Bayer AG - Stockholders' Newsletter First Quarter 2007

Management Report

Liquidity and Capital Resources

Operating cash flow

Gross cash flow in the first quarter of 2007 amounted to €1,411 million, up 29.6 percent from the prior-year quarter (€1,089 million). The increase was mainly due to the inclusion of Schering, Berlin, Germany, and the strong performance of the business. Net cash flow improved by €337 million to €375 million (Q1 2006: €38 million). The change in working capital improved slightly compared with the first quarter of 2006 despite the growth in business.

Bayer Group Summary Cash Flow Statements	1st Quarter 2006	1st Quarter 2007
€ million
Gross cash flow*	1,089	1,411
Changes in working capital/other non-cash items	(1,051)	(1,036)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	38	375
Net cash provided by (used in) operating activities (net cash flow), discontinued operations	90	38
Net cash provided by (used in) operating activities (net cash flow) (total)	128	413
Net cash provided by (used in) investing activities (total)	(192)	4,589
Net cash provided by (used in) financing activities (total)	(187)	(1,764)
Change in cash and cash equivalents due to business activities (total)	(251)	3,238
Cash and cash equivalents, January 1	3,290	2,915
Change due to exchange rate movements and to changes in scope of consolidation	(13)	(10)
Cash and cash equivalents, March 31	3,026	6,143

2006 figures restated
* for definition see Bayer Group Key Data

Investing cash flow

There was a net cash inflow of €4,589 for investing activities in the first three months of 2007, compared with a €192 million outflow in the prior-year quarter. The main items here are net proceeds totaling €4.7 billion from the divestments of our Diagnostics business and H.C. Starck. In January 2007 we sold the Diagnostics business to Siemens for €4.3 billion. Following an initial receipt of €0.4 billion in December 2006, there was a further inflow of €3.7 billion (after deducting divested cash of approximately €0.2 billion) from this transaction at the beginning of 2007. In subsequent quarters we will pay approximately €0.6 billion in taxes on the divestment gain. We sold H.C. Starck to Advent International and The Carlyle Group for approximately €1.2 billion. The transaction volume is comprised mainly of a cash component – including compensation for financial liabilities – of more than €0.9 billion, along with the assumption of €0.2 billion in pension obligations. This sale was closed at the beginning of February 2007.

Cash outflows for property, plant and equipment (€193 million) and intangible assets (€8 million) totaled €201 million (Q1 2006: €419 million). The prior-year figure included in particular the purchase of the European marketing rights for the blood pressure treatments Pritor® and PritorPlus® and expenditures for the expansion of our polymers production facilities in Caojing, China.

Financing cash flow

The €1,764 million (Q1 2006: €187 million) cash outflow for financing activities comprised €245 million in interest payments, €1,510 million in net repayments of loans and €9 million for dividend payments to minority stockholders of consolidated companies. The item “Bayer AG dividend” in the prior-year period contained an inflow of €176 million from the reimbursement of advance capital gains tax payments made on intragroup dividends in 2004.

As of March 31, 2007 the Bayer Group had cash and cash equivalents of €6,143 million, including €784 million held in escrow accounts. The latter amount comprises €699 million deposited in a guarantee account following the decision by the Extraordinary Stockholders’ Meeting of Bayer Schering Pharma AG, Germany* on January 17, 2007 to squeeze out Bayer Schering Pharma AG’s remaining minority stockholders. The decisions means the shares still held by minority stockholders will be transferred to the main stockholder, Bayer Schering GmbH, a wholly owned subsidiary of Bayer AG, in return for cash compensation of €98.98 per share. Dissenting stockholders are seeking to have the stockholder resolution set aside or to have it declared null and void. An additional €85 million is earmarked for payments relating to civil law settlements in antitrust proceedings.

In view of the restriction on its use, the liquidity held in escrow accounts was not deducted when calculating net debt. The high level of cash and cash equivalents will return to normal in subsequent quarters, particularly following the redemption of bonds.

Liquid assets and net debt

Net debt (total) declined by €4.8 billion compared with December 31, 2006, to €12.8 billion. This was due particularly to cash inflows from the divestitures and to the improvement in operating cash flow. We intend to use the proceeds of the planned sale of Wolff Walsrode to The Dow Chemical Company to further reduce net debt.

Net debt	Dec. 31, 2006	March 31, 2007
€ million
Noncurrent financial liabilities as per balance sheets (including derivatives)	14,723	14,626
of which mandatory convertible bond	2,276	2,278
of which hybrid bond	1,247	1,245
Current financial liabilities as per balance sheets (including derivatives)	5,078	3,673
Derivative receivables	(185)	(165)
Financial liabilities	19,616	18,134
Cash and cash equivalents*	(2,116)	(5,359)
Current financial assets	(27)	(5)
Net debt from continuing operations	17,473	12,770
Net debt from discontinued operations	66	7
Net debt (total)	17,539	12,777

* In view of the restriction on its use, the €784 million liquidity in escrow accounts in the first quarter of 2007 (Q1 2006: €299 million) was not deducted when calculating net debt. March 31, 2007: €5,359 million = €6,143 million - €784 million (Dec. 31, 2006: €2,116 million = €2,915 million - €799 million).

As of March 31, 2007 we had noncurrent financial liabilities of €14.6 billion, including the €1.2 billion hybrid bond issued in July 2005 and the €2.3 billion mandatory convertible bond issued in April 2006. Moody’s and Standard & Poor’s treat 75 percent and 50 percent, respectively, of the hybrid bond as equity. Both rating agencies consider the mandatory convertible bond wholly as equity. Unlike conventional borrowings, the hybrid bond thus has only a limited effect on the Group’s rating-specific debt indicators, while the mandatory convertible bond has no effect.

Standard & Poor’s gives Bayer AG a long-term issuer rating of BBB+ with positive outlook, while Moody’s gives the company a rating of A3 with negative outlook. The short-term ratings are A-2 (Standard & Poor’s) and P-2 (Moody’s). These investment-grade ratings evidence a continuing high level of creditworthiness.

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.