steven sanders, et al. v. bayer (ag)...

82
ORIGINAL UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x IN RE BAYER AG SECURITIES : Consolidated Civil Action LITIGATION : No. 03 CV 1546 (WHP) Class Action x CONSOLIDATED AMENDED COMPLAINT Jury Trial Demand .7 - -'S f MILBERG WEISS BERSHAD HYNES & LERACH LLP Melvyn I. Weiss (MW-1392) Michael C . Spencer (MS-8874) Lee A. Weiss (LW-1130) Lili Sabo (LS-0370) One Pennsylvania Plaza New York, NY 10119 (212) 594-5300 Attorneys for Lead Plaintiff October 31, 2003

Upload: others

Post on 18-Aug-2020

2 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

ORIGINALUNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

x

IN RE BAYER AG SECURITIES : Consolidated Civil ActionLITIGATION : No. 03 CV 1546 (WHP)

Class Actionx

CONSOLIDATED AMENDED COMPLAINTJury Trial Demand

.7 -

-'S f

MILBERG WEISS BERSHADHYNES & LERACH LLPMelvyn I. Weiss (MW-1392)Michael C . Spencer (MS-8874)Lee A. Weiss (LW-1130)Lili Sabo (LS-0370)One Pennsylvania PlazaNew York, NY 10119(212) 594-5300

Attorneys for Lead Plaintiff

October 31, 2003

Page 2: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Table of Contents

Page

SUMMARY OF CLAIMS ....................................................................................................... ........1

JURISDICTION AND VENUE .............................................................................................. ........7

PARTIES ................................................................................................................................. ........7

RELEVANT EVENTS ............................................................................................................ ...... 10

A. Background of the Statin Market ......................................................... ...... 10

B. FDA Approval and Introduction of Baycol; Early Safety Warnings ... ......11

C. The FDA Approves 0.4 mg Dosage , as Defendants Fail to Disclosethe Dangers Associated with Baycol ................................................... ......20

D. Bayer Seeks and Obtains Approval of an 0.8 mg Dosage DespiteOverwhelming Evidence of Baycol ' s Link to Rhabdomyolysis .......... ......26

E. Bayer Is Compelled to Withdraw Baycol ............................................ ......43

F. Defendants Continue to Withhold Material Facts Concerning theDangers Associated With Baycol ........................................................ ......45

G. Bayer AG Registers Its ADRs with the SEC ....................................... ......49

H. Defendants' Knowledge of Baycol' s Dangers Is Made Public .................56

ACCOUNTING VIOLATIONS ....................... ...........................................................................58

A. U.S. GAAP, IAS, AND SEC VIOLATIONS ............................................ 59

B. GERMAN STOCK EXCHANGE RULE VIOLATIONS ........................64

INDIVIDUAL DEFENDANTS' LIABILITY; DUTY . ................................................................65

THE MARKET FOR BAYER SECURITIES; APPLICABILITY OF PRESUMPTIONOF RELIANCE; FRAUD-ON-THE-MARKET DOCTRINE ................................................. ..... 66

CLASS ACTION ALLEGATIONS ......................................................................................... ..... 68

NO STATUTORY SAFE HARBOR.................................................... 69.................................... .....

CLAIMS FOR RELIEF ............................................................................................................ .....71

7 1-

Page 3: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

COUNT I [VIOLATIONS OF SECTION 10(B) AND RULE 10B-5 BY ALLDEFENDANTS] ........................................................................................71

COUNT II [VIOLATIONS OF SECTION 20(A) OF THE EXCHANGE ACTBY THE INDIVIDUAL DEFENDANTS] ................................................74

COUNT III [VIOLATIONS OF SECTION 11 OF THE SECURITIES ACTBY DEFENDANTS BAYER AG AND WENNING] .............................75

COUNT IV [VIOLATIONS OF SECTION 15 OF THE SECURITIES ACTBY DEFENDANTS SCHNEIDER AND WENNING] ............................77

JURY TRIAL DEMAND ..............................................................................................................78

- 11 -

Page 4: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

1,•

Lead Plaintiff, Alan Hevesi, Comptroller of the State ofNew York, as Administrative

Head of the New York State and Local Retirement Systems and as the sole trustee ofthe New

York State Common Retirement Fund ("NYSCRF"), individually and on behalf of all other

persons similarly situated, by the undersigned attorneys, makes the following allegations for his

Consolidated Amended Complaint.

Defendants named in this complaint are Bayer AG (also referred to herein as the

"Company"); Bayer Corporation; and the following Individual Defendants: David Ebsworth,

Manfred Schneider, Werner Wenning, and Wolfgang Plischke.

Lead Plaintiff' s allegations as to himself and his own acts are made upon personal

knowledge, and as to all other matters are based upon an investigation made by his attorneys,

which included, among other things: (i) interviews of former employees of Bayer AG and Bayer

Corp.; (ii) review and analysis of the public filings of Bayer AG, including its filings with the

Securities and Exchange Commission ("SEC") and stock exchanges in Europe; (iii) review and

analysis of news articles, press releases and analysts' reports by or relating to Bayer AG and

Bayer Corp.; and (iv) review of the documents made public by attorneys for plaintiffs who are

suing Bayer AG, Bayer Corp. and Bayer' s marketing partner, GlaxoSmithKline PLC, for

products liability and personal injuries related to the drug Baycol. Lead Plaintiff believes that

further evidentiary support for the allegations set forth below will exist after a reasonable

opportunity for discovery.

SUMMARY OF CLAIMS

1. This is a class action on behalf of a proposed Class of all persons who purchased

securities of Bayer AG between March 6, 1998, and February 21, 2003, inclusive (the "Class

Period") and have been damaged thereby, to recover damages caused by defendants' violations

Page 5: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

t b y

of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and

Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act")

2. Defendants made repeated statements to the public before and during the Class

Period extolling the safety and commercial potential of cerivastatin , a prescription statin

(cholesterol- and triglyceride-reducing) drug produced and marketed by Bayer under the brand

names Baycol in North America and Lipobay elsewhere (usually referred to as Baycol herein).

Bayer introduced Baycol commercially in 1997 and portrayed it as a "sleeping blockbuster"

pharmaceutical product that would capture substantial market share from Lipitor, a competitive

statin sold by Warner-Lambert that held approximately 40 percent of the worldwide market and

surpassed $1 billion in sales in the first eleven months it was on the market. Defendants

repeatedly stated that Baycol was safe and that its success was essential in driving Bayer's future

profitability. By August 2001, Baycol had become Bayer's third-best-selling prescription drug.

Securities analysts called Baycol the "key growth product" and a "major strategic pillar" in

Bayer's healthcare business. Internally, a memo sent to defendant Ebsworth, President of Bayer

Corp.'s Pharmaceutical Division, in May 1998, noted that Baycol "must carry the company for

the short and long haul."

3. Throughout the period that Bayer was depicting Baycol as safe, and was seeking

regulatory approval for higher dosages, evidence was being accumulated inside Bayer and its

marketing partner in the United States, SmithKline Beecham (now called GlaxoSmithKline), that

Baycol was unsafe, particularly at higher doses and particularly when used in conjunction with

the drug gemfibrozil, with which it was often ,rescribed. As early as June 1997, when Baycol

first received U.S. regulatory approval, defendant Ebsworth was notified in writing by a

SmithKline Beecham officer that "[s]imple and safe no longer appears to be a viable promotional

-2-

Page 6: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

platform." By early 1998, Bayer learned that a serious medical condition, rhabdomyolysis, was

afflicting patients taking Baycol. However, Bayer resisted disclosing the severity of the problem

and continued to insist that Baycol had a "proven safety profile" for several years, so as to

continue profiting from the drug. One Bayer officer observed, for example, that there was a

company strategy to "get by that July hurdle" - referring to anticipated regulatory approval of a

0.8 mg dosage for Baycol, which in fact was granted in July 2000. The following month, a

meeting among senior members of Bayer's Global Drug Safety group, including defendant

Wolfgang Plischke, General Manager of Bayer AG's Pharmaceutical Business Group, reached

the conclusion that Baycol's dangers were putting the brand at risk and posing serious problems

with the FDA. No action resulted , however, except that defendant Ebsworth, upon hearing about

the meeting, told his senior marketing personnel that "there is no safety problem" and that they

should "promote the hell out of this product. We need this product to be successful."

4. Bayer's press releases, statements, and filings with European regulators continued

to emphasize the success of Baycol throughout this period. In November 2000, defendant

Schneider, Chairman of Bayer AG's Board of Management, identifed Baycol as a "future

blockbuster" for the company. Bayer AG's annual report for 2000, issued in March 2001, stated

that the company "scored great success" with Baycol, which had "surpassed the €500 million

sales threshold for the first time, and doubled its market share in the United States." A securities

reported in July 2001 that Baycol was the "growth engine" of Bayer Pharmaceutical , driven by

market growth and market share gains by Baycol in its new higher dosages.

5. While obtaining FDA approvals for higher dose versions of Baycol, Bayer

withheld critical information from the FDA regarding the known dangers of Baycol. However,

-3-

Page 7: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

l t S

by August 2001, the FDA had received reports of 31 rhabdomyolysis fatalities associated with

the use of Baycol. Thus, the FDA placed immense pressure on Bayer to withdraw Baycol.

6. On August 8, 2001, Bayer bowed to the FDA's pressure and issued a press release

announcing the withdrawal of Baycol from all worldwide markets (except in Japan, where it was

withdrawn on August 23, 2001) "because of reports of sometimes fatal rhabdomyolysis." In the

press release, the Company admitted that cases of fatal rhabdomyolysis "in association with the

use of Baycol have been reported significantly more frequently than for other approved statins."

That information had, however, been known by defendants and other senior officers within

Bayer for several years beforehand. Two days after the withdrawal, a J.P. Morgan report noted

that "Bayer is left without `the cornerstone' of its ethical pharmaceuticals business and growth

rates have been substantially reduced."

7. Throughout the Class Period until August 8, 2001, defendants had deliberately

misrepresented that Baycol was safe and concealed the evidence that it was unsafe, which was

known by defendants. In fact, defendants knew that patients taking Baycol faced an increased

risk of death and serious injury from the drug's adverse effects. Defendants knew that these

problems meant that future earnings and profits from Baycol would not be realized once the truth

about the product was revealed. In addition, applicable accounting principles in both the U.S.

and Europe required that the company establish reserves in its existing financial statements

against the probability of large financial exposure from product liability lawsuits concerning

Baycol.

8. On August 8, 2001, upon news of the withdrawal, the price of Bayer securities

fell approximately 17 percent, from $39.50 on the prior day's close to $32.85.

T4-

Page 8: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

9. Withdrawal of Baycol from the market unfortunately did not end defendants'

deceptive misconduct. On August 13, 2001, defendant Schneider told a news conference that

Bayer's "top priority" had been to "withdraw the product quickly" when "it became clear that

certain risks could not be excluded." In a press release three days later, Bayer insisted that it "at

all times behaved responsibly and acted in the interest of patient safety and health." As a result,

it was "unperturbed" by damages actions being brought against it for deaths and injuries caused

by Baycol, and stated that it saw "no reason to establish provisions as a result" - referring to

provisions for financial statement reserves to pay litigation claims . Defendant Schneider went so

far as to insist on August 23, 2001, that there was "at the moment no evidence" that Baycol had

led to patient deaths , and that lawsuits against the company were "groundless ." In October 2001,

he was quoted in a trade publication as stating that the company held an "unassailable position"

in the litigation because it had responded immediately to safety concerns. Bayer insisted that

insurance would pay for any claims that might be successful . In October 2002, a stock analyst

covering Bayer reported that defendant Weaning, Bayer AG's Chief Financial Officer,

"remain[ed] emphatic that all settlements will be fully covered by product liability insurance,"

and loss contingency reserves were not established.

10. Defendants' statements that Bayer had acted prudently and withdrawn Baycol

immediately when safety concerns arose, and consequently that the company' s litigation

exposure was nil, were false. As stated above, Bayer officers, including defendants, had actual

knowledge of serious health risks and safety problems throughout the Class Period, but they

deliberately concealed the problems from the public in order to continue selling the product and

to obtain regulatory approvals for higher dosages.

-5-

Page 9: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

11. On December 20, 2001, Bayer AG filed a Form 20-F Registration Statement with

the SEC, signed by defendant Wenning, in order to register its American Depositary Receipts

(ADRs) for trading on the New York Stock Exchange (previously, Bayer ADRs had traded in the

U.S. over-the-counter market). The Registration Statement repeated defendants ' materially false

and misleading misrepresentations and omissions about Baycol.

12. On February 22, 2003 (a Saturday), the New York Times published an article

reporting that senior executives at Bayer were aware that Baycol had serious problems and

presented health risks to patients long before the drug was pulled from the market. "The

documents , made public by lawyers suing Bayer, include e-mail messages, memos and sworn

depositions of executives that suggest that Bayer promoted the drug, Baycol, even as a company

analysis found that patients on Baycol were falling ill or dying from a rare muscle condition

much more often than patients on similar drugs." The article, which coincided with the opening

of the first Baycol trial in Corpus Christi, Texas, noted that more than 10,000 patients had sued,

and that Bayer and GlaxoSmithKline had settled more than 400 cases for individual amounts

between $200,000 and $2. 1 million . Four days later, defendant Wenning was quoted as saying

that Bayer "may consider" establishing reserves to settle Baycol-related lawsuits.

13. The news that Bayer had not acted responsibly and thus was not immune to

exposure in Baycol product liability lawsuits caused the market price of Bayer stock to decline

again. On February 24, 2003, the first trading day after the publication of the New York Times

article, the price of Bayer securities fell approximately ten percent, from $17.15 at the prior

trading day' s close to $15.44. The first of the securities lawsuits consolidated in this litigation

was filed on March 6, 2003.

76-

Page 10: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

14. Overall, the price of Bayer AG's securities price fell from $43.125 at the

beginning of the Class Period to $15.44 at the end, a decline of 64 percent, representing over $20

billion in capitalized value. As of October 15, 2003, about 11,300 product liability actions

involving Baycol had been filed against Bayer, and the company reportedly had settled 1,683 of

those cases for a total of about $614 million.

JURISDICTION AND VENUE

15. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange

Act, 15 U. S.C. §§ 78j (b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240 . 10b-5 promulgated

thereunder ; and under Sections 11 and 15 of the Securities Act, 15 U.S.C. § § 77k and 77o.

16. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act, 15 U.S.C. § 78aa; Section 22 of the Securities Act, 15 U.S.C. §

77v; and 28 U.S .C. § 1331.

17. Venue is proper in this District pursuant to Section 27 of the Exchange Act,

Section 22 of the Securities Act, and 28 U. S.C. § 1391 (b). Defendants Bayer AG and Bayer

Corp. transact business in this District, and many of the acts and transactions constituting the

violations of law alleged herein occurred in this District, including the preparation, issuance, and

dissemination of the materially false and misleading Registration Statement.

18. In connection with the acts, transactions and conduct alleged herein, defendants,

directly and indirectly, used the means and instrumentalities of interstate commerce, including

the United States mails and interstate telephone communications and the facilities of national

securities exchanges and markets.

PA^^ES

19. Lead Plaintiff NYSCRF purchased Bayer AG securities at artificially inflated

prices during the Class Period, as stated in its certification dated May 12, 2003, and has been

r7-

Page 11: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

damaged thereby. NYSCRF is the second-largest public pension fund in the nation, in terms of

both membership and assets, with nearly one million members and beneficiaries and about $100

billion in assets . Alan Hevesi, the Comptroller of the State ofNew York, is Administrative Head

of the New York State and Local Retirement Systems and the sole trustee ofNYSCRF.

20. The present complaint also consolidates actions filed in this District by the

following other named plaintiffs , who are also plaintiffs herein: Sanders , 1:03cvl546; Abramsky,

1:03cv1724; Gerber, 1:03cvl882; Ostrzyzek, 1:03cv1959; Moyer, 1:03cv2454; Sadowsky,

1:03cv2998; Korsinsky, 1:03cv3209. Order Consolidating Actions; Appointing Lead Plaintiff;

and Approving Selection of Lead Counsel, filed August 13, 2003. These additional plaintiffs

purchased Bayer securities during the Class Period as set forth in their respective complaints and

certifications.

21. Defendant Bayer AG is a diversified international healthcare and chemicals

company, with executive offices in Germany and the United States. Pharmaceuticals comprise

in excess of 30 percent of Bayer AG's worldwide business. Bayer AG manufactured, marketed,

distributed, tested, promoted, and sold Baycol/Lipobay in worldwide markets, prior to

withdrawing the product from most markets on August 8, 2001, and from the Japanese market on

August 23, 2001.

22. Defendant Bayer Corp., a wholly owned subsidiary of defendant Bayer AG, is an

Indiana corporation with its principal place of business in Pittsburgh, Pennsylvania. (In this

complaint , "Bayer" refers to Bayer AG and/or Bayer Corp.) During the Class Period, Bayer

Corp. manufactured, marketed, distributed, tested, promoted, and sold Baycol for and in North

American markets, prior to the withdrawal of Baycol from the market on August 8, 2001.

-8-

Page 12: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

23. Defendant David Ebsworth was Executive Vice President of Bayer Corp. and

President of Bayer Corp.'s Pharmaceutical Division from 1995 through December 1999, and was

head of the worldwide Pharmaceutical Business Group of Bayer AG from January 1, 2000, until

he resigned on January 9, 2002.

24. Defendant Manfred Schneider was the Chairman of Bayer AG's Board of

Management until April 2002. Defendant Schneider signed a Chairman's Letter in each of

Bayer AG's annual reports for the years 1998 through 2001, which were filed with German stock

exchanges and incorporated by reference in Bayer AG's Form 20-F filings with the SEC.

