In 2005 Bayer invested a total of EUR 1,886 million in research and development. It is particularly important for us to continuously optimize our product portfolio and manufacturing processes, while at the same time developing new products aimed at strengthening our core businesses.

Research and Development Expenses 2005

by subgroup in %

Other research focuses are enabling technologies such as biotechnology and nanotechnology, which offer enormous potential for developing new products and businesses.

For innovation projects in particular, we depend on our network of collaborations with leading universities, public-sector research institutes and partner companies. These collaborations allow the pooling of expertise in order to rapidly translate new ideas into successful products.

In order to further strengthen the company’s innovative power, Bayer has launched a Group-wide innovation initiative entitled “Triple-i”, which stands for “inspiration, ideas, innovation”. This long-term initiative is designed to encourage Bayer’s employees around the world to put forward creative ideas and suggestions that can be utilized for the company’s benefit through a special innovation process that has been put in place for this purpose. Particular emphasis will be placed on examining ideas and options that lie outside the existing business areas of our subgroups or at the interface between them.

Bayer HealthCare
In 2005, EUR 954 million, or roughly 51 percent of the Bayer Group’s research and development budget, was spent by Bayer HealthCare. With this investment, the subgroup is laying the foundation in the Pharmaceuticals, Consumer Care, Diagnostics, Diabetes Care and Animal Health divisions for the introduction of further innovative products in expanding markets.

In connection with the realignment of the Pharmaceuticals Division, we have adjusted our global pharmaceutical research and development activities to reflect changing business conditions. This is reflected in the division’s modified research and development structure with the newly created units Global Active Substances Research and Global Development. The purpose of the realignment, which took effect in January 2006, is to enable early evidence of the efficacy of new medicines in humans (proof of concept). Our global active substances research is focused on oncology at the site in West Haven, Connecticut, and on cardiovascular disease at the research center in Wuppertal, Germany. The research and development facilities for the expansion of our Kogenate® product line are located at our site in Berkeley, California.

Bayer HealthCare has carved its anti-infective research activities out of the Pharmaceuticals Division and placed them into a new company in which Santo Holding (Deutschland) AG of Stuttgart, Germany, will hold a majority interest and Bayer HealthCare a minority interest of 12 percent. The anti-infectives research activities are expected to be fully independent by March 2006.

In addition to focusing on new active substances, we have intensified post-marketing research in the Pharmaceuticals Division. We aim to expand the applications spectrum of products that are already on the market by identifying additional indications and developing improved formulations. A particularly good example of this is the life cycle management of our product Adalat®, which contributed EUR 659 million in sales in 2005 even after many years on the market.

Our development product BAY 59-7939, an oral inhibitor of the blood coagulation Factor Xa, is currently being investigated for the prevention and therapy of thromboembolic diseases, where there is a clear medical need for improved treatment options. In October 2005, Bayer HealthCare and Johnson & Johnson subsidiary Ortho-McNeil Pharmaceutical, Inc. concluded an agreement to jointly develop BAY 59-7939. Phase III trials for the prevention of venous thromboembolism (VTE) after major orthopedic surgery began in December 2005. Phase II trials for acute VTE treatment and stroke prevention in atrial fibrillation are currently ongoing.

Our new cancer drug Nexavar® (sorafenib) was approved by the U.S. Food and Drug Administration in December 2005 for the treatment of patients with advanced renal cell carcinoma (RCC). Nexavar® is based on a novel active ingredient developed jointly with Onyx Pharmaceuticals Inc. that is designed to inhibit tumor growth by simultaneously blocking several serine/threonine and receptor tyrosine kinases in tumor cells. The drug also cuts off the supply of blood to the tumor. Nexavar® was shown in clinical studies to double progression-free survival in patients with advanced RCC. The product has received orphan drug status in the European Union from the Committee for Orphan Medicinal Products (COMP) of EMEA, the European regulatory body. We have also filed with EMEA for regulatory approval of Nexavar® in the treatment of advanced kidney cancer. To expand the product’s spectrum of indications, we and Onyx Pharmaceuticals launched phase III trials in 2005 for patients with advanced liver and skin cancer, as well as further phase II studies for other tumor types. Furthermore, in December 2005 we announced the beginning of a phase III clinical trial in non-small-cell lung cancer (NSCLC).

