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Executives

Alexander Rosar – Head, IR

Marijn Dekkers – Chairman and CEO

Joerg Reinhardt – Chairman, HealthCare

Werner Baumann – CFO

Sandra Peterson – Chairman, CropScience

Analysts

Richard Vosser – J.P. Morgan

Sachin Jain – Bank of America-Merrill Lynch

Jeremy Redenius – Sanford Bernstein

Andrew Baum – Morgan Stanley

Jo Walton – Credit Suisse

Florent Cespedes – Exane BNP Paribas

Thomas Gilbert – UBS

Andreas Heine – UniCredit

Ronald Koehler – MainFirst

Martin Flückiger – Helvea

Michael Leuchten – Barclays Capital

Ronald Köhler – MainFirst

Bayer Aktienges Ads (OTCPK:BAYRY) Q4 2010 Earnings Call February 28, 2011 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Bayer’s Investor and Analyst Conference Call on the Full-Year and Fourth Quarter 2010 Results. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Alexander Rosar, Head of Investor Relations of Bayer AG. Please go ahead, sir.

Alexander Rosar

Thank you, Clare. Ladies and gentlemen, dear friends, it’s a great pleasure for me to welcome you also on behalf of my colleagues to our conference call.

With me on the call are Marijn Dekkers, our new CEO, and Werner Baumann, our CFO. And from our subgroups, we have Jörg Reinhardt, CropScience us represented by Sandra Peterson, and MaterialScience by Patrick Thomas.

You have received developed information this morning including the annual report, our Investor Relations briefing documents and the conference slides. Marijn Dekkers will start off our conference call with a brief summary of the main developments in the quarter and during 2010. Please understand that we have to close our call at 12:30 AM.

Before handing over to Marijn, I’d like to draw your attention also to the Safe Harbor statement. Thank you. Marijn?

Marijn Dekkers

Thank you, Alexander. Ladies and gentlemen, I would like to summarize 2010 as the year in which Bayer is operationally untracked. The global economy recovered surprisingly quickly from the deep recession in 2010. And in this environment, we raised group sales to all-time high of EUR35.1 billion. EBITDA before special items came in at EUR7.1 billion and core earnings per share were up 15.1%.

We essentially as a result of that, achieved the targets we communicated for 2010. We also reduced net financial debt by EUR1.8 billion to now 7.9 billion by further increasing our operating cash flow. With regard to Q4 in particular, we are pleased to report that, operationally the business improved with positive momentum into 2011.

So overall, 2010 was a successful year for Bayer. However earnings in 2010 were partly supported by unexpected development. For example, the MaterialScience sub-group returned to the precrisis level much more quickly than anticipated. And currency effects were also clearly in our favor.

On the other hand, the performance of HealthCare and CropScience did not meet our expectations. In addition, reported earnings were significantly reduced by high special charges. Reported earnings per share declined by 8% versus the prior-year. I am convinced the Bayer has good growth prospect in all of its businesses, and our key priority going forward is to strengthen our innovation capability and to successfully commercialize our innovation, especially the Xarelto.

In 2010, we invested a record EUR3.1 billion in R&D, up 11% over the previous year. In addition, we will further expand our business in the emerging markets this year where we’re already enjoying above average growth. The restructuring measures we announced in November are creating the financial (inaudible) room we need to systematically invest in these opportunities and to further leverage our balance sheet.

Over the next three years, we are planning to invest a total of approximately EUR15 billion in R&D and capital expenditures to further fuel and fuel our growth. So we’re also confident for 2011, our outlook projects 10% core EPS growth.

So, let’s not take a brief look at the Q4 figures. In my comments, I will concentrate on the sales data adjusted for portfolio and currency effects. Net sales in the quarter improved by 8% driven by higher volumes, higher selling prices contributed 2% to the increase. Adjusted EBITDA rose by 12% and core earnings per share by 6% to EUR0.59.

Net cash flow increased by 10%. Reported fourth quarter earnings were diminished by substantial special charges. EUR825 million were mainly due to impairments and asset write-downs, EUR67 million were incurred for litigations in the United States and 62 million for restructuring and healthcare. As a result, reported group EBIT dropped by 86% to EUR51 million. After non-operating results of minus 237 million, we recorded a pre-tax loss of 186 million for the quarter and net loss of 145 million and earnings per share of minus EUR0.18.

From a regional perspective, the strongest growth was achieved in the emerging economies. In Western Europe, business gained 4% and in the United States, business declined by 1%. The emerging markets however accomplished for now 38% of group sales. In these markets, we extended our sales by 19% versus strongest growth achieved in the emerging Asian markets and Latin America. These figures clearly demonstrate that we are well positioned in the emerging markets and as our significant investment stack are paying up.

Gross cash flow of the Bayer Group advanced in the fourth quarter by 37% to EUR1.4 billion in light of the improved operating performance. Net cash flow moved ahead by 10% to EUR1.9 billion and free operating cash flow by 11% to 1.4 billion. As a result of the strong performance, we were able to reduce net financial debt in the quarter by 1.2 billion compared to the previous quarter to now 7.9 billion at year-end.

Let’s now move on to the performance of our subgroups. The challenges that impacted the performance of healthcare during the first nine months were also felt in the final fourth quarter. At Pharma, sales were impacted by the negative effect of healthcare reform in the early than anticipated genericization of YAZ in the US. Business in the US declined by 15%. Ex-US, we registered the sales increase of 6% driven by the strong performance in the emerging market.

Overall, Pharma sales advanced by 2%. Adjusted EBITDA grew by 5% including a gain from the settlement of the patent dispute with Teva concerning YAZ. Consumer health sales were up 1% compared with the prior year quarter. The drop in sales of – blood glucose monitoring systems in the United States caused by the difficult market situation was offset by growth in the over-the-counter and Animal Health business.