25. Defendant Werner Wenning has been, since April 2002, the Chairman of Bayer

AG's Board of Management. Prior thereto he acted as the equivalent of the Company's CFO.

Defendant Wenning signed Bayer AG's Form 20-F (Registration Statement and Amendments 1

and 2), filed with the SEC on December 20, 2001, January 14, 2002 and January 15, 2002,

respectively, and the Company's Form 20-F (2001 Annual Report), filed with the SEC on June

24, 2002.

26. Defendant Wolfgang Plischke was Executive Vice President of Bayer Corp. and

President of Bayer Corp.'s Pharmaceutical Division from January 2000 until June 2002, and has

been serving as the General Manager of the Pharmaceuticals Business Group of Bayer AG since

January 2002.

27. Statements made by the Individual Defendants were made as officers of their

respective companies, Bayer AG and Bayer Corp., as described above. The Individual

Defendants and other corporate employees identified herein were authorized to speak and did

speak on behalf of the companies that employed them.

-9-

Page 13: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

RELEVANT EVENTS

A. Background of the Statin Market

28. The United States Food and Drug Administration (FDA) first approved statins in

the late 1980s, beginning with lovastatin (Mevacor) in 1987, and pravastatin (Pravachol) and

simvastatin (Zocor) in 1991. The FDA approved other statins such as fluvastatin (Lescol) and

atrovastatin (Lipitor), as well as cerivastatin (Baycol), in 1997. Statins are commonly prescribed

by physicians to lower cholesterol and triglyceride levels in the bloodstream.

29. In 1997, the worldwide statin market was experiencing dramatic growth, with

revenues reported at $6 to $7 billion per year and annual growth rates of 35 to 40 percent. Merck

Pharmaceuticals dominated the statin market with two statin drugs, Mevacor and Zocor, which

together held more than 40 percent of the worldwide market. Lipitor was introduced by Warner-

Lambert in the first quarter of 1997. Within eight months of its launch, it obtained more than a

25 percent share ofnew prescriptions in the U.S. market.

30. Bayer accordingly faced stiff competition . In July 1997 , an analyst at Deutsche

Morgan Grenfell, Mariola Haggar, predicted that "Baycol won't do as well as the more potent

Lipitor, but will still capture a significant market share." Even though Baycol was a relative late-

comer (the sixth statin to enter the market), some analysts felt that if Bayer and SmithKline

Beecham could document a distinguishing clinical profile, "Baycol could reach $500 million to

$ 1 billion [in yearly revenue]," according to one report in MedAd News in September 1997.

31. Cerivastatin was first introduced on the market as Lipobay in the United Kingdom

on April 14, 1997. The drug was launched in Germany later that year.

32. Bayer sought to gain market share by selling Baycol at a price significantly below

that of other statins, which influenced insurance companies and HMO's to put Baycol on their

lists of preferred or approved drugs.

-10-

Page 14: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

B. FDA Approval and Introduction of Baycol ; Early Safety Warnings

33. The FDA approved Bayer Corp.'s application to develop and market 0.05, 0.1, 0.2

and 0.3 mg doses of Baycol for use in the United States on June 26, 1997. Although Baycol is

more potent than other statins (i.e., it can begin to reduce cholesterol at a lower dosage), at

higher doses, it was less effective at reducing cholesterol than its competitors. Moreover, the

increased potency led to increased side effects . Thus, when the FDA approved Baycol, the

agency specifically stated that Bayer could not make claims comparing the efficacy of Baycol to

other statins. Because statins had been on the market for many years and Bayer was prohibited

from making claims of superior efficacy, Bayer was able to obtain FDA approval for Baycol

after clinical trials involving only 3,000 test subjects -- far fewer than the numbers used in

clinical studies involving other statins.

34. On June 27, 1997, only one day after the FDA approval was issued, Jerry

Karabelas , an Executive Vice President for pharmaceuticals at SmithKline Beecham, with which

Bayer had been discussing a marketing partnership for Baycol upon its approval by the FDA,

wrote to defendant Ebsworth to express "serious concerns" regarding the safety of Baycol.

Karabelas stated that Baycol appeared to be no stronger than a competing drug, Lescol, and

noted that Baycol also caused "drug interactions that could be magnified at higher doses."

Karabelas warned, "[s]imple and safe no longer appears to be a viable promotional platform."

35. Nevertheless, on July 22, 1997, Bayer Corp . entered into a "co-promotion"

agreement with SmithKline Beecham to cooperatively promote, market, and distribute Baycol in

the United States. Despite Karabelas's concerns about drug interactions at "higher doses," Bayer

Corp. and SmithKline Beecham amended their co-promotion agreement on February 3, 1998, to

encourage Bayer Corp. to obtain approval for and market higher doses of Baycol. The

amendment provided for two $4 million milestone payments from SmithKline Beecham to Bayer

- 11 -

Page 15: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Corp., one payment following initiation of a study on a 0.8 mg dose of Baycol, and the second

after 1,000 patients had received that dosage for six months.

36. On February 18, 1998, Baycol was launched in the United States. A joint press

release issued by Bayer Corp. and SmithKline Beecham quoted defendant Ebsworth as saying,

"Baycol continues Bayer's proud heritage in cardiovascular medicine. We're bringing to the

rapidly expanding statin marketplace a new competitively priced drug which offers physicians

and their patients a safe and effective alternative that in addition to diet helps achieve target

cholesterol levels at a good value." Defendant Ebsworth assured the public that studies

confirmed that Baycol had no drug interactions with several commonly used drugs, and was

generally well tolerated.

37. Defendant Ebsworth's statements that Baycol was a "safe" alternative statin, that

it had no drug interactions with commonly used drugs, and that it was generally well tolerated

were materially false and misleading, as he knew from Karabelas's warning.

38. The Class Period defined in th}s pleading commences on March 6, 1998 (five

years prior to the filing of the first of these consolidated actions).

39. According to a very senior Bayer marketing executive, sales of Baycol in its 0.1,

0.2, and 0. 3 mg dose versions were disappointing . When Lipitor quickly rose to the top of the

market with a 1.0 mg dose, Bayer determined it needed to launch higher-dosage versions to

compete successfully. Bayer explored 0.8, 1.6 and 3.2 mg doses, concluding that the latter two

were dangerous and that 0. 8 mg was marginally safe only if used after a successful course of the

0.4 mg dosage. Senior executives recommended that the Company seek additional approval for

the 0.4 mg dose only.

- ^2 -

Page 16: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

ti, • '

40. In 1998, the German equivalent to the FDA (the Bundesinstitut fur Arzneimittel

and Medizinprodukte, or BFArM) reported the death of a patient taking Baycol due to

rhabdomyolysis, a disease that causes acute damage to skeletal muscle and tissue, leading to

kidney failure, heart failure, muscle tissue degeneration, liver lesions, other organ damage, and

often death.

41. On or about May 4, 1998, Bayer AG issued its "Stockholders' Newsletter --

Interim Report for the First Quarter 1998; Report on the 46th Annual Stockholders' Meeting of

Bayer AG on April 30, 1998 in Cologne." Included in the newsletter was a reprint of defendant

Schneider's address to the meeting, in which he stated in part:

We expect Health Care to make the largest contribution to this year's growth.

Our expectations are founded mainly on the Pharmaceuticals Business Group,with its top-selling drugs and new medications such as the cholesterol-loweringdrug Lipobay/Baycol ....

The newsletter also stated that net income rose 17 percent to Deutsche Mark (DM) 858 million

from DM 710 million in the first quarter of 1997, and that earnings per share rose to DM 1.17 for

the first quarter, from DM 0.98 in the first quarter of the previous year.

42. Defendant Schneider's statement emphasizing Baycol as a contributor to the

Company's expected growth was materially false and misleading because defendants failed to

disclose that Baycol had displayed problems with drug interactions and that the Company's

marketing partner had serious concerns regarding the drug's safety. Moreover, the statements

concerning net income and earnings per share were materially false and misleading because

those figures did not reflect required accruals for reserves for loss contingencies associated with

Baycol.

43. On May 28, 1998, a post-marketing report prepared by Bayer Corp. revealed that

four patients who were prescribed the 0.3 mg dose of Baycol had developed rhabdomyolysis.

-13-

Page 17: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Despite the serious and often fatal consequences of contracting this disorder, Bayer did not

inform the FDA until January 1999.

44. On May 31 , 1998, a document sent to defendant Ebsworth by a sales executive

stated that the company needed to do everything it could to maximize the sale of Baycol because

"it must carry the company for the short and long haul."

45. On August 20, 1998, Bayer AG issued its "Stockholders' Newsletter 1998 --

Interim Report for the First Half of 1998." As reported in The Regulatory News Service, the

interim report stated that net income rose 0 .5 percent to DM 1.728 billion from DM 1.72 billion

in 1997, while earnings per share remained unchanged at DM 2.37. Those statements

concerning net income and earnings per share were materially false and misleading because the

figures did not reflect required accruals for reserves for loss contingencies associated with

Baycol.

46. At a "Baycol Therapeutic Brand Review" meeting in West Haven, Connecticut,

on September 30, 1998, defendant Ebsworth advocated that Bayer adopt what he called "the rule

of the market," by pushing marketing materials aggressively and following the philosophy, "we

do not know where the legal boundary is until we hit it." He said, "The area is grayer than we

treat it, e.g. we can pick the better study for detail aid. It is the role of Marketing to find ways to

sell our product to the maximum .... It is the role of Marketing to challenge Regulatory

systematically -- and the role of Regulatory to prevent stupid mistakes."

47. Defendant Ebsworth had noted that a highly respected medical journal, The

Medical Letter, had concluded in an article on Baycol dated January 16, 1998, that until safety

and effectiveness of higher doses of Baycol had been determined, the more effective older drugs

-^4-

Page 18: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

were preferred. In response, defendant Ebsworth suggested creating new promotional materials

to entice the editors of The Medical Letter to present Baycol's efficacy in a more positive light.

48. On October 30 , 1998 , Bayer AG issued a press release announcing Mexico's

approval of Baycol in a 0.4 mg dose. The press release stated in part:

Mexico leads the way with the first approval of the 0.4 mg. dose of Cerivastatin(Lipobay/Baycol), the novel HMG-CoA reductase inhibitor from Bayer, indicatedfor patients with primary hypercholesterolaemia. The 0.4 mg dosage ofCerivastatin will be launched in Mexico, Quarter 1 1999, under the brand Baycol.

Approval is expected from regulatory authorities worldwide by the end of 1998

and throughout next year. * * *

The 0.4 mg formulation of Cerivastatin ... affords even greater efficacy at a verylow dosage whilst maintaining an excellent safety and tolerability profile. * * *

Further studies are currently underway using even higher doses of Cerivastatin.

49. The approval in Mexico was further explained in an article in Pharma

Marketletter on November 5, 1998, which stated:

Boost To The Drug's Competitive Position? Cerivastatin's high potency and low

dosage helps contribute to a good safety and efficacy profile, but the drug has a

tall order competing with the phenomenally successful Lipitor (atorvastatin) from

Warner-Lambert, which has been introduced using a similar potency/tolerability

promotion and has successfully captured close to 40% of the statin market. * * *

Analysts at Goldman Sachs see the new high-strength cerivastatin data as beingcentral to Bayer's efforts to compete with Lipitor, as the drug has so far failed tomake much impression on the market leader, despite a similar profile. They haveforecast full-year 1998 sales for cerivastatin at around $ 115 million.

50. While touting the cholesterol-reducing benefits of the higher dose version of

Baycol, defendants failed to disclose to analysts and the investing public that an officer

(Karabelas) of Bayer's marketing partner had warned it that Baycol's drug interactions could be

magnified at higher doses, and failed to disclose that even patients taking the lower dose version

had developed rhabdomyolysis.

-15-

Page 19: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

51. On November 11, 1998, Bayer AG issued its "Interim Report for the First Three

Quarters of 1998," reporting that net income rose to DM 2.409 billion from DM 2.352 billion,

and earnings per share rose to DM 3.30 from DM 3.24, as compared to the first three quarters of

1997. Those statements concerning net income and earnings per share were materially false and

misleading because the figures did not reflect required accruals for reserves for loss

contingencies associated with Baycol.

52. In January 1999, the FDA required certain changes in Baycol labeling. In the

warning section of the Physician 's Desk Reference (PDR), under the heading "Skeletal Muscle,"

the text was revised to read, "Rare cases of rhabdomyolysis (some with acute renal failure

secondary to myoglobinuria) have been reported with cerivastatin and other drugs in this class."

However, Bayer Corp. added the following language to the Adverse Reactions section to cast

doubt on reports that Baycol was causing rhabdomyolysis:

The following events have been reported since market introduction. While theseevents were temporally associated with the use of Baycol, a causal relationship tothe use of Baycol cannot be readily determined due to the spontaneous nature ofreporting of medical events, and the lack of controls: hepatitis, myositis,rhabdomyolysis, some with associated renal failure (most cases involveconcomitant Gemfibrozil), urticaria, angioedema, visual disturbance, blurredvision.

53. On March 16, 1999, the Company issued a press release entitled "Earnings Target

Achieved in 1998 Despite Deterioration in the Economy; Bayer Net Income up 7 Percent to Dm

3.2 Billion; Health Care: Earnings Set to Rise More than Dm 1 Billion by 2001." The press

release stated in part:

Despite a global economic environment that deteriorated from one quarter to thenext, the Bayer Group achieved its earnings target for 1998. As Bayer AGManagement Board Chairman Dr. Manfred Schneider announced at the SpringFinancial News Conference on Tuesday, net income rose 7 percent to DM 3.2billion on sales ofDM 54.9 billion, which were virtually unchanged from theprevious year .... As far as earnings were concerned, he believed there was agood chance of matching last year's trend, also on an adjusted basis. * * *

-16-

Page 20: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Bayer AG's Chief Financial Officer, Werner Wenning, reported to the newsconference on what he termed `healthy financial results that evidence Bayer's

financial strength and high earning power' He stressed it was clear from the

`Strategy' and `Risk management' sections featured for the first time in the 1998Annual Report that Bayer had identified very good opportunities for futuregrowth in its core businesses and was not aware of any factors that could threaten

the company's existence.

54. On March 16, 1999, the Company also issued its 1998 Annual Report, which

stated in pertinent part:

After its successful launch in Europe, our lipid-lowering product Baycol/Lipobay

has not yet fulfilled our expectations in the United States. However, with the

higher dosage scheduled for release in fall 1999, we assume that this product will

enjoy greater success in the U.S. market.

The Annual Report stated that net income rose 7.3 percent to DM 3.157 billion, from DM 2.941

billion for the previous year, while earnings per share rose to DM 4.32, from DM 4.04 in 1997.

55. Defendants ' statements in the March 16, 1999 press release and 1998 Annual

Report were materially false and misleading because defendants failed to disclose that Baycol

had displayed serious health problems with drug interactions that could be magnified at higher

doses, and that Baycol caused potentially fatal rhabdomyolysis. The 1998 Annual Report's

projection that the higher dose version of Baycol would boost sales in the United States was

particularly egregious because Smithkline Beecham had warned defendant Ebsworth of unsafe

drug interaction problems at higher doses as early as June 1997. Defendants' statements were

also materially false and misleading as they failed to disclose that the Company's revenue, net

income and earnings per share figures did not reflect required accruals for reserves for loss

contingencies associated with Baycol.

56. Although to this point Baycol sales had been disappointing in the U.S., defendants

informed analysts that the higher dose version would greatly boost sales . For example, on March

23, 1999, an analyst for ABN-AMRO bank issued a report on Bayer, stating in part:

-17-

Page 21: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Baycol (anti-cholesterol) was launched in the US and Europe in 1998. The launchwas disappointing by the standards of market leader Lipitor (Pfizer/WarnerLambert). We attribute this to the decision to go ahead and launch the product inthe US in the lower dosage formulation. In 1998 sales of DM184m exceeded ourestimates of DM150m, after a strong fourth quarter. Baycol is now launchedeverywhere except Japan where a launch is expected on 18 May. Bayer islooking for over DM500m in sales in 1999 from Baycol. We are revising up ourestimates for the product.

Defendants did not, however, disclose any of the adverse facts in their possession concerning the

life-threatening dangers associated with the higher doses.

57. By April 1999, Bayer was receiving overwhelming evidence that patients were

developing rhabdomyolysis when they used Baycol in combination with gemfibrozil, but took no

action to inform the public of its findings. For example, on April 1, 1999, an internal Bayer

Corp. document reported that the company had received 29 Baycol-related adverse event reports

as of March 1999. On April 23, 1999, Roger Celesk, the Senior Clinical Drug Safety Officer of

the U.S. Pharmaceutical Division of Bayer AG, notified his colleague, Mel Sorensen, Bayer

Corp.'s Director of Cardiopulmonary and Oncology, that Bayer Corp.'s Drug Safety department

had received 31 U.S. cases and 20 non-U.S. cases of Baycol- related rhabdomyolysis. Further,

he said there were an additional seven cases identified in the FDA's Spontaneous Report.

Thirty-two of the reports listed gemfibrozil as a factor . In response , Sorensen conceded that the

Baycol packaging insert should carry a warning reflecting this development. However, his

suggested language for the revision was vague and incomplete:

The potential for clinically relevant interaction between gemfibrozil andcerivastatin has not been assessed. However, during post-marketing surveillance,patients on cerivastatin who experienced rhabdomyolysis and associated renalfailure, were in most cases taking gemfibrozil. (See Warnings: Skeletal Muscle).

