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Worldwide orthopaedic market and the Contract Manufacturing April 3 rd 2013 Ali MADANI Phone: + 33 1 47 78 46 00 a.madani@avicenne.com Table of contents I Worldwide orthopaedic market: dynamics, competition, drivers Worldwide orthopaedic

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Ali MADANI

Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

Worldwide orthopaedic market and the Contract Manufacturing

April 3rd 2013

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Ali MADANI

Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Table of contents

Worldwide orthopaedic market: dynamics, competition, drivers…

Worldwide orthopaedic markets in 2012: hip, knee, trauma, spine, others… The Worldwide Orthopaedic Market: growth Worldwide Orthopaedic Market in 2012: competition Worldwide Orthopaedic Market dynamics European Orthopaedic Market Drivers and limiters of the market Growth forecasts by 2017

Worldwide Orthopaedic Contract Manufacturing

II.1. The value chain II.2. Level of the Contract Manufacturing by type of OEM II.3. Orthopaedic Contract Manufacturing market II.4. Contract Manufacturing: competition II.5. Trends

Take home messages I II III

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Worldwide orthopaedic markets in 2012: ~34.5 B$ (+4.5%)

Source: Avicenne research & analysis 2013

18% 22% 4% 23% 17% 13% 2% HIP KNEE EXTREMITIES SPINE TRAUMA ORTHOBIOLOGICS OTHERS

KNEE

7.7 B$

+4.5%

Hip

6.2 B$

+1.5%

SPINE

8 B$

+4%

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Ali MADANI

Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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The Worldwide orthopaedic market: growth

Source: Avicenne research & analysis 2013

2000 - 2010 CAGR 2010 - 2011 Growth 2011 - 2012 Growth

10,4% 13,3% 11,5% 11,4% 0% 5% 10% 15% HIP KNEE SPINE AVERAGE Total Ortho 3,0% 5,0% 4,0% 4,9% 0% 2% 4% 6% HIP KNEE SPINE AVERAGE Total Ortho 1,5% 4,5% 4,0% 4,5% 0% 2% 4% 6% HIP KNEE SPINE AVERAGE Total Ortho

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Worldwide implants market in 2012 in value (B$)

Market value (B$)

Source: Avicenne research & analysis 2013

7,7 6,2 8,0 3 4 5 6 7 8 9 Knee Hip Spine

55% 23% 22% Row USA Europe 54% 23% 23% Row USA Europe 76% 13% 11% Row USA Europe

+4.5% +1.5% +4%

% Growth 2011-2012

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Worldwide implants & Orthobiologic market in 2012 in value (B$)

Market value (B$)

Source: Avicenne research & analysis 2013

6,2 4,5 1,5 2 4 6 8 Trauma & CMF Orthobiologics Extremities

56% 29% 15% Row USA Europe 70% 21% 9% Row USA Europe 61% 24% 15% Row USA Europe

+6% +6% +8%

% Growth 2011-2012

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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European implants market in 2012 in value (M€)

Market value (M€)

Source: Avicenne research & analysis 2013

1 150 1 300 140 200 400 600 800 1000 1200 1400 Hip Knee Shoulder

% Growth 2011-2012

11% 24% 21% 13% 12% 19%

Germany UK Italy Spain Others France

17% 24% 18% 16% 7% 18%

Germany UK Italy Spain Others France

+2.7% +5.1% +8.3%

18% 28% 10% 11% 6% 27%

Germany UK Italy Spain Others France

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Worldwide orthopaedic market in 2012: competition

2012 Worldwide Orthopaedic Market

Source: Avicenne research & analysis 2013

2012 revenues of the Major Orthopaedic Companies (B$)

Depuy- Synthes 21% Zimmer 11% Stryker 14% Medtronic 10% Biomet 6% Smith & Neph 6% Others 32% 2,0 2,2 3,9 3,3 4,7 7,4 10 20 Smith & Nephew Biomet Zimmer Medtronic Stryker Depuy-Synthes Orthopaedic products 2012 Other Medical devices 2012

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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The challengers gained market shares

Source: Avicenne research & analysis 2013

2011 challengers 2012 challengers Hip Knee Spine Trauma & CMF Total Ortho

14% 14% 23% 21% 25% 31% 15% 16% 31% 31%

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Majors Vs Challengers: Majors save ranking & Challengers the growth!