The decline of 16% in adjusted EBITDA of consumer health was mainly due to higher investments in marketing and sales. So ladies and gentlemen, we are proud of our achievements in the development of key Pharma pipeline projects. We successfully completed important pivotal studies for Xarelto including Rocket AF and EINSTEIN-DVT. In the meantime, Xarelto has been fired for stroke prevention in patients with atrial fibrillation in the US and Europe, and for treatment of deep vein from both – in Europe.

Towards the end of the year, we reported positive Phase III data from the VEGF Trap-Eye program in wet AMD and CRVO. We gained approvals for Beyaz, Natazia and Safyral – Safyral, and a new oil dispersion formulation of (inaudible). Significant cancellations includes (inaudible) L19-SIP. We expect important new slope from our Pharma pipeline also in 2011. This includes the expected completion of major relative studies ATLAS and EINSTEIN-PE this summer.

Additional data from the VEGF Trap-Eye program and from Nexavar studies. The Magellan study in which we are starting Xarelto for the prevention of VTE and medically ill patient has been completed, and we’re planning to present the data at the Annual Meeting of American College of Cardiology on April 5. CropSciences saw a strong finish to the year with sales up 10% from the quarter. The increase was driven by higher volumes, selling prices added one percentage point.

At Crop Protection Q4 sales improved by 8%. Supported by the positive market momentum, compared to Q4 last year, our business expanded strongly in Latin America, particularly in Brazil. Sales improved by 22 and 26% respectively.

In Asia Pacific, we grew sales by 14%. In North America, we’ve been 3% due to new product introduction. A sales decline of 10% in Europe resulted mainly from weaker herbicides and fungicides sales in France. The top line of the Environmental Science, BioScience segment grew 20% in the quarter, mainly driven by the strong performance of our BioScience business. Adjusted EBITDA of CropScience has advanced to EUR270 million, including one-time income of EUR44 million from the execution of the license agreements and the divestments of some algae-active ingredients.

The improvement in the business performance for our MaterialScience subgroup continued in the quarter. Sales at nearly EUR2.6 billion were up 22% year-on-year and only slightly below the third quarter level despite the seasonal business slowdown in Q4. The expansion of business over last year was due to a considerable increase and demand in our key customer industry. This enables us to significantly raise volumes and selling prices.

We registered at the largest absolute volume gains in Europe and Asia Pacific. The improved business situation was also reflected in earnings. EBITDA before special items of MaterialScience rose markedly in the fourth quarter of 2010 to EUR297 million, despite the negative impact of 160 million from higher raw materials and energy price.

So, so much for the fourth quarter. Now let me comment briefly on our performance against our targets for the full-year 2010. Group sales rose by 8% to a record EUR35.0 billion exceeding our target of a 5% increase. EBITDA before special items came in at EUR7.1 billion, and was therefore in line with our target which was to exceed 7 billion.

Core earnings per share were up 15.1% compared to the target of an increase of more than 15%. We thus achieved our sales and earnings targets for the group. Net financial debt were reduced by EUR1.8 billion to 7.9 billion. These achievements were essentially attributable to the strong recovery in the MaterialScience business in 2010 and also to positive currency effect.

Ladies and gentlemen, we are proposing at the Annual General Shareholders Meeting declares the dividend of EUR1.50 per share. We believe that this proposal reflects improved operating performance of the Bayer Group last year, and on this course that we are optimistic for the future.

Now let me discuss 2010 for the three subgroups. For HealthCare, 2010 was more difficult than expected. Pharma sales came in below our expectation. Over-the-counter and in animal health most likely exceeded market growth and achieved the sales targets.

Adjusted EBITDA of HealthCare was in line with our last earnings target update, but short of the guidance we gave at the beginning of the year. CropScience clearly missed its targets in fiscal 2010. Sales and earnings came in below 2009 mainly due to very difficult market conditions in the first six months.

The second half of the year developed more favorably with encouraging positive momentum into 2011. And for MaterialScience it was a stellar year. The recovery was more pronounced and much faster than we had anticipated, and we are very pleased that MaterialScience clearly exceeded even our upgraded targets. So what I know our concrete plans for 2011.

We expect the global economic recovery to continue in 2011. However the pace of expansion is likely to be slower than in 2010. The major emerging economies especially China, the peer set to continue driving global economic growth. However, global economic and clinical risks will most likely remain high during 2011.

We have based our budgets on a U.S. dollar exchange rate of 140 to the euro, and average crude oil price of $80 per barrel. We are fairly optimistic for the development of our key markets during 2011. We expect the growth rate for the pharmaceutical market to be in the middle single digit, driven by the emerging countries. We expect the over-the-counter and also the animal health market to grow around 4%. The diabetics care market will probably see only very slight growth due to continuing pressure on prices in the United States.

We foresee a positive trend for the global seed and crop protection markets in 2011. So assuming normal weather patterns, we anticipate robust market growth for agrochemicals as well as for seeds and traits. We expect to further strengthening of MaterialScience, main customer industry. The automotive industry will most likely continue along the road to recovery. We anticipate robust expansion in the global electrical, electronics industry, and we predicted distinct recovery in the construction and furniture industry in 2011.

In this total context, we can look to 2011 with considerable optimism. For the group, we are targeting a currency and portfolio adjusted sales increase of between 4 and 6% in 2011. Based on our currency assumptions, we therefore expect to report group sales of between 35 and EUR36 billion. We aim to increase EBITDA before special items to over EUR7.5 billion. Core earnings per share are expected to improve by about 10%.

We can confirm our target for 2012. We expect group sales to again grow by approximately 5% and to achieve EBITDA before special items of approximately 8 billion and core earnings per share of around EUR5. We’re planning significant investments in our business. During the next three years, we intend to invest total of 15 billion in capital expenditures and R&D. This year, we are budgeting capital expenditures of 1.5 billion of property plans and equipment.

We expect our research and development expenditures in 2011 to match the record level of 2010, which as I said before was approximately 3.1 billion. We are targeting higher sales and earnings in all our subgroups in 2011. In 2011, healthcare plans to increase sales by a low to mid-single digit percentage, and to achieve a small improvement in EBITDA before special items.