Our research and development efforts in the Biological Products Division are centered around strengthening and expanding our recombinant Factor VIII product Kogenate®. We have identified five new protein variants for potential development of the next Kogenate® generation whose optimization is expected to be completed by the end of 2006. In addition, we are currently evaluating technologies that can also be used in the development of the next generation of Kogenate®. In this connection, Bayer HealthCare has signed an exclusive, worldwide license agreement with Dutch-based company Zilip-Pharma concerning the development and marketing of a new, longer-acting Kogenate® formulation based on patented pegylated liposome technology. In April 2005, Bayer completed an Investigational New Drug filing with the FDA for a phase I clinical study involving the new formulation.

In May 2005 we entered into a research agreement with Asklepios Biopharmaceutical concerning the evaluation of gene therapy for the treatment of hemophilia B.

The continuous optimization of Kogenate® also includes the development of Kogenate®-FS with Bio-Set®, a needle-free system for our recombinant Factor VIII product that minimizes the risk of needle-stick injuries. The Bio-Set® system was launched in the European Union in mid-2005. Bayer received FDA approval for the product at the end of the year, and Bio-Set® was introduced to the U.S. market at the beginning of 2006.

To strengthen our activities in the fields of cardiovascular disease and hematology, we signed two agreements effective January 2006. One of these agreements concerns the acquisition from GlaxoSmithKline of European marketing rights for the antihypertensive agent telmisartan (trade names: Pritor® and PritorPlus®). The other covers a collaboration with Nuvelo for the development and commercialization of that company’s blood clot dissolver alfimeprase. Following the completion of ongoing phase III clinical development and the product’s subsequent registration, Bayer HealthCare will hold marketing rights for alfimeprase outside the United States. In January 2006 Nuvelo was granted fast track status for alfimeprase from the FDA.

Development activities of the Consumer Care Division focus on the identification, development and market introduction of non-prescription products. Further initiatives focus on the expansion of indications to support existing brands and on the reclassification of current prescription medicines as over-the-counter products. One example is the joint development program with Bristol-Myers Squibb for Pravachol® (pravastatin), the goal of which is to register Pravachol® in the United States as an over-the-counter cholesterol-lowering drug.

R&D activities in the Diagnostics Division concentrate on strengthening core product lines for Laboratory Testing and Near Patient Testing, and on expanding nucleic-acid-based tests. Our product line has been strengthened by the launch of the Advia Centaur® CP Immunoassay System in November 2005 and by the adaptation and implementation of new diagnostic tests for the indications infectious diseases and oncology. Our product range in Near Patient Testing was supplemented in mid-2005 by the improvement of the DCA 2000+® Analyzer diabetes management platform. The expanded test menu for the Clinitek Status® analyzer also helped to strengthen this segment. Through a license agreement signed with CIS Biotech Inc. in September 2005, we secured development and marketing rights for an automated assay for stroke diagnosis. In addition, in November 2005 we acquired development rights from Inverness Medical Innovations concerning the development of new cardiovascular diagnostic tests. We concluded a further agreement with that company concerning the use of a hybridoma cell line capable of producing monoclonal antibodies against the envelope protein of the Hepatitis B virus. We plan to steadily expand our portfolio for both the clinical diagnostics and molecular testing markets.

In the Diabetes Care Division, we are working to strengthen core product lines and expand into market segments characterized by strong growth and margins. We aim to achieve this through the development of user-friendly blood glucose measurement devices that meet the individual needs of diabetic patients. We are also investing in technologies designed to enable continuous monitoring of blood glucose levels and, in the longer term, blood-free glucose monitoring. In this connection we extended a license agreement with Sontra Medical Corporation, whose ultrasonic SonoPrep® technology increases skin permeability and is thus intended to obviate the need for blood samples.

In the Animal Health Division, our research efforts focus on antibiotics, parasiticides and active ingredients to treat non-infectious diseases such as liver failure, cancer and congestive heart failure. Our active ingredient pradofloxacin, which is currently undergoing clinical development for the antimicrobial treatment of dogs and cats, has been submitted to the E.U. regulatory authorities for registration. Also undergoing the registration process are our Baycox® parasiticide for use in calves and Baytril® for antimicrobial therapy in pigs.