58. On or about April 30, 1999, the Company issued its "Stockholders' Newsletter

'99 - Interim Report for the First Quarter of 1999; Report on the 47th Annual Stockholders'

Meeting of Bayer AG on April 30, 1999 in Cologne." Included within the newsletter was a

-18-

Page 22: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

reprint of defendant Schneider's address during the annual stockholders' meeting, in which he

stated in part:

Our pharmaceuticals business occupies a pivotal position. To improve itsefficiency and enhance its earning power, we have introduced a program to cutcosts and boost earnings by DM 700 million by 2002....

Further opportunities will come from new products such as our new antibioticAvelox and our lipid-lowering product Lipobay/Baycol.

Both have the potential to become blockbusters, by which I mean products thatgenerate sales of over DM 1 billion worldwide.

The stockholders' newsletter also reported that net income dropped 7.9 percent to E 399 million,

compared to € 433 million for the first quarter of 1998, while earnings per share decreased 7.8

percent to € 0.55 from € 0.59 in 1998.

59. The statements in the April 30, 1999 Stockholders' Newsletter were materially

false and misleading because defendants failed to disclose that Baycol had displayed serious

problems with drug interactions that could be magnified at higher doses, and that they were

aware of an increasing number of adverse events demonstrating that Baycol caused potentially

fatal rhabdomyolysis. The statements concerning net income and earnings per share were

materially false and misleading when made because they did not reflect required accruals for

reserves for loss contingencies associated with Baycol.

60. On May 5, 1999, William McGuire, a Bayer employee, e-mailed his colleague,

Leonard James, stating that negative information on Baycol would not be incorporated in the

Baycol packaging insert as earlier agreed unless sanctioned by Dr. Lawrence Posner, Bayer

Corp.'s Senior Vice President, Pharmaceutical Development. James wrote back and expressed

concern that this decision "places Drug Safety in a difficult situation. Not only has internal

documentation been generated in which it has been mentioned that Drug Safety initiated changes

-19-

Page 23: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

to the Baycol package insert, but we have also gone on record within discussions involving the

timing ofwhen these changes should and would be incorporated."

61. Bayer Corp. did not employ the proposed warning language, evidently because it

did not want to jeopardize impending FDA approval of a higher dose of Baycol. This higher

dose was necessary for Bayer to remain competitive in the statin market, as the lower doses of

Baycol were not as effective at reducing cholesterol as other statins. In order to gain FDA

approval of the 0.4 mg dose, Bayer undertook additional studies to demonstrate the safety and

efficacy of Baycol. However, the studies demonstrated that adverse events were even more

frequent and severe as the dosage amount increased.

62. For example, a study published in 1999 by the Rikshospitalet University Hospital

comparing dosages of 0.2 mg Baycol to 0.4 mg Baycol demonstrated that higher dosages of

Baycol were likely to cause significant cell death. In the study, eight patients receiving 0.4 mg

dosage and five patients receiving 0.2 mg dosage of Baycol withdrew from the study due to

adverse events. Moreover, nine patients in the 0.4 mg group (as opposed to none in the 0.2 mg

group) experienced abnormally elevated levels of CPK (a bloodstream enzyme marker for heart

injuries) -- an indicator for rhabdomyolysis.

C. The FDA Approves an 0.4 mg Dosage, as DefendantsFail to Disclose the Dangers Associated with Baycol

63. On May 24, 1999, the FDA approved the 0.4 mg dose of Baycol. Bayer Corp.

failed to disclose to the FDA that rhabdomyolysis and/or increased CPK levels had been

identified as adverse events for Baycol patients. Bayer Corp. was silent about the serious and

even fatal dangers posed by Baycol. After the approval of the 0.4 mg dosage of Baycol,

defendants launched an aggressive marketing campaign trumpeting Baycol's "proven

performance," "exceptional value" and "powerful new strength."

-20-

Page 24: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

64. On May 26, 1999, the Company issued a press release regarding the new higher

dosage Baycol:

"As a result of its higher effectiveness and the fact that is taken only once a day, itis expected that it will become the most-used dosage," Bayer said, adding that itwill lead to a significant increase in sales of the drug.

However, defendants failed to disclose that Baycol had displayed serious health problems with

drug interactions that could be magnified at higher doses and that a senior Bayer Corp. official

had advised changing the Baycol warning language to discuss the increasing link between

Baycol and rhabdomyolysis.

65. On August 15, 1999, the Company issued a press release entitled "Stockholders'

Newsletter '99 Interim Report for the First Half of 1999; Upward trend: Demand recovers in the

second quarter," reporting that Bayer AG's sales for the first half of 1999 were € 14.2 billion,

compared with € 14.5 billion in the same period of 1998. The Newsletter, dated August 16,

1999, also reported that Bayer AG's net income rose 100 percent to E 1.742 billion from € 871

million in 1998, and earnings per share increased to € 2.39, from ,6 1.19 in the first half of 1998.

66. The statements in the August 15, 1999 press release and August 16, 1999

Stockholders' Newsletter were materially false and misleading because defendants failed to

disclose that Baycol had displayed serious health problems with drug interactions that could be

magnified at higher doses, and that Baycol caused potentially fatal rhabdomyolysis. The press

release and newsletter were also materially false and misleading as the revenue, earnings per

share and net income figures did not incorporate an accrual for contingent liabilities associated

with Baycol

67. Unaware of the dangers inherent in the higher-dose version of Baycol, analysts

continued to focus on the new version as the catalyst for improved Baycol sales.

-21-

Page 25: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

68. On September 27, 1999 , an analyst for Commerzbank issued a report on Bayer,

which stated in part:

Lipobay on road to success despite start-up difficulties

* *

The market for cholesterol-reducing remedies was worth USD 8.6bn in 1998 andis growing 25% a year. * * *

Bayer aims for a world-wide market share of 10%, yielding a sales potential ofEUR 1.6bn in line with our estimate for global market volume in 2002. Thecompany is highly successful in Europe, where a 10% target for market share weregard as very conservative. In the US, however, Bayer had to adjust its planning.The co-marketing agreement with SKB did not prove very successful, as the UKcompany had to deal with important market introductions of its own rather thanpush Baycol's introduction as hard as expected.

After restructuring the co-marketing agreement (Bayer is now leading the US

effort) and especially after introducing a stronger Baycol (originally 0.2 mg or 0.3

mg; mid-1999: 0.4 mg; 2000E: 0.8 mg), we expect that Bayer will at least

approach its target for the US market. We view a global market share of 10% as

realistic. The current market share in Europe is 8% to 13% and 3.6% in the US.

Considering the latest development (sales from January to August 1999: EUR

168m), the sales target ofEUR 250m could even be slightly exceeded.

69. On October 18, 1999, an analyst for ABN-AMRO bank issued a report on Bayer,

which stated in part:

Baycol (lipid-lowering) sales are estimated at €260m in 1999 and €500m in 2000.Although Baycol has performed well in Europe, it has been slow to take off in theUS. With the launch of the 400 microgram version in the US in July 1999, salesare beginning to rise more sharply.

70. On October 19, 1999, Celesk (Bayer AG' s senior drug safety officer in the U.S.)

expressed concern about a reported 60 percent increase in myopathy (muscular disorder) when

Baycol was used in combination with gemfibrozil. In an e-mail to his colleague, Franz Hulla,

Celesk said that the number of rhabdomyolysis cases continued to increase worldwide and in the

United States. He further said that Bayer Corp.'s marketing department had persuaded a large

healthcare provider in the western United States to replace another drug, fluvastatin, with

-22-

Page 26: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Baycol, and within one month of the switch two patients had been hospitalized with

rhabdomyolysis. He said his research uncovered a similar case in California. All three cases

involved the use of Baycol 0.4 mg in combination with gemfibrozil. Despite the foregoing,

Bayer Corp.'s marketing for Baycol misrepresented the known risks associated with the drug,

and continued to characterize associated rhabdomyolysis as "rare."

71. On October 25, 1999, the FDA informed Bayer Corp. by letter that its

promotional materials on Baycol were "false, lacking in fair balance, or otherwise misleading,"

and therefore in violation of the Federal Food Drug and Cosmetic Act. The FDA' s letter

criticized statements made by Bayer Corp. directly claiming or implying that Baycol was

superior to other statins . The FDA also told Bayer Corp. that its "presentation of risk

information . . . lacks fair balance" and that "the most important risk information (risk of

myopathy, rhabdomyolysis, etc.) was hidden in the materials not devoted to risk." The FDA

instructed Bayer Corp. to immediately cease using these promotional materials and to submit a

written response describing its plans for complying with the FDA's directives.

72. In spite of the FDA letter , on October 29, 1999, the Company issued a press

release entitled "Cholesterol Lowering Agent, Baycol, Demonstrates Impressive LDL-C

Lowering in Women." The press release stated in part:

The new 0.4 mg dose of Baycol was recently approved in the United States andthe 0.8 mg dose has just been submitted for FDA approval. This addition of the0.4 mg. dose to the portfolio of Baycol provides physicians with even greateroptions for effective management of their patients.

73. While focusing on the cholesterol-reducing benefits of the 0.4 mg dose of Baycol

(and noting the application to the FDA for approval of an 0 . 8 mg dose), defendants failed to

disclose to the FDA and the investing public that the Rikshospitalet University Hospital study

(see above) had demonstrated that the higher-dose versions of Baycol were more strongly linked

-23-

Page 27: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

to rhabdomyolysis and that Bayer Corp. was in possession of strong evidence that the

combination of Baycol and gemfibrozil was causing life-threatening cases of rhabdomyolysis

throughout the world.

74. On November 16, 1999, the Company issued its "Stockholders' Newsletter 1999 -

Interim Report for the First Half of 1999." As reported in The Regulatory News Service, net

income rose to € 2.182 million from € 1.212 million for the previous three quarters, while

earnings per share rose from € 1.66 from the previous three quarters to € 2.99. A Bayer AG

press release dated the next day entitled "Business Picks up in the Third Quarter - Health Care

Sales Grow Strongly" stated in part:

In Pharmaceuticals, expanding sales of our lipid-lowering agent Baycol/Lipobayand market introduction of the antibiotic Avelox/Avalox will add to the success ofour existing portfolio. We expect that earnings from these products, combinedwith the effects of our efficiency improvement program designed to save EUR360million in costs , will produce a sustained increase in the operating margin.

75. The statements in the November 16, 1999 Stockholders' Newsletter and the

November 17, 1999 press release were materially false and misleading because defendants failed

to disclose that Baycol had displayed serious health problems with drug interactions that could

be magnified at higher doses, and that Baycol caused potentially fatal rhabdomyolysis

particularly when taken with gemfibrozil. The press release and interim report were also

materially false and misleading as the revenue, earnings per share and net income figures did not

did not reflect required accruals for reserves for loss contingencies associated with Baycol.

76. On December 1, 1999, Bayer Corp. finally added a warning to its label stating

that Baycol should not be prescribed with gemifibrozil. However, this did not stem the

increasing flow of rhabdomyolysis cases.

77. By the end of December 1999, the number of reported cases of Baycol-related

rhabdomyolysis was escalating so rapidly that Bayer Corp.'s Drug Safety Assurance department

-24-

Page 28: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

was overwhelmed and reported delays in processing Serious Adverse Events (SAEs).1 A

December 30, 1999 memorandum prepared by that department for Dr. Lawrence Posner, Bayer

Corp.'s Senior VP for Pharmaceutical Development , and Dr. E. Paul MacCarthy, Bayer Corp.'s

Head of U.S. Medical Science, stated that: "In the past two months, 60 US cases of

rhabdomyolysis have been received in Safety Assurance.... The steadily increasing numbers of

spontaneous reports of rhabdomyolysis associated with Baycol, along with additional telephone

activity, have overwhelmed the available Safety Assurance resources in terms of processing

SAEs."

78. At this time, more Bayer employees were questioning the safety of Baycol

internally. For example, an e-mail circulated on October 1, 1999 said that a clinical investigator

and consultant for Bayer, Dr. Evan Stein, had criticized the company for failing to honestly

present safety levels. The e-mail stated, "Dr. Stein has been quite vocal about the lack of candor

in presenting our safety level." A February 2000 e-mail from Patricia Stenger, a manager in

Bayer Corp.'s Scientific Affairs division, notified Bayer Corp. officials that Baycol

representatives in the northeastern U.S. had become increasingly uncomfortable with detailing

Baycol due to rumors of increased incidents of rhabdomyolysis. In another e-mail that same

month, Stenger confided to other executives, "[s]o much for keeping this quiet."

79. Prior to the FDA approval of the 0.8 mg dosage of Baycol, Stenger sent an e-mail

in June 2000, attaching a document which stated that doctors who reported problems were

hearing of similar reports of deaths associated with Bacyol. The attached document went on to

1 An SAE is defined as an "untoward medical occurrence that at any dose: results in death, is

life-threatening, requires inpatient hospitalization or prolongation of existing hospitalization, [or]

results in persistent or significant disability/incapacity." Clinical safety data management:

definitions and standards for expedited reporting, 60 Federal Register 11284, 11285 (Mar. 1,1995). SAEs are required to be collected in all clinical trials and reported to the FDA.

-25-

Page 29: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

state that these doctors "appear to be more angry and concerned and feel that Bayer is hiding

information."

D. Bayer Seeks and Obtains Approval of an 0.8 mg DosageDespite Overwhelming Evidence of Baycol's Link to Rhabdomyolysis

80. At the beginning of 2000, defendant Ebsworth was under increasing pressure to

bring a "blockbuster" drug to market, as many other drugs he sponsored had failed during

clinical trials . He therefore pushed for introduction of the 0. 8 mg dosage . He observed to a

senior marketing executive that Bayer's growth had to be with Baycol, and that he expected

Baycol to contribute about half of the growth of Bayer's pharmaceutical division for the next

five years.

81. On March 10, 2000, Dr. Steve Niemcryk, an epidemiologist who was a member

of Bayer Corp.'s Drug Safety Surveillance group, sent an e-mail to Dr. Richard Goodstein, Bayer

Corp.' s Vice President for Scientific Relations , stating that his review of FDA data had revealed

that Baycol caused patients to develop rhabdomyolysis five times more often that Mevacor, ten

times more often than Lipitor and Lescol, 20 times more often than Zocor, and 67 times more

often than Lipostat. Incredibly, defendants continued to conceal the dangers posed by Baycol.

82. Soon thereafter, Stenger, the Scientific Affairs division manager, expressed

dissatisfaction with the manner in which Bayer Corp. had fielded questions about the high

incidence of Baycol-related rhabdomyolysis at an earlier Baycol Project Team meeting. Stenger

stated in an e-mail: "The first question from the participants: How does this compare to other

statins. The answer. I don't know." She questioned this response and noted that another Bayer

employee at the meeting, Bob Tota, reported that he had examined the data on other statins, and

found that "we [Bayer] clearly have a higher incidence, which begged the question of the 0.8 mg

approval."

-26-

Page 30: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

83. On May 13, 2000, Goodstein responded to Stenger ' s e-mail . He told a colleague

that:

I see a false comfort factor in place across the company for obvious reasons. Itappears the strategy is to get by that July hurdle and continue to be silent [anobvious reference to a meeting with the FDA to obtain approval of a 0.8 mgdose].... The message seems very clear given the total lack of response to mynote two weeks ago, that the subject is in the control of Global DS [Drug Safety]now and they will respond per Worldwide Marketing. We are a minority of oneand have been told to stay away upon severe penalties. We may face some toughpersonal decisions as this progresses.

84. However, with FDA approval of Baycol 0.8 mg dose on the horizon, Bayer Corp.

executives conspired to deceive the FDA as to the dangerous nature of the drug that the

administration was about to sanction. During a teleconference of Bayer Corp. executives held on

June 27, 2000, to discuss problems with Baycol and rhabdomyolysis, participants decided to

withhold critical information from the FDA. A participant in the teleconference summarized the

decisions made as follows: "Patient information leaflet should be prepared before 12 July 2000

when a meeting is scheduled with the FDA to discuss labeling for 0.8 mg tablet. Paul mentioned

that this leaflet should not be distributed prior to 0.8 mg Baycol approval, otherwise it will most

likely delay the approval."

85. On March 16, 2000, the Company issued a press release entitled "Strong 1999

performance in a difficult business environment; Bayer Group net income climbs 24 percent to

EUR 2 billion ; Good start to 2000: Sales jump by 20 percent in January/February." The press

release stated in part:

"Last year we maintained our strong position in a difficult business environment."This was how Dr. Manfred Schneider, Chairman of Bayer's Board ofManagement, described the Group's 1999 performance at its Spring FinancialNews Conference on Thursday. Due primarily to tax-free earnings from the Agfaflotation, Bayer Group net income climbed by 24 percent to EUR 2 billion.Schneider's outlook for 2000 was optimistic: "Our performance in the first twomonths of this year was most encouraging." Sales jumped by 20 percent year-on-year and earnings also improved considerably.

-p7-

Page 31: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

* * *

The company also plans to raise profitability through extensive restructuring

measures, the continuing success of its star products Ciprobay, Adalat and

Aspirin, and also that offuture blockbusters such as Avelox, Lipobay/Baycol and

Kogenate.

(Emphasis added.)

