Good growth prospects for our businesses
As the new Chairman of the Board of Management, I am pleased to present Bayer’s Annual Report for 2010. First, I would like to take the opportunity to make a personal statement: Bayer is a strong, world-class enterprise, and I am very proud to be a part of it.
We all know that my predecessor Werner Wenning rendered outstanding service to Bayer. Until the change of leadership on October 1, 2010, I had the opportunity to work closely with him – and I am very grateful to him for his support.
The other new members of our management team have also started their tasks with great dedication: Sandra Peterson at the helm of Bayer CropScience, Jörg Reinhardt at Bayer HealthCare, and of course Werner Baumann, the new Chief Financial Officer of Bayer AG. We are confident that together with Wolfgang Plischke and Richard Pott – our existing colleagues on the Bayer AG Board of Management – and Bayer MaterialScience Chairman Patrick Thomas, we will prove to be a strong team.
Now let’s look at fiscal 2010. Although the effects of the crisis could still be felt, the global economy recovered surprisingly quickly from the deep recession. Total economic output continued to grow in the second half of 2010, albeit at a slower pace.
In this environment, we raised Group sales by 12.6 percent to an all-time high of €35.1 billion. Adjusted for currency and portfolio effects, sales advanced by 8.0 percent. EBITDA before special items came in at €7.1 billion, which means we improved our operating performance by 9.7 percent. And with core earnings per share up by 15.1 percent, we achieved the targets we communicated for 2010. We also reduced net financial debt by €1.8 billion to €7.9 billion by further increasing our operating cash flow.
This performance was largely due to the tremendous expertise and the hard work of our employees, for which I would like to thank them on behalf of the entire Board of Management.
We are facing new challenges in 2011 and beyond, however. Earnings in 2010 were partly supported by unexpected developments. For example, the MaterialScience subgroup returned to the pre-crisis level more quickly than anticipated, and currency effects were also clearly in our favor. However, the performance of the CropScience and HealthCare subgroups did not meet our expectations. In HealthCare, generic competition had a very noticeable effect. A particularly negative factor is the pressure on YAZ™/Yasmin™, the best-selling product line of our Pharmaceuticals Division. Sales – and especially earnings – are also being weighed down by health system reforms that are impacting prices in many countries. In addition, we raised both our marketing and R&D expenditures. In the CropScience subgroup, strong generic competition – particularly for herbicides – led to a sharp decline in prices. Last year was also characterized by adverse weather conditions in nearly all of the subgroup’s principal markets.
Aside from these challenges, however, we believe our businesses have good growth prospects. That is because the products and solutions offered by our three subgroups address some of today’s most significant global trends in the areas of health care, nutrition and high-tech materials. To take advantage of the growth opportunities these trends present, we must continue to focus on our core competency: the development of innovative products. This is summed up by our mission “Bayer: Science For A Better Life.”
Specifically, that means that in HealthCare we must continue to invest in our active-substance pipeline and market our new products more effectively in the future. A product that holds great promise is the anticoagulant Xarelto™. In early 2011, applications were submitted both in Europe and the United States for marketing authorization for stroke prevention in non-valvular atrial fibrillation. We stand by our forecast that Xarelto™ has a peak sales potential of more than €2 billion. Other examples from our well-stocked pipeline are VEGF Trap-Eye (ophthalmology), Qlaira™ and YAZ™ Plus (gynecology), AlpharadinTM and new indications for Nexavar™ (both oncology), and finally riociguat (cardiology).
In CropScience, too, we intend to commercialize our innovations as fast as possible. Our R&D pipeline in the conventional crop protection segment is among the best in the world, and we will continue investing in this area. We plan to bring six new products to market by 2012. In addition, we aim to progress more quickly in the area of seeds and plant traits, which also will require further funding. This is because our customers, the farmers, will increasingly be looking to purchase conventional crop protection products and the new technologies – seeds and plant traits – as a complete package.
Bayer MaterialScience is developing many new products and applications that make major contributions to resource efficiency and climate protection. The fact that MaterialScience generates more than 20 percent of sales with products introduced to the market since 2005 illustrates this subgroup’s success. However, with commoditization increasing in some parts of the portfolio, MaterialScience has a clear focus: it must achieve cost and technology leadership. This, however, it can only do by maintaining a high level of capital investment.
All three subgroups must continue to expand their presence in the emerging markets, because that is where our customer industries are expanding fastest. This demands significant investment in local production and research facilities – and in human resources development.
Thus conflicting demands are being made by the challenges facing our business and by the need to invest in our innovative capability and in the emerging markets that hold the key to our future growth and competitiveness. It is crucial that we set the right course today so that we can exploit tomorrow’s opportunities.
In 2010 we already raised our research and development expenditures by 11.2 percent to a new high of €3.1 billion – about €300 million more than in the previous year. We expect to invest the same amount in R&D again in 2011, and will also continue to increase our capital spending in the emerging markets.
At the same time, we must enhance our financial flexibility to make this investment possible despite the challenges I have mentioned. As announced in November last year, we will raise the necessary funds through a targeted transfer of resources, supported by efficiency and cost-containment measures. The goal here is more innovation and less administration.
This ambitious course requires that we exercise even greater care in developing our human resources worldwide, and that our employees understand exactly what our company does and why. Bayer has always stood for good values – the right values. However, we have simplified these to make them a practical framework for our actions. The result is the word LIFE, which is directly based on our mission “Science For A Better Life.” For us, “science” represents our status as an inventor company and our clear commitment to research and innovation. “Life” describes our conduct toward our stakeholders.
The “L” in LIFE stands for “Leadership.” By this we mean the willingness to perform, inspire and be accountable. “I” as in “Integrity” means that we balance the expectations of all stakeholders and comply with all laws and regulations without exception. That is the only way to give our business a stable and credible foundation. The “F” in LIFE stands for the “Flexibility” to accept change, view it as an opportunity and adapt accordingly. The final letter is an “E” for “Efficiency.” We aim to manage resources smartly and do things as simply and effectively as possible.
In short, we are pursuing an evolutionary goal. We will improve our people development and, through the efficiency measures we have announced, create the financial headroom we need to systematically invest in our future.
With a solid post-crisis year behind us, we have created the conditions for capitalizing on our future opportunities in the global arena. On behalf of the Board of Management and the entire company, I would like to thank you for your trust. I hope you will continue to support our endeavors on behalf of Bayer.
Chairman of the Board of Management of Bayer AG