Source: annual company reports May 2012

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 0% 5% 10% 15% 20% 25% 30% 35% 40%

WW Ortho 2011 market shares (%) Revenues CAGR 2009-2011 (%)

Legende 500 M $

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Challengers growing Vs majors

Source: Avicenne research & analysis 2013

Majors Challengers

Product standardization Multiplication of customized Product range reduction Product range Extension Sale channels cost cutting Attracting new sale forces More centralized services Local and high level services

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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European hip, knee & shoulder markets

Source: Avicenne research & analysis 2013

HIP KNEE SHOULDER European Market 2012 in M€ - 14 countries

1 150 M€

23% of WW market

1 300 M€

23% of WW market

140 M€

20% of WW market

Growth per year 2011/2012

+2.7% +5.1% +8.3%

Europe

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Market Drivers

Source: Avicenne research & analysis 2013

Demographic & Economic

Impact 1: Population Impact 2: Inhabitants > 65 years Impact 3: Health expenses Impact 4: Obesity

New products & innovation and revision

Impact 1: Mix Product impact

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Drivers & limiters:

Population ageing and product mix evolution have been the major historical drivers. Going forward, they should remain the major growth contributors

Source: Avicenne research & analysis 2013

Driver Argument Impact

Past Future

Price

Price

Reimbursement trends, Competition, clients pressure and public/private mix lead to some price decrease

  • -

Product mix

Materials The increasing use of higher technology implants (ceramic combinations, cementless products) has a positive impact on the product mix

+ +

Fixation New products, new kinematics, new surgeries, new materials & new instruments New products, new surgical approaches, new ancillaries and instruments increase the product mix

++ ++

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Product Mix pulls the market

Substitution of cemented by cementless or hybrid products should continue with a positive mix impact: example of hip in Italy (% of THP

in volume)

Source: European Orthopaedic Market 2012-2017, Avicenne report

% of Mobile cup in partial hip implants in Italy: mobile cup price is more than two times higher than the standard partial hip

11% 7% 74% 83% 15% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Cemented Cementless Hybrid 35% 65% 0% 10% 20% 30% 40% 50% 60% 70% 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Hip erosion price and the growth factors: example of France

The volume & mix impact balancing price erosion

(*) Excluding currency growth impact Source: European Orthopaedic Market 2012-2017, Avicenne report

2,5% 0,4%

  • 2,6%

0.3%

  • 3%
  • 2%
  • 1%

0% 1% 2% 3% Compound annual Volume growth 2012/2017 Compound annual Mix product impact 2012/2017 Compound annual price erosion 2012/2017 Compound annual Value growth* 2012/2017

Volume growth is the main factor to balance the price

  • erosion. The hip mix

growth factor is no more a leading factor

1 2 3

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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The market limiters

Source: Avicenne research & analysis 2013

Reimbursement

Impact 1: Price decrease Impact 2: Longer Time to market

Buying Groups

Impact 1: Price decrease Impact 2: More Low-end products demand

Certification

Impact 1: Time to market Impact 2: Higher development Cost

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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The orthopaedic sale channels

Three main sale channels co-existing, buying groups dominating in some countries

Source: Avicenne research & analysis 2013

Sales representative

« company » employees Less expensive than

  • ther channels

Positive effect to push the « company» sales strategy Negative impact for “company "working capital

Agents

Commercial interface with the surgeon Very strong relationship between agent & surgeon Do not buy stocks and instruments Do not invoice the clinics & hospitals Gain commission (% of sales) Negative impact for “company” working capital

Distributors

Buy stocks and instruments Discount on catalogue prices (-30% to -40%) Invoice the clinics and hospitals Positive impact for “company” working capital

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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The market limiters

Group purchasing developments in Germany drove the implant prices down… It now serves as a model in lot of other European countries

Source: Avicenne research & analysis 2013

Group purchasing was a success in Germany…

For example the basic knee (fixed tibial plate - cemented) is priced at 1 350 €, for some tenders Depuy proposed 900 € for this basic product. Zimmer had in his customer portfolio the “Endoclinic and DAM Group” for 4 hospitals, with 10 000 knee and hip sales per year! Average price for the knee for this customer is much less than 1 000 €.