86. On March 16, 2000, the Company issued its 1999 Annual Report, which stated in

part:

Demand for our cardiovascular drug Adalat and our lipid-lowering agentLipobay/Baycol was also strong. In the United States, Baycol generatedexceptionally strong sales, in part as a result of the higher-dose tablet. In Japan,

Lipobay also got off to a very good start. * * *

Our products Lipobay/Baycol, Ciprobay, Avelox/Avalox and Kogenate give usstrong potential for future growth. * * *

Sales of the Pharmaceuticals Business Group grew considerably faster than theworld market, increasing by 15 percent over 1998. Exceptional charges from thesuccessful integration of Chiron Diagnostics Inc. and temporary productionproblems for biological products hampered the growth in operating profit, whichnevertheless increased by 10.5 percent to €1.1 billion, giving a 13 percent returnon sales. By 2002 this will reach 20 percent, driven by our future pharmaceuticalblockbusters Lipobay/Baycol, Kogenate and Avelox/Avalox and a consistent costmanagement program. * * *

Bayer's established drug products also performed well in 1999. Sales of the anti-infective Ciprobay/Cipro/Ciproxin, the new lipid-lowering agent Lipobay/Baycoland the cardiovascular drug Adalat grew strongly to record levels. Only ourgenetically engineered drug Kogenate for the treatment of hemophilia registered a2 percent decline in sales, attributable to production problems that have sincebeen rectified.

We nevertheless continue to regard Kogenate as a future blockbuster along withLipobay/Baycol and Avelox/Avalox. This would give the Health Care segmentthree more products with sales of over €500 million each in addition to the currentblockbusters Ciprobay, Adalat and Aspirin.

The Annual Report stated that net income grew 24 percent to € 2 billion, up from € 1.614 billion

for the previous year, and earnings per share rose to € 2.74, from € 2.21 in 1998.

-28-

Page 32: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

87. The statements in the March 16, 2000 press release and the 1999 Annual Report

were materially false and misleading because defendants failed to disclose that increased Baycol

sales could only occur upon approval of higher-dose versions, yet they knew Baycol had

displayed serious health problems with drug interactions that could be magnified at higher doses,

and that Bayer Corp. had been inundated with reports of Baycol-related rhabdomyolysis. The

press release and 1999 Annual Report were also materially false and misleading as the revenue,

earnings per share and net income figures did not reflect required accruals for reserves for

contingent liabilities associated with Baycol.

88. On March 20, 2000, an analyst for J.P. Morgan issued a report on Bayer, which

stated in part:

A robust fourth-quarter performance in Healthcare - Pharmaceuticals got off to agood start in 2000 as well. The fourth-quarter sales increase of 15% was a littleuninspiring given the 22% reported in the third quarter. However, we werebuoyed by management's comments on the very strong start to the year in thepharma business. In the first two months, pharma sales increased by 26%, drivenby Cipro (up 34% and Baycol, up 134%), although 13 percentage points of thisgrowth was derived from foreign exchange gains. * * *

Baycol appears to be doing exceptionally well with sales up 134% in the first twomonths of this year.

89. In April 2000, defendant Ebsworth conceived of and chaired a "Baycol Summit"

meeting in New York City, attended by senior managers responsible for Baycol in many

worldwide markets. Ebsworth outlined his strategy to push for approval and marketing of the

0.8 mg dosage to increase Baycol's competitive position as against Lipitor. According to a

manager at the "summit," attendees were told there was no problem with the 0 . 8 mg dosage and

they should "go with the flow" to get the dosage introduced.

- 29 -

Page 33: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

90. On or about May 12, 2000, the Company issued its "Stockholders' Newsletter

2000 -- Interim Report for the First Quarter of 2000; Report on the 48th Annual Stockholders'

Meeting of Bayer AG on April 28, 2000 in Cologne." The report stated in part:

Health Care increased its sales to €2.3 billion, exceeding the previous year'sfigure by 22 percent. The Pharmaceuticals Business Group did particularly wellwith a 27 percent sales gain thanks to expanding demand for our blockbustersCiprobay and Adalat in the North American and Japanese markets. Sales ofBaycol/Lipobay doubled.

After the excellent start to 2000, we are optimistic about business developmentsover the rest of the year. The favorable economic environment and strongdemand for our products should create a solid framework for further growth. Wetherefore anticipate double-digit growth rates in sales and earnings fromcontinuing operations for the full year.

We expect this growth to come primarily from the Health Care segment,particularly the Pharmaceuticals Business Group. The demand for our newproducts Baycol and Avelox has increased sharply and the temporary difficultieswe experienced with our biological products have been rectified. We seeconsiderable growth potential for this segment.

91. The report also reprinted defendant Schneider's address at the Company's annual

stockholders' meeting, wherein he stated in pertinent part:

There is no doubt that we need to considerably increase our presence inpharmaceuticals, especially in the crucial U.S. market.

Our excellent product portfolio gives us a very good chance of achieving this. Wehave two medicines with sales of over €1 billion each: Cipro and Adalat. Ourcholesterol-lowering agent Baycol, which will post sales of over €500 million thisyear, will be the next product to pass the €1 billion threshold. In Kogenate andAvelox we have another two drugs with enormous potential.

The report also reflected that net income rose 26.4 percent to € 556 million, compared to € 440

million from the previous first quarter, while earnings per share rose 26.7 percent to € 0.76, from

€ 0.60 for the previous first quarter.

-30-

Page 34: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

92. The statements in the May 12, 2000 Stockholders' Newsletter were materially

false and misleading because defendants failed to disclose that increased Baycol sales could only

occur upon approval of higher-dose versions, but that Baycol had displayed serious health

problems with drug interactions that could be magnified at higher doses; that Bayer Corp. had

been inundated with reports of Baycol-related rhabdomyolysis; and that Bayer Corp.'s review of

FDA data had revealed that Baycol was causing rhabdomyolysis at significantly higher rates than

other statins The Stockholders' Newsletter was also materially false and misleading, because the

revenue, earnings per share, and net income figures did not reflect required accruals for reserves

for contingent liabilities associated with Baycol.

93. On July 7, 2000, Ernst Weidmann, head of Global Drug Safety for Bayer,

received an e-mail from Dr. Gerald A. Faich, President of Pharmaceutical Safety Assessments,

Inc., a former FDA Commissioner and consultant whom Weidmann had retained in connection

with the Company's application to the FDA for approval of the 0.8 mg dose of Baycol, with a

"quick assessment" on Baycol. Dr. Faich said, "[i]f the FDA is already tuned into this, you may

have some resistance about the higher dose. Also, what further efforts are you prepared to take

to inform providers and patients?" On July 10, 2000, a hand-written note at the bottom of a

memo outlining a telephone discussion involving several Bayer executives indicated a "very

strong signal" involving Baycol. A "signal" is a term used to denote the fact that negative

information has been received about a drug.

94. Despite the accumulating evidence that Baycol was unsafe, defendants pressed

ahead with their plans and received FDA approval to market an 0.8 mg dose in July 2000.

During this time, defendants continued to receive notice of adverse events associated with

-31-

Page 35: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Baycol, both directly from doctors and from the FDA. These adverse events were more frequent

with doses of 0.4 mg and higher.

95. On July 24, 2000, the Company issued a press release entitled "FDA Approves

New 0.8 mg Baycol Dosage and Important HDL-C Indication for the Brand." The press release

stated in part:

The U.S. Food and Drug Administration have just approved the marketing of anew 0.8mg dosage of Bayer's Baycol (cerivastatin sodium tablets) for thetreatment of primary hypercholesterolemia and mixed dyslipidemia, along with anadditional indication for the brand for raising HDL cholesterol.

"Baycol 0.8 mg is a highly effective and safe treatment for patients with primaryhypercholesterolemia who need aggressive lipid management in order to achieveNCEP-recommended goals," Professor Insull stated.

With Baycol you get premium power not premium price, making it a veryattractive option for both physicians and patients. Bayer expects the new 0.8mgdosage of Baycol to be available to physicians and patients by August 14th. Itwill be available in bottles of 30 and 90 tablets.

(Footnotes omitted.)

96. The statements announcing the approval of the 0.8 mg version of Baycol were

materially false and misleading as they failed to disclose the facts in defendants' possession

concerning the dangers associated with Baycol, including that:

(a) defendants were aware since 1997 that Baycol's drug interaction problemsincreased at higher doses;

(b) reports of Baycol-related rhabdomyolysis had increased tremendouslywhen Bayer Corp. had marketed higher-dose versions of Baycol;

(c) Baycol was causing rhabdomyolysis at much higherrates than otherstatins; and

(d) numerous Bayer Corp. and Bayer AG officials had expressed concernsregarding the safety of Baycol and the lack of effective warnings on Baycolpackaging.

-32-

Page 36: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

97. At the time Bayer launched the 0.8 mg version of Baycol in the U . S., its own

studies showed that starting a patient's treatment at the high dose was very dangerous. Over the

objections of the Baycol marketing executives, senior management of Bayer's Pharmaceutical

Division instructed Baycol sales representatives to give doctors samples of only the 0.8 mg dose

pills, in order to ensure that the 0.8 mg version captured market share quickly. A senior

marketing executive explained the dispute as follows:

Their argument was that the sales reps will remind the physician that even thoughthere's a sample of 0.8, they should still start the patient on 0.4. Our attitude wasvery simple. We've been in sales ourselves. Doctors are doctors. If you go inthere and talk up the 0.8 mg, you leave a sample, and that sample is only 0.8,that's most likely what they're going to use. It's just statistics.

98. On August 1, 2000, Bayer Corp. distributed a "Dear Doctor" letter to doctors

promoting the 0.8 mg dose of Baycol. The letter acknowledged that the combined use of

cerivastatin and gemfibrozil was contradicted due to a risk of rhabdomyolysis, without disclosing

that Bayer was aware of adverse events increasing as the dosage increased, even without

concomitant gemfibrozil use. Remarkably, in the letter, Bayer Corp. continued to insist that

Baycol had a "proven safety profile."

99. On August 2, 2000, Weidemann, the Global Drug Safety director, conducted a

meeting to address the overwhelming reports of adverse events related to Baycol. The meeting

attendees included defendant Plischke and all senior members of Global Drug Safety, and an

outside consultant and former FDA commissioner, Dr. Gerald Faich. The participants concluded

that the data regarding Baycol's dangers was putting the brand at risk and that there was the

potential for serious problems with the FDA. Upon learning of the results of the meeting,

defendant Ebsworth told his senior marketing personnel that "there is no safety problem" and

that they were directed "to promote the hell out of this product. We need this product to be

successful."

-33-

Page 37: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

100. On August 11, 2000, an analyst for Merck Finck & Co. issued a report on Bayer,

which stated in part:

Health Care was the best performing segment with sales up 21 % to €4.7bn and

OP up 86% to €700m in H1, mostly driven by its pharma division. This was

significantly higher as we expected. The strong earnings increase was a

consequence of increasing demand for their products Baycol/Lipobay (+86% to

€280m), Cipro (+11% to €806m), Adalat (+28% to €604m) and a price increase

of up to 2% in the USA. We expect the strong growth to continue and see the

pharma division as Bayer's main earnings contributor already in this FY as well

as in the future.

101. On August 11, 2000, an e-mail marked "urgent" from an employee named

Masanori Katsuki, of Bayer's Japanese subsidiary Bayer Yakuhin, advised Bayer AG officials

that three patients involved in an ongoing Baycol high-dose study at the Fukuoka University

Hospital had been withdrawn from the studies after they experienced a "high CPK elevation

(more than 5 times the normal range)." Baycol administration was discontinued, and one of the

patients was hospitalized and diagnosed with rhabdomyolysis. The patient's doctor, Dr. Jun

Sasaki, immediately discontinued the Baycol study. The e-mail stated that:

Dr. Sasaki was very serious about securing the safety of the patients undertreatment not only in his hospital, but also in other hospitals. He stronglyrecommended to inform all investigators of these facts and to stop the drugadministration in all treated patients due to Rhabdomyolysis during the clinicaltrial..... He complained strongly because we (Bayer) didn't come up withcountermeasure despite the critical issue which actually occurred to his patient.... It seems that under this situation, he cannot and has no intention to continue thestudy in his hospital.

102. Katsuki reported further that he consulted with the external medical consultant for

the Baycol study, Yamamota, who recommended the immediate discontinuation of the

development of high-dose Baycol. Yamamota said, "If we promptly stop the HD [high dose]

development, it would not cause impact on the currently approved doses of Baycol." The e-mail

noted that "we cannot deny the fact that the frequency of CPK elevation in cerivastatin high dose

is fairly high in Japanese patients."

-34-

Page 38: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

103. On August 14, 2000, the Company issued a press release entitled "Strong Growth

in all business segments - Health Care earnings climb sharply." The press release stated in part:

Business trend by segment

All four business segments - Health Care, Agriculture, Polymers and Chemicals -registered double-digit sales growth of between 17 and 27 percent. The operatingresult showed a less uniform pattern. While Chemicals earnings declined slightlyand Polymers recorded only moderately higher profits, Agriculture and HealthCare boosted their operating incomes by 17 and 68 percent, respectively.

This improvement was due mainly to the substantially higher earnings of thePharmaceuticals Business Group, achieved by sharpening our focus on coreproducts. Demand was particularly strong for our new blockbuster drug, thecholesterol-lowering agent Baycol/Lipobay, and for our biological products,where we compensated for past production shortfalls.

104. On October 1, 2000, an article in Pharmaceutical Executive entitled "Bayer

Crosses Over: President Wolfgang Plischke Tackles the US Market" reported:

"We really have sleeping blockbusters in the United States," [Plischke] declares."Baycol will make close to $300 million in sales this year. We have a marketshare of only 5 percent among the statins. But the market is growing by-doubledigit numbers. It will probably grow even faster in the future. There are only sixcompetitors in this market. It's heaven for marketers."

Plischke observes that the third product in the statin market, BMS' Pravachol(pravastatin), has a 15 percent market share--the company's "minimumaspiration" for Baycol. "We talk about a potential $1 billion product in theUnited States, and we are still not being naive or overly ambitious," he says.

105. By the fall of 2000, so many adverse events regarding Baycol had been reported

to the Arznei Telegram, a drug safety information bulletin based in Germany, that the German

health ministry put the drug on a watch list. By the end of October 2000, doctors had reported

482 cases of rhabdomyolysis among Baycol users worldwide.

106. On October 11, 2000, Bayer AG's Japanese associate , Takeda Chemical

Industries , Ltd. (the largest pharmaceutical company in Japan), wrote to Bayer Corp . expressing

-35-

Page 39: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

concern about the frequency of rhabdomyolysis based on information contained in a publication

posted on the World Health Organization (WHO) database. The letter said:

The reported incidents of rhabdomyolysis , arthralgia , myalgia is fairly high inBAY w 6228 compared to other statins (Table III). Furthermore, as the data on(Baycol) were collected before March 1999, i . e. before 0 . 8 mg was approved in(the) US, there is a possibility that the frequency of these events are higher nowwith the 0 . 8 mg in the market.

Takeda's representative, F. Kumamoto, faxed to Bayer AG a copy of the publication excerpted

from the WHO database, stating, "we are anxious about the high frequency of rhabdomyolysis in

BAY w 6228, which is 2. 1%, whereas in other statins , it is 0 .2 - 0.5%."

107. Bayer AG failed to respond to Takeda's queries. An e-mail from Darril Palidwar

of Bayer Corp., dated December 20, 2000, stated that Bayer AG's Japanese marketing colleagues

were very upset by this failure, and advised Bayer AG to produce "an official letter from Bayer

Headquarters with an official rebuttal/response to the publication of cerivastatin safety data in

the publication. This letter should state why there was a higher incidence of rhabdomyolysis in

cerivastatin, and how the launch of the 0.8 mg dose would affect this data."

108. On November 16, 2000, the Company issued its "Stockholders' Newsletter 2000 -

Interim Report for the First Three Quarters of 2000," which reported that net income dropped

27.1 percent to € 1.567 billion from € 2.150 billion for the first three quarters of 1999, and

earnings per share dropped to € 2.15 from € 2.94 for the same period in 1999. These figures

were materially false and misleading as they did not reflect the required accruals for reserves for

contingent liabilities associated with Baycol.

109. On November 21, 2000, the Company issued a press release entitled "Bayer AG

3rd Quarter & 9 Mths Results." The press release stated in part:

The Bayer Group posted excellent sales and earnings growth from continuingoperations in the first three quarters of 2000. Speaking at the company's FallFinancial News Conference, Bayer Management Board Chairman Dr. Manfred

-36-

Page 40: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Schneider announced that sales increased by 22 percent to EUR22.2 billion, whilethe operating result improved by 29 percent to EUR2.7 billion.

With respect to the business segments, the Bayer CEO was particularly pleased

with the performance of the Health Care segment, which boosted sales by 21

percent to EUR7.3 billion and its operating result by 40 percent to EUR1.1

billion. "Sales ofthe Pharmaceuticals Business Group increased by 23 percent.

This was considerablyfaster than the world market, which only grew by 9 to 10

percent. In addition to the encouraging double-digit growth in sales ofour

proven blockbusters Adalat and Cipro, threefuture blockbusters, in particular -

Baycol, Kogenate, and Avelox -registered very good growth. "

Health Care

In Health Care, the encouraging rise in demand experienced in the first half of the

year continued in the third quarter, with three-quarter sales up 21 percent to

EUR7.3 billion. The principal contribution came from the Pharmaceuticals

Business Group, where sales moved ahead 23 percent. Particularly successful

among the products ofthis business group were our cholesterol lowering agent

Lipobay)/Baycol, our biologicals line and the antihypertensive Adalat. Sales

registeredparticularly strong growth in North America and Japan.

(Emphasis added.)

110. The statements in the November 16, 2000 Stockholders' Newsletter and

November 21, 2000 press release were materially false and misleading because defendants failed

to disclose that Baycol had displayed serious health problems with drug interactions that could

be magnified at higher doses; that Bayer Corp. had been inundated with reports of Baycol-related

rhabdomyolysis; that Bayer Corp.'s review of FDA data had revealed that Baycol was causing

rhabdomyolysis at significantly higher rates than other statins; and that the revenue , earnings per

share, and net income figures did not reflect required accruals for reserves for contingent

liabilities associated with Baycol.

