Werner Wenning, Chairman of the Board of Management of Bayer AG

I look back on 2005 with the greatest satisfaction I have felt since becoming Chairman. Last year was among the most successful in Bayer’s history. We had forecasted a 20 percent rise in earnings, but actually far exceeded those expectations, ending 2005 with underlying EBIT up 56 percent from the previous year, at EUR 3.3 billion.

Our underlying EBITDA margin of 18.6 percent already put us very close to our 2006 target of 19 percent, a year ahead of schedule.

The other key data also underscore our focus on growth:

• Sales rose 18 percent to EUR 27.4 billion
• Net income jumped 133 percent to EUR 1.6 billion
• Net cash flow advanced 57 percent to EUR 3.5 billion
• Cash flow return on investment (CFROI) reached the record level of 12.4 percent

That last number is particularly important for me. It means we have created substantial value for you, our stockholders.

We are pleased that the capital market is rewarding our success. With a 51 percent increase in the share price in 2005, Bayer was among the best-performing equities in the German stock index DAX. Our market capitalization rose by EUR 8.7 billion in the space of twelve months.

All this clearly illustrates that our strategic realignment toward innovation and growth has lastingly improved the Bayer Group’s performance capability.

We made further progress last year not only operationally, but also strategically – from the LANXESS spin-off through the successful integration of the Roche consumer health business to the repositioning of our Pharmaceuticals Division.

We completed the most extensive restructuring process in Bayer’s history within an extremely short period, the final step in that process being the successful listing of LANXESS on the stock market early in the year. The strong upward trend in the price of both companies’ shares shows that we made the right decisions.

Our new strategy not only laid the foundation for a successful 2005, but has also put the entire enterprise on track for the future.

Let me start with Bayer HealthCare – Germany’s biggest health care company, with sales of EUR 9.4 billion. We gave this subgroup a new focus, and it fared outstandingly last year. The aim is to continue matching or outpacing market growth in all areas.

The Pharmaceuticals Division has a new identity, with a stronger concentration on the specialties business and on a restructured and optimized primary care business. The division’s performance in recent months has been very encouraging.

Our specialty products, including in particular the biotechnologically manufactured hemophilia drug Kogenate, have considerable growth potential. We believe our new cancer drug, Nexavar, could eventually exceed EUR 1 billion in annual sales. The same applies to our oral antithrombotic Factor Xa inhibitor, which entered phase III clinical testing at the end of 2005 for the prevention of venous thromboembolism. Our Pharmaceuticals Division also has twelve projects in phase I trials and another eleven in preclinical development. We plan to further support the business with external growth, for example through inlicensing.

We have strengthened the other parts of the HealthCare subgroup as well. Following the acquisition of the Roche consumer health activities, our Consumer Care Division is now among the world’s top three suppliers in the self-medication business. The newly acquired products Bepanthen, Rennie and Supradyn have performed particularly well, bringing us a significant step closer to our goal of becoming the leading supplier in this segment. We integrated the acquisition more quickly than we had previously thought possible.

And the other HealthCare divisions – Animal Health, Diagnostics and Diabetes Care – also hold strong positions in their respective markets. We plan to expand all of these businesses faster than the market average.

We continue to see considerable potential at Bayer CropScience. This company is the world market leader in conventional crop protection and in the environmental science and seed treatment businesses. While it is on the right track in terms of performance, we have not yet reached our goal. We nevertheless believe that we can set the industry standard in the medium term.

In a market characterized by only moderate expansion, we consider our own innovative capability to be the main factor for organic growth in this area. The years since 2000 have seen the launch of sixteen new active ingredients. Including ten further substances that we plan to introduce by 2011, we anticipate total sales potential of up to EUR 2 billion from our CropScience pipeline. We also expect to achieve faster-than-average growth through the expansion of our environmental science, seed treatment and plant biotechnology franchises.

Regarding MaterialScience, we remain in confident mood following a record-breaking year. This subgroup is a global leader in terms of market positions and technologies, occupying first place in both polyurethanes and coating raw materials, and the number two slot in polycarbonates. We envisage a major opportunity in the development of the Asian markets, and therefore plan to invest about US$ 1.8 billion in world-scale polymer facilities in China alone through 2009.

At MaterialScience, too, we are pursuing a strategy of growth through innovation. Some 20 percent of this subgroup’s total revenues already come from new products and applications introduced within the past five years, and that ratio is set to increase.

To expedite growth and foster a high level of innovation in the future, we have earmarked EUR 1.5 billion for capital expenditures on property, plant and equipment this year and, as in 2005, we plan to spend roughly EUR 1.9 billion on research and development. This is by far the largest research budget of any chemical and pharmaceutical company in Germany.

To further support the innovation process, we have launched a global initiative named “Triple-i” – the three i’s standing for inspiration, ideas and innovation. The initiative is designed to boost our employees’ willingness and ability to submit creative ideas and suggestions for consideration and possible commercialization by units of the Bayer Group. To this end a special innovation support procedure has been developed. The first part of the money to be made available under this program will go for our project to manufacture plant-based pharmaceutical active ingredients.

I firmly believe that innovation and growth are the key success factors in the globalized business arena, and I am therefore certain that our realignment has paved the way to a bright future for our company.

The efforts we put into restructuring the Bayer Group have paid off. Since the beginning of 2003, we have steadily improved year-on-year earnings before special items – our actual operating performance – in twelve consecutive quarters.

Of course we want you, our stockholders, to benefit from our economic success. We therefore propose to raise the dividend for 2005 by more than 70 percent to EUR 0.95.

And what do we have planned for the current year?

We aim to continue expanding and to further improve our operating performance. Our goal is to grow with, or faster than, all of our markets, and to achieve total Group sales in excess of EUR 28 billion.

We are targeting a small further improvement in underlying EBIT and underlying EBITDA, and thus a record earnings level.

While we remain oriented toward profitability, I am also personally committed to ensuring that Bayer embraces the principle of good corporate citizenship. For example, we are involved in more than 300 social responsibility projects worldwide – from initiatives to combat hunger in Brazil through our joint environmental efforts with the United Nations to the fight against AIDS and sleeping sickness in Africa. We play a pioneering role in such activities throughout the world, and intend to expand that role in the future.

My colleagues and I on the Board of Management would like to thank you for the trust you have placed in Bayer. Our special thanks also go to our employees. Together, we have achieved a great deal over the past year. I am very pleased that the broad majority of respondents to our most recent managerial employees’ survey said they are proud to work for Bayer. I agree with them: we can all be proud that we have put Bayer back on track following difficult years of reorganization and realignment.

We will continue to work very hard to remain on the successful course we have set for our company, at the same time helping to sustainably improve people’s health, nutrition and quality of life through our products – true to the slogan we chose for our new mission statement: “Bayer: Science For A Better Life.”

Sincerely,