest 180-182, 185 Highest governance body's role concerning strategy and goals G4–42 Measures taken concerning the highest governance body’s knowledge in sustainability issues G4–43 32-34, 182-183 34-35 Bayer Annual Report 2016 C Further Information 323 GRI Content Index Augmented Version GRI aspect limitation G4-20 G4-21 within out- side GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity General Standard Disclosures Evaluation of the highest governance body’s performance concerning sustainability 32 G4–44 Highest governance body’s role concerning sustainability impacts, risks, and opportunities Highest governance body’s role concerning the effectiveness of the risk management Frequency of the highest governance body’s review of sustainability impacts, risks, and opportunities G4–45 G4–46 G4–47 168-170, 183, 185 33-35, 169-170, 183 34-35, 170 Highest committee that formally reviews and approves the sustainability report 56 G4–48 Process for communicating critical concerns to the highest governance body Critical concerns that were communicated to the highest governance body 36, 39, 185-186; www.bayer.com/ asm 33; www.bayer.com/ asm G4–49 G4–50 Remuneration policies for the highest governance body and senior executives G4–51 41, 185, 187-191, 198-199 G4–52 Process for determining remuneration 34, 187, 198 G4–53 Stakeholders’ views regarding remuneration 187, 198; www.bayer.com/ asm Ratio of the highest annual total compensation to the median annual total compensation G4–54 Ratio of percentage increase in the highest annual total compensation G4–55 Not available: we do not consider this compensation detail to be of informative value for the evaluation of the appropriateness of our compensation structures. We report on these in detail in the section “Competitive compensation and variable pay” and in our Compensation Report. Not available: we do not consider this compensation detail to be of informative value for the evaluation of the appropriateness of our compensation structures. We report on these in detail in the section “Competitive compensation and variable pay” and in our Compensation Report. 324 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side within out- side Employee relations & development Product and process innovation Environmental protection / resource efficiency X X X X X General Standard Disclosures Ethics and Integrity 10 G4–56 Values, principles, standards and norms of behavior 41, 56, 81, 87, 184-185 10 G4–57 Mechanisms for seeking advice on ethical and lawful behavior 185 10 G4–58 Mechanisms for reporting concerns about unethical or unlawful behavior 87, 101, 185 Specific Standard Disclosures G4-19 Economic 7 7 Aspect: Economic Performance – Management Approach 47, 88 G4- EC1 Direct economic value created and distributed 47, 83-84, 87-88, 244 Financial implications and other risks and opportunities due to climate change 171; www.bayer.cm/ CDP-Climate Coverage of benefit plan obligations 83, 86, 177, 264-269, 272 G4- EC2 G4- EC3 G4- EC4 Financial assistance received from government 6 Aspect: Market Presence – Management Approach 65 82 Employee relations & development X We align our compensation with local market conditions in Emerging Markets and developing countries. Furthermore, in keeping with our human rights position, we pursue the goal of paying adequate salaries that ensure a suitable standard of living for our employees and their families. In all Emerging Markets where we are active, the lowest salary paid by Bayer is at least in line with the applicable minimum wage and in most cases higher. We are not currently reporting on the margin between standard entry salary and minimum wage. A new survey on this aspect is currently being performed. 6 6 G4- EC5 G4- EC6 Ratios of standard entry level wage compared to local minimum wage Proportion of senior management hired from the local community 82 Bayer Annual Report 2016 C Further Information 325 GRI Content Index Augmented Version GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Specific Standard Disclosures G4-19 Aspect: Indirect Economic Impacts – Management Approach 47, 88 G4- EC7 G4- EC8 Infrastructure investments and services provided Indirect economic impacts Aspect: Procurement Practices – Management Approach 49, 88-89, 95 47 91 G4- EC9 Proportion of spending on local suppliers 91, 335 Environmental 7, 8 Aspect: Materials – Management Approach 96, 102-103, 120 7, 8 G4- EN1 Materials used by weight or volume 91 8 G4- EN2 Percentage of materials used that are recycled input materials 127-128 7, 8, 9 Aspect: Energy – Management Approach 54, 96, 102-103, 120-121 7, 8 G4- EN3 Energy consumption within the organization 120-121 G4- EN4 G4- EN5 G4- EN6 8 8, 9 Energy consumption outside of the organization Energy intensity 120-121 Reduction of energy consumption 121 We do not report on the weight and volume of the materials used. This information constitutes a business secret. We do not provide any information on volumes relating to the total material use of secondary raw materials since this also constitutes a business secret. We do provide information on production-, material- and, where possible, product-related recycling. Such energy consumption is contained in the details of greenhouse gas emissions for Scope 3, which we publish in the CDP Report (www.bayer.com/CDP-Climate). Bayer area of activity Sustainable food supply Access to health care Supplier management GRI aspect limitation G4-20 G4-21 within out- side X X X Environmental protection / resource efficiency X X Environmental protection / resource efficiency X X 8, 9 G4- EN7 Reductions in energy requirements of products and services We do not consider this indicator to be applicable to our product portfolio as a Life Science company. Data are therefore not available. 