Strategy and Management Group Strategy and Targets The steadily growing and aging global population presents fundamental challenges in health care and nutrition. How will we feed up to ten billion people by 2050 while contending with the impact of climate change? How will we ensure quality of life for an ever-increasing number of elderly people? These are the challenges that we are looking to address. In line with our corporate purpose “Science for a better life,” we are driving the development of better medicines and the production of high-quality food through innovative solutions. Alongside our goal of achieving economic success, we also seek to make a responsible contribution to the United Nations Sustainable Development Goals “Good Health and Well-Being” and “Zero Hunger” within the scope of our entrepreneurial possibilities. We strive to meet our responsibility to the environment and society, and to continuously develop our businesses such that they assume leadership positions in their respective industries and segments to achieve long-term success for our company. We invest in a diversified portfolio of strong businesses that create value. Our efforts are sustained by our employees and by our core competencies of innovation, customer focus, quality, process excellence and portfolio management. Strategies of the Segments Pharmaceuticals Demographic change is impacting health care systems through the growing number of chronic diseases and the increasing occurrence of multiple conditions. We are seeking to contribute to medical progress through our focus on researching, developing and marketing innovative medicines that provide significant clinical benefit and value primarily in the therapeutic areas of cardiology, oncology, women’s health, hematology and ophthalmology. Our medium-term growth is being primarily driven by our successfully launched products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™. To safeguard long-term growth, we are continuing to invest in research and development (R&D). Here our efforts are focused on the areas in which we see a substantial need for innovation and can make a major impact through the expertise amassed by our researchers. This is true especially for cardiovascular diseases, cancer and certain uses in women’s health. To supplement our R&D activities, we will continue to expand our portfolio through acquisitions, licensing agreements and external collaborations while maintaining a targeted approach. To improve access to our products in developing and emerging countries (Access to Medicine schließen Access to Medicine (ATM) describes activities to promote general access to essential medicines and improve knowledge on health. – ATM), we are implementing economically feasible concepts and further developing our compounds for the treatment of neglected tropical diseases alongside our philanthropic activities. Online Annex: A 1.2.1-1 limited assurance As an innovative company, we improve people’s quality of life by developing products and solutions for preventing and treating disease. We also work on programs and initiatives with various partners so that people worldwide, regardless of their origin and income, have access to our products (Access to Medicine, ATM). For more than ten years, we have donated to the World Health Organization (WHO) two of our active ingredients and financial resources for the treatment of African sleeping sickness and Chagas disease, which is widespread in Latin America. As a 2012 cosignatory to the London Declaration on Neglected Tropical Diseases, we committed to providing these medications to the WHO until these diseases are either contained or eradicated. Moreover, we are developing a new formulation of the drug Nifurtimox (for Chagas disease) that is suitable for children and are researching whether weight-based dosing could reduce treatment time. In a product development partnership with DNDi (Drugs for Neglected Diseases Initiative), we are examining whether the ingredient emodepside deployed by Bayer Animal Health could also be used to develop an innovative treatment for river blindness. As a member of the TB Drug Accelerator program, we are providing access to parts of our substance library in support of the search for new compounds to combat tuberculosis. We are additionally developing economically feasible family planning programs. For instance, we provide women in developing countries with better access to hormonal birth control. These programs make our products available to international development partners at preferential prices. To this end, we reduced the price of Jadelle™, a reversible, long-term contraceptive implant, by half. Before the program was originally scheduled to end, Bayer announced that it would be extended to 2023. Bayer’s family planning activities directly support “Good Health and Well-Being,” the third of the U.N. Sustainable Development Goals, since these activities address maternal and infant mortality as well as reproductive health. In some countries where sections of the population have no access to innovative medicines via health care systems, we establish patient assistance programs for selected products. These aim particularly to provide access to oncology and cardiovascular products and products to treat chronic diseases such as multiple sclerosis and hemophilia. Such programs exist in the United States, China, South Africa, a number of countries in Southeast Asia, and other regions. Consumer Health Increasing cost pressure on public health care systems and greater personal responsibility by consumers are increasingly putting the spotlight on the benefits of self-care. In addition, advancing digitization in the health care market necessitates a stronger focus on digital products and services. We are tackling these changes by investing in innovation to reinforce our core brands Claritin™, Aspirin™, Aleve™, Bepanthen™, Canesten™, Alka-Seltzer™, Dr. Scholl’s™, One A Day™, Coppertone™, Elevit™ and Berocca™. We are also expanding our digital range, as well as our e-commerce activities. Furthermore, we are focusing on increasing our presence in key markets such as the United States, Germany, Brazil, Russia and China, as well as additional countries. We are also promoting the transfer of prescription medicines and active ingredients to nonprescription status (Rx-to-OTC schließen OTC (over-the-counter) designates the business with nonprescription medicines. switch), enabling them to be used in self-care.. In so doing, we want to guarantee consumers better access to medicines and give them the opportunity to take more responsibility for their health, thereby improving their quality of life. Crop Science The need for food, animal feed and renewable raw materials is growing worldwide. At the same time, however, the available arable land is limited and is increasingly endangered by the impact of climate change. In addition, there is growing demand for sustainable farming practices. This requires innovative solutions that can be leveraged to boost agricultural productivity and guarantee food security. As part of our strategy to develop holistic solutions, we aim to build on our expertise in the integration of seed technology with chemical and biological crop protection. We are also driving digitization. In the field of digital farming, we plan to develop a proprietary range of services with specific