…it was much less successful in France and Italy

Some private hospital groups in France like “Vitalia or Générale de Santé” are trying to centralize their implant purchasing, but it is only the beginning. The discounted price was only a few % lower and those hospitals have to share these savings with the “French Caisse d’Assurance Maladie”. The surgeon name reputation is considered as product marketing showcase of the private hospitals, which are making what is necessary to keep their surgeons. Hence they are not focusing on implants price reduction. In Italy, purchasing groups make less than 10% of the total orthopaedic market value per year and growing slowly.

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Worldwide Orthopaedic Contract Manufacturing

Orthopaedic Contract Manufacturing market

Contract Manufacturing market value chain Orthopaedic Contract Manufacturing rates Contract Manufacturing market Competition & Size Heavy trends

II

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Contract manufacturing market value chain

Hospitals & Clinics Orthopaedic companies OEM Revenues in 2012:

34.5 B$ 6 majors

Few 100 challengers Implants

1.7 B$

Instruments

1.0 B$

Cases & Trays

0.4 B$

Contract Manufacturers

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Orthopaedic Contract Manufacturing rates

Contract Manufacturing rate for IMPLANTS

MPS: Marking-Packaging-Sterilization Source: Avicenne research & analysis 2013

Contract Manufacturing rate for INSTRUMENTS

HIGH HIGH LOW LOW HIGH ALMOST 100% MEDIUM 2 4 6 Forging Casting Machining Finishing Coating Sintering MPS

Contract Manufacturing Rate

VERY HIGH VERY HIGH VERY HIGH VERY HIGH HIGH 2,2 2,4 2,6 2,8 3 3,2 Forging Casting Machining Finishing MPS

Contract Manufacturing Rate

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Contract Manufacturing market:2005-2012 3 Billion US$ in 2012

Contract Manufacturing market showing a cycle (M$)

Source: Avicenne research & analysis 2013

715 805 905 1005 880 930 1000 970 295 325 360 400 350 370 390 378 950 1065 1200 1345 1400 1480 1600 1664 500 1000 1500 2000 2500 3000 3500 2005 2006 2007 2008 2009 2010 2011 2012 Instruments Cases & trays Implants

CAGR : 6.3 %

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The Orthopaedic suppliers are relatively small, compared to OEM

Major OEM revenues: M US$

Source: Avicenne research & analysis 2013

Contract manufacturers revenues: M US$

100 200 300 400 500 2,0 2,2 3,9 3,3 4,7 7,4 5 10 15 20 Smith & Nephew Biomet Zimmer Medtronic Stryker Depuy-Synthes

X 10 X 100

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How an OEM chooses its Contract Manufacturers: what are the main criterias?

Majors: criterias to choose its Contract Manufacturers in instruments

Source: Avicenne research & analysis 2013

Challengers: criterias to choose its Contract Manufacturers in instruments

5 10 15 20

Level of quality Design and conception services Co- industrializ ation Production capacity Price Delay & Services Customized instrument services Specific skills & know how

5 10 15 20

Level of quality Design and conception services Co- industrializ ation Production capacity Price Delay & Services Customized instrument services Specific skills & know how

Level of quality: 1- finishing & adjustment 2–esthetic 3- simplicity 4- hand held Co-industrialization: re-thinking production process and functional sizing

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Heavy trends:

Majors OEM are waiting for strategic partnerships and long term collaboration to outsource more and more OEM are looking for Contract Manufacturers who recognizing mutual interdependency and targeting common goals

Source: Avicenne research & analysis 2013

Reliability Robust supply Chain Sharing risks Long term Planning Services Common Improvements Value added partnership Strategic partnership Long-term partnership

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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Forecasts for the worldwide orthopaedic market

Worldwide orthopaedic market: CAGR 2012/2017 de +7 %

Source: Avicenne research & analysis 2013

10 20 30 40 50 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 34.6 48.5 CAGR 2012-2017: HIP: +4 % KNEE: +7 % EXTREMITIES: +14 % SPINE: +8.0 % TRAUMA: +6.0 % ORTHOBIO.: +7.5 %

CAGR : 10.3% CAGR : 7%

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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The life cycle of the orthopaedic products: growth forecasts by 2017

Hip and knee are more mature than extremities and spine

Source: Avicenne research & analysis 2013

1980 1990 2000

Market Time

HIP

CAGR 12-17: +4%

Market Time

KNEE

CAGR 12-17: +7%

Market Time

SPINE

CAGR 12-17: +8%

Entrance in the mass market

Market Time

EXTREMITIES

CAGR 12-17: +14%

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Take home messages (1/2)

  • 1. Worldwide orthopaedic market continues its growth with a CAGR of 7% by

2012 to 2017.

