2009 Washington State Biomedical Device Summit: Medical Device Industry Outlook Venkat Rajan June 23rd. 2009

Industry Overview Economic Impact Hospital Focus Group Impact of Proposed Health Policy Changes Technologies of Focus Focus Points

Industry Overview

Economic Impact

Hospital Focus Group

Impact of Proposed Health Policy Changes

Technologies of Focus

Markets Covered by Frost & Sullivan Medical Device Team Cardiovascular Devices Orthopedic Devices General Surgery Endoscopy Neurology Devices Urology and Gynecology Ophthalmic Equipment Cosmetics and Aesthetics Hearing and Audiology Wound Care and Management Respiratory and Anesthesia Equipment Disinfection and Sterilization Infusion Systems Mobility Aids

Innovations in diverse device markets propels growth as rapid diagnostics and therapeutic advances reshape demand. Paradigm Shift in Healthcare system … Fragmented Patient Flow From ... Invasive Diagnostic & Treatment Provider Centric Focus Hospital Treatment Monitoring One Size Fits All Approach Therapeutics/Diagnostics/ Devices Tools Treating Sickness Objective ...To Integrated & Automated Less Invasive, Preventive, Image Based Patient Centric Out-of-hospital Treatment Personalized Medicine “ Theranostics” Preventing Sickness – “Wellness”

Industry Fundamentals Investment Analysis Common Size Analysis Fixed Cost Analysis Ratio Analysis

Financial Analysis Financial Analysis Common Size Analysis Fixed Cost Analysis Ratio Analysis Source: Frost & Sullivan Percent Break-up of Fixed Costs

Financial Analysis Financial Analysis Common Size Analysis Fixed Cost Analysis Ratio Analysis 32.8 7.9 9.2 15.1 63.1 Medical Devices Industry 32.7 5.6 11.6 17.2 56.5 Respiratory 35.2 10.2 16.2 14.9 60.4 Laser 34.1 9.5 17.3 22.7 68.1 Ophthalmology 33.8 11.5 (1.7) 4.9 72.9 Cardiovascular 42.1 5.6 18.1 24.9 70.9 Orthopaedic 24.0 2.1 2.0 7.3 40.0 Durable Medical Equipment 39.9 8.2 9.6 19.4 78.6 Urology (%) (%) (%) (%) (%) Year 2006 SGA to Sales R&D to Sales Net Profit Margin Operating Profit Margin Gross Profit Margin Segment

Market Overview- Industry Sectors Market Sectors of Stability Cardiovascular Consumables Next Generation Treatments (Improve Clinical Efficiency, Reduce Costs) Infection Control Market Sectors at Risk Cosmetic procedures (implants, eye treatments, hair removal) Orthopedic Reconstruction Sports medicine treatments Orthodontics Capital Equipment (Energy Based Surgical Equipment, Robot Assisted Surgery, External Beam Radiotherapy)

Market Sectors of Stability

Cardiovascular

Consumables

Next Generation Treatments (Improve Clinical Efficiency, Reduce Costs)

Infection Control

Market Sectors at Risk

Cosmetic procedures (implants, eye treatments, hair removal)

Orthopedic Reconstruction

Sports medicine treatments

Orthodontics

Capital Equipment (Energy Based Surgical Equipment, Robot Assisted Surgery, External Beam Radiotherapy)

Increasing Financial Stress Affecting Health Of Hospitals Decrease in patient care volumes as elective and non-critical procedures requiring self pay get postponed Limited funding and high interest rates have made hospitals apprehensive about the uptake of new expensive technologies` Increasing unemployment accompanied by loss of employer sponsored insurance attributes to rise in number of uninsured patients Patients unable to afford for treatment tend to put-off care till conditions worsen leading to much expensive care

Investments Could Affect the Development of Next Generation Technologies As with other sectors, investment money tight for startups No med tech IPOs since early 2008, None in 2009 Med Tech VC Funding : $2.8 2008 Billion, $3.3 Billion 2007 Source Ernst & Young MedTech Overall financing: $4.6 billion 2008, $7.31 Billion 2007 Source Ernst & Young Cost-to-market may be prohibitive for smaller emerging companies Low-risk products with quicker ROI and products outside stringent regulatory processes will be favored Continued investment in late stage entities preferred over new companies Consolidation and M&A expected to pick up midyear