In the pharmaceutical segments, we do not have expected sales to resume growing with the market in 2011. We plan to increase sales by low-to-mid single digit percentage tend to raise the EBITDA margins before special items. In the consumer health segment, we anticipate above market growth in sales. We expect sales and EBITDA before special items to increase by mid-single digit percentage. In 2012, we aimed to accelerate the pace of growth especially in pharmaceuticals, thanks to our new products and to improved EBITDA before special items in both healthcare segments.

As already mentioned, we anticipate favorable market conditions for CropSciences and are therefore optimistic for 2011. We expect to improve sales in both CropSciences segments and to grow at least by a mid-single digit percentage overall. We plan to expand EBITDA before special items at a higher rate than sales.

In 2012, we again aimed to grow sales at least for the markets and further improved EBITDA before special items. For MaterialScience, we planned to raise sales in 2011 by a mid-single digit percentage and to increase in EBITDA before special items at a higher rate than sales. Provided that the market environment remains favorable, we planned to further increase sales and EBITDA before special items in 2012.

So ladies and gentlemen, I’m sure you would agree that our operating performance remains on track during 2010. We are optimistic for the future and assessing a further improvement in our performance.

That concludes my remarks. We will now be happy to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from Mr. Richard Vosser. Please state your name, company name followed by your question.

Richard Vosser – J.P. Morgan

Hi, it’s Richard Vosser here from J.P. Morgan. Thanks very much for taking my question. A couple of Xarelto related questions to start with please. By my calculation, I think you could have heard back from the FDA in terms of whether you’ve been grown to a priority review or not for Xarelto in the stroke indication. I wondered if you could give us some clarity there. And then related to that, I wondered if you could give your thoughts on the fact that the complete response letter could be haunted in July.

And if you haven’t got a priority review, the stroke indication could be around. Then what you think – what your planning assumption in terms of FDA would do in that situation? And then finally on Xarelto, whether you could give us an idea of when you’re targeting ATLAS to be presented. And then one quick question on R&D spend or innovation spend from – in terms of 15 billion. This were accounted about 10 billion in terms of R&D spend.

And if that’s correct, that seems to imply flat to slightly growing R&D spend over the three years. And that despite the relative spend tailing off. Could you give us an outline where this spend will be targeted both in the farmer and crop sides and of course materials as well? Thanks very much.

Marijn Dekkers

Okay, thank you Richards. We’ll ask your (inaudible) to answer your Xarelto questions first.

Joerg Reinhardt

Yeah. Regarding regulatory situation in the US, so far we have not viewed back from the SG&A in terms of priority reviews, but we would assume a normal review time of 10 months for Xarelto in this tough indication, which should then lead to the situation you must describe meaning that the six months review clock for the VTE indication would be before that time, I personally believe that the SG&A will look at these two submissions independently. They would be familiar with the product by now, and at least that they will deal with both indications independent from each other.

The other question you had was on ATLAS. As you know, we believe that this is study should be completed around summer time, which will mean that after recent analysis of the data, we should be able to present to the result towards the end of the year early next year.

Marijn Dekkers

Okay. And then regarding your question on the R&D, we are planning just like last years to spend in 2011, crops and seed 3.1 billion euro, and if you take the 15 billion for three years, two-thirds of it R&D, one-third capital investments that’s around 10. So in that – ballpark number of that 10, we have room to go up in the budget in 2012 and 2013, which is most likely the situation. Healthcare, CropScience, MaterialScience, the ratio, I don’t think will change significantly, of course the areas of emphases might change but not the overall ratios.

Richard Vosser – J.P. Morgan

Thanks very much.

Marijn Dekkers

Thank you.

Operator

The next question is from Mr. Sachin Jain. Please state your name, company name followed by your question.

Sachin Jain – Bank of America-Merrill Lynch

Hi, Sachin Jain from Bank of America-Merrill Lynch. Thanks for taking my question. Just three if I may. First, I’ve just one clarification, you mentioned that Magellan had completed, can you have data in-house and can you just quantify your intentions for headline press releases at ACC? Secondly, you briefly commented on rate ratio, the 2012 guidance to EUR5. I wonder if you just discuss that number in the context of consensus of EUR40, where do you see the major differences in-house versus where the market is.

And is Xarelto still a major swing factor in terms of your thought process on that number for next year? Thirdly and finally, on MaterialScience I am wondering if you could just comment on the demand environment, operating rates there. (If you would like) to comment on growing EBITDA first quarter despite higher costs. And if you could just clarify the cost statement for the first quarter, given that I think your planning assumptions slide was based on an oil price of $80, clearly we are higher than that at the moment. Thank you.

Marijn Dekkers

Okay. Your first question on the Magellan?

Joerg Reinhardt

Yeah, Magellan (inaudible) in-house, it’s correct. We’re still in the process of analyzing these. We are in discussions with the ACC regarding potential headlines of these. So however, if you kind of mention there are very strict in terms of the rules that they applied for an event like this. And for the time being four weeks ahead of the presentation, I cannot commit that we will be coming to an agreement to submit any or propose any headline data. So bear with us if you can do it. We will otherwise, you will see the data on April 5.

Marijn Dekkers

Okay. And then Werner Baumann, our CFO on the guidance for 2012 EPS?

Werner Baumann

I think if you look at the 540 versus the EUR5. You have to bear in mind that first of all, for the entire planning period between 2011 and 2013, we work on the basis of 140 dollar to the euro and that is not necessarily yet I think fully reflected in the animal’s estimates. So you will have a technical difference in virtually all guided numbers compared to some of the projections which are out there. Secondly, I think on a business-by- business group comparison, projections specifically on CropScience are very, very bullish. These are I think the main drivers compared to our (inaudible) per share value.

Sachin Jain – Bank of America-Merrill Lynch

Good. And then material science question?