7; 8 7, 8 Aspect: Water – Management Approach 54, 96, 102-103, 120, 124-125 G4- EN8 Total water with- drawal by source 125 8 G4- EN9 Water resources significantly affected 124; www.bayer.com /CDP-Water Environmental protection / resource efficiency X X 326 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity Specific Standard Disclosures G4-19 8 G4- EN10 Water recycled and reused 125 7, 8, 9 Aspect: Emissions – Management Approach 54, 96, 102-103, 120-123 G4- EN15 G4- EN16 G4- EN17 G4- EN18 G4- EN19 G4- EN20 G4- EN21 Direct greenhouse gas (GHG) emissions (Scope 1) Energy indirect greenhouse gas (GHG) emissions (Scope 2) 122 122 Other indirect greenhouse gas (GHG) emissions (Scope 3) 122-123; www.bayer.com/ CDP-Climate Greenhouse gas (GHG) emissions intensity 122-123 Reduction of greenhouse gas (GHG) emissions Emissions of ozone- depleting substances (ODS) NOx, SOx and other significant air emissions 121, 127 123 123 Aspect: Effluents and Waste – Management Approach G4- EN22 G4- EN23 G4- EN24 Total water discharge by quality and destination Total weight of waste by type and disposal method Total number and volume of significant spills 96, 102-103, 110, 120, 124-128, 174 125-126 126-127 124 G4- EN25 Handling of hazardous waste 126-127 Water bodies significantly affected by discharges of water and runoff G4- EN26 124 Waste transported across borders is recorded in Europe in line with legal regulations and reported to the responsible authorities. We give detailed information on all water- related issues in our CDP Water Report (www.bayer.com/CDP-Water) 7, 8 7, 8 7, 8 8 8, 9 7, 8 7, 8 8 8 8 8 8 8 7, 8, 9 Aspect: Products and Services – Management Approach 104, 111, 114, 120, 174 7, 8, 9 G4- EN27 Mitigation of environmental impacts of products and services 76, 111-113 GRI aspect limitation G4-20 G4-21 within out- side Environmental protection / resource efficiency X X Environmental protection / resource efficiency X X Product and process innovation Product stewardship Environmental protection / resource efficiency X X X X X X Bayer Annual Report 2016 C Further Information 327 GRI Content Index Augmented Version GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side Business ethics X X Safety Environmental protection / resource efficiency X X Supplier management X X X Specific Standard Disclosures G4-19 G4- EN28 Reclaimed products and packaging Aspect: Compliance – Management Approach Fines and sanctions for noncompliance with environmental regulations G4- EN29 127-128 54, 169, 175, 184-186 223, 273, 291, 294-295 Aspect: Transport – Management Approach 90, 98-99, 174 G4- EN30 Significant environmental impacts of transporting products 98-99 Aspect: Supplier Environmental Assessment – Management Approach 53, 90, 92-93, 99, 174 Percentage of new suppliers that were screened using environmental criteria G4- EN32 92-93 G4- EN33 Significant environmental impacts in the supply chain 93-94 We do not report on the percentage of new suppliers screened using environmental criteria because these data are not available. We report on the procedure used for assessment. We do not report in detail on the negative environmental impact determined during supplier assessment. We give details on the areas in which essential impacts were identified and corrective measures were defined. Aspect: Environmental Grievance Mechanisms – Management Approach 113, 185-186 Business ethics X X We do not report on the number of grievances with respect to negative environmental impact. We report on the total number of notifications registered with the compliance hotline. We internally record the precise reason for the grievance, track how it is followed up and take corresponding action in line with our corporate policy. More detailed information on this would constitute a business secret. Employee relations & development X G4- EN34 Grievances about environmental impacts 185-186 Labor Practices and Decent Work Aspect: Employment – Management Approach 76-77, 84 G4- LA1 G4- LA2 New employee hires and employee turnover 79-80 Benefits provided to full-time employees 83 8 8 8 8 8 8 8 8 8 8 6 6 328 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side Specific Standard Disclosures G4-19 G4- LA3 Return to work and retention rates after parental leave Aspect: Labor / Management Relations – Management Approach G4- LA4 Minimum notice period(s) regarding operational changes 84-85 81-82 81 6 3 3 Aspect: Occupational Health and Safety – Management Approach 54, 76, 85, 96, 102-103, 114- 116, 174, 185 1, 6 Percentage of total workforce represented in health and safety committees G4- LA5 G4- LA6 