As with other sectors, investment money tight for startups

No med tech IPOs since early 2008, None in 2009

Med Tech VC Funding : $2.8 2008 Billion, $3.3 Billion 2007 Source Ernst & Young

MedTech Overall financing: $4.6 billion 2008, $7.31 Billion 2007 Source Ernst & Young

Cost-to-market may be prohibitive for smaller emerging companies

Low-risk products with quicker ROI and products outside stringent regulatory processes will be favored

Continued investment in late stage entities preferred over new companies

Consolidation and M&A expected to pick up midyear

Increased Dependency on Third Parties - Outsourcing Companies turn to CRO’s and CMO’s for product development and manufacturing. - Increase in influence of third party entities Increased reprocessing of medical devices is expected GPOs and large volume purchasing will increase pressures on vendors - Outside Market Entrants Looking to Healthcare for Growth Electronic Chip Manufacturers Materials Science HCIT Services

- Outsourcing

Companies turn to CRO’s and CMO’s for product development and manufacturing.

- Increase in influence of third party entities

Increased reprocessing of medical devices is expected

GPOs and large volume purchasing will increase pressures on vendors

- Outside Market Entrants Looking to Healthcare for Growth

Electronic Chip Manufacturers

Materials Science

HCIT Services

Market Strategies- Product Bundling, Exclusive Contracts Product bundling becomes more of a point of emphasis to get new products to market Increase in volume sales even if the margins are reduced. Improve Brand Loyalty Large companies with broad product portfolio tend to bundle products to increase sales Smaller companies tend to tie up with complementary products to enhance market presence Economic Meltdown Economies of Scale Product Bundling, Product Lining, Family Branding

Product bundling becomes more of a point of emphasis to get new products to market

Increase in volume sales even if the margins are reduced.

Improve Brand Loyalty

Large companies with broad product portfolio tend to bundle products to increase sales

Smaller companies tend to tie up with complementary products to enhance market presence

AHA Study Illustrates Hospital Concerns A recent survey of hospital CEOs conducted by the American Hospital Association (November 2008) indicates that fewer patients are seeking hospital care, in particular elective procedures, and those seeking care are requiring more financial assistance. The report also states that hospitals, due to the difficulty in obtaining credit, may delay equipment purchases. Hospital spending on cap projects 82% have put facilities projects on hold 65% have put clinical projects on hold 62% have put IT projects on hold 96% of hospitals said postponement of capital projects was due to uncertainty about future economic conditions 84% said a decline in operating performance contributed to this decision A majority of hospitals reported putting 50% or more of their capital budget on hold

A recent survey of hospital CEOs conducted by the American Hospital Association (November 2008) indicates that fewer patients are seeking hospital care, in particular elective procedures, and those seeking care are requiring more financial assistance. The report also states that hospitals, due to the difficulty in obtaining credit, may delay equipment purchases.

Hospital spending on cap projects

82% have put facilities projects on hold

65% have put clinical projects on hold

62% have put IT projects on hold

96% of hospitals said postponement of capital projects was due to uncertainty about future economic conditions

84% said a decline in operating performance contributed to this decision

A majority of hospitals reported putting 50% or more of their capital budget on hold

What we are Hearing……… Declines in Demand for Services Number of elective surgeries has already dropped according to several hospital executives who point to recent internal tracking data as evidence How long will it last and how deep will it go? Actions to prevent a more serious erosion of revenue price increases introduction of procedures new to the hospital (to increase competitiveness and revenues) actively marketing for new patients outsourcing “ We have already seen our volume decrease for these procedures. The real question is to what extent will the economy delay these procedures and for how long.” “ We believe that there will be a slight down turn on planned procedure[s] [and] a major on elective.” “ Elective procedures have decreased slightly. As people lose their jobs, we expect there to be more self-pay patients and more patients deferring elective procedures.”

