#1BCG BOSTON CONSULTING GROUP Puerto Rico Healthcare Manufacturing Strategy Board Presentation AUGUST 4, 2020 Financial Oversight Managard & t for Puerto Rico#2Project Disclaimer BCG is supporting the Puerto Rico Financial Oversight and Management Board ("Board") in a short, focused effort to assess how Puerto Rico can best position itself to create mutual value for biopharmaceutical and medical device manufacturing companies, the US, and Puerto Rico. As part of the project, BCG was asked to consider: • Companies and/or product segments most likely to in-shore to the US in the face of COVID- 19 impacts and potential federal action; Puerto Rico's competitive position and value proposition for biopharmaceutical and medical device manufacturers, particularly those identified as most likely to in-shore; Related potential impacts of federal tax incentives currently under consideration in Congress Operating on a rapid four-week timeline, BCG developed recommendations set forth herein based on critical assumptions provided by and scope aligned with the Board and estimated impacts from policy and economic analysis, relying on best-faith efforts and stakeholder interviews, and to the extent possible, utilizing data that currently existed. Note that where location-specific data was unavailable, BCG leveraged similar data from other locations as an illustrative proxy to inform decision making. The results of the analysis reflect current context and are subject to change based on evolving federal and local action, insights from outreach efforts to companies, and information on global manufacturing shifts in the coming months. This report is intended to provide directional guidance based on the current state of in-shoring discussions, scenario planning, and federal action. It is also based on a critical assumption provided by the Board that federal legislation is significant enough that it brings back material manufacturing to the US and is applicable to companies in Puerto Rico. 1 Copyright © 2020 by Boston Consulting Group. All rights reserved.#3Context & Introduction 2#4Recent events and trends may drive federal action to in-shore healthcare manufacturing Disruptive global events Current COVID crisis has highlighted multiple failure modes of healthcare supply chains globally Multiple uncertainties about future shocks and geopolitical conflicts persist Changes in trade laws and tariffs, esp. with China, and decline in global trade favoring local models Healthcare manufacturing trends Increased globalization of healthcare supply chains Shifts in network strategy, including increased outsourcing and use of CDMOs² Federal action Over 15 localization bills¹ to incentivize or require in-shoring of healthcare manufacturing introduced in US Congress in 2020 1. Examples include H.R. 6443 "Securing the National Supply Chain Act of 2020" (Rep. Gonzalez-Colon, R-PR- At Large), H.R. 6648 "Territorial Economic Recovery Act" (Rep. Plaskett, D-VI-At Large), H.R. 6903 (Rep. Green, R-TN), H.R. 6930 "MADE in America Act of 2020" (Rep. Carter, R-GA) 2. Contract Development and Manufacturing Organizations; inclusive of CMOS (Contract Manufacturing Organizations) Source: Congress. Gov, expert interviews, industry publications, BCG analysis 3 Copyright © 2020 by Boston Consulting Group. All rights reserved.#5For this report, assume federal action leads to significant in-shoring of Biopharma and Medtech manufacturing to the US based on incentive schemes Scenario Impact to companies Impact on Puerto Rico 1 Limited financial intervention Federal efforts to support in-shoring focused on areas with limited financial impact (e.g., supply chain reporting) Companies choose to localize to US for strategic reasons (e.g., increase resilience) Minimal Puerto Rico must deploy own resources strategically, given minimal federal aid 2 Focus of this report.. Federal incentive schemes ("middle of the road") Federal action creates new financial incentives; wide spectrum (e.g., wage tax credits, credits for economically distressed zones, elimination of GILTI) More companies view in-shoring to US as right business case as incentives outweigh tradeoffs (e.g., time / cost for volume and/or tech transfer) Moderate Potential to capture incremental manufacturing value depending on specific legislation 3 Forced localization ("extreme") Illustrative Federal action or contracts ban or prohibit companies from selling non- domestically produced products in the US (i.e., full US supply chain req'd) Companies make material supply chain and network moves required to do business in US and maintain position in growing global markets (e.g., China) High Potential to capture significant manufacturing value from forced in- shoring, but lower likelihood scenario¹ Less change 1. Based on synthesized interviews with industry stakeholders More change 4 Copyright 2020 by Boston Consulting Group. All rights reserved.