111. Desperate to increase sales and present a proven safety profile for the 0.8 mg dose

of Baycol, Bayer had The British Journal of Cardiology publish the results of a favorable Bayer

-37-

Page 41: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

study purporting to demonstrate the safety of that dosage . However, the journal was not peer-

reviewed, and the articles it contained were published based on payment by the author or

submitting party. A former senior marketing executive for Baycol observed that this amounted

to a "big thrust from global marketing to have this data quickly published in a pretty Mickey

Mouse journal and use that as your primary data to support how safe the product is," in order to

conceal the fact that reliable data pointed to the opposite conclusion.

112. In December 2000, Bayer Corp. hired Pacificare, a managed care company, to

analyze Baycol's risks among its members. Although the study did not include patients taking

the highest dose of Baycol, adverse results still were reported, which troubled officials at

Pacificare, but which Bayer wished to keep under wraps.

113. As a result, on January 25, 2001, Dr. David Berenbeim, Medical Director and

Vice President for Health Services at PacifiCare, wrote an e-mail to another PacifiCare

employee, Ed Feaver, expressing dissatisfaction with Bayer Corp.'s approach regarding the

Baycol study. The e-mail was forwarded to Stephen Hanceford in the corporate accounting

department at Bayer:

Bayer has been a real pain on the study we are doing with respect torhabdomyolysis, and their product. They are insisting on contracts and which is apoint K&R believes we should not. In this case where we are examining an agentfrom the perspective of adverse drug effects this would even be more problematic;to relinquish or compromise our ability to publicly communicate this type ofproblem could potentially open us up to medical - legal liability issues. I believethey are playing a game of chicken and in the end, like the other pharma clients,will see that as it relates to ADRs [Adverse Drug Reactions2] there isn't muchroom for compromise. This would clearly be a different matter ifwe were simplyreporting some incremental benefit of one agent over another.

2 An Adverse Drug Reaction, as it relates to marketed medicinal products, is defined as "[a]response to a drug which is noxious and unintended and which occurs at doses normally used inman for prohylaxis, diagnosis, or therapy of disease or for modification of physiologicalfunction." Clinical safety data management: definitions and standards for expedited reporting,60 Federal Register 11284, 11285 (Mar. 1, 1995).

-38-

Page 42: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

114. In response to the PacifiCare e-mail , Hanceford wrote to his colleague, Ralph

Googooian at Bayer Corp.: "Ralph, this does not reflect well on Bayer. It fails to demonstrate a

strategic business relationship between our companies. The issue of Medical ethics and integrity

(or lack thereof) is disturbing."

115. Meanwhile, in England, David Sommerville from Bayer UK wrote to Ernst

Weidman and Kuno Sprenger at Bayer Corp., expressing concerns regarding the drug safety

message that should be conveyed to their UK marketing colleagues:

I recall that during Kuno's presentation a statement was made to the effect that, asa company, we currently have no particular concerns over rhabdomyolsisincidence rate when cerivastatin is correctly titrated through the dosage regimeup to 800mcg, and it is not used in combination with gemifibrozil. I also,however, recall seeing data that suggested that even when the product has beenused as specified there still appear to be six times greater incidence ofrhabdomyolysis in patients receiving 800mcg in comparison to those receiving400mcg or less.

I am concerned that from a marketing perspective the efficacy data would suggestthat the higher the dose, up to 800mcg, the better response in terms of lipidlowering. If my recollection from Kuno's presentation (is) correct I feel it maywell be appropriate to, at least, temper marketing enthusiasm with a caution thatover use of 800mcg might precipitate a significant rise in the number of cases ofrhabdomyolsis which, in turn, could have a detrimental effect on the product as awhole. Clearly any message going to out local marketing needs to be consistentwith advice currently offered by Global Drug Safety to Strategic Marketing andhigher management.

116. On March 15, 2001, the Company issued its 2000 Annual Report, which reported

that net income decreased 9.3 percent to € 1.816 billion, compared to € 2.002 billion in 1999,

while earnings per share also rose in 2000 to € 2.49, from € 2.74 in 1999. The report also stated

that:

Higher sales , improved operating profit, increasing margins -- more than anythingelse, the successful story of Bayer's Health Care segment is a story of innovativeproducts , many of which are blockbusters with annual sales of at least €500million. * * *

-39-

Page 43: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Other Bayer blockbusters are the recombinant blood clotting drug Kogenate andthe lipid-lowering agent Lipobay/Baycol, which quickly doubled its market sharein the United States. * * *

Sales growth in the Pharmaceuticals Business Group was particularly strong inNorth America and Japan. We scored great success in 2000 with our lipid-lowering agent Lipobay/Baycol and with our biological product range.Lipobay/Baycol surpassed the €500 million sales threshold for the first time, anddoubled its market share in the United States.

117. The statements in the Annual Report and by defendant Plischke on October 1,

2000 set forth above, describing Baycol as a "blockbuster" drug, were materially false and

misleading because defendants knew, but did not disclose, that Baycol posed serious health

dangers to patients, which would ultimately affect or prevent sales of the drug. The financial

statement figures in the Annual Report were materially false and misleading when made because

they did not reflect required accruals for reserves for contingent liabilities associated with

Baycol.

118. In March 2001, the Arznei Telegram, the German medical information service,

informed German doctors that, based on reports it had received of rhabdomyolysis associated

with Baycol, it saw no reason for doctors to prescribe Baycol, since it provided no therapeutic

advantage over other statins.

119. On March 26, 2001, a teleconference took place between several Bayer officials,

including Ernst Weidmann, Roger Celesk, K. Sprenger, and F. Monteagudo, to discuss certain

data and U.S. reports of Baycol related deaths. The minutes of that meeting stated that "it was

agreed that current labeling was inadequate to discourage a starting dose of 0.8 mg. Spontaneous

reports of deaths in the U.S. (12 since the beginning of the year) were overwhelmingly

associated with use of the 0. 8 mg dose . Only one of these cases noted concomitant use of

gemfibrozil .... [G]lobally, a total of 231 deaths from all sources had been reported in the GDS

[Global Drug Safety] database . Of these, 53 deaths were noted in cases where rhabdomyolysis

-40-

Page 44: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

was reported. This total was without regard to whether there was possible drug association with

deaths."

120. In April 2001, the FDA again mandated stronger warning labels, emphasizing in

particular the risk of prescribing gemfibrozil in conjunction with Baycol. Acting in response to

an FDA directive, on May 21, 2001, Bayer Corp. finally sent out a "Dear Doctor" letter, which

belatedly called attention to some of the dangers associated with Baycol, particularly when

combined with gemfibrozil. Nonetheless, Bayer continued to misrepresent and conceal the

dangers associated with Baycol. For example, the Company insisted "When used as directed,

Baycol effectively and safely treats patients ... [with high cholesterol levels]."

121. On April 27, 2001, the Company announced in its "Information for Stockholders

2001 - Interim Report for the First Quarter" that net income decreased 20.5 percent to € 442

million, from € 556 million in the previous first quarter, while earnings per share dropped 19.7

percent, from € 0.76 to € 0.61 for the quarter. These figures were materially false and

misleading because they did not reflect required accruals for reserves for loss contingencies

associated with Baycol.

122. On May 1, 2001, the Company issued a press release entitled "Bayer AG lst

Quarter Results." The press release stated in part:

Sales in the Health Care segment rose by 4 percent to EUR2.4 billion, with

Pharmaceuticals expanding by 2 percent. The expansion of our field force,

especially in the United States, also led to a pleasing performance by our

cholesterol-lowering agent Lipobay/Baycol.

The operating result of the segment advanced by 5 percent to EURO.4 billion,boosting the return on sales to 15 percent. The cash flow improved by 12 percentto EUR0. 3 billion.

-41-

Page 45: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

123. On or about May 21, 2001, the Company issued its "Stockholders' Newsletter

2001 -- Interim Report for the First Quarter of 2001; Report on the 49th Annual Stockholders'

Meeting of Bayer AG on April 27, 2001 in Cologne." The newsletter contained the presentation

made by defendant Schneider during the meeting, wherein he stated, in pertinent part:

The Health Care segment lifted sales 20 percent to €10 billion, with all threebusiness groups outpacing growth in the global market . The main reasons forth isexpansion were our successful pharmaceutical products Cipro, Adalat, Baycol,Kogenate and Avelox, all of which registered double-digit percentage salesgrowth . Baycol did particularly well, doubling its market share in the UnitedStates and recording more than 80 percent higher sales in total.

124. The March 20, May 1, and May 21, 2001 statements highlighting increasing

Baycol sales and the FDA's approval of the 0.8 mg version of Baycol as the reasons for those

increased sales were materially false and misleading because defendants failed to disclose the

facts in their possession concerning the dangers associated with higher-dose versions of Baycol.

The financial figures were materially false and misleading when made because they did not

reflect required accruals for reserves for contingent liabilities associated with Baycol.

125. On July 9, 2001, an analyst for ABN-AMRO bank issued a report on Bayer,

which stated in part:

Baycol -- heavyweight drug

Currently Baycol is the growth engine of Bayer Pharmaceutical. Baycol salesrose a massive 84% to €636m in 2000. Growth is driven by two factors:underlying market growth of 15%; and market share gains by Baycol in its newhigher dosages. The launch of the 0.4 mg dosage in the US in July 1999,coincided with a marked improvement in Baycol sales. The 0.8 mg dosage waslaunched in August 2000. In addition, Bayer has boosted sales through a rentalsales force. We estimate sales of €lbn in 2001. The market continues to grow at15% pa, with expectations of an increased usage in the US.

126. In July 2001, the European Medicines Evaluation Agency announced that it was

investigating the side effects of Baycol.

-42-

Page 46: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

E. Bayer Is Compelled to Withdraw Baycol

127. By August 2001, even though Bayer had withheld critical data, the FDA had

evidence that Baycol was causing fatal rhabdomyolysis at significantly higher rates than other

statins . The FDA then placed overwhelming pressure on Bayer to withdraw Baycol from the

market.

128. On August 8, 2001, Bayer AG issued a press release entitled "Bayer withdraws

cholesterol-lowering drug Baycol/Lipobay," which stated:

Bayer has withdrawn all dosages of its cholesterol-lowering drug with the brandnames Baycol/Lipobay (active ingredient: cerivastatin) with immediate effectthroughout the world, except in Japan, and is withdrawing supplies of the productcurrently in the market.

The reason for this voluntary action lies in increasing reports of side effectsinvolving muscular weakness (rhabdomyolysis), especially in patients who havebeen treated concurrently with the active substance gemfibrozil despite acontraindication and warnings contained in the product information. Japan isunaffected by this move because gemfibrozil is not available there.

"We have decided on this action in the interest ofpatient safety. We will continue

to conduct further assessments over the next few months to evaluate the

benefit/risk ratio of cerivastatin," explains Dr. David Ebsworth, Head of Bayer's

Pharmaceuticals Business Group. Any possible resumption of the marketing of

certain dosages of Baycol/Lipobay will be the subject of extensive consultations

between Bayer and the regulatory authorities.

In view of the financial burden and loss of earnings for Bayer's Health Caresegment resulting from the withdrawal of its cholesterol-lowering drug, as well asthe continuing weakness of the world economy, which particularly affects theindustrial business, it is now assumed that earnings for the full year will fallsubstantially short of previous estimates. The target of a 20 percent return onsales (before exceptional items) in the Health Care segment in 2002 can no longerbe met.

On the same day, Bayer Corp.'s Pharmaceutical Division issued a press release which, apart

from the paragraph with the quoted language from defendant Ebsworth, contained statements

virtually identical to Bayer AG's press release.

129. On August 8, 2001, the FDA also issued a press release , which stated in part:

-43-

Page 47: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

FDA today announced that Bayer Pharmaceutical Division is voluntarilywithdrawing Baycol (cerivastatin) from the U.S. market because of reports ofsometimes fatal rhabdomyolysis, a severe muscle adverse reaction from thischolesterol-lowering (lipid-lowering) product. The FDA agrees with and supportsthis decision. Baycol (cerivastatin), which was initially approved in the U.S. in1997, is a member of a class of cholesterol-lowering drugs that are commonlyreferred to as `statins,' Statins lower cholesterol levels by blocking a specificenzyme in the body that is involved in the synthesis of cholesterol. While allstatins have been associated with very rare reports of rhabdomyolysis, cases offatal rhabdomyolysis in association with the use of Baycol have been reportedsignificantly more frequently than for other approved statins.

Fatal rhabdomyolysis reports with Baycol have been reported most frequentlywhen used at higher doses, when used in elderly patients, and particularly, whenused in combination with gemfibrozil (LOPID and generics), another lipidlowering drug. FDA has received reports of 31 U.S. deaths due to severerhabdomyolysis associated with use of Baycol, 12 of which involved concomitantgemfibrozil use.

130. On the day the withdrawal was announced, the price of Bayer securities fell

approximately 17 percent, from $39.50 on the prior day's close to $32.85

131. On August 10, 2001, J.P. Morgan issued a report emphasizing the importance of

Baycol to Bayer AG, which stated in part:

Following yesterday's announcement that Bayer was withdrawing Baycol, the keygrowth product in its Healthcare business, the company this morning announcedQ2 results well below expectations.

Following the withdrawal ofBaycol, Bayer is left without "the cornerstone" of itsethical pharmaceuticals business and growth rates have been substantiallyreduced.

It therefore appears that Bayer withdrew this drug because it could not controlinappropriate prescribing and has acted in the interests of patient safety. Whilethe company expects compensation claims to be filed it is insured against thistype of action.

132. On August 13, 2001 , Bear Steams issued a report similarly describing Baycol's

importance to Bayer AG, which stated in part:

-44-

Page 48: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

We consider that this is a major financial blow for the company, and its pharmabusiness in particular, since it forecast sales in 2002 of Eurl.5bn for theproduct ... Furthermore, we estimate that Baycol probably enjoyed a very highgross margin (around 95%). The company has therefore clarified that it expectsaround Eur600m to Eur650m lower operating profits than previously expectedwithin its Healthcare division. It believes around Eur250m to Eur300m of thesewill be exceptional, principally in relation to buying back inventory. Bayer hasnot provided any guidance for the earnings impact in 2002 or beyond. Inconjunction, Bayer has totally scrapped its 2002 operating margin targets of 20%for its healthcare business and 22% for pharmaceuticals.

In conjunction with the loss of the majority of the sales from the Baycol product,the company itself has admitted that it has lost a major strategic pillar from itspharma business. We note that Baycol was the company's only major productthat was currently enjoying strong sales growth (H1 2001 +85% versus H1 2000)and contrasted to overall Healthcare sales growth ofjust 3.8% (H1 2001 versusHl 2000).

F. Defendants Continue to Withhold Material FactsConcerning the Dangers Associated With Baycol

133. On August 13, 2001, in his address during a Baycol/Lipobay news conference in

Leverkusen, Germany, defendant Schneider attempted to ease the concerns of investors and the

public and to protect his company by stating:

First of all I would like to emphasize that our top priority was to withdraw theproduct quickly in view of our responsibility to patients.

If the use of this medicine has resulted damage to health, that is something wedeeply regret. We do everything we can to eliminate such risks.

For us, the safety and health of patients who put their trust in our medicines andrely on them to improve their health has priority over all other interests. That iswhy, when it became clear that certain risks could not be excluded, we did nothesitate to withdraw the product voluntarily and quickly.

Defendant Schneider's statement that Bayer's "top priority was to withdraw the product quickly"

was materially false and misleading because officials ofBayer AG and Bayer Corp. had known

-45-

Page 49: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

ofthe serious health problems associated with Baycol for years before the product was

withdrawn.

134. On August 16, 2001, Bayer AG issued a press release entitled "Bayer says claims

are without foundation," which stated in part:

Bayer AG confirms that actions for damages have been brought in the UnitedStates in connection with alleged side effects of the cholesterol-lowering drugLipobay/Baycol. The company regards these claims as unfounded and willdefend them vigorously.

Bayer has at all times behaved responsibly and acted in the interest of patientsafety and health. The company is therefore unperturbed by this litigation andsees no reason to establish provisions as a result.

The reference to "provisions" meant reserves for loss contingencies associated with product

liability lawsuits or other claims concerning Baycol.

135. On August 17, 2001, the Company issued a press release entitled "Facts prove

that Bayer gave authorities proper notification," in which defendant Ebsworth stated:

[W]e have acted in the interest of patient safety at all times.... Throughout thedevelopment of the cholesterol-lowering drug Lipobay we have always put thesafety and health of patients first. We took voluntary action as soon as anaccumulation of anomalous findings became apparent.

136. Approximately two weeks following the withdrawal of Baycol, Bayer issued a

Stockholders' Newsletter "Special Issue : Withdrawal of Lipobay/Baycol." The newsletter

reprinted the August 17, 2001, press release , and described an interview with defendant

Schneider, in which he stated:

[T]he most important thing is that we have acted in the interests of patients andthat these took clear priority over economic considerations. The crucial factor ispeople's safety - and we have taken action in line with that principle.

137. The statements in the August 16 and 17, 2001 press release and Stockholders'

Newsletter concerning the withdrawal of Baycol were materially false and misleading in that

-46-

Page 50: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

defendants failed to disclose (a) that they had been aware of drug interaction problems with

Baycol since 1997, and (b) that they had continued to seek FDA approval for higher dosages of

Baycol after they were aware that Baycol caused rhabdomyolysis (and that the problem was

exacerbated at higher dosage levels) and after they learned that Baycol was causing

rhabdomyolysis at a much higher rate than other statins.

