Elanco Animal Health Inc (Form: 8-K/A, Received: 10/15/2020 16:49:03)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 30, 2020

__________________

Elanco Animal Health Incorporated

(Exact name of registrant as specified in its charter)

__________________

Indiana

001-38661

82-5497352

(State or other jurisdiction of incorporation)

(Commission File
Number)

(IRS Employer
Identification No.)

2500 Innovation Way Greenfield, Indiana

(Address of principal executive offices)

46140

(Zip Code)

Registrant’s telephone number, including area code: (877) 352-6261

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):


☐			Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐			Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐			Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐			Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value	ELAN	New York Stock Exchange
5.00% Tangible Equity Units	ELAT	New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter)

Emerging growth company ☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Explanatory Note.

As previously reported, on August 1, 2020, Elanco Animal Health Incorporated, an Indiana corporation (“Elanco”), completed the acquisition (the “Acquisition”) of the animal health business (the “Business”) of Bayer Aktiengesellschaft, a German stock corporation (“Bayer”), pursuant to the terms of the Share and Asset Purchase Agreement, dated as of August 20, 2019, between Elanco and Bayer (as amended from time to time, the “Agreement”).

This Form 8-K/A amends the Current Report on Form 8-K, filed on August 3, 2020 (the “Initial 8-K”), to include the historical audited and unaudited financial statements of the Business and the pro forma combined financial information required by Items 9.01(a) and 9.01(b) of Form 8-K and certain non-GAAP financial measures and reconciliations, and should be read in conjunction with the Initial 8-K.

Except as described above, all other information in the Initial 8-K remains unchanged.

Item 7.01 Regulation FD Disclosure.

Elanco uses non-GAAP financial measures, such as adjusted EBITDA, adjusted net income (loss) and adjusted EPS to assess and analyze operational results and trends. The non-GAAP financial measures and reconciliations in Exhibit 99.4 hereto present selected adjusted non-GAAP financial information derived from Elanco’s historical condensed consolidated and combined financial statements and the unaudited pro forma condensed combined financial statements presented in Exhibit 99.1 hereto, which gives effect to the Acquisition, as further adjusted to reflect certain non-GAAP adjustments as explained in more detail in the reconciliation tables presented in Exhibit 99.4 hereto, which is incorporated herein by reference.

The information contained in the accompanying Exhibit 99.4 is being furnished pursuant to Item 7.01 of Form 8-K and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section. The information contained in the accompanying Exhibit 99.4 shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, except as shall be expressly set forth by specific reference in such a filing.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The historical audited combined financial statements of the Business as of December 31, 2019, 2018 and 2017 and for the three years then ended, together with the notes thereto and the independent auditor’s report thereon, are filed as Exhibit 99.2 to this Current Report on Form 8-K and incorporated herein by reference.

The historical unaudited condensed combined interim financial statements of the Business as of June 30, 2020 and for the six month periods ended June 30, 2020 and 2019, together with the notes thereto, are filed as Exhibit 99.3 to this Current Report on Form 8-K and incorporated herein by reference.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed combined financial information for Elanco and the Business as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 and the year ended December 31, 2019, together with the notes thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K and incorporated herein by reference.


Exhibit No.						Description

23.1						Consent of Deloitte GmbH WPG.
99.1						Unaudited pro forma condensed combined financial information.
99.2						Audited combined financial statements of the Business as of December 31, 2019 , 2018 and 2017 and for the three years then ended , and the independent auditor’s report thereon.
99.3						Unaudited condensed combined interim financial statements of the Business as of June 30, 2020 and for the six month periods ended June 30, 2020 and 2019.
99.4						Summary historical and unaudited pro forma and non-GAAP financial information of Elanco.
104.1						Cover Page Interactive Data File (embedded within the Inline XBRL document).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


Date: October 15, 2020		Elanco Animal Health Incorporated

	By:	/s/ Michael-Bryant Hicks
	Name:	Michael-Bryant Hicks
	Title:	Executive Vice President, General Counsel and Corporate Secretary

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statement No. 333-235991 on Form S-3 and Registration Statement No. 333-227447 on Form S-8 of Elanco Animal Health Incorporated of our report dated March 12, 2020, relating to the financial statements of the Animal Health Business of Bayer Aktiengesellschaft appearing in this Current Report on Form 8-K dated October 15, 2020.

/s/ Deloitte GmbH Wirtschaftsprüfungsgesellschaft

Deloitte GmbH

Wirtschaftsprüfungsgesellschaft

Munich, Germany

October 14, 2020

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following unaudited pro forma condensed combined financial information gives effect to the acquisition and the financing effectuated (the “Acquisition”) related to the animal health business (the “Bayer Animal Health Business”) of Bayer Aktiengesellschaft, a German stock corporation (“Bayer”), by Elanco Animal Health Incorporated, an Indiana corporation (“Elanco”), pursuant to the terms of the Share and Asset Purchase Agreement (the “Agreement”), dated as of August 20, 2019, between Elanco and Bayer, as amended by Amendment No. 1 to the Share and Asset Purchase Agreement, dated as of October 15, 2019, Amendment No. 2 to the Share and Asset Purchase Agreement, dated as of January 17, 2020, Amendment No. 3 to the Share and Asset Purchase Agreement, dated as of June 15, 2020 and Amendment No. 4 to the Share and Asset Purchase Agreement, dated as of July 30, 2020. The unaudited pro forma condensed combined financial data set forth below gives effect to the following:

•the completion of the Acquisition, which closed on August 1, 2020 (the ‘‘Closing’’) with a total transaction value of $6.89 billion, funded by $5.17 billion in cash and 72.9 million in shares at a fair value of $1.72 billion;

•the incurrence of $4.28 billion of additional debt to fund the cash portion of the Acquisition consideration and pay fees and expenses related to the Acquisition; and

•the estimated impact of the divestitures of certain products required by government regulators for the completion of the Acquisition. These products include Osurnia, Capstar, Standguard, Vecoxan, other minor products and the Drontal and Profender product lines of the Bayer Animal Health Business as well as other immaterial divestitures in connection with the Acquisition.

The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it occurred on June 30, 2020 and the unaudited pro forma condensed combined statements of operations give effect to the Acquisition as if it occurred as of the beginning of the period. The unaudited pro forma condensed combined financial data has been prepared by management in accordance with the regulations of the U.S. Securities and Exchange Commission (“SEC”) and is not necessarily indicative of what the combined financial position or results of operations actually would have been had the Acquisition been completed as of the dates indicated, nor is it indicative of future results or financial position of the combined company. In addition, the unaudited pro forma condensed combined financial data do not purport to project the future financial position or results of operations of the combined entity. Differences between these preliminary estimates and the final acquisition accounting will likely occur and these differences could be material. The differences, if any, could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and Elanco’s future results of operations and financial position. There were no material transactions between Bayer and Elanco during the period presented in the unaudited pro forma condensed combined financial data that would need to be eliminated.

The unaudited pro forma condensed combined financial data have been prepared using the acquisition method of accounting under U.S. generally accepted accounting principles (“U.S. GAAP”), with Elanco being the accounting acquirer. The pro forma adjustments are preliminary and based on currently available information and are subject to change. Under the acquisition method generally all assets acquired and liabilities assumed are recorded at their respective fair values as of the date the acquisition is completed. For pro forma purposes, the fair value of the Bayer Animal Health Business’s tangible and identifiable intangible assets acquired and liabilities assumed are based on a preliminary estimate of fair value as of June 30, 2020. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognized as goodwill. Management believes that the fair values recognized for the assets acquired and liabilities assumed are based on reasonable estimates and assumptions.

The unaudited pro forma condensed combined financial data gives pro forma effect to events that are directly attributable to the Acquisition, are factually supportable, and with respect to the unaudited pro forma condensed combined statements of operations, are expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined statement of operations excludes the impact of any incremental cost of sales related to the increase of the Bayer Animal Health Business inventory by $142.7 million to fair value at the acquisition date.

All financial data included in the unaudited condensed combined financial data is presented in millions of U.S. dollars and has been prepared on the basis of U.S. GAAP and Elanco’s accounting policies. For the purpose of the pro forma condensed combined financial data, the Bayer Animal Health Business’s historical combined financial data has been converted from International Financial Reporting Standards (“IFRS”) to U.S. GAAP and Elanco’s accounting policies for material accounting policy differences and translated from Euro to U.S. dollars. The conversion from IFRS to U.S. GAAP was based on information available to Elanco.

The pro forma adjustments in this document include the final terms of the additional debt funding, the issuance of shares to effect the Acquisition, and the preliminary determination of the fair value of the assets acquired and liabilities assumed.

The unaudited pro forma condensed combined financial data presented is for informational purposes only. The unaudited pro forma condensed combined statements of operations do not reflect any anticipated synergies or dis-synergies, operating efficiencies or cost savings that may result from the Acquisition or any further potential divestitures that may occur prior to, or subsequent to, the completion of the Acquisition or any acquisition and integration costs that may be incurred. The pro forma adjustments, which Elanco believes are reasonable under the circumstances, are preliminary and are based upon available information and certain assumptions described in the accompanying notes to the unaudited pro forma condensed combined financial data.

The unaudited pro forma financial data reflects cash paid at Closing, which is subject to a purchase price adjustment related to the final closing statement for assets acquired and liabilities assumed. The total cash consideration will be adjusted, as needed, based on the final net asset position per the terms of the Agreement. Elanco issued a set number of consideration shares with a value of $1.72 billion at Closing.

The unaudited pro forma condensed combined financial data should be read together with the Bayer Animal Health Business’s audited combined financial statements as of December 31, 2019, 2018 and 2017 and or the three years then ended, included as Exhibit 99.2 to Elanco's Current Report on Form 8-K/A, filed with the SEC on October 15, 2020 (the “Amended Form 8-K”), the Bayer Animal Health Business’s unaudited condensed combined interim financial statements as of June 30, 2020 and for the six months ended June 30, 2020 and 2019, included as Exhibit 99.3 to the Amended Form 8-K, as well as Elanco’s consolidated and combined financial statements and related notes thereto contained in its Annual Report on Form 10-K for the year ended December 31, 2019 and Elanco’s Quarterly Report on Form 10-Q for the six months ended June 30, 2020.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JUNE 30, 2020

(Dollars in millions)


	Elanco		Bayer Animal Health Business (A)		Pro Forma Adjustments		Note	Pro forma
ASSETS
Current assets:
Cash and cash equivalents	$	1,391.1	$	6.7	$	(674.1)	(C)	$	723.7
Account receivable, net	543.9		325.9		(315.8)		(B)	554.0
Other receivables	72.9		50.4		—			123.3
Inventories	1,065.3		376.3		131.3		(B) (G)	1,572.9
Prepaid expenses and other	107.4		607.0		(445.5)		(B) (D)	268.9
Restricted cash	10.7		—		—			10.7
Total current assets	3,191.3		1,366.3		(1,304.1)			3,253.5
Non-current assets:
Goodwill	3,044.0		108.6		3,579.3		(B)	6,731.9
Other intangibles, net	2,432.7		142.2		3,215.8		(B)	5,790.7
Other non-current assets	283.9		219.3		(120.3)		(B)	382.9
Property and equipment, net	924.1		301.5		71.8		(F)	1,297.4
Total assets	$	9,876.0	$	2,137.9	$	5,442.5				$	17,456.4
LIABILITIES
Current liabilities:
Accounts payable	242.5		189.3		(131.1)		(B)	300.7
Employee compensation	57.2		37.6		—					94.8
Sales rebates and discounts	164.0		61.6		—					225.6
Current portion of long-term debt	25.9		—		—			25.9
Other current liabilities	321.7		341.7		(52.6)		(B)	610.8
Payable to Lilly	24.1		—		—					24.1
Total current liabilities	835.4		630.2		(183.7)					1,281.9
Non-current liabilities:
Long-term debt	2,030.4		—		4,184.8		(D)	6,215.2
Accrued retirement benefits	83.9		214.8		(47.8)		(B)	250.9
Deferred taxes	65.5		56.0		709.7		(B) (G)	831.2
Other noncurrent liabilities	208.9		31.9		(2.6)		(B) (D)	238.2
Total liabilities	3,224.1		932.9		4,660.4					8,817.4
EQUITY
Common stock	—		—		—					—
Additional paid in capital	6,886.1		—		1,722.8		(E)	8,608.9
Invested equity attributable to Bayer Group	—		1,205.0		(1,205.0)		(E)	—
Retained earnings	(19.4)		—		264.3		(E)	244.9
Accumulated other comprehensive loss	(214.8)		—		—					(214.8)
Total Equity	6,651.9		1,205.0		782.1					8,639.0
TOTAL LIABILITIES AND EQUITY	$	9,876.0	$	2,137.9	$	5,442.5				$	17,456.4

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2019

(Dollars and shares in millions, except per-share data)


	Elanco		Bayer Animal Health Business ^(A)		Pro Forma Adjustments			Note	Pro forma
Revenue	$	3,071.0	$	1,745.7	$	(125.4)		(G)	$	4,691.3
Costs, expenses and other:
Cost of sales	1,470.3		583.6		(34.2)			(G) (H)	2,019.7
Research and development	270.1		160.7		(6.3)			(G)	424.5
Marketing, selling, and administrative expense	760.2		631.2		8.3			(I)	1,399.7
Amortization of intangible assets	200.4		12.3		268.0			(J)	480.7
Asset impairments, restructuring and other special charges	185.5		90.7		(133.3)			(K)	142.9
Interest expense, net of capitalized	78.9		10.1		106.7			(D)	195.7
Other (income) expense, net	27.4		26.9		—						54.3
	2,992.8		1,515.5		209.2						4,717.5
Income (loss) before income tax expense	78.2		230.2		(334.6)						(26.2)
Income tax expense (benefit)	10.3		87.4		(97.0)			(L)	0.7
Net income (loss)	$	67.9	$	142.8	$	(237.6)					$	(26.9)

Earnings (loss) per share:
Basic	0.18								(0.06)
Diluted	0.18										(0.06)
Weighted average shares outstanding:
Basic	369.0				72.9		(M)		441.9
Diluted	370.3				72.9		(M)		441.9

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2020

(Dollars and shares in millions, except per-share data)


	Elanco		Bayer Animal Health Business ^(A)		Pro Forma Adjustments			Note	Pro forma
Revenue	$	1,244.0	$	1,065.6	$	(63.9)		(G)	$	2,245.7
Costs, expenses and other:
Cost of sales	628.6		309.4		(15.3)			(G) (H)	922.7
Research and development	126.2		74.8		(1.7)			(G)	199.3
Marketing, selling, and administrative expense	344.7		331.1		4.5			(I)	680.3
Amortization of intangible assets	100.6		6.6		137.2			(J)	244.4
Asset impairments, restructuring and other special charges	194.2		101.2		(225.6)			(K)	69.8
Interest expense, net of capitalized	41.4		5.5		57.3			(D)	104.2
Other (income) expense, net	(46.8)		5.5		—						(41.3)
	1,388.9		834.1		(43.6)						2,179.4
Income (loss) before income tax expense	(144.9)		231.5		(20.3)						66.3
Income tax expense (benefit)	(42.6)		70.2		(5.9)			(L)	21.7
Net income (loss)	$	(102.3)	$	161.3	$	(14.4)					$	44.6

Earnings (loss) per share:
Basic	(0.25)								0.09
Diluted	(0.25)										0.09
Weighted average shares outstanding:
Basic	408.5				72.9		(M)		481.4
Diluted	408.5				72.9		(M)		481.4

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2019

(Dollars and shares in millions, except per-share data)


	Elanco		Bayer Animal Health Business ^(A)		Pro Forma Adjustments			Note	Pro forma
Revenue	$	1,512.7	$	977.1	$	(62.5)		(G)	$	2,427.3
Costs, expenses and other:
Cost of sales	699.8		289.9		(21.4)			(G) (H)	968.3
Research and development	132.9		72.3		(1.7)			(G)	203.5
Marketing, selling, and administrative expense	382.0		333.7		3.8			(I)	719.5
Amortization of intangible assets	98.3		6.8		133.4			(J)	238.5
Asset impairments, restructuring and other special charges	56.7		31.6		(35.6)			(K)	52.7
Interest expense, net of capitalized	41.5		1.1		50.6			(D)	93.2
Other (income) expense, net	6.5		10.1		—						16.6
	1,417.7		745.5		129.1						2,292.3
Income (loss) before income tax expense	95.0		231.6		(191.6)						135.0
Income tax expense (benefit)	27.6		58.1		(55.6)			(L)	30.1
Net income (loss)	$	67.4	$	173.5	$	(136.0)					$	104.9

Earnings (loss) per share:
Basic	0.18								0.24
Diluted	0.18										0.24
Weighted average shares outstanding:
Basic	365.7				72.9		(M)		438.6
Diluted	366.5				72.9		(M)		439.4

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

Basis of Preparation

The unaudited pro forma condensed combined financial data reflects adjustments that are: (i) directly attributable to the Acquisition; (ii) factually supportable; and (iii) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the consummation of the Acquisition.

The unaudited pro forma condensed combined balance sheet has been prepared by combining Elanco’s balance sheet and the Bayer Animal Health Business’s statement of financial position and applying the pro forma adjustments described below. The unaudited pro forma condensed combined statements of operations have been prepared by combining Elanco’s statement of operations and the Bayer Animal Health Business’s statement of income for the periods presented and applying the pro forma adjustments to each period described below. The historical combined financial information of the Bayer Animal Health Business has been prepared based on IFRS under Bayer’s accounting policies, which has been converted to U.S. GAAP and Elanco’s accounting policies. The pro forma condensed combined balance sheet has been prepared assuming the Acquisition occurred on June 30, 2020, and the pro forma condensed combined statements of operations have been prepared assuming the Acquisition occurred as of the beginning of the period.

The pro forma adjustments for the Acquisition are made on the basis that the Acquisition is a business combination that is accounted for under the acquisition method of accounting.

Accordingly, Elanco has estimated the fair value of the Bayer Animal Health Business’s assets acquired and liabilities assumed and conformed the Bayer Animal Health Business’s accounting policies to its own for material policy differences and based on available information.

The unaudited pro forma condensed combined financial data has been prepared based upon currently available information and assumptions deemed appropriate by Elanco management and for informational purposes only and should be read in conjunction with Elanco’s and the Bayer Animal Health Business’s financial statements. The preparation of these unaudited pro forma condensed combined financial data requires management to make estimates and assumptions deemed appropriate. The unaudited pro forma condensed combined financial data is not intended to represent, or be indicative of, the actual financial position and results of operations that would have occurred if the Acquisition described above had been effected on the dates indicated, nor are they indicative of the combined company’s future results.

Pro Forma Adjustments

(A)The historical combined financial statements of the Bayer Animal Health Business were prepared in accordance with IFRS and reported in Euro. The historical combined financial information of the Bayer Animal Health Business presented in the pro forma condensed combined financial information has been converted from IFRS to U.S. GAAP and uses Elanco’s accounting policies for material accounting policy differences based on information available at the time of preparation and was translated to U.S. dollars. A reconciliation of the historical combined financial information of the Bayer Animal Health Business from IFRS to U.S. GAAP and using Elanco’s accounting policies and the foreign currency rates used to convert the historical combined financial statements to U.S. dollars are presented in Note N.

Elanco is not aware of any additional accounting policy differences that would have a material impact on the unaudited pro forma condensed combined financial data and that have not been reflected in the conversion shown in Note N.

(B)Reflects the preliminary purchase price allocation among assets acquired and liabilities assumed as set forth below (in millions):


	Amount
Estimated purchase price:
Cash⁽ⁱ⁾	$	5,170.1
Elanco shares⁽ⁱⁱ⁾	1,723.7
Total	6,893.8
Preliminary purchase price allocation:
Net assets of the Bayer Animal Health Business at June 30, 2020	1,205.0
Adjustments to remove assets and liabilities not acquired⁽ⁱⁱⁱ⁾	(711.4)
Adjusted net assets of the Bayer Animal Health Business at June 30, 2020	493.6
Preliminary fair value adjustments to net assets acquired
Increase inventories to fair value^(iv)	142.7
Record acquired intangible assets at fair value^(v)	3,317.8
Tax impact of fair value adjustment^(vi)	(735.5)
Contract asset / liability in place for divested assets^(viii)	(12.7)
Preliminary fair value of net assets acquired	2,712.3
Allocation to goodwill^(vii)	$	3,687.9

(i) The cash consideration is based on the Purchase Agreement and adjusted for the amount of working capital at June 30, 2020 and other contractual adjustments (including intercompany trade accounts, certain pension liabilities, existing indebtedness and certain tax positions). The total cash consideration will be adjusted, as needed, based on the final net asset position per the terms included within the Agreement.

(ii) Elanco issued 72.9 million shares to an affiliate of Bayer at $23.64 per share as of August 1, 2020.

(iii) Certain assets and liabilities reflected on the Bayer Animal Health Business’s historical combined statement of financial position were not acquired by Elanco pursuant to the terms of the Agreement.

(iv) Represents the adjustment to record inventory at fair value. The preliminary fair value estimate was calculated using estimated forecasts provided to management. The impact of any incremental cost of sales related to the recognition of the inventory of the Bayer Animal Health Business at fair value is expected to be recorded within the first year after Closing.

(v) Represents the recognition of intangible assets at preliminary fair value, offset by intangible assets associated with the divested product lines. The preliminary fair value estimate was calculated by using the multi-period excess earning method within the income approach. The calculation is as follows (in millions):


	Amount
Marketed Products	$	3,220.0
IPR&D	240.0
Total fair value	3,460.0
Less: Historical intangible assets of Bayer Animal Health Business	(142.2)
Less: Intangibles attributable to Elanco product divestitures (Note G)	(102.0)
Pro forma adjustment	$	3,215.8

(vi) The tax impact is based on the tax rate by jurisdiction for the fair value adjustments associated with inventory and intangibles.

(vii) The pro forma adjustment to goodwill represents goodwill of $3,687.9 million less the historical goodwill on the Bayer Animal Health Business balance sheet of $108.6 million.

(viii) Supply agreement related to Drontal and Profender put into place at Acquisition close. As part of the required divestitures, the supply agreement was contracted at lower than market rates. This is offset with a contract asset related to future milestone payments associated with these products.

(C)Reflects the impact on cash and cash equivalents of the Acquisition as follows (in millions):


	Amount
Net proceeds from borrowings (Note D)	$	4,157.2
Proceeds from divestitures (Note G)	410.8
Capitalized software and services costs (Note F)	(72.0)
Cash consideration for the Acquisition (Note B)	(5,170.1)
Pro forma adjustment	$	(674.1)

(D)Reflects the impact on the net change in borrowings resulting from the Acquisition and the associated impact of additional interest expense (in millions):


			Interest Expense
	Amount		Year Ended December 31, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Term Loan A⁽ⁱ⁾	$	—	$	(16.0)	$	(0.9)	$	(9.2)
Term Loan B (TLB)⁽ⁱⁱ⁾	4,275.0		107.0		51.8		51.8
TLB debt issuance costs⁽ⁱⁱ⁾	(90.2)		12.9		6.5		6.5
Tangible equity units⁽ⁱⁱⁱ⁾	—		2.9		—		1.6
Interest expense related to pension plans not acquired	—		(0.1)		(0.1)		(0.1)
Total	$	4,184.8	$	106.7	$	57.3	$	50.6

(i) Represents Elanco's historical debt that was paid down on January 31, 2020 using proceeds raised in conjunction with Elanco's equity issuance. This amount is reflected to remove the interest expense associated with the historical debt for comparative prior periods to avoid a duplicate charge of interest expense for the new Term Loan B and previously paid down Term Loan A.

(ii) Represents the total borrowings of the floating debt instrument Term Loan B Elanco entered into to fund the Acquisition. The pro forma financial information at June 30, 2020 reflects the debt financing of $4.28 billion, which is the amount required to fund the Acquisition (without using cash on hand) if the Acquisition occurred on June 30, 2020. This includes an interest rate at LIBOR plus 175 basis points for the Term Loan B. The debt issuance costs are amortized over an estimated life of 7 years.

(iii) On January 22, 2020, Elanco issued $550.0 million of tangible equity units, which included as a component $79.2 million of senior amortizing notes. The pro forma adjustment above reflects the impact of the senior amortizing notes to the comparative historical periods.

(E)Represents the elimination of the Bayer Animal Health Business’s historical equity and the impact of the Acquisition as follows (in millions):


	Equity Attributable to the Bayer Group		Additional Paid In Capital		Retained Earnings		Total
Eliminate Bayer Animal Health Business's equity	$	(1,205.0)	$	—	$	—	$	(1,205.0)
Share consideration (Note B)	—		1,723.7		—		1,723.7
APIC impact from equity issuance⁽ⁱⁱ⁾	—		(0.9)		—		(0.9)
Estimated gain on divestitures (Note G)	—		—		300.6		300.6
Less: Closing costs⁽ⁱ⁾	—		—		(36.3)		(36.3)
Total	$	(1,205.0)	$	1,722.8	$	264.3	$	782.1

(i) Represents the impact on retained earnings of the costs paid by Elanco that were recorded at the Acquisition date. These transaction costs are excluded from the pro forma condensed combined statement of operations, as they are non-recurring in nature.

(ii) Represents the impact on APIC of the costs paid by Elanco that were recorded at the Acquisition date. These transaction costs are excluded from the pro forma condensed combined statement of operations as they are non-recurring in nature.

(F)In connection with the Acquisition, Elanco capitalized approximately $72.0 million of costs related to software and services that was payable at Closing. This represents the adjustment to reflect the depreciation of these

costs over an average estimated useful life of five years, which was offset by the disposal of $0.2 million of property and equipment related to the divestitures.

The fair value of property and equipment, net recorded from the Acquisition has been assumed to be equal to its net book value at the time of the Acquisition based on the information currently available and pending finalization of our fair value assessment.

(G)Elanco was required by government regulators to dispose of certain products for the completion of the Acquisition. These products include Osurnia, Capstar, Standguard, Vecoxan, other minor products and the Drontal and Profender product lines of the Bayer Animal Health Business as well as other immaterial divestitures. This adjustment represents the removal of the revenues and expenses associated with all product divestitures, and the removal of assets and liabilities associated with the material Elanco required product divestitures.

(H)Represents the impact of the divestitures (see Note G) and the elimination of pension expense related to pension obligations that will not be acquired. The pension expense included in cost of sales is $0.4 million, $0.2 million and $0.3 million for the year ended December 31, 2019, and the six months ended June 30, 2020 and 2019, respectively.

(I)Reflects the impact of the Acquisition calculated as follows (in millions):


	Year Ended December 31, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Depreciation expense on capitalized assets (Note F)	$	14.4	$	7.2	$	7.2
Impact of divestitures (Note G)	(5.8)		(2.5)		(3.1)
Impact of pensions not acquired	(0.3)		(0.2)		(0.3)
Total	$	8.3	$	4.5	$	3.8

(J)Represents the incremental amortization expense resulting from the Acquisition (in millions):


	Year Ended December 31, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Amortization of acquired intangible assets⁽ⁱ⁾	$	287.5	$	143.8	$	143.8
Less: Historical amortization of the Bayer Animal Health Business	(12.3)		(6.6)		(6.8)
Less: Historical amortization of divested intangible assets (Note G)	(7.2)		—		(3.6)
Total	$	268.0	$	137.2	$	133.4

(i) Amortization expense is based on the estimated fair value of the marketed products and assuming an average life of 11.2 years. If the fair value changed by 10%, amortization expense would change by $32.2 million for the year ended December 31, 2019, and $16.1 million for the six months ended June 30, 2020 and 2019.

(K)Represents the elimination of costs incurred by Elanco and Bayer related to the Acquisition, which are excluded from the pro forma statement of operations due to the non-recurring nature of the expenses.

(L)The estimated tax impact is based on an assumed tax rate of 29%, which is a blended average statutory rate based on the assumed jurisdiction for the pro forma adjustments and current structure.

(M)The weighted average number of shares outstanding reflects the issuance of 72.9 million shares to an affiliate of Bayer at closing of the Acquisition. Total weighted average shares of 481.4 million is calculated as 72.9 million shares issued to the Bayer affiliate plus 408.5 million shares issued and outstanding as of June 30, 2020. During certain periods we have a reported net loss. Therefore, dilutive common shares are not assumed to have been issued since their effect is anti-dilutive. As a result, basic and diluted weighted average shares are the same, causing diluted net loss per share to be equivalent to basic net loss per share.

(N)The following is a reconciliation of the Bayer Animal Health Business’s historical combined financial information from IFRS to U.S. GAAP and using Elanco’s accounting policies.

UNAUDITED BAYER ANIMAL HEALTH BUSINESS CONDENSED COMBINED

STATEMENT OF FINANCIAL POSITION

AS OF JUNE 30, 2020


(in millions)	IFRS (EUR)⁽ⁱ⁾		IFRS (USD)⁽ⁱⁱ⁾		Adjustments(iii)		Note	U.S. GAAP and Elanco Classification (USD)
ASSETS
Current assets:
Cash	€	6.0	$	6.7	$	—		$	6.7	Cash
Trade accounts receivable	291.0		325.9		—			325.9		Accounts receivable, net
Inventories	336.0		376.3		—			376.3		Inventories
Other financial assets	367.0		411.0		(411.0)		a.	—
Other receivables	45.0		50.4		—			50.4		Other receivables
Claims for income tax refunds	175.0		196.0		(196.0)		a.	—
					607.0		a.	607.0		Other current assets
Total current assets	1,220.0		1,366.3		—			1,366.3
Noncurrent assets:
Goodwill	97.0		108.6		—			$	108.6	Goodwill
Other intangible assets	127.0		142.2		—			142.2		Other intangibles, net
Other financial assets	1.0		1.1		(1.1)		a.	—
Other receivables	4.0		4.5		(4.5)		a.	—
Deferred taxes	177.0		198.2		(198.2)		a.	—
					219.3		a.	219.3		Other noncurrent assets
Property, plant and equipment	283.0		317.0		(15.5)		a.	301.5		Property and equipment, net
Total assets	€	1,909.0	$	2,137.9	$	—		$	2,137.9
LIABILITIES
Current liabilities
Trade accounts payable	€	169.0	$	189.3	$	—		$	189.3	Accounts payable
Refund liabilities	55.0		61.6		—			61.6		Sales Rebates and Discounts
Other provisions	118.0		132.2		(132.2)		a.	—
					37.6		a.	37.6		Employee compensation
Contract liabilities	3.0		3.4		(3.4)		a.	—
Financial liabilities	39.0		43.7		(43.7)		a.	—
Income tax liabilities	134.0		150.1		(150.1)		a.	—
Other liabilities	35.0		39.2		302.5		a.	341.7		Other current liabilities
Total current liabilities	553.0		619.5		10.7			630.2
Noncurrent liabilities:
Financial Liabilities	15.0		16.8		(16.8)		a.	—
Provisions for pensions and other post-employment benefits	192.0		215.0		(0.2)		d.	214.8		Accrued retirement benefits
Deferred taxes	50.0		56.0		—			56.0		Deferred taxes
Other liabilities	5.0		5.6		26.3		a.	31.9		Other noncurrent liabilities
Other provisions	18.0		20.2		(20.2)		a.	—
Total liabilities	€	833.0	$	933.1	$	(0.2)		$	932.9
Total Equity	1,076.0		1,204.8		0.2		d.	1,205.0
Total liabilities and equity	€	1,909.0	$	2,137.9	$	—		$	2,137.9

UNAUDITED BAYER ANIMAL HEALTH BUSINESS CONDENSED COMBINED

STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2019


(in millions)	IFRS (EUR)⁽ⁱ⁾		IFRS (USD)⁽ⁱⁱ⁾		Adjustments⁽ⁱⁱⁱ⁾		Note	U.S. GAAP and Elanco Classification (USD)
Net Sales	€	1,572.0	$	1,760.6	$	(14.9)	h.	$	1,745.7	Revenue
Expenses:
Cost of goods sold	509.0		570.1		13.5		b, d, e, i.	583.6		Cost of sales
Research and development expenses	143.0		160.2		0.5		c.	160.7		Research and development
Selling expenses	533.0		597.0		(597.0)		a.	—
General and administration expenses	138.0		154.6		(154.6)		a.	—
					631.2		a, e, h, i.	631.2		Marketing, selling and administration
					12.3		a.	12.3		Amortization of intangible assets
					90.7		a, f.	90.7		Asset impairments, restructuring, and other special charges
					10.1		a.	10.1		Interest expense, net of capitalized interest
Other operating income	(5.0)		(5.6)		5.6		a.	—
Other operating expenses	14.0		15.7		(15.7)		a.	—
Financial income	(1.0)		(1.1)		1.1		a.	—
Financial expense	25.0		28.0		(28.0)		a.	—
					26.9		a.	26.9		Other expense (income), net
Income taxes	82.0		91.8		(4.4)		g.	87.4		Income tax expense
Income after income taxes	€	134.0	$	149.9	$	(7.1)		$	142.8	Net income (loss)

UNAUDITED BAYER ANIMAL HEALTH BUSINESS CONDENSED COMBINED

STATEMENT OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2020


(in millions)	IFRS (EUR)⁽ⁱ⁾		IFRS (USD)⁽ⁱⁱ⁾		Adjustments⁽ⁱⁱⁱ⁾		Note	U.S. GAAP and Elanco Classification (USD)
Net Sales	€	984.0	$	1,082.4	$	(16.8)	h.	$	1,065.6	Revenue
Expenses:
Cost of goods sold	278.0		305.8		3.6		d, e, i.	309.4		Cost of sales
Research and development expenses	69.0		75.9		(1.1)		c.	74.8		Research and development
Selling expenses	300.0		330.0		(330.0)		a.	—
General and administration expenses	119.0		130.9		(130.9)		a.	—
					331.1		a, e, h, i.	331.1		Marketing, selling and administration
					6.6		a.	6.6		Amortization of intangible assets
					101.2		f.	101.2		Asset impairments, restructuring, and other special charges
					5.5		a.	5.5		Interest expense, net of capitalized interest
Other operating income	(3.0)		(3.3)		3.3		a.	—
Other operating expenses	7.0		7.7		(7.7)		a.	—
Financial income	(2.0)		(2.2)		2.2		a.	—
Financial expense	8.0		8.8		(8.8)		a.	—
					5.5		a.	5.5		Other (income) expense, net
Income taxes	63.0		69.3		0.9		g.	70.2		Income tax expense
Income after income taxes	€	145.0	$	159.5	$	1.8		$	161.3	Net income (loss)

UNAUDITED BAYER ANIMAL HEALTH BUSINESS CONDENSED COMBINED

STATEMENT OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2019


(in millions)	IFRS (EUR)⁽ⁱ⁾		IFRS (USD)⁽ⁱⁱ⁾		Adjustments⁽ⁱⁱⁱ⁾		Note	U.S. GAAP and Elanco Classification (USD)
Net Sales	€	874.0	$	987.6	$	(10.5)	h.	$	977.1	Revenue
Expenses:
Cost of goods sold	250.0		282.5		7.4		d, e, i.	289.9		Cost of sales
Research and development expenses	64.0		72.3		—			72.3		Research and development
Selling expenses	289.0		326.6		(326.6)		a.	—
General and administration expenses	58.0		65.5		(65.5)		a.	—
					333.7		a, e, h, i.	333.7		Marketing, selling and administration
					6.8		a.	6.8		Amortization of intangible assets
					31.6		f.	31.6		Asset impairments, restructuring, and other special charges
					1.1		a.	1.1		Interest expense, net of capitalized interest
Other operating income	(2.0)		(2.3)		2.3		a.	—
Other operating expenses	8.0		9.0		(9.0)		a.	—
Financial expense	4.0		4.5		(4.5)		a.	—
					10.1		a.	10.1		Other (income) expense, net
Income taxes	51.0		57.6		0.5		g.	58.1		Income tax expense
Income after income taxes	€	152.0	$	171.9	$	1.6		$	173.5	Net income (loss)

(i) Represents the historical condensed combined statement of financial position of the Bayer Animal Health Business as of June 30, 2020 and the condensed combined statement of income for the six months ended June 30, 2020 and 2019, which is included as Exhibit 99.3 to the Amended Form 8-K, and the combined statement of income year ended December 31, 2019, which is included as Exhibit 99.2 to the Amended Form 8-K.

