Bill Tribe, Ph.D., Partner, A.T. KearneyE-mail: bill.tribe@atkearney.com – Phone: +1 847 422 3930

June 15, 2016

Opening Keynote Address

Orthopaedic Device Industry Business Models: 2020 and Beyond

OMTEC Keynote

■ Industry / Sector Specific Challenges

■ Potential Responses

■ Q&A

Industry / Sector Specific Challenges

0%

5%

10%

15%

20%

25%

30%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Disruptive change is just beginning – eroding 5% of margin if left unaddressed

Actual Forecast

Global Medical Device Margin Trend(USD, as % of Sales)

-5%

+2% -1%

$34B value at stake

Source: A.T. Kearney

Volumes and overall market size are projected to continue growing for orthopaedics …

Source: ORTHOWORLD, A.T. Kearney

Global Orthopaedics Revenue ($M)

0

10,000

20,000

30,000

40,000

50,000

60,000

1 2 3 4 5 6 7 8 9 10

2.5%2.0%

… but prices and margins will continue to face strong downward pressures in U.S. and abroad

Source: Deutsche Bank, A.T. Kearney

-3%

-2%

-1%

0%

1%

201420132005 2006 2007 2008 2009 20112010 2012

U.S. Joint Reconstructive Pricing (Estimated % Change Year-over-Year)

Interviews coupled with our research and experience suggest five combined forces are likely to disrupt orthopaedics

Source: A.T. Kearney

The confluence of these disruptors is forcing unattractive economics on the traditional orthopaedics business model

Orthopaedics market is already experiencing the power shift among the value chain players

Source: A.T. Kearney

Power shift to players and providers

BeforeFee-for-service, specialized care

AfterACO/IDN, coordinated care, increased quality and transparency, narrower product choice

Before

Negotiated

contract rate,

risk mitigation

AfterMerging for scale,pay for performance, real world evidence

Provider

Payer

Source: A.T. Kearney

Regulators have focused on orthopaedics for the last few years and that has driven increasing burdens

Heightened regulatory scrutiny

Orthobiologics UDI Sterilization Instruments

2007

FDA Amendments Act

2010 - 2011

510K Revisions

2012

FDASIA: MDUFMA revisions

2013

Medical device excise tax

2007

FDA ordered to implement UDI

2011

Class 1lb classification created

2012

Registration requirements change

2015

CMS voices concerns about UDI

20102008 20142009 20152013201220112007

US VC Medical Device Companies (% of total VC)

Innovation in the sector has slowed down and funding is becoming more challenging

Unclear sources of innovation

2015 (1H)

6

2013

7

2012

10

2009

15

0

5

10

2004 2006 2008 2010 2012 2014

-8%

Orthopaedics PMA (#)

0

50

100

150

2004 2006 2008 2010 2012 2014

+11%

Orthopaedics sPMA (#)

Source: A.T. Kearney

Healthcare models emphasize outcomes and bundled solutions with a clear focus on reducing procedure overall costs

Source: CMS, A.T. Kearney

Example: Hip Replacement Value Breakdown

New healthcare delivery models

Bundled payments (CJR) Healthcare systems

Represents only 3% of total cost

Cost of implant &

equipment

Cost of operation

(hospital based)

Post op care

(hospital based)

Post discharge

(short term)

Post discharge

(long term)

3% 22% 29% 19% 27%

3% 25% 54% 73% 100%

Coverage, affordability & accessibility will drive growth in underserved segments of developed markets

Source: A.T. Kearney

US Healthcare Spend vs. Insurance Coverage by State

‘000 $

/cap

ita p

er

sta

teNeed to serve lower socio-economic classes

Multi-tiered product portfolios Differentiated market access models

80% 85% 90% 95%

$0

100%

$6

$8

$10

$12

0%

DE

LA

MA

MIMT

NV

RI

UT

VT

VA

AK

AZ

CO

CT

DC

Private or Public Insurance (% of population)

IA

FL

GA

HI

ID

WV

$6B potential

PotentialResponses

Hospitals: 3-5%

Majors: 1-2%

CMOs: 5-10%

Majors: 20-30%

Challengers: 10-15%

OEMsSuppliers /

CMOsDistributors

Payers &

Providers

1. Distributors: based on Cardinal Health, McKesson & ABC; OEMs: majors based on Zimmer Biomet, Stryker, Smith & Nephew, challengers based on Nuvasive, Amplitude and Exactech; Hospitals based on American Hospital Association and Kaiser Permanente; CMOs based on Greatbatch, Symmetry and estimates for private players

0%

10%

20%

30%

Current orthopaedics value chain margins are concentrated on OEMs but that will be increasingly challenged

OEMs are increasingly challenging traditional models to deliver a differentiated customer experience …

Source: WSJ.com, Company News, A.T. Kearney

Distinct Customer Experience Concepts Select Examples

Post-op

CareLink Network

Less return visits

and proactive

issue identification

Center for Advanced Recovery™ (CARE)

In-decision

Exam

ple

sV

alu

e Commitment to

patient-centric

care

Surgery

Destination Centers for Superior Performance

Streamlined end-

to-end patient

journey

Manufacturers

Customized Implants and Rep-less Models

Pre-op

Simplified steps

and surgical

environment

… with personalized surgery and implants becoming more relevant in their value proposition

Personalized OrthopaedicsSelect Examples

Manufacturers

Source: Stryker, Zimmer Biomet, A.T. Kearney

Robotic

Personalized Surgery

Personalized

Implant Systems

At the same time, distributors are moving upstream in the chain and offering new delivery models

Distributors Business ModelsSelect Examples

Direct-to-patient /

hospital distribution

Distributors

Source: Cardinal Health, Millstone, A.T. Kearney

Expansion into

orthopaedics

Payers & Providers Initiatives

For payers and providers, partnerships with OEMs and bundled payment models are rapidly expanding

Select Examples

Source: Zimmer Biomet, HBR, Hoag Orthopedic Institute, A.T. Kearney

Payers & Providers

Bundled payments for

commercial insurers

OEM – clinic holistic

partnership

Winning orthopaedics business models will leverage an end-to-end perspective and interactions across the value chain

OEM

ManufacturersSuppliers / CMOs Distributors

Payers &

Providers

How do portfolio choices help manage supplier relationships?

How can you define differentiated supply chains to serve different markets & segments effectively?

How can you enhance end-to-end cost efficiencies? What drives a more scalable & efficient supply base?

What upstream relationships can create the most value?

What services truly enhance your products and the ability to provide value?

How can bundling be managed?

Restructuring already underway in adjacent sectors

Current M&A activity just scratching the surface

Big names will disappear

New and unexpected ones will emerge

Multi-billion $$ value at stake

Are you equipped for the future?

The change has begun, and the winners will address the challenges early…

This document is exclusively intended for select audiences. Distribution, quotations, duplication, and excerpts are not permitted without A.T. Kearney’s prior written consent. The content compiled in this report is for presentation only and does not represent the complete findings or total documentation on the topic represented.

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