data models that simulate risk factors for crop disease outbreaks, among other things. Our goal is to provide farmers with tailored recommendations on the targeted and correct use of our products, thus helping them to improve their yields. In line with our commitment to sustainable agriculture, we promote cost-effective and socially viable farming practices that use resources efficiently and protect the environment. By providing tailored solutions, we aim to help smallholder farmers in developing and emerging countries to optimize agricultural production and improve their living standards. Moreover, as part of our Bayer ForwardFarming initiative, we develop and promote innovative solutions for sustainable agricultural practices in collaboration with farmers. As part of these efforts, we are continuously expanding our network of ForwardFarms. As previously communicated, we are seeking to acquire the Monsanto Company. Together we see ourselves being in a position to offer a broader portfolio of innovative products customized to better meet farmers’ many challenges and individual needs. In the medium to long term, the combined enterprise would be able to bring innovative solutions to the market faster and provide its customers with better solutions and an optimized product offering on the basis of agricultural analysis and supporting digital farming applications. Animal Health The development of the animal health market is primarily driven by a growing global population and higher average incomes. In the companion animals segment, this leads to rising pet onwership levels. In the farm animals segment, moreover, a growing aspiration to adopt Western lifestyle habits is leading to higher meat consumption. Effective and safe animal medicines are therefore increasingly in demand in both areas. In the companion animals business, Animal Health holds a leading position in the global parasiticide segment. We are focusing on maintaining the strong performance of the innovative Seresto™ collar, opening up new distribution channels and leveraging the brand equity of the Advantage™ product family. In the farm animals business, we are focusing on antiparasitics and anti-infectives for the treatment of infectious diseases. In addition to the products developed in-house, we also explore opportunities to strengthen our business through acquisitions. For example, we expanded our antiparasitics business in the United States through the successful integration of the Cydectin™ portfolio in January 2017. Targets and key performance indicators Our strategy is aimed at achieving economic growth balanced with our responsibility for the environment and society. To advance the consistent implementation of our strategy, we have set ambitious Group targets along the value chain. These targets are in the areas of growth and profitability, innovation, sustainability and employees. The current status of our progress in these areas is documented in the following table and the respective chapters. Bayer Group Targets Growth and Profitability Target Target attainment (as of 2017) New or adjusted target Group sales (Fx & portfolio adj. change); revised forecast in October 2017: low-single-digit-percentage increase to €35 billion to €36 billion 1.5% increase to €35.0 billion Increase by by a low- to mid-single-digit percentage to around €35 billion EBITDA before special items; revised forecast in October 2017: slightly above the level of the previous year At the prior-year level (−0.3%) At the prior-year level Core earnings per share; revised forecast in October 2017: low-single-digit percentage decrease 1.0% increase At the prior-year level Innovation Target Target attainment (as of 2017) New or adjusted target Group: Increase in R&D investment to €4.8 billion (2017) €4.5 billion R&D investment of around €4.1 billion (2018) Pharmaceuticals: transition of 10 new molecular entities (NMEs) into development (2017) 10 new molecular entities (NMEs) transferred Transition of nine new molecular entities (NMEs) and one new indication or one new formulation project into development (2018) Consumer Health: transition of 25 consumer-validated concepts into early development (2017) 47 new concepts transferred Transition of 25 consumer-validated concepts into early development (2018) Crop Science: transfer of three new molecular entities (NMEs), plant traits or biologics into confirmatory technical proof-of-concept field studies (2017) Start of field studies on two new molecular entities (NMEs) Transfer of three to four new molecular entities (NMEs), plant traits or biologics into confirmatory technical proof-of-concept field studies See Chapter “Focusing on Innovation” for more information Sustainability Target Target attainment (as of 2017) New or adjusted target Supplier management Evaluation of all strategically important suppliers (2017) 99.5% Target achieved Bayer will conduct a new stakeholder survey and materiality analysis in 2018. This will be used to define new Group targets. Evaluation of all potentially high-risk suppliers with significant Bayer spend (2020) 93% Target unchanged Development and establishment of a new sustainability standard for our supply base (2020) In implementation Target unchanged See Chapter “Procurement and Supplier Management” for more information Resource efficiency Improvement of 10% in energy efficiency (2020); reference value 2015: 143 kWh/€1,000 external sales 125 kWh / €1,000 external sales (12.6% improvement) Target unchanged Reduction of 20% in specific greenhouse gas emissions (2020); new reference value 2015: 55.7 kg CO2e / €1,000 external sales 46.3 kg CO2e/€ 1,000 external sales (−16.9%) Target unchanged Establishment of water management at all sites in water-scarce areas (2017) 100% Target achieved Bayer will conduct a new stakeholder survey and materiality analysis in 2018. This will be used to define new Group targets. See Chapter “Environmental Protection” for more information Safety Reduction of 35% in occupational safety incident rate (Recordable Incident Rate – RIR) (2020); reference value 2012: 0.50 RIR 0.45 (−10%) Target unchanged Reduction of 30% in process and plant safety incidents (Loss of Primary Containment Incident Rate – LoPC-IR) (2020); reference value 2012: 0.21 LoPC-IR 0.13 (−38%) Target unchanged See Chapter “Safety” for more information Product stewardship Conclusion of assessment of hazard potential of all substances (>99%) used in quantities exceeding one metric ton per annum (2020) 76% Target unchanged See Chapter “Product Stewardship” for more information Compliance Annual compliance training for virtually 100% of Bayer managers 97% Target unchanged See Chapter “Compliance” for more information Employees Target Target attainment (as of 2017) New or adjusted target Continuous improvement in employee engagement; reference value 2012: 85% 79%1 Continuous improvement in employee satisfaction; new reference value 2017: 79% Increase in the proportion of women in senior management to 35%; (2020); reference value 2010: 21% 32% Target unchanged Increase in the proportion of senior managers from outside the European Union, the United States or Canada to 25% (2020); reference value in 2013: 18% 21% Target unchanged See Chapter “Commitment to employees and society” for more information 1 The figures are not comparable due to a change in the methodology used in the employee survey.