(ii) Euro amounts are converted to U.S. Dollars at an exchange rate of $1.12 for the statement of financial position and an average rate of $1.12, $1.10 and $1.13 for the statements of operations for the year ended December 31, 2019 and the six months ended June 30, 2020 and 2019, respectively.

(iii) A summary of the differences between IFRS and Elanco’s accounting policies is as follows:

a. Reflects the reclassification of balances to align Bayer Animal Health Business’s financial statement presentation with the Elanco presentation.

b. Reflects an adjustment to eliminate reversals of impairment recorded by the Bayer Animal Health Business for inventory, as these adjustments are not recorded under U.S. GAAP.

c. Reflects adjustments to reverse the capitalization of R&D costs that are required to be recognized as expenses under U.S. GAAP.

d. Reflects the elimination of multi-employer pension plan assets and liabilities, which are not recognizable under U.S. GAAP, and the associated adjustment to expense amounts.

e. Reflects the reclassification of shipping and handling costs of $19.1 million, $9.0 million, and $8.8 million for the year ended December 31, 2019 and six months ended June 30, 2019 and June 30, 2020, respectively, from selling expenses, as presented by the Bayer Animal Health Business in the historical combined statements of income, to cost of sales, which is consistent with Elanco policy.

f. Reflects the reclassification of transaction costs, including internal and external costs such as legal, consulting, accounting and auditing fees, from cost of goods sold, general and administrative expenses, research and development expenses, and financial expenses, as presented by the Bayer Animal Health Business in the historical combined statements of income to asset impairments, restructuring, and other special charges.

g. Reflects the income tax effect of the conversion adjustments based on the Bayer Animal Health Business effective tax rate.

h. Reflects the reclassification of trade fund costs associated with the reimbursement to customers for promotional activities of $21.7 million, $13.9 million, and $20.2 million for the year ended December 31, 2019 and six months ended June 30, 2019 and June 30, 2020, respectively, from selling expenses, as presented by the Bayer Animal Health Business in the historical combined statements of income, to net revenue, which is consistent with Elanco policy.

i.Reflects the reclassification of certain commission costs of $6.8 million, $3.4 million, and $3.4 million for the year ended December 31, 2019 and six months ended June 30, 2019 and June 30, 2020, respectively, from cost of sales, as presented by the Bayer Animal Health Business in the historical combined statements of income, to operating expenses, which is consistent with Elanco policy.

Exhibit 99.2


Combined Financial Statements Animal Health						1
2017, 2018, 2019

Animal Health Business of

Bayer Aktiengesellschaft

Combined Financial Statements

as of

December 31, 2017, 2018, 2019


Animal Health Business of Bayer Aktiengesellschaft Combined Financial Statements Contents
Combined Statements of Income									4
Combined Statements of Comprehensive Income									5
Combined Statements of Financial Position									6
Combined Statements of Changes in Equity									7
Combined Statements of Cash Flows									8
Notes to the Combined Financial Statements
1. Overview and Summary of Significant Accounting Policies									9
2. Effects of new financial reporting standards									20
3. Scope of combination									27
4. Acquisitions									29
5. Net sales									29
6. General administration expenses									30
7. Other operating income									30
8. Other operating expenses									31
9. Personnel expenses									31
10. Financial Result									32
11. Income taxes									33
12. Goodwill and other intangible assets									35
13. Property, plant and equipment									38
14. Other financial assets									39
15. Inventories									40
16. Trade accounts receivable									40
17. Other receivables									42
18. Equity									43
19. Provisions for pensions and other post-employment benefits									44
20. Other provisions									53
21. Financial liabilities									57
22. Other liabilities									58
23. Financial instruments									58
24. Contingent liabilities and other financial commitments									68
25. Legal risks									69
26. Financial opportunities and risks									70
27. Leases									71
28. Related parties									73
29. Statements of Cash Flow									75
30. Events after the end of the reporting period									77

Combined Financial Statements


Combined Financial Statements Animal Health						4
2017, 2018, 2019

Combined Statements of Income


						1

€ million		Note	2017		2018		2019

Net sales	[5]			1,576		1,510		1,572

Cost of goods sold			(472)		(480)		(509)

Gross profit			1,104		1,030		1,063


Selling expenses			(576)		(534)		(533)
Research and development expenses			(156)		(142)		(143)

General administration expenses	[6]			(66)		(55)		(138)

Other operating income	[7]			11		14		5

Other operating expenses	[8]			(20)		(14)		(14)

Operating income			297		299		240


Financial income			5		1		1
Financial expenses			(19)		(10)		(25)

Financial result	[10]			(14)		(9)		(24)


Income before income taxes			283		290		216

Income taxes	[11]			(86)		(76)		(82)
Income after income taxes			197		214		134


Combined Financial Statements Animal Health						5
2017, 2018, 2019

Combined Statements of Comprehensive Income


						2

€ million		Note	2017		2018		2019

Income after income taxes			197		214		134

Remeasurements of the net defined benefit liability
for post-employment benefit plans	[19]			16		(18)		(50)

Income taxes	[11]			(5)		5		14

Other comprehensive income from remeasurements of the
net defined benefit liability for post-employment benefit plans			11		(13)		(36)

Other comprehensive income that will not be reclassified subsequently
to profit or loss			11		(13)		(36)

Changes in fair values of derivatives designated as cash flow hedges	[23.3]			10		(15)		2

Reclassified to profit or loss			-		-		5

Income taxes	[11]			(3)		3		(2)

Other comprehensive income from cash flow hedges			7		(12)		5

Changes in exchange differences recognized on translation
of operations outside the eurozone			(39)		9		6

Other comprehensive income from exchange differences			(39)		9		6

Other comprehensive income that may be reclassified subsequently to profit or
loss			(32)		(3)		11

Total other comprehensive income			(21)		(16)		(25)

Total comprehensive income			176		198		109


Combined Financial Statements Animal Health						6
2017, 2018, 2019

Combined Statements of Financial Position


						3
				Dec 31,	Dec 31,		Dec 31,
€ million		Note	2017		2018			2019

Noncurrent assets

Goodwill	[12]			95		97			99

Other intangible assets	[12]			136		128			129

Property, plant and equipment	[13]			187		211			280

Other financial assets	[14]			5		12			3

Other receivables	[17]			5		3			6

Deferred taxes	[11]			147		155			201

			575		606			718

Current assets

Inventories	[15]			259		281			320

Trade accounts receivable	[16]			181		184			224

Other financial assets	[14]			928		1,030			220

Other receivables	[17]			24		21			27

Claims for income tax refunds			88		126			94

			1,480		1,642			885

Total assets			2,055		2,248			1,603


Equity	[18]

Invested equity attributable to Bayer Group			1,386		1,551			789

Other components of equity			(24)		(27)			(16)

Total invested equity attributable to Bayer Group			1,362		1,524			773


Noncurrent liabilities

Provisions for pensions and other post-employment benefits	[19]			155		178			233

Other provisions	[20]			23		24			23

Financial liabilities	[21]			20		23			18

Other liabilities	[22]			4		7			3

Deferred taxes	[11]			34		39			61

			236		271			338

Current liabilities

Other provisions	[20]			113		65			86

Refund liabilities	[23]			-		52			55

Contract liabilities	[5]			-		2			2

Financial liabilities	[21]			156		142			124

Trade accounts payable			135		150			160

Income tax liabilities	[11]			1		7			30

Other liabilities	[22]			52		35			35

			457		453			492

Total equity and liabilities			2,055		2,248			1,603


Combined Financial Statements Animal Health						7
2017, 2018, 2019

Combined Statements of Changes in Equity


				4
		Other Components of Equity

				Total invested equity attributable to Bayer Group
	Invested equity attributable to Bayer Group	Exchange differences	Cash flow hedges

€ million

Jan. 1, 2017	1,086	11	(3)	1,094

Equity transactions with owners

Withdrawals/contributions	92	-	-	92

Other comprehensive income	11	(39)	7	(21)

Income after income taxes	197	-	-	197

Total comprehensive income	208	(39)	7	176

Dec. 31, 2017	1,386	(28)	4	1,362

Adjustments on adoption of IFRS 9 (after tax)	(1)	-	-	(1)

Adjustments on adoption of IFRS 15 (after tax)	16	-	-	16

Jan. 1, 2018, adjusted	1,401	(28)	4	1,377

Equity transactions with owners

Withdrawals/contributions	(51)	-	-	(51)

Other comprehensive income	(13)	9	(12)	(16)

Income after income taxes	214	-	-	214

Total comprehensive income	201	9	(12)	198

Dec. 31, 2018	1,551	(19)	(8)	1,524

Equity transactions with owners

Withdrawals/contributions	215	-	-	215

Dividend payments ¹	(1,075)	-	-	(1,075)

Other comprehensive income	(36)	6	5	(25)

Income after income taxes	134	-	-	134

Total comprehensive income	98	6	5	109

Dec. 31, 2019	789	(13)	(3)	773

¹Refer to Note 18 and 28 for more details


Combined Financial Statements Animal Health						8
2017, 2018, 2019

Combined Statements of Cash Flows¹


				5
€ million	2017		2018			2019

Income after income taxes	197		214			134

Income taxes	86		76			82

Financial result	14		9			24

Income taxes (paid) refunds received	(113)		(53)			1

Depreciation, amortization and impairments	46		41			33

Change in pension provisions	24		(11)			(3)

Loss on sale of property, plant, equipment and other noncurrent assets	1		-			-

(Increase) decrease in inventories	(46)		16			(34)

(Increase) decrease in trade accounts receivable	(8)		10			(35)

Increase in trade accounts payable	25		15			12

Changes in other working capital, other noncash items	(76)		(93)			(46)

Net cash provided by operating activities	150		224			168


Cash outflows for additions to property, plant, equipment and intangible assets	(46)		(51)			(82)

Cash inflows from sales of property, plant, equipment and other assets	4		2			2

Cash outflows for acquisitions less acquired cash	(158)		-			-

Interest and dividends received	5		1			1

Cash (outflows) inflows for loans (to) from Remaining Bayer	(79)		(116)			819

Net cash (used in) provided by investing activities	(274)		(164)			740


Other financial transactions with Bayer Group	70		(110)			(23)

Hedging transactions with Bayer Group	(14)		8			(5)

Contributions from (to) Bayer Group	92		(51)			215

Dividend payments	-		-			(1,075)

Proceeds from the issuance of debt with Bayer Group	-		100			120

Repayments of debt with Bayer Group	(15)		(5)			(134)

Principal elements of lease payments ²		-	-		(4)
Interest paid	(9)		(2)			(2)

Net cash provided by (used in) financing activities	124		(60)			(908)


Change in cash and cash equivalents due to business activities	-		-			-

Cash and cash equivalents at beginning of year	-		-			-

Cash and cash equivalents at end of year	-		-			-

¹ Refer to Note 29 for additional details regarding the Combined Statements of Cash Flows

²Refer to Note 2 and 27 for details about the Company’s adoption of IFRS 16


Combined Financial Statements Animal Health						9
2017, 2018, 2019

Notes to the Combined Financial Statements

1.Overview and Summary of Significant Accounting Policies

1.1 Background

The Animal Health segment (“Animal Health” or “the Company”) of Bayer AG, Leverkusen (“Bayer” or “Bayer Group”) develops, produces and markets prescription and non-prescription veterinary products to promote the health and wellbeing of companion and farm animals. The Company’s companion animal products, which focus on the prevention and treatment of parasites and infections, include the Advantage™, Seresto™, and Drontal™, and Baytril™ products. Farm animal products include medicines and solutions to treat parasitic diseases, in addition to anti -invectives, immunostimulants, pharmacological treatments and farm hygiene products.

On November 29, 2018, Bayer announced its intention to divest the Animal Health segment. Subsequently, on August 20, 2019, Bayer entered into a definitive agreement with U.S. -based company Elanco Animal Health Incorporated, Greenfield, Indiana, USA, (“Elanco”) to sell the Company.

The Combined Financial Statements were prepared on March 11, 2020 by management of Bayer Animal Health GmbH, Alfred-Nobel-Str. 50, 40789 Monheim am Rhein, Germany.

1.2 Basis of Presentation

These financial statements were prepared in accordance with the International Financial Reporting Standards (“IFRS”) – as issued by the International Accounting Standards Board (“IASB”) and are derived from Bayer’s consolidated financial statements. They are prepared on a combined basis.

During the reporting periods presented, Animal Health was not a group of entities under the control of an immediate parent as defined by IFRS 10 (“Consolidated Financial Statements”) and did not historically prepare consolidated financial statements. The Combined Financial Statements reflect the companies and the operations assigned to Animal Health as historically included in the IFRS consolidated financial statements of the Bayer Group and managed by Animal Health management. The Combined Financial Statements reflect the legal entities historically fully dedicated to Animal Health (dedicated entities), in addition to balances held by legal entities shared between the Animal Health segment and other Bayer Group businesses (shared entities) for each of the periods presented. Transactions and account balances associated with Bayer Group businesses outside the scope of combination (“Remaining Bayer”) are excluded from the Combined Financial Statements (Refer to Note 3 for the scope of combination).

The Combined Statements of Income include revenues and expenses directly attributable to Animal Health. In addition, Bayer Group historically provided general corporate services to Animal Health, including communications and public affairs, controlling and planning, human resources, procurement, risk management, engineering and technology, accounting, and finance. The costs for general corporate services are directly attributed at historical cost or, where this was not possible, allocated using appropriate and consistent allocation methods, including revenue, expenses, headcount, or other relevant measures. Management of the Company and Bayer Group consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Animal Health. These allocations may not reflect the expenses Animal Health would have incurred as a standalone company for the periods presented. Consistent with Bayer Group, the new accounting standards IFRS 9 (“Financial Instruments”) and IFRS 15 (“Revenue from Contracts with Customers”) were applied for the first time as of January 1, 2018 and the new accounting standard IFRS 16 (“Leases”) was applied for


Combined Financial Statements Animal Health						10
2017, 2018, 2019

the first time as of January 1, 2019 using the modified retrospective approach. Therefore, the new standards have not been applied consistently for all periods in the Combined Financial Statements.

The Combined Statements of Financial Position of Animal Health include assets and liabilities specifically identifiable or attributable to Animal Health. The assets and liabilities of Animal Health were measured at carrying amounts that were included in Bayer Group’s consolidated financial statements.

Assets and liabilities are classified by maturity. They are regarded as current if they mature within one year or within the normal business cycle of the Company. The normal business cycle is defined for this purpose as beginning with the procurement of the resources necessary for the production process and ending with the receipt of cash or cash equivalents as consideration for the sale of the goods or services produced in that process. Inventories and trade accounts receivables and payables are always presented as current items. Deferred tax assets and liabilities and pension provisions are always presented as noncurrent items.

Historically, Animal Health financed its operations using cash pooling or financing arrangements through entities of Bayer Group. The treatment of the associated financing balances varies for dedicated and shared entities. The Combined Financial Statements include interest expense, interest income, Other financial assets (Note 14), and Financial liabilities (Note 21) balances resulting from cash pooling agreements between dedicated Animal Health entities and Bayer Group. Conversely, balances resulting from such cash pooling arrangements for shared entities, including cash, debt, interest expenses, and interest income, are excluded from the Combined Financial Statements, unless they can be fully attributed to Animal Health. The Combined Statements of Income only include interest income and expense amounts pertaining to financing arrangements attributable to Animal Health. Furthermore, debt and related interest expenses incurred outside the Animal Health scope of combination are excluded from the Combined Financial Statements. Consequently, Animal Health’s Combined Financial Statements may not reflect the same financing costs, had the Company obtained financing on a stand-alone basis.

The combined financial information presented does not necessarily reflect the financial position and results of operations that would have occurred if Animal Health had existed as a separate company during each of the reporting periods presented. The fact that Animal Health did not historically exist therefore limits the applicability of the combined financial information. It also means that the combined financial information cannot be used to forecast the future development of the operations that have been combined to form the Animal Health business.

All figures are presented in euro (EUR). Amounts are stated in millions of euros ( € million) except when otherwise indicated. As the indicators in this report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact.

1.3 Significant Accounting Policies and Critical Accounting Estimates and Judgements

In general, Animal Health applied the same accounting policies and measurement principles in preparing the Combined Financial Statements as those used by Bayer Group in the preparation of financial information included in Bayer’s consolidated financial statements.

Critical Accounting Estimates

Certain accounting policies are considered to be critical to the Company. An accounting policy is considered to be critical if, in Management’s judgement, its selection or application materially affects the Company’s financial position or results. The application of the Company’s accounting policies also requires the use of estimates and assumptions that affect the Company’s financial position or results. Below is a summary of areas in which estimation is applied primarily in the context of applying critical accounting policies and judgements.

Under IFRS, management is required to make estimates, judgments and assumptions that affect the amounts reported in Combined Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable


Combined Financial Statements Animal Health						11
2017, 2018, 2019

under the circumstances. These estimates form the basis for making judgments that affect the carrying amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on the Company’s income, financial position and cash flows.

Management believes the critical accounting policies for revenue recognition (Net sales), pension provisions and goodwill reflect the significant estimates and assumptions used in the preparation of the Company’s Combined Financial Statements. Furthermore, in preparing the Combined Financial Statements, additional assumptions and estimates were made in connection with the allocation of expenses from Bayer Group, which were necessary to present Animal Health on a stand-alone basis. These expense allocations represent a significant estimate in the Combined Financial Statements.

Net sales

The Company’s material revenues are derived from the sale of prescription and non-prescription veterinary products. This is done on the basis of customer contracts and the performance obligations contained therein. Revenues are recognized through profit or loss when the Company transfers control of goods to a customer. Control lies with the customer if the customer can independently determine the use of and consume the benefit derived from a product. Revenues from product deliveries are recognized at a point in time based on an overall assessment of the existence of a right to payment, the allocation of ownership rights, the transfer of physical possession, the transfer of risks and rewards, and acceptance by the customer. The Company does not engage in material bill and hold arrangements.

Net sales are limited to the amount Animal Health expects to receive for the fulfillment of performance obligations. Payments withheld, including expected sales taxes, rebates, and sales discounts are deducted from Net sales. Sales deductions and rebates are estimated primarily on the basis of historical experience, specific contractual terms and future expectations. Net sales are also reduced by provisions for expected customer returns. The net sales are reduced on the date of sale or on the date when the amount of future product returns can be reasonably estimated. For customer contracts where more than one year passes between performance and payment, significant financing components are accounted for separately based on their present values and the subsequent unwinding of the discount. The underlying discount rate takes into account the individual credit risk of the contracting party that receives the financing.

The Company adopted IFRS 15 effective January 1, 2018 using the modified retrospective approach (Refer to Note 2).

Research and development expenses

For accounting purposes, research expenses are defined as costs incurred for current or planned investigations undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development expenses are defined as costs incurred for the application of research findings or specialist knowledge to plans or designs for the production, provision or development of new or substantially improved products, services or processes, respectively, prior to the commencement of commercial production or use. Research and development (R&D) expenses are incurred for in -house R&D activities as well as numerous research and development collaborations and alliances with third parties. R&D expenses mainly comprise the costs for active ingredient discovery, research and development activities in the areas of application technology and engineering, field t rials, regulatory approvals and approval extensions.

The Company does not capitalize research costs. Capitalization of development costs requires sufficient certainty that the development activity will generate future cash flows that will cover the associated development costs. Since the Company’s development projects are often subject to regulatory approval procedures and other uncertainties, the conditions for the capitalization of costs


Combined Financial Statements Animal Health						12
2017, 2018, 2019

incurred before receipt of approvals are not normally satisfied. The company did not capitalize any internal development costs during the periods presented.

Income Taxes

Complex tax regulations may give rise to uncertainties with respect to their interpretation and the amounts and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate adjustments to tax income and expense in future periods. Liabilities to tax authorities that are uncertain as to their amount and the probability of their occurrence are recognized as tax liabilities based on reasonable estimates. The amounts recognized are based on various factors, such as experience with previous tax audits and differing legal interpretations by the taxable entity and the responsible tax authority.

Current and deferred income taxes are recognized in accordance with IAS 12 ( “Income Taxes”). For purposes of the Combined Financial Statements, income taxes were determined using the separate tax return approach based on the assumption that Animal Health entities constitute separate taxpayers. This assumption implies that current and deferred taxes assigned to Animal Health are calculated separately and that the recoverability of deferred tax assets is assessed on this basis. For shared entities, which did not historically constitute separate income tax payers, current tax expenses and tax income were recognized in the Combined Financial Statements in the year in which they arose as non-cash contributions or withdrawals by Bayer Group. Current tax receivables or payables are derecognized for shared entities.

Deferred tax assets resulting from tax loss carry forwards for dedicated entities are recognized to the extent it is probable that they can be offset against future taxable income or taxable temporary differences. For dedicated and shared entities, tax income resulting from tax loss carry forwards was recognized in the Combined Financial Statements. Deferred tax assets resulting from tax loss carry forwards for shared entities are derecognized as non-cash contributions or withdrawals by Bayer Group, because these tax deductions will remain with Bayer Group.

The Combined Statements of Cash Flows only include the taxes actually paid by dedicated entities of Animal Health. Income taxes paid on behalf of shared entities within Animal Health are treated as equity contributions from Bayer Group.

Goodwill

Goodwill is not amortized, but tested for impairment at least annually, or when there is an indication of possible impairment. Once an impairment loss has been recognized on goodwill, it is not reversed in subsequent periods. The Company’s acquired goodwill balance is consistent with the historical Animal Health segment financial information presented within the consolidated financial statements of Bayer Group.

Other Intangible Assets

Other intangible assets include patents, trademarks, and marketing rights. They are capitalized if the future economic benefits attributable to the asset will probably flow to the Company and the cost of acquisition or generation of the asset can be reliably measured. Other intangible assets are recognized at the cost of acquisition or development. Intangible assets with a finite life are amortized on a straight - line basis over a period of up to 20 years. The expected useful life is based on estimates of the period for which the asset will generate future cash flows.


Combined Financial Statements Animal Health						13
2017, 2018, 2019

Intangible assets with a finite useful life are evaluated for impairment when events have occurred that may give rise to an impairment. Other intangible assets with an indefinite life and intangible asset s not yet available for use are not amortized, but tested annually for impairment.

Property, plant and equipment

Property, plant and equipment is depreciated on a straight-line basis over an asset’s expected useful life, except where use-related depreciation is more appropriate. The Company applies the following useful lives when estimating depreciation of Property, plant and equipment:


		1/1
Useful Life of Property, Plant and Equipment

Buildings	5 to 50 years
Plant installations and machinery		4 to 40 years
Furniture, fixtures and other equipment	2 to 15 years

When disposing of an asset, the difference between the net proceeds and the net carrying amount is recognized as a gain or loss in Other operating income or Other operating expenses, respectively.

Impairment Testing Procedures

Impairment tests are performed not only on individual items of intangible assets and property, plant and equipment, but also at the cash generating unit level. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Management determined that Animal Health constituted a single cash generating unit (CGU) for each of the reporting periods presented, which it subjected to global impairment testing. Goodwill is tested at the CGU level.

The Animal Health CGU is tested for impairment at least annually, or when an event becomes known that may trigger impairment.

Impairment testing involves comparing the carrying amount of a cash-generating unit, unit group or item of intangible assets, or property, plant and equipment to the recoverable amount, which is the higher of its fair value less costs of disposal or value in use. If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized for the difference. In this case an impairment loss is first recognized on any goodwill assigned to the cash generating unit or unit group. Any remaining impairment loss is allocated among the other noncurrent nonfinancial assets in proportion to their carrying amounts. The resulting expense is reflected in the functional item of the income statement in which the depreciation or amortization of the respective assets is recognized. The same applies to income from impairment loss reversals.

The recoverable amount is generally determined on the basis of the fair value less costs of disposal, taking into account the present value of the future net cash flows as market prices for the ind ividual units are not normally available. These are forecasted on the basis of the Company’s current planning, the planning horizon normally being three to five years. Forecasting involves making assumptions, especially regarding future selling prices, sales volumes, costs, market growth rates, economic cycles and exchange rates. These assumptions are based on internal estimates along with external market studies. Where the recoverable amount is the fair value less costs of disposal, measurement is undertaken from the viewpoint of an independent market participant. Where the recoverable amount is the value in use, the object of valuation is measured as currently used. In either case, net cash flows beyond the planning period are determined on the basis of long-term business expectations using the respective individual growth rates derived from market information. The fair value less costs of disposal is determined on the basis of unobservable inputs (Level 3).


Combined Financial Statements Animal Health						14
2017, 2018, 2019

The net cash inflows are discounted at a rate equivalent to the weighted average cost of equity and debt capital. The after-tax cost of capital considers information and risks specific to Animal Health, such as regional focus areas and a capital structure benchmarked against comparable companies in the same industry sector. The cost of equity corresponds to the return expected by stockholders, while the cost of debt is based on the conditions on which comparable companies can obtain long -term financing. Both components are derived from capital market information.

The growth rates applied for impairment testing in 2017, 2018 and 2019 and the capital cost factors are shown in the following table:


					1/2
Impairment Testing Parameters
		Growth rate		After-tax cost of capital

%	2017	2018	2019	2017		2018	2019

Animal Health	1.00	1.00	1.00	5.00		8.60	6.80

Although the estimates of the useful lives of certain assets, assumptions concerning the macroeconomic environment and industry developments, and estimates of the discounted future cash flows are believed to be appropriate, changes in assumptions or circumstances could require changes in the carrying amounts. This could lead to the recognition of additional impairment losses in the future or – except in the case of goodwill – to reversals of previously recognized impairment losses if developments are contrary to expectations.

A sensitivity analysis undertaken for the impairment testing of goodwill was based on a 10% reduction in future cash flows, a 10% increase in the weighted average cost of capital or a one -percentage-point reduction in the long-term growth rate. For all reporting periods the sensitivity analysis showed no impairment loss.

Financial Assets (2019 and 2018)

The Company adopted IFRS 9 effective January 1, 2018 using the modified retrospective method, resulting in a change to the Company’s accounting policy.

Financial assets include receivables, acquired equity and debt instruments, cash and cash equivalents, and derivatives with positive fair values. Regular-way purchases and sales of financial assets are generally posted on the settlement date. The amount at which a financial asset is initially recognized comprises its fair value and in most cases the transaction costs.

The classification and measurement of financial assets is based in each case on the business model and the characteristics of the cash flows. The business models “hold” and “sell” are applied to divested trade accounts receivable depending on the structure of the respective sale agreements, resulting in measurement at amortized costs or fair value. The option of recognizing debt instruments at fair value through profit or loss under certain conditions is not exercised. In the case of equity instruments that are not held for trading, the option of recognizing future changes in their fair value through Other comprehensive income is generally exercised.

Loss allowances for expected credit losses are recognized for financial assets measured at amortized cost.

Expected defaults on receivables expected over the respective term (stage 2 of the impairment model) is determined for trade accounts receivable based on portfolio-specific default rates. These expected default rates are mainly based on the average defaults on receivables in recent years. In individual cases, these default rates are adjusted during the year for the respective customer portfolio if a significant increase or decrease in defaults is expected in the future. The business model, specific customer circumstances, and the economic environment of the customer’s geographic region are considered when determining the expected default rates. Further differentiation is achieved by taking


Combined Financial Statements Animal Health						15
2017, 2018, 2019

into account the Company’s various customer groups. Customers are assigned to risk classes with different expected default rates depending on their individual credit risk assessments.

Where action such as insolvency or comparable proceedings has been initiated against a defaulter or other substantial indications exist that receivables are impaired (such as a considerable worsening of creditworthiness or a financial restructuring), the receivables are individually tested for impairment (stage 3 of the impairment model). In addition, all receivables more than 90 days past due are individually tested for impairment during the year. There are no financial assets which are written-off but still subject to an enforcement activity.

For other financial assets, the expected credit loss for the next 12 months is determined on first -time recognition and on subsequent measurement using the Monte Carlo simulation method (stage 1 of the impairment model). In the event of a significant increase in the default risk, which is defined as a more than 0.25% increase in the probability of default, the expected credit losses over the respective term of the asset are taken into account (stage 2 of the impairment model) . An impairment loss is recognized if there are objective indications of an impairment. The definition of objective indications of an impairment for other financial assets correspond to those of trade account receivables.

The maximum credit risk of receivables and other financial assets corresponds to the respective carrying amount. As a part of Bayer Group, the Company participates in a global credit insurance program to insure trade accounts receivable against certain catastrophic losses. The Company doe s not hold collateral as securities.

Expected credit losses are not calculated for contract assets or lease receivables due to insignificant carrying amounts.

Financial assets are derecognized when contractual rights to receive cash flows from the financial assets expire or the financial assets were transferred together with all material risks and benefits.

Financial Assets (2017)

Financial assets are comprised of loans and receivables, acquired equity and debt instruments, cash and cash equivalents, and derivatives with positive fair values.

Regular-way purchases and sales of financial assets are generally posted on the settlement date. Financial assets are initially recognized at fair value plus transaction costs. The transaction costs incurred for the purchase of financial assets held at fair value through profit or loss are expensed immediately.

If there are substantial and objective indications of a decline in the value of loans and receivables, held - to maturity financial assets or available-for-sale financial assets, an impairment test is performed. Indications of possible impairment include a high probability of insolvency, a significant deterioration in credit standing, a material breach of contract, operating losses reported by a company over several years, a reduction in market value, the financial restructuring of the debtor, or the disappearance of an active market for the asset.

Impairment losses are generally recorded on receivables in the event of insolvency or similar proceedings being launched, financial restructuring at business partners, or the initiation of enforcement measures. Payment history and past-due receivables are also analyzed, with customer-specific facts assessed in each case.

Financial assets are derecognized when contractual rights to receive cash flows from the financial assets expire or the financial assets are transferred together with all material risks and benefits.


Combined Financial Statements Animal Health						16
2017, 2018, 2019

Inventories

Inventories include assets consumed in production or in the rendering of services (raw materials and supplies), assets in the production process for sale (work in process), goods held for sale in the ordinary course of business (finished goods and goods purchased for resale), and advance payments on inventories. Inventories are recognized at the lower of cost or net realizable value. Cost compromises direct materials and, where applicable, direct labor costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business less associated selling expenses.

Cash and cash equivalents

Cash and cash equivalents comprise cash funds and all short-term investments with original maturities of up to three months. Short-term investments are highly liquid and readily convertible into known amounts of cash. The risk of changes in value is insignificant.

Provisions for pensions and other post-employment benefits

Animal Health employees receive post-employment benefits under defined contribution and defined benefit plans. In regards to these plans, employees primarily dedicated to the Company (greater than 50% of an employee’s time) are attributed to Animal Health. For dedicated entities, active and non-active employees were attributed to Animal Health. For shared entities, only active employees were attributed to Animal Health since it is unfeasible to assign inactive employees to Animal Health or Remaining Bayer precisely. The impact of employee transfers between Animal Health and Remaining Bayer is separately presented for each of the reporting periods, with corresponding changes to plan assets and obligations.

In the case of defined contribution plans, the business historically paid contributions to publicly or privately administered pension plans on a mandatory, contractual or voluntary basis. After making the contributions, the business had no further payment obligations. The regular contributions constitute expenses for the year in which they are due. Defined contribution plan expenses are allocated to Animal Health and classified within operating expenses based on employee mappings.

All other post-employment benefit plans are salary defined benefit plans, which may be either unfunded (financed by provisions) or funded (financed through pension funds). Obligations under these plans are measured using actuarial valuations prepared by an external expert.

The present value of provisions attributable to Animal Health employees for defined benefit plans and the resulting expense are calculated in accordance with IAS 19 (“Employee Benefits”) by the projected unit credit method. The future benefit obligations are valued by actuarial methods and spread over the entire employment period using specific assumptions regarding beneficiary structure and the economic environment. These assumptions relate mainly to the discount rate, expected future salary and pension increases, variations in health care costs, and mortality rates. The discount rates used are calculated from the yields of high-quality corporate bond portfolios in specific currencies with cash flows approximately equivalent to the expected disbursements from the pension plans. The uniform discount rate derived from this interest-rate structure is thus based on the yields, at the closing date, of a portfolio of AA-rated corporate bonds whose weighted residual maturities approximately correspond to the duration necessary to cover the entire benefit obligation.


Combined Financial Statements Animal Health						17
2017, 2018, 2019

is recognized in Operating income. The net interest on the net liability is reflected in the financial result under financial income and expenses. The effects of remeasurements of the net defined benefit liability are reflected in Other comprehensive income. They consist of actuarial gains and losses, the return on plan assets and changes in the effects of the asset ceiling, less the amounts included in net interest.

Deferred taxes relating to the effects of remeasurements are also recognized in Other comprehensive income.

Bayer-Pensionskasse

Employees of Animal Health participate in the Bayer-Pensionskasse VVaG (Bayer-Pensionskasse), Leverkusen, Germany. This plan has been closed to new members since 2005. This legally independent fund is considered a life insurance company and is subject to the German Insurance Supervision Act. The benefit obligations covered by Bayer-Pensionskasse comprise retirement, surviving dependents’ and disability pensions. The Bayer-Pensionskasse pension obligations are classified as a multi-employer plan as defined under IAS 19. A defining characteristic of multi-employer plans is that assets from various employers not under common control are pooled at plan level and used to collectively grant pension benefits to employees. Allocation mechanisms that would permit an exact distribution of the plan assets managed by the pension plan to individual employers often do not exist. The Company applied an estimation method to allocate the proportional share of the assets of the pension plans to Animal Health.

Other Provisions

Other provisions are recognized for present legal and constructive obligations arising from past events that will probably give rise to a future outflow of resources, provided that a reliable estimate can be made of the amount of the obligations. If the projected obligation declines as a result of a change in the estimate, the provision is reversed by the corresponding amount and the resulting income recognized as an operating expense.

Financial Liabilities

Financial Liabilities include Trade accounts payable and other liabilities that are settled in cash and cash equivalents or other financial instruments, as well as negative fair values of derivatives. Financial liabilities are measured at amortized cost with the exception of those carried at fair value, such as derivatives with negative fair values.

Other Receivables and Liabilities

Accrued items and other nonfinancial assets and liabilities are carried at amortized cost. They are amortized to income on either a straight-line basis or according to performance of the underlying transaction.

Derivatives

Animal Health uses derivatives to mitigate the risk of changes in currency exchange rates. Derivatives are recognized at the trade date and carried at fair value. Positive fair values at the end of the reporting period are reflected in financial assets and negative fair values are reflected in financial liabilities. Changes in the fair values of these derivatives are recognized directly in profit or loss except where hedge accounting is used.

Changes in the fair values of the effective portion of derivatives designated as cash flow hedges are initially recognized in Other comprehensive income. They are reclassified to profit or loss when the underlying transaction is recognized through profit or loss. The ineffective portion of derivatives designated as cash flow hedges is recognized either in Other operating income, Other operating expenses, or Financial result, depending on the type of underlying transaction. Changes in the fair values of derivatives designated as fair-value hedges and the adjustments in the carrying amounts of the underlying transactions are recognized in profit or loss.


Combined Financial Statements Animal Health						18
2017, 2018, 2019

Changes in the fair values of forward exchange contracts and currency options serving as hedges of items in the Statements of Financial Position are reflected in financial income and expenses as exchange gains or losses. Effects from cash flow hedges of forward exchange contracts used to hedge forecasted sales transactions in foreign currencies are initially recognized in other comprehensive income and then reclassified to other operating income or expenses at the time the sales are recognized. Changes in the fair values of stock options or forward stock transactions used to hedge stock-based employee compensation are initially recognized in other comprehensive income and subsequently reclassified to profit or loss in the functional costs over the periods of the Aspire programs.

Related Party and Intercompany Transactions

Transactions between Bayer Group businesses outside the scope of combination and Animal Health are recognized as third party transactions and are disclosed as related party transactions. The treatment of these transactions, which were historically treated as intercompany transactions for purposes of the Bayer consolidated financial statements, depends on the nature of the entities involved. No impairment losses were recognized on receivables from related entities in any of the reporting periods.

As discussed in Note 3, Animal Health consists of both dedicated and shared entities. Transactions historically occurred between Animal Health and Remaining Bayer within individual shared entities (“intracompany transactions”). These transactions primarily consisted of local overhead cost allocations, which are treated as contributions from Bayer Group and do not result in related party payables or receivables.

The treatment of related party transactions with Remaining Bayer occurring between separate legal entities depends on the nature of the transaction. These types of transactions primarily include sales and purchasing activity and corporate allocations, such as overhead, employee benefits, and financing. Generally, cost allocations from Remaining Bayer are treated as equity contributions from Bayer Group, while sales and purchases result in amounts payable from or due to Bayer Group. Refer to Note 2 8 for further details regarding the treatment of these transactions.

Intercompany balances, which represent transactions entirely within Animal Health, are eliminated in preparation of the Combined Financial Statements.

Equity

The equity of Animal Health consists of the Invested equity attributable to the Bayer Group and Other components of equity. Invested equity attributable to the Bayer Group represents Bayer’s historical investment in Animal Health, the net effect of transactions with and allocations from Bayer Group and Animal Health’s accumulated earnings. Other components of equity primarily consist of accumulated currency exchange differences and cash flow hedging activity.

Other comprehensive income balances are allocated to Animal Health using reasonable methods consistent with the underlying account balances.

Leases (2019)

A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. The Company transitioned to IFRS 16 from IAS 17 (prior “Leases” standard) effective January 1, 2019 (refer to Note 2), resulting in an accounting policy change between 2018 and 2019.

Under IFRS 16, the Company no longer classifies leases as either finance leases or operating leases when it is the lessee. Rather, the Company recognizes a right-of-use asset and lease liability for all leases in the balance sheet. The lease liability is measured on the basis of outstanding lease payments, discounted using the incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability, plus any initial direct costs. During the lease term, the Company adjusts the amount of the lease liability using the effective interest method and reducing the liability for any lease


Combined Financial Statements Animal Health						19
2017, 2018, 2019

payments. The right-of-use asset is depreciated consistently with the Company policy for Property, plant and equipment.

The Company applied the practical expedient for short-term leases under IFRS 16, whereby the Company does not recognize right-of-use assets or lease liability for these types of leases. Short-term leases are defined as leases with a lease term of 12 months or less at the commencement date. The Company reflects lease payments under these agreements in the combined statements of income consistently as before.

Lessor accounting under IFRS 16 is consistent with the previous guidance of IAS 17. Lessors under IFRS 16 are required to continue to classify leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset.

For the purpose of the Combined Financial Statements all lease transactions between the Bayer Group and Animal Health are treated as third party leases. Furthermore, certain leases with third parties are shared between Animal Health and Bayer Group. Leases held by dedicated entities, in addition to leases primarily supporting Animal Health operations held by shared entities, are fully attributed to the Company, including the related right-of-use assets and lease liabilities under IFRS 16. In the event Animal Health is not the primary beneficiary of a shared lease agreement, the Company records an expense for the use of the leased asset.

Leases (2018 and 2017)

Under IAS 17, leases are classified as either finance or operating leases. Leasing transactions that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee are treated as finance leases. All other leasing agreements are classified as operating leases.

When the Company is a lessee in a finance lease, the leased asset is capitalized at the lower of the fair value of the asset or the present value of the minimum lease payments at the beginning of the lease term and simultaneously recognized under financial liabilities. The minimum lease payments are divided into the principal portion of the remaining obligation and the financing costs, which are determined using the effective interest method. The leased asset is depreciated by the straight -line method over the shorter of its estimated useful life or the lease term.

When the Company is a lessee in an operating lease, the lease payments are expensed using the straight-line method. When the Company is the lessor, the lease payments received are recognized in combined profit or loss. The leased asset continues to be recognized under Property, plant and equipment in the Combined Statements of Financial Position.

Foreign Currency

The financial information comprising Animal Health is based on each entity’s functional currency. An entity’s functional currency is that of the economic environment in which it primarily operates. The majority of Animal Health entities carry out their activities autonomously from a financial, economic and organizational point of view, and their functional currencies are therefore the respective local currencies.

When preparing the Combined Statements of Financial Position, non-euro denominated assets and liabilities are translated into euros using the closing rates of each period presented. Income and expense items and cash flows are translated into euros at average annual rates. The components of equity are translated at the historical exchange rates prevailing at the respective dates of their first -time recognition in Animal Health.

The exchange differences arising between the resulting amounts and those obtained by translating at closing rates are recognized as Other comprehensive income.


Combined Financial Statements Animal Health						20
2017, 2018, 2019

The exchange rates for major currencies against the euro varied as follows:


										1/3
Exchange Rates for Major Currencies
		BRL	CAD		CNY	GBP	JPY		RUB		USD

		Brazil	Canada		China	U.K.	Japan		Russia		U.S.A.

Closing rate	2017	3.98		1.51		7.81		0.89			135.01	69.41	1.20

	2018	4.44		1.56		7.87		0.89			125.87	79.76	1.15

	2019	4.52		1.46		7.82		0.85			121.87	69.94	1.12

Average rate	2017	3.59		1.46		7.61		0.88			126.39	65.71	1.13

	2018	4.29		1.53		7.80		0.88			130.38	73.87	1.18

	2019	4.41		1.49		7.74		0.88			122.01	72.44	1.12

Currency translation for Animal Health is calculated based on the value of assets and liabilities attributed to the Company.

Hedging transactions for Animal Health are mainly initiated by Bayer Animal Health or KVP Pharma+Veterinär Produkte with Bayer. For the purpose of the Combined Financial Statements all hedging transaction were treated as third party transactions. All hedged items and hedged instruments that are related to Animal Health dedicated entities, are reflected in the Combined Financial Statements.

Separation Costs

The Company incurred costs related to the separation from Bayer Group during 2019. These costs consist of various internal and third-party advisor fees associated with the sale of the Company, including for example legal, consultancy, accounting, and auditing fees. The Company attributes these costs to either Animal Health or Remaining Bayer based on the nature of the costs. Costs directly associated with the divestiture or the Animal Health business are attributed to the Company.

During 2019, the Company incurred approximately €81 million in costs related to the anticipated sale and separation of Animal Health which, given their nature, were directly attributable to the Company . These costs are primarily classified within General administration expenses.

2.Effects of new financial reporting standards

Financial reporting standards applied for the first time in 2017

The first-time application of the following amended financial reporting standards had no impact, or no material impact, on the presentation of Animal Health’s financial position or results of operations.

In January 2016, the IASB published amendments to IAS 7 (“Statement of Cash Flows”) under the title “Amendments to IAS 7: Disclosure Initiative.” The following changes in liabilities arising from financing activities must be disclosed: (a) changes from financing cash flows; (b) changes arising from obtaining or losing control of subsidiaries or other businesses; (c) the effect of changes in foreign exchange rates; (d) changes in fair values; (e) other changes.

In January 2016, the IASB also published amendments to IAS 12 (“Income Taxes”) under the title “Recognition of Deferred Assets for Unrealized Losses.” These amendments clarify that in the case of assets recognized at fair value (e.g. fixed-rate debt instruments) where the taxable value is the cost of acquisition, unrealized losses result in deductible temporary differences, irrespective of the future use of the asset. Further, when estimating future taxable profits for the purpose of recognizing deferred tax assets, the tax deductions resulting from the reversal of other deductible temporary differences must be eliminated.


Combined Financial Statements Animal Health						21
2017, 2018, 2019

In December 2016, the IASB published “Annual Improvements to IFRS Standards 2014 - 2016 Cycle” as part of its annual improvements project. The changes relating to IFRS 12 (“Disclosure of Interest in Other Entities”) primarily pertain to clarifications.

Financial reporting standards applied for the first time in 2018

IFRS 9 (“Financial Instruments”) and IFRS 15 (“Revenue from Contracts with Customers”) were applied for the first time as of January 1, 2018. The Company elected the modified retrospective approach for both standards, accounting for the aggregate amount of any transition effects by way of an adjustment to equity and presenting the comparative periods in line with previous rules.

The effects that the first time application of IFRS 9 and IFRS 15 had on equity are detailed in the table below.


			2/1
Invested equity attributable to Bayer Group Reconciliation IFRS 9 and IFRS 15
€ million

Invested equity attributable to Bayer Group as of December 31, 2017			1,386

Effects of IFRS 9			(1)

Effects of IFRS 15			16

Invested equity attributable to Bayer Group as of January 1, 2018			1,401

IFRS 9 – Financial Instruments

IFRS 9 is the new standard for accounting for financial instruments. It replaces the previous rules under IAS 39 (“Financial Instruments: Recognition and Measurement”). Animal Health applied IFRS 9 using the modified retrospective approach for the first time effective January 1, 2018, accounting for the aggregate amount of any transition effects by way of an adjustment to equity and presenting the comparative periods in line with previous rules.

Based on the Company’s investment holdings, the overall impact of IFRS 9 on the value of equity instruments was immaterial.

IFRS 9 introduces new provisions for the classification and measurement of financial assets and replaces the current rules on the impairment of financial assets. The new standard requires a change in accounting methods for the effects resulting from a change in the Company’s own credit risk for financial liabilities classified at fair value and modifies the requirements for hedge accounting. The classification and measurement of financial liabilities are otherwise largely unchanged from the existing regulations.

Under IFRS 9, the classification and measurement of financial assets is determined by the Company’s business model and the characteristics of the cash flows of each financial asset. In the case of equity instruments held as of January 1, 2018, that are not held for trading, Animal Health has uniformly opted to recognize future changes in their fair value through Other comprehensive income and to continue to classify these changes as equity upon the derecognition of the financial instrument. As for new instruments, Animal Health can opt to make use of this option on an instrument -by-instrument basis upon recognition, but it must continue to do so thereafter.


Combined Financial Statements Animal Health						22
2017, 2018, 2019

IFRS 9 resulted in the following changes as of the date of first-time application:


					2/2
Financial Assets Reconciliation from IAS 39 to IFRS 9
€ million

		Carrying amount Dec. 31, 2017 (IAS 39)	Effect of the expected loss model	Carrying amount Jan. 1, 2018 (IFRS 9)	Measurement category² (IFRS 9)
Measurement category¹ (IAS 39)


Trade accounts receivable

LaR	181		(1)		180		AC

Other financial assets

LaR	923		-		923		AC

						FVTOCI (no
AfS - equity instruments	2		-		2		recycling)

Derivatives	8		-		8		Derivatives

Other receivables

LaR	11		-		11		AC

Total financial assets		1,125	(1)	1,124

¹AfS: available for sale; at fair value through Other comprehensive income

LaR: loans and receivables; at amortized cost

² AC: at amortized cost; The standard had no effect on financial liabilities

FVTOCI: at fair value through Other comprehensive income

The standard had no effects on financial liabilities.

The following table shows the effects of the first-time application of IFRS 9 on Invested equity attributable to Bayer Group and Other comprehensive income in the Combined Statements of Comprehensive Income, broken down by measurement category:

2/3

Effects of First-Time Application of IFRS 9 on Retained Earnings and Other Comprehensive Income

€ million

Measurement category (IAS 39)¹

Measurement category (IFRS 9)¹

Retained earnings effect as of Jan. 1, 2018

OCI effect as of Jan. 1, 2018

Trade accounts receivable

LaR

(1)

Total financial assets

(1)

¹ See table 2/2 for definition of measurement categories

As of the transition date, the Company did not have any financial assets or liabilities measured at fair value using unobservable inputs (Level 3).

The overall impact of IFRS 9 on the Company’s loss allowances was immaterial as of the transition date.

For hedge accounting, Animal Health has opted to prospectively apply IFRS 9 from January 1, 2018. If only the intrinsic value of an option is designated as a hedging instrument in a hedging relationship, IFRS 9 requires that changes in the fair value of the time value of options during the hedging period initially be recognized as other comprehensive income in the Combined Statements of Comprehensive Income. The release of the accumulated amounts, either in the form of a basis adjustment or directly through profit or loss, depends on the type of hedged transaction. In contrast to the other rules on hedge accounting, the revised accounting method is to be applied retrospectively. Animal Health opted to not change the accounting treatment for foreign currency derivatives upon adoption of IFRS 9. As at the transition date, these changes did not have any material impact on the presentation of the Company’s financial position and results of operations.


Combined Financial Statements Animal Health						23
2017, 2018, 2019

In October 2017, the IASB published an amendment to IFRS 9 under the title “Prepayment Features with Negative Compensation.” It also published a clarification regarding the accounting for a modification of a financial liability that does not result in its derecognition. For these nonsubstantial modifications, modification gains or losses – including the costs of the modification – must be immediately recognized in profit or loss. This amendment to IFRS 9 is to be applied for annual periods beginning on or after January 1, 2018. This amendment did not have any impact on the presentation of the Company’s financial position and results of operations.

IFRS 15 – Revenue from Contracts with Customers

IFRS 15 introduced the five-step model for revenue recognition from contracts with customers. Under the standard, revenue is recognized at amounts that reflect the consideration that an entity expects to be entitled to receive in exchange for transferring goods or services to a customer. Under the new standard, the Company primarily recognizes revenue from performance obligations satisfied at a point in time when control of goods or services has been transferred to a customer. In addition, IFRS 15 clarifies the allocation of individual topics to (new) line items in the Combined Statements of Financial Position and to functional cost items in the Combined Statements of Income, and whether gross or net amounts are to be presented.

The Company adopted IFRS 15 effective January 1, 2018, using the modified retrospective method. Under the modified retrospective method, the aggregate transition effect is recorded by an adjustment to equity as of January 1, 2018. Comparative period balances for 2016 and 2017 are presented in accordance with the prior standards and remain unchanged. The Company elected to retrospectively apply the new standard to uncompleted contracts as of January 1, 2018, reflecting the aggregate effect of all contract modifications that occurred prior to the date of first -time application in accordance with IFRS 15.C7A(b).

The adoption of IFRS 15 has led to the following effects:

// Changes in the timing of recognition – As of December 31, 2015, the Company had a €21 million deferred income balance related to the proceeds from a divestiture transaction in 2015, which was classified in Other provisions. Under IFRS 15, the proceeds from this transaction would have been recognized immediately, resulting in the elimination of the deferred income balance. The introduction of IFRS 15 resulted in a €20 million decrease in Net sales in 2018 and a €5 million decrease in deferred tax expenses in 2018.

// Presentational changes:

•IFRS 15 changes the presentation of expected product returns within the statement of financial position from net to gross in cases where returns are expected to be resalable and Animal Health will refund the purchase price. The refund liabilities resulting from the gross presentation include amounts expected to be refunded upon product return. Prior to the adoption of IFRS 15, Animal Health presented the margin of expected returns on a net basis in Other provisions. Due to the nature of products sold by the Company, right of return assets are not recognized in inventories for expected customer returns.

•Amounts already received (or receivable) but expected to be refunded to the customer are presented as “refund liabilities” under IFRS 15. These amounts typically relate to expected volume rebates and expected product returns and were previously presented within Other provisions.

•Advance payments received (or receivable) in connection with product deliveries were previously recognized in trade accounts payable. Advance payments received (or receivable) relating to right-to-access licenses and service contracts recognized over time were previously presented as deferred income in Other liabilities. With the introduction of IFRS 15, both are presented as contract liabilities. Within the statement of cash flows, the decline in trade accounts payable resulting from the presentational change is set against a corresponding change in “other working capital, other noncash items.”


Combined Financial Statements Animal Health						24
2017, 2018, 2019

Adoption of IFRS 15 under the modified retrospective approach had the following impact on the opening statement of financial position as of January 1, 2018:


							2/4
IFRS 15 Accounting Changes: Combined Statements of Financial Position as of January 1, 2018
		Dec 31, 2017						Jan 1, 2018

		Before accounting changes		Presentational changes		Changes in timing of recognition		After accounting changes

€ million

Inventories	259				–		–	259


Invested equity attributable to Bayer Group	1,386				–	16			1,402

Contract liabilities (noncurrent)		–	3			(1)			2

Other liabilities (noncurrent)	4			(3)				–	1

Deferred taxes	34				–	5			39

Other provisions (current)	113			(44)				–	69

Refund liabilities (current)		–	44				–	44

Contract liabilities (current)		–	20			(20)				–

Trade accounts payable	135			(1)				–	134

Other liabilities (current)	52			(19)				–	33

The transition to IFRS 15 had the following impact on the Statement of Financial Position as of December 31, 2018:


					2/5
Reconciliation IFRS 15 to IAS 18 for Presentational Changes: Combined Statement of Financial Position as of December 31, 2018
€ million		IFRS 15 December 31, 2018	Presentational changes		IAS 18 December 31, 2018

Inventories	281			–	281

Other provisions (noncurrent)	24			–	24

Other liabilities (noncurrent)	7			–	7

Other provisions (current)	65		52			117

Refund liabilities (current)	52		(52)			-

Contract liabilities (current)	2		(2)			-

Trade accounts payable	150		2			152

Other liabilities (current)	35			–	35

Financial reporting standards applied for the first time in 2019

In January 2016, the IASB published the new standard for lease accounting, IFRS 16 (“Leases”), which replaces the rules contained in IAS 17 (“Leases”) along with the associated interpretations. The new standard is to be applied for annual periods beginning on or after January 1, 2019. The standard introduces a single lessee accounting model, requiring lessees to recognize right -of-use assets for granted rights of use and corresponding lease liabilities. It eliminates the requirement for lessees to differentiate between operating leases – without recognizing the respective assets or liabilities – and finance leases. However, IFRS 16 contains the option of exercising exemptions for the recognition of short-term leases and those pertaining to low-value assets. As under the previous standard, IAS 17, lessors are still required to differentiate between operating and finance leases. According to IFRS 16, subleases are classified as a finance or operating lease by reference to the right -of-use asset arising from the head lease.

Animal Health applied IFRS 16 for the first time as of January 1, 2019 using the modified retrospective approach, accounting for the aggregate amount of any transition effects by way of an adjustment to equity. Comparative period amounts were therefore not restated and are presented in line with previous rules.


Combined Financial Statements Animal Health						25
2017, 2018, 2019

Upon transition, various options and practical expedients were exercised as of the transition date for lease agreements in which Animal Health is the lessee. No additional assessment was undertaken upon the first-time application of the new standard with regard to whether a contract represents or contains a leasing relationship. For contracts previously classified as operating leases, Animal Health measured the lease liabilities as of the date of first-time application of IFRS 16 at the present value of the outstanding lease payments. The Company used the incremental borrowing rate as of the transition date to measure the present value. On the date of first-time application, right-of-use assets were generally measured at the amount of the lease liability, adjusted by the amounts of any prepaid or accrued lease payments. Initial direct costs were not taken into account in the measurement of right-of-use assets as of the date of first-time application. The Company has performed the analysis of lease liabilities based on the facts and circumstances that existed as of January 1, 2019 transition date.

The Company exempts short-term leases beginning after December 31, 2018 from the scope of application of IFRS 16. The Company also exercised the option of applying the short -term lease exemptions to certain leases ending in 2019.

The first-time application of IFRS 16 as of January 1, 2019, resulted in the recognition of additional lease liabilities of €13 million, presented as part of financial liabilities. Right -of-use assets, including those previously recognized as finance leases according to IAS 17 until December 31, 2018, rose in line with the lease liabilities by €13 million as of January 1, 2019, after the adjustments resulting from the first-time application of IFRS 16.

The significant effects on the individual items in the statement of financial position that were recognized as of December 31, 2018, in line with previous requirements were as follows:


			2/6
IFRS 16 Accounting Changes: Combined Statements of Financial Position as of January 1, 2019
		Adjustments due to
€ million	Dec. 31, 2018	IFRS 16	Jan. 1, 2019

Property, plant and equipment	211	13	224

Financial liabilities	165	13	178

Refer to Note 27 for a breakdown of the capitalized right-of-use asset into asset classes.

Beginning January 1, 2019, in the Combined Statements of Income, Animal Health ceased recognizing rental expenses for operating leases within operating income, and instead recognized the depreciation of the right-of-use assets. Depending on the nature of the leased asset, the classification of depreciation expense for the right-of-use assets is either recognized within the appropriate functional cost category or other operating expenses. Further, the Company records the related interest expense for lease liabilities under IFRS 16 within Financial expenses. The application of IFRS 16 resulted in an increase in Net cash provided by operating activities and a decrease in Net cash used in financing activities as the retirement of the lease liabilities and the interest expense were assigned to the Cash Flow from financing activities. Short-term lease payments and variable lease payments that are not included in the measurement of the lease liability are presented within operating activities.

Material items in connection with the reconciliation of operating lease commitments of €14 million as of December 31, 2018, to the lease liabilities recognized as of January 1, 2019, comprised of €3 mill ion in finance leases already recognized as liabilities and a €1 million discount on the lease liabilities initially recognized under IFRS 16. Refer to Note 24 for further information.

The weighted average incremental borrowing rate for leases initially recognized upon the first-time application of IFRS 16 was 6.19%.


Combined Financial Statements Animal Health						26
2017, 2018, 2019

In addition to IFRS 16, the Company also applied the following amendments to accounting standards for the first time in 2019, which did not have a material impact on the Combined Financial Statements.

2/7

Amendments to financial reporting standards applied for the first time in 2019 without material impact

Amendments to standards/interpretations

IFRS 9

Prepayment Features with Negative Compensation

IAS 19

Amendments to IAS 19 (Employee Benefits): Plan Amendments, Curtailments or Settlements

IAS 28

Long-term Interests in Associates and Joint Ventures

IFRIC 23

Uncertainty over Income Tax Treatments

Annual Improvements to IFRS Standards 2015-2017 Cycle

Published financial reporting standards that have not yet been applied

The IASB and the IFRS Interpretations Committee have issued the following standards, amendments to standards, and interpretations whose application was not yet mandatory for the year ended December 31, 2019. The following IFRS and interpretations have not yet been applied by the Company:

2/8

Published financial reporting standards that have not yet been applied

Amendments to standards/interpretations

Mandatory application

Anticipated effects

Amendment to IFRS 3 Business

IFRS 3

Combinations

Jan. 1, 2020

No material effects expected

Effects currently being

IFRS 17

Insurance Contracts

Jan. 1, 2021

evaluated

Amendments to IAS 1 and IAS 8: Definition

IAS 1, IAS 8

of Material

Jan. 1, 2020

No material effects expected

Amendments of IFRS 9, IAS 39, IFRS 7:

Effects currently being

IFRS 9, IAS 39, IFRS 7

Interest rate benchmark reform

Jan. 1, 2020

evaluated

Amendments to IAS 1: Classification of

Effects currently being

IAS 1

Liabilities as Current or Noncurrent

Jan. 1, 2022

evaluated

Amendments to References to the

Conceptual Framework in IFRS Standards

Jan. 1. 2020

No material effects expected


Combined Financial Statements Animal Health						27
2017, 2018, 2019

3.Scope of combination

The Combined Financial Statements of Animal Health consist of both dedicated entities and shared entities. Dedicated entities are comprised entirely of Animal Health operations, with all assets and liabilities attributed to the Company. The shared entities consist of both Animal Health and Remaining Bayer operations, with assets and liabilities attributed to both Animal Health and Remaining Bayer. Shared entity costs are allocated when direct attribution is not possible.

As of September 1, 2019, all Animal Health assets and liabilities attributed to Bayer Intellectual Property GmbH, previously a shared entity, were legally transferred to Bayer Animal Health GmbH. The account balances were transferred to Bayer Animal Health GmbH at the previous carrying amounts.

In addition, during 2019, the Company ceased to include Bayer West-Central Africa S.A. within the scope of combination for Animal Health, as the related account balances were immaterial to the Company.

As a result of the above items, the overall scope of combination used to prepare the Combined Financial Statements changed from the Combined financial statements prepared for the year ended December 31, 2018.

Animal Health consists of the following entities:

3/1

Scope of Combination

Company name

Registered Office

Entity Type

KVP Pharma+Veterinär Produkte GmbH

Kiel, Germany

Dedicated

Bayer (Sichuan) Animal Health Co., Ltd.

Chengdu, China

Dedicated

Bayer Animal Health GmbH

Leverkusen, Germany

Dedicated

Bayer HealthCare Animal Health Inc.

St. Joseph, USA

Dedicated

PT. Bayer Indonesia

Jakarta, Indonesia

Shared

Bayer Philippines, Inc.

Laguna, Philippines

Shared

Bayer Türk Kimya Sanayii Limited Sirketi

Istanbul, Turkey

Shared

Bayer Yakuhin, Ltd.

Osaka, Japan

Shared

Bayer S.A.

Buenos Aires, Argentina

Shared

Bayer Australia Limited

Pymble, Australia

Shared

Bayer NV

Antwerp, Belgium

Shared

Bayer S.A.

San Jose, Costa Rica

Shared

Bayer S.A.

Santiago de Chile, Chile

Shared

Bayer S.A.

San Salvador, El Salvador

Shared

Bayer S.A.

Guatemala City,

Shared

Guatemala

Bayer de México, S.A. de C.V.

Mexico City, Mexico

Shared

Bayer, S.A.

Quito, Ecuador

Shared

Bayer S.p.A.

Milan, Italy

Shared

Bayer B.V.

Maastricht, Netherlands

Shared

Bayer HealthCare SAS

Loos, France

Shared

Bayer Portugal, Lda.

Carnaxide, Portugal

Shared

Bayer S.A

Montevideo, Uruguay

Shared

Bayer S.A.

Lima, Peru

Shared

Bayer S.A.

Managua, Nicaragua

Shared

Bayer Public Limited Company

Cambridge, United

Shared

Kingdom

Bayer Austria Gesellschaft m.b.H.

