May 2012 Extremities Market Update

1. Carleton McKenna & Company – Healthcare Insights
Extremities Market Update
May 2012
© 2012 Carleton McKenna & Company
1801 East Ninth Street Suite 1425 Cleveland, OH 44114 | 216.523.1962 | www.carletonmckenna.com
Securities offered through Financial America Securities, Inc., Member FINRA, Member SIPC and the affiliated broker-dealer of Carleton McKenna & Company, LLC

2. For more information, please contact:
Extremities Market Update Author:
Dominic M. Brault
Managing Director
(216) 523-1962
dmb@carletonmckenna.com
To learn more about Carleton McKenna, please contact:
Paul H. Carleton Christopher J. McKenna
Managing Partner Managing Director
(216) 523-1962 (216) 523-1962
phc@carletonmckenna.com cjm@carletonmckenna.com
or visit us at:
www.carletonmckenna.com
2

3. I. Orthopedic Market Overview
3

4. Worldwide Orthopedic Market
• The worldwide orthopedic market generates over $20 billion in global revenue, with the large joint (hip, knee, and spine) market
representing the large share of the total market.
• The large joint market is generally characterized as stable, competitive, and challenging, related to pricing pressures, procedure deferrals,
payer pushback, supply cost containment at hospitals, higher co-pays, and COBRA.
• The extremities market is pegged at roughly $2.4 billion and is underserved relative to the large joint market. Most large orthopedic
companies (J&J, Zimmer, Stryker, and Smith & Nephew) have weak offerings in the extremities market. Although the extremities market
faced macroeconmic headwinds like its larger joint brethren, the overall growth rate continues to be in the high single-digit (some argue low
double-digit) range, which offers a nice respite from the other challenging ortho markets.
Worldwide Orthopedic Market
Extremities Market
Large Joint Market Upper Extremities Lower Extremities
Hip Knee Spine Shoulder Elbow Wrist/Finger/Thumb Foot / Ankle
Market Size Total Global: ~$19 Billion Total Global Extremities: ~$2.4 Billion
Upper Extremities Global: $1.4B
U.S. $2.7B $3.9B $4.3B $575M $200M $300M $800M
ROW $3.0B $2.8B $2.9B $225M $50M $50M $200M
Global $5.7B $6.7B $7.2B $800M $250M $350M $1.0B
Low Single Low Single Business Single
High High Single
Growth Rate Digit Digit
Planning /
Flat Digit Digit High Single Digit High Single Digit
Key Players Biomet Biomet Reporting
Medtronic JNJ/DePuy Biomet JNJ/DePuy JNJ/DePuy/Synthes
J&J/DePuy J&J/DePuy J&J/Synthes Zimmer Zimmer Wright Medical Wright Medical
Smith & Nephew Smith & Nephew Stryker Biomet Acumed Integra LifeSciences Integra LifeSciences
Stryker Stryker NuVasive Tornier Wright Medical Small Bone Innovations Small Bone Innovations
Wright Medical Wright Medical Zimmer DOJ Surgical Tornier Biomet Tornier
Zimmer Zimmer Biomet Stryker Stryker/Memometal
Orthofix Smith & Nephew
Alphatec
Source: BMO Capital Markets, RBC Capital Markets,
Credit Suisse, BernsteinResearch, and Carleton
McKenna
4

5. Extremities Market Overview
The extremities market is relatively more rosey than in hips and knees, Hips, Knees, Spine Extremities
given younger patients, private payors that are less affected by Medicare
reimbursement, a largely untapped revision pool, and generally lower
penetration rates.
While growth rates may have slowed related to deferrals of elective
procedures and lower price increases (analysts suggest it is hard to tell
since the market is highly fragmented), growth is still relatively attractive,
hovering in the high single-digit range.
• According to ThinkEquity, the size of the U.S. extremity hardware market is estimated at approximately $1 billion
(70% foot & ankle, with the balance hand, wrist, and elbow), growing at an 8% CAGR.
• A late 2011 survey of extremity surgeons conducted by RBC Capital Markets also points to relative stability in the
upper extremity market with expectations for high single-digit to low double-digit growth.
Business
Given the comparable growth rates to the other large joint markets, the stocks that participate in this sector (i.e.,
Planning /
Tornier, Integra LifeSciences, and Wright Medical) are garnering quite a bit of attention (as evidenced by Tornier’s
Reporting
premium valuation), and the companies that do not have a stalwart portfolio (i.e., Zimmer, Stryker, etc.) seem to be
making forays into this segment.
• Management @ Zimmer announced an anatomical combined shoulder adapter at the American Academy of
Orthopedic Surgeons
• Stryker suggested on its 4Q11 conference call that it will be investing in shoulders
5