Number of elective surgeries has already dropped

according to several hospital executives who point to recent internal tracking data as evidence

Actions to prevent a more serious erosion of revenue

price increases

introduction of procedures new to the hospital (to increase competitiveness and revenues)

actively marketing for new patients

outsourcing

“ We have already seen our volume decrease for these procedures. The real question is to what extent will the economy delay these procedures and for how long.”

“ We believe that there will be a slight down turn on planned procedure[s] [and] a major on elective.”

“ Elective procedures have decreased slightly. As people lose their jobs, we expect there to be more self-pay patients and more patients deferring elective procedures.”

What we are Hearing……… Hospitals Are Taking Immediate Action Budget Reductions Just a Stop Gap “ [Our] operating budget has been reduced by about 33% versus 2007.” “ [W]e cut 20-23% in 2009 budget. Staff was cut by 10%, we laid off 10% of staff.” Reductions in operating budgets and in capital spending budgets – Majority of the interviewed Hospital Executives “ We are holding on all non essential capital. Essentially no capital for new services or service expansion, just capital for replacement equipment.” Have reduced or are selectively managing capital spending – For those yet to make operating budget cuts “ We have reduced operating budgets but may actually increase our capital budget over 2008. The reason for an increase in the capital budget is that most of the capital equipment is very old and is in need of replacement.” No choice but to increase capex – Hospitals with aging or outdated equipment due for replacement

“ [Our] operating budget has been reduced by about 33% versus 2007.”

“ [W]e cut 20-23% in 2009 budget. Staff was cut by 10%, we laid off 10% of staff.”

“ We are holding on all non essential capital. Essentially no capital for new services or service expansion, just capital for replacement equipment.”

“ We have reduced operating budgets but may actually increase our capital budget over 2008. The reason for an increase in the capital budget is that most of the capital equipment is very old and is in need of replacement.”

Hospitals Are Taking Immediate Action Creative Cost Saving and New Financial Measures Consolidating campuses or departments, consolidating vendors, tracking physicians Eliminate service redundancy Save on operating expenses Measure individual physician profitability “ We reduced our operating overhead by putting our OB and PEDS beds in [suspension] at one of our campuses. As a result we have eliminated duplication of services in at least eight different areas and reduced our payroll expenses by about 40%...” “ Looking at different suppliers to reduce costs.” Not all areas are affected Especially if they are revenue generating Emergency rooms have not generally been affected by budget cuts “ Our ER has been unaffected by our budget cuts since 90% of our admissions are generated thru the ER.” “ We will also begin to look at the physician level to determine which physicians make a procedure profitable vs. not profitable.” “ The current economy is actually increasing our admissions levels because there are more patients using our ER as their primary care physician, and because more members of the medical staff are sending their patients after hours to our ER for service.”

Creative Cost Saving and New Financial Measures

Consolidating campuses or departments, consolidating vendors, tracking physicians

Eliminate service redundancy

Save on operating expenses

Measure individual physician profitability

“ We reduced our operating overhead by putting our OB and PEDS beds in [suspension] at one of our campuses. As a result we have eliminated duplication of services in at least eight different areas and reduced our payroll expenses by about 40%...”

“ Looking at different suppliers to reduce costs.”

Not all areas are affected

Especially if they are revenue generating

Emergency rooms have not generally been affected by budget cuts

“ Our ER has been unaffected by our budget cuts since 90% of our admissions are generated thru the ER.”

“ We will also begin to look at the physician level to determine which physicians make a procedure profitable vs. not profitable.”

“ The current economy is actually increasing our admissions levels because there are more patients using our ER as their primary care physician, and because more members of the medical staff are sending their patients after hours to our ER for service.”

What we are Hearing……… Hospitals Changing Approach to Capital Expenditures Plans to alter capital expenditures for 2009 Majority of interviewed Hospital Executives In response to already experienced or anticipated revenue shortfalls Planned capital expenditure changes differ from one hospital to another Most common changes would be: to eliminate all capital expenditures entirely to reduce only non-essential capital purchases to take a disciplined investment approach to capital expenditures “ We have no large capital expenditures planned for 2009, due to slower economy and fewer expected patients.” “ We are planning to finish construction projects that are already in progress and to replace equipment that breaks down during the course of the year. Until the economy evens out we do not plan on purchasing new capital.” “ Proposals for new programs and services which require significant capital start up will be either deferred or more critically evaluated re: cost/benefit analysis before "go/no go" decisions are made.”

Plans to alter capital expenditures for 2009

Majority of interviewed Hospital Executives

In response to already experienced or anticipated revenue shortfalls

Planned capital expenditure changes differ from one hospital to another

Most common changes would be:

to eliminate all capital expenditures entirely

to reduce only non-essential capital purchases

to take a disciplined investment approach to capital expenditures

“ We have no large capital expenditures planned for 2009, due to slower economy and fewer expected patients.”

“ We are planning to finish construction projects that are already in progress and to replace equipment that breaks down during the course of the year. Until the economy evens out we do not plan on purchasing new capital.”

“ Proposals for new programs and services which require significant capital start up will be either deferred or more critically evaluated re: cost/benefit analysis before "go/no go" decisions are made.”

Capex Alternatives Sought “ We normally purchase equipment but due to the economy, will look into leasing more.” “ We are considering more leasing in order to conserve cash.” “ Due to limited funds, some equipment which we acquire may be reconditioned rather than new. May also consider lease to own options in some cases.” “… looking into leasing for the reason [that] we don’t have to put as much capital upfront and can spread smaller cost out over [the] fiscal year.” Hospitals looking at alternatives to capex. Many will turn to leasing or refurbishment rather than purchasing Hospitals that had never considered leasing in the past now expect to turn to this method to preserve capital “ We generally stay away from leasing equipment, but we may enter into more leases this year to conserve cash.” Still, many respondents indicate that the operating budget will suffer more than the capex budget “ Operation budget will see more of a reduction [than capex]. Less patients, less staff.”

“ We normally purchase equipment but due to the economy, will look into leasing more.”

“ We are considering more leasing in order to conserve cash.”

“ Due to limited funds, some equipment which we acquire may be reconditioned rather than new. May also consider lease to own options in some cases.”

“… looking into leasing for the reason [that] we don’t have to put as much capital upfront and can spread smaller cost out over [the] fiscal year.”

“ We generally stay away from leasing equipment, but we may enter into more leases this year to conserve cash.”

“ Operation budget will see more of a reduction [than capex]. Less patients, less staff.”

What we are Hearing……… New Service Lines Offer Opportunity Development of New Service Lines Increases Strategies employed by many hospitals to compensate for revenue decreases elsewhere in the business: Development of new service lines Overall upgrade of capabilities 9 of 11 Materials Managers reported growth within their hospitals – development of new service lines and expanding facilities “ We have several business development initiatives which are being implemented to recruit new physicians, develop new lines of business and increase the number of more profitable payer groups of patients.” “ We are in the process right now of upgrading our EP labs and adding one cath lab. This is one of our most profitable product lines so we place a strong emphasis on new technology in the cardiac arena.” “ We are adding a cancer center. We feel that will benefit us in terms of additional revenue and in terms of maintaining our status as first class medical center.”

Development of New Service Lines Increases

Strategies employed by many hospitals to compensate for revenue decreases elsewhere in the business:

Development of new service lines

Overall upgrade of capabilities

9 of 11 Materials Managers reported growth within their hospitals – development of new service lines and expanding facilities

“ We have several business development initiatives which are being implemented to recruit new physicians, develop new lines of business and increase the number of more profitable payer groups of patients.”

“ We are in the process right now of upgrading our EP labs and adding one cath lab. This is one of our most profitable product lines so we place a strong emphasis on new technology in the cardiac arena.”

“ We are adding a cancer center. We feel that will benefit us in terms of additional revenue and in terms of maintaining our status as first class medical center.”

What we are Hearing………Materials Managers --Hospital Materials Managers The downturn is affecting all of our hospitals. Census is down, elective surgeries are down, financing is much more difficult to obtain and scrutiny by lenders has increased according to our Corp CFO. We will have more ER patients who cannot pay with California unemployment at 10% The state is holding back/delaying payment of Medical as well. So we must watch our cash. We have always kept our operations lean, so far we have not downsized. Infection Control has not been be affected yet. Obviously with the attention on hospital infections from payers, we are attempting to mitigate the occurrence of those infections in order to maintain our reimbursement.

