Emerging Markets Kelvin Johnson, President Emerging Markets

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<ul><li><p>Emerging MarketsKelvin Johnson, President Emerging Markets19-20 November 2009</p></li><li><p>2</p><p>Since the industrial revolution in the 19th Century, the rich countries of the first world have dominated the global economy... That era may be over</p><p>The Economist, 21 January 2006</p></li><li><p>3</p><p>Market characteristics Developed markets Developed markets </p><p> Established healthcare regulation</p><p>Educational marketing</p><p>Compliance</p><p>Products and pricing</p><p> Evolving regulation and developing business practices creates operational risks</p><p>Strong sales and </p><p>distribution</p><p> Consumers are generally aware of various options and products - standard marketing campaigns can be applied</p><p> Surgeon training focused on converting existing surgeons</p><p> Products developed for western customers - full product portfolio can be leveraged</p><p> Overall affordability less of an issue, and innovation is key</p><p> Direct sales possible Well-established distributors with strong </p><p>long-term relationship network</p><p> Specific campaigns for customer education essential to improve consumer awareness and unlock demand</p><p> Surgeon training can focus on winning new surgeons and unlock demand</p><p> Products must be customised to cater for different needs, hospital environments</p><p> Products must be provided at appropriate price points</p><p> Direct sales mostly not yet possible Key decision makers are changing quickly, </p><p>relationships must be continuously re-established/expanded</p><p>Emerging marketsEmerging markets</p></li><li><p>4</p><p>Assessing the potential our process</p><p> Clear strategy on Emerging Market / Group fit</p><p> Identify the markets</p><p> Research the markets</p><p> Execute</p><p> Stick to the plan</p></li><li><p>5</p><p>Addressing the potential</p><p>Set clear objectives for each market</p><p>Build the right local teams Drive efficient operations</p><p>Right products and pricing Effective educational marketing Strong sales and distribution</p></li><li><p>6</p><p>Market size and competition</p><p> Reconstruction Major global companies have established </p><p>position Much more open than global market </p><p>positions</p><p> Trauma Significant local manufacturing competition</p><p> Endoscopy Relatively immature market</p><p> AWM Traditional wound care remains treatment </p><p>of choice Global companies established, but wide </p><p>variation on country specific basis</p><p>1.7</p><p>4.8</p><p>2008 2018F</p><p>Emer</p><p>ging</p><p> mar</p><p>ket r</p><p>even</p><p>ue ($</p><p>bn) CAGR</p><p>11%</p><p>2018F</p><p>Endoscopy</p><p>AWM</p><p>Trauma</p><p>Reconstruction42%</p><p>27%</p><p>12%</p><p>19%</p><p>1</p><p>2</p><p>3</p><p>4</p><p>5</p><p>0</p><p>Note: markets currently served by S&amp;NSource: Smith &amp; Nephew, BCG</p><p>General observationsGeneral observationsMarket sizeMarket size</p></li><li><p>7</p><p>Market prioritisation the 3 step approach</p><p>Global pool of all developed and emerging </p><p>markets</p><p>50 largest markets</p><p>27 largest emerging markets</p><p>27 largest emerging markets </p><p>prioritised</p><p>15 emerging markets </p><p>categorisedinto 5 groups</p><p>1Initial screening Prioritising Grouping</p><p>2 3</p><p>15 high-priority emerging markets selected</p></li><li><p>8</p><p>Economic outlook and healthcare market opportunity used as key criteria for prioritisation</p><p>Key factorsKey factors</p><p> Is the size of economy substantial? How large is the population? How many aged people in the market? How many wealthy people who can afford </p><p>the premium products? How large is the growth potential? Any drivers to promote conversion / </p><p>trading up opportunities?</p><p>Data Data </p><p> '12 real GDP '12 total population '12 population aged 60+ '12 household # with HH earning &gt;</p><p>US$10k per year '07-'12 real GDP CAGR '12 real GDP/capita</p><p>WeightWeight</p><p>1111</p><p>12</p><p>Overall economic outlook </p><p>Current healthcare </p><p>market </p><p>Healthcare market </p><p>potential </p><p> Is the healthcare market substantial? Is healthcare expense affordable? Are there enough healthcare </p><p>infrastructure / supply? How large is the medical device market?</p><p> '07 HC expenditure '07 HC expenditure/capita '07 doctors/1,000 pop '07 hospital beds/1,000 pop '06 medical device market</p><p>21112</p><p> How large is the growth potential for healthcare market?