September 30, 2010

Equity Research
Key Take-Aways From Emerging Markets Forum
Growth Opptny Significant--Hurdle To Success Relatively High Summary. We hosted a MedTech Emerging Markets Investor Forum on Sept 30 to provide investors with an understanding of the opportunity for western medical device companies in Emerging Markets. We estimate the size of the Emerging Markets to be around $30-40B, which constitute about 10% of the global medtech market today. We expect Emerging Markets growth of 10-13% over the next four years to exceed the global growth rate of approximately 5%. We forecast that the Emerging Markets share will increase to 13% of the global Medical Devices and Diagnostics (MD&D) market by 2014. Moreover, by our analysis, approximately 25% of global medtech growth over the next four years is expected to be due to the contribution from Emerging Markets. For major US companies, the exposure to Emerging Markets varies with ABT at the high end having approx 20% of total medtech sales come from Emerging Markets and BSX at the low end with a low single digit contribution. As we detail in Figure 1, for a company like ABT, its above average exposure to Emerging Markets boosts 2010-2014 CAGR by about 80 bps (assuming 5% global CAGR and 11.5% Emerging Markets CAGR), whereas for a company like BSX with below average exposure to Emerging Markets (~3%), the 2010-2014 CAGR is lower than average by about 50 bps. We summarize the various speaker presentations in the body of this note. Emerging Markets are diverse and require solutions uniquely tailored to their needs. Many speakers outlined how the value proposition that makes sense in the western world does not necessarily apply to Emerging Markets. Companies entering Emerging Markets need to cultivate local expertise and develop products and business processes that are compatible with the business dynamics in Emerging Markets. To this end, companies entering Emerging Markets need to identify appropriate market segments where they can effectively compete, hire and retain local talent, broaden their product portfolios in response to local market needs, customize their commercial and business models and pursue local M&A, research and manufacturing. Emerging Markets are generally price sensitive but operating margins can be comparable to those in the west. Although price sensitivity is relatively higher in Emerging Markets leading to lower gross margins, the R&D and SG&A costs are also lower resulting in operating margins that are comparable to those of medical device companies in the US and Europe. Companies can realize cost savings by developing a supply chain that utilizes local infrastructure and talent to manage the design, engineering, manufacturing, sourcing and logistics functions. Investments in healthcare infrastructure are driving growth of medical devices in Emerging Markets. China announced a massive $124B investment plan in 2009 that is expected to drive a multi-year period of growth and increase access to medical technology in that country. Beyond the widely discussed BRIC countries, the ASEAN member states are also expected to see robust growth in their medical device markets as governments increase hospital and healthcare related investments in response to the needs of their increasingly affluent populations.

Medical Technology

Larry Biegelsen, Senior Analyst ( 21 2 ) 2 1 4 -8 0 15 / l a r r y. b i e g e l s e n @ w a c ho v i a . c o m Narendra Nayak, Associate Analyst ( 21 2 ) 2 1 4 -8 0 3 8 / na ren d ra.n a y ak@ w achov ia. co m Lei Huang, Associate Analyst ( 21 2 ) 2 1 4 -8 0 3 9 / le i. hu an g@w achov ia. c om

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Medical Technology

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

I. Overview Emerging Markets (EM) currently comprise approximately 10% of global MD&D sales. Among major US companies, the exposure to EM varies with ABT at the high end having approximately 20% of total medtech sales come from EM and BSX at the low end with a low single digit contribution. Below we outline a simple model which outlines the impact to overall growth due to exposure to EM (Figure 1). We assume that the global MD&D market grows at a CAGR of 5% from 2010-2014 and EM grow at 11.5% in the same period. If the companies included in our analysis were to grow only as fast as the market, then ABTs global growth in 2010-2014 would be boosted by about 80 bps because of its higher than average exposure to EM. At the other end of the spectrum a company like BSX would see its global growth come in about 50 bps below industry average due to its below average exposure to EM. This put into perspective, the recent investments by BSX and MDT to expand their presence in EM. Figure 1: Growth Impact of Emerging Markets Exposure
Company ABT ACL COV BAX BDX AGN STJ JNJ EW SYK ZMH MDT BCR COO BSX EM Exposure (2010) 20% 19% 11% 11% 11% 10% 10% 10% 10% 8% 8% 7% 6% 6% 3% Global Medtech 2010-2014 CAGR Revenue in Impact Due to EM 2010 ($B) Exposure $9.8 $7.1 $8.3 $7.2 $7.5 $0.8 $5.1 $23.0 $1.4 $7.2 $4.3 $16.0 $2.7 $1.1 $7.7 0.8% 0.7% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% -0.1% -0.1% -0.2% -0.3% -0.3% -0.5%

