Annual Report 2 017 Augmented Version Bayer Annual Report 2017 The integrated Bayer Annual Report 2017 is available in a print version and in an aug- mented online version (Annual Report 2017 – Augmented Version). The online version contains the notes to the consolidated financial state- ments of the Bayer Group, along with additional information on the management report. The Annual Report 2017 – Augmented Version can be found at www.bayer.com/AR17. Cover photo: Farmer Aaron Gingerich with his daughter Kylie on one of his cornfields in Illinois, United States. You can read more in the Magazine section, which starts on page 8. At a Glance Sales EBITDA Net Income Before Special Items 1 2 +1.5% -0.3 % + 61.9% 2016 2017 Core Earnings per Share Supplier Management Investment in Research and Development 2 +1.0 % 99.5% of all strategically important suppliers billion evaluated since 2012 €4.5 Proportion of Women Specific Greenhouse Gas Emissions3 Energy Efficiency3 in Senior Management 2 - % up by 4.5 2 % 3.8% 32 1 Currency- and portfolio-adjusted 2 Changes from 2016; 2016 figures restated 3 Bayer excluding Currenta Fiscal 2017 Bayer: business at prior-year levelFiscal 2017 – on track with strategy Bayer:Group sales business €35.0 billion (Fx at & portfolioprior-year adj. + 1.5%) levelAnother – recordon trackyear for Pharmaceuticals with strategy Weak business development at Consumer Health CrGropoup Science sales €35.0 business billion down (Fx &against portfolio prior adj. year + 1.5%) due to situation in Brazil – measures taking effect Another record year for Pharmaceuticals EBITDA before special items €9.3 billion (– 0.3%) Weak business development at Consumer Health Net income €7.3 billion (+ 61.9%) Crop Science business down against prior year due to Coresituation earnings in Brazil per –share measures €6.74 taking(+1.0% effect) CovestroEBITDA before deconsolidated special items – additional €9.3 billion cash (– 0.3%) inflows of €4.7 billion Net income €7.3 billion (+ 61.9%) Monsanto acquisition expected to close in Core earnings per share €6.74 (+ 1.0%) second quarter of 2018 Covestro deconsolidated – additional cash Further progress in implementing sustainability targets inflows of €4.7 billion Group outlook for 2018: increase in sales (Fx & portfolio Monsanto acquisition expected to close in adj.), EBITDA before special items and core earnings per second quarter of 2018 share at prior-year level due to currency effects Further progress in implementing sustainability targets Group outlook for 2018: increase in sales (Fx & portfolio adj.), EBITDA before special items and core earnings per share at prior-year level due to currency effects Key Data Change from € million 2016 2017 2016 (%) Bayer Group Sales 34,943 35,015 + 0.2% 1 EBITDA 8,801 8,563 – 2.7% 1 EBITDA before special items 9,318 9,288 – 0.3% 1 EBITDA margin before special items 26.7% 26.5% 1 EBIT 5,738 5,903 + 2.9% 1 EBIT before special items 6,826 7,130 + 4.5% Income before income taxes 4,773 4,577 – 4.1% Net income (from continuing and discontinued operations) 4,531 7,336 + 61.9% 1 Earnings per share (from continuing and discontinued operations) (€) 5.44 8.41 + 54.6% 1 Core earnings per share (from continuing operations) (€) 6.67 6.74 + 1.0% Net cash provided by operating activities (from continuing and discontinued operations) 9,089 8,134 – 10.5% Net financial debt 11,778 3,595 – 69.5% 2 Capital expenditures as per segment table 2,627 2,418 – 8.0% Bayer AG Total dividend payment 2,233 2,315 + 3.7% Dividend per share (€) 2.70 2.80 + 3.7% Innovation Research and development expenses 4,405 4,504 + 2.2% Ratio of R&D expenses to sales – Pharmaceuticals (%) 16.7 16.2 Ratio of R&D expenses to sales – Crop Science (%) 11.7 11.7 Employees in research and development 14,213 14,041 – 1.2% Employees 3 Number of employees (Dec. 31) 99,592 99,820 + 0.2% Personnel expenses (including pension expenses) (€ million) 9,459 9,528 + 0.7% Proportion of women in senior management (%) 31 32 Proportion of employees with health insurance (%) 98 98 Fluctuation (voluntary / total) (%) 4.8 / 13.2 4.8 / 10.4 Hours of vocational and ongoing training per employee 23.0 23.4 + 1.7% Safety & Environmental Protection Recordable Incident Rate (RIR) for Bayer employees 0.40 0.45 + 12.5% 4 Loss of Primary Containment Incident Rate (LoPC-IR) 0.17 0.13 – 21.4% Total energy consumption (terajoules) 26,243 25,832 – 1.6% 5 Energy efficiency (kWh / €1,000 external sales) 130 125 – 3.8% 6 Total greenhouse gas emissions (CO2 equivalents in million t) 4.64 3.63 – 21.8% Specific greenhouse gas emissions (kg CO2 equivalents / €1,000 external sales) 7 according to the market-based method 48.45 46.26 – 4.5% Water use (million m³) 93 98 + 6.0% 2016 figures restated 1 For definitions