G4- LA7 G4- LA8 Injuries, occupational diseases, lost days and work-related fatalities 115-116 Workers with high incidence or risk of diseases 115-116 Health and safety topics covered in formal agreements with trade unions 85-86 Aspect: Training and Education – Management Approach 76-77, 80, 174 G4- LA9 Average hours of training 81 Employee relations & development X Safety X X We do not report on the percentage of the total workforce represented in health and safety committees as these data are not available. We plan to record these data in the future. We do not report on occupational injuries by gender, as these data have to be collected in certain regions anonymously. It is important for us to have classification by incident type and a detailed analysis of the causes of the individual incidents. 6 6 6 1, 6 6 6 Programs that support the continued employability of employees Percentage of employees receiving regular performance and career development reviews G4- LA10 G4- LA11 Aspect: Diversity and Equal Opportunity – Management Approach Composition of governance bodies and breakdown of employees by aspects of diversity G4- LA12 80, 86, 116 81 54, 76-77, 81-82, 174, 181 30-31, 77-78, 82- 83, 87, 181, 315- 317 We do not report on minorities, as these data may not be recorded in some countries on grounds of protection of personal rights. Aspect: Equal Remuneration for Women and Men – Management Approach 83 Employee relations & development X Employee relations & development X Employee relations & development X Bayer Annual Report 2016 C Further Information 329 GRI Content Index Augmented Version GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side Specific Standard Disclosures G4-19 G4- LA13 Ratio of basic salary and remuneration of women to men 83 6 We do not report quantitatively on the ratio of the basic salary and compensation of women to men. Male and female employees at Bayer receive equal compensation. It is awarded on the basis of qualifications and responsibility. Aspect: Supplier Assessment for Labor Practices – Management Approach 53, 90, 92-93, 174 Percentage of new suppliers that were screened using labor practices criteria G4- LA14 92-93 G4- LA15 Significant impacts for labor practices in the supply chain 93-94 We do not report on the percentage of new suppliers screened using labor practices criteria because these data are not available. We report on the procedure used for assessment. We do not report in detail on the negative impact on labor practices determined during supplier assessment. We give details on the areas in which essential impacts were identified and corrective measures were defined. Supplier management X Aspect: Labor Practices Grievance Mechanisms – Management Approach 87, 185-186 Business ethics X X We do not report on the number of grievances with respect to the negative impact on labor practices. We report on the total number of notifications registered with the compliance hotline. We internally record the precise reason for the grievance, track how it is followed up and take corresponding action in line with our corporate policy. More detailed information on this would constitute a business secret. We do not report on the number of incidents of discrimination. We report on the total number of notifications registered with the compliance hotline. We internally record the precise reason for the grievance, track how it is followed up and take corresponding action in line with our corporate policy. More detailed information on this would constitute a business secret. Business ethics X X Employee relations & development X Supplier management X X G4- LA16 Grievances about labor practices 185-186 Human Rights 6 Aspect: Non-discrimination – Management Approach 81, 87, 185 6 G4- HR3 Incidents of discrimination and corrective actions taken 185-186 Aspect: Freedom of Association and Collective Bargaining – Management Approach 2, 3 87, 92, 185 330 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side Specific Standard Disclosures G4-19 Operations and suppliers identified in which the right to exercise freedom of association may be violated or at risk, and measures taken 87, 93 2, 3 G4- HR4 2, 5 Aspect: Child Labor – Management Approach 87, 90, 95, 185 Operations and suppliers having significant risk for incidents of child labor, and measures taken 87, 95-96 2, 5 G4- HR5 Aspect: Forced or Compulsory Labor – Management Approach 2, 4 87, 92, 185 Operations and suppliers having significant risk for incidents of forced or compulsory labor, and measures taken 2, 4 G4- HR6 Aspect: Security Practices – Management Approach G4- HR7 Percentage of security personnel trained in the field of human rights 87, 93 87 87 Employee relations & development Supplier management Employee relations & development Supplier management X X X X Employee relations & development X Supplier management X X X 1 1 2 2 2 1 Aspect: Supplier Human Rights Assessment – Management Approach 53, 87, 90, 92-93, 174 Percentage of new suppliers that were screened using human rights criteria G4- HR10 92-93 G4- HR11 Significant human rights impacts in the supply chain 93-94 We do not report on the percentage of new suppliers screened using human rights