  • 2. Highest growth for orthopaedic implants would be on those following

markets: shoulders, extremities… and in countries like Japan, China, India, Brazil,...

  • 3. The Challengers Vs Majors: usually a double digits growth for the dynamic

challengers… Majors are losing market shares but maintain margin.

  • 4. Concentration in the orthopaedic market is continuing: we predict more

acquisitions and mergers.

  • 5. Concentration in the Contract Manufacturing market is continuing: the

target is the critical size to be able to supply more services, more production capacity, more quality services and share more risks…

  • 6. Today OEM do not find a large range of offers from their Contract
  • Manufacturers. As soon as the OEM find the right supplier he starts to
  • utsource.

Worldwide

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Take home messages (2/2)

  • 7. OEM and particularly Majors are waiting for extend partnerships with their

suppliers: common product improvements, long term planning of developments and productions.

  • 8. OEM looking for partners with robust supply chain.
  • 9. Majors OEM sold their facilities to Contract Manufacturers, we are

expecting this trend for the future.

10.If China is becoming the new investment place for manufacturing generic

instruments in short and mid term, we do not think the main part of implants and customized instruments will switch from Europe or US to BRICS countries.

11.OEMs need structured suppliers ready to:

Deliver within shorter time frames and enable flexibility. Be efficient in terms of less waste and thus reducing manufacturing costs. Share with them more responsibility and risk concerning regulatory constraints.

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Phone: + 33 1 47 78 46 00 a.madani@avicenne.com

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THANK you!

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Annexe: AVICENNE marketing reports

First publication in 1993 Yearly up-date Hip, knee, shoulder Based on +80 interviews 650 pages & 800 graphs detail the European Market in Germany, France, Italy, Spain, UK, and other countries Available immediately

“European Orthopaedics Market” April 2012 13rd edition

Première publication en 2000 Publication annuelle Système universels, cages… 70 interviews d’acteurs dans le domaine du rachis 400 pages & 300 graphs détaillant le marché européen du rachis en Allemagne, UK, France, Italie, Espagne, Belgique et Suisse Available immediately Les 100 plus importants sous-traitants européens de l’orthopédie Analyse détaillée par fiche individuelle L’évolution des revenus sur plusieurs années, activités et savoir faire, principaux clients, principaux actionnaires, détails dans l’orthopédie… Comparaison avec les sous- traitants majors américains Available immediately 4 segments surveillés : hanche, genou, trauma et biomatériaux Publication du bulletin de veille tous les 2 mois 50 brevets présentés par numéro de façon claire et avec schéma Ces éléments permettent : D’identifier les tendances en matière de R&D De connaitre les choix technologiques du concurrent Available immediately

“Trends, Developments & Dynamics of the European Spine Market”

  • Sept. 2011 6th edition

“European Orthopaedic Contract Manufacturing detailed analysis and Profiles”

  • Feb. 2012 edition

“Orthopaedic patent watch” Yearly edition

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Orthopaedic Contract Manufacturing competitor response: concentration by acquisition

Greatbatch

1977 Unique Instruments 1992 Stealth Technologies 2001 HY-VAC 2003 Stro Met Inc 2004 Unique Design 2005 Bio-Vac 2005 Bio-Coat 2006 McDee 2007 Anzon 2007 Keller 2007 MPS 2008 Azary 1977 Wilson Greatbatch 1998 Hittman Materials 1998 Medical Components 2001 Sierra-KD 2002 Globe Tool 2002 Manufacturing 2004 NanoGram 2007 Biomec Inc 2007 Enpath Medical 2007 Intellisensing 2007 Ouan Emerteq 2007 EAC 2008 PRECIMED 2008 Depuy Facilities

Orchid

2006 Everest Metal 2007 Clamonta 2008 DePuy OEM Bedford Facility

Symmetry

2007 TNCO 2003 Symmety 2003 Mettis Ortho 2006 Riley Medical 2007 SSI/UCA Merger

Sandvik

2007 Doncasters 2007 JKB Medical Tech 2008 Medtronic Memphis Facilities 2008 Eurocut

Lisi Medical

2007 Seignol 2007 Hugueny 2007 Jeropa USA 2010 Stryker Herouville Facilities 2008 INTERMED 2011 Surgical Instruments Codman & Shurtleff