Bayer AG - Annual Report 2006 - Changes in Corporate Structure

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Management Report

Changes in Corporate Structure

Since June 23, 2006, we have held a majority of the shares of Schering AG, Berlin, Germany, and therefore have included Schering in our consolidated financial statements as of that date. The names “Bayer Schering Pharma” or “Schering” as used in this Annual Report always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively. The reference to Bayer Schering Pharma AG, Germany* or Schering AG also includes business conducted by affiliated entities in countries outside Germany. Bayer Schering Pharma AG, Germany* and Schering-Plough Corporation, New Jersey, are unaffiliated companies that have been totally independent of each other for many years. On October 27, 2006, the domination and profit and loss transfer agreement between Bayer Schering GmbH and Schering AG was entered in the commercial register. The renaming of Schering AG to Bayer Schering Pharma AG, Germany* took effect on December 29, 2006. As of December 31, 2006, our interest in the voting capital of Bayer Schering Pharma AG, Germany* amounted to 96.2 percent. The 95 percent majority required to squeeze out the minority stockholders in return for cash compensation pursuant to Sections 327a through 327f of the German Stock Corporation Act was exceeded in the third quarter. The Extraordinary Stockholders’ Meeting on January 17, 2007, resolved to effect a squeeze-out of the remaining minority stockholders of Bayer Schering Pharma AG, Germany*.

The sale of the Diagnostics Division of Bayer HealthCare to Siemens, announced in the second quarter of 2006, was closed in January 2007. The divestment of H.C. Starck to Advent International and The Carlyle Group was completed in February 2007. The transfer of our Wolff Walsrode activities to The Dow Chemical Company is planned for the second quarter of 2007. These three businesses are recognized as discontinued operations.

To ensure comparability between reporting periods, the following table provides a reconciliation of Bayer’s sales and earnings data in the corporate structure existing at the beginning of 2006 to those in the new structure in place on December 31, 2006.

Bayer Key Data for the Previous and Current Corporate Structures	Bayer excl. Schering, incl. Discontinued Operations		Schering AG, Germany¹		Operations Reported as Discontinued as of 2006⁴		Continuing Operations incl. Schering¹
€ million	2005	2006	2005	2006	2005	2006	2005	2006
Sales	27,383	28,719	-	3,082	2,682	2,845	24,701	28,956
EBITDA²	4,647	4,986	-	151	525	462	4,122	4,675
EBITDA before special items	5,082	5,291	-	774	480	481	4,602	5,584
EBITDA margin before special items	18.6%	18.4%	-	25.1%	17.9%	16.9%	18.6%	19.3%
EBIT²	2,812	3,179³	-	(119)	298	298³	2,514	2,762
EBIT before special items	3,300	3,635³	-	178	253	334³	3,047	3,479

1 Schering AG business for the period June 23 - December 31, 2006
2 For definition see Bayer Group Key Data
3 For a year-on-year comparison of data, it should be borne in mind that depreciation and amortization for the Diagnostics Division only took place for the first half of 2006. According to International Financial Reporting Standards, depreciation and amortization must cease from the date on which operations are classified as discontinued.
4 Diagnostics, H.C. Starck, Wolff Walsrode

Calculation of EBIT(DA) before special items for the Schering AG business
The purchase price paid for Schering AG, Germany, was allocated among the acquired assets and assumed liabilities in accordance with the International Financial Reporting Standards (IFRS) (see also Note [7.2] to the consolidated financial statements).

One of the effects of the preliminary purchase price allocation is an upward revaluation or “step-up” of the acquired inventories and noncurrent assets. The greater part of the noncurrent asset step-up relates to assets used for production. Depreciation of the step-up amount results in a long-term increase in the cost of production of goods manufactured after the acquisition date. The “work-down” of the inventory step-up as the acquired inventories are sold off results in charges to earnings in the short term.

To ensure comparability with future earnings data, the expected long-term effects of the step-up are reflected in EBIT and EBITDA before special items, whereas temporary, non-cash effects of the purchase price allocation are eliminated.

Special items in EBIT and EBITDA for 2006 include €84 million and €429 million, respectively, in charges resulting from the purchase price allocation.

The names "Bayer Schering Pharma" or "Schering" as used in this publication always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively.