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Medical Devices 101September 29, 2013

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Healthcare Landscape

Pharma/Biotech

Medical Device

Payors & Providers

Healthcare IT (EMR)

IndustryRegulatory

Uncertainty

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Industry Snapshot

Highly complex, heavily regulated industry Customers include physicians and hospitals Large, often untapped markets Innovation achieved in relatively frequent

increments 2013 excise tax to have significant affect, e.g.,

lay-offs and restructuring Global opportunity is growing

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Medical Device Sector Growth

Outperforms S&P 500 Nearly 40% of revenue comes from outside US markets

Source: Frost & Sullivan

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Two Regulatory Pathways for Device Approval

R&D can vary from 6% to 15% of sales Clinical trials can last 6 months to 3 years Patient enrollment ranges from 100s to 1000s Clinical trials conducted by independent physicians

Trials can be used post launch to increase number of patients with indications

510(k) NDA Approval Process• Most common• Section 510(k) of the Food, Drug and

Cosmetic Act requires device manufacturers to notify FDA of their intent to market a medical device at least 90 days in advance

• Rarely requires clinical trials

• A scientific review to ensure the device's safety and effectiveness

• Typically, clinical trials are required for this premarket approval pathway

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Stakeholders

• Patients– Quality of care– Less trauma / Shorter recovery– Access to care– Peace of mind– Quality of life

• Providers (Customers)– Clinical efficacy– Rigorously proven technologies– Treatment options / Compliance– Ease of care– Practice management / Productivity

• Regulators– Patient safety– Supervision of manufacturers– Product mandates– Recalls and warnings– Assist and execute legislation

• Payers– Economic feasibility / Lower costs– Macro-level care / Treatment options– Social responsibility– Public (CMS) or private (Insurance)– Influence public policy

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Countries That Make Up Core Device Market Share

U.S. is the core market of the medical device industry, >50% in nearly every case. OUS is dominated by Europe, Japan, Canada and Australia/New Zealand. China

and India are rapidly emerging; payment economics and infrastructure will dictate growth.

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Medical Devices vs. Pharma/Biotech

• Incremental technologies mean a faster development cycle: 1-3 years vs. 7-10 years

• Many segments are volatile – technology “leapfrogging”

• Engineering not chemistry/ biology (changing)

• Sales model: More partner, less sales (CRM exception); device reps more often have healthcare background, higher compensated/more power

• Reimbursement: Many cases by procedure and not by item

• Lower market penetration• Marketing: Less DTC (Ortho, CRM, IC); Device

companies have looser restrictions in US, but likely to change

• Margins: devices (generally) less

• Heavily regulated• Risk of litigation• High margins• Large R&D spend: High barriers to entry

(money and experience) • Large sales force• High budget deficits could impact

spending: Significant exposure to government trends

• Global applicability• Need to demonstrate clinical efficacy• Customers• Reimbursement: bundling an

increasing trend

Differences Similarities

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Therapeutic Areas

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Breakdown of Devices by Therapeutic Area

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Spinal/Orthopedics

Spinal, joint and bone and soft tissue applications Degenerative or trauma related Alloys, ceramics, biomaterials – can be manipulated Load bearing, resisting corrosion and abrasion

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Cardiovascular

Cardiac Rhythm Management “Electrical” – sudden cardiac death The most complex implanted devices

Interventional Cardiology “Plumbing” – the pipes are clogged

with plaque Stents inserted in coronary arteries

to open blockage/ensure blood flow Peripheral Cardiology

Open arteries and veins away from the heart (carotid)

Stop clots from reaching vital organs (stroke or infarction)

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Infusion Systems

Designed for delivery of fluid into the body Address pain management, chemotherapy, nutrition Stationary or ambulatory

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Additional Segments

Neuromodulation Urology Heart Valves

Electrical impulses to alter the nervous system (brain, spine or peripherally)

Enable release, restore function

Replace calcified valves, improving heart’s ability to seal, restoring pumping capability

Include implantable ports for administering chemotherapy treatment and tools for specimen testing

Oncology

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Medical Device Market Growth, 2013-2030

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Industry Trends

Medical Devices 101

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Top Five Growth Sectors

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Top Five Technology Trends

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Trends in Technology Convergence

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Looking Ahead

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Finance

Marketing

Healthcare Economics

Strategy/Business Development

Sales

MBA Opportunities

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Medical Device Recruiting at Ross

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Appendix

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2013 Medical Device Excise Tax (1 of 2)What is the medical device excise tax?Section 4191 of the Internal Revenue Code imposes an excise tax on the sale of certain medical devices by the manufacturer or importer of the device.

When does the tax go into effect?The tax applies to sales of taxable medical devices after Dec. 31, 2012.

How much is the tax?The tax is 2.3 percent of the sale price of the taxable medical device. 

Who is responsible for reporting and paying the medical device excise tax?Generally, the manufacturer or importer of a taxable medical device is responsible for filing Form 720, Quarterly Federal Excise Tax Return, and paying the tax to the IRS.

Will individual consumers be subject to any reporting or recordkeeping requirements?Generally, no action is required by individual consumers. Because the tax is imposed upon the sale of a taxable medical device by the manufacturer or importer, the manufacturer or importer is responsible for reporting and paying the tax.

Who is the manufacturer for purposes of the medical device excise tax?Generally, with regard to the medical device excise tax, the manufacturer is the person who produces a taxable medical device from scrap, salvage or junk material, or from new or raw material, by processing, manipulating or changing the form of a device or by combining or assembling two or more devices. 

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2013 Medical Device Excise Tax (2 of 2)Who is the importer for purposes of the medical device excise tax?Generally, with regard to the medical device excise tax, the importer of a taxable medical device is the person who brings the device into the United States from a source outside the United States, or withdraws the device from a customs-bonded warehouse for sale or use in the United States.

What is a taxable medical device?In general, a taxable medical device is a device that is listed as a device with the Food and Drug Administration under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 CFR part 807, unless the device falls within an exemption from the tax, such as the retail exemption. 

Are there any exemptions to the medical device excise tax?Yes. There are specific statutory exemptions for eyeglasses, contact lenses, and hearing aids. There is also an exemption for other devices that are of a type that are generally purchased by the general public at retail for individual use (the retail exemption).

How does a manufacturer determine if a particular type of device qualifies for the retail exemption?The regulations provide a facts and circumstances approach to determine whether a type of device meets the retail exemption. The regulations enumerate several factors that are relevant, but there may be relevant factors in addition to those enumerated in the regulations. The determination is based on the overall balance of factors relevant to a particular type of device. No one factor is determinative. See § 48.4191-2(b)(2) of the regulations for more information about the retail exemption. The regulations also provide a safe harbor for certain devices that will be considered to be of a type that falls within the retail exemption. See Q&A 18.

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Top Companies to Watch

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CEO’s Perspective

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Treatment Spectrum

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Opportunity Spectrum

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Opportunity Map