criteria because these data are not available. We report on the procedure used for assessment. We do not report in detail on the negative impact on human rights determined during supplier assessment. We give details on the areas in which essential impacts occurred and corrective measures were defined. Aspect: Human Rights Grievance Mechanisms – Management Approach 87, 185-186 Business ethics X X 1 G4- HR12 Grievances about human rights impacts 185-186 We do not report on the number of formal grievances with respect to human rights violations, but on the total number of notifications registered with the compliance hotline. We internally record the precise reason for the grievance and take corre- sponding action in line with our corporate policy. More detailed information on this would constitute a business secret. Bayer Annual Report 2016 C Further Information 331 GRI Content Index Augmented Version GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side Specific Standard Disclosures G4-19 Society 1 1 1 10 Aspect: Local Communities – Management Approach Percentage of operations with implemented local community engagement, impact assessments and development programs Operations with actual and potential negative impacts on local communities G4- SO1 G4- SO2 Aspect: Anti-corruption – Management Approach Percentage of operations assessed for risks related to corruption and risks identified 10 G4- SO3 10 G4- SO4 Communication and training on anti-corruption 54, 58, 62, 88, 90, 96, 98-99, 102- 103, 114-115, 117-118, 124- 125, 174, 185 58, 62 117, 119, 124 54, 101-102, 169, 175, 184-186 185 186 G4- SO5 Confirmed incidents of corruption and actions taken Aspect: Public Policy – Management Approach G4- SO6 Total value of political contributions 185-186 60, 63 60-61 10 10 10 Aspect: Anti-competitive Behavior – Management Approach 54, 102, 169, 175, 184-186 Legal actions for anti- competitive behavior, anti-trust and monopoly practices G4- SO7 Aspect: Compliance – Management Approach 223, 273, 291 54, 169, 175, 184-186 Safety Stakeholder engagement / partnering Societal engagement X X X X X X Business ethics X X Business ethics X X Business ethics X X Business ethics X X We do not report such risks in relation to operations but in relation to sales. Complete coverage across segments is key in compliance / anti-corruption in the first instance. Areas at risk are monitored more frequently than others. We do not report quantitatively on training for the Board of Management, Supervisory Board and business partners. Anti-corruption training is performed globally, we therefore do not disclose such information explicitly according to region. We do not report on the number of confirmed incidents of corruption. We report on the total number of notifications registered with the compliance hotline. We internally record the precise reason for the grievance, track how it is followed up and take corresponding action in line with our corporate policy. More detailed information on this would constitute a business secret. 332 C Further Information Augmented Version GRI Content Index Bayer Annual Report 2016 GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side Specific Standard Disclosures G4-19 G4- SO8 Fines and sanctions for noncompliance with laws and regulations 223, 273, 291, 294-295 Aspect: Supplier Assessment for Impacts on Society – Management Approach 2 53, 90, 92-93, 98- 99, 174 Percentage of new suppliers that were screened using criteria for impacts on society G4- SO9 92-93 2 G4- SO10 Negative impacts on society in the supply chain and actions taken 93-94 Aspect: Grievance Mechanisms for Impacts on Society – Management Approach 2, 3 101, 185-186 2, 3 G4- SO11 Number of grievances about impacts on society 185-186 Product Responsibility Aspect: Customer Health and Safety – Management Approach 54, 102-107,109- 112, 114, 172, 184 Percentage of significant product and service categories for which health and safety impacts are assessed Incidents of noncompliance with regulations and voluntary codes concerning the health and safety impacts of products and services G4- PR1 G4- PR2 68, 76, 104-106, 109, 114 291 Aspect: Product and Service Labelling – Management Approach 90, 99-100, 104- 106, 111, 113- 114 G4- PR3 Principles / procedures for product and service information and labeling 104-106, 109 7 7 We do not report on the percentage of new suppliers screened using criteria for impact on society because these data are not available. We report on the procedure used for assessment. We do not report in detail on the negative impact on society determined during supplier evaluation. We give details on the areas in which essential impacts occurred and corrective measures were defined. We do not report on the number of formal grievances with respect to the negative impact on society. We report on the total number of notifications registered with the compliance hotline. We internally record the precise reason for the grievance, track how it is followed up and take corresponding action in line with our corporate policy. More detailed information on this would constitute a business secret. Supplier management X Business ethics X X Sustainable food supply