A SAMPLING OF BDO THOUGHT LEADERSHIP IN THE MEDIA FOR Q3 2016

EXCERPTS OF RECENT MEDIA COVERAGE

TECHNOLOGY & LIFE SCIENCES PRACTICE

BDO has been a valued business advisor to technology and life sciences companies for 100 years. The Technology & Life Sciences practice of BDO works with a wide variety of clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, providing a myriad of assurance, tax, advisory and consulting services.

THE WALL STREET JOURNALRISK & COMPLIANCE JOURNAL SURVEY ROUNDUPBy Ben DiPietro

A look at some recent surveys and reports dealing with risk and compliance issues.

Risks For Life Sciences: A review of the shareholder filings at the 100 largest publicly traded U.S. life sciences companies by risk advisory firm BDO found a tie for the top risks: regulation, industry competition and intellectual property infringement.

STATPHARMALOT: BIOTECHS SAY THAT CONTROVERSY OVER PRICING IS A BIGGER RISK EACH YEARBy Ed Silverman

The clamor over prescription drug pricing is weighing more heavily on biotech managements.

A recent review of risk factors cited by the 100 largest companies listed in the Nasdaq Biotechnology Index found 89 percent cited worries over pricing pressures, according to the BDO advisory and consulting firm, which examined filings with the US Securities and Exchange Commission.

And concern has been steadily rising. In 2015, the firm noted that 79 percent of biotechs cited anxiety over pricing as a risk factor to their businesses, while 68 percent did so in 2014 and 66 percent in 2013. Thanks to increased controversy over the cost of medicines, pricing is now the 16th most worrisome issue.

The list of corporate concerns that rank higher includes competition; regulation; litigation; patent disputes; and payer reimbursement, among other matters…

“…They’re moving away from a world where they could price what they wanted, so maybe they didn’t understand the risk until now,” said David Friend, who heads BDO’s

Center for Healthcare Excellence and Innovation. “But it’s a huge, systemwide problem and they’re just beginning to grapple with it.”

Indeed, pharmaceutical pricing has generated national outrage.

Some companies bought old drugs and quickly jacked up the prices. At the same time, the launch prices for new medicines for such hard-to-treat diseases as hepatitis C and some forms of cancer, as well as rare diseases, continue to climb new heights. Even some lower-cost generics cost more than in the past.

The issue has become a talking point in the presidential campaign. Some state legislators are pushing laws to force drug

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makers to disclose their costs. And payers have either sought to restrict coverage, or, in some cases, demand companies set pricing according to patient outcomes…

Among other issues that concern biotech execs, threats to international operations and sales ranked 13, but might well be higher now because BDO compiled its ranking before the recent Brexit vote took place in the United Kingdom. Drug makers face several challenges doing business in the UK if the decision is finalized…

CFO MAGAZINE EVOLVING SET OF RISK FACTORS VEXES TECH INDUSTRYBy David McCann

Five years is a long time in the technology industry, so perhaps it’s not surprising that the risk profiles of major tech firms have changed markedly in that time (see chart below).

In fact, some risk factors have become significantly greater concerns rather suddenly. For example, among the fiscal-year 2015 10-K filings of the 100 largest U.S. tech firms, 61 reported loss of a major customer as a risk factor, according to an analysis by BDO. Just a year earlier, only 44 did so.

A leading cause of that shift is accelerating merger-and-acquisition activity in several technology subsectors — like the semiconductor business, with Intel, Singapore-based Avago, and NXP all having completed big deals in 2015.

For many tech firms, the sale of components or solutions to other tech firms is a primary source of revenue, notes Aftab Jamil, leader of the technology and life sciences practice for

BDO. When a major customer is acquired, that account may be in jeopardy. “If there is consolidation in your target sector, maybe instead of selling to five big customers you now have only three left,” Jamil says. “We’re seeing that all the time, especially on the hardware side.”

The growing presence of M&A in the tech industry can also be seen in the steep rise of goodwill impairment as a risk factor in recent years, as shown in the chart below.