138. On August 23, 2001, defendant Schneider told reporters that there was "at the

moment no evidence" that using Baycol/Lipobay had led to the reported deaths , and in a news

report, Bayer reiterated its position that the lawsuits against the Company for selling Baycol

were meritless , stating, "Bayer insists the claims are 'groundless ' and that it worked closely with

regulators on both sides of the Atlantic." This statement was materially false and misleading

because, by that time, defendants had long been in possession of overwhelming evidence that

Baycol caused fatal (and non-fatal) rhabdomyolysis.

139. On or about August 23, 2001, Bayer withdrew Baycol in Japan:

Japan was the last market where Baycol had remained available after being pulledfrom all other areas worldwide on August 8.

An official from the Japanese Health Ministry said that although there have been84 cases of rhabdomyolysis in Japan linked to Baycol use (none fatal thus far),Bayer's withdrawal was wholly voluntary, and not influenced by the government.

140. On October 1, 2001, Med Ad News published an article on Baycol, discussing the

huge expectations that Bayer Corp. had had for Baycol and the importance of the 0.8 mg version

to those expectations:

First approved in the United States in 1997, Baycol generated $210 million insales in 2000. Baycol is known outside the United States as Lipobay. Bayer hadjointly marketed Baycol in the United States with GlaxoSmithKline Plc. Analystsat ABN Amro Inc. had projected Baycol sales of $880 million in 2001.According to analysts at Datamonitor Plc., Baycol's significant growth waslargely driven by the launch of a higher-dose, 0.8-milligram tablet in 2000.

-47-

Page 51: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

141. According to the article, Bayer's management stated that "the possibility that [the

product liability] lawsuits will be successful has been overstated by the financial community.

Bayer executives have not allotted for any expenses from legal damages arising from Baycol

litigation. 'We believe and indeed are convinced that we hold an unassailable position,' says

Manfred Schneider, Ph.D., chairman at Bayer. 'We do not believe that such claims will be

successful. We therefore see no reason to make provisions."' Analysts repeated these positive

statements to investors: "'Although it is imprudent to comment on U.S. litigation, Bayer is

insured and appears to have done everything according to the book,' says Andrew Benson, an

analyst at Salomon Smith Barney Inc. 'Bayer is a very conservative company and the fact that it

has not taken any provisions indicates a degree of confidence in its position."'

142. The statements attributed to Bayer management in the October 1, 2001 Med Ad

News article were materially false and misleading because defendants failed to disclose the facts

(and documents) in their possession that demonstrated that Baycol caused potentially fatal

rhabdomyolysis, particularly at higher doses. Moreover, the statement that there was no need for

the Company to "make provisions" was false and misleading because the Company's exposure

to Baycol-related claims required it to establish reserves for loss contingencies associated with

Baycol.

143. On November 14, 2001, the Company issued its "Stockholders' Newsletter 2001 -

- Interim Report for the First Three Quarters of 2001," reporting that net income dropped 47.5

percent to € 825 million from € 1.567 billion for the first three quarters of 2000, while earnings

per share dropped to € 1.13 from € 2.15 for the same period in 2000. These figures were

materially false and misleading because even though Baycol had been recalled, the Company did

not reveal the adverse facts concerning its knowledge of the dangers associated with Baycol and

-48-

Page 52: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

the Company' s financial statements still did not reflect required accruals for reserves for loss

contingencies associated with Baycol.

G. Bayer AG Registers Its ADRs with the SEC

144. On December 20, 2001, the Company filed a Form 20-F Registration Statement

with the SEC, in order to register its American Depositary Shares (ADRs) for trading on the New

York Stock Exchange . The Registration Statement stated in part:

Marketing withdrawal of Cerivastatin products

Baycol/Lipobay (cerivastatin) is a statin, one of a class of medications used tolower elevated blood levels of cholesterol and other lipids, or fatty substances.We launched cerivastatin in its original dosages of 0.1 mg, 0.2 mg and 0.3 mg in1997. We later obtained regulatory marketing approval for higher dosages, up to0.8 mg.

Statins are powerful medications that can reduce the risk of coronary heartdisease. However, they can also cause significant side effects, includingrhabdomyolysis. This is a serious condition which, in its most severe form, canlead to life-threatening kidney failure.

Rhabdomyolysis has been reported more frequently in patients taking cerivastatinthan other statins. This was particularly true in patients taking cerivastatin incombination with gemfibrozil, another lipid-lowering medication, and in patientstaking cerivastatin in the 0.8 mg dosage. We are currently aware ofapproximately one hundred patients diagnosed with rhabdomyolysis while takingcerivastatin who have died.

We had provided prescription information that warned of the risk ofrhabdomyolysis and contained strong warnings and a contraindication against thecombination of cerivastatin and gemfibrozil. However, we continued to receivereports of this condition in patients who had been taking cerivastatin.Accordingly, we voluntarily ceased marketing cerivastatin in August 2001.

Cerivastatin-related actions. In August 2001, we voluntarily ceased marketingour cerivastatin anticholesterol products in response to reports of serious sideeffects in some patients. See Item 4, Information about the Company - HealthCare - Pharmaceuticals - Products. Since this withdrawal, more than 277lawsuits, many of them putative class actions, have been initiated in the UnitedStates against Bayer Corporation and Bayer AG. The actions in the United Stateshave been primarily on theories ofproduct liability, consumer fraud, medical

-49-

Page 53: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

monitoring, predatory pricing and unjust enrichment. These lawsuits seekremedies including compensatory and punitive damages, disgorgement of fundsreceived from the marketing and sale of cerivastatin and the establishment of atrust fund to finance the medical monitoring of former cerivastatin users. Weexpect the MDL Panel to consolidate the federal court cases before a single judgefor coordinated discovery and other pre-trial proceedings. In addition, severalactions have been initiated against other companies of the Bayer Group in othercountries. We expect additional lawsuits to be filed in the United States andelsewhere. If the plaintiffs in these actions were to be successful, it is possiblethat the ultimate liability could be material to our results of operations and cashflows. We believe that we have meritorious defenses in these actions, and intendto defend them vigorously.

145. The Company subsequently filed amendments to the Registration Statement with

the SEC, on January 14 and January 15, 2002, which contained substantially the same

statements. In the January 15, 2002, second amended Registration Statement, the Company

revealed for the first time that "We are currently aware of ... approximately 1,600 patients

assessed with non-fatal cases of rhabdomyolysis."

146. The Registration Statement and subsequent amendments thereto were materially

false and misleading in that defendants failed to disclose that they had been aware of drug

interaction problems with Baycol since 1997, and that they nevertheless sought FDA approval

for higher dosages of Baycol when they knew that the drug caused rhabdomyolysis (and that the

problem was exacerbated at higher dosage levels); when they knew that Baycol was causing

rhabdomyolysis at a much higher rate than other statins; and when they knew that evidence being

produced to plaintiffs in pending products liability lawsuits would subject the Company to

potentially billions of dollars in judgments, settlements, and legal fees from these suits.

Defendants' statements also concealed the fact that Bayer's records contained files and e-mails

showing that defendants had intentionally concealed the severity of the health hazards of Baycol

from both the medical and the investor communities.

-50-

Page 54: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

147. The Registration Statement and amendments thereto also contained selected

financial data for each of the years in the five-year period ended December 31, 2000, derived

from the Company' s consolidated financial statements , and for the six-month periods ended June

30, 2001 and 2000 from the Company's unaudited consolidated financial statements. The

financial data concerning the Company's net income and earnings per share were materially false

and misleading because, even though Baycol had been withdrawn, the Company did not reveal

the adverse facts concerning its knowledge of the dangers associated with Baycol, and the

concomitant massive exposure in Baycol products liability litigation . The financial statements

still failed to reflect required accruals for reserves for contingent liabilities associated with

Baycol.

148. On or about March 19, 2002, the Company issued its Annual Report for 2001,

which stated in part:

We also aim to ensure the safety of our products and their proper usage bycustomers . For example, when we received a growing number of reports of sideeffects associated with our cholesterol-lowering drug Lipobay/Baycol, especiallyin patients who had been prescribed the active substance gemfibrozilconcomitantly despite specific warnings and a contraindication in the productinformation, we voluntarily withdrew all dosages of the product from the marketin August 2001 in the interest of patient safety despite the adverse financialconsequences for the enterprise.

149. The 2001 Annual Report also contained a feature on Lipobay/Baycol, which

stated in part:

A responsible decision

The voluntary withdrawal of the cholesterol-lowering drug Lipobay/Baycol hashad far-reaching consequences for the Bayer Group. Yet there was no alternativeto this responsible decision. The safety and health of our patients had priorityover economic interests.

Expertise with Responsibility - these words taken from Bayer's mission statementare more than a slogan. Taking Lipobay/Baycol off the market was a decisionmade in line with this principle. Behaving responsibly in a situation like this

-51-

Page 55: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

meant investigating the scientific aspects objectively, making the requisitecorporate decisions and ultimately implementing the product's worldwidewithdrawal rapidly.

When physicians - and, in a few cases, patients themselves - submittedspontaneous reports indicating in particular that the combination of cerivastatinwith the fibrate gemfibrozil was associated with an elevated risk of potentiallylife-threatening rhabdomyolysis, Bayer took further steps to prevent concomitantuse of the two products. These included contraindicating the combination ofthese two drugs in the Lipobay/Baycol product information and running aninformation campaign aimed specifically at health care professionals.

150. Defendants' descriptions in the Annual Report concerning Baycol were materially

false and misleading because defendants and other Bayer officers had been aware of drug

interaction problems with Baycol and gemfibrozil since 1997, and they had continued to seek

FDA approval for higher dosages of Baycol after they were aware that Baycol caused

rhabdomyolysis (and that the problem was exacerbated at higher dosage levels) and after they

learned that Baycol was causing rhabdomyolysis at a much higher rate than other statins.

151. On April 26, 2002, Bayer issued its "Interim Report for the First Quarter 2002,"

reporting net income of € 523 million and earnings per share of € 0.72 per share. These figures

were materially false and misleading because even though Baycol had been withdrawn, the

Company did not reveal the adverse facts concerning its knowledge of the dangers associated

with Baycol and the Company's financial statements still did not reflect required accruals for

reserves for loss contingencies associated with Baycol. Defendants failed to disclose that the

misconduct of officers of Bayer Corp. and Bayer AG in connection with Baycol exposed the

companies to potentially billions of dollars in judgments, settlements, and legal fees from the

product liability lawsuits.

-52-

Page 56: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

152. On or about May 8, 2002, the Company issued a "Stockholders' Newsletter 2002

- Interim Report for the First Quarter; Report on the 50th Annual Stockholders' Meeting of

Bayer AG on April 26, 2002 in Cologne." The newsletter stated in part:

With regard to the cholesterol-lowering drug Lipobay/Baycol, which Bayervoluntarily withdrew from the market last year, Schneider explained Bayer'sposition in detail. * * * "We cannot understand the accusation that we did notimmediately notify the relevant supervisory authorities, the stockholders and thepublic of our decision," said Schneider. "On the contrary, we did everything inour power to explain our decision and its consequences to our stockholders andthe public, and above all of course to the affected patients and their physicians."

153. The statements in the May 8, 2002 Stockholders' Newsletter were materially false

and misleading because defendants failed to disclose that Baycol had displayed significant

problems with drug interactions as early as 1997 that could be magnified at higher doses, and

that defendants knew as early as 1998 that Baycol caused potentially fatal rhabdomyolysis.

Defendant Schneider failed to disclose the existing adverse facts concerning the Company's

exposure in the Baycol products liability litigation.

154. On June 24, 2002, the Company filed a Form 20-F Annual Report with the SEC,

which repeated the statements in the Company's December 20, 2001 Registration Statement and

provided additional facts concerning the prevalence of Baycol-related rhabdomyolysis, including

the statement that Bayer was "currently aware of approximately one hundred patients diagnosed

with rhabdomyolysis while taking cerivastatin who have died, as well as approximately 1,600

patients assessed with non-fatal cases of rhabdomyolysis." The Company stated that it did not

intend to reintroduce Baycol. Further, the Company provided an update on the U.S. lawsuits:

Cerivastatin-related actions. In August 2001, we voluntarily ceased marketingour cerivastatin anticholesterol products in response to reports of serious sideeffects in some patients. See Item 4, Information about the Company - HealthCare - Pharmaceuticals - Products. Since this withdrawal, about 1,700lawsuits, many of them putative class actions, have been initiated in the UnitedStates against Bayer Corporation and Bayer AG. * * * We believe that we havemeritorious defenses in these actions and are defending them vigorously. Without

-53-

Page 57: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

acknowledging any liability, we have settled a small number of these cases in thepast. We may, on a case-by-case basis, settle additional cases for reasonableamounts when, in our judgment, settlement is economically feasible given therisks and costs inherent in any litigation.

155. The Company's Form 20-F Annual Report was materially false and misleading in

that defendants failed to disclose that they had been aware of drug interaction problems with

Baycol since 1997, and that they nevertheless sought FDA approval for higher dosages of Baycol

when they knew that the drug caused rhabdomyolysis (and that the problem was exacerbated at

higher dosage levels), and when they knew that Baycol was causing rhabdomyolysis at a much

higher rate than other statins. Defendants' statements contained in the Form 20-F Annual Report

were also materially false and misleading in that defendants failed to disclose that the

misconduct of officers of Bayer Corp. and Bayer AG in connection with Baycol exposed the

companies to potentially billions of dollars in judgments, settlements, and legal fees from the

product liability lawsuits.

156. The Form 20-F Annual Report also contained financial data for each of the years

in the five-year period ended December 31, 2001. The data concerning the Company's net

income and earnings per share were materially false and misleading because, even though

Baycol had been recalled , the Company did not reveal the adverse facts concerning its

knowledge of the dangers associated with Baycol, and the concomitant massive exposure in the

Baycol products liability litigations . The Company' s financial statements did not reflect required

accruals for reserves for loss contingencies associated with Baycol.

157. On June 21, 2002, an analyst for Bank Gesellschaft Berlin issued a report on

Bayer, which stated in part:

As regards the legal risks relating to Baycol, Bayer let it be known that provisionswill not have to be set up. Given that side effects of Baycol are acute, a lengthymedical supervision and control of patients, who have not yet suffered any sideeffects, is not expected.... We share the management's opinion that risks of

-54-

Page 58: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Baycol cannot be compared with those of the fen-phen-case. Bayer referred to a"conservative" insurance coverage which will cover the costs relating to Baycol(cost of litigation, lawyer's costs etc.) We think that our estimates concerning theBaycol risks (discount of EUR lbn on the enterprise value) are ratherconservative.

158. On August 1, 2002, Bayer issued its Interim Report for the First Half 2002,

reporting that the "first half net income was 19 percent below last year," while second quarter net

income of € 293 million and earnings per share of € 0.40. The report further stated that "the

absence of this product [Baycol] was one of the main reasons for the 44 percent drop in the

operating result before exceptional items to € 0.8 billion." These figures were materially false

and misleading because, even though Baycol had been recalled, the Company did not reveal the

adverse facts concerning its knowledge of the dangers associated with Baycol, and the

concomitant massive exposure in the Baycol products liability litigations. Moreover, the

Company's financial statements did not reflect required accruals for reserves for loss

contingencies associated with Baycol.

159. On October 21, 2002, an analyst for Commerzbank issued a report on Bayer,

which stated in part:

Bayer is now defending 3,500 lawsuits relating to Baycol, its anti-cholesterolproduct withdrawn last year, according to the Financial Times Deutschland today.This has increased from 2,000 at the start of the year. Clearly this news isworrying, and will weigh on the share price. However, Mr. Wenning, CEO,remains emphatic that all settlements will be fully covered by product liabilityinsurance, unless it is proven that Bayer actually did something wrong (whichappears unlikely given its voluntary withdrawal ofthe product). We believe thatthe market is currently assuming a cost to Bayer of c.€lbn - €2bn. The courtprocess is expected to begin in Q1 2003.

160. On November 12, 2002, Bayer issued its "Interim Report for the First Three

Quarters of 2002," reporting third quarter net income of € 656 million and earnings per share of

€ 0.90. These figures were materially false and misleading because, even though Baycol had

been recalled, the Company did not reveal the adverse facts concerning its knowledge of the

-55-

Page 59: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

dangers associated with Baycol, and the concomitant massive exposure in the Baycol products

liability litigations. Moreover, the Company's financial statements did not reflect required

accruals for reserves for loss contingencies associated with Baycol.

161. On November 27, 2002, an analyst for Julius Bar, an investment firm, issued a

report on Bayer, which stated in part:

A short note on the Lipobay/Baycol litigation: as communicated earlier thismonth, Bayer is currently aware of around 5,700 individual lawsuits being filed,of which a majority originating in the US. Trials will start in early 2003 and wedo not expect a final court decision until after 2003. While we still believe thatBayer has a fairly good chance of defending itself successfully, we acknowledgethe risk of a US lawsuit with a jury decision. We currently forecast Bayer havingto ultimately pay EUR2bn on a DCF basis. This would be more on a future cashflow basis, bearing in mind that payments are typically made over a decade.EUR2bn divided by the current number of shares would cost another EUR2.74per share. Bayer continues to say that most of the current settlements done arecovered by the `usual amount ofproduct liability insurance' and so are the legalcosts.

H. Defendants' Knowledge of Baycol's Dangers Is Made Public

162. On Saturday, February 22, 2003, The New York Times published an article

entitled "Papers Indicate That Bayer Knew of Dangers of Its Cholesterol Drug." It stated:

Newly disclosed company documents indicate that some senior executives atBayer were aware that their anticholesterol drug had serious problems long beforethe company pulled it from the market.