Product stewardship X X X We do not report on the number of incidents of noncompliance with regulations and voluntary codes concerning the health and safety impact of products and services. Any proceedings on account of violations would be reported in B Note 32 to the Consolidated Financial Statements, Chapter “Legal Risks.” Product stewardship X X Incidents of noncompliance with regulations and voluntary codes concerning product and service information and labeling 291 G4- PR4 We do not report on the number of incidents of noncompliance with regulations and voluntary codes concerning product and service information and labeling. Any proceedings on account of violations would be reported in B Notes to the Consolidated Financial Statements, Chapter “Legal Risks.” Bayer Annual Report 2016 C Further Information 333 GRI Content Index Augmented Version GRI G4 Content Index UNGC Prin- ciples G4 Standard Disclosures Page Comments Bayer area of activity GRI aspect limitation G4-20 G4-21 within out- side We do not report on the number of incidents of noncompliance with regulations and voluntary codes concerning marketing communications. Any proceedings on account of violations would be reported in B Note 32 to the Consolidated Financial Statements, Chapter “Legal Risks.” Product stewardship X X Business ethics X X We use our site register to record all site-related data (including size). For confidentiality reasons, we do not publish any size data on our sites, for example. Specific Standard Disclosures G4-19 G4- PR5 Results of surveys measuring customer satisfaction 100 Aspect: Marketing Communications – Management Approach 101-102, 107, 111 G4- PR6 Sale of banned or disputed products 113 7 7 Incidents of noncompliance with regulations and voluntary codes concerning marketing communications G4- PR7 Aspect: Compliance – Management Approach 291 54, 169, 175, 184-186 Significant fines concerning the provision and use of products and services G4- PR9 223, 273, 291- 293 Further G4 Standard Disclosures 8 8 8 2 1 Aspect: Biodiversity – Management Approach 96, 107-108 G4- EN11 Operational sites in protected areas 96 G4- EN12 G4-HR1 Impacts on protected areas or areas of high biodiversity value Significant investment agreements and contracts that include human rights clauses or screening 107-108 96 G4-HR2 Employee training on human rights issues 87, 94 Aspect: Customer Privacy – Management Approach 175, 185 Substantiated complaints regarding breaches of customer privacy 175 G4-PR8 334 C Further Information Augmented Version Glossary Bayer Annual Report 2016 Glossary A APM is the abbreviation for alternative performance measure; see A 2.4 for more information. B Biocides are substances and products that control pests such as insects, mice and rats, as well as algae, fungi and bacteria. C CDP is a nonprofit organization that works on behalf of institu- tional investors to compile annual rankings of detailed environmen- tal data, especially in respect of greenhouse gas emissions (CDP- Climate) and water management (CDP-Water), from the top 500 publicly listed companies in the world. According to CDP, more than 800 investors representing fund assets of around US$100 trillion currently draw on this information for their investment decisions. Conflict minerals are those mined in conflict regions. They include tin, tungsten and tanta- lum ores, gold or their deriva- tives. Armed conflicts over the control of these resources occur particularly in the eastern part of the Democratic Republic of Congo and neighboring coun- tries. Continuing operations Sales and earnings reporting for continuing operations pertains only to business operations that are expected to remain in the company’s portfolio for the fore- seeable future; opposite of dis- continued operations. (Corporate) compliance com- prises the observance of statu- tory and company regulations on lawful and responsible conduct. Corporate governance com- prises the long-term manage- ment and oversight of the com- pany in accordance with the principles of responsibility and transparency. The German Cor- porate Governance Code sets out basic principles for the man- agement and oversight of public- ly listed companies. Corruption Perceptions Index (CPI) Since 1995, NGO Trans- parency International has pro- duced an annual index of coun- tries – 176 in 2016 – by the perceived level of public-sector corruption. The CPI ranks coun- tries according to the extent to which public servants and politi- cians are believed to engage in bribery and to grant or accept undue advantage. Credit default swaps (CDS) are tradable insurance contracts used to hedge against the default of a borrower. D Debt Issuance Program (DIP) Formerly the multi-currency European Medium Term Notes (EMTN) program, DIP is a docu- mentation platform that enables Bayer to flexibly issue notes in various currencies and with different maturities. Diversity designates the varia- tion within the workforce in terms of gender, origin, nationality, age, religion, sexual orientation and physical capability. G GHG protocol The Greenhouse Gas Protocol is an internationally recognized tool for recording, quantifying and reporting green- house gas