#6Four-week rapid assessment to determine Puerto Rico's best path forward in face of federal legislation & impacts on ability to attract any in-shoring activity Potential Federal Legislation & Tax Incentive Impacts III Action Plan 56 Priority Companies & Product Segments Value Proposition & Competitive Positioning 5 Copyright 2020 by Boston Consulting Group. All rights reserved.#7Value Proposition & Positioning for Priority Companies and Product Segments#8Three questions to determine priorities for Puerto Rico in current context In the current context, which products are most likely to move? Medically necessary Global guidelines for essential medicines and med tech World Health Organization WORLD TRADE ORGANIZATION FDA Of those products, which are PR well positioned to manufacture? Current landscape in Puerto Rico Product types where Puerto Rico has track record, ecosystem, and available skilled labor force, and companies currently on the island How can PR attract these high potential products / companies? Companies and messages Proactive outreach strategies for companies with economic benefit and higher likelihood of in-shoring in Puerto Rico Impetus to change Magnitude of supply chain at risk, indicating need to adapt or build resilience Puerto Rico value proposition Specific advantages and disadvantages that position Puerto Rico to win a subset of key products Federal action Potential impacts of federal legislation and tax incentives on attractiveness of Puerto Rico for priority products / companies Discussed in next section Ease to adjust Effort to update supply chain, indicating willingness and timeline for changes 7 Copyright ©2020 by Boston Consulting Group. All rights reserved.#9First step: Consider high and medium potential product and segments that appear most likely to be impacted TTT Biopharma Near-term priorities expected to be essential medicines without full US supply chains and/or with supply chain risk Med tech Near-term priorities expected to be COVID- essential equipment and consumables without full US supply chains and/or with supply chain risk High potential, e.g., Asthma/allergy (EpiPen, Zyrtec) Pain relievers (ibuprofen, acetaminophen) Anti-infection (Neulasta & generic) Hormone tx (testosterone, estradiol) Medium potential, e.g., • • • Asthma/allergy (epinephrine) Note: many of these products / segments already have some US component to their supply chains US Sales 2026E ~$50B US sales (2026E) -$500B Antibiotics (amoxicillin, combo tx) US sales (2026E) Blood clotting (thrombin) Anticoagulants (heparin, combo tx) High potential, e.g., PPE (gloves, gowns, masks, etc.) Other key consumables (e.g. syringes) Medium potential, e.g., • Wound care (e.g., bandages) Fluid collection & processing (e.g., vials) Diagnostic imaging accessories Electrodiagnostics (e.g., ultrasound) Cardiac equipment (e.g., stethoscope) General surgical instruments In vitro diagnostics ~$5-15B3 # Products # Owner co's in PR¹ -130 products 12+ companies in PR own products ~1,200 products 14+ companies in PR own products² US sales (2026E) ~2+ product groups 4+ companies in PR own products4 -$130B+ US sales (2026E) ~6+ product groups 13+ companies in PR own products2,5 1. Excludes CDMOS 2. Inclusive of companies with high potential products 3. Varies depending on categories included (gloves and ostomy -$2B, protective clothing, eyewear, hearing and respiratory protection -$16B) 4. Count of companies in PR with final assembly in "General Hospital" category 5. Count of companies in PR with final assembly in "Cardiovascular," "Hematology," or "General & Plastic Surgery," or "Radiology" Source: Fitch Solutions/BMI, Evaluate Pharma, PharmNets, GlobalData, WHO, WTO, DEDC PR, USFDA, BCG analysis Copyright © 2020 by Boston Consulting Group. All rights reserved.