Bayer CropScience
In 2005, EUR 664 million – or about 35 percent of the Bayer Group’s R&D budget – was spent at Bayer CropScience.

Crop Protection has at its disposal a global network of research and development facilities: these are located at Monheim (corporate headquarters) and Frankfurt, Germany; Lyon and Sophia Antipolis, France; Stilwell, Kansas, and Raleigh, North Carolina, in the United States; and Yuki City, Japan.

While our crop protection research is concentrated at certain sites, development activities take place both in our central facilities and in numerous field testing stations around the world to ensure that future products are tested under regional climate conditions.

Our R&D efforts are geared toward the identification and development of innovative, safe and commercially sustainable products in the area of crop protection.

Research activities encompass all measures aimed at identifying new active ingredients which could be developed into insecticides, fungicides or herbicides. In addition to conventional chemistry, biology and biochemistry, we make use of modern technologies such as genomics, high-throughput screening, bioinformatics and combinatorial chemistry to identify new lead structures. Cooperation agreements with external research companies supplement our own activities.

We actively expand the applications spectrum of our products through continuous life cycle management. This includes the development of new formulations for active ingredients and products already on the market so that they can be used for other crops or to improve their handling.

The following new active ingredients were introduced to the market in 2004 and 2005 or are expected to be launched in 2006, provided they receive regulatory approval.

Fluoxastrobin is a systemic broad-spectrum strobilurin for leaf application with curative and protective properties. Products containing fluoxastrobin are designed for spray application (Fandango®) and seed treatment (Bariton®, Scenic®) in cereals, potatoes, vegetables, peanuts and other crops.

Spiromesifen (Oberon®) belongs to a new chemical class called tetronic acids. Oberon® is a new insecticide/mite control product for spray application to control white flies, mites and jumping plant lice, which affect annual crops. Oberon® was developed for global use in vegetables, fruit, cotton, corn, beans, tea and certain ornamentals.

Ethiprole (Curbix® and Kirappu®) belongs to the chemical class called phenylpyrazoles. It is effective against a large number of biting and sucking insects such as thripses, stink bugs, grasshoppers and aphids. The product is used in rice, tea and fruit.

Fluopicolide (Infinito®) belongs to a new chemical class called acylpicolides. Products from this substance class are used to treat oomycete diseases in potatoes, vegetables and ornamental plants. The new mechanism of action will enable farmers to also control oomycete strains that are already resistant to standard fungicides.

Active ingredients discovered by our crop protection researchers are also tested and evaluated by Environmental Science to determine whether they have potential for further development. We also test active ingredients from external companies and acquire them should these tests prove positive. Development projects include so-called passive treatments (gels, baits), pest control formulations, and new herbicide products and fungicidal combinations for the lawn care and ornamental plants sectors.

In 2005 we introduced to the market the insecticide Allectus® (imidacloprid) and the fungicide Armada® (trifloxystrobin with triadimefon) for green industry applications, as well as the insecticide tablet K-O Tab®1-2-3 (deltamethrin) for impregnating mosquito nets. In 2006 we expect to launch the insecticide Forbid® (spiromesifen) for the green industry segment and, in professional pest control, Quickbayt® spray (imidacloprid) to control flies.

* ”2004/2005“ indicates that the new active ingredient was first registered in an important country at the end of 2004, but that the first significant sales were registered in 2005.

In addition to conventional crop protection research, Bayer CropScience also conducts research in the BioScience Business Group, which is active primarily in plant biotechnology. The research and development sites for this unit are located in Lyon, France; Haelen, Netherlands; Ghent, Belgium; and Potsdam, Germany.

R&D in the field of plant biotechnology is mainly geared toward improving the agronomic and qualitative properties of crops. From the identification of a target gene to the development of a plant, the technologies employed for this purpose comprise all relevant tools required to improve important crops such as cotton, canola and rice for producers and industry partners. Activities range from research into novel agronomic traits to the discovery of new plant-based specialty products for the areas of nutrition, health care and biomaterials. These include plants with increased stress tolerance (to resist drought conditions, for example), health-promoting canola oils and renewable raw materials for non-food products.

Our growth is supported by the continuous introduction of new products. In 2005 we introduced four new cotton grades and a new canola type; we expect to launch additional new cotton grades in 2006.