emissions. Its stand- ards cover all emissions within a company’s value chain. Bayer aligns itself to the Corporate Standard for direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions and also to the Corporate Value Chain (Scope 3) Accounting and Reporting Standard, which covers further indirect emissions along the value chain. Dual reporting was introduced in 2015 with the updating of the GHG guidelines for Scope 2. Indirect emissions have now to be reported using both the location-based and the market-based methods. The location-based method uses regional or national average emissions factors, while the market-based method applies provider- or product-specific emissions factors based on contractual instruments. Global commercial paper program Commercial paper (CP) issued under Bayer’s program is a short-term, unsecured debt instrument normally issued at a discount and redeemed at nomi- nal value. It is a flexible way of obtaining short-term funding on the capital market. Bayer’s com- mercial paper program allows the company to issue commercial paper on both the U.S. and European markets. F Foreign exchange Claims for payments in foreign currencies traded on foreign exchanges, usually in the form of balances with foreign banks or bills of exchange or checks payable abroad; banknotes and coins denominated in foreign curren- cies are not considered to be foreign exchange. GRI (Global Reporting Initia- tive) is a nonprofit organization that works to promote the dis- semination and optimization of sustainability reporting. The GRI guidelines are considered the most frequently used and inter- nationally most recognized standard for sustainability report- ing. These guidelines are evolved in a multi-stakeholder process. GRI was established in 1997 by Ceres (Coalition for Environ- mentally Responsible Econo- mies) and UNEP (United Nations Environment Programme). GxP is a collective term for all guidelines that govern “good working practice” and are partic- ularly relevant for the fields of medicine, pharmacy and phar- maceutical chemistry. The “G” stands for “Good” and the “P” for “Practice,” while the “x” in the middle is replaced by the respec- tive abbreviation for the specific area of application – such as Good Manufacturing Practice (GMP), Good Laboratory Practice (GLP), Good Clinical Practice (GCP) or Good Agricultural Prac- tice (GAP). These guidelines are established by institutions such as the European Medicines Agency or the U.S. Food and Drug Administration. H HSEQ stands for health, safety, environment and quality. Hybrid bond A hybrid bond is a corporate bond with equity- equivalent properties, usually with either no maturity date or a very long maturity. Due to its subordination, it has a lower likelihood of repayment than a normal bond in the event of issuer bankruptcy. Bayer Annual Report 2016 C Further Information 335 Glossary Augmented Version I N R U ILO core labor standards The eight core labor standards of the ILO (International Labour Organization) that define the minimum requirements for hu- mane working conditions are internationally recognized “quali- tative social standards.” They represent universal human rights that are deemed valid in all countries regardless of their economic development status. Innovative Medicine Initiative (IMI) is a public-private partner- ship developed by the European Commission and the European Federation of Pharmaceutical Industries and Associations (EFPIA) with the goal of promot- ing biomedical research in Europe. IMI finances research projects aimed at overcoming the major bottlenecks in the research and development of new pharmaceuticals. The part- nership provides funding to project participants from aca- demic institutes, small and medium-sized businesses, patient organizations and other institutions. The pharmaceutical industry contributes to these projects by donating capacities and resources. L Life Sciences This term de- scribes Bayer’s activities in health care and agriculture and com- prises the Bayer Group excluding its legally independent subsidiary Covestro. It refers to the busi- nesses of the Pharmaceuticals, Consumer Health and Crop Science divisions and the Animal Health business unit. Local procurement means that the procuring (Bayer) company is located in the same country as the supplier. Neonicotinoids are a chemical class of systemic insecticides. O OTC (over-the-counter) desig- nates the business with nonpre- scription medicines. P Pharmacovigilance is defined as the science of, and activities related to, the identification, assessment, comprehension and prevention of side effects or other problems associated with pharmaceutical products. Phase I-IV studies are clinical phases in the development of a drug product. The active ingredi- ent candidate is generally tested in healthy subjects in Phase I, and in patients in Phases II and III. The studies test the therapeu- tic tolerability and efficacy of active ingredients in a specific indication. Phase IV studies are conducted following the approval of a new drug product to monitor its safety and efficacy over an extended period of time. The studies are subject to strict legal requirements and documentation procedures. Price / cash flow ratio The price / cash flow ratio is the ratio of the share price to gross cash flow per share. It shows how long it would take for the com- pany’s cash flow to cover the share price. Price / earnings ratio This is the ratio of the current share price to earnings per share (EPS). A high price/earnings ratio indicates that the market assigns a high value to the stock in the expectation of future earnings growth. 