Another risk factor that became more prominent in 2015 annual reports was loss of government contracts and incentives, reported by 57 of the 100 largest technology companies, up from 47 in 2014. “There is more competition for government contracts, and we have observed some cuts in defense-related spending and other federal budgetary constraints,” says Jamil.

Two risks — cybersecurity and regulation — were cited by all 100 companies in their 2015 annual reports. The former completed a steady march upward in recent years; in 2011 reports, only 71% of the largest technology companies reported cyber risk.

BLOOMBERG BNALIFE SCIENCES COMPANIES WORRY ABOUT DRUG PRICING PRESSUREBy John T. Aquino

Nine in 10 life sciences companies identify drug pricing pressures as a considerable risk, according to a new report.

Other, more established, issues ranked higher than drug pricing pressures in the

2016 BDO Life Sciences RiskFactor Report, with competition and consolidation in the industry, federal and state local regulations and intellectual property (IP) infringement each being the concerns of 100 percent of the life sciences companies surveyed.

But the professional service firm BDO USA LLP singled out in its report the high ranking of drug pricing pressures. In previous reports, it was lumped in with other issues such as consolidations. But this year the response was such that BDO broke it out separately.

“While investors appear to be more risk-averse than they were during this time last

year, breakthrough innovations almost always reap dividends. But, for the time being, drug pricing remains the elephant in the room,” Ryan Starkes, BDO assurance partner and

leader of its life sciences practice, said in a statement…

…PRICING PRESSURES INVADE OTHER ISSUES

The BDO report examined the risk factors cited in the most recent annual shareholder filings of the 100 largest publicly traded U.S. life sciences companies, which BDO defines as pharmaceutical, biotechnology

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and medical device companies listed on the Nasdaq Biotechnology Index, by revenue. The risk factors were analyzed and ranked in order of frequency cited.

All 100 companies in the analysis cited regulatory concerns as being a risk factor because the rapid growth of the life sciences sector over the last few years has drawn increased scrutiny from regulators. Eighty-six percent called for changes in health-care laws and regulations, which was up four percentage points from the previous year.

Ninety-seven percent cited reimbursement from third-party payers, including payments from Medicare and Medicaid, as a risk factor, indicating that the shift from fee-for-service to value-based care, set in motion by the Affordable Care Act, is forcing life sciences companies to reevaluate how they price their products.

Eighty-nine percent cited drug pricing pressures as a risk factor, and the report noted that these concerns appeared to be seeping into other issues noted in the report.

“Pricing pressures further complicate a sector already under financial strain, thanks to a lackluster IPO [initial product offering] market and market volatility,” BDO said, referring to report results indicating that 94 percent of life sciences companies identify volatile financial results, including stock prices, as a key threat.

GOOD NEWS IN M&A, IPOS

Additional findings from the BDO risk factor report include:

• cyberattacks and cyber concerns—89 percent of life sciences companies cited this, up 19 percentage points from 2015 and 43 percentage points from 2013, with the biggest threat, arguably, to companies’ IP, which may fall victim to insider theft or corporate espionage;

• innovation impediment—100 percent of companies cited risks to their IP, while 91 percent listed delays or unfavorable results from clinical trials and 97 percent saw FDA regulatory approvals as significant risks;

• international risks, even before Britons voted to leave the European Union (10 LSLR 14, 7/8/16), 92 percent of life sciences companies cited threats to international operations and sales as risks, up four percentage points from 2015, and 42 percent listed the ability to expand abroad.

“But while the pace of IPO activity remains well behind the average for the past decade, the 2016 BDO IPO Halftime Report found that 66 percent of capital markets executives predict the health care sector, including life sciences, will generate the most offerings during the remainder of this year,” Starkes said.

“Amid market turbulence and a difficult IPO environment, the life sciences sector has also experienced a few bright spots in M&A activity as well as promising research and product developments,” Starkes said.

An analysis by audit firm BDO of the incidence of disclosure of various risk factors among tech companies over five years reflects increased emphasis on security breaches, the impact of M&A (including goodwill impairment) and accounting and internal control compliance as key issues affecting the industry. Regulatory concerns and competition continue to hold top spots on the list of the top 25 risk factors.

