Focus on Innovation Overview Bayer and Ginkgo Bioworks form a new company to develop beneficial microbes for plants LifeHub in Boston, United States, reinforces our open innovation network Pharmaceuticals successful with further approvals; cooperation with Loxo Oncology contributes to further expansion of oncology area Crop Science cooperation network with many strategic partners expanded Innovation is one of our core competencies and therefore a cornerstone of our Group strategy. We define innovations as new solutions that generate added value for our customers and society. Our activities focus on innovative products based on our strong research and development (R&D) competencies supplemented with targeted process, service and business model innovations. Group target 2017: increase in R&D investments to €4.8 billion Our innovations help us contribute to solving global challenges in medical care and food security. In addition to the strong innovative capabilities of our employees throughout the company, our efforts concentrate on excellence in research and development, the use of new, groundbreaking technologies and a broad open innovation network. To further develop the innovation expertise of the entire organization, we set ourselves the goal in 2017 of training our employees in new methods, creating a central platform for innovation topics and establishing an agile organizational structure to support employees in developing new ideas and innovation projects. We have successfully implemented this and given around 950 employees an introduction to new methods such as Design Thinking and Systematic Inventive Thinking. In addition, we have established an innovation platform where employees can find information about new trends and current projects and interconnect and exchange with each other on innovation topics globally. An agile, global, cross-divisional network with innovation coaches supports our employees in developing new ideas and pursuing projects. Our activities were honored with the Learning 100! Excellence Award 2017 for innovation, where we achieved 16th place among the top 100 companies worldwide and were the best life science company. Excellence in research and development Bayer’s success has always been based on excellence in research and development. Our researchers develop new molecules and technologies in research-intensive fields to improve human, animal and plant health. The R&D activities we pursue are aligned with the innovation strategies of our segments. At Pharmaceuticals, Crop Science and Animal Health, these activities focus on the research and development of safe and sustainable active ingredients to meet the need for new pharmaceutical and crop protection products as well as of new seed products. Meanwhile, Consumer Health concentrates first on the development of new, nonprescription products and solutions, such as improved product formulations, packaging, technical applications and medical devices. Second, the transition of prescription drugs to OTC schließen OTC (over-the-counter) designates the business with nonprescription medicines. status is a key tool for meeting the growing desire of customers for self-care products. Bayer maintains a global network of R&D locations, which employ more than 14,000 researchers. In 2017, we increased our research and development investment by 3.1% (Fx adj.) to €4,504 million. We plan to invest around €4.1 billion in R&D in 2018. (XLS:) Download Information on Research and Development in 2017 R&D expenses R&D expenses before special items Share of R&D expenses R&D expenses before special items R&D employees 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 € million € million € million € million % % % of sales % of sales FTE FTE 2016 figures restated Pharmaceuticals 2,787 2,888 2,736 2,724 63.3 64.1 16.7 16.2 7,934 8,138 Consumer Health 259 240 234 228 5.9 5.3 3.9 3.9 331 368 Crop Science 1,164 1,166 1,156 1,120 26.4 25.9 11.7 11.7 5,631 5,174 Animal Health 140 155 140 145 3.2 3.4 9.2 9.2 308 333 Reconciliation 55 55 55 55 1.2 1.2 5.2 4.7 9 28 Total 4,405 4,504 4,321 4,272 100 100 12.4 12.2 14,213 14,041 Global open innovation network Partnerships are integral to our innovation strategy. We enter into strategic alliances with various partners such as universities, governmental agencies, start-ups, suppliers and industry. This gives us access to complementary technologies and expertise that expand our framework conditions for innovation. Our open innovation network spans all parts of the company along the entire value chain. Our open innovation portal offers a platform for interdisciplinary collaborations between different organizational units. We also invest in venture capital funds that finance life science start-up companies, among other projects. Our newly established, cross-segment LifeHub in Boston, Massachusetts, United States, reinforces our opportunities to work with leading partners to develop new health care and nutrition solutions. Online Annex: A 1.3-1 limited assurance In addition to our cross-segment LifeHub in Boston, Massachusetts, United States, the segments maintain their own innovation hubs in leading innovation centers throughout the world where global research partnerships are coordinated. In the United States and Germany, we operate an incubator model for young life science companies under the CoLaborator™ name. The objective of the global CoLaborator™ concept is to offer these companies suitable laboratory and office infrastructure in the direct vicinity of Bayer’s own research facilities and the opportunity to exchange experiences with our experts. In 2017, we continued the Grants4Indications™, Grants4Apps™, Grants4Targets™ and PartnerYourAntibodies™ crowdsourcing programs at Pharmaceuticals, as well as Grants4Targets™ and Grants4Traits™ at Crop Science. Moreover, we launched a new Grants4Tech™ program with which we are seeking new technical production solutions. Also in 2017, SRI-BAYER Discovery and Innovation Grants was launched in conjunction with the Society for Reproductive Investigation (SRI). The objective of these grants is to develop new treatment options for women’s health issues where there is a high medical need. Running for the duration of 2017, Bayer and the American