Second quarter of 2018

Bayer completes biggest acquisition in its history

  • Monsanto business included on prorated basis from June 7
  • Group sales €9.5 billion (Fx & portfolio adj. +8.5%)
  • EBITDA before special items increases to €2.3 billion (+3.9%) despite unfavorable currency effects
  • Pharmaceuticals registers higher sales (Fx & portfolio adj.) but lower earnings – substantial increase in R&D investment
  • Consumer Health business weak again
  • Crop Science achieves strong increase in sales and earnings after weak prior-year quarter
  • Animal Health improves sales (Fx & portfolio adj.) and earnings
  • Net income €0.8 billion
  • Core earnings per share €1.54 (+1.3%)
  • Group outlook for 2018 confirmed, with adjustments to reflect acquisition

Interim Group Management Report as of June 30, 2018

Economic Position of the Bayer Group

Sales of the Bayer Group increased by 8.5% (Fx & portfolio adj.) to €9.5 billion in the second quarter of 2018. Group EBITDA before special items rose by 3.9% to €2.3 billion, and was impacted by negative currency effects of around €130 million.

At Pharmaceuticals we posted growth in sales on a currency- and portfolio-adjusted basis, largely because our key growth products continued to perform very well overall. EBITDA before special items declined, in particular due to higher R&D investment. Sales of Consumer Health came in slightly below the prior-year level after adjusting for currency and portfolio effects, while earnings fell substantially. Crop Science registered a significant increase in sales on a currency- and portfolio-adjusted basis, which was largely attributable to the recognition of significantly higher provisions for crop protection product returns in Brazil in the prior-year quarter due to high inventory levels. Sales of Crop Science increased by 39.2% on a reported basis, thanks mainly to a portfolio effect of 25.0% (€543 million) from the acquisition of Monsanto. EBITDA before special items of Crop Science nearly doubled, due particularly to the aforementioned effect in Brazil and to the newly acquired business. Animal Health posted an encouraging increase in sales and earnings.

We have adjusted our Group outlook to account for the sales and earnings contributions from Monsanto since the date of the acquisition. As the transaction closed later than we had anticipated, 2018 earnings will be lower than we had projected in our February forecast including Monsanto due to the seasonality of the agricultural business. Our outlook takes into account the financing costs for the acquisition of Monsanto shares as well as the higher number of shares of Bayer AG following the capital increases on a pro rata temporis basis. The businesses divested to BASF are no longer taken into account from the date of their respective sale.

Key Events

With the acquisition of 100% of the outstanding shares of Monsanto Company, St. Louis, Missouri, United States (Monsanto), for US$63 billion including debt on June 7, 2018, Bayer completed the biggest acquisition in its history. The acquisition of Monsanto brings together two strong and highly complementary businesses: Bayer’s innovative chemical and biological crop protection portfolio and Monsanto’s exceptional expertise in the field of seeds and traits. We are now a leader in the agricultural industry with a clear commitment to innovation and sustainability – for the benefit of our customers and society. In addition to leveraging our employees’ extensive expertise in agriculture, we also have the strongest portfolio of seed and crop protection products for a wide range of crops and indications, the best research and development platform and the leading digital farming business.

In connection with the conditional approval granted by the European Commission in March 20181, Bayer concluded an agreement with BASF SE on April 26, 2018, concerning the sale of Bayer’s global vegetable seed business, certain seed treatments and its digital farming activities for approximately €1.7 billion. This agreement expanded on the agreement already concluded between Bayer and BASF in October 2017, which concerned, among other things, the sale of the global glufosinate ammonium business and the related LibertyLink™ technology for herbicide tolerance, as well as a substantial part of the field crop seed business, for a base purchase price of €5.9 billion.

1 Please see the Q1 2018 interim report for more information.

On May 29, 2018, the U.S. Department of Justice conditionally approved Bayer’s acquisition of Monsanto. The conditions included a hold separate order that remained in place until all of the divestments to BASF had been completed. These transactions closed on August 1 and 16, 2018, which enabled the final integration of the Monsanto business to commence on August 16, 2018. The total purchase price of €7.6 billion before taxes for the businesses divested to BASF is subject to purchase price adjustments typical for such transactions.

