Chairman’s Letter
Procurement and Distribution
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Management Report
Procurement and Distribution
The Pharmaceuticals segment generally procures the starting materials for manufacturing the active ingredients of its prescription medicines from external suppliers. We hold strategic reserves to prevent supply bottlenecks and possible dependence on suppliers. We mitigate major price fluctuations by purchasing the intermediates required to manufacture our principal active ingredients from several approved suppliers on the basis of global contracts. The active ingredients of our prescription medicines are currently manufactured almost entirely in Wuppertal and Bergkamen, Germany, for Bayer production facilities worldwide. Our most important pharmaceutical production plants are located in Berlin, Leverkusen and Weimar, Germany; Berkeley, California, and Seattle, Washington, United States; Garbagnate, Italy; São Paulo, Brazil; Madrid, Spain; and Turku, Finland. Our products are primarily distributed through wholesalers, pharmacies and hospitals.
Since we actively compete with other drug suppliers worldwide, we seek to reinforce our external distribution network with co-promotion and co-marketing arrangements. In September 2004 we entered into a strategic alliance with Schering-Plough under which that company distributes our primary care products (including Cipro® and
Avelox®) in the United States. (Please note that Schering-Plough Corporation, New Jersey and the company acquired by Bayer in June 2006, i.e. Bayer Schering Pharma AG, Germany* [formerly named Schering AG], Berlin, Germany, are unaffiliated companies that have been totally independent of each other for many years.) At the same time, we market selected oncology products from Schering-Plough in selected countries. Bayer and Schering-Plough also plan to jointly market Schering-Plough’s product Zetia® in Japan, where it is currently involved in the registration process. Our erectile dysfunction drug Levitra® is co-marketed in the United States by GlaxoSmithKline and Schering-Plough. In October 2005 we signed a strategic cooperation agreement with Johnson & Johnson under the terms of which Johnson & Johnson is supporting the development of our antithrombotic drug rivaroxaban (BAY 59-7939). It is intended that Johnson & Johnson market the newly developed drug in the United States at a later date. We also have a co-marketing agreement with Wyeth, Inc. for Europe concerning gestoden, an active ingredient for oral contraceptives.
In our Consumer Health segment the focus is on products marketed directly to consumers. The Consumer Care Division concentrates on non-prescription drugs. While the division’s sales and distribution channels outside Europe are typically supermarket chains, drugstores and other wholesalers, pharmacies are the usual distribution channel in Europe. Consumer Care procures certain high-volume raw materials from within the Bayer Group. Our major externally procured high-volume raw materials from third parties are naproxen, ascorbic acid, citric acid, paracetamol and phenylephrine. These are generally readily available. To minimize business risks, we diversify our raw material procurement sources worldwide and conclude long-term supply agreements.
About one quarter of the products of the Diabetes Care Division are manufactured or assembled directly by Bayer, while the rest are procured from original equipment manufacturers (OEMs). The delivery of raw materials, components and finished products is based on a supplier management process. Access to most of the materials is thus safeguarded through contractual agreements, and they are therefore not subject to major fluctuations in price or availability. Delivery bottlenecks for some direct or OEM materials would have negative consequences for the earnings performance of Diabetes Care. These items include customer-specific, integrated circuits and sensors for producing theAscensia® blood glucose measurement system. We therefore hold strategic reserves of certain direct materials or finished products in order to be able to supply our customers consistently and reliably. Furthermore, we maintain a global supplier network. Our Diabetes Care products are generally marketed to consumers outside Europe through supermarket chains, drugstores and other wholesalers. In Europe, we market our products usually through pharmacies.
The Animal Health Division procures the active pharmaceutical ingredients for its veterinary medicines both from within the Bayer Group and from external suppliers throughout the world. Depending on local regulatory frameworks, animal health products may be available to end users with a prescription issued by a veterinarian or over the counter from retailers or in drugstores and other specialized marketers.
Since we actively compete with other drug suppliers worldwide, we seek to reinforce our external distribution network with co-promotion and co-marketing arrangements. In September 2004 we entered into a strategic alliance with Schering-Plough under which that company distributes our primary care products (including Cipro® and
Avelox®) in the United States. (Please note that Schering-Plough Corporation, New Jersey and the company acquired by Bayer in June 2006, i.e. Bayer Schering Pharma AG, Germany* [formerly named Schering AG], Berlin, Germany, are unaffiliated companies that have been totally independent of each other for many years.) At the same time, we market selected oncology products from Schering-Plough in selected countries. Bayer and Schering-Plough also plan to jointly market Schering-Plough’s product Zetia® in Japan, where it is currently involved in the registration process. Our erectile dysfunction drug Levitra® is co-marketed in the United States by GlaxoSmithKline and Schering-Plough. In October 2005 we signed a strategic cooperation agreement with Johnson & Johnson under the terms of which Johnson & Johnson is supporting the development of our antithrombotic drug rivaroxaban (BAY 59-7939). It is intended that Johnson & Johnson market the newly developed drug in the United States at a later date. We also have a co-marketing agreement with Wyeth, Inc. for Europe concerning gestoden, an active ingredient for oral contraceptives. In our Consumer Health segment the focus is on products marketed directly to consumers. The Consumer Care Division concentrates on non-prescription drugs. While the division’s sales and distribution channels outside Europe are typically supermarket chains, drugstores and other wholesalers, pharmacies are the usual distribution channel in Europe. Consumer Care procures certain high-volume raw materials from within the Bayer Group. Our major externally procured high-volume raw materials from third parties are naproxen, ascorbic acid, citric acid, paracetamol and phenylephrine. These are generally readily available. To minimize business risks, we diversify our raw material procurement sources worldwide and conclude long-term supply agreements.