Werner Baumann

Yeah, Sachin on the demand side, we’re seeing a fairly strong development, pretty much in line with our historical growth rate. So an MDI about 7%, TDI now approaching around 5%, poly-oil is coming line with that polycarbon about 6%. The supply situation is not so uncomfortable at the moment. I think on the utilization we’re at about 85% on MDI, 90 to 95% on TDI and probably virtually sold out for each of those moments. On polycorb the overall utilization around 90%. So that doesn’t give too bad environment from point of view of price.

So although we see significantly increased oil price, and current pricing in the market doesn’t reflect that. We’re pushing through price increases of quite significant proportion. So on TDI, MDI and polyeth price increase is 30 to 35% compound, since the key load has already gone out into the market. And on polycarbonates a $0.40 a kilo price increases have already been announced. So our assumptions in our guidance are that the market will allow us to push those prices through. And certainly with this increased oil price, certainly by the end of quarter 2, I would expect to see us get prices in line with free stocks.

Sachin Jain – Bank of America-Merrill Lynch

Thank you very much.

Werner Baumann

Okay. Thank you. Next question.

Operator

The next question comes from the line of Mr. Jeremy Redenius. Please state your name, company name followed by your question.

Jeremy Redenius – Sanford Bernstein

Hi, this Jeremy Redenius from Sanford Bernstein. I have one question for each segment. First of all, is there anything you can do to give us an update on the latest for Riociguat, any update on the trial recruitment? And could you also combine that with Pfizer’s sildenafil? And also when do you expect to file in a PAH and CTEPH? Second on CropScience, I am just wondering if you can give us an update on the pricing dynamic in the market there. We have heard a little bit about price increases selectively from Syngenta and BASF, for example in fungicides, low single-digit order of magnitude, but also some competitive statements about trying to gain market share. And I wonder if we could get your take on how you see that developing? Thirdly, on MaterialScience, I guess, can you give us any indication if you are seeing any pressure from the potential startup of the Saudi cayenne plant for polycarbonate? Then, also, if you’re seeing any pressure from Yantai and their activities with BorsodChem in Europe, if in both situations they are being rational actors in the market? Thank you.

Alexander Rosar

Okay, we will figure it out.

Marijn Dekkers

Yeah. Well, a little bit of good news here. So trial recruitment at least in the PAH trial is going better than it did last time. But still I mean it’s very complicated to us. We have simplified a protocol, we’ve added some new centers, but still we do expect that study as well as the other studies to be completed end of the year, beginning next year, we stated in 2012, which would then also lead us if the studies are positive to submit a file in 2012. I believe that should cover the question, you had something else which I didn’t quite understand.

Joerg Reinhardt

Shall we?

Jeremy Redenius – Sanford Bernstein

Right, I also had asked about the CTEPH.

Marijn Dekkers

Yeah. That is not growing as fast as PAH, but we also believe that that study should give us data in 2012.

Jeremy Redenius – Sanford Bernstein

Okay. Great, thank you.

Alexander Rosar

Okay, certainly Peterson on the pricing environment in crop sciences?

Marijn Dekkers

So, first of all, let me comment on 2010 as you know, on average, our competitors lost four to five percentages points on pricing in 2010 and horizon averages about -1%. In the fourth quarter, we started seeing a little improvement on pricing and selectively, we were able to take growth price increases in some cases. I think the challenge in 2011 is going to be first of all on the herbicide market, we’re still going to have significant pressure from generic glyphosate, which is really going to keep the market from increasing pricing. But I’m hopeful that we’ll see selective improvement in pricing in fungicides and also insecticides as we are bringing new markets in the marketplace. The question is really how these will stick over time and through the year progresses. So we’re hopeful we’ll some better pricing environment in 2011 than we saw in 2010.

Alexander Rosar

Okay. Thank you, Sandy and then Patrick the environments with Saudi Cayen standing up?

Marijn Dekkers

Yeah. I think the best way of looking at it, polycarbonate, utilization rates are above 90% at the moment. So the Saudi Cayen facility would be absorbed pretty fast by the market growth which I forecast to be in the 6% to 7% range, and I don’t see any irrational behavior around that. In the polyurethanes arena, (inaudible) both came out of kind of gaining control of one and another. They’ve been announcing price increases along with the rest of the market. Of course with growth rates being relatively high these connectives will be absorbed quickly as well.

TDI grew by 13% in 2010, MDI by 18%. TDI will continue – re-forecast is around about 5%, which is 1% above historical growth, and MDI is about 7% to 7.5%. So I don’t think these capacity additions will be a problem in terms of price income.

Alexander Rosar

Okay. Thank you.

Jeremy Redenius – Sanford Bernstein

Thank you.

Alexander Rosar

Next question please?

Operator

The next question is from Mr. Andrew Baum. Please state your name, company name, followed by your question.

Andrew Baum – Morgan Stanley

Yes. It’s Andrew Baum from Morgan Stanley. Three quick questions. Firstly on Magellan, do you have an SPA to get U.S. regulatory approval both if it shows superiority as well as it shows non-inferiority versus Lovenox? Second, perhaps you could talk some of the recent management changes you’ve made within the company especially within consumer and also in emerging markets. To what extend there’s scope to augment revenue growth within those areas as a function of the new management structure? And then finally if you could say something about the incremental SG&A commitments to roll out Xarelto for the atrial fibrillation indication within Europe? Thank you.

Marijn Dekkers

Okay. So Magellan and I assume Andrew that your management change question was also related to HealthCare or Bayer in general?

Andrew Baum – Morgan Stanley

I mean you can talk to – I mean specifically it was HealthCare, but I’m interested in emerging markets, and I am sure you’ll have interesting things to say on the broader topics as well, so I’d love to hear those as well?

Alexander Rosar

Okay. Good.