6. Extremities Market Commentary
“The upper extremity market, which is how we categorize shoulder
and elbow and the hand and the wrist, we believe that the market is
growing at a 10% to 12% rate. And others may agree with that, they
may disagree with that, but we see that as a solid double-digit market
grower.” Tornier 4Q11 Earnings Call on February 23, 2012
“Our pricing in the fourth quarter held up very nicely and we anticipate
those trends will continue.” Tornier 4Q11 Earnings Call on February
23, 2012
“During the fourth quarter, we did not see any deterioration in the
growth profile of the Foot and Ankle market, and we continue to
believe that this market is currently growing approximately 8%.”
Wright Medical 4Q11 Earnings Call on February 23, 2012
Business
Planning /
“Extremities has slowed down some but Reporting is still kind of the
clearly it
shining star in the space.” Integra LifeSciences 4Q11 Earnings Call
on February 23, 2012
6

7. Extremities Growth Opportunities
An increasing foot and ankle surgeon base should enable growth in the US foot market.
• An AAOS surgeon survey showed that only 10% of orthopedic surgeons identified the foot and ankle as one of their
specialties versus nearly 3.5x as many for adult knees
• This number is expected to increase as better implant technology expands the market size (big players spending on
R&D in this area given relatively low competition)
Increasing coverage for US total ankle replacement.
• Reimbursement issues have constrained growth in the total ankle replacement market is the past, as most insurers
consider this procedure experimental
• Now, some are considering this procedure medically necessary
There is a very strong patient demographic tailwind, as roughly 1.3 million people will turn 65 each
year between now and 2015.
Should the Patient Protection and Affordable Care Act pass, roughly 32 million individuals may
gain access to health care.
Business
Despite persistent pressures in the U.S. and Europe, emerging markets are starting to gain traction,
Planning /
with most attention paid to China, Brazil, and India.
• Reporting
China is by far the most attractive market opportunity, given the size of the population, upward mobility, increasing
government spending, and migration to urban centers
Private equity could step into the orthopedic market with the companies trading at historical lows.
• Notably, all are trading at discounts to where Biomet and KCI sold to private equity and depending on leverage ratios
and exit multiples, the Med Tech stocks are becoming attractive targets with potential returns in the 20-30% range
7

8. Extremities Risk Factors
Increased competition in the extremity market could hamper growth.
• The extremity market is one of the faster growing markets in orthopedics and has begun to gain the
attention of the larger manufacturers. This increased attention may not be favorable if companies build out
their extremity business internally rather than through acquisition.
A MedTech excise tax is slated to begin in 2013.
• This is a 2.3% tax on all U.S. device sales. The impact across the sector will be significant, particularly for
small-cap companies.
European volumes may drop off with new austerity measures in place to reign in public spending.
• For example, Greece enacted measures to cut spending on medical devices by 25% over two years.
There are key structural changes underway in healthcare, including shift of burden to consumer,
cost consciousness among hospitals, decreasing reimbursement, and hospital consolidation, among
others.
The FDA approval process is “difficult” and expensive as there is a need for clinical and economic
Business
Planning /
data to demonstrate utility and the adoption of new technologies.
Reporting
Heading into 2012, key macro indicators remain largely negative.
• US real GDP growth is still struggling
• Consumer confidence (which is correlated to physician office visits) is showing improvement but off historic
lows
• Still high unemployment
8