#10Given the nature of expected moves, stakeholders believe CDMOS will be an important piece of the puzzle along with select Biopharmas and OEMs What we've heard from companies on strategy Create redundancy in Fully exit vulnerable VS. current mfg locations (e.g., China, India) supply chain to reduce risk of disruption ""Companies can mitigate risk for most products by having a US component of supply chain" - VP at large medtech OEM "It would be "expensive, time-consuming and short sighted" to move all manufacturing capacity out of China to the US - VP at large biopharma MNC "Most of our APIs are made in India; if we had to shift to completely 'made in the USA' that would be cost prohibitive" - VP at large generic biopharma Expand, or leverage underutilized capacity, VS. Build new facilities to support manufacturing in existing facilities shifts " " "I believe we will largely leverage our existing capacity for favorable cost structure" - VP at leading biopharma CDMO "If I had to decide where to invest in the US, I would look at our existing facilities first to maximize their capacity" - Former SVP Manufacturing at leading generics co What it means for Puerto Rico Prioritize Branded Cos. and OEMs that ... • . Own / make essential products for the US market Have an existing footprint in Puerto Rico Lack full value-chain manufacturing footprints or redundancy within the rest of the US; though many have at least some existing presence elsewhere in the US E.g., Not all US product made in US, or ex-US raw materials or API that could be required to move Early outreach & collaboration with CDMOs that... • Are likely already getting requests from customers on this topic may end up playing "matchmaker" . Will be able to pool demand (products/segments) across smaller companies, or those without US or PR footprint Focus on return-on-capital and margins - brownfield and cost-competitive labor more influential Can cover broad set of capabilities from final products through upstream steps - in some cases may provide API or raw materials that could be at risk 9 Copyright 2020 by Boston Consulting Group. All rights reserved.#11As expected, Puerto Rico has best chance to attract volumes in current areas of strength, which informs recommended company prioritization Existing footprint Biopharma Small Molecules, and some Biologics -80% of pharma products identified as made in PR are small molecules, compared with -50% of US sales¹ "PR has a history of a high level of competency small molecules; some I believe in biologics too - VP of Manufacturing, large generics co "We are seeing a move in PR towards biopharma products and processes in the oral solid dosage area finishing and packaging and less in APIs - CRB Caribe, HC&LS Review "Vaccines will need capacity, but also high risk and would want to go where the skill set exists - VP of Global Supply Business Dev., large pharma New modalities are very complex so they require very skilled operators, high speed, high quality, and extensive experience No / limited footprint " - Director of Mfg for Gene Therapy, large pharma Medtech Products that require highly technical, or manual technology-enabled manufacturing are a good fit to Puerto Rico's value proposition - VP of Operations, large medtech "PR is an extremely attractive option from a med tech standpoint, especially because quality and reliability are on par with other US locations 66 - Former Global Head of Procurement, large medtech Approximately 60% of consumables are already made in the US today; PR does have some mid-volume products like tubing sets but most high-volume consumables, like needles, are made in the South of the US - Director of Global Strategic Sourcing, large medtech High end instrumentation used to be the sweet spot for the US, but no longer...much of this is moving to Asia VP Former Global Head of Procurement, large medtech 1. Based on analysis of 125 identified pharma products with at least one manufacturing step in Puerto Rico; US sales in terms of dollar value Source: PharmNets, Evaluate Pharma, Health and Life Sciences Review Puerto Rico 2016, Expert interviews, BCG analysis Copyright © 2020 by Boston Consulting Group. All rights reserved.