Industry View of the Future of Orthopaedics

1. “Industry View of the Future of Orthopaedics” Indiana: The State of Innovation in Orthopaedics Summit

2. The Orthopaedics Universe

3. The Future “Those who cannot remember the past are condemned to repeat it.” George Santayana . Orthopaedics History—Lessons Learned (form OrthoKnow by John Englehardt January 2006) 1983 - “In ten years, all solutions will be biologic. There will be no metal and plastic in orthopaedics.” 1985 - “Titanium will eliminate cobalt chrome in joint replacement.” 1985 - “Disc replacement will eliminate fusion: -spine.” 1996 - “Interbody fusion devices will eliminate traditional hardware in spine.”

4. The Future “Those who cannot remember the past are condemned to repeat it.” George Santayana Orthopaedics History—Lessons Learned (form OrthoKnow by John Englehardt January 2006) 1996 - “Chondrocyte transplantation will eliminate the need for knee replacement.” 1999 - “Synthetics will destroy the allograft business.” 2001 - “Drugs and hyaluronic acid will be the death of our industry.” 2004 - “In ten years nearly all hip replacement will be minimally invasive.”

5. The Future “Those who cannot remember the past are condemned to repeat it.” George Santayana Orthopaedics History—Lessons Learned (form OrthoKnow by John Englehardt January 2006) Still the hype continues: Dynamic Stabilization Minimally invasive surgery Computer Assisted Surgery History suggests some key things in order to remain a consistent success: If it sounds too good to be true, it probably is. Keep your head down and focus on bringing value to your customers. Seek information from objective sources (and multiple ones.)

6. The Medical Device Industry Today Model in the Medical Device Industry: “Small companies bring innovation, Big companies dominate marketing and distribution.” “Pharmaceutical (biologics) industry focuses on research with less product development.” “Medical device industry spends less time in the research phase, but uses more resources on product development.” David Cassack

7. The Medical Device Industry Today Investors beginning to show much more interest in medical device companies: Straight-forward business model Quicker product turn around Incremental innovation VC’s willing to invest Innovation rate will still likely be slowed by the adoption rate of physicians: Training takes time Conversion slower due to current successful treatment Conservative Mind Set/Comfort Zone David Cassack

8. Orthopaedic Segment—Underlying Fundamentals “Favorable Growth and Strong Profitability” Aging demographics provide a constant source of patients New Technology continues to expand the patient base among both younger and older populations Critical role of surgeon preference in product selection Source: InVivo

9. Orthopaedic Trends Industry Growth slowing (pricing), but demographics are completely compelling. Key Issues affecting both surgeons and industry Medical Legal Liability Intellectual Property Obesity continues to drive and confound orthopaedics In Canada, 90% of TKA and 70% of THA patients are overweight Overweight children: Break more bones Have more joint problems Have more spine related disorders Small bone and joint products and treatments gaining the attention of surgeons and industry Biologics continues to expand Regulatory requirements increasing worldwide (U.S., Europe, Japan and China) FDA proposal to Track Medical Devices

10. Major Drivers of Rising Health Care Costs How rapidly Americans embrace new drugs and technology Rising costs for medical services: Hospital costs Labor costs Waste Inefficiency Fraud Obesity Source: USA Today

11. Orthopaedic Industry Revenue

12. Another Take on Forecasting the Orthopaedic Market U.S. Knees Primary Procedures: 3.48 MM in 2030 (8% CAGR over 24 yrs.) Revision Procedures: Same Growth Rate Hips Primary Procedures: 0.572MM in 2030 (2.3% CAGR over 24 yrs.) Revision Procedures: 3.5% CAGR over 24 yrs Exponent, Inc. Latin America Orthopaedic device market=$290MM in 2005 CAGR at 10% over next 5 years India May be the answer to challenges of drug/device trials Cost savings of 40-60% Large, ethnically diverse population (English speaking) Regulatory environment more lax

13. Orthopaedic Economics 1991-2006 DRG 209-544 19% Implant list price 171% Average Implant selling price 117% 2007 Doctor Reimbursement 5.1% 1995-2003 Surgical Specialist Income 8.2% Gain sharing ? Consultancy ? Surgeon Priority 1st “Best” patient outcome 2nd Hospital economics

14. Are Costs Limiting Total Joint Replacement? “Hip replacement was the most cost-effective intervention when compared to a number of other surgical and medical interventions.” --Cecil Rorabeck, MD “Results of hip and knee arthroplasty are sustainable over time.” --Cecil Rorabeck, MD “Patient thanks us for “giving them their life back”. --William Maloney, MD “Study Finds Medical Spending Worth The Investment” --New England Journal of Medicine ISSUE: Awareness/Education Patients take orthopaedic care for granted!

15. Health Care Economics Patient’s Perspective Healthcare = Entitlement Unease with rising costs Confusion about causes Desire for reform BUT Distaste for giving anything up Source: USA Today

16. Goal of Musculoskeletal Care Relieve Pain Return Function/Mobility Minimize Surgical Trauma

17. “Holy Grails” in Orthopaedics Low Back Pain Molecular Medicine-Mechanisms of Degradation Cartilage Tendon Regenerative Medicine – Tissue Engineering Scaffolds Cells Total Joint Arthroplasty (including disc) Kinematics Performance Biologic Interaction Multidisciplinary Approach

18. InMotion a Partnership / Collaboration for ResearchHospitals – Clinics – Universities - Industry

19. The Patient of the Future Baby Boomers (78 million Americans born between 1946-1964) and “Boomeritis” Increasingly Aging Population Impact of Direct to Consumer Advertising Easy access to Medical Information

20. Global Orthopaedics Geographic Product Development North America Europe Japan China/India Geographic Regulatory Environment US/FDA Europe/CE Mark China/SFDA Japan/MHLW Regional Reimbursement

21. Can Indiana Maintain and Grow Its Musculoskeletal Industry? Innovation Entrepreneurship Idea Creation NIH Research Grants Medical School Engineering School Industry Funding Patents & Licensing

22. The Future – The Bottom Line Orthopaedic History—Lessons Learned (from OrthoKnow by John Engelhardt January 2006) “With almost no exceptions, technology in the orthopaedic space doesn’t happen in those types of gigantic leaps and bounds, but generally in slow and systematic creeping substitution.” “…What will happen is that a multitude of devices will exist alongside each other in an extensive product matrix, with each product serving a particular niche in design philosophy, pathology, activity level, etc.”

23. The Future Orthopaedic Opportunities Blood, Sweat & Tears