9. II. Recent Transactions Summary
9

10. MedTech M&A Overview
Consolidation is expected to draw interest in smaller M&A candidates, particularly in the more highly
fragmented extremities market. The 10-year average EV / sales and EV / EBITDA multiples are 4x and 19x,
respectively. The average premium paid has been nearly 50%.
Average Average Average 30 Total Deal Average Deal Number of
EV / Sales EV / EBITDA Day Deal Value (In Value (In Number of Deals >$1
Year Multiple Multiple Premium Billions) Millions) Deals Billion
2011 3.41x 12.5x 54% $47.0 $1,344 35 6
2010 4.53x 23.4x 55% $14.1 $370 38 4
2009 2.85x 14.6x 118% $10.6 $462 23 2
2008 3.76x 21.3x 51% $37.0 $1,193 31 6
2007 4.03x 24.5x 41% $45.0 $1,124 40 12
2006 5.81x 14.8x 37% $44.5 $1,483 30 7
2005 4.38x 26.6x Business
42% $37.8 $1,990 19 4
2004 4.82x 18.3x Planning /
20% $35.5 $1,774 20 6
2003 3.08x 12.7x Reporting
63% $18.1 $1,062 17 3
2002 2.55x 12.0x 38% $2.3 $208 11 0
2001 4.56x 22.1x 21% $20.7 $1,091 19 4
10-yr 4.04x 19.0x 48% $26.7 $1,076 25 5
Average
Source: BMO Capital Markets
10

11. Select Med Device Transactions
EV Target Target
(In Sales (In EBITDA EV / EV /
Date Target Buyer Target Description Millions) Millions) Margin Sales EBITDA
11/4/2011 KCI Private Equity Wound care and $5,793 $2,055 31% 2.7x 8.5x
regenerative medicine
9/23/2011 Ascension Integra Provides orthopedic devices $67 $19 n/a 3.5x n/a
Orthopedics LifeSciences for the hand, upper
extremity, and foot
8/31/2011 Salient Surgical Medtronic Devices and tools for $496 $100 n/a 5.0x n/a
surgical procedures
8/31/2011 PEAK Surgical Medtronic Surgical tools and tissue $118 $20 n/a 5.9x n/a
dissection for physicians
8/31/2011 Cocentric Stryker Minimally invasive surgery $135 $30 n/a 4.5x n/a
Medical
6/6/2011 Memometal Stryker Extremities implants $162 $30 n/a 5.4x n/a
Technologies
5/23/2011 SeaSpine Integra
Business
Orthopedic trauma and $89 $50 n/a 1.8x n/a
LifeSciences spine Planning /
products
4/27/2011 Synthes J&J
Reporting
Orthopedic trauma and $19,300 $3,758 43% 5.2x 12.1x
spine products
12/21/2010 Beijing Zimmer Artificial joints in China $50 $9 n/a 5.5x n/a
Montagne
8/25/2010 Gaymar Stryker Patient temp and ulcer $151 $77 n/a 2.0x n/a
devices
Source: Capital IQ, Inc. and Pitchbook
11

12. Select Med Device Transactions
Target Target
EV (In Sales (In EBITDA EV / EV /
Date Target Buyer Target Description Millions) Millions) Margin Sales EBITDA
10/16/2008 Abbott Spine Zimmer Devices for neck and back $360 $109 n/a 3.3x n/a
8/1/2008 Theken Spine Integra Spinal fixation devices $186 $35 18% 5.3x 30.3x
LifeSciences
11/2/2007 Kyphon Medtronic Spinal fracture devices $3,953 $488 20% 6.4x 28.7x
9/25/2007 Biomet Private Equity Orthopedic reconstruction $11,271 $2,107 28% 4.9x 13.6x
5/31/2007 PLUS Smith & Orthopedic reconstruction $708 $300 n/a 3.0x n/a
Orthopedics Nephew
Averages $2,856 $612 28% 4.3x 18.6x
Business
Planning /
Upper Quartile $2,331 $394 31% 5.4x 28.7x
Reporting
Lower Quartile $127 $30 20% 3.2x 12.1x
Source: Capital IQ, Inc. and Pitchbook
12

13. III. Comparable Public Companies
13

14. Comparable Public Companies
There are very few, if any, directly comparable companies with pure focus on the extremities market.
Most of the large orthopedic companies focus in the hip, knee, and spine areas. Tornier is the closest
to a pure play extremities company and is also one of the smaller companies in the group.
Company Main Product Focus
Johnson & Johnson (DePuy, Synthes) Reconstruction (large joint)
Stryker Reconstruction (large joint)
Zimmer Reconstruction (large joint)
Smith & Nephew Reconstruction (large joint)
Tornier Extremities
Integra LifeSciences Extremities, spine, neuroscience
Wright Medical Reconstruction (hip, knee, extremity)
14