#12Across companies, must consider Puerto Rico's holistic value proposition ... Puerto Rico Strengths Strong existing manufacturing ecosystem and capacity that minimize time and capital requirements for product transfer Specialized, cost-competitive labor with strong pipeline of universities and labs Lower cost of manufacturing compared to US states with established manufacturing Puerto Rico Challenges Perception of higher operational risks than most US states Perception of reliability & infrastructure concerns compared to other US states compared to other US options (for the purposes of this report) Other US alternatives (influence Puerto Rico's "fair share") Non-US alternatives (influence overall in- shoring to US) • Established manufacturing locations e.g., MA, CA, NJ, NC, PA, IN, IL Economically distressed zones e.g., Southeast, Mid-Atlantic, Border States Ireland Germany Singapore China China Assumption is federal action will materially result in in-shoring to US, so focus is on Puerto Rico value proposition vs. US alternatives Copyright ©2020 by Boston Consulting Group. All rights reserved.#13Comparison of Puerto Rico's value proposition relative to US states Considered value proposition across eight dimensions 1. Labor and workforce 2. Quality and reliability 3. Infrastructure 4. Operations risk 5. 6. 7. Tax climate Manufacturing ecosystem Manufacturing cost 8. Ability to serve US market Comparison, along with prioritized products/companies, informs impact analysis of federal legislation Established manufacturing states - Economically distressed zones States MA, CA, NJ, NC, PA, IN, IL Southeast, Mid-Atlantic, Border States + Lower cost in manufacturing + Specialized labor force Puerto Rico's competitive + advantages Established hub for small molecules and diverse medtech + Track record of reliability in mfg. + Puerto Rico's challenges Weaker mfg. ecosystem esp. for new modalities and biologics Perception of infrastructure and reliability issues on the island PR generally not preferred vs. these locations; more credible (or close) in noted segments vs. others; must overcome material perception issues vs. these locations Existing infrastructure for mfg. of pharma and medtech Similar cost in manufacturing Perception of higher operational risk vs. mainland US PR generally preferred with strong value prop. vs. these locations; not expected to lose at scale besides one-offs or where players have existing footprints Source: Fitch Solutions / BMI Research, PharmNets, Euromonitor, Healthcare and Life Sciences Review Puerto Rico 2020, EIU, World Bank, Notre Dame Climate Risk Index, SEDA, Transparency International, CNBC State Business index, EIA, BLS, USTR, Cushman & Wakefield, BCG analysis 12 Copyright 2020 by Boston Consulting Group. All rights reserved.#14Note: Company names are illustrative Companies fall into archetypes for analysis and prioritization Biopharma Prioritize outreach to companies who own or could manufacture medically essential products Multinational companies (MNCs) • • • . Consolidation of key products in few top companies (branded and generics) Prioritize companies with existing footprint in PR given easier route to expansion Cost sensitivity in many segments, likely to find PR expansion attractive Open the door to upstream conversations (e.g., API, raw materials) CDMOS (Contract Development and Manufacturing Organizations)1 • Well positioned to pool demand across smaller companies looking for reliable coverage of US market Some have presence in PR already they can leverage for expansion, and turnkey sites improve ROIC Small to mid-sized companies . • Medtronic abbvie teva stryker® Catalent. Thermo Fisher SCIENTIFIC Expected sig. growth in US sales over next 5 years Opportunity to capture growth or transition to commercial manufacturing for new products Initially, address through small company advocates and trade associations for scale 1. Inclusive of CMOs (Contract Manufacturing Organizations) biohaven ☐ pharmaceuticals NUVASIVE TTT JABIL flex. Medtech Target OEMs and CDMOS with footprint in PR in key product segments for incremental expansion, esp. by bringing more supply chain steps to PR Large OEMs Top few companies have very broad portfolios covering many key segments Prioritize OEMs with existing footprint; likely to have underutilized capacity that can be leveraged for additional production, or ability to build out on a campus / nearby for new capabilities Existing manufacturing ecosystem across the value chain Leading CDMOs or suppliers with coverage of US Medtech ecosystem Potential to pool demand across smaller companies or without US mfg footprint - can help companies establish US • • • component of supply chains Availability of mfg ecosystem, labor, and brownfield sites which improve ROIC make PR appealing to these companies Increasingly active in PPE / consumables 13 Copyright 2020 by Boston Consulting Group. All rights reserved.