Marijn Dekkers

Well, let’s start with the management changes. Andrew, I think you’re primarily referring to the recent recruitment of Erica Mann who is going to the place of Gary in Consumer Care. Erica has a background, which has given a significant experience in some of these, let’s say not mainstream markets. As you’ve seen she was running the pharma business of Bayer’s, so that she covered also in Australia, and now recently given move to the U.S. So she has experience in different parts of the world, which will actually help our consumer health business to focus more than what we did in the past on some of these emerging markets especially in Asia.

As you know, probably we are present in some of these markets but not really at a level of things that we would like to be. So for example in China, if you still heard us that you’re smaller and do we need to actually invest more and get elect together. You also saw that fourth quarter of last year was relatively weak and consumers have to do with the fact that we keep on investing infrastructure in these markets over proportionally.

Other than that, we have streamlined our regional setup. We have taken out a management layer especially with an impact on the emerging markets. We have now most of these markets report directly to the President of the farmer business because he believes that a business like in China or like in Asia Pac needs to have direct access to the main decision-makers into system in order to speed up our movements there.

I believe that this changed together also due to fact that our Latin America reports directly to Andreas, should lead us to simplify speed-up and make sure that is not emphasis on those important markets, which are really going to drive our growth going forward much more than that will be the case in Europe or in the U.S.

With regard to specific SG&A commitments in Europe, please understand that that is an area, where I don’t want to make too much of a guess right now. I mean you can assume that it’s going to be a really competitive environment in Europe going forward. As you saw, we have been doing well with Xarelto business products in the VTE, I mean indication. Indication I mean in almost all of these markets.

We do have larger market share than our main competitor. And of course, we would like to have a similar situation also going forward and the other indication that are going to be approved soon. So for us, an important aspect and important area, where we will make sure that all the necessary investments are being made by the way not only in SG&A, but obviously also in life cycle management and additional Phase IV studies, et cetera. Now third question regarding Magellan, can you repeat please?

Andrew Baum – Morgan Stanley

Yes. So I was asking whether you have a special protocol assessment, a commitment from the FDA that should you show the Xarelto to be either superior or have been non-inferior to Lovenox that they will approve it. Obviously, it’s not interesting trial design that less patient makes, I mean the rest of stuffs you know. Hence my question, what’s your confidence from regulatory approval, given the design of the trial. And to what extent is it dependents on the two possible positive outcomes for the trial? Do you have an FDA?

Marijn Dekkers

The answer is not specifically, it is an area of obviously – the possibility always depends on – data. I mean, this is a situation where we will have to see with the FDA. How we – forward wants the data, publish to once the data clear, but we don’t have a specific agreement with them. Thank you.

Alexander Rosar

Okay. Thank you, Andrew. Next question please.

Operator

The next question is Mr. Jo Walton. Please state your name, company name followed by your question.

Jo Walton – Credit Suisse

Hello, it’s Jo Walton from Credit Suisse. Four quick questions please. Firstly in pharmaceuticals, I wonder whether you could give us some census how successful the Xarelto has been in Europe? Just give us some color as to how it’s succeeding, where it is up against Pradaxa as a competitive product? And also in pharmaceuticals, whether you could split out for us please, the mix of our sales in China and Japan? And then moving on beyond pharmaceuticals and CropScience, I’m trying to get a sense of what is reasonable so long term operating margins. In previous years, you’ve managed to produce 20 to 22% operating margins, you’re now down sub-15.

How is the competitive environment and the impact of generics in herbicides, say made a structural difference such that 20% is no longer a realistic objectives for the long term. And in the same really was the consumer business. Again you had 20% total margins, the fourth quarter was particularly weak. You’ve told this that you have to invest more in marketing support. I haven’t noticed a higher growth in sales. Is this just a kind of structural issue that you are having to spend more in order to get sales and we shouldn’t expect 20% long term operating margins either.

Marijn Dekkers

Okay, thank you. So you entered the first two pharma, Xarelto and Nexavar questions. And then also comment on the consumer business then we go to a sense.

Joerg Reinhardt

Yes. So Jo, Xarelto, obviously it’s still small number. So for the full year 2010, we had overall sales force to about 50 million. What I can say is that, as I mentioned before in those markets really compete, likely this product, so that actually applies to I believe, almost all of the markets. They are doing the low levels better than Pradaxa does, which hopefully is a good sign going forward.

On the other hand, I mean, it’s a very limited market. I don’t think you can say much or you can – base any decent assessment, based on these small numbers. However, it’s better this way than the other way around. So from that perspective, we are recently – reasonably confident and happy. Regarding Nexavar, of course Japan and China are the two markets where we strongest growth. We had sales of 31 million in Japan in the fourth quarter, and we had 14 million sales in China. In Japan, this is the 32% growth, and in China it’s a 16% growth.

Regarding consumer health, yes, we had a relatively weak fourth quarter, but it has also to do with the base of 2009. Our marketing and sales spendings in 2009 was particularly low in consumer health, and we went back in 2010 to a more that’s called reasonable level as compared to 2009. We also had weak diabetes care business in the US. In 2010, we mentioned that we hope that that’s going to improve significantly in 2011. We also had significantly higher R&D investments in animal health. So overall, I don’t think that that level of marketing and sales spending you saw in the fourth quarter is going to be the norm. I would like us to go back to more moderate levels as we did show for the rest of the year, which means that and as we stated, which means that we should see a slight margin improvement there as well again.

Jo Walton – Credit Suisse

And then Sand, the margin aspirations for CropSciences?

Sandra Peterson

It’s a great question Jo. I think the simple way to answer that question is that, over the mid-term, we need to get back to the 20%, which is what we had in 2009. 2010 was a particularly challenging year, for a lot of reasons including the weather. But also there was also a lot of price pressure, and generic pressure in the market. And as we are investing for the future in our bioscience business and in emerging market, we as an organization are transitioning a little bit where our growth will come from. But that also means that, we are aspired to get back to the 20% and then from there, hopefully we’ll be able to get beyond that over the longer term.