3RS principle (replace, re- duce, refine) Replace: prior to each project, Bayer checks whether an approved method is available that does not rely on animal studies and then applies it. Reduce: if no alternative method exists, only as many animals are used as are needed to achieve scientifically meaning- ful results based on statutory requirements. Refine: Bayer ensures that animal studies are performed in a way that mini- mizes any suffering. Reconciliation The reconciliation records, on the one hand, those business activities not assigned to any other segment (“All Other Segments”), including particularly the services provided by Busi- ness Services, Technology Services and Currenta. It also includes “Corporate Functions and Consolidation,” which largely comprises Bayer holding compa- nies and the Bayer Lifescience Center. S Short-Term Incentive program (STI program) is a variable income component for all mana- gerial staff. Significant locations of oper- ation A selection of countries that accounted for more than 80% of total Bayer Group sales in 2016 (United States, Germany, China, Brazil, Japan, France, Canada, Italy, Mexico, U.K., India, Spain, Australia, Russia, Switzerland, Poland, Turkey, Argentina and Belgium) Syndicated credit facility Credit line agreed with a group of banks; generally used for exten- sive financing requirements, such as when making an acquisition, to increase available liquidity or as security for the issuance of debt instruments. The credit facility can be utilized and repaid flexibly, either in full or in portions, during its term. United Nations Global Compact (UNGC) The United Nations Global Compact is the most far-reaching and important responsible corporate govern- ance initiative in the world. Based on ten universal principles in the areas of human rights, labor, environment and anticor- ruption, the UNGC pursues the vision of an inclusive and sus- tainable global economy that benefits people, communities and markets everywhere. By committing to the UNGC, com- panies agree to document each year their efforts to uphold the ten principles. V Vector control describes meth- ods for the avoidance or targeted control of organisms that trans- mit pathogens triggering infec- tious diseases. Vectors include blood-sucking insects such as the Anopheles mosquito, which can transfer malaria parasites, for example. W Working capital is the difference between short-term current assets and short-term liabilities; it is calculated by deducting short-term liabilities from current assets (excluding cash and cash equivalents). In the statement of cash flows, the change in work- ing capital is one of the variables used to assess a company’s financial health. The objective of working capital management is to reduce working capital by minimizing the “financing gap” caused by the time lapse be- tween the disbursement of funds (= payment for necessary raw materials) and the receipt of funds for the finished product. 336 C Further Information Five-Year Summary Bayer Annual Report 2016 Five-Year Summary € million Bayer Group Sales EBITDA 1 EBITDA before special items 1 EBITDA margin before special items 1 EBIT 1 EBIT before special items 1 Income before income taxes Net income (from continuing and discontinued operations) Earnings per share (from continuing and discontinued operations) (€) 1 Core earnings per share (from continuing operations) (€) 1 Net cash provided by operating activities (from continuing and discontinued operations) Net financial debt Capital expenditures as per segment table Bayer AG Total dividend payment Dividend per share (€) Innovation Research and development expenses Ratio of R&D expenses to sales – Pharmaceuticals (%) Ratio of R&D expenses to sales – Crop Science (%) Employees in research and development Employees Number of employees2 (Dec. 31) 2012 2013 2014 2015 2016 39,741 40,157 41,339 6,916 8,280 20.8% 3,928 5,639 3,176 2,403 2.91 5.30 4,530 7,022 2,012 7,830 8,401 20.9% 4,934 5,773 4,207 3,189 3.86 5.61 5,171 6,731 2,155 8,315 8,685 21.0% 5,395 5,833 4,414 3,426 4.14 5.89 5,810 19,612 2,484 46,085 9,573 10,256 22.3% 6,241 7,060 5,236 4,110 4.97 6.82 6,890 17,449 2,511 46,769 10,785 11,302 24.2% 7,042 8,130 5,887 4,531 5.44 7.32 9,089 11,778 2,578 1,571 1.90 1,737 2.10 1,861 2.25 2,067 2.50 2,233 2.70 3,013 14.5 9.3 3,406 15.8 9.8 3,537 15.6 10.3 4,274 16.0 10.7 4,666 17.0 11.7 12,900 13,509 13,900 14,753 15,229 110,000 112,400 117,400 116,600 115,200 Personnel expenses (including pension expenses) (€ million) 9,194 9,430 9,693 11,176 11,357 Proportion of women in senior management (%) Proportion of employees with health insurance (%) Fluctuation (voluntary / total) (%) 23 94 25 95 26 96 28 96 29 98 – / 14.1 5.5 / 14.0 4.8 / 11.4 5.0 / 13.9 4.6 / 12.3 Hours