--Hospital Materials Managers

Healthcare Policy- Proposed Changes - Pillars of the Proposed Obama HC Plan Increased Affordability and Access to Coverage Improved Services and Quality Cost Control Focus on Wellness and Prevention - Proposed Strategies Increase Options for Insurance Coverage Comparative Effectiveness Programs Cost Control Computerize Health Records

- Pillars of the Proposed Obama HC Plan

Increased Affordability and Access to Coverage

Improved Services and Quality

Cost Control

Focus on Wellness and Prevention

- Proposed Strategies

Increase Options for Insurance Coverage

Comparative Effectiveness Programs

Cost Control

Computerize Health Records

Stimulus Plan Provisions - HC Facility Construction Renovations -$3.75 B in construction of new DoD medical facilities -$445 M to renovations for existing DoD medical facilities -$950 M to complete repairs and upgrades to VA facilities -$1B to complete renovations and modernize renovate primary care clinics -$550 M to improve Indian Health Service facilities - Investment in HC -$ 20 B to computerize health records -$3B to improve wellness and preventative medicine programs -$500M to help community care facilities pay for care of uninsured patients -$600M to invest in training of primary care providers Expand Insurance Cover age -$30.3 B to extend COBRA healthcare for unemployed -Provides 100 percent federal funding through 2010 for optional State Medicaid coverage of individuals (and their dependents) who are receiving unemployment benefits or have exhausted those benefits and have no health insurance coverage.

- HC Facility Construction Renovations

-$3.75 B in construction of new DoD medical facilities

-$445 M to renovations for existing DoD medical facilities

-$950 M to complete repairs and upgrades to VA facilities

-$1B to complete renovations and modernize renovate primary care clinics

-$550 M to improve Indian Health Service facilities

- Investment in HC

-$ 20 B to computerize health records

-$3B to improve wellness and preventative medicine programs

-$500M to help community care facilities pay for care of uninsured patients

-$600M to invest in training of primary care providers

Expand Insurance Cover age

-$30.3 B to extend COBRA healthcare for unemployed

-Provides 100 percent federal funding through 2010 for optional State Medicaid coverage of individuals (and their dependents) who are receiving unemployment benefits or have exhausted those benefits and have no health insurance coverage.

Healthcare Policy- Implications for Medical Device Manufacturers - Price Control/Pricing Transparency - Currently Prices are Negotiated between Manufacturers and Hospitals and Distributors (variation up to 25% of ASP for certain technologies). -Pricing Transparency Expected to Reduce Overall Costs Affect Margins - Cost Effectiveness Programs - Implemented through Agency for Healthcare Research and Quality (AHRQ), National Institute of Health (NIH), Health and Human Services (HHS) - Evaluate Clinical and Cost Effectiveness of various products and treatments -$1.1Billion in Stimulus funds to conduct comparative effectiveness studies. $400 M HHS, $300 M AHRQ, $400 M NIH - Industry Taking a Cautious Wait and See Approach Time to be Proactive

- Price Control/Pricing Transparency

- Currently Prices are Negotiated between Manufacturers and Hospitals and Distributors (variation up to 25% of ASP for certain technologies).

-Pricing Transparency Expected to Reduce Overall Costs Affect Margins

- Cost Effectiveness Programs

- Implemented through Agency for Healthcare Research and Quality (AHRQ), National Institute of Health (NIH), Health and Human Services (HHS)

- Evaluate Clinical and Cost Effectiveness of various products and treatments

-$1.1Billion in Stimulus funds to conduct comparative effectiveness studies.