#15III III 眼 0 0 Ο Potential Federal Legislation & Tax Incentive Impacts 14#16US government is considering a range of actions as lever to drive significant in-shoring of biopharma and medtech manufacturing to the US $ Financial incentives Tax credits, reductions in taxable income, reductions in import duties, sourcing penalties Procurement bans Restrictive government purchasing, penalties for sourcing from target jurisdictions Trade restrictions Import bans, Export restrictions, punitive tariffs, local content/manufacturing requirements Access incentives Expedited approvals, exclusive reimbursement, preferential pricing Current situation Over 15 localization bills¹ to strengthen healthcare manufacturing and supply chain introduced in Congress post COVID-19 ... however, provisions vary by bill, so companies are considering several alternative scenarios for how federal action could play out 1. There are more than 20 bills that look at US biopharma and medtech supply chain resilience more broadly (e.g., focusing on reporting requirements, empowering the SecHHS to conduct studies on current supply chain, etc.) Source: USTR, USPTO, US Dept. of Treasury, IRS, Pharm Nets, Congress. Gov, synthesized expert interviews, industry publications, BCG analysis 15 Copyright 2020 by Boston Consulting Group. All rights reserved.#17Identified most relevant incentives for in current federal landscape Starting from a long list of tax incentives, applied 3 filters... A Which incentives impact Puerto Rico the most? B Which incentives are most relevant Which incentives C are currently for biopharma / medtech? under federal consideration? Compared potential attractiveness of incentives for in-shoring mfg. to PR Addressed three key questions for both types of incentives... 1 What are relevant characteristics of target companies / product segments? Company type (e.g., Biopharma Brand Co., CDMO) Product segment (e.g., small molecule, biologics) Company tax status (e.g., US-CFC, US branch) ... and prioritized 2 types of incentives for impact analyses¹ 2 What is the likelihood of in-shoring to PR? Fit with PR's value proposition Level of tax benefit from incentive In-shoring mechanism (e.g., volume shift, new sites) Economically distressed zones Credits for -20-40% of wage expenses & depreciation / amortization allowances in mfg. in specialized zones in US² GILTI elimination + standalone incentives Income generated by PR CFCs not considered toward GILTI³ plus credits for -3-10% wage expenses & depreciation / amortization allowances 1. Also reviewed and deprioritized standalone incentives without GILTI elimination 2. Assumed activities of PR branches and PR CFCs of US-domiciled parent companies are eligible for credits 3. Global Intangible Low-Taxed Income 4. Focused only on PR excise and local tax revenues 3 What is potential impact for PR? Est. incremental mfg. value in-shored in 2026 Est. incremental job growth in 2026 Est. incremental PR tax revenues³ in 2026 ... and assessed potential attractiveness of EDZ & GILTI elimination proposals for each company/product segment 16 Copyright ©2020 by Boston Consulting Group. All rights reserved.#18TTT If PR captures -5-30% of mfg. in-shored to US, up to $5B est. value in 2026 2 US in-shoring value will depend on federal actions; PR share of US value will depend on company/product segment fit Illustrative Total US Sales Estimated US sales in 2026 (high & medium potential) High Potential -$50B US sales (2026E) Varies by company/product segment Varies by tax scenario Non-US Mfg. Value¹ Total US Mfg. In-Shoring Value² Puerto Rico Mfg. In-Shoring Value³,4 Share of US sales from non- US mfg. products Share of non-US mfg. value in-shored to US Share of US in-shoring value captured by Puerto Rico Biopharma Medium Potential -$500B US sales (2026E) High Potential -$5-15B1 US sales (2026E) Estimate non-US mfg. value from 2019 import % by product category Med tech Medium Potential -$130B+ US sales (2026E) Assume greater % of high potential products likely in- shored (vs. medium) Assume company/ product with strong value prop fit more likely to choose PR ~$0.5-4.5B5 US sales (2026E) 1. Based on size of US imports compared to US sales (value of final assembly for products) 2. Varies depending on federal tax incentive scenario and by product/company segments based on likelihood to in-shore mfg. 3. Assume PR captures share of US pharma/medtech in-shored sales approx. equal to PR share of US exports (proxy for mfg. footprint), adjusted for product/company segments with strong value proposition fit 4. Jobs and tax revenues vary depending on estimated in-shoring value 5. Potential direct value; estimated range varies by tax scenario Source: Fitch Solutions/BMI, Evaluate Pharma, PharmNets, GlobalData, PIIE, Research and Markets, USTR, WHO, WTO, DEDC PR, USFDA, synthesized expert interviews, BCG analysis Copyright 2020 by Boston Consulting Group. All rights reserved.