Marijn Dekkers

Jo, I just like to make another general comments about the margins and the margin pressure. There is no question that in healthcare and in CropSciences, we experience margin pressure in 2010, that has to do with the introduction of generic competition and in healthcare case with health reforms. This is exactly why we have, because that – with this restructuring program that we’ve been talking about, because this is absolutely key tool for us to be able to invest in innovation not just R&D, for those for the marketing and the sales of the new products.

And in order to free-up resources for that, and not has that become penalizing for margins, we need to save in other areas. And that is exactly what we’re doing with the restructuring program, which sort of has a motto of more innovation and less administration. So we recognized the pressure and we are committed to continue to invest in innovation freeing up the resources to do so.

Jo Walton – Credit Suisse

Thank you.

Marijn Dekkers

Thank you.

Alexander Rosar

Next question please?

Operator

The next question comes from the line of Mr. Florent Cespedes. Please state your name, company name, followed by your question.

Florent Cespedes – Exane BNP Paribas

Good afternoon, gentlemen. Florent Cespedes, Exane BNP Paribas, few quick questions. First on the pharma division, can you share with us what are the assumptions behind the pharma margin improvement for 2011? Is it better residence or as bit as a whole, is it the cost-cutting measure of any other item? And secondly on Xarelto, could you share with us your expectations for 2011? And lastly Xarelto again, could you tell us your view on Xarelto potential in medically-ill patients market as the key version of Lovenox is already available in the US? Thank you.

Marijn Dekkers

Yeah, so first of all, what we’ve said in the guidance is that we do expect a lot of single – mid-single digit growth in sales for 2011 and a slight improvement in EBITDA, which does not necessarily mean a significant margin improvement. So we will certainly strive to continue to improve margins in 2011. But I believe that if we will be able to do that, it will certainly come from productivity improvements, as Marijn mentioned, 1,800 people out of the – overall restructuring volume is coming from HealthCare.

That is the restructuring scope that will be done in 2011 and 2012, so of that will actually affect us in 2011. But certainly this level of restructuring should have an impact and should help to bring EBITDA in March and overtime. Also we will invest some part of that again in China to build our presence in emerging markets. So, I see mainly volatility improvements across the board twicing (ph) it. And also as we mentioned before, I mean, Xarelto was the very expensive program during the Phase III program over the last two years. And overall investment for Xarelto come and R&D comes down a little bit, which should also help us in 2011.

So you’ve been asking for the expectation for Xarelto for 2011. I mentioned 50 million for 2010. Since we are not expecting any significant contribution from the new indications in 2011, if you don’t – double the sales that we had in 2010, it should be in the right order of magnitude. But still going to be a relatively small product also in 11, and that’s why we do see significant sales, but also profitability increase only in 2012 and beyond.

Joerg Reinhardt

You were asking regarding the medically ill indication. Obviously we have to see how the market will develop there. And also filing it certainly very formidable and well established competitor. And you have to see how we can establish ourselves next to them, that something that will obviously also depend on the data that has been generated. And something that we may want to discuss again once the Magellan data has been made public.

Marijn Dekkers

Thank you.

Florent Cespedes – Exane BNP Paribas

Okay. Thank you.

Marijn Dekkers

Thank you. Next question please.

Operator

The next question is from Thomas Gilbert. Please state your name, company name, followed by your question.

Thomas Gilbert – UBS

Tom Gilbert, UBS Chemicals and its – chemicals question. Three of them. The first one is the 44 million licensing income in the fourth quarter. Can you just clarify that was entirely booked or at the merit of the crop protection business unit? And are there any further such income streams expected for 2011, 12? That is the first question. Second question is also in CropScience or crop protection respectively. Just a clarification the minus 1% for 2010 on pricing. Was that meant to be a comment regarding CropScience or crop protection? And following on from that minus 4.7% organic – decline in 2010 seems way below competitors.

It looks like you’ve lost share, your computers are coming with new value propositions, bundling seeds and crop protection. Just wondering whether you think over the medium term, you’ve got the right value proposition for your growers. But also namely the retailers, the retail model, are you happy with what you’re seeing since you’ve joined the crop protection business.

And the third question is probably for Mr. Dekkers. Obviously, you are allowing all of the business units a nice growth thought with CapEx and R&D. Just wondering how you allocate money for external goals? And the balance sheet is now two times net debt plus pensions to EBITDA looks sound. What is the criteria you apply when business units or clusters ask you for money for external roofing. Any kind of idea on acquisition budget for 2011 that would be helpful? Thank you very much.

Marijn Dekkers

Okay, so Sandy. I’ll start with the 42.

Sandra Peterson

Yes, So Tom, I’ll answer that question. The 44 million is – it’s income that was both due to selling off of older molecules as well as licensing income access you with our bioscience business. And we will continue to always look at our portfolio for opportunities to sell our out license assets as we are streamlining the crop protection portfolio as well as hopefully be able to generate incremental income from licensing, some of our trades and other things that our BioScience platform over the three year short and midterm.

So hopefully that answers your first question. As it relates to pricing and crop – the ones, minus 1% pricing that was crop protection specific actually in our other businesses we were able to sustain our actually increased pricing. And in terms of your general question about market share and our performance of business, I’ll just give you my perspective on where we are in the business and what we need to do going forward.

It’s quite obvious that the 2010 was an extremely disappointing year for the crop protection business. Our BioScience and environmental science’s business is actually saw very nice strong growth and market share gains. Both of them did in the businesses from which they operate. In our crop protection business, we clearly saw declines in most of the markets around the globe. There were couple of phrases that I would describe as very positive and places where we as a business actually have done a very good job of bundling season trades.

That’s in Canada with our Canola business in India both with our vegetable business and crop protection business and our rice business. And in Brazil and the US with our cotton business where we’ve actually been able to sell in and do a quite nice job with growers and the dealers and all of the channel partners in those markets.

