Biotechnology Growth at a reasonable price - How much are you paying for a pipeline? Bank of America e Merrill Lynch Industry Overview Equity 1 19 April 2016 Biotech trading meaningfully below historical averages The Nasdaq Biotechnology Index (NBI) has underperformed the broader market, down 17% vs the S&P 500 up 3% year-to-date. Since the peak in July 2015 (4165.87), the NBI is down 30%. With investors jittery on the outlook for biotechs and questioning current valuations, we took a closer look at the NPVs of the nine larger cap companies in our coverage universe. Most value coming from base businesses Given the significant decline across the board, we found that current valuations largely reflect minimal contributions from the pipeline with the exception of those with large clinical trials underway that could offer high rewards if successful. Our analysis indicates the base businesses for ALXN, AMGN. GILD, INCY, REGN, and VRTX reflect about 75%- 100% of current valuations with very little premium from the pipeline, whereas R&D heavy weights BIIB, BMRN. and CELG screen lower with their base businesses representing about 55%-65% of current valuations. On a multiple basis, most are trading at or below historical averages on forward P/E and EV/EBITDA. We highlight ALXN and REGN as two stocks with above-peer growth and pipeline premium lower than prior levels. Large caps screen well in historical context We also reviewed historical forward PIE multiples for the last 10 years for the four large caps AMGN, BIIB, CELG, and GILD (see Chart 19-22). With the exception of AMGN which is trading slightly above, the other three are trading considerably below historical averages (4x-10x below). AMGN, BIIB, and CELG trade above historical lows (5x-6x above). GILD, however, is currently trading at its lowest forward PIE multiple as investors are concerned about the sustainability of the Hepatitis C (HCV) franchise. We expect the sector to recover after