The documents, made public by lawyers suing Bayer, include e-mail messages,memos and sworn depositions of executives that suggest that Bayer promoted thedrug, Baycol, even as a company analysis found that patients on Baycol werefalling ill or dying from a rare muscle condition much more often than patients onsimilar drugs.

The lawyers are suing Bayer, which is based in Germany, and its Britishmarketing partner, GlaxoSmithKline, in federal court in Minneapolis and indozens of other cases around the country. Though the documents do not paint afull picture of what the companies knew, or how early they knew it before Baycolwas pulled from the market in 2001, they provide a rare glimpse inside a majordrug company's marketing efforts in the face of mounting indications of trouble.

-56-

Page 60: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Bayer, which developed Baycol, says the drug was marketed appropriately and issafe when used properly.

But approximately 100 deaths and 1,600 injuries worldwide have been linked to amuscle disorder caused by the drug, according to regulatory filings by thecompany. Similar drugs are at least as effective as Baycol but cause the disordermuch less frequently, according to the Food and Drug Administration.

The F.D.A., which allowed the sale of two higher doses of Baycol in the yearsafter initially approving the drug, said it did not see a rapid increase in deaths untilthe spring of 2001, and Bayer took the drug off the market shortly after theagency raised serious concerns about it with company executives in late July.

The drug, which studies found to be less effective at its initially approved strengththan competing medicines, caused more problems at higher doses. Seniorexecutives at Bayer and GlaxoSmithKline were aware that this might be possibleas early as 1997, according to a letter that is part of the court filings.

More than 10,000 patients who took Baycol or the families of those who diedhave filed lawsuits against Bayer and GlaxoSmithKline. The first trial, in CorpusChristi, Tex., began Tuesday.

Bayer and GlaxoSmithKline have settled more than 400 of the cases forindividual amounts ranging from $200,000 to $1.2 million, according to lawyersfor the patients. At that rate, the drug makers could pay billions of dollars toresolve all the lawsuits. The companies deny the allegations in the lawsuits, andBayer says that no more than 15 percent of the patients who have sued actuallysuffered any injury and that it is trying to settle most of those claims. Lawyers forthe plaintiffs dispute that estimate.

The companies have agreed that Bayer, which discovered the drug and played thebiggest role in marketing it, will pay 95 percent of the cost of settling cases.

163. The securities markets were closed on the day the article was published. On the

next trading day, the price of Bayer securities fell approximately ten percent, to $15.44 from the

prior trading day's close of $17.15.

164. On February 26, 2003, The New York Times published an article entitled "Bayer

Says It Is Trying to Settle Another 500 Lawsuits Over Its Drug for Cholesterol." It stated:

Bayer A.G., the German drug maker, said today that it was trying to settle another500 lawsuits over its anticholesterol drug Baycol.

-57-

Page 61: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Baycol, once the mainstay of a drugs unit that Bayer is trying to spin off, waswithdrawn in August 2001 after dozens of deaths worldwide. Credit analysts atMerrill Lynch said reports that management knew of the risks of Baycol as muchas four years before recalling the drug could expose the company to claims of upto 5 billion euros ($5.4 billion), if negligence was proved.

Bayer has already reached settlements in 450 cases concerning the medicine, at acost of $125 million, and its lawyer, Philip S. Beck, said the group was in talks tosettle additional cases involving patients who suffered side effects.

"We have 500 cases altogether where we are in active discussions with plaintiffs'lawyers," Mr. Beck said from Corpus Christi, Tex., where the first case overBaycol is being heard.

Most of the 7,800 lawsuits filed over Baycol, however, did not come from peoplewho had experienced any adverse side effects, he said. He said that Bayerintended to defend itself vigorously in cases with no evidence of side effects.

A majority of settlements so far have been at the lower end of the $200,000 to$1.2 million range suggested in the media, he added.

ACCOUNTING VIOLATIONS

165. During the Class Period, Bayer AG violated Generally Accepted Accounting

Principles in the U.S. ("U.S. GAAP"), SEC rules, the rules of the International Accounting

Standards Committee ("IASC"), and stock exchange rules in Germany by failing to properly

report its financial results for FY 1998 through 2002. Bayer AG manipulated its financial

statements by not disclosing and accruing for loss contingencies associated with the Baycol

lawsuits, which artificially inflated the Company's income and understated its liabilities.

166. U.S. GAAP are those principles recognized by the accounting profession as the

conventions , rules and procedures necessary to define accepted accounting practice at a

particular time . SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements

filed with the SEC which are not prepared in compliance with U.S. GAAP are presumed to be

misleading and inaccurate . Regulation S-X requires that interim financial statements must also

comply with U.S. GAAP, with the exception that interim financial statements need not include

-58-

Page 62: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

disclosure which would be duplicative of disclosures accompanying annual financial statements.

17 C.F.R. § 210.10-01(a).

167. The International Accounting Standards Committee (the "IASC") and the related

International Accounting Standards (IAS's) are those standards which set out recognition,

measurement, presentation and disclosure requirements dealing with transactions and events that

are important in financial statements in an international environment.

168. The undisclosed adverse information concealed by defendants during the Class

Period is the type of information which, because of SEC regulations, regulations of the national

stock exchanges, and customary business practice, is expected by investors and securities

analysts to be disclosed, and is known by corporate officials and their legal and financial

advisors to be the type of information which is expected to be and must be disclosed.

A. U.S. GAAP, IAS AND SEC VIOLATIONS

169. Bayer AG registered its securities with the SEC pursuant to Section 12(b) of the

Securities Exchange Act 1934 on December 21, 2001 , using Form 20-F. The registration

included financial statements for the years ended December 31, 2000, 1999, and 1998.

170. In addition to this initial registration, Bayer AG filed its annual reports with the

SEC pursuant to Section 13(a) of the Securities Exchange Act 1934 for the year ended December

31, 2001. All financial statements were represented to have been prepared in conformity with

GAAP in Germany, and in accordance with the rules of the IASC and IAS' s. There is no

requirement that a foreign issuer file quarterly reports with the SEC.

171. The SEC allows foreign issuers to prepare their financial statements in accordance

with a comprehensive body of GAAP other then U.S. GAAP, provided that such statements

contain a reconciliation to U.S. GAAP.

-59-

Page 63: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

., r

172. Item 18 of Form 20-F provides, among other things, that the financial statements

shall disclose an informational content substantially similar to financial statements that comply

with U.S. GAAP and SEC Regulation S-X. Item 18 also requires that the financial statements

contain a discussion of any material variations in accounting principles, practices, and methods

being used for reports, as compared to those generally accepted in the U.S., and a quantification

of each material variation.

173. Item 9 of Form 20-F provides that a registrant shall describe any known trends or

uncertainties that have had or the registrant reasonably expects will have a material favorable or

unfavorable impact on net sales or revenues or income from continuing operations in the

management discussion and analysis section ("MD&A").

174. Defendants knew or recklessly disregarded that Bayer AG's public filings were

materially false and misleading during the Class Period because they failed to disclose the

uncertainties in its MD&A and financial statements concerning sales and earnings from Baycol,

due to serious medical safety concerns known internally since as early as 1997.

175. Defendants' intent to deceive investors is further evidenced by the failure of

Bayer AG's Class Period financial statements to disclose and accrue contingent liabilities

associated with those safety concerns in conformity with U.S. GAAP and Statement of Financial

Accounting Standard ("SFAS") No. 5 Accounting for Contingencies (March 1975).

176. SFAS No. 5 ¶ 10 requires that financial statements disclose contingencies when it

is at least reasonably possible (i.e., a greater than slight chance) that a loss may have been

incurred . The disclosure shall indicate the nature of the contingency and shall give an estimate

of the possible loss, a range of loss, or state that such an estimate cannot be made. Similarly,

IAS 37 Provisions , Contingent Liabilities and Contingent Assets (July 1998) provides similar

-60-

Page 64: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

disclosure requirements to SFAS No. 5 and states that "contingent liabilities are disclosed unless

an outflow is only remotely likely."

177. The SEC considers the disclosure of loss contingencies to be so important to an

informed investment decision that it issued Article 10-01 of Regulation S-X [17 C.F.R. § 210.10-

01], which provides that disclosures in interim period financial statements may be abbreviated

and need not duplicate the disclosure contained in the most recent audited financial statements,

except that "where material contingencies exist, disclosure of such matters shall be provided

even though a significant change since year end may not have occurred."

178. In addition, U.S. GAAP requires that financial statements disclose significant

risks and uncertainties associated with an entity's business. American Institute of Certified

Public Accountant's Statement of Position No. 94-6.

179. In violation of U.S. GAAP and the IAS's, Bayer AG's financial statements for the

years ended December 31, 2000, 1999, and 1998, and interim periods improperly failed to

disclose the medical safety concerns with Baycol and the impending financial impact upon the

Company. In addition, Bayer AG continued to issue misleading statements to the public

regarding Baycol until 2003. The first disclosure in Bayer AG's financial statements regarding

Baycol was not made until 2001 in Form 20-F filed with the SEC on January 15, 2002, but that

disclosure was insufficient to inform investors of the Company's true potential exposure from

Baycol-related lawsuits. Since defendants knew or recklessly disregarded the safety concerns

with Baycol from 1997 through the end of the Class Period, and knew that Baycol was the

Company's third best-selling drug, defendants deliberately misled the investing public by not

disclosing such information in Bayer AG's annual financial statements from 1998 to 2001.

-61-

Page 65: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

180. Bayer AG also violated the SEC requirement to furnish a Form 6-K promptly

upon material "changes in the financial condition and results of operations; material legal

proceedings ... after they are made public." Bayer AG did not file a Form 6-K in connection

with the August 2001 withdrawal of Baycol. Moreover, Bayer AG did not file a Form 6-K

discussing the Baycol-related product liability lawsuits filed against Bayer AG, Bayer Corp.,

and others as required by Rule 12b [17 CFR 240.12b] , until April 2003 -- 18 months after the

first suit was filed.

181. Defendants had an affirmative duty to disclose the safety issues regarding Baycol

in its interim financial statements in accordance with U.S. GAAP. As indicated by Accounting

Principles Board Opinion No. 28, ¶ 22, Interim Financial Reporting (December 1973),

"Contingencies and other uncertainties that could be expected to affect the fairness of

presentation of financial data at an interim date should be disclosed in interim reports in the same

manner required for annual reports."

182. U.S. GAAP and lAS' s also require that financial statements accrue for loss

contingencies if information available prior to the issuance of the financial statements indicates

that it is probable (i.e., likely) that a liability has been incurred at the date of the financial

statements and the amount of the loss can be reasonably estimated. SFAS No. 5, ¶ 8. Similarly,

under IAS 37, "provisions should be recognized ... [if] it is probable (i.e. more likely than not)

that an outflow of resources ... will be required to settle [an] obligation ... and a reliable

estimate can be made of the amount of the obligation." Defendants were aware of the medical

safety issues surrounding Baycol and the likely associated liabilities incurred in connection

therewith, yet misleadingly failed to accrue loss contingencies under U.S. GAAP or make

provisions under IAS's in their financial statements for the period from 1998 to 2002.

-62-

Page 66: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

183. Additionally, Financial Interpretation ("FIN") No. 14, Reasonable Estimation of

the Amount of a Loss an Interpretation of FASB Statement No. 5 (September 1976), states that

the condition in SFAS No. 5 -- that the loss can be reasonably estimated -- does not delay accrual

of a loss until a single amount can be reasonably estimated . When some amount within a range

of losses appears to be a better estimate than any other amount within the range, then that amount

shall be accrued. When no amount within the range is better than any other, the minimum in the

range shall be accrued . FIN 14, ¶ 3.

184. In addition to the false financial reporting noted above , Bayer AG' s financial

statements violated at least the following other provisions of U.S. GAAP:

(a) The principle that financial reporting should provide information that isuseful to present and potential investors in making rational investment decisionsand that information should be comprehensible to those who have a reasonableunderstanding of business and economic activities (FASB Statement of ConceptsNo. 1, 34);

(b) The principle that financial reporting should provide information about theeconomic resources of an enterprise, the claims to those resources, and effects oftransactions, events and circumstances that change resources and claims to thoseresources was violated (FASB Statement of Concepts No. 1, 140);

(c) The principle that financial reporting should provide information abouthow management of an enterprise has discharged its stewardship responsibility toowners (stockholders) for the use of enterprise resources entrusted to it. To theextent that management offers securities of the enterprise to the public, itvoluntarily accepts wider responsibilities for accountability to prospectiveinvestors and to the public in general (FASB Statement of Concepts No. 1, 50);

(d) The principle that financial reporting should provide information about anenterprise's financial performance during a period. Investors and creditors oftenuse information about the past to help in assessing the prospects of an enterprise.Thus, although investment and credit decisions reflect investors' expectationsabout future enterprise performance, those expectations are commonly based atleast partly on evaluations of past enterprise performance (FASB Statement ofConcepts No. 1, 42);

(e) The principle that financial reporting should be reliable in that itrepresents what it purports to represent. The notion that information should be

-63-

Page 67: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

reliable as well as relevant is central to accounting (FASB Statement of ConceptsNo. 2, 58-59);

(f) The principle of completeness, which means that nothing, is left out of theinformation that may be necessary to ensure that it validly represents underlyingevents and conditions (FASB Statement of Concepts No. 2, 80); and

(g) The principle that conservatism be used as a prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in business

situations are adequately considered. The best way to avoid injury to investors is

to try to ensure that what is reported represents what it purports to represent

(FASB Statement of Concepts No. 2, 95, 97).

B. GERMAN STOCK EXCHANGE RULE VIOLATIONS

185. In addition to the foregoing U.S. GAAP, SEC, and related IAS violations,

defendants also violated IAS's and stock exchange rules in Germany from 1998 to 2002. The

exchanges in Germany, on which Bayer common shares were listed, are governed by the

Exchange Supervisory Authority. Each exchange requires issuers to file annual and quarterly

reports , apply international accounting standards (IASs or U.S. GAAP), and provide ad-hoc

disclosures. The exchanges are governed by strict international transparency requirements.

During the Class Period, defendants were subject to these requirements.

186. Defendants knew or recklessly disregarded that Bayer AG's financial statements

and quarterly reports under IAS 37 and German stock exchanges rules failed to disclose and

accrue for loss contingencies related to the known serious medical safety concerns with Baycol.

187. LAS 37 states that "contingent liabilities are disclosed unless outflow is only

remotely likely . . . and provisions should be recognized ... [if] it is probable (i.e. more likely

than not) that an outflow of resources ... will be required to settle an obligation ... and a

reliable estimate can be made of the amount of the obligation." German stock exchange rules

require that issuers publish quarterly reports in accordance with the same accounting principles

as annual financial statements. Defendants misleadingly failed to disclose matters related to

-64-

Page 68: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

Baycol in its quarterly reports until August 21, 2001. The August 21, 2001, quarterly report and

all subsequent Bayer quarterly and annual reports failed to disclose material facts concerning

defendants' knowledge of the safety risks regarding Baycol. That information was material for

investors seeking to evaluate the Company's exposure in the Baycol-related lawsuits. Thus,

Bayer AG's quarterly and annual reports from first quarter 1998 to the end of the Class Period

were materially misleading. Additionally, defendants willfully failed to accrue for loss

contingencies on a quarterly or annual basis at any time during the Class Period.

INDIVIDUAL DEFENDANTS' LIABILITY; DUTY

188. The Individual Defendants, as officers of Bayer AG and Bayer Corp., are

controlling persons of those entities within the meaning of Section 20(a) of the Exchange Act. It

is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume

that the false or misleading information contained in the Company's public filings and

statements in Bayer AG and Bayer Corp. press releases and other publications, as alleged herein,

result from the collective action of this narrowly defined group of defendants. By reason of their

senior positions with Bayer AG and Bayer Corp., they were able to and did, directly or

indirectly, in whole or in material part, control the content, and participate in the dissemination,

of public statements issued by or on behalf of Bayer AG and Bayer Corp. They participated in

and approved the issuance of such statements made throughout the Class Period, including the

materially false and misleading statements and omissions identified herein. The materially false

and misleading statements are presumed to be the work of the Individual Defendants, and thus,

they are each individually liable for all of these statements.

189. By reason of their senior positions with Bayer AG and/or Bayer Corp., the

Individual Defendants had access to internal Company documents, reports and other information,

including the adverse, non-public information concerning the Company's sales, services,

-65-

Page 69: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

financial condition, and prospects, and attended management and/or board of directors meetings.

As a result of the foregoing, they were responsible for the truthfulness and accuracy of the

Company's public statements described herein and knew or recklessly disregarded the falsity

thereof.

190. Bayer AG, Bayer Corp. and the Individual Defendants, as officers of a publicly

held company, had a duty to and failed promptly to disseminate truthful and accurate information

with respect to Bayer AG and to promptly correct any public statements issued by or on behalf of

Bayer AG and Bayer Corp. which had become false and misleading.

191. Each of the defendants knew that the misleading statements and omissions

complained of herein would adversely affect the integrity of the market for Bayer securities and

would cause the price of those securities to become artificially inflated or distorted. Each of the

defendants acted knowingly or in such a manner as to constitute a fraud and deceit upon

plaintiffs and the other members of the Class.

192. Defendants are liable, jointly and severally, as direct participants in and co-

conspirators, for the wrongs complained of herein.

THE MARKET FOR BAYER SECURITIES;APPLICABILITY OF PRESUMPTION OF RELIANCE;

FRAUD-ON-THE-MARKET DOCTRINE

193. Bayer AG securities , as the term is used in this complaint, includes the capital

stock and American Depositary Receipts (ADRs) of Bayer AG. During the Class Period, Bayer

AGsecurities were traded in the United States and on exchanges in Germany and other countries

in Europe.