Therefore for us, I think as we move forward, it’s going to be important for us to take full advantage of the innovation that we have. We have the strongest portfolio products and the strongest pipeline in CPM, what we need to do is make sure that we are able to appropriately fund the marketing and commercialization of those products, and ensure that those value propositions are fully understood and are appreciated by the growers and the sellers in the marketplace.

So we’re – in 2011 and 2012, we’ve done a lard of things to change the focus of the organization. We’ve changed a number of key leaders in the organization, and I believe that will really help us to improve our commercial model further. And really take advantage of the models where it places like India, Brazil and Canada.

Thomas Gilbert – UBS

Thank you, Sandra. Can I just ask in on the 44 million, can you split the benefit to the Crop Production and Environmental and Bioscience business separately or was it by enlarge a corporate section income?

Sandra Peterson

It’s about half and half.

Thomas Gilbert – UBS

Thank you.

Marijn Dekkers

Okay. And Thomas your question with respect to acquisitions budget, we don’t have a specific acquisitions budget, because of cost of acquisitions you have to be somewhat opportunistic since we have to know what exactly is going to be available for sale. And – but I think we’re pleased to bring down our net debt to under 8 billion with terrific working capital improvement in the company in all three subgroups. And that gives us, of course with lower debt always more flexibility as our things are related. There is a focus for our smaller acquisitions of the subgroups for somewhat larger voluntary specialty HealthCare and CropScience. Next question please?

Operator

The next question comes from the line of Mr. Andreas Heine. Please state your name, company name followed by your question.

Andreas Heine – UniCredit

From UniCredit. You have booked clients on restructuring and litigations and the restructuring program has just started. Can you remind me what you will have for the restructuring charges next year, and even more importantly what the cash out will be in the year 2011 and 2012, please? Thanks.

Marijn Dekkers

So, Werner Baumann will answer this question on this.

Werner Baumann

Yeah, for the overall program, we said that we’re going to have expenses of roughly EUR1 billion most, not all of it, most of it actually cash effective. Out of that amount EUR62 million that booked in 2010 exclusively related to healthcare and the next slide of it if you want so. So 2011 is (indiscernible) in euros. The remainder obvious is to come mostly in 2012.

Andreas Heine – UniCredit

And these 0.5 billion that is cash and what about the litigation you have booked in 2010, according to the cash flow statement and the strengths of the cash flow in last quarter that have not been paid yet?

Marijn Dekkers

That’s absolutely correct. First, your follow-up question on the possibility and the restructuring charges, most of it will be cash relevant in 2011. And then on the litigation-related charges, our guidance always is exclusive of litigation because that’s impossible to estimates at the beginning of the year. And in your estimates, you’re right that the charges you’ve taken in quarter three mostly on the LLY has not become cash effective so far. And here, the timing really depends on how discussions and negotiations proceed during the year.

Andreas Heine – UniCredit

Thanks.

Marijn Dekkers

Thank you. Next question, please.

Operator

The next question is from Mr. Anthony Fernandes. Please state your name, company name followed by your question.

Marijn Dekkers

Hello?

Joerg Reinhardt

I guess we lost him.

Operator

Excuse me. I think we have lost Mr. Fernandes line. I will proceed to the next question. The next question is from the line of Mr. Ronald Koehler. Please state your name, company name followed by your question.

Ronald Koehler – MainFirst

Hello, it’s Ronald Koehler from MainFirst. First question is on the YAZ franchise especially in U.S. you launched Beyaz. You had a rebound actually from 32 million to 55 in U.S. Is that the stocking effect by S, or do we really now get let say to more decent levels once again or can you little bit elaborate on that?

Second question is on Levitra, also here you had quite a good fourth quarter. I was wondering, is it the ODT version and what is – is at a sustainable level or has it also some stocking effect here? Third question is actually regarding tax rate. And do you have a new guidance 27 to 28% previously for 28 to 30%, is that now a long-term guidance? Is it influenced I guess by more money made in emerging markets, can you also little bit elaborate on that please?

And the last question on healthcare. I’m a little bit curious if you could give us let’s say the major healthcare product of pharma product in emerging markets, I know Glucobay is quite dominant in China. But a little bit here and the outlook meaning also the risk of getting generic pressure here on your existing portfolio. Thanks.

Marijn Dekkers

Okay. I suggest you take the questions. Yes, Levitra and HealthCare products in emerging products is the first, and then we go to (indiscernible).

Joerg Reinhardt

Okay. So regarding, yes, you’re absolutely right, the way we look at that product family is from a franchise perspective. And BS launch actually so far has done well. Then you look at new prescriptions. We already had 1% in the last week, 1% market share of NIX’s which is actually absolutely in line with our expectations, which leads us to the assumption that our overall YAZ business for 2011 or the franchise is going to be flat in terms of sales.

We would expect us to 2011 once we have overcome the first six months of generalization in fact that in 2012 and 2013, the franchise should actually grow even by high single-digits is what we expect. Driven to a larger extent also by emerging markets where we see that all contraceptives are going to be more and more accepted with the younger generation.

As you may know there are cultural differences, obviously in the way contraception is being done between the U.S, Europe and Asia. But what we see at the younger generation in Asia is more open to hormones and all contraception. So there also from a mid-term perspective, we see still growth to come. Levitra, no, it’s not yet the ODT formulation in the U.S. which we expect to launch later this year.

Overall, I believe that for the time being the Levitra, let’s say take up is hopefully going to be sustainable. We would hope that the ODT formulation continues to add value to this overall franchise. Although we are not going to let’s say have particularly high hopes for Levitra, but nevertheless, we do hope that the ODT formulation contributes to the stable growth of the sales there.

Now regarding HealthCare in Asia, it’s actually interesting when you look at main contributions that we have in China for example, when it comes from products like Glucobay, Avelox, Avalox products that are off patents into long period of time, at least in most parts of the world. And they are still going strong. And that has to do with the brand.

I mean, we are talking about essentially a good – arguably we are talking about plan to generics where the Bayer brand is absolutely key to make this product successful.