Heart Association launched the AHA-Bayer Discovery Target Grants Program to advance scientific understanding and address unmet medical needs in cardiovascular disease. By investing in venture capital funds, we support up-and-coming companies in pharmaceutical and agricultural technologies. We have already set up various venture capital funds with partners such as Versant Ventures, HTGF, Flagship Ventures, Trendlines and Finistere Ventures, LLC. The Bayer Trendlines AG Innovation Fund has established IBI-AG, a company involved in the crop protection arena. The company’s goal is to discover and develop a novel, environmentally friendly pest management platform. Scientists from Bayer are engaged in constant dialogue with renowned research institutes and support partnership projects in the public and private sectors. In 2017, public funding worth more than €47.5 million was spent worldwide on Bayer R&D projects. This is equivalent to roughly 1.1% of our annual R&D expenses. Use of groundbreaking technologies Another key tool for achieving our strategic goals is the use of new, groundbreaking technologies. We pursue such technologies through the activities of Leaps by Bayer (formerly Lifescience Center) and our Life Science Collaboration program. Leaps by Bayer has the strategic goal of establishing access to state-of-the-art technologies through a new innovation and collaboration model. After making investments in defined research applications for the CRISPR-Cas9 technology (Casebia) and in the development of highly efficient induced pluripotent stem cell therapies (BlueRock Therapeutics) in the past two years, we entered into our first agreement in the agricultural sector in September 2017. In conjunction with U.S.-based Ginkgo Bioworks, Inc., Bayer founded a new company focused on the plant microbiome. The primary focus of this research is the mechanism of nitrogen fixation for minimizing agriculture’s environmental impact. This entry into microbiome research is part of Bayer’s innovation strategy. The company will be located in Boston, Massachusetts, and Sacramento, California, in the United States. In addition, with the help of our Life Science Collaboration Program, we are conducting cross-divisional evaluations of groundbreaking biological and technological innovations in the fields of optogenetics and artificial intelligence, for example. Patents protect Bayer’s intellectual property Globally reliable protection of intellectual property rights is particularly relevant for an innovation company like Bayer. Depending on the legal framework, we therefore endeavor to obtain patent protection for our products and technologies in major markets. When we successfully market patent-protected products, this enables us to reinvest the profits in sustainable research and development. Several years can pass between the time we submit a product approval application and market launch of a product, so only a few years are left for generating a return on the investment in this intellectual property. At the end of 2017, we owned approximately 48,100 valid patent applications and patents worldwide relating to more than 4,700 protected inventions. The following table shows the expiration dates for the Bayer Group’s significant patents. (XLS:) Download Pharmaceuticals Patent Expiration Dates Market Germany France Italy Switzerland Spain U.K. China Japan Brazil Canada U.S.A. a Current expiration date; patent term extension applied for b Patent application pending c Patent term revised d Application-specific term extension(s) e Patent term extension granted Products Adempas™ Active ingredient 2028 2028 2028 2028 2028 2023a 2023 2027–2028d 2023b 2023 2023a Production process / intermediate 2030 2030 2030 2030 2030 2030 2030 2030 2030b 2030 2030 Eylea™ Active ingredient 2025 2025 2025 2025 2025 2020a 2020 2021–2023d 2020b 2020 – Formulation 2027 2027 2027 2027 2027 2027 2027b 2028–2029d 2027b 2027 – Kogenate™ Active ingredient – – – – – – – – – 2021 – Formulation 2017 2017 2017 2017 2017 2017 2017 2020 2020 2017 – Kovaltry™ Active ingredient – – – – – – – – – 2021 – Formulation 2017 2017 2017 2017 2017 2017 2017 2023e 2020 2017 – Production process 2018 2018 2018 2018 2018 2018 2018 2023e 2023 2018 2018a Production process(cell line / chaperone) 2029e 2024a 2029e – 2024a 2024a – 2028e – 2024 2024 Mirena™ Inserter 2029 2029 2029 2029 2029 2029 2029 2029 2029b 2029 2031c Nexavar™ Active ingredient 2021 2021 2021 2021 2021 2021 2020 2021–2025d 2025 2020 2020 Salt form 2022 2022 2022 2022 2022 2022 – – – – – Polymorph 2025 2025 2025 2025 2025 2025 2025 2025–2026d 2025b 2025 2027 Formulation 2026 2026 2026 2026 2026 2026 2026 2026–2027d 2026b 2026 2028c Stivarga™ Active ingredient 2028 2028 2028 2028 2028 2024a 2024 2026d 2024b 2024 2031 Formulation 2025 2025 2025 2025 2025 2025 2025 2026d 2025b 2025 2031 Production process 2031 2031 2031 2031 2031 2031 2031 2031 2031b 2031 2031 Xarelto™ Active ingredient 2023 2023 2023 2023 2023 2023 2020 2022–2025d 2022 2020 2024 Formulation 2024 2024 2024 2024 2024 2024 2024 2025–2028d 2024b 2024 2024 Xofigo™ Use 2024 2024 2024 2024 2024 2024 2019 2019a – 2019 2022e Production process 2031 2031 2031 2031 2031 2031 2031 2031 2031b 2031b 2031 Online Annex: A 1.3-2 limited assurance Patent protection is essential Patent terms vary according to the laws of the country granting the patent. In view of the high investment required for product research and development, the European Union (E.U.) member states, the United States, Japan and some other countries extend patent terms or issue supplementary protection certificates to compensate for the shortening of the effective patent protection period due to regulatory approval processes for new drugs. The term of a patent is normally 20 years. Since it takes an average of 12 years to develop a new medicine, only eight years of patent protection generally remain following the product’s approval. In most cases it would be impossible to cover the high costs incurred in the research and development of innovative medicines or of new indications or dosage forms for existing drugs without this protection. We are therefore committed worldwide to protecting both the international patent system and our own intellectual property.