Vienna, Austria

Shared

Bayer (Proprietary) Limited

Isando, South Africa

Shared


Combined Financial Statements Animal Health						28
2017, 2018, 2019

3/2

Continue Scope of Combination

Company name

Registered Office

Entity Type

Bayer New Zealand Limited

Auckland, New Zealand

Shared

Bayer Hispania, S.L.

Sant Joan Despí, Spain

Shared

Bayer HealthCare LLC

Whippany, USA

Shared

Bayer Inc.

Mississauga, Canada

Shared

Bayer S.A.

Panama City, Panama

Shared

Bayer Thai Co., Ltd.

Bangkok, Thailand

Shared

Bayer A/S

Copenhagen, Denmark

Shared

Bayer S.A.

Santo Domingo, Dominican

Shared

Rep.

Bayer S.A. de C.V.

Tegucigalpa, Honduras

Shared

Bayer Taiwan Company Ltd.

Taipei, Taiwan

Shared

Bayer Korea Ltd.

Seoul, Korea

Shared

Bayer Hungária Kft.

Budapest, Hungary

Shared

Bayer Sp. z o.o.

Warsaw, Poland

Shared

Bayer (China) Limited

Shanghai, China

Shared

AO Bayer

Moscow, Russia

Shared

Bayer Healthcare Co., Ltd.

Beijing, China

Shared

Bayer S.A.

Asunción, Paraguay

Shared

Bayer Vital GmbH

Leverkusen, Germany

Shared

Bayer Pharmaceuticals Private Limited

Thane, India

Shared

Bayer Business Services GmbH

Leverkusen, Germany

Shared

Bayer S.A.S.

Lyon, France

Shared

Bayer Co. (Malaysia) Sdn Bhd

Petaling Jaya, Malaysia

Shared

Bayer S.A.

Bogotá, Colombia

Shared

Bayer Vietnam Ltd.

Biên Hòa City, Vietnam

Shared

Bayer S.A.

Sao Paulo, Brazil

Shared

Bayer U.S. LLC

Whippany, USA

Shared

Bayer East Africa Ltd.

Nairobi, Kenya

Shared

Bayer Ltd.

Kiev, Ukraine

Shared

Bayer Holding Ltd.

Tokyo, Japan

Shared

Bayer Middle East FZE

Dubai, United Arab Emirate

Shared

Bayer Intellectual Property GmbH¹

Monheim, Germany

Shared

Dritte Bayer Real Estate VV GmbH & Co. KG

Schönefeld, Germany

Shared

Bayer West-Central Africa S.A.²

Abidjan, Ivory Coast

Shared

Bayer Aktiengesellschaft

Leverkusen, Germany

Shared

Bayer Pharma AG

Berlin, Germany

Shared

¹ In 2019 all Animal Health assets and liabilities attributed to Bayer Intellectual Property GmbH were legally transferred to Bayer Animal Health GmbH

² In 2019 Bayer West-Central Africa S.A. was excluded from the scope of combination for Animal Health, as the related account balances were immaterial to the Company


Combined Financial Statements Animal Health						29
2017, 2018, 2019

4.Acquisitions

On January 3, 2017, Animal Health acquired the Cydectin™ portfolio in the Un ited States from Boehringer Ingelheim Vetmedica, Inc., St. Joseph, Missouri, United States, which qualifies as a business, for a purchase price of €158 million, which the Company accounted for as an asset deal. The acquired portfolio includes the CYDECTIN Pour-On, CYDECTIN Injectable and CYDECTIN Oral Drench endectocides for cattle and sheep. The acquisition is intended to strengthen the Company’s antiparasitics portfolio in the United States. The purchase price pertained mainly to trademarks and goodwill, which is fully tax-deductible. The goodwill included expected synergies and cost savings in the selling and general administration functions, in addition to the sales synergies resulting from combined product offerings.

The effects of this transaction – as of the acquisition date – on the Animal Health’s assets and liabilities are shown in the following table.


			4/1
Acquired Assets and Assumed Liabilities (Fair Values at the Respective Acquisition Dates)
€ million

Goodwill			51

Trademarks			85

Production rights			4

Inventories			18

Net assets			158

Purchase price			158

Net cash outflow for acquisitions			158

In fiscal 2017, the Cydectin™ business contributed €31 million to the sales of Animal Health. After -tax income of €5 million was recorded for the Cydectin™ business in the same period since the acquisition date.

5.Net sales

The Company’s net sales are derived primarily from product deliveries. During each of the reporting periods, the Company recognized sales to customers in each of the following markets:


			5/1
Net sales - by Geography
€ million	2017	2018		2019

Europe / Middle East / Africa	448	413		419

North America	653	631		657

Asia/Pacific	319	320		339

Latin America	156	146		157

Total	1,576	1,510		1,572

Sales of €5 million were recognized in 2019 (2018: €4 million) from performance obligations already satisfied in previous years. These sales primarily resulted from adjustments to refund liabilities for expected product returns and from rebates to be granted and pertain to customer contracts which have original terms in excess of one year.

The Company has certain sales contracts with minimum sales commitments. The unfulfilled performance obligations for these contracts are expected to be reclassified into profit and loss as follows, based on the underlying contract terms and estimated dates of delivery:


Combined Financial Statements Animal Health						30
2017, 2018, 2019


			5/2
Allocation of Transaction Price to Unfulfilled Performance Obligations
€ million¹		Dec. 31, 2018		Dec. 31, 2019
Transaction price outstanding as of	83			90

of which to be recognized within 1 year	16			18

of which to be recognized between 1 and 2 years	16			13

of which to be recognized between 2 and 3 years	17			13

of which to be recognized between 3 and 4 years	17			13

of which to be recognized between 4 and 5 years	17			33

of which to be recognized after more than 5 years		-		-

¹ Figures presented for the years ended December, 31 2018 and 2019 only, due to the transition to IFRS 15

The table above includes only contracts with original maturities of more than one year.

Contract liabilities mainly result from advance payments by customers for product deliveries and are generally recognized as sales within one year. Contract liabilities were approximately €2 million as of December 31, 2019 (2018: €2 million).

6.General administration expenses

In 2019, General administration expenses amount to €138 million (2018: €55 million, 2017: €66 million) and consist of general corporate overhead costs, employee costs, and separation costs associated with the sale to Elanco. The increase in General administration expenses during 2019 resulted primarily from separation costs related to the Elanco sale, which amounted to €71 million (2018: €0 million, 2017: €0 million). These separation costs are directly attributable to Animal Health and related to the separation from Remaining Bayer.

7.Other operating income

Other operating income is comprised of the following:


			7/1
Other Operating Income
€ million	2017	2018		2019

Gains on retirements of noncurrent assets	-	-		1

Reversal of impairment losses on receivables	1	2		1

Gains from derivatives	5	6		-

Miscellaneous operating income	5	6		3

Total	11	14		5

In 2017, Miscellaneous operating income includes gains from the Company’s long -term incentive compensation hedging activities (€1 million).

In 2018, Miscellaneous operating income was primarily comprised of a litigation settlement in Germany related to royalty licensing arrangements (€3 million) and a working capital adjustment settlement associated with the Company’s 2013 Teva acquisition (€2 million).


Combined Financial Statements Animal Health						31
2017, 2018, 2019


8.	Other operating expenses
Other operating expenses are comprised of the following:
					8/1
Other Operating Expenses
€ million		2017		2018		2019

Losses on retirements of noncurrent assets			(1)		-		(1)

Impairment losses on receivables			(4)		(2)		(2)

Losses from derivatives			(5)		(5)		(5)

Miscellaneous operating expenses			(10)		(7)		(6)

Total		(20)		(14)		(14)

In 2017, Miscellaneous operating expenses includes €2.5 million in legal expenses in the United States and €2 million related to penalties claimed by fiscal authorities in Costa Rica.

In 2018, Miscellaneous operating expenses includes €1 million in legal expenses in the United States.

In 2019, Miscellaneous operating expenses includes €2 million related to legal costs, primarily aimed at protecting the Company’s patents, and €1 million related to foreign currency hedging losses. Refer to Note 25 for additional details regarding the Company’s legal risks.

9.Personnel expenses

Personnel expenses consisted of the following:


			9/1
Personnel Expenses
€ million	2017	2018		2019

Salaries	273	248		280

Social expenses and expenses for pensions and other benefits	81	69		66

of which for defined contribution pension plans	19	18		19

of which for defined benefit and other pension plans	14	13		11

Total	354	317		346

The interest portion of personnel-related expenses – mainly for pensions and other post-employment benefits – is included within Financial result on the Combined Statements of Income.


Combined Financial Statements Animal Health						32
2017, 2018, 2019

10. Financial result

10.1 Net interest expense

The net interest expense is comprised of the following:


			10/1
Net Interest Expense
€ million	2017	2018		2019

Expenses

Interest expense	(9)	(2)		(6)

Income

Interest income	5	1		1

Total	(4)	(1)		(5)

The interest expense and interest income included above resulted entirely from financial liabilities and financial assets, respectively. In 2019, interest expenses included €4 million interest related to income tax audits. Refer to Note 11 for further details.

10.2 Other financial income and expenses

Other financial income and expenses were comprised as follows:


			10/2
Other Financial Income and Expenses
€ million	2017	2018		2019

Expenses

Interest portion of interest-bearing provisions	(4)	(4)		(4)

Exchange loss	(4)	(2)		-

Miscellaneous financial expenses	(2)	(2)		(15)

Income

Exchange gain	-	-		-

Miscellaneous financial income	-	-		-

Total	(10)	(8)		(19)

In 2019, Miscellaneous financial expenses include €8 million in charges from Bayer AG to Bayer Animal Health GmbH for retired Bayer AG employees as a onetime payment.


Combined Financial Statements Animal Health						33
2017, 2018, 2019

11. Income taxes

Income tax expense is comprised of the following:


			11/1
Major components of tax expense
	2017	2018	2019

	Of which	Of which	Of which
€ million	income taxes	income taxes	income taxes

Taxes paid or accrued

Current income taxes	(58)	(86)	(123)

Germany	(41)	(45)	(79)

Other countries	(17)	(41)	(44)


Deferred taxes	(28)	10	41

from temporary differences	(37)	(4)	14

from tax loss and interest carryforwards
and tax credits	9	14	27


Total	(86)	(76)	(82)

Current income taxes comprise current income tax expenses from prior years of €29 million in 2019 (2018: €7 million, 2017: €-1 million) which is mainly related to income tax audits performed for the taxable periods 2013-2015. Refer to Note 24 for additional details.

Deferred tax assets and liabilities result from the following temporary differences and tax loss carryforwards:


								11/2
Deferred Tax Assets and Liabilities
		Dec. 31. 2017				Dec. 31. 2018				Dec. 31. 2019

€ million		Deferred tax assets	Deferred tax liabilities	Deferred tax assets		Deferred tax liabilities	Deferred tax assets		Deferred tax liabilities

Intangible assets	4		-		5			-	2		1

Property, plant and equipment	2		3		6			5	1		6

Financial assets	-		1		2			-	-		-

Inventories	83		27			92	28	91		23

Receivables	-		13		-			19	-		26

Other assets	1		-		-			-	-		-

Provisions for pensions and other post-employment
benefits	72		45			90	63	141		95

Other provisions	14		1			12	1	15		-

Liabilities	26		-			25	-	41		-

Tax loss and interest carryforwards	1		-			-	-	-		-

Tax credits	-		-			-	-	-		-

Total before netting	203		90			232	116	291		151

Netting	(56)		(56)			(77)	(77)	(90)		(90)

Total	147		34			155	39	201		61

Based on the separate tax return approach described in Note 1.3, for shared entities that did not constitute separate income tax payers in the reporting periods, current tax expenses and tax income were recognized in the Combined Financial Statements in the year in which they arose as non -cash contributions or withdrawals by the respective stockholders. As a result, current tax liabilities were reduced by €70 million in 2019 (2018: €70 million; 2017: €63 million).


Combined Financial Statements Animal Health						34
2017, 2018, 2019

For shared entities which are not separate income taxpayers, deferred tax assets for tax loss carryforwards of €55 million (2018: €28 million; 2017: €13 million) were derecognized as non -cash withdrawals, because the tax losses pertain to the respective shareholders.

Deferred tax assets on tax loss carryforwards at an amount of €0 million in 2019 (2018: €0 million; 2017: €1 million) were recognized for fully dedicated entities which suffered a taxable loss in the current or previous period.

In addition to the tax loss carryforwards for which deferred tax assets were recognized, the Company has tax loss carryforwards from fully dedicated entities for which utilization is not probable as of reporting date:


				11/3
Tax loss carryforwards
by expiration date¹
€ million		Dec. 31. 2017	Dec. 31. 2018		Dec. 31. 2019

After 5 years	95		102			105

Total		95	102		105

¹ The tax loss carryforwards for which no deferred assets were capitalized are related to state tax losses incurred in the United States

No deferred tax liabilities were recognized for taxable temporary differences associated with investments in subsidiaries amounting €49 million in 2019 (2018: €73 million; 2017: €56 million) as the Group is able to control the timing of the reversals and the temporary differences will not reverse in the foreseeable future.

The following table reconciles expected income tax expense using the Company’s weighted average statutory income tax rate and actual tax expense:


									11/4
Reconciliation of Expected to Actual Income Tax Expense
	Dec. 31, 2017						Dec. 31, 2018					Dec. 31, 2019

	€ million	%				€ million	%			€ million	%

Expected income tax expense¹ and expected tax rate	79		28.0%		74		25.6%	52		24.1%
Reduction in taxes due to tax-free income			(1)	(0.4)%			(1)		(0.3)%			(1)	(0.4)%

First-time recognition of previously unrecognized deferred tax
assets on tax loss and interest carryforwards			-	-			-		-			-	-

Use of tax loss and interest carryforwards on which deferred
tax assets were not previously recognized			-	-			-		-			-	-

Increase in taxes due to non-tax-deductible expenses			2	0.9%			2		0.7%			2	0.9%

New tax loss and interest carryforwards unlikely to be usable			1	0.4%			-		-			-	-

Existing tax loss and interest carryforwards on which deferred
tax assets were previously recognized but which are unlikely to
be usable			-	-			-		-			-	-

Tax income (-) and expenses (+) relating to other periods	(1)		(0.3)%		3		0.9%	29 ²		13.3%
Tax effects of changes in tax rates			8	2.7%			-		(0.1)%			1	0.3%

Other tax effects			(2)	(0.7)%			(2)		(0.7)%			(1)	(0.2)%

Actual income tax expense and effective tax rate	86		30.6%		76		26.2%	82		38.0%

¹ Expected income tax expense is calculated by applying an expected weighted average tax rate to the pre-tax income of the Company. This average rate was determined on the basis of expected tax rates for the individual legal entities of the Company

² In 2019, as a result from tax audit, prior period taxes increased actual income tax expense by €28 million


Combined Financial Statements Animal Health						35
2017, 2018, 2019

12. Goodwill and other intangible assets

Changes in goodwill and intangible assets in the years presented were as follows:


											12/1
Changes in Intangible Assets (2019)
€ million		Acquired goodwill	Patents and tech- nologies		Trade- marks		Marketing and distrubu- tion rights	Pro- duction rights	R&D projects	Other rights and advance payments		Total

Cost of acquisition
or generation,
December 31, 2018	97			15		120	53		4	8	42		339

Acquisitions	-			-		-	-		-	-	-		-

Capital expenditures	-			-		-	3		-	1	1		5

Retirements	-			-		-	-		-	(1)	(10)		(11)

Exchange differences	2			-		2	1		-	-	1		6

December 31, 2019	99			15		122	57		4	8	34		339

Accumulated
amortization
and impairment,
December 31, 2018	-			13		50	20		4	-	27		114

Retirements	-			-		-	-		-	-	(10)		(10)

Amortization and
impairment losses	-			-		4	5		-	-	2		11

Amortization	-			-		4	5		-	-	2		11

Impairment losses	-			-		-	-		-	-	-		-

Impairment loss reversals	-			-		(7)	-		-	-	-		(7)

Exchange differences	-			-		1	1		-	-	1		3

December 31, 2019	-			13		48	26		4	-	20		111

Carrying amounts,
December 31, 2019	99			2		74	31		-	8	14		228

Carrying amounts,
December 31, 2018	97			2		70	33		-	8	15		225


Combined Financial Statements Animal Health						36
2017, 2018, 2019


											12/2
Changes in Intangible Assets (2018)
€ million		Acquired goodwill	Patents and tech- nologies		Trade- marks	Marketing and distrubu- tion rights		Pro- duction rights	R&D projects	Other rights and advance payments		Total

Cost of acquisition or generation, December 31, 2017	95			15	115		50		4		3		41	323

Acquisitions	-			-	-		-		-		-		-	-

Capital expenditures	-			-	-		-		-		5		-	5

Retirements	-			-	-		-		-		-		-	-

Exchange differences	2			-	5		3		-		-		1	11

December 31, 2018	97			15	120		53		4		8		42	339

Accumulated amortization and impairment, December 31, 2017	-			12	38		14		2		-		26	92

Retirements	-			-	-		-		-		-		-	-

Amortization and impairment losses	-			-	11		4		1		-		2	18

Amortization	-			-	5		4		1		-		2	12

Impairment losses	-			-	6		-		-		-		-	6

Impairment loss reversals	-			-	-		-		-		-		-	-

Exchange differences	-			1	1		2		1		-		(1)	4

December 31, 2018	-			13	50		20		4		-		27	114

Carrying amounts, December 31, 2018	97			2	70		33		-		8		15	225

Carrying amounts, December 31, 2017	95			3	77		36		2		3		15	231

											12/3
Changes in Intangible Assets (2017)
€ million		Acquired goodwill	Patents and tech- nologies		Trade- marks	Marketing and distrubu- tion rights		Pro- duction rights	R&D projects	Other rights and advance payments		Total

Cost of acquisition or generation, December 31, 2016	56			15	44		55		-		4		47	221

Acquisitions	51			-	85		-		4		-		-	140

Capital expenditures	-			-	-		2		-		-		1	3

Retirements	-			-	-		(2)		-		-		(2)	(4)

Transfers	-			-	-		1		-		(1)		-	-

Exchange differences	(12)			-	(14)		(6)		-		-		(5)	(37)

December 31, 2017	95			15	115		50		4		3		41	323

Accumulated amortization and impairment, December 31, 2016	-			12	27		15		-		-		26	80

Retirements	-			-	-		(2)		-		-		(1)	(3)

Amortization and impairment losses	-			-	13		4		1		-		5	23

Amortization	-			-	3		4		1		-		5	13

Impairment losses	-			-	10		-		-		-		-	10

Impairment loss reversals	-			-	-		-		-		-		-	-

Transfers	-			-	-		-		-		-		-	-

Exchange differences	-			-	(2)		(3)		1		-		(4)	(8)

December 31, 2017	-			12	38		14		2		-		26	92

Carrying amounts, December 31, 2017	95			3	77		36		2		3		15	231

Carrying amounts, December 31, 2016	56			3	17		40		-		4		21	141


Combined Financial Statements Animal Health						37
2017, 2018, 2019

As of December 31, 2019, the Company had €8 million of indefinite-lived intangible assets (2018: €8 million; 2017: €3 million). These indefinite-lived intangibles consist of research and development projects, where the Company is unable to determine the point from which the project can be expected to generate an economic benefit for the Company and hence, the economic life of these assets has not been estimated. The company tests indefinitely lived intangible assets for impairments at least annually.

All capitalized research and development costs were acquired by the Company. No development costs incurred by the Company were capitalized during the reporting periods presented.

The Company performs impairment tests on goodwill at least annually. A cash generating unit reflects the lowest level on which goodwill is monitored for internal management purposes. The company performs the annual impairment test of goodwill at the CGU level. The company identified only one CGU during each of the reporting periods presented. The Company did not identify any impairment to goodwill during the reporting periods presented.

During 2019, the Company recognized impairment loss reversals of €7 million, of which €6 million pertained to the Company’s Cydectin™ brand portfolio, which is recorded in Selling expenses. In 2018, the Company recognized impairment losses on other intangible assets in the amount of €6 million related to the Company’s Cydectin™ brand portfolio acquired in 2017. The impairment occurred in 2018 and resulted from lower expected revenues from the Cydectin™ brand portfolio due to diminished overall market conditions. The Company measured the impairment based on the recoverable amount of the related intangibles, which was determined by the fair value less costs of disposal. Refer to Note 1.3 for further details regarding the Company’s impairment testing approach for goodwill and other intangible assets.

The impairment loss of €6 million for Cydectin™ was reversed in 2019 due primarily to a decrease in the weighted average cost of capital that was utilized for determining the recoverable amount of the intangible asset, in addition to an improvement in expected margins . In line with previous years the recoverable amount was determined by the fair value less costs of disposal method, resulting in a recoverable amount of €93 million.

During 2017, impairment losses on other intangible assets were recognized in the amount of €10 million, primarily related to the impairment of the Company’s TEVA OTV brand in the amount of €7 million. The Company previously distributed the TEVA OTV brand exclusively through a chain of retail outlets in the United States. The Company discontinued these sales in 2017, resulting in the impairment charge.


Combined Financial Statements Animal Health						38
2017, 2018, 2019

13. Property, plant and equipment

Changes in Property, plant and equipment during the years presented were as follows:


								13/1
Changes in Property, Plant and Equipment (2019)
€ million		Land and buildings	Plant installations and machinery	Furniture, fixtures and other equipment		Construction in progress and advance payments		Total

Cost of acquisition or construction,
December 31, 2018	230		215		52			50	547

Adjustments on adoption of IFRS 16	10		-		3			-	13

January 1, 2019	240		215		55			50	560

Capital expenditures	8		8		7			61	84

Retirements	(3)		(13)		(6)			-	(22)

Transfers	5		11		1			(17)	-

Exchange differences	1		2		1			1	5

December 31, 2019	251		223		58			95	627

Accumulated depreciation
and impairment losses,
December 31, 2018	153		147		36			-	336

Retirements	(3)		(12)		(4)			-	(19)

Depreciation and impairment losses	9		13		7			-	29

Exchange differences	-		1		-			-	1

December 31, 2019	159		149		39			-	347

Carrying amounts, December 31, 2019	92		74		19			95	280

Carrying amounts, December 31, 2018	77		68		16			50	211

							13/2
Changes in Property, Plant and Equipment (2018)
€ million		Land and buildings	Plant installations and machinery	Furniture, fixtures and other equipment		Construction in progress and advance payments		Total

Cost of acquisition or construction,
December 31, 2017	222		202		52			29	505

Capital expenditures	2		3		5			36	46

Retirements	(2)		(3)		(5)			-	(10)

Transfers	4		10		1			(15)	-

Exchange differences	4		3		(1)			-	6

December 31, 2018	230		215		52			50	547

Accumulated depreciation
and impairment,
December 31, 2017	145		137		36			-	318

Retirements	(1)		(3)		(4)			-	(8)

Depreciation and impairment losses	6		12		5			-	23

Exchange differences	3		1		(1)			-	3

December 31, 2018	153		147		36			-	336

Carrying amounts, December 31, 2018	77		68		16			50	211

Carrying amounts, December 31, 2017	77		65		16			29	187


Combined Financial Statements Animal Health						39
2017, 2018, 2019


					13/3
Changes in Property, Plant and Equipment (2017)
		Plant	Furniture,	Construction
		installations	fixtures and	in progress
	Land and	and	other	and advance
€ million	buildings	machinery	equipment	payments	Total

Cost of acquisition or construction,
December 31, 2016	238	208	52	26	524

Capital expenditures	7	6	7	23	43

Retirements	(10)	(11)	(6)	-	(27)

Transfers	5	11	2	(18)	-

Transfer of assets to Remaining Bayer	(3)	-	-	-	(3)

Exchange differences	(15)	(12)	(3)	(2)	(32)

December 31, 2017	222	202	52	29	505

Accumulated depreciation
and impairment,
Accumulated depreciation and impairment December 31, 2016	156	145	37	-	338

Retirements	(9)	(10)	(4)	-	(23)

Depreciation and impairment losses	7	11	5	-	23

Exchange differences	(9)	(9)	(2)	-	(20)

December 31, 2017	145	137	36	-	318

Carrying amounts, December 31, 2017	77	65	16	29	187

Carrying amounts, December 31, 2016	82	63	15	26	186

Impairment losses on Property, plant and equipment were immaterial during each of the years presented. Property, plant and equipment also includes leased assets. Refer to Note 27 for further information.

14. Other financial assets

Other financial assets are comprised of the following:


									14/1
Other Financial Assets
		Dec. 31, 2017			Dec. 31, 2018							Dec. 31, 2019

			Of which			Of which				Of which
€ million		Total	current	Total		current		Total		current

LaR¹		923	921	-	-			-			-

AfS¹		2	-	-	-			-			-

of which equity instruments		2	-	-	-			-			-

AC²		-	-	1,040	1,029			221			219
FVTOCI²		-	-	1		-		-		-
of which equity instruments (no
recycling)	-		-		1		-			-		-

Receivables from derivatives	8		7		1		1			2		1

Total	933		928		1,042		1,030			223		220

¹ Measurement category in accordance with IAS 39; applicable until December 31, 2017

LaR: loans and receivables; at amortized cost

AfS: Available for sale; at fair value through Other comprehensive income

² Measurement category in accordance with IFRS 9; applicable as of January 1, 2018 AC: at amortized cost

FVTOCI: At fair value through other comprehensive income

The AC category (2017 LaR category) includes receivables due from Remaining Bayer relating to short - term deposits and the Company’s cash pooling arrangement (refer to Note 28). Refer to Note 23.3 for further information on the accounting for receivables from derivatives.


Combined Financial Statements Animal Health						40
2017, 2018, 2019

15. Inventories

Inventories are comprised of each of the following:


				15/1
Inventories
€ million		Dec. 31, 2017	Dec. 31, 2018		Dec. 31, 2019

Raw materials and supplies	89		89			105

Work in process, finished goods and goods purchased for resale	170		192			215

Total	259		281			320

Impairment losses recognized on inventories were reflected in the Cost of goods sold. They were comprised as follows:


			15/2
Impairments of Inventories
€ million	2017	2018		2019

Accumulated impairment losses, January 1	(11)	(11)		(8)

Impairment losses in the reporting period	(8)	(6)		(3)

Impairment loss reversals or utilization	7	9		3

Exchange differences	1	-		-

Accumulated impairment losses, December 31	(11)	(8)		(8)

The cost of goods sold included acquisition and production costs of inventories amounting to €404 million (2018: €403 million, 2017: €391 million).

16. Trade accounts receivable

Trade accounts receivable are presented net of impairment losses. Animal Health’s Trade accounts receivable had the following geographic concentrations:


				16/1
Trade Accounts Receivable
€ million		Dec. 31, 2017	Dec. 31, 2018		Dec. 31, 2019

Europe / Middle East / Africa	65		64			69

North America	39		45			69

Asia / Pacific	54		52			59

Latin America	28		30			34

Trade accounts receivable (before impairments)	186		191			231

Accumulated impairment losses	(5)		(7)			(7)

Carrying amount, December 31	181		184			224

Trade receivables principally comprise amounts outstanding from veterinary service providers and distribution channels. The Company is exposed to credit risk on its trade receivables, with the book value of its trade receivables representing the maximum credit risk. The Company does not have any significant concentrations of credit risk, with exposure spread over a large number of counterparties and customers. The unimpaired receivables were deemed to be collectible on the basis of established credit management processes and individual assessments of customer risks. Recognized impairment losses included an appropriate allowance for the default risk as of the end of the reporting period. The Company writes-off trade receivables based on specific facts and circumstances, including days past due and customer insolvency.


Combined Financial Statements Animal Health						41
2017, 2018, 2019

Credit losses on trade accounts receivable were as follows:


16/2
Trade Accounts Receivable – Gross Carrying Amounts¹
	Trade
	accounts
	receivable for
	which lifetime	Trade
	expected	accounts
	credit losses	receivable
	are calculated	that are
	(collectively	credit-
€ million	assessed)	impaired	Total

Gross carrying amounts as of January 1, 2018	186	(5)	181

Changes resulting from trade accounts receivables recognized, derecognized
or written-off in the reporting period	6	1	7

Transfer to credit-impaired trade accounts receivable	-	(3)	(3)

Other changes:

From exchange differences	(1)	-	(1)

Gross carrying amounts as of December 31, 2018	191	(7)	184

Changes resulting from trade accounts receivables recognized, derecognized
or written-off in the reporting period	36	-	36

Transfer to credit-impaired trade accounts receivable	-	-	-

Other changes:
From exchange differences	4	-	4

Gross carrying amounts as of December 31, 2019	231	(7)	224

¹ Figures excluded for 2017. Refer to Note 2 for the effects related to the adoption of new financial reporting standards.


		16/3
Trade Accounts Receivable - Loss Allowances
€ million	2018	2019

Loss allowances as of January 1	(5)	(7)

Changes resulting from loss allowances newly recognized or derecognized in the reporting period and
additions/reductions to existing loss allowances	1	-

Changes due to write-offs	-	-

Transfer to loss allowances for credit-impaired trade accounts receivable	(3)	-

Other changes:

From exchange differences	-	-

Loss allowances as of December 31	(7)	(7)


						16/4
Impairments of Trade Accounts Receivable
€ million						2017

Accumulated impairment losses, January 1						(4)

Divestments / changes in scope of consolidation						0

Impairment losses in the reporting period						(3)

Impairment loss reversals or utilization						2

Exchange differences						0

Accumulated impairment losses, December 31						(5)


Combined Financial Statements Animal Health						42
2017, 2018, 2019


										16/5
Impaired and Past-Due Trade Accounts Receivable
			Of which neither impaired nor past due at the closing date					Of which unimpaired but past due at the closing date		Of which impaired at the closing date

				up to 3		3 – 6	6 – 12 more than
Carrying amount		€ million		months		months	months	12 months

December 31, 2019	224		202		20		2		-		-	7

December 31, 2018	184		172		11		1		-		-	7

December 31, 2017	181		166		12		2		1		-	5

As a part of Bayer Group, the Company participates in a global credit insurance program to insure trade accounts receivable against certain catastrophic losses. The Company did not include any expected recoveries under this program when estimating the accounts receivable loss allowances. The maximum annual compensation payment amount for Bayer Group under the program is €150 million (2018: €150 million; 2017: €150 million).

The unimpaired receivables were deemed to be collectible on the basis of established credit management processes and individual assessments of customer risks.

17. Other receivables

Other receivables were comprised as follows:


								17/1
Other Receivables
		Dec. 31, 2017				Dec. 31, 2018					Dec. 31, 2019

			Of which			Of which			Of which
€ million		Total	current	Total		current	Total		current

Other tax receivables	8		8		6		6			10		10

Deferred charges	9		5		6		5			5		4

Net defined benefit asset	-		-		-		-			2		-

Receivables from employees	1		1		1		1			1		1

Miscellaneous receivables	11		10		11		9			15		12

Total	29		24		24		21			33		27

Miscellaneous receivables includes amounts due from VAT receivables of €4 million (2018: €1 million; 2017: €1 million), sales based royalties of €2 million (2018: €2 million; 2017: €2 million), and production reimbursements of €1 million (2018: €1 million; 2017: €1 million). Additionally, in 2019, the Company had a €3 million receivable related to advance payments for services. In 2018, the Company had a €1 million receivable from the sale of certain distribution rights in the United States. In 2017, the Company had a €2 million receivable related to an unpaid favorable legal settlement, which the Company received in 2018.


Combined Financial Statements Animal Health						43
2017, 2018, 2019

18. Equity

Equity consists of Invested equity attributable to Bayer Group and Other components of equity.

Invested equity attributable to Bayer Group

The Invested equity attributable to Bayer Group represents Bayer AG’s historical investment in Animal Health, the net effect of transactions with and allocations from Bayer Group, and Animal Health’s accumulated earnings.

Changes in invested equity result from withdrawals and contributions from Bayer AG in addition to Income after income taxes and Other comprehensive income. Invested equity includes all re-measurements of the net defined benefit liability for pension and other post -employment benefits that are recognized outside of Income after income taxes.

Contributions and withdrawals are mainly comprised of changes in the net assets of shared entities, tax receivables, tax liabilities, and deferred tax assets on loss carryforwards of shared entities of Animal Health, which do not constitute separate tax subjects in the reporting periods, transactions with Bayer Group, and allocated costs from Bayer Group.

During 2019, Bayer Animal Health GmbH paid a €1,075 million dividend to Bayer AG. Refer to Note 28 for details regarding this transaction, in addition to other transactions between Bayer Group and Animal Health.

Other components of equity

The Other components of equity is comprised of foreign exchange differences and changes in fair values of cash flow hedges.