</p><p> Will the medical device market grow fast in the next few years?</p><p> 07-12 HC expenditure CAGR 07-12 HC expenditure/cap CAGR '06-'11 medical device CAGR '06-'11 medical device/bed CAGR</p><p>2121</p><p>20</p><p>7</p><p>7</p><p>6</p><p>Absolute-scale-related</p><p>13</p><p>Growth-rate-</p><p>related</p><p>7</p><p>Score of 1 (low) to 5 (high) to be assigned to each factor; weight of each factor then taken into account to arrive at the final score for each market</p></li><li><p>9</p><p>China</p><p>Russia</p><p>Poland</p><p>India</p><p>Brazil</p><p>South Korea</p><p>Turkey</p><p>Mexico</p><p>Taiwan</p><p>Singapore</p><p>Argentina</p><p>Hong KongSouth Africa</p><p>Israel</p><p>8580</p><p>66</p><p>65626257</p><p>55</p><p>55</p><p>55</p><p>53</p><p>52</p><p>51</p><p>51</p><p>Malaysia</p><p>Saudi Arabia</p><p>Iran</p><p>Thailand</p><p>Indonesia</p><p>Chile</p><p>Venezuela</p><p>Colombia</p><p>Nigeria</p><p>Kuwait</p><p>UAE</p><p>Pakistan</p><p>Algeria</p><p>47</p><p>46</p><p>44</p><p>43</p><p>41</p><p>40</p><p>39</p><p>35</p><p>34</p><p>34</p><p>34</p><p>31</p><p>30</p><p>Markets with relatively stable business operation environment</p><p>Favorable environment / low risks Tough environment / high risksNote: 1. Based on EIU overall operation business environment index (June 2008) 2. Based on EIU business operation risks index (June 2008)Source: EIU, BCG analysis</p><p>MarketMarket ScoreScoreMarketMarket ScoreScore</p><p>Operation environment1</p><p>Operation environment1</p><p>Operation risks2</p><p>Operation risks2</p><p>Operation environment1</p><p>Operation environment1</p><p>Operation risks2</p><p>Operation risks2</p><p>23 markets selected with relatively stable business operation environment</p></li><li><p>10</p><p>0</p><p>10</p><p>20</p><p>30</p><p>40</p><p>50</p><p>Focus in on 5 Groups with China the most attractive</p><p>Sizable medium-term potential Steady economic and healthcare </p><p>market growth</p><p>0</p><p>5</p><p>10</p><p>15</p><p>0 1,000 2,000 3,000 4,000</p><p>China</p><p>India</p><p>Russia</p><p>Brazil</p><p>South Korea</p><p>Mexico</p><p>Turkey</p><p>Saudi Arabia</p><p>Poland</p><p>Indonesia</p><p>South Africa</p><p>Thailand</p><p>UAE</p><p>Malaysia</p><p>Argentina</p><p>Medical device market</p><p>2006 (US$ Mn)</p><p>Medical device market</p><p>2006-2011 CAGR (%)</p><p>5</p><p>Smaller markets with lower growth</p><p>A clear strategic priority Large overall size and good </p><p>affordability</p><p>Medical device market 2011 (US$ 500 Mn)</p><p>India</p><p>RussiaBrazil</p><p>South</p><p>Korea</p><p>MexicoTurkey</p><p>Poland</p><p>South</p><p>Africa</p><p>0 100 1,1002002006 population (Mn)</p><p>Medical device market per capita 2006 (US$)</p><p>2</p><p>1</p><p>3</p><p>4</p><p>A fast-growing market but will remain small in the medium-term</p><p>Already more developed markets</p><p>Source: BCG analysis</p></li><li><p>11</p><p>Smith &amp; Nephews Emerging Markets</p><p>Countries with direct presence</p><p>Countries with established distributors</p></li><li><p>12</p><p>Smith &amp; Nephew local teams run by local talent</p><p>Managed directly</p><p>AfricaMiddle East</p><p>South America</p><p>ASEAN China SouthKorea</p><p>PuertoRico</p><p>EasternEurope</p><p>India Mexico</p><p>Finance</p><p>Supply Chain</p><p>HR</p><p>Strategy and Direction</p><p>Compliance</p><p>President</p></li><li><p>13</p><p>Revenue analysis</p><p>2008 Revenue by GBU2008 Revenue by GBU</p><p>Asia</p><p>Europe</p><p>Central &amp; South </p><p>America</p><p>Africa/Middle East</p><p>2008 Revenue by Regions2008 Revenue by Regions</p><p>19%</p><p>35%</p><p>15%31%</p><p>AWM</p><p>Endo</p><p>Orthopaedics27%</p><p>30%</p><p>43%</p></li><li><p>14</p><p>Performance milestones</p><p> Pre-2005</p><p> Opportunistic</p><p> 2006: Formation of Emerging Markets Team</p><p> 2006-07</p><p> Clarity on strategic intent</p><p> Quantification and Research</p><p> Dedicated structures and teams</p><p> Focused teams, but matrixed with GBUs</p><p> 2009</p><p> Strategy refined</p><p> Clear priorities</p><p> Investment increased</p><p> Expectations exceeded</p><p>Emerging market revenues and growthEmerging market revenues and growth</p><p>0</p><p>50</p><p>100</p><p>150</p><p>200</p><p>250</p><p>300</p><p>2006 2007 2008</p><p>Reve</p><p>nues</p><p> (US$</p><p>m)</p><p>0%</p><p>5%</p><p>10%</p><p>15%</p><p>20%</p><p>25%</p><p>30%</p><p>Und</p><p>erly</p><p>ing </p><p>grow</p><p>th ra</p><p>te (%</p><p>)</p><p>Revenue Underlying