LEXOLOGYBDO ANALYSIS OF TECH INDUSTRY RISK FACTORS SHOWS INCREASED IMPACT OF CYBERSECURITY AND M&A CONCERNSBy Cydney Posner

BDO examined and analyzed the risk factors reported in Forms 10-K filed over the years 2012 to 2016 by the 100 largest (by revenue) public U.S. technology companies and ranked the risk factors in order of frequency cited.

Not surprisingly, cybersecurity and the threat of security and privacy breaches and technology theft appeared in every 10-K, compared with only 71% in 2012. Data breaches are problematic not simply because of stock price impact, which BDO describes as typically short-lived, but more because “long-term reputational and legal consequences can have a heavy financial toll.” Interestingly, the report indicates that the “tech industry accounts for just 2.6 percent of total reported data breach incidents since 2010, according to TrendMicro data, although it’s important to note that this excludes incidents where public disclosure isn’t required. Personally Identifiable Information (PII) is the most popular record type stolen, so it stands to reason that B2B technology companies would be less frequently targeted than consumer-facing industries like banking and healthcare. The per capita cost of a data breach in the tech industry is also on

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the lower end, averaging $127 compared to the overall mean of $154, data from the Ponemon Institute shows.” According to this article in CFO.com reporting on the BDO analysis, a greater risk in the tech industry is the threat of theft or misuse of intellectual property, which a BDO representative suggests “‘can erode [company value] quickly and significantly’”

Related to cybersecurity are risks cited in connection with suppliers, vendors, distributors and partners/alliances, which appeared in 92% of 10-Ks in 2016, compared with 88% in 2012. As CFO.com observes, “many technology firms are exposed to risks that their products will contribute to breaches suffered by their customers.”

BDO indicates that although “vendor risk extends far beyond cybersecurity, the majority of cybercrime is carried out via third parties. The risk for the tech industry is twofold: technology companies often outsource a number of key business and operational functions that, lacking the proper oversight and controls, may be vulnerable endpoints in the network; and many tech companies are also service providers to other user entities and, depending on contract terms, may be held liable or become embroiled in a lengthy and expensive data breach lawsuit.”

Another cybersecurity-related risk is the ability to maintain or implement effective operational infrastructure, including information technology, which was cited as a risk in 81% of 10-Ks in 2016, compared with 73% in 2012. According to BDO, a “failure in security or a technical glitch that throws operations offline can erode trust and have lingering reputational impact, particularly in an industry like tech where data integrity and security are part

of the organization’s value proposition.” Consistent with these heightened concerns, over half of the industry increased spending on cybersecurity in 2015, according to a recent BDO study…

…Sharing the top spot on the list of risk factors is regulatory risk, which appeared in all of the 10-Ks in 2016 (up from 98% in 2012). In addition to regulations related to cybersecurity, there have been significant tax and accounting changes, and potential policy and regulatory changes could result from the approaching election…

Moreover, according to BDO, the PCAOB “has stepped up its scrutiny on internal control procedures and testing, following a significant rise in tax and financial reporting control deficiencies over the last few years. In addition, the Financial Accounting Standards Board has announced a number of Accounting Standard Updates that technology companies are in the early stages of implementing. Although the new revenue recognition standard was announced in 2014, 31 percent of tech CFOs are still trying to understand the changes.”

THE MORNING ACCOUNTRISKS IDENTIFIED A review of the shareholder filings at the 100 largest publicly traded U.S. life sciences companies by BDO found a tie for the top risks: regulation, industry competition and intellectual property infringement.

CONTACT:TIM CLACKETTLos Angeles310-557-8201 / tclackett@bdo.com

SLADE FESTERSilicon Valley408-352-1951 / sfester@bdo.com

HANK GALLIGANBoston617-422-7521 / hgalligan@bdo.com

PAUL HEISELMANNChicago312-233-1876 / pheiselmann@bdo.com

AFTAB JAMILSilicon Valley408-352-1999 / ajamil@bdo.com

RYAN STARKESWoodbridge732-734-1011 / rstarkes@bdo.com

DAVID YASUKOCHIOrange County714-913-2597 / dyasukochi@bdo.com

ABOUT BDOBDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 countries.

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