About one quarter of the products of the Diabetes Care Division are manufactured or assembled directly by Bayer, while the rest are procured from original equipment manufacturers (OEMs). The delivery of raw materials, components and finished products is based on a supplier management process. Access to most of the materials is thus safeguarded through contractual agreements, and they are therefore not subject to major fluctuations in price or availability. Delivery bottlenecks for some direct or OEM materials would have negative consequences for the earnings performance of Diabetes Care. These items include customer-specific, integrated circuits and sensors for producing the
Ascensia® blood glucose measurement system. We therefore hold strategic reserves of certain direct materials or finished products in order to be able to supply our customers consistently and reliably. Furthermore, we maintain a global supplier network. Our Diabetes Care products are generally marketed to consumers outside Europe through supermarket chains, drugstores and other wholesalers. In Europe, we market our products usually through pharmacies. The Animal Health Division procures the active pharmaceutical ingredients for its veterinary medicines both from within the Bayer Group and from external suppliers throughout the world. Depending on local regulatory frameworks, animal health products may be available to end users with a prescription issued by a veterinarian or over the counter from retailers or in drugstores and other specialized marketers.
Crop Protection procures most of its raw materials from external companies. The cost of some raw materials depends on fluctuating crude oil and energy prices and freight charges. As a large proportion of our sales is generated in the northern hemisphere, the business is affected by the growing seasons for the relevant crops and the respective distribution cycles. The products of Crop Protection are marketed either to wholesalers or directly to retailers through a two- or three-tier distribution system, according to local market conditions.
Our Environmental Science Business Group markets its products to both professional users and consumer markets in the non-crop segment through various distribution channels. Our green industry, pest control and vector control products are marketed directly to professional users, while home and garden products are sold to consumers through distribution channels.
BioScience makes its seed products available to growers, distributors and processing industries. Traits developed using plant biotechnology are either outlicensed to other seed companies for use in their products or sold through our own seed companies. Important brands here includeInVigor® and FiberMax®. In some cases we make plant traits available to other companies for use in their own research.
Our Environmental Science Business Group markets its products to both professional users and consumer markets in the non-crop segment through various distribution channels. Our green industry, pest control and vector control products are marketed directly to professional users, while home and garden products are sold to consumers through distribution channels.
BioScience makes its seed products available to growers, distributors and processing industries. Traits developed using plant biotechnology are either outlicensed to other seed companies for use in their products or sold through our own seed companies. Important brands here include
InVigor® and FiberMax®. In some cases we make plant traits available to other companies for use in their own research. The Polycarbonates business unit of MaterialScience sells its products primarily to injection molding and extrusion processors for the manufacture of plastics components used predominantly in the automotive, electronics, construction, data systems, medical equipment and leisure sectors. The key petrochemical raw materials used by our Polycarbonates business unit are acetone and phenol. With raw material costs affected mainly by the volatility of crude oil and oil derivative prices, we generally conclude long-term supply agreements containing cost-based and market-price-oriented adjustment formulas. Our products are marketed chiefly through regional distribution channels. We also use trading houses and local distributors to sell to small volume customers.
The polyurethane products of the Polyurethanes business unit, which are based on isocyanatepolyol systems, are used in the automotive, construction, electronics and furniture industries and in leisure articles. The primary raw materials are petrochemical feedstocks, which we mostly procure on the open market through long-term agreements. Our global joint venture with Lyondell provides a supply source for propylene oxide, one of our key raw materials. We mostly sell our isocyanate and polyol products directly to customers. Europe and the NAFTA countries remain the primary markets for our polyurethanes business, with the Asian market continuing to show the strongest prospects for future growth.
Our Coatings, Adhesives, Sealants business unit is a major manufacturer of raw materials for coatings and adhesives used primarily in the automotive, furniture, plastics and construction industries. Temporary fluctuations in prices for crude oil or utilities, for example, can heavily impact the cost of our raw materials. For this reason, supplies of the principal chemical raw materials are secured through long-term agreements. Major customers with global operations are serviced directly by our key account managers.
The polyurethane products of the Polyurethanes business unit, which are based on isocyanatepolyol systems, are used in the automotive, construction, electronics and furniture industries and in leisure articles. The primary raw materials are petrochemical feedstocks, which we mostly procure on the open market through long-term agreements. Our global joint venture with Lyondell provides a supply source for propylene oxide, one of our key raw materials. We mostly sell our isocyanate and polyol products directly to customers. Europe and the NAFTA countries remain the primary markets for our polyurethanes business, with the Asian market continuing to show the strongest prospects for future growth.
Our Coatings, Adhesives, Sealants business unit is a major manufacturer of raw materials for coatings and adhesives used primarily in the automotive, furniture, plastics and construction industries. Temporary fluctuations in prices for crude oil or utilities, for example, can heavily impact the cost of our raw materials. For this reason, supplies of the principal chemical raw materials are secured through long-term agreements. Major customers with global operations are serviced directly by our key account managers.
*
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.
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