Average

10%

Source: Company reports and Wells Fargo Securities, LLC estimates

We estimate that the global MD&D market in 2010 will be approximately $368B. The EM are about 10% of the global market with size estimates ranging from $30B to $40B. Growth in EM (10-13% CAGR) in 2010-2014 is expected to outpace global growth (5% CAGR) and by 2014, EM likely will comprise about 13% of the global market. Figure 2: Emerging Markets Share of Global MD&D Markets in 2010 and 2014
2010E MD&D Market Global MD&D Market Total Emerging Markets Emerging Markets Share of Global MD&D $368B $37B ~10% $447B $54-$60B ~13% 5.0% 10-13% -2014E 2010-2014E CAGR

Source: Company reports and Wells Fargo Securities, LLC estimates

Key Take-Aways From Emerging Markets Forum

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Figure 3 below shows the expected dollar contribution of EM to global growth through 2014. We estimate approximately 25% of growth over the next 4 years will be from EM ($20B of $79B in absolute $). Figure 3: Contribution of Emerging Markets to MD&D Growth
2010-2014E MD&D Market Growth in Global MD&D Market Growth in Emerging Markets Emerging Markets Share of Global MD&D growth $79B $20B ~25% 5.0% 11.5% -CAGR 20102014E

Source: Company reports and Wells Fargo Securities, LLC estimates

II. Key take-aways from each of the eight speakers at the meeting. Emerging Markets as a Key Growth Driver Ramesh Srinivasan, Director McKinsey & Co EM growth fueled by economic growth and increased government investment in healthcare infrastructure. While EM GDP is expected to grow at double the rate of developed markets through 2018, companies need to tailor strategy and operating model to account for differences in IP, supply chain, government role, etc. EM government views healthcare as a solution to many societal challenges and are investing to improve the overall system i.e. Chinese Increasing government plans to spend $125B by 2011 to focus on rural coverage and accelerate hospital reform, while Russian governments national health project is targeting to reduce poverty population, extend life expectancy and social services. Key success factors to win in EM include: 1) market segmentation to ensure appropriate targeting; 2) be an insider keep it local; 3) broaden product portfolio by adopting highlow strategy; 4) customize product line to meet local needs and affordability; 5) customize commercial model; 6) find talent by providing challenging opportunities. M&A in EM is less likely in medtech, as compared to trend in pharma, partly due to the fragmented nature of the business and more limited cost saving and synergy opportunities. Legal Perspectives: Acquisition of Intellectual Property Rights in Emerging Markets Jane Love, PhD, Partner and Vice Chair of Intellectual Property WilmerHale Strong intellectual property (IP) protection is crucial for companies to recoup investments in EM. However, patent and other IP enforcement continue to be difficult in markets like China and Russia, where copycat device is still prevalent, while countries like Brazil have well developed IP system. Companies need to continually assess IP landscape as patent law/regulations evolve. Examples of BRIC nations demonstrate that opportunities and challenges are unique by individual country: o In Brazil, there is a patent application backlog, further hindered by relatively inexperienced application examiners. o As a party to the Patent Cooperation Treaty (PCT) an international patent law treaty, India accepts patent application filings under a unified PCT procedure. However, the country does not offer data protection. o In China, the existence of the first to file principle is a plus to innovators. However, the lack of method patenting is a disadvantage.