Upon closing of the transaction, an amount of US$128 per share was paid out to the Monsanto stockholders, and trading of Monsanto shares on the New York Stock Exchange ceased. The purchase price of US$63 billion for the acquisition of Monsanto includes net debt of approximately US$6 billion held by that company. In September 2016, Bayer secured bridge financing from a consortium of 26 banks for the remaining amount of US$57 billion. Between September 2016 and the first quarter of 20182, the required bridge financing was reduced to approximately US$43 billion through a range of equity and debt measures, such as the placement of mandatory convertible notes, the sale of Covestro shares and the acquisition of a 3.6% interest in Bayer (31 million newly issued Bayer shares) by the investment firm Temasek, Singapore. The bridge financing was drawn on June 7, 2018 to finance the acquisition.

2 For details of the financial transactions in previous quarters, please see the 2016 and 2017 Annual Reports and the respective quarterly reports of the Bayer Group.

On May 4, 2018, Bayer sold 28.81 million shares, or 14.2%, of Covestro, at a price of €75.50 per share. The proceeds of this sale totaled €2.2 billion. Bayer AG now holds just 6.8% of Covestro shares to repay the exchangeable bond that matures in 2020. Bayer AG acquired these shares, which are recognized at fair value through profit or loss, from Bayer Pension Trust, which no longer holds any Covestro shares.

After the acquisition closed, Bayer undertook further equity and debt measures:

On June 7, 2018, we raised around €6 billion in net proceeds from a capital increase out of authorized capital against cash contributions and with subscription rights for existing Bayer stockholders. The move strengthened the company’s equity. As part of the capital increase, Bayer issued approximately 74.6 million new registered (no-par value) shares with entitlement to dividends from January 1, 2018.

In late June 2018, Bayer issued bonds of US$15 billion via its subsidiary Bayer U.S. Finance II LLC, Pittsburgh, United States, and bonds of €5 billion via its subsidiary Bayer Capital Corporation B.V., Mijdrecht, Netherlands. All bonds are guaranteed by Bayer AG.

In addition, Bayer signed an agreement on July 27, 2018, to divest the Consumer Health prescription dermatology business to LEO Pharma A/S, Ballerup, Denmark. The business will be transferred in two steps: on September 4, 2018, for the United States, and during the second half of 2019 for all other markets, subject to the satisfaction of customary closing conditions. The portfolio being divested comprises prescription brands including Advantan™, Skinoren™ and Travocort™. The purchase price amounts to €58 million for the U.S. business and €555 million for the rest of the global business, and is subject to customary purchase price adjustments.

On August 10, 2018, a state court jury in San Francisco, United States, awarded US$39 million in compensatory and US$250 million in punitive damages to a plaintiff who claimed that a Monsanto product caused his non-Hodgkin lymphoma (NHL). The news impacted Bayer’s share price, which declined quite considerably at times. We disagree with the verdict and intend to seek trial court review and appeal, if necessary. More than 800 scientific studies – including an independent study which followed more than 50,000 licensed pesticide applicators and farm workers and their spouses for more than 20 years – and regulatory authorities all over the world confirm that glyphosate and glyphosate-based herbicides do not cause cancer and are safe for use when used according to label instructions. Please see the “Legal Risks” section for further details.

Changes to the Corporate Structure

In connection with the acquisition of Monsanto, the reporting structure of the Crop Science segment was adjusted to reflect the future relative sizes of the various strategic business entities. The figures for previous periods were adjusted accordingly.

Realignment of Crop Science structure

Previous reporting structure

 

Reporting structure from Q2 2018

Herbicides

 

Herbicides

 

 

Corn Seed & Traits

 

 

Soybean Seed & Traits

Fungicides

 

Fungicides

Insecticides

 

Insecticides

SeedGrowth

 

 

Environmental Science

 

Environmental Science

Vegetable Seeds

 

Vegetable Seeds

Other

 

Other

Crop Science

 

Crop Science

Due to the relative sizes of Monsanto’s “Corn seed and traits” and “Soybean seed and traits” businesses, we will report our corresponding strategic business entities Corn Seed & Traits and Soybean Seed & Traits separately from now on. Monsanto’s “Agricultural Productivity” business will be allocated among Herbicides, Environmental Science and Other, while “Cotton seed and traits” and “All other crops seeds and traits” will be reported under Other and the “Vegetable seeds” business will be allocated to our corresponding Vegetable Seeds business entity. Due to its relative size, we will no longer report our SeedGrowth business separately, but under Other. Regional reporting will not be impacted by these changes.

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