#19Legislation for economically distressed zones is more likely to spur in-shoring of mfg. and produce more impact for Puerto Rico (vs. eliminating GILTI) Estimated Impact Companies & Products Value Proposition Economically Distressed Zones (EDZ) • Potential to in-shore up to approx. $1.5-4.5B in mfg. value to PR (2026E); rep. -1,000-3,000 FTEs & -$70M-$220M in tax dollars 1,2 Lower margin companies Tax benefit most attractive for cost-sensitive generics in small molecules, biologics, and medical devices Good fit with Puerto Rico value prop (talent availability, quality, existing mfg. ecosystem, especially small molecules) Growth via volume shifts w/ some opportunistic site expansion Tax benefit & value prop also attractive for lower margin OEM med devices, given existing brownfield sites & underutilized capacity Higher margin companies Unlikely to drive change for branded cos. and some higher margin OEMs, since level of incentive not enough to change siting (prioritized by existing footprint, labor available) CMOS/CDMOS Tax benefit and fit with PR value prop also attractive, given cost sensitive margin structure and ability to leverage turnkey sites w/ good ROIC4 + production pooling to grow via volume shifts PR is competitively positioned vs. other economically distressed zones due to talent and mfg. ecosystem Incentives help strengthen labor cost advantage vs. established mfg. locations in the US (e.g., CA, MA, IN) GILTI Elimination + Standalone Incentives Potential to in-shore up to approx. $0.5-2.5B in mfg. value to PR (2026E); rep. -500-1,400 FTES & -$35M-$105M in tax dollars 1,2 Lower margin companies Tax benefit similar but slightly less attractive vs. EDZ for generics (smaller impact from eliminating GILTI; other incentives weaker) Small molecules, biologics, med devices still priority given value prop fit (current mfg. footprint and talent) Also attractive for lower margin OEM value prop, esp. in med devices, although upside is much smaller compared to EDZ Higher margin companies Unlikely to drive change for branded cos. and some higher margin OEMS, despite preferring GILTI elimination over EDZ, given costs/tax benefits are less important than overall value prop for future growth³ CMOS/CDMOS Tax benefit slightly less attractive vs. EDZ, given reduced benefit of limited GILTI impact and weaker benefits from standalone incentives for cost-sensitive margin structure Limited change for PR competitive positioning vs. states, given brand cos unlikely to change, and lower value for Gx and CDMOS Standalone incentives provide smaller labor cost advantage vs. established mfg. locations in the US (e.g., CA, MA, IN) Likely requires additional language in federal legislation to ensure realization of mfg. investment and job creation in PR 1. Incremental FTEs, tax revenues in 2026e over current FTEs, tax revenues; FTEs rounded to nearest 100 and tax revenue rounded to nearest $5M 2. Only looking at PR excise and local income tax revenues, and assumes US-domiciled parent companies can claim credits for PR branch and CFC activities 3. Increasing foreign tax credit cap vs. GILTI obligations likely also has limited impact today; could shift if excise tax is eliminated as tax on PR source income tax increases to cover shortfall. Companies would be enabled to use more of these incremental tax dollars as foreign income tax credits against higher cap 4. Return on invested capital Copyright 2020 by Boston Consulting Group. All rights reserved.