of vocational and ongoing training per employee – 17.8 18.0 20.0 22.1 Safety & Environmental Protection Recordable Incident Rate (RIR) for Bayer employees Loss of Primary Containment Incident Rate (LoPC-IR) 3 Total energy consumption (terajoules) Energy efficiency (MWh/t) 4 Total greenhouse gas emissions (CO2 equivalents in million t) 5 Specific greenhouse gas emissions (CO2 equivalents in t / manufactured sales volume in t), according to the market-based method 6 Hazardous waste generated (thousand t) Water use (million m³) 0.49 0.38 0.47 0.35 0.43 0.23 0.42 0.22 0.39 0.32 83,184 80,848 85,317 83,182 84,494 8.86 8.96 1.88 603 384 8.54 9.00 1.83 467 361 7.62 9.55 1.72 487 350 6.34 9.71 1.69 541 346 6.77 9.87 1.54 547 330 2015 figures restated; figures for 2012-2014 as last reported 1 For definitions of the indicators see Chapter 2.4. 2 Employees calculated as full-time equivalents (FTEs) 3 Number of incidents per 200,000 working hours in which chemicals leak from their primary container, such as pipelines, pumps, tanks or drums 4 Quotient of total energy consumption and manufactured sales volume; Life Sciences only 5 Direct emissions from power plants, waste incinerators and production plants and indirect emissions from external supplies of electricity, steam and refrigeration (according to the market-based method); portfolio-adjusted in accordance with the GHG Protocol 6 Life Sciences without Currenta Financial Calendar Q1 2017 Interim Report Annual Stockholders’ Meeting 2017 Planned dividend payment date Q2 2017 Interim Report Q3 2017 Interim Report 2017 Annual Report Q1 2018 Interim Report Annual Stockholders’ Meeting 2018 Masthead April 27, 2017 April 28, 2017 May 4, 2017 July 27, 2017 October 26, 2017 February 28, 2018 May 3, 2018 May 25, 2018 Publisher Bayer AG, 51368 Leverkusen, Germany Editor Jörg Schäfer, Tel. +49 214 30 39136 email: joerg.schaefer@bayer.com Investor Relations Peter Dahlhoff, Tel. +49 214 30 33022 email: peter.dahlhoff@bayer.com Date of publication Wednesday, February 22, 2017 Sustainability & Business Stewardship Dagmar Jost, Tel. +49 214 30 75284 email: dagmar.jost@bayer.com English edition Currenta GmbH & Co. OHG Language Service ISSN 0343 / 1975 For fast and easy access to our online services, there’s no need to copy down the internet addresses. Simply scan the codes below with your smartphone and an appropriate app: Annual Report online Available at: bayer.com / ar16 Annual Stockholders’ Meeting 2017 Information available at: bayer.com / asm Other publications Overview available at: bayer.com / publications Bayer on the internet: www.bayer.com Combined Management Report and consolidated financial statements produced in-house with firesys. The paper this report is printed on is derived from sources managed in line with social, economic and ecological principles and therefore bears the seal of the Forest Stewardship Council® (FSC Mix Credit). The inside section was produced using 100% recycled fibers – as guaranteed by the E.U. Ecolabel certification (paper reg. no. FR / 011 / 003). Cautionary Statements Regarding Forward-Looking Information Certain statements contained in this Annual Re- port may constitute “forward-looking state- ments.” Actual results could differ materially from those projected or forecast in the for- ward-looking statements. The factors that could cause actual results to differ materially include the following: uncertainties as to the timing of the transaction; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected time-frames or at all and to suc- cessfully integrate Monsanto’s operations into those of Bayer; such integration may be more difficult, time-consuming or costly than expect- ed; revenues following the transaction may be lower than expected; operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) may be greater than expected following the an- nouncement of the transaction; the retention of certain key employees at Monsanto; risks asso- ciated with the disruption of management’s at- tention from ongoing business operations due to the transaction; the conditions to the completion of the transaction may not be satisfied, or the regulatory approvals required for the transaction may not be obtained on the terms expected or on the anticipated schedule; the parties’ ability to meet expectations regarding the timing, com- pletion and accounting and tax treatments of the merger; the impact of indebtedness incurred by Bayer in connection with the transaction and the potential impact on the rating of indebted- ness of Bayer; the effects of the business com- bination of Bayer and Monsanto, including the combined company’s future financial condition, operating results, strategy and plans; other fac- tors detailed in Monsanto’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended August 31, 2016 and Monsanto’s other filings with the SEC, which are available at http://www.sec.gov and on Monsanto’s website at www.monsanto.com; and other factors dis- cussed in Bayer’s public reports which are available on the Bayer website at www.bayer. com. Bayer and Monsanto assume no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 

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