growth</p></li><li><p>China</p></li><li><p>16</p><p>Growth fueled by favorable demographic, economic and HC environment</p><p>Growth fueled by favorable demographic, economic and HC environment</p><p>Chinese medical device market willcontinue to boom</p><p>HC spending / cap (US$) 83 116 197 317</p><p>Med dev/ cap (US$) 2.3 2.7 3.5 4.5</p><p>6,130</p><p>4,739</p><p>3,635</p><p>3,005</p><p>0</p><p>2,000</p><p>4,000</p><p>6,000</p><p>8,000</p><p>+9%</p><p>US$ M</p><p>2005 2007 2010 2013</p><p>Chinese medical device market will reach US$ 6.1Bn in 20132</p><p>Chinese medical device market will reach US$ 6.1Bn in 20132</p><p>+10%</p><p>1. at price of US$ 20052. Market size based on price to distributorSource: Espicom, EIU, BCG analysis</p><p>86</p><p>1.3</p><p>2005</p><p>15</p><p>85</p><p>1.3</p><p>2007</p><p>17</p><p>83</p><p>1.3</p><p>2010</p><p>19</p><p>81</p><p>1.4</p><p>2013</p><p>Aged 60+</p><p>Aged 0-59</p><p>0</p><p>100 14</p><p>50</p><p>% of population</p><p>Large and agingpopulation</p><p>Rapidly increasing </p><p>wealth</p><p>Total (Bn)</p><p>3.32.62.11.8</p><p>0</p><p>2</p><p>4</p><p>6</p><p>20102005 2013</p><p>Real personal disposable income1 (k US$)</p><p>2007</p><p>+8%</p><p>Increasinginsurancecoverage</p><p> Urban resident basic medical insurance started pilot in 2007 to cover unemployed urban residents</p><p> Public insurance schemes gradually introduced into rural areas</p></li><li><p>17</p><p>Reimbursement</p><p>Regulatory</p><p>Pricing control</p><p>Healthcare provision</p><p>Healthcare operational environment Clear evidence of commitment to improve quality and ensure customer </p><p>safety New domestic, and imported lines, require mandatory clinical trials</p><p> Current policy differs by city and favors local products in some areas Most imported products are not included</p><p> Tendering significant component of market Bidding entry prices often double digit reduction on existing average </p><p>prices Ominous signs of NDRC price controls</p><p> Healthcare provision is very uneven across the county, and favours urban population</p><p> Private insurance remains very low</p></li><li><p>18</p><p> High-level and speciality medical service providerDefinition</p><p>Specialisation</p><p>No of Hospitals</p><p>Av. No of Beds/Hospital</p><p>Healthcare infrastructure - hospitals</p><p>Av. No of Joint Procedures / </p><p>Year</p><p>Class IIIClass III Class IIClass II Class IClass I</p><p> Regional Hospital offers comprehensive medical services</p><p> Grass roots medical institution offers basic healthcare services</p><p>1,182 6,608 4,687</p><p>~600 ~200 ~50</p><p> Dedicated Recon/Trauma Team in Orthopaedics Department</p><p> Specialised Orthopaedics Department</p><p> No specialised Orthopaedic Department</p><p> Coastal / big cities: ~50 Inland / small cities ~30</p><p> Coastal / big cities: ~20 Inland / small cities: ~10</p><p> Coastal / big cities: 0 Inland / small cities: 0</p></li><li><p>19</p><p>Mid-market an important opportunity</p><p>High-end</p><p>Low-end</p><p>Premium with advanced technology and features</p><p> MNC high-end imported</p><p>Target customersTarget customers</p><p>Top hospitals in big cities Experienced doctors using </p><p>advanced products Less price sensitive</p><p>PricePrice</p><p>High price ~US$2.5k</p><p>Mid-market</p><p>ProductProduct GrowthGrowth</p><p>Medium to high growth</p><p>Less advanced features, with product specificationsmeeting local demand</p><p> MNC low-end imported</p><p> MNC locally produced Quality local</p><p>Basic features, with medium to low quality</p><p> Local low-end</p><p>Large hospitals in lower-tier cities, or lower-tier hospitals in big cities</p><p> Need training in specialty operations</p><p> More price sensitive due to patient' lower affordability</p><p>Other hospitals in lower-tier cities</p><p> Not fully mastered basic surgical skills</p><p> Very price sensitive due to patient' affordability and hospital budget limit</p><p>Medium price ~US$1.5k</p><p>Low price ~US$0.5k</p><p>High growth</p><p>Medium growth </p><p>Note: MNC = Multi-national corporation</p></li><li><p>20</p><p>Chinese Government launched new healthcare reform in early 2009</p><p>Main Healthcare Reform PoliciesMain Healthcare Reform Policies</p><p>Expand basic medical insurance program Enroll 90% rural and urban residents by 2011 Medical assistance covers all families in hardship Raise basic medical insurance standard</p><p>Develop primary healthcare system Build complete rural and urban communities </p><p>healthcare network and facilities