of the indicators see A 2.4 2 Group total 2016 including Covestro 3 Employees calculated as full-time equivalents (FTEs) 4 Number of incidents in which chemicals leak from their primary container, such as pipelines, pumps, tanks or drums, per 200,000 working hours 5 Quotient of total energy consumption and manufactured sales volume; Bayer excluding Currenta 6 Direct emissions from power plants, waste incinerators and production plants and indirect emissions from external supplies of electricity, steam and cooling (according to the market-based method); portfolio-adjusted in accordance with the GHG Protocol 7 Bayer excluding Currenta Chairman’s Letter People should know what Bayer stands for I am pleased to present to you Bayer’s new annual report. It reflects an eventful year in which our employees around the world once again showed great commitment to drive the success of our company. On behalf of the Board of Management – and on your behalf as well I’m sure – I would like to sincerely thank all our employees for their dedication. The trust you have in our employees, in the members of the Supervisory Board and Board of Management, and in me personally strengthens us in our daily work. I would like to sincerely thank you and I am pleased that we are once again able to let you participate in Bayer’s success. We are therefore proposing to the Annual Stockholders’ Meeting an increase in the dividend to €2.80 per share. 2017 was a year of ups and downs. We saw many advances, but also experienced setbacks. We received new approvals, formed new collabo- rations and celebrated encouraging successes. But we also had to deal with unexpectedly high inventories in our Crop Science Division in Brazil and with the weak business development of our Consumer Health Divi- sion, which meant we had to adjust our guidance during the year. Overall, sales and earnings in 2017 remained only on a par with 2016. 2 Chairman’s Letter Bayer Annual Report 2017 Augmented Version Our share price reflected this development. Over the course of 2017, Bayer stock delivered just over seven percent, which was less than the DAX and the Euro STOXX 50. The ongoing regulatory process for the planned Monsanto acquisition certainly played a role here. We are very confident that we will receive final antitrust approval in the second quarter of 2018. In 2017, we also benefited from the long-term realignment of our company across the rest of the portfolio. Since the IPO of Covestro in October 2015, we have been aiming to sell our shares step by step and to achieve full sepa- ration from Covestro in the medium term. Last year, Bayer AG reduced its direct interest in Covestro from 64.2 percent to 24.6 percent, generating cash inflows of around €4.7 billion thanks to Covestro’s good share price perfor- mance. Bayer’s strategic foresight has proved successful and we also have had a lucky hand. It is with the same long-term perspective that we are pursuing the Monsanto acquisition. We are deeply convinced that both companies together can create significant additional value for our customers and shareholders, as well as for the society in which we live and whose acceptance we need. Providing food in high quality, sufficient quantity and at affordable prices is crucial to human coexistence. And we want to contribute to that. In 2017, we made important progress in obtaining antitrust approval for the planned acquisition. Of particular importance was the agreement with BASF in October regarding large parts of our seeds business and the Liberty™ / LibertyLink™ herbicide platform. These are excellent businesses that have been built up by our employees over the years. We regret having to divest these businesses, but we are convinced that in BASF we have found a long- term strategic purchaser and an employer with a first-class reputation. Bayer reached another long-term decision in November by in-licensing two development candidates from biotechnology company Loxo Oncology. Both these candidates complement our existing oncology portfolio. Moreover, it shows that we are keeping our word because we have always emphasized that we will continue to invest in our other businesses regardless of the acquisition of Monsanto. Bayer Annual Report 2017 Chairman’s Letter 3 Augmented Version Covestro, Monsanto and Loxo are prime examples of how Bayer has demon- strated its strategic foresight in 2017. Clear focus and long-term perspective – that’s the way we run our company. We have aligned our business activities to the main societal challenges in the fields of health and nutrition, and we are convinced that we are able to provide substantial and sustainable solutions, based on the highest standards and our responsibility to humankind and the environment.