#20DD Action Plan for Puerto Rico 19#2110 Recommend Puerto Rico begin proactive outreach while continuing to monitor federal actions and address value proposition misconceptions in near-term 의 66 Before federal action announced After federal action announced, before implemented After federal action implemented Initial wave of company outreach 1A 1B Ongoing discussions to prepare and implement action First benefits from action (approximately 6-18 months depending on scale of action) Monitor ongoing federal discussions and adapt company and product priorities based on outcomes Secondary wave of company outreach, opportunity discussions, and planning for implementation in near- to medium-term 2 Marketing refinement: Focus on misconceptions in value proposition with emphasis on breadth of core competencies, talent availability, turnkey / brownfield sites, infrastructure, solvency, and shipping / distribution logistics Work across stakeholders in Puerto Rico to address persistent challenges in value proposition (e.g., infrastructure) 20 20 Copyright © 2020 by Boston Consulting Group. All rights reserved.#22Rationale Topics for discussion Based on publicly available company data and interview synthesis Proactive outreach will be critical in near-term, and companies - especially CDMOS are open to dialogue 1A MNCs & OEMs with existing footprint • Existing relationships and largely open to discussions on product/line moves Important to ensure appropriate actions to retain Puerto Rico volumes in any case Ensure Puerto Rico is in the scenario discussion now as federal actions play out • Understand supply chain resilience of medically necessary products, including understanding upstream value chain e.g. API for biopharma, or raw materials, parts, and mid-level assembly for medtech Reinforce Puerto Rico value proposition, including track record for existing sites, lower barriers to expansion such as available labor Discuss scenarios, continue engagement, align on action plan when there is more clarity on federal legislation 1B CDMOS with/without footprint • Many already engaging with customers about potential US supply chain needs Able to create scale by pooling incremental moves by companies on/off island Driven by ROIC¹ and economics, so incentives are material to site decisions Understand what they are hearing from their customers (e.g., increased US demand, likelihood and stringency of potential legislative changes) Understand ability to serve customers such as current CDMO US footprint and capacity Reinforce Puerto Rico value proposition Discuss scenarios, continue engagement, align on action plan when there is more clarity on federal legislation 2 Companies without footprint • Potential to interest companies with concentration of high potential products • • Overall level of interest likely dependent on if there is extreme federal action Potential for coverage of companies without footprint via CDMOs in near-term Initiate discussions with key stakeholders to better understand company context and introduce PR value proposition Assess likelihood of major internal moves Potentially raise opportunity and value of outsourcing and connect with actively engaged CDMOs in parallel (even potentially approach with CDMO) Selectively continue discussions based on company interest and further clarity on legislation 1. Return on invested capital Source: Publicly available company data, expert interviews, BCG analysis 21 Copyright ©2020 by Boston Consulting Group. All rights reserved.#23Track and continue to assess key elements of federal legislation Important terms that determine scope Related impacts to track for outreach strategy Additional considerations to monitor closely • • • • • Qualified employee (e.g., full-time vs. part-time, local talent) Scope of wages and benefits to include (e.g., salary, healthcare) Allowed depreciating property (e.g., real property, personal property, short/medium/long-life property) Qualified manufacturing line/facility (e.g., line/facility moved to the US) Geographic scope of applicability (e.g., including US territories) Qualifying companies (e.g., CFCs, domestic branches, CDMOs) • Defined list of essential products Could include non-finished products (e.g. sub- assembly, excipients) • Biannual review of pharma and medtech • . supply chain resilience by Dept HHS Degree to which SecHHS empowered to redefine list (e.g., item must be at least 5x required level for shortage designation before considered for removal) Carry forward/back allowances for credits (e.g., %/$ of allowable credits, furthest period for carry forward/back) Effective date of Dec. 2019 (e.g., bill goes into effect immediately) 1. Base Erosion and Anti-Abuse Tax (BEAT) 2. Currently not in any proposed legislation 3. Currently proposed in HR 6930 4. Elimination of excise