During last year’s closing keynote, Dr. Wael Barsoum underscored the importance of producing transformational, innovative products to stay competitive and maintain a strong company and a healthy supply chain. This year, Dr. Bill Tribe will shine the “innovation lens” on the value of transforming your business. Dr. Tribe co-authored the often-cited “Medical Devices: Equipped for the Future?” study in which the orthopaedics sector is called out specifically as facing an extreme combination of forces — none of which come as a surprise or are new, but when viewed holistically (as in the image below), paint a rather obvious picture of the need for companies to respond. As you can see, orthopaedics is the only sector with 4 of 5 “hot” areas…and in this case, the odd one out (regulatory scrutiny) is still marked “critical.” From a top-down view, the five “disruptors” listed above are acute (power shift to payors, regulatory scrutiny, unclear sources of innovation, new healthcare delivery models, need to serve lower socio-economic classes). They impact the overall orthopaedic industry intensely – but how are they impacting you? Dr. Tribe’s Keynote Address will take into account the uniqueness of the OMTEC audience: large and small OEMs, Suppliers and Service Providers. As stated in the A.T. Kearney study, “Each company faces a different set of headwinds…while the macro-factors held true, individual experiences and prioritization depended on factors such as market geography, product life cycles and go-to-market strategies. The most effective strategies are therefore likely to be company specific.” What will be your business model in 2020? 2025? Will you be considering cost-structure, deployment of inventory, commercial logistics, quality and regulatory frameworks, R&D, innovation and data collection? Dr. Tribe will break down the issues and share potential approaches to help you navigate toward a more relevant and lucrative business model – regardless of where you are in the process.

2. Bill Tribe, Ph.D., Partner, A.T. Kearney
E-mail: bill.tribe@atkearney.com – Phone: +1 847 422 3930
June 15, 2016
Opening Keynote Address
Orthopaedic Device Industry Business
Models: 2020 and Beyond

3. OMTEC Keynote
■ Industry / Sector Specific Challenges
■ Potential Responses
■ Q&A

4. Industry / Sector
Specific Challenges

5. 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

6. 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%

7. … 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)

8. 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

9. Orthopaedics market is already experiencing the
power shift among the value chain players
Source: A.T. Kearney
Power shift to players and providers
Before
Fee-for-service,
specialized
care
After
ACO/IDN, coordinated
care, increased quality
and transparency,
narrower product choice
Before
Negotiated
contract rate,
risk mitigation
After
Merging for scale,
pay for performance,
real world evidence
Provider
Payer

10. 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

11. 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

12. 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%

13. 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$/capitaperstate
Need 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
MI
MT
NV
RI
UT
VT
VA
AK
AZ
CO
CT
DC
Private or Public Insurance (% of population)
IA
FL
GA
HI
ID
WV
$6B potential

14. Potential
Responses

15. Hospitals: 3-5%
Majors: 1-2%
CMOs: 5-10%
Majors: 20-30%
Challengers: 10-15%
OEMs
Suppliers /
CMOs
Distributors
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

16. 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
ExamplesValue
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

17. … with personalized surgery and implants becoming
more relevant in their value proposition
Personalized Orthopaedics
Select Examples
Manufacturers
Source: Stryker, Zimmer Biomet, A.T. Kearney
Robotic
Personalized Surgery
Personalized
Implant Systems

18. At the same time, distributors are moving upstream in
the chain and offering new delivery models
Distributors Business Models
Select Examples
Direct-to-patient /
hospital distribution
Distributors
Source: Cardinal Health, Millstone, A.T. Kearney
Expansion into
orthopaedics

19. 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

20. Winning orthopaedics business models will leverage an
end-to-end perspective and interactions across the
value chain
OEM
Manufacturers
Suppliers / 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?

21. 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…

23. 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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