Combined Financial Statements Animal Health						44
2017, 2018, 2019

19.Provisions for pensions and other post-employment benefits

Remaining Bayer sponsors several defined benefit plans, of which employees attributed to Animal Health are participants. The Company established provisions for the defined benefit obligations attributed to Animal Health employees, as follows:


												19/1
Net Defined Benefit Liability Reflected in the Statement of Financial Position
		Pensions						Pensions Other post-employment benefits									Total

		Dec. 31,	Dec. 31,	Dec. 31,		Dec. 31,	Dec. 31,	Dec. 31,		Dec. 31,	Dec. 31,		Dec. 31,
€ million	2017		2018		2019		2017		2018		2019			2017	2018	2019

Provisions for pensions and
other post-employment
benefits (net liability)	152		176		230		3		2		3			155	178	233

of which Germany	141		166		220		-		-		-			141	166	220

of which other countries	11		10		10		3		2		3			14	12	13

Net defined benefit asset	-		-		-		-		-		2			-	-	2

Net defined benefit liability	152		176		230		3		2		1			155	178	231

Defined benefit expenses attributed to Animal Health consisted of the following:


													19/2
Expenses for Defined Benefit Plans
											Other post-employment
									Pension plans					benefit plans

		Germany					Other countries								Total	Other countries

€ million	2017		2018	2019	2017	2018		2019		2017		2018		2019	2017		2018	2019

Current service cost	10		9	10	2	2		3		12		11		13	1		-	-

Past service cost	2		2	-	-	-		-		2		2		-	-		-	-

of which plan
curtailments	-		-	-	-	-		-		-		-		-	-		-	-

Plan settlements	-		-	-	(1)	-		-		(1)		-		-	-		-	-

Plan administration cost
paid out of plan assets	-		-	-	-	-		-		-		-		-	-		-	-

Net interest	3		3	3	1	1		1		4		4		4	-		1	-

Total	15		14	13	2	3		4		17		17		17	1		1	-

Defined benefit obligation remeasurement adjustments recorded within Other comprehensive income amounted to €-50 million (2018: €-18 million; 2017: €16 million). Substantially all of these adjustments recorded to Other comprehensive income pertained to pension obligations.


Combined Financial Statements Animal Health						45
2017, 2018, 2019

Movements in the defined benefit liability consisted on the following:


			19/3
Changes in Net Defined Benefit Liability (2019)
€ million	Defined benefit obligation	Fair value of plan assets	Net defined benefit liability

Germany

January 1, 2019	(321)	155	(166)

Acquisitions	-	-	-

Employee transfer	7	(4)	3

Current service cost	(10)	-	(10)

Past service cost	-	-	-

Net interest	(6)	3	(3)

Net actuarial gain / (loss)	(59)	-	(59)

of which due to changes in financial parameters	(60)	-	(60)

of which due to changes in demographic parameters	-	-	-

of which due to experience adjustments	1	-	1

Return on plan assets excluding amounts recognized as interest income	-	7	7

Employer contributions	-	5	5

Employee contributions	(1)	1	-

Payments due to plan settlements	-	-	-

Benefits paid out of plan assets	2	(2)	-

Benefits paid by the company	3	-	3

Plan administration cost paid from plan assets	-	-	-

Reclassification to current assets / liabilities held for sale	-	-	-

December 31, 2019	(385)	165	(220)

Other countries

January 1, 2019	(35)	23	(12)

Acquisitions	-	-	-

Employee transfer	3	(2)	1

Current service cost	(3)	-	(3)

Past service cost	-	-	-

Gains / (losses) from plan settlements	-	-	-

Net interest	(2)	1	(1)

Net actuarial gain / (loss)	(1)	-	(1)

of which due to changes in financial parameters	(4)	-	(4)

of which due to changes in demographic parameters	3	-	3

of which due to experience adjustments	-	-	-

Return on plan assets excluding amounts recognized as interest income	-	2	2

Employer contributions	-	-	-

Employee contributions	-	-	-

Payments due to plan settlements	-	-	-

Benefits paid out of plan assets	-	-	-

Benefits paid by the company	3	-	3

Plan administration costs paid out of plan assets	-	-	-

Reclassification to current assets / liabilities held for sale	-	-	-

Exchange differences	(1)	1	-

December 31, 2019	(36)	25	(11)

of which other post-employment benefits	(11)	9	(2)

Total, December 31, 2019	(421)	190	(231)


Combined Financial Statements Animal Health						46
2017, 2018, 2019


				19/4
Changes in Net Defined Benefit Liability (2018)
€ million		Defined benefit obligation	Fair value of plan assets		Net defined benefit liability

Germany

January 1, 2018	(295)		154			(141)

Acquisitions	-		-			-

Employee transfer	3		(2)			1

Current service cost	(9)		-			(9)

Past service cost	(2)		-			(2)

Net interest	(6)		3			(3)

Net actuarial gain / (loss)	(14)		-			(14)

of which due to changes in financial parameters	(10)		-			(10)

of which due to changes in demographic parameters	(4)		-			(4)

of which due to experience adjustments	-		-			-

Return on plan assets excluding amounts recognized as interest income	-		(5)			(5)

Employer contributions	-		5			5

Employee contributions	(1)		1			-

Payments due to plan settlements	-		-			-

Benefits paid out of plan assets	1		(1)			-

Benefits paid by the company	2		-			2

Plan administration cost paid from plan assets	-		-			-

Reclassification to current assets / liabilities held for sale	-		-			-

December 31, 2018	(321)		155			(166)

Other countries

January 1, 2018	(39)		25			(14)

Acquisitions	-		-			-

Employee transfer	2		(1)			1

Current service cost	(2)		-			(2)

Past service cost	-		-			-

Gains / (losses) from plan settlements	-		-			-

Net interest	(2)		-			(2)

Net actuarial gain / (loss)	4		-			4

of which due to changes in financial parameters	4		-			4

of which due to changes in demographic parameters	-		-			-

of which due to experience adjustments	-		-			-

Return on plan assets excluding amounts recognized as interest income	-		(2)			(2)

Employer contributions	-		-			-

Employee contributions	-		-			-

Payments due to plan settlements	-		-			-

Benefits paid out of plan assets	-		-			-

Benefits paid by the company	3		-			3

Plan administration costs paid out of plan assets	-		-			-

Reclassification to current assets / liabilities held for sale	-		-			-

Exchange differences	(1)		1			-

December 31, 2018	(35)		23			(12)

of which other post-employment benefits	(11)		9			(2)

Total, December 31, 2018	(356)		178			(178)


Combined Financial Statements Animal Health						47
2017, 2018, 2019


			19/5
Changes in Net Defined Benefit Liability (2017)
€ million	Defined benefit obligation	Fair value of plan assets	Net defined benefit liability

Germany

January 1, 2017	(283)	136	(147)

Acquisitions	-	-	-

Employee Transfers	(7)	4	(3)

Current service cost	(10)	-	(10)

Past service cost	(2)	-	(2)

Net interest	(6)	3	(3)

Net actuarial gain / (loss)	11	-	11

of which due to changes in financial parameters	7	-	7

of which due to changes in demographic parameters	-	-	-

of which due to experience adjustments	4	-	4

Return on plan assets excluding amounts recognized as interest income	-	6	6

Employer contributions	-	5	5

Employee contributions	(1)	1	-

Payments due to plan settlements	-	-	-

Benefits paid out of plan assets	1	(1)	-

Benefits paid by the company	2	-	2

Plan administration cost paid from plan assets	-	-	-

Reclassification to current assets / liabilities held for sale	-	-	-

December 31, 2017	(295)	154	(141)

Other countries

January 1, 2017	(42)	27	(15)

Acquisitions	-	-	-

Employee transfer	3	(2)	1

Current service cost	(2)	-	(2)

Past service cost	-	-	-

Gains / (losses) from plan settlements	1	-	1

Net interest	(2)	1	(1)

Net actuarial gain / (loss)	(1)	-	(1)

of which due to changes in financial parameters	(1)	-	(1)

of which due to changes in demographic parameters	-	-	-

of which due to experience adjustments	-	-	-

Return on plan assets excluding amounts recognized as interest income	-	-	-

Employer contributions	-	-	-

Employee contributions	-	-	-

Payments due to plan settlements	-	-	-

Benefits paid out of plan assets	-	-	-

Benefits paid by the company	2	-	2

Plan administration costs paid out of plan assets	-	-	-

Reclassification to current assets / liabilities held for sale	-	-	-

Exchange differences	2	(1)	1

December 31, 2017	(39)	25	(14)

of which other post-employment benefits	(11)	8	(3)

Total, December 31, 2017	(334)	179	(155)

Within the tables above the line item “Employee transfers“ contains the obligations and assets from employees who transferred from Animal Health to Remaining Bayer (or vice versa), including employees that retired or left the business during the period.


Combined Financial Statements Animal Health						48
2017, 2018, 2019

Germany accounts for approximately 92% (2018: 90%; 2017: 88%) of the defined benefit obligations. In Germany, current employees accounted for 60% (2018: 67%; 2017: 72%) of the benefit obligations, while retirees or their surviving dependents account for approximately 31% (2018: 26%; 2017: 22%). Former employees with vested pension rights accounted for the remaining 8% (2018: 7%; 2017: 6%) of the defined benefit obligations in Germany.

The actual return on the assets of defined benefit plans for pensions or other post -employment benefits amounted to €13 million (2018: €-4 million; 2017: €10 million).

The following table shows the defined benefit obligations for pensions and other post -employment benefits along with the funded status of the funded obligations.


									19/6
Defined Benefit Obligation and Funded Status
		Pension obligation				Other post-employment benefit obligation					Total

€ million	2017		2018	2019	2017		2018	2019		2017	2018	2019

Defined benefit obligation	322		345	410	11		11	11		334	356	421

of which unfunded	10		9	8	3		2	3		14	11	11

of which funded	312		336	402	8		9	8		320	345	410

Funded status of funded
obligations

Overfunding	-		-	-	-		-	2		-	-	2

Underfunding	142		167	230	1		-	3		143	167	233

Pension and other post-employment benefit obligations

Animal Health employees receive retirement benefits through defined benefit plans, either directly or by contributions paid to privately or publicly administered funds. The benefits vary depending on the legal, fiscal and economic conditions of each country. The obligations relate both to existing retirees’ pensions and to pension entitlements of future retirees.

Funded pension plans exist for employees in various countries. The most appropriate investment strategy is determined for each defined benefit pension plan based on the risk structure of the obligations (especially demographics, the current funded status, the structure of the expected future cash flows, interest sensitivity, biometric risks, etc.), the regulatory environment and the existing level of risk tolerance or risk capacity.

Bayer-Pensionskasse VVaG (Bayer-Pensionskasse), Leverkusen, Germany, is the most significant of the pension plans. It has been closed to new members since 2005. This legally independent fund is regarded as a life insurance company and therefore is subject to the German Insurance Supervision Act. The benefit obligations covered by Bayer-Pensionskasse comprise retirement, surviving dependents’ and disability pensions. It constitutes a multi-employer plan, to which the active members and their employers contribute. The company contribution is a certain percentage of the employee contribution. This percentage is the same for all participating employers in the plan, including those outside the Bayer Group and Animal Health, and is set by agreement between the plan’s executive committee and its supervisory board, acting on a proposal from the responsible actuary. Bayer Group has historically had the ability to adjust the company contribution percentage after agreeing with the plan’s executive committee and its supervisory board, acting on a proposal from the responsible actuary. The plan’s liability is governed by Section 1, Paragraph 1, Sentence 3 of the German Law on the Improvement of Occupational Pensions. This means that if the pension plan exercises its right under the articles of association to reduce benefits, each participating employer has to make up the resulting difference. Bayer Group and Animal Health are not liable for the obligations of participating employers outside the Bayer Group, even if they cease to participate in the plan.


Combined Financial Statements Animal Health						49
2017, 2018, 2019

Pension entitlements for employees who joined Animal Health in Germany in 2005 or later are granted via Rheinische Pensionskasse VVaG, Leverkusen. Future pension payments from this plan are based on contributions and the return on plan assets; a guaranteed interest rate applies.

Another important pension provision vehicle is Bayer Pension Trust e. V. (BPT). This covers further retirement provision arrangements, such as deferred compensation and component s of other direct commitments.

The defined benefit pension plans in the United States are frozen, and no significant new entitlements can be earned under these plans. The assets of all the U.S. pension plans are held within master trusts for reasons of efficiency. The applicable regulatory framework is based on the Employee Retirement Income Security Act (ERISA), which includes a statutory 80% minimum funding requirement to avoid benefit restrictions. The actuarial risks, such as investment risk, interest-rate risk and longevity risk, remain with the company.

The other post-employment benefit obligations outside Germany mainly comprised health care benefit payments for retirees in the United States.

The fair value of the plan assets to cover pension and other post-employment benefit obligations was as follows:


														19/7
Fair Value of Plan Assets as of December 31
						Pension obligations								Other post-employment obligations

		Germany									Other countries						Other countries

€ million	2017		2018			2019		2017	2018		2019		2017			2018		2019

Plan assets based on quoted prices in active markets

Real estate and special real
estate funds	-			-	-		-	-		-		-			-			-

Equities and equity funds	38			23	35		6	5		4		3			3			2

Callable debt instruments	-			-	-		2	2		-		-			-			-

Noncallable debt instruments	-			-	-		3	3		7		3			3			6

Bond funds	40			51	56		3	2		3		2			2			-

Derivatives	-			-	-		-	-		-		-			-			-

Cash and cash equivalents	3			10	7		-	-		-		-			-			-

Other	-			-	-		-	-		-		-			-			1

	81			84	98		14	12		14		8			8			9

Plan assets for which quoted prices in active markets are not available

Real estate and special real
estate funds	10			10	10		-	-		-		-			-			-

Equities and equity funds	2			2	3		-	-		-		-			-			-

Callable debt instruments	30			28	25		-	-		-		-			-			-

Noncallable debt instruments	29			29	28		-	-		-		-			-			-

Bond funds	-			-	-		-	-		-		-			-			-

Derivatives	-			-	-		-	-		-		-			-			-

Cash and cash equivalents	-			-	-		-	-		-		-			-			-

Other	2			2	1		2	2		2		1			1			-

	73			71	67		2	2		2		1			1			-

Total plan assets	154			155	165		16	14		16		9			9			9

The fair value of plan assets in Germany included Bayer AG shares and bonds held through investment funds, recognized at their fair values of €1 million (2018: €0 million; 2017: €1 million). Other plan assets comprised mortgage loans granted, other receivables and qualified insurance policies.


Combined Financial Statements Animal Health						50
2017, 2018, 2019

Risks

The risks from defined benefit plans arise partly from the defined benefit obligations and partly from the investment in plan assets. These risks include the possibility that additional contributions will have to be made to plan assets in order to meet current and future pension obligations, and negative effects on provisions and equity.

Demographic / biometric risks

Since a large proportion of the defined benefit obligations comprises lifelong pensions or surviving dependents’ pensions, longer claim periods or earlier claims may result in higher benefit obligations, higher benefit expense and / or higher pension payments than previously anticipated.

Investment risks

If the actual return on plan assets were below the return anticipated on the basis of the discount rate, the net defined benefit liability would increase, assuming there were no changes in other parameters. This could happen as a result of a drop in share prices, increases in market rates of interest, default of individual debtors or the purchase of low-risk but low-interest bonds, for example.

Interest-rate risk

A decline in capital market interest rates, especially for high-quality corporate bonds, would increase the defined benefit obligation. This effect would be at least partially offset by the ensuing increase in the market values of the debt instruments held.

Measurement parameters and their sensitivities

The following weighted parameters were used to measure the obligations for pensions and other post - employment benefits as of December 31 of the respective year:


								19/8
Parameters for Benefit Obligations
			Germany		Other countries					Total

%	2017	2018		2019	2017	2018	2019		2017		2018	2019

Pension obligations

Discount rate	2.20	2.00		1.10	3.07	3.48	2.56		2.26		2.09	1.18

Projected future salary
increases	2.75	2.75		2.50	2.75	2.60	2.42		2.75		2.75	2.50

Projected future benefit
increases	1.70	1.60		1.40	3.15	3.02	2.96		1.73		1.62	1.43

Other post-employment
benefit obligations

Discount rate				3.70	4.30	3.40	3.70		4.30		3.40

In Germany the Heubeck RT 2018 G mortality tables were used, in the United States the MP-2019 Mortality Tables, and in the United Kingdom 95% of S1NXA.

In Germany, the RT 2005 G tables had been used for financial year 2017. In 2018, the Company switched to the new RT 2018 G tables, as we believe that the resulting measurement reflects the economic impact on the respective closing date more accurately than measurement based on the RT 2005 G tables. If we had not switched to the RT 2018 G tables, provisions would have been €4 million lower for Animal Health as of December 31, 2018.


Combined Financial Statements Animal Health						51
2017, 2018, 2019

The following weighted parameters were used to measure the expense for pension and other post - employment benefits in the respective year:


																19/9
Parameters for Benefit Expense
	Germany												Other countries								Total

%		2017	2018			2019		2017	2018		2019			2017			2018		2019

Pension obligations

Discount rate				2.00	2.20		2.00		3.33	3.05		3.48			2.10			2.26		2.09

Projected future salary
increases				2.75	2.75		2.75		2.76	2.75		2.60			2.75			2.75		2.75

Projected future benefit
increases				1.50	1.70		1.60		3.13	3.15		3.02			1.53			1.73		1.62

Other post-employment
benefit obligations

Discount rate									4.00	3.70		4.30			4.00			3.70		4.30

The parameter sensitivities were computed by expert actuaries based on a detailed evaluation similar to that performed to obtain the data presented in Table Changes in Net Defined Benefit Liability. Altering individual parameters by 0.5 percentage points (mortality by 10% per beneficiary) while leaving the other parameters unchanged would have impacted pension and other post -employment benefit obligations as of year-end 2019 as follows:


							19/10
Sensitivity of Benefit Obligations (2019)
			Germany	Other countries					Total

€ million		Increase	Decrease	Increase	Decrease	Increase		Decrease

Pension obligations

0.5%-pt. change in discount rate	(39)		46		(2)	2	(41)		48

0.5%-pt. change in projected future
salary increases	3		(3)		-	-	3		(3)

0.5%-pt. change in projected future
benefit increases	20		(18)		-	-	20		(18)

10% change in mortality	(11)		13		-	-	(11)		13

Other post-employment benefit obligations

0.5%-pt. change in discount rate	-		-		(1)	1	(1)		1

10% change in mortality	-		-		-	-	-		-

							19/11
Sensitivity of Benefit Obligations (2018)
			Germany	Other countries					Total

€ million		Increase	Decrease	Increase	Decrease	Increase		Decrease

Pension obligations

0.5%-pt. change in discount rate	(31)		36		(1)	1	(32)		37

0.5%-pt. change in projected future
salary increases	2		(2)		-	-	2		(2)

0.5 %-pt. change in projected future
benefit increases	17		(15)		-	-	17		(15)

10% change in mortality	(9)		10		-	-	(9)		10

Other post-employment benefit obligations

0.5%-pt. change in discount rate	-		-		(1)	1	(1)		1

10% change in mortality	-		-		-	-	-		-


Combined Financial Statements Animal Health						52
2017, 2018, 2019


								19/12
Sensitivity of Benefit Obligations (2017)
			Germany	Other countries							Total

€ million		Increase	Decrease	Increase		Decrease	Increase		Decrease

Pension obligations

0.5%-pt. change in discount rate	(29)		34		(2)		1			(31)		35

0.5%-pt. change in projected future
salary increases	3		(3)		-		-			3		(3)

0.5 %-pt. change in projected future
benefit increases	16		(14)		-		-			16		(14)

10% change in mortality	(8)		9		-		-			(8)		9

Other post-employment benefit obligations

0.5%-pt. change in discount rate	-		-		(1)		1			(1)		1

10% change in mortality	-		-		-		-			-		-

Provisions are also established for the obligations, mainly of U.S. subsidiaries, to provide post - employment benefits in the form of health care cost payments for retirees. The valuation of health care costs was based on the assumption that they will increase at a rate of 7% (2018: 6.3%; 2017: 6.5%), which should gradually decline to 5.0% by 2028 (assumption in 2018: gradually decline to 5.0% by 2023; assumption in 2017: gradually decline to 5.0% by 2023). The following table shows the impact on other post-employment benefit obligations and total benefit expense of a one -percentage-point change in the assumed cost increase rates:


						19/13
Sensitivity to Health Care Cost Increases
		Increase of one percentage point					Decrease of one percentage point

€ million	2017		2018	2019	2017			2018	2019

Impact on other post-employment benefit obligations	1		1	1	(1)			(1)	(1)

Impact on benefit expense	-		-	-	-			-	-

Payments made and expected future payments

The following payments or asset contributions correspond to the employer contributions made or expected to be made to funded benefit plans:


											19/14
Employer Contributions Paid or Expected
					Germany					Other countries

				2020								2020
€ million	2017	2018	2019				expected	2017		2018			2019		expected

Pension obligations	5	5	5			5			-		-			-	-

Other post-employment
benefit obligations	-	-	-			-			-		-			-	-

Total	5	5	5			5			-		-			-	-


Combined Financial Statements Animal Health						53
2017, 2018, 2019

Pensions and other post-employment benefits payable in the future from funded and unfunded plans are estimated as follows:


													19/15
Future Benefit Payments
		Payments out of plan assets													Payments by the company

					Other post-							Other post-
					employment							employment
			Pensions			benefits					Pensions		benefits

			Other			Other					Other		Other
€ million		Germany	countries			countries	Total		Germany			countries		countries		Total

2020	2			-	-		2			3				-	-		3

2021	3			-	-		3			3				-	-		3

2022	3			-	-		3			4				-	-		4

2023	3			-	-		3			4				-	-		4

2024	3			-	-		3			4				-	-		4

2025-2029	22		3			1		26				26		3	1		30

The weighted average term of the pension obligations is 23 years (2018: 20 years; 2017: 20 years) in Germany and 17 years (2018: 16 years; 2017: 16 years) in other countries. The weighted average term of the obligations for other post-employment benefits in other countries is 15 years (2018: 15 years; 2017: 15 years).

20. Other provisions

Changes in other provisions consist of the following:


											20/1
Changes in Other Provisions
€ million	Other Taxes		Restruc-turing		Trade-related commit-ments		Litigations		Personnel commit-ments		Miscella-neous		Total

December 31, 2018		1		5		1		3		73		6	89

Additions		6		1		3		-		80		23	113

Utilization		(6)		(3)		(1)		-		(66)		(4)	(80)

Reversal		(1)		-		-		(2)		(8)		(4)	(15)

Exchange differences		1		-		-		-		1		-	2

December 31, 2019		1		3		3		1		80		21	109

of which current		-		3		3		-		61		19	86

									-


Combined Financial Statements Animal Health						54
2017, 2018, 2019

Changes in other provisions in 2018 consist of the following:


											20/2
Changes in Other Provisions
€ million	Other Taxes		Restruc-turing		Trade-related commitments		Litigations		Personnel commitments		Miscella-neous		Total

December 31, 2017		-		5		45		4		74		8	136

Reclassification to
refund liabilities		-		-		(44)		-		-		-	(44)

Additions		2		4		1		2		78		7	94

Utilization		-		(3)		(1)		(1)		(67)		(5)	(77)

Reversal		(1)		-		-		(2)		(11)		(6)	(20)

Exchange differences		-		(1)		-		-		(1)		2	-

December 31, 2018		1		5		1		3		73		6	89

of which current		-		2		1		-		58		4	65

Changes in other provisions in 2017 consist of the following:


											20/3
Changes in Other Provisions
€ million	Other Taxes		Restruc-turing		Trade-related commit-ments		Litigations		Personnel commit-ments		Miscella-neous		Total

December 31, 2016		-		5		41		1		77		9	133

Additions		-		7		138		4		81		14	244

Utilization		-		(3)		(122)		-		(71)		(7)	(203)

Reversal		-		(4)		(10)		-		(9)		(6)	(29)

Exchange differences		-		-		(2)		(1)		(4)		(2)	(9)

December 31, 2017		-		5		45		4		74		8	136

of which current		-		3		45		-		57		8	113

Restructuring

Provisions for restructuring included €3 million (2018: €4 million; 2017: €4 million) for severance payments and €0 million (2018: €1 million; 2017: €1 million) for other restructuring expenses, which mainly comprised of costs related to the closure of research and production facilities.

Personnel commitments

Retention bonus program

In connection with the sale to Elanco, the Company awarded certain Animal Health employees retention bonuses. Payment of the retention bonuses is contingent on the employees remaining with the Company through the closing date of the sale. The total expected payment by the Company for these awards is approximately €18 million. As of December 31, 2019, the Company accrued approximately €9 million related to these awards, with the planned payment to occur during 2020. The timing of the expected outflow is still uncertain and can vary based on the closing date of the sale to Elanco.

Short-term incentive payments (STI)

Personnel-related provisions include amounts for short-term incentive payments to Animal Health dedicated employees that are not share-based. In 2019, provisions for short-term incentive (STI) payments amounted to €38 million (2018: €45 million; 2017: €33 million), including €24 million (2018: €26 million; 2017: €17 million) for managerial employees and €7 million (2018: €7 million; 2017: €3 million) for non-managerial employees. The provision for each employee is based on performance of Bayer Group, the employee’s respective division’s performance, and the employee’s personal


Combined Financial Statements Animal Health						55
2017, 2018, 2019

performance, each of which is given a one-third weighting in the performance evaluation. The remaining €7 million (2018: €12 million; 2017: €13 million) recognized as provisions for STI payments is comprised of all other local short-term incentive programs, which do not follow Remaining Bayer’s Group-wide STI-funding scheme.

Stock-based compensation programs

Animal Health employees participate in stock-based compensation programs provided by Remaining Bayer. As required by IFRS 2 (Share-based Payment) for compensation systems involving cash settlement, awards to be made under the stock-based programs are covered by provisions in the amount of the fair value of the obligations existing as of the date of the financial statements vis -à-vis the respective employee group. All resulting valuation adjustments are recognized in profit or loss. The Company specifically identified employees primarily dedicated to the Animal Health business and attributed the associated employee stock-based compensation expense and provision amounts to Animal Health.

The following table shows the changes in provisions for the various programs:


				20/4
Changes in Provisions for Stock-Based Compensation Programs
€ million	Aspire I	Aspire II	Aspire 2.0	Total

December 31, 2018	-	-	7	7

Additions	-	-	6	6

Utilization	-	-	-	-

Reversal	-	-	-	-

December 31, 2019	-	-	13	13

				20/5
Changes in Provisions for Stock-Based Compensation Programs
€ million	Aspire I	Aspire II	Aspire 2.0	Total

December 31, 2017	-	1	7	8

Additions	-	-	-	-

Utilization	-	(1)	-	(1)

Reversal	-	-	-	-

December 31, 2018	-	-	7	7

				20/6
Changes in Provisions for Stock-Based Compensation Programs
€ million	Aspire I	Aspire II	Aspire 2.0	Total

December 31, 2016	-	5	4	9

Additions	-	-	5	5

Utilization	-	(4)	-	(4)

Reversal	-	-	(2)	(2)

December 31, 2017	-	1	7	8


Combined Financial Statements Animal Health						56
2017, 2018, 2019

The value of Aspire tranches that were fully earned at the end of 2019, which will result in a cash payment during 2020 amounted to €4 million (2018: €0 million; 2017: €1 million).

The net expense for all stock-based compensation programs in 2019 was €6.2 million (2018: €0.1 million; 2017: €3.4 million), including €0.1 million (2018: €0.2 million; 2017: €0.2 million) for the BayShare stock participation program. See Note 23.3 for information on the hedging of obligations under stock-based employee compensation programs.

The fair value of the obligations under the Aspire I and Aspire II programs were calculated using the Monte Carlo simulation method based on the following key parameters:


			20/7
Parameters for Monte Carlo Simulation¹
	2017	2018		2019

Dividend yield	2.46%	3.60%			n/a

Risk-free interest rate	(0.35)%	(0.46)%			n/a

Volatility of Bayer stock	15.49%	33.26%			n/a

Volatility of EURO STOXX 50	9.27%	16.94%			n/a

Correlation between Bayer stock price and the EURO STOXX 50	0.71	0.76			n/a

¹ Parameters for Monte Carlo Simulation are not required for 2019 as all obligations are under the Aspire 2.0 program.

Long-term incentive program for members of the Board of Management and other senior executives (Aspire I)

Between 2005 and 2015, members of the Board of Management and other senior executives were entitled to participate in Aspire I on the condition that they purchased a certain number of Bayer shares – determined for each individual according to specific guidelines – and retained them for the full term of the program. A percentage of the executive’s annual base salary – according to their position – was defined as a target for variable payments (Aspire target opportunity). Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50 index over a four-year performance period, participants receive a payment of up to 300% of their individual Aspire target opportunity at the end of the period. At the start of 2019 no payment was made for the final tranche issued in 2015.

Long-term incentive program for middle management (Aspire II)

From 2005 through 2015, other senior managers were offered Aspire II, which was similar to Aspire I but did not require a personal investment in Bayer shares. The amount of the payment is based entirely on the absolute performance of Bayer stock over a four-year period. The maximum payment is 250% of each manager’s Aspire target opportunity. At the start of 2019 no payment was made for the final tranche issued in 2015.


Combined Financial Statements Animal Health						57
2017, 2018, 2019

Long-term incentive program Aspire 2.0

Aspire 2.0 is based on a percentage of each employee’s annual base salary, the percentage varying according to their position. This target value is multiplied by the employee’s STI (short -term incentive) payment factor for the previous year to give the Aspire grant value. The STI payment factor reflects the business performance under the global short-term incentive program. The Aspire grant value is converted into virtual Bayer shares by dividing it by the share price at the start of the program. The program’s performance is based on these virtual shares. For the Board of Management, there is an additional hurdle in the form of a comparison between the performance of Bayer stock and that of the EURO STOXX 50. Each tranche runs for four years.

The fair value of the obligations is determined from the price of Bayer stock at year -end and the dividends paid up to that time. The payment made at the end of each tranche is determined by multiplying the number of virtual shares by the Bayer share price at that time and adding an amount equivalent to the dividends paid during the period of the tranche. The maximum payment for Aspire 2.0 is 250% of the Aspire grant value. At the start of 2020, a payment of 69% was made for the tranche issued in 2016.

BayShare

All management levels and nonmanagerial employees are offered an annual stock participation program known as BayShare, under which Bayer subsidizes their personal investments in the company’s stock. The discount under this program in 2019 was 20% (2018: 20%; 2017: 20%) of the subscription amount. Employees stated a fixed amount that they wished to invest in shares. The maximum employee subscription amount in Germany was set at €2,500 (2018: €2,500; 2017: €2,500) or €5,000 (2018: €5,000; 2017: €5,000), depending on the employee’s position. These shares must be retained until December 31, 2020.

21. Financial liabilities

Financial liabilities consist of the following:


									21/1
Financial Liabilities
		Dec. 31, 2017			Dec. 31, 2018						Dec. 31, 2019

			Of which			Of which				Of which
€ million		Total	current	Total		current		Total		current

Lease liabilities¹		3	1	3		1		16		5
Related party liabilities	173		155		162		141			126	119

thereof cash pooling arrangement	128		128		23		23			-	-

thereof loan to Bayer New Zealand
Limited	45		27		39		18			36	29

thereof loan to KVP Pharma+Veterinär
Produkte GmbH	-		-		100		100			90	90

Total	176		156		165		142			142	124

¹ Refer to Note 2 and Note 27 for details about the effects of new financial reporting standards and the company’s adoption of IFRS 16

Related party liabilities consist of loans from Remaining Bayer, in addition to liabilities under the Company’s cash pooling arrangement. Refer to Note 28 for further details regarding these related party arrangements.


Combined Financial Statements Animal Health						58
2017, 2018, 2019

22. Other liabilities


Other liabilities consist of the following:
										22/1
Other Liabilities
	Dec. 31, 2017							Dec. 31, 2018				Dec. 31, 2019

				Of which			Of which				Of which
€ million		Total		current		Total	current		Total		current

Other tax liabilities					16	16		12			12	17	17

Deferred income					22	19		-			-	0	0

Liabilities to employees					6	6		7			7	7	7

Liabilities for social expenses					4	4		4			4	5	5

Accrued interest on liabilities					1	1		1			1	1	1

Liabilities from derivatives					1	-		13			7	4	1

Miscellaneous liabilities					6	6		5			4	4	4

Total		56	52			42		35			38	35

23. Financial instruments

23.1 Financial instruments by category

The following table shows the carrying amounts and fair values of financial assets and liabilities by category of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the statements of financial position. Since the line items “Other receivables” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities”.