$400 M HHS, $300 M AHRQ, $400 M NIH

- Industry Taking a Cautious Wait and See Approach Time to be Proactive

20 Medical Device Technologies Changing Healthcare TOP 20 TECHNOLOGIES BRONCHIAL THERMOPLASTY PERCUTANEOUS AORTIC VALVE MEDICAL ROBOTICS TOTAL DISC REPLACEMENT VENTRICULAR ASSIST DEVICES NEURAL INTERFACE SYSTEMS JOINT REPLACEMENT NEUROSTIMULATION CAPSULE ENDOSCOP STENTS CARDIAC ABLATION BIONIC LIMBS BARIATRIC SURGERY REMOTE REPORTING IMPLANTABLE DEVICES SITE SPECFIC DRUG DELIVERY MUSCULOSKELETAL GROWTH FACTORS ENGINEERED CARTILAGE REPAIR PRODUCTS THORACIC ENDOGRAFTING NATURAL ORIFICE TRANSLUMAIL ENDOSCOPY NEGATIVE PRESSURE WOUND THERAPY

Combination Devices Are A Step Towards The Integration Of The Healthcare Sector In The Future It is believed that 30% of new products under development are combination products of medical devices embedded with pharmaceutical or biologics components. The combination products market in 2009 is estimated to be worth $9.5 Billion. Combine Diagnosis & treatment = Cost effective & less time consuming Interventional devices are used to treat the complexities Interventional Diagnostics Methods Diagnosis Treatment Combination

It is believed that 30% of new products under development are combination

products of medical devices embedded with pharmaceutical or biologics

components.

The combination products market in 2009 is estimated to be worth $9.5 Billion.

NOTES: A revolutionary surgical approach that uses the bodies natural orifices: mouth, anus, and vagina as entry points and aids in minimizing pain, scarring, recovery time, while circumventing complications associated with highly invasive surgery or laparoscopic procedures Minimizing body trauma and improving cosmesis makes NOTES a highly regarded technology that is gaining a lot of traction in recent times Natural Orifice Transluminal Endoscopic Surgery (NOTES) Fuelling The Transformation In Laproscopic Surgery N OTES Requirements for Effective Realization

Source: Frost & Sullivan Q21. What impact do you foresee the current economic climate having on your institution in terms of the following situations? Upgrading of existing products / technologies is foreseen as being very negatively impacted by the economy by 27 percent of Electrophysiologists. Purchasing of new products / technologies is foreseen to be very negatively impacted by the economy by 37 percent of Electrophysiologists, and 26 percent foresee replacing existing products / technologies as being very negatively affected. Snapshot: Catheter Ablation Market Expansion

Q13a. How do you expect the number of catheter ablation procedures in your practice to change within the next 12 months? Q13b. What percentage of (RESTORE Q.13A RESPONSE) change are you expecting in the number of catheter ablation procedures at your facility over the next 12 months? Source: Frost & Sullivan Snapshot: Catheter Ablation Market Expansion Overall, eighty-three percent of Electrophysiologists expect catheter ablations to increase over the next twelve months. Of those, seventy-six percent expect their catheter ablations to increase between 1 and 25%. Source: Frost & Sullivan Note: # indicates small sample; sample size does not support actionable analysis.

Q14: Are you aware of the FDA Panel’s first recommendation for pre-market approval (PMA, effective November, 2008) of a system used for treatment of symptomatic paroxysmal Atrial Fibrillation? Q14A: What impact will the FDA Panel’s first recommendation for pre-market approval (PMA, effective November, 2008) of a system used for treatment of symptomatic paroxysmal Atrial Fibrillation have on your practice? Source: Frost & Sullivan Fifty-nine percent of Electrophysiologists are aware of the FDA Panel’s recommendation for pre-market approval of a system used for treatment of symptomatic paroxysmal Atrial Fibrillation. One-third of respondents expect that the recommendation will result in a moderate (16-25%) increase in the number of AFib ablation referrals. Note: # indicates small sample; sample size does not support actionable analysis. Snapshot: Catheter Ablation Market Expansion

For Additional Information For Additional Information Jake Wengroff, Global Director Corporate Communications North America (210) 247-3806 [email_address] Venkat Rajan Industry Manager Medical Devices (210) 247-2427 [email_address] Mona Patel Research Director Healthcare & Life Sciences (650) 475-4506 [email_address]

For Additional Information