So there has being – seeing generic competitions since quite a while and are still growing double-digits, and that’s not only the case in China, but also in quite a range of other emerging markets. So overall I believe that that portfolio of Primary Care product strong planned, well established, efficacious, safe and driven by the Bayer heritage is going to drive our emerging markets portfolio over the next few years, not only in Asia, but also in Latin America. In addition to that, we obviously do plan to also launch our new product, Nexavar has been launched, Xarelto has been launched. So it’s going to be a mix of mature products still going strong and new products that hopefully drive growth.

Werner Baumann

Yeah, on your question on tax rate, almost you’re absolutely right. We’ve suggested our guidance to new range of 27% to 28% for 2011. So it’s come down and we’ll see it continue at roughly that levels. And that compared to even lower current tax rates in 2010, which is driven by an unusual distribution of our results yes, effective tax rate, sorry, not the current tax rate.

Ronald Koehler – MainFirst

Okay. Thank you.

Alexander Rosar

Okay. Thank you.

Operator

The next question comes from the line of Mr. Martin Flückiger. Please state your name, company name, followed by your question.

Martin Flückiger – Helvea

Yes, good afternoon, gentlemen. Martin Flückiger of Helvea. Just one question left really on biomaterial science. I was wondering whether you could give us some more color on the raw material price evolution that you’ve experienced in the fourth quarter, and if I understood Marijin correctly, could you – that’s just a clarification question – additional one, did I hear this correctly that the EBIT hit from raw materials was EUR160 million in the fourth quarter, just to double check on that. And regarding raw material prices again looking forward what your expectations are, obviously, everyone is expecting rising raw material prices given the search in oil prices as, but I was just wondering whether you could provide a little bit more flavor on that? Many thanks.

Marijn Dekkers

Sure. Yeah, thank you, Martin. Yeah, the 160 million, just to clarify, that was fourth quarter ‘10 compared to fourth quarter ‘09, so that was the year-on-year comparison. The sequential comparison on raw materials from quarter three to quarter four would be around about 60 million of increased total raw material plus energy price. Clearly as we go forward with the current volatility in oil price, we can’t forecast what the average for the year will be.

But just give your crude fix or – for about $10 of barrel oil equates to around about $200 million in cost for us. Clearly, we can’t pass that on instantly, but typically over a period of 3, 4 months that is capable of being reflected in prices. And I think I highlighted those price changes earlier. So that’s the dynamic at the moment. All I can say is, we’re no better at forecasting oil prices than anybody else. So I’m not going to (indiscernible) into that game.

Martin Flückiger – Helvea

Good color.

Marijn Dekkers

Okay. Next question?

Operator

The next question comes from Mr. Michael Leuchten. Please state your name, company name, followed by your question.

Michael Leuchten – Barclays Capital

Yeah. It’s Michael Leuchten from Barclays Capital. Just a quick follow-up on Xarelto. In terms of capacity, do you have enough capacity in place to launch in most major markets immediately, or would you have to affect a staggered launch across the regions?

Marijn Dekkers

We have sufficient capacity to launch in – mentioned markets at the same time.

Michael Leuchten – Barclays Capital

Thank you.

Marijn Dekkers

Next question please?

Operator

(Operator Instructions) We have a question from Mr. Ronald Köhler. Please state your name, company name followed by your question.

Ronald Köhler – MainFirst

Yeah, well, it’s Ronald Köhler from MainFirst. A follow-up question on R&D. Obviously, you said it’s overtime to looking for higher R&D, even it seems 2011 versus 2010 a slight increase in pharma R&D and I’m potentially as the others are wondering a little bit after Xarelto, it’s running out the pipeline. It’s – let’s say with more specialized drugs, which I would have believed would require much less R&D. Does that mean you put more money into the – or to early phases or what is actually your spending targets in terms of – which product or early phases? And second question is on amortization. Obviously, you had a lot of write-downs, now does it in any way affect your amortization budgeted, amortization or depreciation amortization for 2011 and – your number perhaps on that?

Marijn Dekkers

Okay, R&D and Pharma.

Joerg Reinhardt

Well, no, there is no significant shift from one area into the other within R&D. Please don’t forget that the – Alpharadin is a quite a rich phase III pipeline that also cost money. And even this Xarelto, I mean we’re talking about the large management program that sooner or later is going to add significant numbers of patients as well, we have VEGF Trap program still ongoing. We have Nexavar additional indications we have (indiscernible). So, down a range of products that add to the quality of a number of – say it’s one project since we’re starting now on the oncology pipeline. So altogether, I would say that our overall level of investments is absolutely adequate. And I do not foresee a significant change between research and development in the near term.

Werner Baumann

Yeah. And on depreciation and amortization, in rough charts, you can work at the same level of D&A as you have for 2010. For 2010, prior to special items and impairments, it was about 1.3 billion each between depreciation and amortization, and thus we have roughly ended up. For 2011, a total of depreciation and amortization is about 2.5 billion, also again roughly cut in half and half depreciation and amortization – company.

Ronald Köhler – MainFirst

Okay. Thanks.

Alexander Rosar

Thank you. Is there another question?

Operator

Excuse me, Mr. Rosar, there are no further questions at this time. Please continue with any other point you wish to raise.

Alexander Rosar

Thank you, Clare. Ladies and gentlemen, on strong behalf of my colleagues, I’d like to say thank you for being with us on the call and thank you for your questions. Before closing the call, please allow me also to draw your attention to our upcoming Investor and Analyst Conference. Firstly, as you – everybody know on March 22nd and 23rd, we’ll host our Annual Mid Management Conference here in New York. Secondly, on the 17th and 18th of November, we have joining an Investor and Analyst Conference focusing on our business in China. The conference will take place at our head office in Shanghai. We’re now saying goodbye and hope to meeting you all soon again.

Operator

Ladies and gentlemen, this concludes the full-year and fourth quarter 2010 results investor analyst conference call of Bayer AG. Thank you for participating. You may now disconnect.

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