Combined Financial Statements Animal Health						59
2017, 2018, 2019

The transition effects from the reclassification and remeasurement of financial assets upon the first -time application of IFRS 9 in 2018 are detailed in Note 2 “Effects of new financial reporting standards”.

23.1/1

Carrying Amounts and Fair Values of Financial Instruments

Dec. 31, 2019

Carried at

amortized

Carried at fair value [fair value

Nonfinancial assets /

cost

for information²]

liabilities

Based

quoted

Carrying

prices in

observable

unobserv-

amount in

active

market

able

the

markets

data

inputs

statement

Measurement category (IFRS 9)¹

(Level 1)

(Level 2)

(Level 3)

Carrying

financial

€ million

amount

position

Trade accounts receivable

224

Nonfinancial assets

Other financial assets

221

223

221

[221]

221

Derivatives that qualify for hedge accounting

Derivatives that do not qualify for hedge accounting

Other receivables

[9]

Nonfinancial assets

Total financial assets

454

456

of which AC

454

Financial liabilities

142

[142]

142

of which lease liabilities

[16]

Trade accounts payable

160

Other liabilities

[12]

Derivatives that qualify for hedge accounting

Derivatives that do not qualify for hedge accounting

Nonfinancial liabilities

Total financial liabilities

314

318

of which AC

314

of which derivatives that qualify for hedge accounting

of which derivatives that do not qualify for hedge

accounting

¹ AC: at amortized cost

FVTOCI: at fair value through other comprehensive income

² Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a)


Combined Financial Statements Animal Health						60
2017, 2018, 2019

23.1/2

Carrying Amounts and Fair Values of Financial Instruments

Dec. 31, 2018

Carried at

amortized

Carried at fair value [fair value

Nonfinancial assets /

cost

for information³]

liabilities

Based

quoted

Carrying

prices in

observable

unobserv-

amount in

active

market

able

the

markets

data

inputs

statement

Measurement category (IFRS 9) ¹

(Level 1)

(Level 2)

(Level 3)

Carrying

financial

€ million

amount

position

Trade accounts receivable

184

Nonfinancial assets

Other financial assets

1,040

1,042

1,040

[1041]

1,040

FVTOCI (no Recycling)²

Derivatives that qualify for hedge accounting

Derivatives that do not qualify for hedge accounting

Other receivables

[8]

Nonfinancial assets

Total financial assets

1,232

1,234

of which AC

1,232

Financial liabilities

165

[165]

165

Trade accounts payable

150

Other liabilities

[13]

Derivatives that qualify for hedge accounting

Derivatives that do not qualify for hedge accounting

Nonfinancial liabilities

Total financial liabilities

328

341

of which AC

328

of which derivatives that qualify for hedge accounting

of which derivatives that do not qualify for hedge accounting

¹ AC: at amortized cost

FVTOCI: at fair value through other comprehensive income

² Measured at fair value through other comprehensive income in accordance with paragraph 5.7.5 of IFRS 9

³ Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a)

The following table shows the carrying amounts and fair values of financial assets and liabilities by category of financial instrument as of December 31, 2017. The table is presented under IFRS 7 and includes a reconciliation to the corresponding line items in the statements of financial position.


Combined Financial Statements Animal Health						61
2017, 2018, 2019


									23.1/3
Carrying Amounts and Fair Values of Financial Instruments
							Dec. 31, 2017

		Carried at
		amortized	Carried at fair value [fair value								Nonfinancial assets /
		cost			for information²]						liabilities
			Based
			on		Based	Based
			quoted		on	on			Carrying
			prices in		observable	unobserv-			amount in
			active		market	able			the
			markets		data	inputs			statement
Measurement category (IAS 39)¹			(Level 1)		(Level 2)	(Level 3)			of
		Carrying	Carrying		Carrying	Carrying	Carrying		financial
€ million		amount	amount		amount	amount	amount		position

Trade accounts receivable	181									181

LaR	181									181

Other financial assets	923				10						933

LaR	923				[925]						923

AfS				2						2

Derivatives that qualify for hedge accounting				7						7

Derivatives that do not qualify for hedge accounting				1						1

Other receivables	11							18		29

LaR	11				[11]						11

Nonfinancial assets							18		18

Cash and cash equivalents

LaR


Total financial assets	1,115				10						1,125

of which LaR	1,115									1,115


Financial liabilities	176									176

AC	176				[176]						176

Trade accounts payable	135				-						135

AC	135									135

Other liabilities	35				1				20		56

AC	35				[35]						35

Derivatives that qualify for hedge accounting				1						1

Derivatives that do not qualify for hedge accounting

Nonfinancial liabilities							20		20

Total financial liabilities	346				1						347

of which AC	346									346

of which derivatives that qualify for hedge accounting				1						1

of which derivatives that do not qualify for hedge accounting

¹ AfS: available for sale; at fair value through other comprehensive income

LaR: loans and receivables; at amortized cost

² Fair value of the financial instruments at amortized cost under IFRS 7. Paragraph 29(a)

As shown separately above, the category “AC – measured at amortized cost” within Financial liabilities includes lease-related liabilities under IFRS 16 in the amount of €16 million as of December 31, 2019. For 2017 and 2018 the category AC (measured at amortized cost) and “AC – measured at amortized cost” respectively within other financial assets and financial liabilities also includes receivables and liabilities under finance leases in which Animal Health is the lessor or lessee and which were therefore measured in accordance with IAS 17.


Combined Financial Statements Animal Health						62
2017, 2018, 2019

Due to the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values.

The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price is available, however, this is deemed to be the fair value.

The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1), or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3).

The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit and debt value adjustments are determined to allow for the contracting party’s credit risk.

Currency forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads.

The Company does not have any Level 3 financial instruments.

Categories according to IAS 39 (applicable for the Financial Year 2017)

Available-for-sale financial assets mainly include equity instruments, such as shares, and debt instruments not to be held to maturity that are included in other financial assets. After their first -time recognition, available-for-sale financial assets are measured at fair value and any unrealized gains or losses are recognized outside profit or loss in equity.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are accounted for at amortized cost using the effective interest method. This category comprises trade accounts receivable, the loans and receivables included in other financial assets, the additional financial receivables reflected in other receivables, and cash and cash equivalents. Interest income from items assigned to this category is determined using the effective interest method.

Held-to-maturity financial assets are non-derivative financial assets, with fixed or determinable payments, that Animal Health is willing and able to hold until maturity. They are accounted for at amortized cost using the effective interest method. Held-to-maturity financial investments are recognized in other financial assets.


Combined Financial Statements Animal Health						63
2017, 2018, 2019

Income, expense, gains and losses on financial instruments can be assigned to the following categories:


					23.1/4
Income, Expense, Gains and Losses on Financial Instruments (2019)
		Derivatives that
		do not qualify for
€ million	Assets - AC¹	hedge accounting		Liabilities - AC¹		Total

Interest income	1	-	-			1

Interest expense	-	-	(2)			(2)

Impairment losses	(2)	-	-			(2)

Impairment loss reversals	1	-	-			1

Exchange gains / losses	3	(2)	(1)			-

Net result	3	(2)		(3)		(2)

¹ See table 21.1/1 for definition of measurement categories


					23.1/5
Income, Expense, Gains and Losses on Financial Instruments (2018)
		Derivatives that
		do not qualify for
€ million	Assets - AC¹	hedge accounting		Liabilities - AC¹		Total

Interest income	1	-	-			1

Interest expense	-	-	(2)			(2)

Impairment losses	(2)	-	-			(2)

Impairment loss reversals	2	-	-			2

Exchange gains / losses	3	2	(7)			(2)

Net result	4	2		(9)		(3)

¹ See table 21.1/1 for definition of measurement categories


					23.1/6
Income, Expense, Gains and Losses on Financial Instruments (2017)
€ million	LaR	Held for trading			Liabilities - at amortized cost		Total

Interest income	1		-	4		5

Interest expense	-		-	(9)		(9)

Impairment losses	(4)		-	-		(4)

Impairment loss reversals	1		-	-		1

Exchange gains / losses	(5)		1	1		(3)

Net result	(7)		1	(4)		(10)

The interest income and expense from assets and liabilities within the AC category also included income and expenses from interest rate derivatives that qualified for hedge accounting. Remaining Bayer is the counterparty on substantially all derivative arrangements.


Combined Financial Statements Animal Health						64
2017, 2018, 2019

23.2 Maturity analysis

The liquidity risks to which Animal Health was exposed from its financial instruments at the end of the reporting period comprised obligations for future interest and repayment installments on financial liabilities and the liquidity risk arising from derivatives.


						23.2/1
Maturity Analysis of Financial Instruments (2019)
		Dec. 31,
	2019		2020	2021	2022	2023	2024		after 2024

		Carrying
€ million		amount			Interest and repayment

Refund liabilities	55		55	-	-	-	-	-


Financial liabilities	142		126	11	3	2	1	9

thereof lease liabilities	16		5	4	3	2	1	9


Trade accounts payable	160		160	-	-	-	-	-


Other liabilities	16		11	3	-	-	-	-

thereof liabilities from derivatives

Derivatives that qualify for hedge accounting	4		1	3	-	-	-	-

Derivatives that do not qualify for hedge
accounting	-		-	-	-	-	-	-


Receivables from derivatives

Derivatives that qualify for hedge accounting	1		-	-	1	-	-	-

Derivatives that do not qualify for hedge
accounting	1		1	-	-	-	-	-

						23.2/2
Maturity Analysis of Financial Instruments (2018)
		Dec. 31,
	2018		2019	2020	2021	2022	2023		after 2023

		Carrying
€ million		amount			Interest and repayment

Refund liabilities	52		52	-	-	-	-	-


Financial liabilities	165		142	22	1	-	-	-


Trade accounts payable	150		150	-	-	-	-	-


Other liabilities	26		19	2	5	-	-	-

thereof liabilities from derivatives	-		-	-	-	-	-	-

Derivatives that qualify for hedge accounting	13		6	2	5	-	-	-

Derivatives that do not qualify for hedge
accounting	-		-	-	-	-	-	-


Receivables from derivatives	-		-	-	-	-	-	-

Derivatives that qualify for hedge accounting	-		-	-	-	-	-	-

Derivatives that do not qualify for hedge
accounting	1		1	-	-	-	-	-


Combined Financial Statements Animal Health						65
2017, 2018, 2019


						23.2/3
Maturity Analysis of Financial Instruments (2017)
	Dec. 31,
	2017	2018	2019	2020	2021	2022		after 2022

	Carrying Amount
€ million					Interest and repayment

Refund liabilities	-	-	-	-	-	-	-


Financial liabilities	176	156	19	1	-	-	-


Trade accounts payable	135	135	-	-	-	-	-


Other liabilities	36	35	-	-	1	-	-

thereof liabilities from derivatives

Derivatives that qualify for hedge accounting	1	-	-	-	1	-	-

Derivatives that do not qualify for hedge
accounting	-


Receivables from derivatives

Derivatives that qualify for hedge accounting	7	6	1	-	-	-	-

Derivatives that do not qualify for hedge
accounting	1	1	-	-	-	-	-

23.3 Information on derivatives

Asset and liability fair values and future cash flows are exposed to currency and interest-rate risks. Derivatives are used to reduce the Company’s exposure to currency risk. In some cases they are designated as hedging instruments in a hedge accounting relationship. Animal Health’s outstanding financial liabilities are primarily related party liabilities. As a result, it does not hedge against interest rate risk.

Currency risks hedging

Foreign currency receivables and liabilities are hedged using foreign exchange derivatives without the existence of a hedge accounting relationship. Fluctuations in future cash flows resulting from forecasted foreign currency transactions and procurement activities are avoided partly through derivatives contracts, most of which are designated as cash flow hedges. In 2019, all forward exchange contracts regarding forecasted foreign currency transactions and procurement activities are expired.

Hedging of obligations under stock-based employee compensation programs

A portion of the obligations to make variable payments to employees under stock-based compensation programs (Aspire) is hedged against share price fluctuations using derivatives contracts that are settled in cash at maturity. These derivatives are designated as cash flow hedges.


Combined Financial Statements Animal Health						66
2017, 2018, 2019

Further information on cash flow hedges

The following table shows changes in reserves for cash flow hedges (before taxes), broken down by risk category:


				23.1/4
Changes in Reserves for Cash Flow Hedges (before taxes)
			Hedging of stock-
	Currency hedging		based employee
	of forecasted		compensation
€ million	transactions		programs		Total

December 31, 2016	(6)	1			(5)

Changes in fair values	11	(1)			10

Reclassified to profit or loss	-	-			-

December 31, 2017	5	-			5

Changes in fair values	(6)	(9)			(15)

Reclassified to profit or loss	(3)		3		-
December 31, 2018	(4)		(6)		(10)

Changes in fair values	(2)		4		2

Reclassified to profit or loss	6		(1)		5

December 31, 2019	-		(3)		(3)

No material ineffective portions of hedges required recognition through profit or loss in 2018 or 2019.


Combined Financial Statements Animal Health						67
2017, 2018, 2019

The fair values of the derivatives in the major categories as of year-end are indicated in the following table together with the included volumes of hedges:


														23.3/2
Fair Values of Derivatives
		Dec. 31, 2017										Dec. 31, 2018				Dec. 31, 2019

			Positive		Negative				Positive	Negative			Positive	Negative
		Notional	fair		fair		Notional		fair	fair		Notional	fair	fair
€ million		amount¹	value³		value⁴		amount¹		value³	value⁴		amount¹	value³	value⁴
Currency hedging of
recorded transactions^2,3		87	1		-		122		1	-		55	1	-
Forward exchange contracts	87			1		-		122	1		-		55		1		-


Currency hedging of
forecasted transactions^2,4		116	6		-		97		-	(4)		-	-	-
Forward exchange contracts	116			6		-		97	-		(4)		-		-		-

of which cash flow hedges	115			6		-		90	-		(4)		-		-		-


Hedging of stock-based
employee compensation
programs^2,4		25	1		(1)		29		-	(9)		29	1	(4)
Share price options	1			-		-		-	-		-		-		-		-

of which cash flow
hedges	1			-		-		-	-		-		-		-		-

Forward share transactions	24			1		(1)		29	-		(9)		29		1		(4)

of which cash flow
hedges	24			1		(1)		29	-		(9)		29		1		(4)


Total	228			8		(1)		248	1		(13)		84		2		(4)

of which derivatives with
maturities of 12 months or
less	205			7		(1)		225	1		(7)		59		1		(1)

for currency hedging	202			6		(1)		219	1		(4)		55		1		-

for hedging of stock-
based employee
compensation
programs		3	1		-		6		-	(3)		4	-	(1)

¹ The notional amount is reported as gross volume, which also contains economically closed hedges

² Derivatives with positive fair values are recognized under "Other financial assets" in the statement of financial position.

³ Derivatives with negative fair values are recognized under "Financial liabilities" in the statement of financial position

⁴ Derivatives with negative fair values are recognized under "Other liabilities" in the statement of financial position

The following table provides an overview of the hedging rates for the material derivatives that existed at year-end and qualified for hedge accounting:

23.3/3

Hedging Rates of Derivatives that Qualify for Hedge Accounting

Dec. 31, 2019

Derivatives with

maturities of 12

maturities of over 12

months or less

months

Hedging of stock-based employee compensation programs

Ø hedging rate (€)

Forward share transactions - cash flow hedges

Bayer share

90.07

74.08


Combined Financial Statements Animal Health						68
2017, 2018, 2019

In 2018 the hedging rates for the material derivatives that existed at year -end and qualified for hedge accounting were the following:

23.3/4

Hedging Rates of Derivatives that Qualify for Hedge Accounting

Derivatives with

maturities of 12

maturities of over 12

months or less

months

Nominal

value

hedging

value

hedging

(million)

rate

(million)

rate

Currency hedging of forecasted transactions

Forward exchange contracts - cash flow hedges

Sell

EUR / AUD

14 AUD

1.6304

EUR / GBP

18 GBP

0.8931

EUR / USD

71 USD

1.2333

Hedging of stock-based employee compensation programs

Ø hedging rate (€)

Forward share transactions - cash flow hedges

Bayer share

104.29

82.42

24. Contingent liabilities and other financial commitments

Contingent liabilities

Contingent liabilities amount to €0 million as of December 31, 2019 (2018: €81 million, 2017: €81 million). In 2018 and 2017, the contingent liabilities comprised mainly tax risks. The contingent liabilities from previous years resulted in a tax liability of €28 million and an interest accrual of €4 million as of December 31, 2019. Refer to Note 11 for further details.

Other financial commitments

The other financial commitments were as follows:


				24/1
Other Financial Commitments
		Dec. 31,	Dec. 31,		Dec. 31,
€ million	2017		2018			2019

Operating leases		15	14		n/a¹
Commitments under purchase agreements for property, plant and equipment	46		31			23

Potential payment obligations under collaboration agreements	23		15			29

Total		84	60		52

¹ Refer to Note 2 for details about the effects of new reporting standards, including IFRS 16

The purchase commitments for property, plant, and equipment in 2017 comprised primarily expenses for the planned expansion of production sites in Germany during 2018.


Combined Financial Statements Animal Health						69
2017, 2018, 2019

The maturities of the other financial commitments are as follows:


										24/2
Maturities of Other Financial Commitments
						Payment obligations under
€ million			Operating leases¹					collaboration agreements
	2017		2018		2019				2017		2018	2019

Maturing within 1 year	4		3			n/a	12			3			6

Maturing in 1-5 years	6		6			n/a	10				12	24

Maturing after 5 years	5		5			n/a	1			-			-

Total		15	14	n/a		23		15		30

¹ Refer to Note 2 for details about the effects of new financial reporting standards

Animal Health has entered into cooperation agreements with third parties under which it has agreed to fund the development of certain products based on the achievement of milestones. The amounts shown represent the maximum payments to be made, and it is unlikely that they will all fall due. Since the achievement of the conditions for payment is highly uncertain, both the amounts and the dates of the actual payments may vary considerably from those stated in the table. In 2019, potential payment obligations under collaboration agreements primarily comprise future not-sales-related milestone payments for the development of products (e.g. for Baytril) in the United States and Germany that are expected to be capitalized.

25. Legal risks

The Company is exposed to various legal risks, primarily in the areas of patents, intellectual property, and regulatory compliance matters. Each reporting period, internal and external legal counsel evaluate the current status of the Company’s material legal risks, considering pending and threat ened litigation matters up to the preparation date of the Combined Financial Statements. When it is more likely than not that such litigation will result in a liability that is reasonably estimable, a provision for litigation is recorded in the amount of the present value of the expected cash outflows. Such provisions cover the estimated payments to the plaintiffs, court and procedural costs, attorney costs and the cost of potential settlements. While it is not possible to predict the outcome of these matters with certainty, and some lawsuits, claims or proceedings may be disposed or decided unfavorably, the Company does not expect that any asserted or un-asserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on the Company.

In the third quarter of 2019, Tevra Brands, LLC filed a complaint against Bayer in the US District Court of the Northern District of California. The complaint alleges that Bayer´s Animal Health business has been involved in unlawful exclusive dealing and tying of its flea and tick products Advantage, Advantix and Seresto and also maintained a monopoly in the market. Tevra’s demands include both actual and treble damages. Bayer believes it has meritorious defenses and intends to defend itself vigorously. Bayer has filed a motion to dismiss the lawsuit. Tevra has filed a motion to amend its complaint. Both motions are pending.


Combined Financial Statements Animal Health						70
2017, 2018, 2019

26. Financial opportunities and risks

Animal Health is exposed to financial risks in the form of liquidity, credit and market price risks, as well as risks resulting from pension obligations. The following paragraphs provide details of these risks and how they are managed.

Capital Management for Animal Health is performed by Bayer AG. The legal requirements regarding equity and liquidity are taken into account in the light of the needs of the Bayer Group.

The management of financial opportunities and risks takes place using established, documented processes. Financial planning, which serves as the basis for determining the liquidity risk and the future foreign currency risks and covers all Group companies that are relevant from a cash -flow perspective, is an important component of the Company’s process. Financial planning comprises a planning horizon of 12 months and is regularly updated. In the reporting periods for the combined financial statements, the financing activities of Animal Health were managed by Bayer Group.

Liquidity risk

Liquidity risks are defined as the possible inability to meet current or future payment obligations. The liquidity risk is determined and managed centrally by the finance department of Bayer AG as part of the companies same-day and medium-term liquidity planning.

Animal Health is largely financed by the Bayer Group and invests excess liquidity with Bayer AG or its subsidiaries using Bayer Group’s Cash pooling and cash management system. Bayer Group holds sufficient liquidity to ensure the fulfillment of all planned payment obligations at maturity. For unbudgeted shortfalls in cash receipts or unexpected disbursements, furthermore, a reserve is maintained and its balance is regularly reviewed and adjusted. Bayer Group has Credit facilities with banks, including, in particular, an undrawn €4.5 billion syndicated revolving credit facility with a current maturity of 2023.

Credit risk

Credit risks arise from the possibility that the value of receivables or other financials assets of the Animal Health segment may be impaired because counterparties cannot meet their payment or other performance obligations. To manage credit risks from trade receivables, credit managers regularly analyze customers’ creditworthiness. Reservation of title with customers are generally agreed. Credit limits are set for all customers. All credit limits for debtors where total exposure is €10 million or more are evaluated locally and submitted to the finance function. To minimize risks, financial transactions are only conducted within predefined exposure limits and with banks and other partners that preferabl y have investment grade ratings. The maximum credit risk of receivables and other financial assets corresponds to the respective carrying amount. The Company does not hold collateral as securities. Additionally, as a part of Bayer Group, the Company participates in a global credit insurance program to insure trade accounts receivable against certain catastrophic losses. Refer to Note 16 for further details regarding this program.

Opportunities and risks resulting from changes in exchange rates

Opportunities and risks resulting from fluctuating exchange are managed by Finance function of Bayer Group. Risks are avoided or mitigated through the use of derivative financial instruments.

Foreign currency opportunities and risks for Animal Health mainly result from changes in exchange rates and the related changes in the value of financial instruments (including receivables and payables) not in the functional currency. Receivables and payables in liquid currencies from operating activities and financial items are generally fully exchange hedged through foreign exchange forward contracts. Anticipated exposure from planned payment receipts and disbursements in the future were hedged through forward exchange contracts until 2019.


Combined Financial Statements Animal Health						71
2017, 2018, 2019

Sensitivities were determined on the basis of a hypothetical scenario in which the euro appreciates or depreciates by 10% against all other currencies compared with the year -end exchange rates. In this scenario, the estimated hypothetical increase or decrease in cash flows from derivative and non - derivative financial instruments would have improved or diminished earnings as of December 31, 2019 by €0 million (December 31, 2018: €0 million; December 31, 2017: €0 million) . Derivatives used to hedge anticipated currency exposure that are designed for hedge accounting have expired during 2019 and therefore a sensitivity of +/-10% has no impact on equity as of December 31, 2019 (December 31, 2018: €9 million; December 31, 2017: €11 million).

Financial risk associated with pension obligations

Animal Health has obligations to current and former employees related to pensions and other post - employment benefits. Changes in relevant measurement parameters such as interest rates, mor tality and salary increase rates may raise the present value of the pension obligations. This may lead to increased costs for pension plans or diminish equity due to actuarial losses being recognized as other comprehensive income in the statement of comprehensive income. A large proportion of the pension and other post-employment benefit obligations is covered by plan assets including fixed -income securities, shares, real estate and other investments. Declining or even negative returns on these investments may adversely affect the future fair value of plan assets. Both of these effects may negatively impact the development of equity and/or earnings and/or may necessitate additional payments by the company. Risk of market related fluctuations is addressed in the fair value of the plan assets through balances strategic investment, and investment risks is constantly monitored in regard to the global pension obligations.

27. Leases

The transition effects from the change in accounting for leases at the time of first -time adoption of IFRS 16 as well as the use of practical expedients are presented in the section "Financial reporting standards applied for the first time in 2019".

Accounting under IFRS 16 since January 1, 2019

Animal Health leases building, machinery and equipment, and vehicles. Lease terms for buildings range from 1 to 16 years with an average lease term of 3 years, while lease terms for other assets are 2 years on average. Leasing contracts are negotiated individually and might include certain specifications, such as extension, termination or purchase options.

In many cases the payments agreed under building leases are adjusted annually based on the development of the consumer price index for the respective country. Building leases generally contain clauses that prohibit subleasing except with the consent of the lessor.

57% of all contracts (excluding vehicle leases) contain an option for Animal Health as lessee to terminate the lease on a date specified in the contract, while 31% of all contracts with a fixed minimum term (excluding vehicle leases) grant Animal Health as lessee an extension option. Vehicle leases generally contain a right of early return and an extension option.


Combined Financial Statements Animal Health						72
2017, 2018, 2019

The following right-of-use assets are reported under property, plant and equipment:


	27/1
Right-of-use assets
€ million		Dec. 31, 2019

Land and buildings		11

Plant installations and machinery		-

Furniture, fixtures and other equipment	5

Total		16

In 2019, additions of right-of-use assets in the amount of €6 million were recognized.

Scheduled depreciation of right-of-use assets in 2019 breaks down into the following asset categories:


	27/12
Depreciation of right-of-use assets
€ million		Dec. 31, 2019

Land and buildings		2

Plant installations and machinery		-

Furniture, fixtures and other equipment	3

Total		5

In addition to depreciation, the following amounts relating to leases in which Animal Health acts as the lessee were recognized in the income statement in 2019:


	27/3
Depreciation of right-of-use assets
€ million		Dec. 31, 2019

Interest expense on lease liabilities		1

Expense relating to short-term leases		-

Expense relating to variable lease payment not included in the calculation of lease liabilities	-

Income from subleasing right-of-use assets		-

Total		1

In 2019, the cash outflows in connection with the activities as lessee amounted to € 5 million.

Accounting under IAS 17 until December 31, 2018

Prior to 2019, the Company accounted for leases under IAS 17. In 2018, capitalized property, plant and equipment included assets with a total net value of €4 million (2017: €4 million) held under finance leases. The cost of acquisition or construction of these assets for these assets amounted to €6 million in 2018 (2017: €6 million), primarily related to furniture, fixtures and other equipment.

In 2018, rental payments of €4 million (2017: €4 million) were made for assets leased under operating leases as defined in IAS 17 (Leases).


Combined Financial Statements Animal Health						73
2017, 2018, 2019

28. Related parties

Related parties as defined in IAS 24 are those legal entities and natural persons that are able to exert significant influence on Animal Health and its subsidiaries or over which the Company can exercise significant influence. The related parties include Bayer AG and Bayer Group companies.

The following table shows the volume of transactions with related entities:


															28/1
Related Parties
		Sales of goods and					Purchases of goods and
				services				services			Receivables							Liabilities

€ million	2017		2018		2019	2017			2018	2019		2017	2018	2019	2017	2018	2019

Bayer AG	3		3		0	33			39	36		900	1,008	215	134	39	45

Bayer Group
companies	5		5		7	46			44	42		35	37	7	50	142	93

Intercompany purchases and sales

Bayer Group provides services to Animal Health. These services include engineering and process - related services, information technology, accounting and personnel management. In addition, Animal Health receives energy, maintenance services, environmental services, logistics and infrastructure services through Bayer Group’s Currenta GmbH & Co. OHG (“Currenta”), Leverkusen, subsidiary. These transactions are carried out on an arm’s length basis. In November 2019, Bayer Group sold Currenta, which is no longer considered as related party thereafter.

Financing

Animal Health participates in Bayer Group’s cash pooling and cash management system. Cash pool balances are denominated in local currencies, with interest rates depending on local short -term base rates (mainly one-month EURIBOR in the reporting periods). Cash pooling receivables due from Bayer AG amount to €0 million (2018: €27 million; 2017: €0 million) and cash pooling receivables due from Bayer Group Companies amount to €7 million (2018: €11 million; 2017: €9 million). Cash pooling liabilities due to Bayer AG amount to €0 million (2018: €23 million; 2017: €128 million). Cash pooling liabilities due to Bayer Group Companies amount to €0 million (2018: €0 million; 2017: €0 million). The agreement governing cash pooling will be terminated as part of the sale to Elanco.

Bayer Group also finances Animal Health through loans. As of December 31, 2019, the miscellaneous financing liabilities amount to €126 million (2018: €139 million; 2017: €45 million). The balance in 2019 comprises mainly of a €90 million loan from Bayer Cyprus to KVP Kiel. The remaining part of the balance in 2019 as well as the amounts in 2018 and 2017 relate to a financial liability as a result of the 2013 acquisition of Bomac Group, an Animal Health business in Auckland, New Zealand. The acquired operations exclusively support Animal Health and consequently, the financing associated with the acquisition, which is payable to Bayer AG is attributed to Animal Health. The loans are largely denominated in EUR and have a maximum remaining term of 19 months as of December 31, 2019. The interest rate on the principal loans outstanding as of December 31, 2019 is between 0% and 2.9% (2018: 3.9%; 2017: 3.9%). Interest expense to Bayer Group companies in 2019 amounted to €2 million

(2018: €2 million; 2017: €2 million).

In addition, Animal Health has provided loans to Bayer Group companies. As of December 31, 2019, these amount to €214 million (2018: €1,002 million; 2017: €914 million). The amounts relate to loans given by Animal Health entity Bayer Animal Health/Leverkusen. The decrease in loans provided to Bayer Group companies primarily resulted from a dividend payment from Animal Health to Bayer AG in the amount of €1,075 million.


Combined Financial Statements Animal Health						74
2017, 2018, 2019

Hedging Transactions

Hedging transactions for the Company are mainly initiated by Bayer AG. The corresponding receivables are reflected in other financial assets, and the liabilities are reflected in financial liabilities or other liabilities.

Corporate Allocations

Animal Health received functional leadership services (e.g. corporate accounting/finance/tax etc.) from Bayer Group. The associated corporate costs were allocated to the Animal Health entities within the scope of combination on a pro-rata basis. During 2019, Animal Health received functional leadership services in the amount of €13 million (2018: €11 million; 2017: €8 million).

Insurance

Animal Health has various insurance policies, in particular for liability and property insurance, with t he wholly owned Bayer Group subsidiary Pallas Versicherungs AG, Leverkusen.

Leasing

Animal health has concluded lease arrangements with the Bayer Group. Various finance and operating leases exist during 2017 and 2018. During 2019 immaterial Right-of-use assets and Lease liabilities exist with Bayer Group entities.

Employee Benefits

Animal Health employees participate in plans sponsored by Bayer Group. The way the benefits are provided varies according to the legal, tax and economic framework of each country, the benefits generally being based on employee compensation and years of service.

Stock-based compensation

Employees of Animal Health participate in Bayer AG’s stock-based compensation programs. Bayer AG confers the relevant entitlements on behalf and for the account of Animal Health (see Note 20 for further information).

HealthCare Pension Reimbursements

By way of an agreement signed on July 8, 2019, Bayer AG and Animal Health GmbH agreed to release Animal Health GmbH against a one-time payment of €8 million, from all further obligations in connection with existing pension entitlements payable by Bayer AG to employees who left the company prior to July 1, 2002, and who worked in what was then the Animal Health business area of Bayer AG. These pension provisions remained with Bayer AG following the carve-out of the former HealthCare business from Bayer AG on January 1, 2003. Animal Health GmbH had previously been obligated to reimburse to Bayer AG the proportional expenses attributable to the Animal Health business, provided it was not covered by a corresponding provision, as well as the proportional administrative expenses.

Miscellaneous

Furthermore, there are profit-and-loss transfer agreements as well as tax groups with Bayer Group companies. The related transactions are shown as contributions and withdrawals for purposes of the combined financial statements of the Animal Health.


Combined Financial Statements Animal Health						75
2017, 2018, 2019

Related persons

Related persons as defined by IAS 24 are persons who, by virtue of the positions they hold in Animal Health and in the interests of Bayer AG, are globally responsible for the operational business of Animal Health. The related persons of Animal Health are the members of its leadership team. In connection with the sale to Elanco, these individuals, as well as other executive staff, are entitled to a retention bonus, which will be paid out shortly before or after the closing of the sale. Members of the Animal Health leadership team are entitled to a retention bonus of up to 50% of their annual base salary, provided they remain with the Company through the closing of the sale to Elanco and certain key performance indicators are met. The maximum amount of potential retention payments to members of the Animal Health leadership team is expected to be approximately €1.4 million. The total compensation of the Animal Health key management, exclusive of pension entitlements, amounts to € 4.6 million (2018: €5.1 million; 2017: €5.1 million). It includes a short-term incentive component of €1.5 million (2018: €1.7 million; 2017: €1.3 million) and a stock-based compensation component of €0.9 million (2018: €0.1 million; 2017: €0.6 million). It further includes car allowances in the amount of € 0.1 million (2018: €0.1 million; 2017: €0.1 million).The pension entitlements earned by the related persons amount to €0.8 million (2018: €0.6 million; 2017: €0.6 million).