Bayer MaterialScience
In 2005 Bayer MaterialScience spent EUR 251 million, not including joint development activities with customers, to further expand its position as a technology leader and global supplier of customized, high-quality materials and systems solutions. This corresponds to 13 percent of the Group’s research and development expenses.

In the five Bayer MaterialScience business units – Polyurethanes; Polycarbonates; Coatings, Adhesives, Sealants; Thermoplastic Polyurethanes; and Inorganic Basic Chemicals – ultra-modern technologies and production processes are used to implement new products and applications in close cooperation with our external partners and customers.

The Polycarbonates business unit, for example, is working to optimize the melt-polycarbonate process at our new facility in Caojing, China, which is being equipped with ultra-modern production technologies. An outstanding example of a new product application is our diffuser sheets, which ensure the even distribution of light for rear illumination of LCD flat screens.

In the Polyurethanes business unit, we are concentrating on steadily improving existing manufacturing processes for aromatic isocyanates and polyethers, as well as on developing new products for new applications. In the area of high-performance composites, in which polyurethanes play a key role, we have succeeded in developing a new Baydur® formulation for exterior body parts for large vehicles that is superior to the currently used material in terms of heat resistance and strength.

The Coatings, Adhesives, Sealants business unit is another showcase for our innovative capability. Its researchers are concentrating on the development of polyurethane raw materials for the formulation of high-grade products. Raw materials for more environmentally friendly low-solvent systems are an important focus and include thermoformable soft-feel coatings with a velvety feel.

Innovation also plays an important role at our subsidiaries Wolff Walsrode and H.C. Starck. Research activities at Wolff Walsrode aim at exploiting the unique structural and chemical properties of cellulose and other polysaccharides, which are important renewable raw materials, in order to manufacture a wide variety of products for the construction, food and pharmaceutical industries, for example. New developments at H.C. Starck include precursors and components that Staxera, a 50:50 joint venture with Webasto, uses to produce high-temperature fuel cells for mobile applications such as trucks and boats.

To exploit profitable fields of activity for the future, the New Business section of Bayer MaterialScience constantly tracks and evaluates new technological and market trends. The most promising ideas are channeled into research and development projects. These projects are then either implemented in cooperation with the business units or developed within independent companies as part of the so-called greenhouse concept. Here we place great emphasis on global cooperation with universities, other institutes and start-up companies. For example, we have signed a joint development agreement with InPhase Technologies concerning holographic data storage media with a capacity of up to 1.6 terabytes.

Bayer Technology Services
For engineering and technological issues, particularly in the area of process technology, all subgroups work closely together with Bayer Technology Services. This service company develops innovative technology platforms for the Bayer Group, helping the subgroups to sustain their performance. These enabling technologies shorten development times and support the manufacture of new products, system solutions and production processes in the subgroups.

A strategic core element in this connection is international insourcing, which involves the acquisition of know-how. This ranges from country-specific expertise in the implementation of capital expenditure projects through the global exploitation of innovations and public research funding to the recruitment of top international experts and the establishment of collaborations with other companies and research institutes. One example is the acquisition of Zeptosens AG, a spin-off of Novartis, whose highly sensitive biochip systems can considerably reduce development times for the active substances of Bayer HealthCare and Bayer CropScience.

Bayer Innovation
Responsibility for the development of innovative products and new fields of business outside of the subgroups’ existing core activities lies with Bayer Innovation GmbH (BIG). The goal of this company is to add to Bayer’s business portfolio and facilitate access to new growth markets. The current focus is on medical technology, the manufacture of certain pharmaceutical active ingredients in plants, and security technology.

One example of the targeted exploitation of intradisciplinary synergies is medical technology, where expertise in new materials and active substances development, combined with knowledge of human physiology and diseases, is crucial in creating novel and promising products. Such applications can include chronic wound dressings made from materials which contain pharmaceutical active ingredients to help prevent infections, stop undesirable cell growth and accelerate the healing process.

BIG also consolidates Bayer’s activities for producing specific pharmaceutical substances in plants (plant-made pharmaceuticals or PMPs). Building on expertise from the BioScience Business Group, this technology utilizes the natural protein production process in plants to manufacture therapeutically active substances. In this connection, BIG in January 2006 acquired biotech company Icon Genetics AG, which provides a promising technology platform for this application.