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Earnings Performance

Bayer Group Summary Income Statements	2007	2008	Change
	€ million	€ million	%
Sales	32,385	32,918	+1.6
Cost of goods sold	(16,352)	(16,456)	+0.6
Selling expenses	(7,782)	(8,105)	+4.2
Research and development expenses	(2,578)	(2,653)	+2.9
General administration expenses	(1,772)	(1,649)	-6.9
Other operating income and expenses – net	(747)	(511)	-31.6
EBIT (operating result)	3,154	3,544	+12.4
Non-operating result	(920)	(1,188)	-29.1
Income before income taxes	2,234	2,356	+5.5
Income taxes	72	(636)	•
Income after taxes from discontinued operations	2,410	4	-99.8
Income after taxes	4,716	1,724	-63.4
of which attributable to non-controlling interest	5	5	+0.0
of which attributable to Bayer AG stockholders (net income)	4,711	1,719	-63.5

Sales of the Bayer Group increased by 1.6%, or €533 million, from the previous year to €32,918 million. Adjusted for currency and portfolio effects, sales rose by 4.4%.

The cost of goods sold remained approximately level year on year at €16,456 million (+0.6%). The ratio of the cost of goods sold to total sales was 50.0% (2007: 50.5%). Selling expenses rose by 4.2% from the previous year, to €8,105 million, and were thus equivalent to 24.6% of sales (2007: 24.0%). This increase was due particularly to the introduction of new pharmaceutical products and the expansion of our sales organization in the BRIC countries. Our research and development expenses also increased by 2.9% to €2,653 million. The ratio of R&D expenses to sales was 8.1% (2007: 8.0%). However, we reduced general administration expenses by 6.9% to €1,649 million (2007: €1,772 million), thanks mainly to synergies from the integration of Schering AG, Berlin, Germany, and the restructuring program at MaterialScience. The negative balance of other operating income and expenses, at €511 million, resulted mainly from costs related to the integration of Schering AG, restructuring, litigations and valuation write-downs.

EBIT for 2008 came in at €3,544 million. Before net special charges of €798 million (2007: €1,133 million), EBIT increased by 1.3% to €4,342 million.

The non-operating result dropped by €268 million to minus €1,188 million, its main components being €702 million (2007: €701 million) in net interest expense, €300 million (2007: €246 million) in interest cost for pension and other provisions, a €70 million (2007: €69 million) net loss from investments in affiliated companies and a €79 million exchange loss (2007: €88 million exchange gain). The shift in the balance of exchange gains and losses was partly due to the increased cost of exchange hedging in emerging countries arising from the expansion of our business there, while in the previous year we had benefited from exchange gains on financial transactions.

In 2008 we recorded tax expense of €636 million. In the previous year we had net tax income of €72 million after one-time non-cash tax income of €912 million arising in connection with the corporate tax reform in Germany. This tax effect resulted mainly from the remeasurement of the deferred tax liabilities accrued in connection with the Schering acquisition, particularly in order to reflect the lower nominal rates of corporate income tax that apply in Germany from 2008. Without this one-time effect, tax expense in 2007 amounted to €840 million.

Including the result of discontinued operations and after non-controlling interests, Group net income came in at €1,719 million. Group net income of €4,711 million in 2007 included €2,410 million of income from discontinued operations, which contained mainly the proceeds from the divestments of the diagnostics business, H.C. Starck and Wolff Walsrode.