194. Plaintiffs will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

-66-

Page 70: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

(a) defendants made public misrepresentations or failed to disclose materialfacts during the Class Period;

(b) the omissions and misrepresentations were material;

(c) the securities of the Company traded in an open and efficient market;

(d) the misrepresentations and omissions alleged would tend to induce areasonable investor to misjudge the value and prospects of the Company'ssecurities; and

(e) plaintiffs and members of the Class traded in Bayer AG securities betweenthe time the defendants failed to disclose or misrepresented material facts and thetime the true facts were disclosed, without knowledge of the omitted ormisrepresented facts.

195. At all relevant times, the market for Bayer securities was an efficient market, for

the following reasons, among others:

(a) Bayer securities met the requirements for listing, and were listed andactively traded, on the New York Stock Exchange and exchanges throughoutGermany and other European countries, which were all highly efficient andinterrelated markets;

(b) As a regulated issuer, Bayer AG filed periodic reports with the SEC andexchanges throughout Germany and other European countries;

(c) Bayer AG securities were followed by securities analysts employed bymajor brokerage firms who wrote reports which were distributed to the sales forceand customers of their respective firms. These reports were publicly availableand entered the public marketplace; and

(d) Bayer AG regularly issued press releases which were carried by nationaland international newswires. Each of these releases was publicly available andentered the public marketplace.

196. Based upon the foregoing, the market for Bayer securities promptly digested

current information with respect to Bayer AG from all publicly available sources and reflected

such information in the price of Bayer AG securities. Under these circumstances, all purchasers

of Bayer securities during the Class Period suffered similar injury through their trades in Bayer

securities at artificially inflated or distorted prices and a presumption of reliance applies.

-67-

Page 71: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

I

CLASS ACTION ALLEGATIONS

197. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and 23(b)(3)

of the Federal Rules of Civil Procedure. The Class is defined as all persons who purchased

securities of Bayer AG between March 6, 1998 , and February 21, 2003, inclusive (the "Class

Period") and were damaged thereby. Excluded from the Class are defendants; members of the

Individual Defendants' immediate families; and the officers, directors, affiliates, legal

representatives , heirs , predecessors , successors , or assigns of any defendant.

198. The members of the Class are so numerous that joinder of all members is

impracticable. The exact number of Class members is not known to plaintiffs at this time but can

readily be ascertained in discovery. Plaintiffs believe that there are, at a minimum, thousands of

members of the Class who purchased Bayer AG securities during the Class Period. As of June

30, 2003, the Company had over 730 million shares of capital stock outstanding.

199. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants' acts asalleged herein;

(b) whether the Registration Statement misrepresented and/or omittedmaterial facts;

(c) whether Bayer AG and Bayer Corp. issued false and misleadingstatements during the Class Period;

(d) whether the Individual Defendants issued and caused Bayer AG and BayerCorp. to issue false and misleading statements during the Class Period;

(e) whether defendants acted knowingly or recklessly in issuing false andmisleading statements;

-68-

Page 72: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

(f) whether the market price of Bayer AG securities during the Class Periodwas artificially inflated or distorted because of defendants' conduct complained ofherein; and

(g) whether the members of the Class have sustained damages and, if so, whatis the proper measure of damages.

200. Plaintiffs' claims are typical of the claims of the members of the Class as

plaintiffs and members of the Class sustained damages arising out of defendants' wrongful

conduct in violation of the federal securities laws as complained of herein.

201. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class actions and securities

litigation. Plaintiffs have no interests antagonistic to or in conflict with those of the Class.

202. A class action is superior to other available methods for the fair and efficient

adjudication of the controversy since joinder of all members of the Class is impracticable.

Furthermore, because the damages suffered by the individual Class members may be relatively

small, the expense and burden of individual litigation makes it impracticable for the Class

members individually to redress the wrongs done to them. There will be no difficulty in the

management of this action as a class action.

NO STATUTORY SAFE HARBOR

203. The statutory safe harbor provided for forward-looking statements under certain

circumstances, Section 21E of the Exchange Act, 15 U.S.C. § 78u-5, does not apply to any of the

false statements pleaded in this complaint. Moreover, the statutory safe harbor in the Securities

Act (Section 27A, 15 U.S.C. §77z-2), does not apply to any of the false statements in the

Registration Statement and amendments thereto pleaded in this complaint. Certain of the

specific statements pleaded herein, including, among others, statements made in conferences

with analysts and investors, were not identified as "forward-looking statements" when made.

-69-

Page 73: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

S ^ r

r •

Nor was it stated with respect to any of the statements forming the basis of this complaint that

actual results "could differ materially from those projected ." To the extent there were any

forward-looking statements, there were no meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the purportedly

forward-looking statements . Alternatively, to the extent that the statutory safe harbor does apply

to any forward-looking statements pleaded herein, defendants are liable for those false forward-

looking statements because at the time each of those forward-looking statements was made the

particular speaker knew that the particular forward-looking statement was false and/or the

forward-looking statement was authorized and/or approved by an executive officer of Bayer who

knew that those statements were false when made.

204. To the extent that defendants ' written statements regarding the Company's

expected revenues, earnings, earnings per share and growth, are deemed to be forward-looking

statements , those statements are actionable for the following reasons:

(a) such statements were material to investors;

(b) the statements were not accompanied by meaningful cautionary statementsidentifying important factors that could cause actual results to differ materiallyfrom those in the purportedly forward-looking statements. Rather, defendantsmerely advised investors that the Company's results could differ based upongeneral risks and uncertainties. Such statements themselves were materially falseand misleading for failing to disclose the concrete present facts and risks set forthabove; and

(c) at the time the statements were made, they were made by and/or with theapproval of senior Bayer executives, including the Individual Defendants, amongothers, who knew that the particular statements were materially false andmisleading for the reasons set forth above.

205. In addition, defendants' oral statements during the Class Period regarding

expected growth of revenues and earnings based on increased Baycol sales are not protected by

the safe harbor provision of the PSLRA because:

-70-

Page 74: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

7C

(a) such statements were material to investors;

(b) such statements were not identified as forward looking;

(c) such statements were not accompanied by a caution that actual resultscould differ materially from those projected;

(d) defendants failed to identify a readily available written documentcontaining information about factors which could cause actual results to differmaterially from those projected; and

(e) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for Baycolsales could be achieved only if the FDA approved, and defendants marketed, an0.8 mg version of Baycol, which they knew to be strongly linked to potentiallyfatal rhabdomyolysis.

CLAIMS FOR RELIEF

COUNT I

[Violations Of Section 10(B) And Rule 10b-5By All Defendants]

206. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein.

207. This Count is asserted against all defendants and is based upon Section 10(b) of

the Exchange Act, 15 U.S.C. §78j(b), and Rule lOb-5 promulgated thereunder.

208. During the Class Period, defendants, singly and in concert, directly engaged in a

common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly or

recklessly engaged in acts, transactions, practices and courses of business which operated as a

fraud and deceit upon plaintiffs and the other members of the Class; made various deceptive and

untrue statements of material facts and omitted to state material facts necessary in order to make

the statements made, in light of the circumstances under which they were made, not misleading;

and employed devices, schemes and artifices to defraud in connection with the purchase and sale

of securities. The purpose and effect of said scheme, plan, and unlawful course of conduct were,

-71-

Page 75: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

among other things, to: (a) conceal the adverse facts concerning the Company' s operations,

particularly with respect to its financial condition and prospects; (b) artificially inflate or distort

and maintain the market price of Bayer AG securities; and (c) cause plaintiffs and the other

members of the Class to trade in Bayer AG securities at inflated or distorted prices.

209. During the Class Period, defendants, pursuant to said plan, scheme, and unlawful

course of conduct, knowingly and/or recklessly, participated directly or indirectly in the

preparation and issuance of deceptive and materially false and misleading statements to the

investing public as identified above.

210. The Individual Defendants, by virtue of their positions at the Company, had actual

knowledge of the materially false and misleading statements and material omissions alleged

herein and intended thereby to deceive plaintiffs and the other members of the Class, or, in the

alternative, the Individual Defendants acted with reckless disregard for the truth in that they

failed or refused to ascertain and disclose such facts as would reveal the materially false and

misleading nature of the statements made, although such facts were readily available to

defendants. Said acts and omissions of defendants were committed knowingly or with reckless

disregard for the truth and defendants knew or recklessly disregarded that material facts were

being misrepresented or omitted as described above.

211. The Individual Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, the Individual

Defendants were able to and did, directly or indirectly, control the content of the statements of

the Company. As officers and directors of a publicly held company, the Individual Defendants

had a duty to disseminate timely, accurate, and truthful information with respect to the

Company's businesses , operations , future financial condition and future prospects . As a result of

-72-

Page 76: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

i`.

r ,w

the dissemination of the aforementioned false and misleading reports, releases and public

statements , the market price of Bayer AG securities was artificially inflated or distorted

throughout the Class Period . In ignorance of the adverse facts concerning Bayer AG' s business

and financial condition which were concealed by defendants, plaintiffs and the other members of

the Class traded in Bayer securities at artificially inflated or distorted prices and relied upon the

price of the stock, the integrity of the market for the stock and/or upon statements disseminated

by defendants, and were damaged thereby.

212. During the Class Period, Bayer AG securities were traded on the New York Stock

Exchange and other exchanges throughout Germany and other European countries, all active and

efficient markets . Plaintiffs and the other members of the Class, relying on the materially false

and misleading statements described herein, which the defendants made, issued or caused to be

disseminated, or relying upon the integrity of the market, traded in Bayer AG securities at prices

artificially inflated or distorted by defendants' wrongful conduct. Had plaintiffs and the other

members of the Class known the truth, they would not have traded in Bayer AG securities or

would not have traded in Bayer AG securities at the inflated or distorted prices that were paid.

At the time of the purchases by plaintiffs and the Class, the true value of Bayer AG securities

was substantially lower than the prices paid by plaintiffs and the other members of the Class.

The market price of Bayer securities declined sharply upon public disclosure of the facts alleged

in this complaint.

213. By reason of the conduct alleged herein, defendants knowingly or recklessly,

directly or indirectly, violated Section 10(b) of the Exchange Act and Rule 10-5 promulgated

thereunder. As a direct and proximate result of their wrongful conduct, plaintiffs and other

-73-

Page 77: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

rII vY y ♦ ^

members of the Class suffered damages in connection with purchasing the Company's securities

during the Class Period.

COUNT II

[Violations Of Section 20(A) Of TheExchange Act By The Individual Defendants]

214. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein.

215. During the Class Period, the Individual Defendants participated in the operation

and management of the Company, and conducted and participated, directly and indirectly, in the

conduct of Bayer AG's business affairs. By virtue of Individual Defendants' high-level and

senior positions, they knew the adverse non-public information about Bayer AG sales, services,

financial condition, and future prospects, or recklessly disregarded such adverse facts.

216. As directors and officers of a publicly owned company, the Individual Defendants

had a duty to disseminate accurate and truthful information with respect to Bayer AG's financial

condition and prospects, and to promptly correct any public statements issued by Bayer AG

which had become materially false or misleading.

217. Because of their positions of control and authority as senior officers and directors

of Bayer AG and Bayer Corp., the Individual Defendants had the power and authority, and

exercised the same, to control the contents of the various reports and press releases which Bayer

AG disseminated in the marketplace during the Class Period concerning the Company' s sales,

services, financial condition, and future prospects. Throughout the Class Period, the Individual

Defendants exercised their power and authority to cause Bayer AG and Bayer Corp. to engage in

the wrongful acts complained herein. Therefore, each was a "controlling person" of Bayer AG

and/or Bayer Corp. within the meaning of Section 20(a) of the Exchange Act. In their capacities,

-74-

Page 78: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

the Individual Defendants culpably participated in the unlawful conduct alleged which

artificially inflated or distorted the market price of Bayer AG securities.

218. By reason of the above conduct, the Individual Defendants are liable pursuant to

Section 20 of the Exchange Act for the violations of Bayer AG and Bayer Corp. As a direct and

proximate result of their wrongful conduct, plaintiffs and other members of the Class suffered

damages in connection with purchasing theBayer AG's securities during the Class Period.

COUNT III

[Violations of Section 11 of the Securities Act byDefendants Bayer AG and Wenning]

219. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein, except for any allegations above that contain any facts

needed to prove any elements not required to state a Section 11 claim, including allegations

relating to scienter.

220. This Count is brought pursuant to Section 11 of the Securities Act, 15 U.S.C. §

77k, on behalf of all plaintiffs who purchased Bayer AG ADRs issued pursuant to or traceable to

Bayer AG's Form 20-F Registration Statement , filed with the SEC on December 21, 2001, and

amendments 1 and 2 thereto filed with the SEC on January 14 and 15, 2002, respectively

(collectively, the "Registration Statement"), against defendants Bayer AG and Wenning and does

not sound in fraud.

221. The Registration Statement for Bayer AG ADRs was materially misleading,

contained untrue statements of material facts, and omitted to state other facts necessary to make

the statements made not misleading.

-75-

Page 79: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

V .

222. Bayer AG is the registrant of the ADRs. As issuer of the ADRs, Bayer AG is

strictly liable to the plaintiffs and the class for the misstatements and omissions contained in the

Registration Statement.

223. Defendant Wenning signed the Registration Statement and is liable to plaintiffs

and the class.

224. Each defendant named in this Count issued, caused to be issued and participated

in the issuance of materially false and misleading written statements to the investing public that

were contained in the Registration Statement, which misrepresented or failed to disclose, inter

alia, the facts set forth above. By reasons of the conduct herein alleged, each defendant named

herein violated, and/or controlled a person who violated, Section 11 of the Securities Act.

225. Plaintiffs and the class purchased Bayer AG ADRs pursuant to and traceable to

the Registration Statement.

226. By reason of the conduct alleged herein, defendants violated Section 11 of the

Securities Act.

227. As a result of the wrongs alleged herein, plaintiffs and other class members have

sustained damages.

228. This action has been brought with two years after the discovery of the untrue

statements or the omissions, or after such discovery should have been made by the exercise of

reasonable diligence, and within five years after the securities were bona fide offered to the

public.

-76-

Page 80: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

I

COUNT IV

[Violations of Section 15 of the Securities Actby Defendants Schneider and Wenning]

229. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein, except for any allegations above that contain any facts

needed to prove any elements not required to state a Section 15 claim, including allegations

relating to scienter.

230. This Count is brought pursuant to Section 15 of the Securities Act, 15 U.S.C. §

77o, against defendants Schneider and Wenning.

231. Defendants Schneider and Wenning were controlling persons of Bayer AG within

the meaning of Section 15 of the Securities Act. By virtue of their high-level positions and their

participation in the Company's operations, defendants Schneider and Wenning had the power to

influence and control and did influence and control the decision-making of the Company,

including the content and dissemination of the Registration Statement that plaintiffs contend is

false and misleading. Defendant Schneider and Wenning were provided with or had unlimited

access to copies of the complained of statements prior to and/or shortly after the Registration

Statement was issued and had the ability to prevent the issuance of the Registration Statement or

cause the Registration Statement to be corrected.

232. The defendants named in this Count were culpable participants in the violations of

Section 11 of the Securities Act alleged in Count III above, based on their having participated in

the process that allowed the registration of the ADRs to be successfully completed, and

defendant Wenning's culpable participation is further shown by his having signed the

Registration Statement. As a result, defendants Schneider and Wenning are liable jointly and

-77-

Page 81: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

severally with defendant Bayer AG under Section 15 for the Company's primary violations of

Section 11 of the Securities Act.

WHEREFORE, plaintiffs pray for judgment against defendants as follows:

A. Declaring this action to be a proper class action under Rule 23 of the

Federal Rules of Civil Procedure;

B. Awarding compensatory damages and interest thereon in favor of

plaintiffs and the other members of the Class against defendants;

C. Awarding Lead Plaintiff the fees and expenses incurred in this action,

including reasonable allowance of fees for Lead Plaintiff's attorneys and experts, and other costs;

and

D. Granting such other and further relief as this Court may deem just and

proper.

JURY TRIAL DEMAND

Plaintiffs demand a trial by jury of all issues so triable.

Dated: October 31, 2003Respectfully submitted,

MILBERG WEISS BERSHADDYNES & LERACH LLP

61^=e a . 6.0et--4-8 /-e- 4 SMelvyn I. Weiss (MW-1392)Michael C. Spencer (MS-8874)Lee A. Weiss (LW-1130)Lili R. Sabo (LS-0370)One Pennsylvania PlazaNew York, NY 10119-1065Telephone: 212/594-5300212/868-1229 (fax)

Plaintiffs 'Lead Counsel

-78-

Page 82: Steven Sanders, et al. v. Bayer (AG) …securities.stanford.edu/filings-documents/1027/BAY03-01/...2003/10/31  · Schneider, Chairman of Bayer AG's Board of Management, identifed

FAW

CERTIFICATE OF SERVICE

I, Lili R. Sabo, hereby certify that on October 31, 2003, I caused a true and correct copy

of the attached "Consolidated Amended Complaint" to be served upon the following counsel in

the manner indicated:

Byfacsimile and First Class Mail:

Walter C. CarlsonSidley Austin Brown & Wood LLPBank One Plaza10 South Dearborn StreetChicago, Illinois 60603(312) 853-7036 (fax)Attorneyfor defendant Bayer AG

By First Class Mail:

Roger J. Hawke

Sidley Austin Brown & Wood LLP767 Seventh AvenueNew York, NY 10019Attorneyfor defendant Bayer AG

Dated: October 31, 2003

oe^^ Q d_Q^Lili R. Sabo (LS-0370)Milberg Weiss BershadHynes & Lerach LLP

One Pennsylvania Plaza

New York, NY 10119

(212) 594-5300