tax could increase in PR source income tax to cover shortfall. Unlike excise tax, source income tax payments can be used for foreign tax credit purposes; increasing credit cap would enable companies, to use more of these incremental tax dollars as foreign tax credits against GILTI Source: Congress. Gov, synthesized expert interviews, BCG analysis Amend BEAT1 to reduce BEAT liability for US companies with PR CFCs² Changes could stimulate high-margin US companies (e.g., Brand Cos., OEMs) to invest more in PR via CFCs Increase foreign tax credit cap vs. GILTI (e.g., from 80% to 100%)³ Magnitude of impact potentially tied to changes in excise tax4 22 22 Copyright © 2020 by Boston Consulting Group. All rights reserved.#24Given our conversations, we believe additional strategic marketing separating fact from fiction/perception would be beneficial AL Illustrative Effective marketing messages could clarify existing perceptions (not exhaustive), e.g., ... Characterize the true extent of structural issues (not exhaustive), e.g., ... Availability of Talent •Productivity Natural Hazards Business env. " There's been loss of talent on the island after 936, with little new talent coming in - VP of Governmental Affairs, large brand pharma There is skill but in small numbers. It's limited to what's on the island, other people won't move there - Director of Global Strategic Sourcing, large med-tech Sometimes there is "a mañana culture" - in other words, worry about it tomorrow. That could lead to quality & reliability issues -Head of External Supply, large brand pharma "The quality issues we had in PR with CDMOs was technical incompetence Source: Synthesized interviews with industry experts -Former VP of Mfg, large generic pharma "Issues with infrastructure and natural disaster push Puerto Rico further down the list -CEO, small med-tech "We have spent a lot of time and money building redundancies in Puerto Rico to shore up resilience in case of disasters - Former Exec. Director of US Advocacy, large brand pharma "I would be surprised if there is major investment [in PR] unless there is a significant negotiation with the government for a tax break -Head of External Supply, large brand pharma "If there is no financial incentive to be there, I would pick anywhere else in the contiguous US -SVP global supply chain, large pharma 23 Copyright © 2020 by Boston Consulting Group. All rights reserved.#25Non-exhaustive To further strengthen PR's competitiveness, continue evaluating additional federal and local legislation, and improvements to broader value proposition Ideas captured from stakeholder discussions and additional research Federal Local Federal and local incentives for further exploration . Increase cap on foreign tax credit vs. GILTI • Amend BEAT1 to reduce liability for payments to PR CFCs Seek permanent exemption of rules for foreign air transport of cargo² Increase Free Trade Zone coverage with Commerce Dept. approval ⚫ Loosen Jones Act restrictions on shipping (e.g., exemption for mfg products) Phase-out or reduce excise tax burden, with clarity around timetable for tax revenue replacement options (e.g., source income tax) Provide additional innovation credits for businesses, grants for universities to increase research conducted on island Provide tax credits for hiring/retaining local talent > Fundamental changes to strengthen PR value proposition • Increase economic certainty by improving . • • . Transparency around process (e.g., mfg permits, consent agreements) Clarity on leg. prerogatives (e.g., excise tax, vision for biopharma/medtech) Strengthen industrial infrastructure (e.g., electrical grid, water supply) Improve surface transport (e.g., quality, reach of roads) • Shift narrative about island to strength of resilience of operations when faced with natural hazards (e.g., hurricane, earthquake) • Increase incentives for talent to stay local (e.g., credits for hiring PR talent) 1. Base Erosion and Anti-Abuse Tax (BEAT) 2. Building on the temporary waiver granted to PR by the Dept. of Transportation on April 29, 2020 (Order 2020-4-10) 24 Copyright 2020 by Boston Consulting Group. All rights reserved.#26Disclaimer The services and materials provided by Boston Consulting Group (BCG) are subject to BCG's Standard Terms (a copy of which is available upon request) or such other agreement as may have been previously executed by BCG. 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