Medical Technology

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Overview of the Medical Device Landscape in China Helen Chen, Partner and Head of China Life Sciences - L.E.K. Consulting Although China is amongst the top 5 medical device markets in the world, ($11B in 2009 per L.E.K. estimates) it has plenty of room to grow on a per capita basis. The market is expected to be in the range of $30-$40 billion by 2015. Capital Equipment is the largest segment. Implantable devices have robust growth rates. An ageing population and changing lifestyles are driving the growth in the patient base. In 2009, China committed to a 3 year investment of $124B to improve healthcare access and infrastructure. Medical spending varies by province and about a third of the payment is out of pocket, thus we believe affordability of medical therapy is a key consideration. Different strategies needed for products in different stages of life cycle. For mature products low cost and distribution infrastructure critical. For newer products, companies need to invest in sales and training. For early stage products companies need to cultivate KOLs, invest in specific hospitals and determine reimbursement strategy. The Asian Med Device Manufacturer Perspective Chris Holt, CEO Tiger Medical Group US and European healthcare providers face thin margins that continue to shrink, and need to reduce cost through the supply chain. However, current Western device manufacturers and supply chain are designed to focus on service and innovation, not cost reduction. This creates an opportunity in Asia to produce high quality, low cost medical supplies that can offer 10-20% immediate savings. o While Asian suppliers produce quality products, offering portfolios are usually limited and most suppliers still lack credibility to sell directly overseas. There are currently 12K medical device companies in China worth $11B, with local companies accounting for 75% of the business, mostly in low-end categories. Increased exports and government spending are among key growth drivers. Typical Asian device manufacturer is a privately-held company with up to $100MM annual sales, CAGR of 15-50% and largely run by founder. Most of these producers are exporters and have the ability to rapidly adapt to changing environment, although execution consistency is generally poor. Largest Indian Orthopedic Manufacturer Ajay Pitre, Managing Director Sushrut / Adler Group There is a mismatch Indias healthcare supply/demand while 70% of the population is in rural areas, 80% of doctors and 60% of hospitals are in urban locations. Overall supply shortage with 0.9 bed and 0.6 doctors for every 1K people. While Indias population is nearly 4x that of the US, total healthcare spending was <5% of US HC spend in 2009. Challenges in India include inadequate regulatory environment, low IP protection and technology awareness, and general acceptance of inadequacies (in products and services) these are changing and there is growing awareness of the need to improve. In 2007, Indias orthopedic market consisted of 82% implants and 18% instruments; of the implants, 45% was for trauma, 41% for joints and 14% for spine; while 76% of the devices are local and only 24% were imported, 94% of joint implants were imports and only 6% were locally supplied. Like many other EM, price rather than product quality is the main criteria in India. The opportunity is to create effective, accessible and affordable solutions that can potentially address diverse needs.

Key Take-Aways From Emerging Markets Forum

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Overview of the Medical Device Market in Brazil and Eastern Europe Stephen Hull, Principal - Hull Associates Every market is different in terms of clinical needs and reimbursement dynamics and hence products need to be customized for different markets. Brazil is the 10th largest medical device market ahead of Switzerland, Australia, South Korea and India. The size of the Brazilian market is estimated to be $4.5B and is expected to grow at around 10% in 2010. Approximately 75% of healthcare coverage in Brazil is through the public system and approximately 22% is through private insurers. In Eastern Europe, the medical device spending in Russia, Poland and the Czech Republic is forecasted to exceed $5B by 2014. In general, Eastern European markets offer high growth potential driven by significant unmet clinical needs and growing patient awareness. Some challenges include the lack of adequate healthcare funding compared to EU and lack of consistency among different reimbursement systems. Overview of Various Medical Device Markets in Asia Ames Gross, President - Pacific Bridge Medical The medical device market comprising of the ASEAN states (Burma, Laos, Thailand, Cambodia, Vietnam, Philippines, Brunei, Malaysia, Singapore and Indonesia) is expected to grow at a CAGR of 9% through 2014. High end devices like cardiovascular, ophthalmologic and in-vitro diagnostic devices are expected to see strong demand. The Indian medical device market currently stands at approximately $2.5B and is expected to grow to $3B by 2012. Orthopedic, cardiovascular and ophthalmologic devices are key products in this market Medical device companies need to set up local operations to lower costs and tailor products to meet local needs. Class I and II medical devices are presently manufactured in Asia and in the future Class III devices will be manufactured there as well. Due to cost advantages, Asia is also emerging as a destination for conducting R&D and clinical trials The Emerging Markets Opportunity BRIC Thomas Dietiker, Co-founder Opto Circuits (India) Limited With a 2.7B total population, BRIC nations represent a $10.8 billion medical market opportunity, with per capita spend range of $2 (India) to $17 (Russia), and significant unmet medical needs. Key growth drivers include emergence of a higher income middle class, increased awareness of and demand for advanced medical technologies, increased government spend on healthcare and greater acceptance of minimally invasive procedures, partly offset by infrastructure and distribution network limitations. Competitive dynamics differ among the BRIC nations i.e. imports play a majority role in the medical industry in Russia and India while multi-nationals and locals dominate in Brazil and China. Companies need to tailor product offering to meet needs and cost threshold of different EM while expanding overall product offering.

Medical Technology

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

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SECTOR RATING

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Key Take-Aways From Emerging Markets Forum

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

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