29. Statements of Cash Flows

The Company classifies cash flows as operating, investing or financing activities in accordance with IAS 7 (“Statement of Cash Flows”). The cash flows reported by Animal Health operations outside the eurozone are translated at average annual exchange rates, while cash equivalents are translated at closing rates.

Net cash provided by operating activities

Operating activities are the main revenue producing activities of the Company that are not investing or financing, including cash received from customers and cash paid to suppliers and employees. Net cash provided by operating activities in 2019 was €168 million (2018: €224 million; 2017: €150 million).

Under the separate tax return approach described above, payments of current taxes actually paid by Remaining Bayer were treated as non-cash contributions or withdrawals. Income taxes paid represent amounts paid by dedicated Animal Health entities. In 2019 income tax refunds received from tax authorities exceeded income taxes paid by €1 million. This primarily resulted from received refunds in the amount of €53 million due to income tax prepayments in preceding periods by Animal Health entity Bayer Animal Health/Leverkusen. The changes in income tax liabilities, income tax provisions and claims for reimbursement of income taxes are included in the line item “Changes in other workin g capital, other non-cash items”.

Net cash (used in) provided by investing activities

Investing activities represent the acquisition and disposal of non-current assets and other investments that are not considered cash equivalents. Net cash provided by investing activities in 2019 amounted to €740 million (2018: €164 million; 2017: €274 million). Investing activities include amounts due from Remaining Bayer, including loans and cash pooling receivables. In 2019, cash received from Remaining Bayer increased, due to repayments of short-term loans to fund the dividend payment from Animal Health entity Bayer Animal Health/Leverkusen to Bayer AG in the amount of €1,075 million.

Net cash (used in) provided by financing activities

Financing activities include activities that alter the equity capital and borrowing structure of t he entity, including borrowings under the Bayer Group cash pooling arrangement. Net cash used in financing activities in 2019 was €-908 million (2018: €-60 million; 2017: €124 million).

Financing activities primarily include related party transactions with Bayer Group. The Company carries financial liability balances through its participation in the cash pooling arrangement with Bayer Group.


Combined Financial Statements Animal Health						76
2017, 2018, 2019

The Company includes activity associated with these liabilities within Other financial transactions with Bayer Group. Net cash used in financing activities primarily increased in 2019 due to a dividend payment from Animal Health entity Bayer Animal Health/Leverkusen to Bayer AG in the amount of €1,075 million.

The Change in financial liabilities is included in the following table:


								29/1
Financial Liabilities¹
€ million
		December	Cash		Currency		Fair Value		December
	31, 2018			flows		Effects		Changes	31, 2019

Related party liabilities	162		(37)			1			-	126

thereof cash pooling arrangement	23		(23)			-			-	-

thereof loan to Bayer New Zealand Limited	39		(4)			1			-	36

thereof loan to KVP Pharma+Veterinär Produkte GmbH		100	(10)		-		-		90
¹ Amounts above are exclusive of lease liabilities in the amount of €16 million


								29/2
Financial Liabilities¹
€ million

		December	Cash		Currency		Fair Value		December
	31, 2017			flows		Effects		Changes	31, 2018

Related party liabilities	173		(17)			5			1	162

thereof cash pooling arrangement	128		(110)			5			-	23

thereof loan to Bayer New Zealand Limited	45		(7)			-			1	39

thereof loan to KVP Pharma+Veterinär Produkte GmbH	-		100			-			-	100

^•¹ Amounts above are exclusive of finance lease liabilities in the amount of €3 million


								29/3
Financial Liabilities¹
€ million

		December	Cash		Currency		Fair Value		December
	31, 2016			flows		Effects		Changes	31, 2017

Related party liabilities	135		46			(8)			-	173

thereof cash pooling arrangement	70		61			(3)			-	128

thereof loan to Bayer New Zealand Limited	65		(15)			(5)			-	45

¹ Amounts above are exclusive of finance lease liabilities in the amount of €3 million


Combined Financial Statements Animal Health						77
2017, 2018, 2019

30. Events after the end of the reporting period

The Company evaluated subsequent events for recognition or disclosure through March 11, 2020.

No significant activities or events have taken place subsequent to the balance sheet date December 31, 2019 that have a material impact on the key figures and earnings presented.

Leverkusen, March 11, 2020

/s/ Dr. Dirk Ehle

/s/ Roland Backes

/s/ Bernd-Peter Bier

Dr. Dirk Ehle

Roland Backes

Bernd-Peter Bier

Chief Executive Officer

Chief Financial Officer

Head of Group Finance

Bayer Animal Health

Bayer Group

INDEPENDENT AUDITORS’ REPORT

To: Bayer Aktiengesellschaft, Leverkusen

We have audited the accompanying combined financial statements of Animal Health Business of Bayer Aktiengesellschaft (the “Company”), which comprise the combined statements of financial position as of December 31, 2017, 2018 and 2019, and the related combined statements of income, combined statements of comprehensive income, combined statements of changes in equity, and combined statements of cash flows for the years then ended, and the related notes to the combined financial statements.

Management’s Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion the combined financial statements referred to above present fairly, in all material respects, the financial position of Animal Health Business of Bayer Aktiengesellschaft as of December 31, 2017, 2018 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

Emphasis of Matter

We draw attention to the fact that, as described in Note 1.1 and Note 1.2, the Animal Health Business of Bayer Aktiengesellschaft has not operated as a separate group of entities. These combined financial statements are, therefore, not necessarily indicative of results that would have occurred if the Animal Health Business of Bayer Aktiengesellschaft had been a separate stand-alone group of entities during the years presented or of future results of the Animal Health Business of Bayer Aktiengesellschaft. Our opinion is not modified with respect to this matter.

Munich, March 12, 2020


/s/ Deloitte GmbH Wirtschaftsprüfungsgesellschaft
Deloitte GmbH
Wirtschaftsprüfungsgesellschaft

Exhibit 99.3

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Animal Health Business of

Bayer Aktiengesellschaft

Unaudited Condensed Combined

Interim Financial Statements

Half Year Report 2020

Animal Health Business of Bayer Aktiengesellschaft Unaudited Condensed Combined Interim Financial Statements Contents


Unaudited Condensed Combined Statements of Income									4
Unaudited Condensed Combined Statements of Comprehensive Income									5
Unaudited Condensed Combined Statements of Financial Position									6
Unaudited Condensed Combined Statements of Changes in Equity									7
Unaudited Condensed Combined Statements of Cash Flows									8
Notes to the Unaudited Condensed Combined Interim Financial Statements
1. Background									9
2. Basis of Presentation									9
3. Significant Accounting Policies and Critical Accounting Estimates and Judgements									10
4. Scope of combination									19
5. Net Sales									19
6. Financial Instruments									20
7. Legal Risks and Contingent Liabilities									22
8. Statements of Cash Flows									23
9. Income Taxes									23
10. Related Parties									23
11. Events after the end of the reporting period									26

Unaudited Condensed Combined Interim Financial Statements as of June 30, 2020

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Unaudited Condensed Combined Statements of Income


					1
€ million		Q2 2019	Q2 2020	H1 2019		H1 2020

Net sales	453		491		874		984

Cost of goods sold	(128)		(139)		(250)		(278)

Gross profit	325		352		624		706


Selling expenses	(166)		(169)		(289)		(300)

Research and development expenses	(35)		(36)		(64)		(69)

General administration expenses	(39)		(59)		(58)		(119)

Other operating income	-		2		2		3

Other operating expenses	(2)		-		(8)		(7)

Operating Income	83		90		207		214


Financial income	-		2		-		2

Financial expenses	(2)		(8)		(4)		(8)

Financial result	(2)		(6)		(4)		(6)


Income before income taxes	81		84		203		208


Income taxes	(20)		(32)		(51)		(63)


Income after income taxes	61		52		152		145

See Notes to Unaudited Condensed Combined Interim Financial Statements

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Unaudited Condensed Combined Statements of Comprehensive Income


						2
€ million		Q2 2019		Q2 2020		H1 2019		H1 2020

Income after income taxes	61		52			152			145

Remeasurements of the net defined benefit liability
for post-employment benefit plans		(26)	3		(39)		40

Income taxes	7		(1)			11			(11)

Other comprehensive income from remeasurements of the
net defined benefit liability for post-employment benefit plans		(19)	2		(28)		29

Other comprehensive income that will not be reclassified subsequently
to profit or loss		(19)	2		(28)		29

Changes in fair values of derivatives designated as cash flow hedges	2		5			(1)			(2)

Reclassified to profit or loss	2		(1)			5			2

Income taxes	(1)		(1)			(1)			-

Other comprehensive income from cash flow hedges	3		3			3			-

Other comprehensive income from exchange differences	(5)		(4)			2			(12)

Other comprehensive income that may be reclassified subsequently to
profit or loss		(2)	(1)		5		(12)

Total other comprehensive income	(21)		1			(23)			17

Total comprehensive income	40			53	129			162

See Notes to Unaudited Condensed Combined Interim Financial Statements

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Unaudited Condensed Combined

Statements of Financial Position


			3
€ million		Dec. 31, 2019		June 30, 2020

Noncurrent assets

Goodwill		99		97

Other intangible assets		129		127

Property, plant and equipment		280		283

Other financial assets		3		1

Other receivables		6		4

Deferred taxes		201		177

	718		689

Current assets

Cash and cash equivalents		-		6

Inventories		320		336

Trade accounts receivable		224		291

Other financial assets		220		367

Other receivables		27		45

Claims for income tax refunds		94		175

	885		1,220

Total assets		1,603		1,909


Equity

Invested equity attributable to Bayer Group		789		1,104

Other components of equity		(16)		(28)

Total invested equity attributable to Bayer Group		773		1,076


Noncurrent liabilities

Provisions for pensions and other post-employment benefits		233		192

Other provisions		23		18

Financial liabilities		18		15

Other liabilities		3		5

Deferred taxes		61		50

	338		280

Current liabilities

Other provisions		86		118

Refund liabilities		55		55

Contract liabilities		2		3

Financial liabilities		124		39

Trade accounts payable		160		169

Income tax liabilities	30		134

Other liabilities	35		35

	492		553

Total equity and liabilities	1,603		1,909

See Notes to Unaudited Condensed Combined Interim Financial Statements

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Unaudited Condensed Combined

Statements of Changes in Equity


					4
			Other Components of Equity
						Total invested
		Invested equity				equity
		attributable to	Exchange	Cash flow		attributable to
€ million		Bayer Group	differences	hedges		Bayer Group

Dec. 31, 2018	1,551		(19)		(8)		1,524

Equity transactions with owners

Withdrawals/contributions	119		-		-		119

Other comprehensive income	(28)		2		3		(23)

Income after income taxes	152		-		-		152

Total comprehensive income	124		2		3		129

June 30, 2019	1,794		(17)		(5)		1,772


Dec. 31, 2019	789		(13)		(3)		773

Equity transactions with owners

Withdrawals/contributions	141		-		-		141

Other comprehensive income	29		(12)		-		17

Income after income taxes	145		-		-		145

Total comprehensive income	174		(12)		-		162

June 30, 2020	1,104		(25)		(3)		1,076

See Notes to Unaudited Condensed Combined Financial Statements

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Unaudited Condensed Combined Statements of Cash Flows


		5
€ million		H1 2019	H1 2020

Income after income taxes	152		145

Income taxes	51		63

Financial result	4		6

Income tax refunds received (taxes paid)	7		(18)

Depreciation, amortization and impairments	20		23

Change in pension provisions	-		-

Loss on sale of property, plant, equipment and other noncurrent assets	-		1

Increase in inventories	(21)		(38)

Increase in trade accounts receivable	(97)		(79)

(Decrease) Increase in trade accounts payable	(2)		4

Changes in other working capital, other noncash items	(27)		12

Net cash provided by operating activities	87		119


Cash outflows for additions to property, plant, equipment and intangible assets	(29)		(27)

Cash inflows from sales of property, plant, equipment and other assets	1		1

Interest and dividends received	-		2

Cash outflows for loans to Remaining Bayer	(139)		(4)

Net cash used in investing activities	(167)		(28)


Other financial transactions with Bayer Group	(22)		1

Hedging transactions with Bayer Group	(3)		3

Contributions from (to) Bayer Group	119		(2)

Proceeds from the issuance of debt with Bayer Group	106		-

Proceeds from revolving credit facility	-	6

Repayments of debt with Bayer Group	(118)		(90)

Principal elements of lease payments	(1)		(2)

Interest paid	(1)		(1)

Net cash provided by (used in) financing activities	80		(85)


Change in cash and cash equivalents due to business activities	-	6

Cash and cash equivalents at beginning of year	-	-

Cash and cash equivalents at end of year	-	6

See Notes to Unaudited Condensed Combined Financial Statements

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Notes to the Unaudited Condensed Combined Interim Financial Statements of Animal Health

1. Background

The Animal Health segment (“Animal Health” or “the Company”) of Bayer AG, Leverkusen (“Bayer” or “Bayer Group”) develops, produces and markets prescription and non-prescription veterinary products to promote the health and wellbeing of companion and farm animals. The Company’s companion animal products, which focus on the prevention and treatment of parasites and infections, include the Advantage™, Seresto™, and Drontal™, and Baytril™ products. Farm animal products include medicines and solutions to treat parasitic diseases, in addition to anti-invectives, immunostimulants, pharmacological treatments and farm hygiene products.

On November 29, 2018, Bayer announced its intention to divest the Animal Health segment. Subsequently, on August 20, 2019, Bayer entered into a definitive agreement with U.S.-based company Elanco Animal Health Incorporated, Greenfield, Indiana, USA, (“Elanco”) to sell the Company.

These Condensed Combined Interim Financial Statements were prepared on August 6, 2020 by management of Bayer AG, Kaiser-Wilhelm-Allee 3, 51373 Leverkusen, Germany.

2. Basis of Presentation

The Condensed Combined Interim Financial Statements were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. They are prepared on a combined basis and reflect the companies and operations assigned to Animal Health as historically included in the IFRS consolidated financial statements of the Bayer Group and managed by Animal Health management. During the reporting periods presented, Animal Health was not a group of entities under the control of an immediate parent as defined by IFRS 10 (“Consolidated Financial Statements”) and did not historically prepare consolidated financial statements. The Condensed Combined Interim Financial Statements reflect the companies and the operations assigned to Animal Health as historically included in the IFRS consolidated financial statements of Bayer Group and managed by Animal Health management. The Condensed Combined Interim Financial Statements reflect the legal entities historically fully dedicated to Animal Health (dedicated entities), in addition to balances held by legal entities shared between the Animal Health segment and other Bayer Group businesses (shared entities) for each of the periods presented. Transactions and account balances associated with Bayer Group businesses outside the scope of combination (“Remaining Bayer”) are excluded from the Condensed Combined Interim Financial Statements. (Refer to Note 4 for the scope of combination).

The Condensed Combined Statements of Income include revenues and expenses directly attributable to Animal Health. In addition, Bayer Group historically provided general corporate services to Animal Health, including communications and public affairs, controlling and planning, human resources, procurement, risk management, engineering and technology, accounting, and finance. The costs for general corporate services are directly attributed at historical cost or, where this was not possible, allocated using appropriate and consistent allocation methods, including revenue, expenses, headcount, or other relevant measures. Management of the Company and Bayer Group consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Animal Health. These allocations may not reflect the expenses Animal Health would have incurred as a standalone company for the periods presented.

The Condensed Combined Statements of Financial Position of Animal Health include assets and liabilities specifically identifiable or attributable to Animal Health. The assets and liabilities of Animal Health were measured using Bayer Group’s carrying amounts as of June 30, 2020.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Assets and liabilities are classified by maturity. They are regarded as current if they mature within one year or within the normal business cycle of the Company. The normal business cycle is defined for this purpose as beginning with the procurement of the resources necessary for the production process and ending with the receipt of cash or cash equivalents as consideration for the sale of the goods or services produced in that process. Inventories and trade accounts receivable and payable are always presented as current items. Deferred tax assets and liabilities and pension provisions are always presented as noncurrent items.

Animal Health primarily finances its operations using cash pooling or financing arrangements through entities of Bayer Group. The treatment of the associated financing balances varies for dedicated and shared entities. The Condensed Combined Interim Financial Statements include interest expense, interest income, other financial assets, and financial liabilities balances resulting from cash pooling agreements between dedicated Animal Health entities and Bayer Group. Conversely, balances resulting from cash pooling arrangements for shared entities, including cash, debt, interest expenses, and interest income, are excluded from the Condensed Combined Interim Financial Statements, unless they can be fully attributed to Animal Health. The Condensed Combined Statements of Income only include interest income and expense amounts pertaining to financing arrangements attributable to Animal Health. Furthermore, debt and related interest expenses incurred outside the Animal Health scope of combination are excluded from the Condensed Combined Interim Financial Statements. Consequently, Animal Health’s Condensed Combined Interim Financial Statements may not reflect the same financing costs, had the Company obtained financing on a stand-alone basis.

The condensed combined financial information presented does not necessarily reflect the financial position and results of operations that would have occurred if Animal Health had existed as a separate company during each of the reporting periods presented. The fact that Animal Health did not historically exist therefore limits the applicability of the combined financial information. It also means that the combined financial information cannot be used to forecast the future development of the operations that have been combined to form the Animal Health business.

All figures are presented in euro (EUR). Amounts are stated in millions of euros (€ million) except when otherwise indicated. As the indicators in this report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact.

3.Significant Accounting Policies and Critical Accounting Estimates and Judgements

The Company applied the same accounting policies and measurement principles in preparing the Condensed Combined Interim Financial Statements as those used to prepare the most recent annual Animal Health Combined Financial Statements for the year ended December 31, 2019, with exception to the application of new financial reporting standards applied for the first time in 2020.

For further explanation of the Animal Health business and additional information reference is made to the Animal Health Combined Financial Statements for the year ended December 31, 2019. The Condensed Combined Interim Financial Statements should be read in conjunction with the Animal Health Combined Financial Statements for the year ended December 31, 2019.

Financial reporting standards applied for the first time in 2020

The Company applied the following amendments to accounting standards for the first time in 2020, which did not have a material impact.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

3/1

Other financial reporting standards applied for the first time in 2020

IFRS 3

Amendment to IFRS 3 Business Combinations

IAS 1, IAS 8

Amendments to IAS 1 and IAS 8: Definition of Material

IFRS 9, IAS 39, IFRS 7

Amendments of IFRS 9, IAS 39, IFRS 7: Interest rate benchmark reform

IAS 1

Amendments to References to the Conceptual Framework in IFRS Standards

Critical Accounting Estimates

Under IFRS, management is required to make estimates, judgements and assumptions that affect the amounts reported in Condensed Combined Interim Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. These estimates form the basis for making judgements that affect the carrying amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Making estimates and judgements about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on the Company’s income, financial position and cash flows.

Management believes the critical accounting policies for revenue recognition (Net sales), pension provisions and goodwill reflect the significant estimates and assumptions used in the preparation of the Company’s financial statements. Furthermore, in preparing the Condensed Combined Interim Financial Statements, additional assumptions and estimates were made in connection with the allocation of expenses from Bayer Group, which were necessary to present Animal Health on a stand-alone basis. These expense allocations represent a significant estimate.

Net sales

Net sales are limited to the amount Animal Health expects to receive for the fulfilment of performance obligations. Payments withheld, including expected sales taxes, rebates, and sales discounts are deducted from Net sales. Sales deductions and rebates are estimated primarily on the basis of historical experience, specific contractual terms and future expectations. Net sales are also reduced by provisions for expected customer returns. The net sales are reduced on the date of sale or on the date when the amount of future product returns can be reasonably estimated. For customer contracts where more than one year passes between performance and payment, significant financing components are accounted for separately based on their present values and the subsequent unwinding of the discount. The underlying discount rate takes into account the individual credit risk of the contracting party that receives the financing.

Research and development expenses

Animal Health

Unaudited Condensed Combined Interim Financial Statements

designs for the production, provision or development of new or substantially improved products, services or processes, respectively, prior to the commencement of commercial production or use. Research and development (R&D) expenses are incurred for in-house R&D activities as well as numerous research and development collaborations and alliances with third parties. R&D expenses mainly comprise the costs for active ingredient discovery, research and development activities in the areas of application technology and engineering, field trials, regulatory approvals and approval extensions.

Income Taxes

Current and deferred income taxes are recognized in accordance with IAS 12 (“Income Taxes”) and IAS 34 (“Interim Financial Reporting”). The income tax expense for the Condensed Combined Interim Financial Statements was calculated on the basis of the average annual effective income tax rate expected for the entire year, in accordance with IAS 34.

For purposes of these Condensed Combined Interim Financial Statements, income taxes were determined using the separate tax return approach based on the assumption that Animal Health entities constitute separate taxpayers. This assumption implies that current and deferred taxes assigned to Animal Health are calculated separately and that the recoverability of deferred tax assets is assessed on this basis. For shared entities, which did not historically constitute separate income taxpayers, current tax expenses and tax income are recognized in these Condensed Combined Interim Financial Statements in the year in which they arose as non-cash contributions or withdrawals by Bayer Group. Current tax receivables or payables are derecognized for shared entities.

Deferred tax assets resulting from tax loss carry forwards for dedicated entities are recognized to the extent it is probable that they can be offset against future taxable income. For dedicated and shared entities tax income resulting from tax loss carry forwards is recognized in these Condensed Combined Interim Financial Statements. Deferred tax assets resulting from tax loss carry forwards for shared entities are derecognized as non-cash contributions or withdrawals by Bayer Group, because these tax deductions will remain with Bayer Group.

The Condensed Combined Statements of Cash Flows only include the taxes actually paid by dedicated entities of Animal Health. Income taxes paid on behalf of shared entities within Animal Health are treated as equity contributions from Bayer Group.

Goodwill

In a business combination, goodwill is capitalized at the acquisition date. It is measured as the excess of the acquisition price over the proportionate share of net assets acquired. The goodwill attributed to Animal Health resulted from prior acquisitions specifically related to the Animal Health business. Goodwill is not amortized but tested at least annually for impairment. Additionally, goodwill is tested for impairment when a triggering event occurs that indicates that the fair value may be below its carrying value. Once an impairment loss has been recognized on goodwill, it is not reversed in subsequent periods. The Company’s acquired goodwill balance is consistent with the historical Animal Health segment financial information presented within the consolidated financial statements of Bayer Group. The Company tests goodwill for impairment annually in the fourth quarter, or when there is an indication of possible impairment.

Other Intangible Assets

Other intangible assets include patents, trademarks, and marketing rights. They are capitalized if the future economic benefits attributable to the asset will probably flow to the Company and the cost of acquisition or generation of the asset can be reliably measured. Other intangible assets are recognized at the cost of acquisition or development. Intangible assets with a finite life are amortized on a straight-line basis over a period of up to 20 years. The expected useful life is based on estimates of the period for which the asset will generate future cash flows.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Intangible assets with a finite useful life are evaluated for impairment when events have occurred that may give rise to an impairment. Other intangible assets with an indefinite life and intangible assets not yet available for use are not amortized but tested annually for impairment. The Company tests indefinite lived intangible assets for impairment annually in the fourth quarter.

Property, plant and equipment


		3/2
Useful Life of Property, Plant and Equipment

Buildings	5 to 50 years
Plant installations and machinery		4 to 40 years
Furniture, fixtures and other equipment	2 to 15 years

When disposing of an asset, the difference between the net proceeds and the net carrying amount is recognized as a gain or loss in Other operating income or Other operating expenses, respectively.

Financial Assets

Loss allowances for expected credit losses are recognized for financial assets measured at amortized cost.

For other financial assets, the expected credit loss for the next 12 months is determined on first-time recognition and on subsequent measurement using the Monte Carlo simulation method (stage 1 of the impairment model). In the event of a significant increase in the default risk, which is defined as a more than 0.25% increase in the probability of default, the expected credit losses over the respective term of the asset are taken into account (stage 2 of the impairment model). An impairment loss is recognized if there are objective indications of an impairment. The

Animal Health

Unaudited Condensed Combined Interim Financial Statements

definition of objective indications of an impairment for other financial assets correspond to those of trade account receivables.

Expected credit losses are not calculated for contract assets or lease receivables due to insignificant carrying amounts.

Inventories

Cash and cash equivalents

Provisions for pensions and other post-employment benefits

Animal Health employees receive post-employment benefits under defined contribution and defined benefit plans. With regard to these plans, employees primarily dedicated to the Company (greater than 50% of an employee’s time) are attributed to Animal Health. For dedicated entities, active and non-active employees were attributed to Animal Health. For shared entities, only active employees were attributed to Animal Health since it is unfeasible to assign inactive employees to Animal Health or Remaining Bayer precisely.

The present value of provisions attributable to Animal Health employees for defined benefit plans and the resulting expense are calculated in accordance with IAS 19 (“Employee Benefits”) by the projected unit credit method. The future benefit obligations are valued by actuarial methods and spread over the entire employment period using specific assumptions regarding beneficiary structure and the economic environment. These assumptions relate mainly to the discount rate, expected future salary and pension increases, variations in health care costs, and mortality rates. The discount rates used are calculated from the yields of high-quality corporate bond portfolios in specific currencies with cash flows approximately equivalent to the expected disbursements from the pension plans. The uniform discount rate derived from this interest rate structure is thus based on the yields, at the closing date, of a portfolio of AA-rated corporate bonds whose weighted residual maturities approximately correspond to the duration necessary to cover the entire benefit obligation.

The most important interest rates used to calculate the present value of pension obligations are given below:

Exhibit 99.3

Animal Health

Unaudited Condensed Combined Interim Financial Statements


			3/3
Discount Rate for Pension Obligations
%		Dec. 31, 2019		June 30, 2020

Germany	1.10			1.60

Other countries	2.56			2.25

Plan assets are assigned to Animal Health using a pro rata method consistent with the attribution of benefit obligations. Plan assets for inactive employees for shared entities are excluded from Animal Health. The fair value of plan assets is deducted from the present value of the defined benefit obligation for pensions and other post-employment benefits to determine the net defined benefit liability. The fair values of assets without quoted prices in active markets are determined by applying measurement methods on the basis of freely accessible data such as interest rate curves and credit spreads. Plan assets in excess of the benefit obligation are reflected in Other receivables, subject to the asset ceiling specified in IAS 19. The balance of all income and expenses, except the net interest on the net liability, is recognized in Operating income. The net interest on the net liability is reflected in the financial result under financial income and expenses. The effects of remeasurements of the net defined benefit liability are reflected in Other comprehensive income. They consist of actuarial gains and losses, the return on plan assets and changes in the effects of the asset ceiling, less the amounts included in net interest. Deferred taxes relating to the effects of remeasurements are also recognized in Other comprehensive income.

Bayer-Pensionskasse

Other Provisions

Financial Liabilities

Financial liabilities include Trade accounts payable and other liabilities that are settled in cash and cash equivalents or other financial instruments, as well as negative fair values of derivatives. Financial liabilities are measured at amortized cost with the exception of those carried at fair value, such as derivatives with negative fair values or liabilities designated at fair value through profit or loss.

Other Receivables and Liabilities

Derivatives

Animal Health historically used derivatives to mitigate the risk of changes in currency exchange rates. Derivatives are recognized at the trade date and carried at fair value. Positive fair values at the end of the reporting period are reflected in financial assets and negative fair values are reflected in financial liabilities. Changes in the fair values of these derivatives are recognized directly in profit or loss except where hedge accounting is used.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

Related Party and Intercompany Transactions

Animal Health consists of both dedicated and shared entities. Transactions historically occurred between Animal Health and Remaining Bayer within individual shared entities (“intracompany transactions”). These transactions primarily consisted of local overhead cost allocations, which are treated as equity contributions from Bayer Group and do not result in related party payables or receivables.

Refer to Note 10 for further details regarding related party transactions.

Intercompany balances, which represent transactions entirely within Animal Health, are eliminated in preparation of the Condensed Combined Interim Financial Statements.

Equity

Leases

A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

The Company recognizes a right-of-use asset and lease liability for all leases in the balance sheet. The lease liability is measured on the basis of outstanding lease payments, discounted using the incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability, plus any initial direct costs. During the lease term, the Company adjusts the amount of the lease liability using the effective interest method and reducing the liability for any lease payments. The right-of-use asset is depreciated consistently with the Company policy for Property, plant and equipment.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

The Company does not recognize right-of-use assets or lease liabilities for short term leases. Rather, the Company reflects lease payments under these agreements in the condensed combined statements of income over the term of the lease on a straight-line basis.

As a lessor, the Company classifies leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset.

For the purpose of the Condensed Combined Interim Financial Statements, all lease transactions between the Bayer Group and Animal Health are treated as third party leases. Furthermore, certain leases with third parties are shared between Animal Health and Bayer Group. Leases held by dedicated entities, in addition to leases primarily supporting Animal Health operations held by shared entities, are fully attributed to the Company, including the related right-of-use assets and lease liabilities under IFRS 16. In the event Animal Health is not the primary beneficiary of a shared lease agreement, the Company records an expense for the use of the leased asset.

Foreign Currency

When preparing the Condensed Combined Interim Statements of Financial Position, non-euro denominated assets and liabilities are translated into euros using the closing rates of each period presented. Income and expense items and cash flows are translated into euros at average annual rates. The components of equity are translated at the historical exchange rates prevailing at the respective dates of their first-time recognition in Animal Health.

The exchange differences arising between the resulting amounts and those obtained by translating at closing rates are recognized as Other comprehensive income.

The exchange rates for major currencies against the euro varied as follows:


															3/4
Exchange Rates for Major Currencies
				BRL		CAD		CNY		GBP				JPY	RUB		USD

				Brazil		Canada		China		U.K.				Japan	Russia		U.S.A.

Closing rate		Dec. 31 2019			4.52			1.46			7.82			0.85			121.87			69.94			1.12

	June 30, 2020			6.09			1.53			7.92			0.91			120.63			79.56			1.12

Average rate			Q2 2019	4.41			1.50			7.67			0.87			123.58			72.55			1.12

		H1 2019	4.34			1.51			7.68			0.87			124.33			73.78			1.13

		Q2 2020	5.89			1.53			7.81			0.89			118.31			79.72			1.10

		H1 2020	5.33			1.50			7.76			0.87				119.22	76.19			1.10

Currency translation for Animal Health is calculated based on the value of assets and liabilities attributed to the Company.

Hedging transactions for Animal Health are mainly initiated by Bayer Animal Health or KVP Kiel with Bayer. For the purpose of the Condensed Combined Interim Financial Statements all hedging transaction are treated as third party transactions. All hedged items and hedged instruments that are related to Animal Health dedicated entities, are reflected in the Condensed Combined Interim Financial Statements.

Separation Costs

Separation costs consist of various internal and third-party advisor fees associated with the sale of the Company, including for example legal, consultancy, accounting, and auditing fees. The Company attributes these costs to either Animal Health or Remaining Bayer based on the nature of the costs. Costs directly associated with the divestiture or the Animal Health business are attributed to the Company.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

The Company incurred the following amounts of separation costs during the three and six months ended June 30, 2019 and 2020, which given their nature, were deemed directly attributable to the Company:


					3/5
€ million		Q2 2019	Q2 2020	H1 2019		H1 2020

Separation costs	24		42		28		92

of which General administration expenses	23		36		26		81

COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) was first identified, and in March 2020, the World Health Organization categorized COVID-19 as a pandemic. The COVID-19 pandemic has significantly impacted the global economy. Public health efforts to mitigate the impact of the pandemic include government actions such as travel restrictions, limitations on public gatherings, shelter in place orders and mandatory closures. While the pandemic will impact substantially all of the Company’s customers, the Company has not experienced material declines in revenue or a deterioration in its net assets as of June 30, 2020. In many territories, Animal Health’s primary customers are considered essential businesses by the local governments, limiting disruption caused by the pandemic. In some cases, the Company experienced increased orders as customers increased their inventories in connection with COVID-19.

Prior to 2020, the Company most recently assessed its goodwill and intangible assets for potential impairment during the fourth quarter of 2019. Due to the overall uncertainty and changes in the weighted average cost of capital during the initial phases of the pandemic, the Company re-evaluated its goodwill and Cydectin™ brand portfolio intangible asset for potential impairment. These analyses indicated no impairments to the Animal Health cash generating unit and the Cydectin™ brand portfolio.