in 3 years Improve quality and standard level of primary hospitals, </p><p>especially through GP education Establish dual-direction referral system between </p><p>community healthcare center and hospitals</p><p>Accelerate public hospital reform Encourage private sector to open non-profit hospitals Reduce hospital dependency on drug sales (with </p><p>increased public spending and refined compensation policy)</p><p>Implication to Medical Device businessImplication to Medical Device business</p><p>More potential patients accessible to diagnosis</p><p>Improved patient affordability, with medical insurance support</p><p>Patients are more likely to be treated in their own cities instead of coming to large cities (with improved local insurance coverage and improved local hospital quality)</p><p>Increasing importance of community and primary hospitals (patients to be referred from them)</p><p>Private hospitals are more likely to become more important (but overall percentage still very low)</p><p>Surgery and service is likely to become more important revenue source for hospitals</p><p>Backed by $125billion increased public healthcare spending in next 3 years</p><p>The reform is more focused on developing primary healthcare service, but will also benefit overall medical </p><p>device market in the end, by widening patient base</p></li><li><p>21</p><p>Smith &amp; Nephew in China 1994: Establish S&amp;N Office in Shanghai</p><p>2004: Teams organised along GBU lines, but essentially approach still opportunistic</p><p>2007: Plus acquisition grants entre to Ortho Recon mid market S&amp;N switches to Strategic Mould, formalise thinking and commits resources</p><p>2008: China manufacturing plans formalised and approved</p><p>2009: Opening of second S&amp;N Manufacturing Unit AWC plant in Suzhou</p><p>Ground breaking on additional OrthopaedicManufacturing Site outside Beijing</p><p>New S&amp;N China Head Office in Shanghai</p><p>Establishment of S&amp;N China Board to guide strategy</p><p>Opening of first S&amp;N Surgeon Education Centre in Shanghai</p><p>Beijing Orthopaedic plant Site of new </p><p>orthopaedic plant</p><p>Shanghai China head office Training facility</p><p>Suzhou AWM manufacturing </p><p>plant</p></li><li><p>22</p><p>Success in China is a core Group imperative</p><p> China market is significant but challenging Medical device market forecast to be $6bn+ by 2013</p><p> Complex market : uneven healthcare provision, evolving insurance, long registrations, daunting pricing controls, tiered markets, geography</p><p> Smith &amp; Nephew is making the required investment</p><p> Opportunity exists for both China growth from high-end and mid-market products</p><p> Reverse innovation source back to Western markets</p></li><li><p>23</p><p>Emerging Markets summary</p><p> Emerging markets offer significant opportunities</p><p> Double digit CAGR forecast to give circa US$5bn+ market by 2018</p><p> China growing faster and potentially a circa US$1bn market in less than 10 years</p><p> Smith &amp; Nephew has a clear focus on key markets</p><p> 15 high-priority emerging markets selected and categorised into five groups with different potential investment priorities</p><p> China stands out as the most attractive market</p><p> Our initial success suggests a current competitive advantage</p><p> Delivering strong growth rates</p><p> Co-ordinated investment by business unit and manufacturing</p><p> Emerging markets will be beneficial to our mature key markets</p><p> Reverse innovation to be deployed to widen impact</p><p> Our strategy, structure and resources are aligned for success</p></li><li><p>25</p><p>Forward looking statements</p><p>This presentation contains certain "forward-looking statements" within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and trading margins discussed under "Outlook" are forward-looking statements as are discussions of our product pipeline. These statements, as well as the phrases "aim", "plan", "intend", "anticipate", "well-placed, "believe", "estimate", "expect", "target", "consider" and similar expressions, are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors (including, but not limited to, the outcome of litigation, claims and regulatory approvals) that could cause the actual results, performance or achievements of Smith &amp; Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith &amp; Nephew has filed with the U.S. Securities and Exchange C...</p></li></ul>

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