updated 6/29/2006 4:22:43 PM ET 2006-06-29T20:22:43

German drug maker Bayer AG said Thursday it was selling its diagnostics operations to Siemens AG for 4.2 billion euros ($5.26 billion).

The sale, which is subject to regulatory approval, is expected to close in the first half of 2007, Bayer said in a statement.

Munich-based Siemens said the purchase is part of its continued expansion of its health care equipment and services business. The deal will also help partly finance Bayer’s pending takeover of domestic rival Schering AG.

The sale was approved Thursday evening, after markets in Europe had closed, by Bayer’s supervisory board in Leverkusen.

“This decision is fully in line with our strategy for systematically aligning our health care business,” Bayer Chief Executive Werner Wenning said. “We are concentrating on pharmaceuticals for both humans and animals, and products that can be promoted directly to patients.”

Bayer said that sales of the divested unit, which employs 5,000 workers, rose in 2005 by 8.4 percent to 1.4 billion euros. Siemens, Germany’s largest engineering and technology conglomerate by sales, added in a separate statement that the unit achieved double-digit earnings before interest, taxes, depreciation and amortization margin in 2005.

Bayer said that the after-tax proceeds of the divestment will be about 3.6 billion euros ($4.5 billion), and added that the proceeds will be used to partly finance the pending takeover of Schering.

In addition to helping fund the takeover of Schering, Bayer said it may also now refrain from launching a planned hybrid bond.

“The planned 1.3 billion euros ($1.6 billion) hybrid bond may not be launched or may have a much smaller volume,” Bayer said. “In addition, the previously announced equity raising of up to 4 billion euros ($5 billion) in connection with the Schering acquisition is now likely to be reduced by 500 million euros ($626 million).”

Bayer HealthCare Diagnostics offers an extensive portfolio of in-vitro diagnostic products for evaluating and monitoring the therapy of numerous diseases, including cardiovascular disorders, kidney diseases, infections, cancer and diabetes.

“With this acquisition we are continuing to consistently pursue our strategy of building the industry’s first integrated diagnostics company that combines diagnostic imaging, laboratory diagnostics and clinical information technology under one roof,” said Erich Reinhardt, CEO of Siemens Medical Solutions.

In a separate statement, Bayer said that its supervisory board has extended the contract of three of its executive board members; CEO Werner Wenning’s contract was extended until 2010 while the contracts of CFO Klaus Kuehnand and Labor Director Richard Pott were extended until 2012. All contracts would have expired in 2007.

Bayer shares closed up 3.18 percent in Frankfurt at 34.38 euros ($43.10) while Siemens shares closed up 2.35 percent at 67.50 euros ($84.60).

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