The Company also evaluated its remaining assets, particularly trade accounts receivable and inventories. Animal Health’s trade accounts receivable are mainly comprised of net unpaid invoices for product sales. Based on its review, the Company did not observe any significant deterioration of its receivable portfolio to warrant a significant increase in impairments during the first half of 2020. The Company will continue to monitor its trade accounts receivable for potential deterioration resulting from the COVID-19 outbreak.

The Company’s inventories are stated at the lower of cost or net realizable value. During the first half of 2020, the Company did not identify significant increases in slow moving, obsolete, or expired inventory that would indicate a significant deterioration in the net realizable value of the Company’s inventories.

In response to the pandemic and in coordination with local government requirements, the Company temporarily closed certain offices, with affected employees working remotely. These closures are primarily limited to the Company’s administrative offices, as production, distribution and logistics remained in operation.

The COVID-19 pandemic remains an evolving situation, which may lead to increased asset recovery and valuation risks, such as potential impairment of the Company’s goodwill and intangible assets, trade accounts receivable, and inventories. The uncertainties in the global economy may adversely impact the Company’s suppliers, customers, and other business partners, which may interrupt the Company’s supply chain, limit the Company’s ability to collect receivables and require other changes to its operations. However, is it not possible to reliably estimate the long-term effects of the pandemic at this time. The Company will continue to closely monitor the effects of the pandemic, including the impact on inventories, customer receivables, and significant estimates, including the Company’s goodwill and intangible assets.

4. Scope of combination

The Condensed Combined Interim Financial Statements of Animal Health consist of both dedicated entities and shared entities. Dedicated entities are comprised entirely of Animal Health operations, with all assets and liabilities attributed to the Company. The shared entities consist of both Animal Health and Remaining Bayer operations, with

Animal Health

Unaudited Condensed Combined Interim Financial Statements

assets and liabilities attributed to both Animal Health and Remaining Bayer. Shared entity costs are allocated when direct attribution is not possible.

The overall scope of combination used to prepare the Condensed Combined Interim Financial Statements remained unchanged from the annual combined financial statements prepared for the year ended December 31, 2019.

5. Net Sales

The Company’s net sales are derived primarily from product deliveries. The Company recognized sales to customers in each of the following markets as follows:


					5/1
Net sales - by Geography
€ million		Q2 2019	Q2 2020	H1 2019		H1 2020

Europe / Middle East / Africa	114		117		262		281

North America	214		244		367		453

Asia/Pacific	86		97		167		176

Latin America	39		33		78		74

Total	453		491		874		984

The growth in net sales during the first half of 2020 is attributable to the positive performance of Seresto™ and the Advantage™ product family, both of which registered their strongest sales gains in the United States. This development was partly attributable to inventory build-ups by the Company’s customers in connection with COVID-19 and increased sales to new retail and e-commerce customers. The Company also experienced increased sales in Europe during the first half of 2020 resulting from both an increase in inventory build-up by Animal Health’s customers and increased orders of Seresto™ and the Advantix™.

6. Financial instruments

The following tables show the carrying amounts and fair values of financial assets and liabilities by category of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the Condensed Combined Statements of Financial Position. Since the line items “Other receivables” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities”.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

6/1

Carrying Amounts and Fair Values of Financial Instruments

June 30, 2020

Carried at

Nonfinancial

amortized

Carried at fair value [fair value for

assets /

cost

information²]

liabilities

Based on

quoted

prices in

Based on

active

observable

unobserva-

Carrying

markets

market data

ble inputs

amount in

Measurement category (IFRS 9)¹

(Level 1)

(Level 2)

(Level 3)

the

statement

Carrying

of financial

€ million

amount

position

Trade accounts receivable

291

Nonfinancial assets

Other financial assets

368

[368]

368

Derivatives that qualify for hedge accounting

Derivatives that do not qualify for hedge

accounting

Other receivables

[23]

Nonfinancial assets

Cash and cash equivalents

[6]

Total financial assets

688

of which AC

688

Financial liabilities

[54]

of which lease liabilities

[14]

Trade accounts payable

169

Other liabilities

[14]

Derivatives that qualify for hedge accounting

Nonfinancial liabilities

Total financial liabilities

237

243

of which AC

237

of which derivatives that qualify for hedge

accounting

¹ AC: at amortized cost

² Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a)

Animal Health

Unaudited Condensed Combined Interim Financial Statements


									6/2
Carrying Amounts and Fair Values of Financial Instruments
								Dec. 31, 2019

	Carried at						Nonfinancial
	amortized	Carried at fair value [fair value for									assets /
	cost	information²]									liabilities
		Based on
		quoted
		prices in			Based on	Based on
		active			observable	unobserva-				Carrying
		markets			market data	ble inputs				amount in
Measurement category (IFRS 9)¹		(Level 1)			(Level 2)	(Level 3)				the
									statement
	Carrying	Carrying			Carrying	Carrying		Carrying		of financial
€ million	amount	amount			amount	amount		amount		position

Trade accounts receivable	224							224

AC	224							224

Nonfinancial assets

Other financial assets	221			2				223

AC	221		[221]						221

Derivatives that qualify for hedge accounting				1					1

Derivatives that do not qualify for hedge
accounting				1					1

Other receivables	9					24			33

AC	9		[9]						9

Nonfinancial assets						24			24


Total financial assets	454			2				456

of which AC	454							454


Financial liabilities	142							142

AC	142		[142]						142

of which lease liabilities	16			[16]				16

Trade accounts payable	160							160

AC	160							160

Other liabilities	12		4				22			38

AC	12		[12]						12

Derivatives that qualify for hedge accounting			4						4

Nonfinancial liabilities						22			38

Total financial liabilities	314			4				318

of which AC	314							314

of which derivatives that qualify for hedge
accounting			4						4

¹ AC: at amortized cost

² Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a)

Animal Health

Unaudited Condensed Combined Interim Financial Statements

As shown separately above, the category “AC – measured at amortized cost” within Financial liabilities includes lease-related liabilities under IFRS 16 in the amount of €14 million as of June 30, 2020 (Dec. 31, 2019: €16 million).

The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a quoted market price in an active market is available, this is deemed to be the fair value.

Currency forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. These contracts all expired in the first half year of 2020 and the Company was no longer party to any currency forward contracts as of June 30, 2020.

The Company does not have any financial assets categorized within Level 3 of the fair value hierarchy.

The changes recognized in profit or loss for all derivatives which are not designated as hedges are classified within financial income and financial expenses. Changes recognized in profit or loss for cash flow hedges are recognized within Other operating income and Other operating expenses, as well as in Financial income and Financial expenses.

As of June 30, 2020, Other financial assets includes a related party receivable from Bayer AG in the amount of €143 million in connection with a control/loss transfer agreement (Refer to Note 10).

7. Legal Risks and Contingent Liabilities

The Company is exposed to various legal risks, primarily in the areas of patents, intellectual property, and regulatory compliance matters. Each reporting period, internal and external legal counsel evaluate the current status of the Company’s material legal risks, considering pending and threatened litigation matters up to the preparation date of the Condensed Combined Interim Financial Statements. When it is more likely than not that such litigation will result in a liability that is reasonably estimable, a provision for litigation is recorded in the amount of the present value of the expected cash outflows. Such provisions cover the estimated payments to the plaintiffs, court and procedural costs, attorney costs and the cost of potential settlements. While it is not possible to predict the outcome of these matters with certainty, and some lawsuits, claims or proceedings may be disposed or decided unfavorably, the Company does not expect that any asserted or un-asserted legal claims or proceedings, individually or in the aggregate, will significantly affect the Company’s revenues and earnings.

Contingent liabilities were immaterial as of June 30, 2020 and December 31, 2019.

Animal Health

Unaudited Condensed Combined Interim Financial Statements

8. Statements of Cash Flows

In the first half of 2020, the Company reported net cash used in investing activities of €28 million and net cash used in financing activities of €85 million. The net cash used in investing activities resulted primarily from cash outflows to finance additions to property, plant, and equipment. The net cash used in financing activities resulted primarily from transactions with Bayer Group, including the repayment of a related party loan to Remaining Bayer in the amount of €90 million.

During the second quarter of 2020, the Company's Bayer Sichuan Animal Health Co., Ltd. legal entity discontinued its participation in Bayer's cash pooling arrangement. Excess cash held by Bayer Sichuan Animal Health Co., Ltd. as of June 30, 2020 is classified within Cash and cash equivalents. To facilitate this legal entity's cash needs, it also entered into two revolving credit facilities on June 2, 2020. During the second quarter of 2020, the Company borrowed €6 million and made no repayments on these revolving credit facilities. As of June 30, 2020, these facilities, which carry an annual interest rate of 3.6%, have a combined maximum borrowing amount of €11 million denominated in CNY. The facilities have respective maturity dates of March 15, 2021 and June 15, 2021.

As of June 30, 2020, all cash and cash equivalents were held by dedicated entities of Animal Health.

In the first half of 2019, the Company reported net cash used in investing activities of €167 million and net cash provided by financing activities of €80 million. The net cash used in investing activities resulted primarily from cash outflows for a related party loan to Bayer Group by Animal Health. The net cash provided by financing activities resulted primarily from transactions with Bayer Group.

9. Income Taxes

Claims for income tax refunds and Income tax liabilities both increased significantly during the first half of 2020. The increases primarily resulted from a reclassification to present income tax receivables and liabilities related to an audit over tax years 2013 through 2015 on a gross basis. The reclassification and final tax audit results during the first half of 2020 resulted in a €93 million increase to Claims for income tax refunds and in a €131 million increase in Income tax liabilities. A net liability of €28 million was previously reported as of December 31, 2019. The amounts related to the tax audit have been paid in July 2020.

10. Related Parties

The following table shows the volume of transactions with related entities during the three and six months ended June 30, 2020 and 2019:


															10/1
Related Party Transactions
						Sales of goods and services								Purchases of goods and services
€ million		Q2 2019		H1 2019		Q2 2020	H1 2020		Q2 2019			H1 2019		Q2 2020		H1 2020

Bayer AG		-	-			-		-			9					18	6	12

Bayer Group
companies	1				2		-			2			9			18			8	16

Animal Health

Unaudited Condensed Combined Interim Financial Statements

The following table shows the value of related party payables and receivables as of June 30, 2020 and December 31, 2019 (excluding cash pooling receivables and liabilities – see Table 10/3):


					10/2
		Receivables				Liabilities

€ million	Dec. 31, 2019	June 30, 2020		Dec. 31, 2019		June 30, 2020

Bayer AG	215	70	45			43

Bayer Group companies	7	7	93			4

Intercompany purchases and sales

Bayer Group provides services to Animal Health. These services include engineering and process-related services, information technology, accounting and personnel management. In addition, Animal Health receives energy, maintenance services, environmental services, logistics and infrastructure services through Bayer Group’s Currenta GmbH & Co. OHG (“Currenta”), Leverkusen, subsidiary. These transactions are carried out on an arm’s length basis. In November 2019, Bayer Group sold Currenta, which is no longer considered as related party thereafter.

Financing


					10/3
	Cash Pooling Receivables					Cash Pooling Liabilities

€ million	Dec. 31, 2019	June 30, 2020		Dec. 31, 2019		June 30, 2020

Bayer AG	-	290	-			-

Bayer Group companies	7	2		-	-

The agreement governing cash pooling was terminated as part of the sale to Elanco.

Bayer Group also finances Animal Health through loans. As of June 30, 2020, these financing liabilities amount to €34 million (Dec. 31, 2019: €126 million). The entire balance as of June 30, 2020 is comprised of a loan from Bayer AG to Bayer New Zealand which was issued in multiple tranches between December 2018 and 2019 (Dec. 31, 2019: €36 million). During the first quarter of 2020, the Company repaid a related party loan from Bayer Cyprus to KVP Kiel, which had a €90 million balance as of December 31, 2019.

In addition, Animal Health provides loans to Bayer Group companies. As of June 30, 2020, these loans amount to €76 million (Dec. 31, 2019: €214 million). The amount relates mainly to loans provided by Animal Health entity Bayer Animal Health/Leverkusen in the amount of €70 million (Dec. 31, 2019: €214 million), in addition to a loan provided by Bayer HealthCare Animal Health Inc., USA in the amount of €6 million (Dec. 31, 2019: €0 million).

Hedging Transactions

Corporate Allocations

Animal Health receives functional leadership services (e.g. corporate accounting/finance/tax etc.) from Bayer Group. The associated corporate costs were allocated to the Animal Health entities within the scope of combination on a pro-

Animal Health

Unaudited Condensed Combined Interim Financial Statements

rata basis. During the three and six months ended June 30, 2020, Animal Health received functional leadership services in the amount of €2 million and €5 million respectively (Q2 2019: €3 million, H1 2019: €6 million).

Insurance

Animal Health has various insurance policies, in particular for liability and property insurance, with the wholly owned Bayer Group subsidiary Pallas Versicherungs AG, Leverkusen.

Leasing

Animal health has leasing arrangements with the Bayer Group. For the purpose of the Condensed Combined Interim Financial Statements all lease transactions with Remaining Bayer are treated as third party transactions. The amount of related party leasing arrangements attributed to Animal Health as of June 30, 2020 is immaterial.

Employee Benefits

Animal Health employees participate in plans sponsored by Bayer Group. The benefits provided vary, based on the legal, tax and economic framework of each country, with benefits generally based on employee compensation and years of service.

Stock-based compensation

Employees of Animal Health participate in Bayer AG’s stock-based compensation programs. Total stock-based compensation expense was immaterial for the Company in the first half of 2020 and 2019.

Control/loss transfer agreements

There are control/loss transfer agreements as well as tax groups with Bayer Group companies. The related transactions are reflected as contributions and withdrawals in the Condensed Combined Statements of Changes in Equity. As of June 30, 2020, other financial assets include related party receivables due from Bayer AG related to a control/loss transfer agreement between Animal Health and Bayer AG amounting to €143 million (Dec. 31, 2019: €0). These amounts are reflected as cash pooling receivable (Refer to Table 10/3).

Related persons

Animal Health

Unaudited Condensed Combined Interim Financial Statements

11. Events after the end of the reporting period

The Company evaluated subsequent events for recognition or disclosure through August 6, 2020.

Prior to the sale to Elanco, Bayer Animal Health licensed use of the Bayer brand, including the Bayer cross logo, from a subsidiary of Bayer AG. This license agreement terminated upon the transfer of control to Elanco on August 1, 2020.

In July 2020, Animal Health settled its €143 million control/loss transfer receivable from Bayer AG via the Company’s cash pooling arrangement. Subsequent to settling this receivable, Animal Health also paid a dividend of €265 million to Bayer AG.

On August 1, 2020, Bayer completed the sale of Animal Health to Elanco. The proceeds to Bayer, which are denominated in U.S. Dollars, are estimated to be $6,893 million (€5,852 million), comprising of $5,170 million (€4,389 million) in cash and $1,723 million (€1,463 million) in shares of Elanco Animal Health common stock (assuming a closing share price of Elanco’s common stock of $23.63 on July 31, 2020). In connection with the sale to Elanco, the Company has made payments of €10 million related to employee retention bonuses, including €1.2 million in retention payments to the members of Animal Health’s leadership team, with remaining payments to be made in the month of August.

Following the sale to Elanco, Elanco divested the rights to the Profender™ and Drontal™ product families within the United Kingdom and European Economic Area. The transaction was contingent on the closing of the sale of Animal Health.

No other significant activities or events have taken place subsequent to the balance sheet date of June 30, 2020 that have a material impact on the key figures and earnings presented.

Leverkusen, August 6, 2020


/s/ Bernd -Peter Bier						/s/ Jens Schedler
Bernd-Peter Bier						Jens Schedler
Head of Group Finance						Head of M&A and Projects

Exhibit 99.4

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA AND NON-GAAP

FINANCIAL INFORMATION OF ELANCO

The following table presents summary historical condensed consolidated and combined financial information for Elanco Animal Health Incorporated, an Indiana corporation (“Elanco”), and unaudited pro forma condensed combined financial data for Elanco and the animal health business (the “Bayer Animal Health Business”) of Bayer Aktiengesellschaft, a German stock corporation (“Bayer”), as of the dates and for the periods indicated.

The summary historical condensed consolidated and combined statements of operations data for the six months ended June 30, 2020 and 2019 and the summary historical condensed consolidated balance sheet data as of June 30, 2020 presented below have been derived from Elanco’s unaudited condensed consolidated and combined financial statements. The summary historical consolidated and combined statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the consolidated and combined balance sheet data as of December 31, 2019 and 2018 presented below have been derived from Elanco’s audited consolidated and combined financial statements. Elanco’s results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

Elanco’s combined financial statements for the periods prior to its initial public offering on September 24, 2018 (the “IPO”) include the attribution of certain assets and liabilities that have historically been held at the Eli Lilly and Company (“Lilly”) corporate level but which are specifically identifiable or attributable to Elanco. Elanco’s combined financial statements for the period prior to the IPO also include expense allocations related to certain Lilly corporate functions, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. These expenses have been allocated to Elanco based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis of revenue, headcount or other measures. Elanco believes that this expense methodology, and the results thereof, is reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred if Elanco had operated as an independent, publicly traded company for the periods presented prior to the IPO. It is impractical to estimate what Elanco’s standalone costs would have been for the historical periods presented prior to the IPO.

The unaudited pro forma condensed combined financial data are based upon the historical condensed consolidated and combined financial data of Elanco and the Bayer Animal Health Business, after giving effect to the acquisition (“the Acquisition”) of the Bayer Animal Health Business, pursuant to the Share and Asset Purchase Agreement, dated as of August 20, 2019, between Elanco and Bayer. The historical financial information of the Bayer Animal Health Business was prepared in accordance with International Financial Reporting Standards as adopted by the International Accounting Standards Board (“IFRS”), which differ from U.S. generally accepted accounting principles (“U.S. GAAP”) and reported in Euro. The historical combined financial statements of the Bayer Animal Health Business have been converted to U.S. GAAP and translated to U.S. dollars for the preparation of the pro forma financial data. The unaudited pro forma condensed combined financial data should be read in conjunction with the financial statements and the related notes thereto presented in Exhibit 99.1 to Elanco's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on October 15, 2020.

The Acquisition will be accounted for using the purchase method of accounting. The purchase accounting allocations in the Acquisition will be determined at a later date and depend on a number of factors, including the final valuation of our tangible and identifiable intangible assets acquired and liabilities assumed. The actual fair values of the assets acquired, liabilities assumed and resulting goodwill may differ significantly from the adjustments

set forth in the unaudited pro forma condensed combined financials.


	Pro Forma Combined						Historical Elanco Animal Health Incorporated
	As of and for the six months ended June 30, 2020		As of and for the year ended December 31, 2019		As of and for the six months ended June 30,						As of and for the year ended December 31,
							2020		2019		2019		2018		2017
(in millions, except per share data)
Statement of Operations Data:
Revenue	$	2,245.7	$	4,691.3	$	1,244.0	$	1,512.7	$	3,071.0	$	3,066.8	$	2,889.0
Costs, expenses and other:
Cost of sales	922.7		2,019.7		628.6		699.8		1,470.3		1,573.8		1,493.9
Research and development	199.3		424.5		126.2		132.9		270.1		246.6		251.7
Marketing, selling and administrative	680.3		1,399.7		344.8		382.0		760.2		735.2		779.8
Amortization of intangible assets	244.4		480.7		100.6		98.3		200.4		197.4		221.2
Asset impairment, restructuring and other special charges	69.8		142.9		194.2		56.7		185.5		128.8		375.1
Interest expense, net of capitalized interest	104.2		195.7		41.3		41.5		78.9		29.6		—
Other expense (income), net	(41.3)		54.3		(46.8)		6.5		27.4		41.3		(0.1)
	2,179.4		4,717.5		1,388.9		1,417.7		2,992.8		2,952.7		3,121.6
Income (loss) before income taxes	66.3		(26.2)		(144.9)		95.0		78.2		114.1		(232.6)
Income tax expense (benefit)	21.7		0.7		(42.6)		27.6		10.3		27.6		78.1
Net income (loss)	$	44.6	$	(26.9)	$	(102.3)	$	67.4	$	67.9	$	86.5	$	(310.7)
Earnings per share:
Basic	$	0.09	$	(0.06)	$	(0.25)	$	0.18	$	0.18	$	0.28	$	(1.06)
Diluted	0.09		(0.06)		(0.25)		0.18		0.18		0.28		(1.06)
Weighted average shares outstanding:
Basic	481.4		441.9		408.5		365.7		369.0		313.7		293.3
Diluted	481.4		441.9		408.5		366.5		370.3		313.7		293.3
Balance Sheet Data:
Total assets	$	17,456.4			$	9,876.0	$	8,856.9	$	8,985.8	$	8,956.7	$	8,940.3
Total liabilities	8,817.4				3,224.1		3,591.4		3,438.9		3,759.2		1,160.0
Long-term debt	6,215.2				2,030.4		2,382.0		2,330.5		2,443.3		—
Total equity	8,639.0				6,651.9		5,265.5		5,546.9		5,197.5		7,780.3
Other Financial Data:
Adjusted EBITDA⁽¹⁾	$	514.1	$	967.3	$	204.3	$	346.2	$	662.8	$	643.8	$	498.9
Adjusted net income⁽²⁾					$	89.7	$	194.5	$	394.0	$	431.8	$	250.5
Adjusted EPS⁽³⁾					$	0.22	$	0.53	$	1.06	$	1.18	$	0.69

(1)Elanco defines adjusted EBITDA as net income (loss) adjusted for interest expense, income tax expense (benefit) and depreciation and amortization, further adjusted to exclude purchase accounting adjustments to inventory, integration costs of acquisitions, severance, asset impairment, gain on sale of assets, facility exit costs and other specified significant items, such as unusual or non-recurring items that are unrelated to Elanco’s long-term operations. Pro forma adjusted EBITDA is defined as net income on a pro forma basis for the relevant period, assuming the completion of the Acquisition at the beginning of the period, adjusted for similar items, as well as the impact of the Bayer Animal Health Business’ severance costs, asset impairment

and other costs not associated with ongoing operations recorded during the periods presented. For the periods presented, Elanco has not made adjustments for all items that may be considered unrelated to its long-term operations. Elanco believes adjusted EBITDA and pro forma adjusted EBITDA, when used in conjunction with Elanco’s results presented in accordance with U.S. GAAP and its reconciliation to net income (loss) and pro forma net income (loss), enhances investors’ understanding of Elanco’s performance, valuation and prospects for the future. Elanco also believes adjusted EBITDA is a measure used in the animal health industry by analysts as a valuable performance metric for investors. The primary material limitations associated with the use of adjusted EBITDA and pro forma adjusted EBITDA as compared to net income (loss) or pro forma net income (loss) results include the following: (i) it may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) it excludes financial information and events, such as the effects of an acquisition or amortization of intangible assets, that some may consider important in evaluating our performance, value or prospects for the future, (iii) it excludes items or types of items that may continue to occur from period to period in the future and (iv) it may not exclude all unusual or non-recurring items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations, such as business activities that Elanco has either exited or made the strategic decision to exit (referred to as “Strategic Exits”). Adjusted EBITDA and pro forma Adjusted EBITDA are not, and should not be viewed as, a substitute for net income (loss). We encourage investors to review our audited and unaudited financial statements and pro forma financial data in their entirety and caution investors to use U.S. GAAP measures as the primary means of evaluating our performance, value and prospects for the future, and non-GAAP measures as supplemental measures. The pro forma combined financial information, which Elanco believes is reasonable under the circumstances, is preliminary and is based on upon available information and certain assumptions described in the accompanying notes to the unaudited pro forma condensed combined financial data. The pro forma combined financial information is for informational purposes only and is not intended to represent, or be indicative of, the actual financial position and results of operations that would have occurred if the Acquisition had been effected on the dates indicated, nor are they indicative of the combined company’s future results.

The following is a reconciliation of adjusted EBITDA and pro forma adjusted EBITDA to net income (loss) and pro forma net income (loss), as reported under U.S. GAAP for the periods presented below:


	Pro Forma Condensed Combined						Historical Elanco Animal Health Incorporated
	Six months ended June 30, 2020		Year ended December 31, 2019		Six months ended June 30,						Year ended December 31,
							2020		2019		2019		2018		2017
(in millions)
Reported Net Income (Loss)	$	44.6	$	(26.9)	$	(102.3)	$	67.4	$	67.9	$	86.5	$	(310.7)
Interest expense, net	104.2		195.7		41.3		41.5		78.9		29.6		—
Income tax expense (benefit)	21.7		0.7		(42.6)		27.6		10.3		27.6		78.1
Depreciation and amortization	316.3		641.6		162.4		152.4		314.4		296.0		318.4
EBITDA	486.8		811.1		58.8		288.9		471.5		439.7		85.8
Cost of sales	—		—		4.3		0.6		0.8		—		—
Purchase accounting adjustments to inventory^(a)	—		0.6		—		—		—		—		42.7
Integration costs of acquisitions^(b)	27.3		102.1		187.4		53.5		144.7		26.5		90.3
Severance^(b)	—		11.6		1.0		(0.8)		8.2		15.5		162.0
Asset impairments^(b)	—		33.1		5.8		4.0		32.6		81.9		110.6

Gain on sale of assets	—		—		(3.8)		—		—		(0.8)		(19.6)
Facility exit costs	—		—		0.7		—		—		5.7		31.8
Settlements and other	—		—		3.1		—		—		—		—
Accelerated depreciation and amortization	—		—		(5.3)		—		(3.0)
Contingent consideration^(c)	—		7.5		—		—		8.0		40.4		(4.7)
Inventory write-off^(d)	—		0.2		—		—		—		38.6		—
Other^(e)	—		1.1		(47.7)		—		—		—		—
Adjusted EBITDA	$	514.1	$	967.3	$	204.3	$	346.2	$	662.8	$	647.5	$	498.9

(a)Represents the amortization of the fair value increase in inventory in connection with business combinations.

(b)The pro forma amounts reflect the impact of the Bayer Animal Health Business’ severance costs, asset impairment and other costs not associated with ongoing operations recorded during the periods presented. The amounts also reflect the elimination of the integration costs related to the Acquisition in the pro forma results. The historical Elanco amounts include the integration costs related to the Acquisition as well as costs related to severance recorded in 2017 associated with the U.S. voluntary early retirement program offered by Lilly.

(c)Primarily represents the change in the fair value of contingent consideration related to Aratana.

(d)Primarily represents the write-off of inventory associated with the suspension of commercial activities of Imrestor.

(e)Primarily represents the gain on our sale of land and buildings in New South Wales, Australia.

(2)Elanco defines adjusted net income as net income (loss) excluding amortization of intangible assets, purchase accounting adjustments to inventory, integration costs of acquisitions, severance, asset impairment, gain on sale of assets, facility exit costs and other specified significant items, such as unusual or non-recurring items that are unrelated to Elanco’s long-term operations. For the periods presented, the only other specified significant item included is the exclusion in 2017 of the benefit related to the recently enacted U.S. tax reform legislation. Adjusted net income is an alternative view of performance used by Elanco’s management to evaluate the results of Elanco’s operations and the discovery, development, manufacture and commercialization of Elanco’s products, prior to considering certain income statement elements. Specifically, Elanco’s management uses adjusted net income for the purpose of analyzing performance results and setting

compensation targets. Elanco believes adjusted net income, when used in conjunction with Elanco’s results presented in accordance with U.S. GAAP and its reconciliation to net income (loss), enhances investors’ understanding of its performance, valuation and prospects for the future. Elanco also believes adjusted net income is a measure used in the animal health industry by analysts as a valuable performance metric for investors. The primary material limitations associated with the use of adjusted net income as compared to net income (loss) results include the following: (i) it may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) it excludes financial information and events, such as the effects of an acquisition or amortization of intangible assets, that some may consider important in evaluating our performance, value or prospects for the future, (iii) it excludes items or types of items that may continue to occur from period to period in the future and (iv) it may not exclude all unusual or non-recurring items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations, such as Strategic Exits. Adjusted net income is not, and should not be viewed as, a substitute for net income (loss). We encourage investors to review our audited and unaudited financial statements in their entirety and caution investors to use U.S. GAAP measures as the primary means of evaluating our performance, value and prospects for the future, and non-GAAP measures as supplemental measures.

The following is a reconciliation of adjusted net income to net income (loss), as reported under U.S. GAAP for the periods presented below:


	Historical Elanco Animal Health Incorporated
	Six months ended June 30,						Year ended December 31,
	2020		2019		2019		2018		2017
(in millions)
Reported Net Income (Loss)	$	(102.3)	$	67.4	$	67.9	$	86.5	$	(310.7)
Cost of sales	4.3		0.6		0.8		—		—
Amortization of intangible assets	100.6		98.3		200.4		197.4		221.2
Purchase accounting adjustments to inventory^(a)	—		—		—		—		42.7
Integration costs of acquisitions and separation costs	187.4		53.5		144.7		26.5		90.3
Severance	1.0		(0.8)		8.2		15.5		162.0
Asset impairment	5.8		4.0		32.6		81.9		110.6

Gain on sale of assets	(3.8)		—		—		(0.8)		(19.6)
Facility exit costs	0.7		—		—		5.7		31.8
Settlements and other	3.1		—		—		—		—
Contingent consideration^(b)	—		—		8.0		40.4		(4.7)
Inventory write-off^(c)	—		—		—		38.6		—
Interest expense, net of capitalized interest	0.8		—		—		—		—
Other-net (income) expense^(d)	(47.7)		—		—		—		—
U.S. tax reform	—		—		—		—		(33.1)
Tax effect of adjustments^(e)	(60.2)		(28.5)		(68.6)		(59.9)		(40.0)
Adjusted Net Income	$	89.7	$	194.5	$	394.0	$	431.8	$	250.5

(a)Represents the amortization of the fair value increase in inventory in connection with business combinations.

(b)Primarily represents the change in the fair value of contingent consideration related to Aratana acquisition.

(c)Primarily represents the write-off of inventory associated with the suspension of commercial activities of Imrestor.

(d)Primarily represents the gain on our sale of land and buildings in New South Wales, Australia.

(e)The tax effect of the adjustments is calculated by applying the applicable tax rate to each adjustment in each relevant jurisdiction. In jurisdictions where Elanco had recorded deferred tax assets related to net operating losses that were offset with valuation allowances, Elanco applied the applicable tax rate to each adjustment and further adjusted for the tax effect of the beneficial reversal of the valuation allowances.

(3)Elanco defines adjusted EPS as adjusted net income divided by the number of weighted average shares outstanding as of the applicable period. The primary material limitations associated with the use of adjusted EPS as compared to As Reported EPS include the following: (i) it may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) it excludes financial information and events, such as the effects of an acquisition or amortization of intangible assets, that some may consider important in evaluating our performance, value or prospects for the future, (iii) it excludes items or types of items that may continue to occur from period to period in the future and (iv) it may not exclude all unusual or non-recurring items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations, such as Strategic Exits. Adjusted EPS is not, and should not be viewed as, a substitute for As Reported EPS. We encourage investors to review our audited and unaudited financial statements in their entirety and caution investors to use U.S. GAAP measures as the primary means of

evaluating our performance, value and prospects for the future, and non-GAAP measures as supplemental measures. The following is a reconciliation of adjusted EPS to EPS, as reported under U.S. GAAP for the periods presented below:


	Historical Elanco Animal Health Incorporated
	Six months ended June 30,						Year ended December 31,
	2020		2019		2019		2018		2017
As Reported EPS	(0.25)		0.18		0.18		$	0.28	$	(1.06)

Cost of sales	0.01		—		—		0.10		0.12
Amortization of intangible assets	0.25		0.27		0.54		0.54		0.60
Asset impairments, restructuring and other special charges	0.48		0.16		0.50		0.35		1.03
Other-net, (income) expense	(0.12)		—		0.02		0.11		(0.01)
Interest expense, net of capitalized interest	0.00		—		—		—		—
Subtotal	$	0.62	$	0.43	$	1.07	$	1.10	$	1.74
Tax impact of adjustments	(0.15)		(0.08)		(0.19)		(0.16)		(0.20)
Total adjustments to EPS	$	0.47	$	0.35	$	0.88	$	0.94	$	1.54

Impact of adjusted weighted average shares outstanding: Basic and diluted^(a)	—		—		—		(0.04)		0.21
Adjusted EPS^(b)	$	0.22	$	0.53	$	1.06	$	1.18	$	0.69

Numbers may not add due to rounding

(a)Adjusted weighted average shares outstanding: Basic and diluted includes the full impact of 72.3 million shares sold in the IPO for the nine months ended September 30, 2018.

(b)Adjusted EPS is calculated as the sum of As Reported EPS, Total Adjustments to EPS, and Impact of Adjusted weighted average shares outstanding: Basic and diluted.