15. Public Companies
Key Stats
Public Company Comparables Financial Information
In Millions of Shares and U.S. Dollars, Except Stock Price
4/9/2012 Market Value Add: Add:
Price Shares of Equity Total Noncontrol. Enterprise
Company Per Share Outstanding ("MVE") Net Debt Int. in Subs. Value ("EV")
1 Johnson & Johnson (NYSE:JNJ) $ 65.34 2,745.3 $ 179,379.9 $ (12,634.0) - $ 166,745.9
2 Stryker Corp. (NYSE:SYK) 55.03 381.3 20,980.7 (1,650.0) - 19,330.7
3 Zimmer Holdings, Inc. (NYSE:ZMH) 64.72 177.2 11,468.4 495.5 7.6 11,971.5
4 Smith & Nephew plc (LSE:SN.) 9.76 896.2 8,746.4 138.0 - 8,884.4
5 Tornier N.V. (NasdaqGS:TRNX) 24.99 39.3 982.4 (14.8) - 967.6
6 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 33.83 26.9 909.4 435.5 - 1,344.9
7 Wright Medical Group Inc. (NasdaqGS:WMGI) 19.01 38.3 727.7 8.1 - 735.8
LTM NTM LTM EBITDA NFY EBITDA
Company Revenue Revenue LTM EBITDA NTM EBITDA Margin Margin
8 Johnson & Johnson (NYSE:JNJ) $ 65,030.0 $ 67,487.3 $ 19,398.0 $ 21,299.2 29.8% 31.6%
9 Stryker Corp. (NYSE:SYK) 8,307.0 8,672.6 2,452.0 2,544.4 29.5% 29.3%
10 Zimmer Holdings, Inc. (NYSE:ZMH) 4,451.8 4,537.8 1,470.6 1,674.7 33.0% 36.9%
11 Smith & Nephew plc (LSE:SN.) 4,270.0 4,305.9 1,191.0 1,259.9 27.9% 29.3%
12 Tornier N.V. (NasdaqGS:TRNX) 261.2 282.1 22.1 37.9 8.5% 13.4%
13 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 780.1 827.2 158.1 169.4 20.3% 20.5%
14 Wright Medical Group Inc. (NasdaqGS:WMGI) 512.9 483.0 64.6 69.5 12.6% 14.4%
15 Low Quartile $ 646.5 $ 655.1 $ 111.4 $ 119.5 16.4% 17.4%
16 Median 4,270.0 4,305.9 1,191.0 1,259.9 27.9% 29.3%
17 Upper Quartile 6,379.4 6,605.2 1,961.3 2,109.6 29.7% 30.4%
Source: Capital IQ, Inc.
15

16. Public Companies
Multiples
The companies are generally trading within a range of 2-3x revenue and 8-9x EBITDA.
Tornier, the most pure play extremities company, trades at the high end of the range at over 3x
revenue, given its focus on a more attractive extremities market
Public Company Comparables Multiples
EV / LTM EV / NTM EV / LTM EV / NTM
Company Revenue Revenue EBITDA EBITDA
1 Johnson & Johnson (NYSE:JNJ) 2.56x 2.47x 8.6x 7.8x
2 Stryker Corp. (NYSE:SYK) 2.33x 2.23x 7.9x 7.6x
3 Zimmer Holdings, Inc. (NYSE:ZMH) 2.69x 2.64x 8.1x 7.1x
4 Smith & Nephew plc (LSE:SN.) 2.08x 2.06x 7.5x 7.1x
5 Tornier N.V. (NasdaqGS:TRNX) 3.70x 3.43x nmf nmf
6 Wright Medical Group Inc. (NasdaqGS:WMGI) 1.43x 1.52x 11.4x 10.6x
7 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 1.72x 1.63x 8.5x 7.9x
8 Low Quartile 1.90x 1.84x 7.9x 7.3x
9 Median 2.33x 2.23x 8.3x 7.7x
10 Upper Quartile 2.63x 2.55x 8.6x 7.9x
Source: Capital IQ, Inc.
16

17. Public Companies
Multiples
Multiples in the orthopedic sector have compressed over the last several years, mainly due to slowing
growth in hip, knee, and spine area (there is still growth in the extremities market) combined with the
weak macroeconomy and structural changes in healthcare
Med Tech Index
4.00x
3.50x
3.00x
2.50x
2.00x
1.50x
The index is comprised of the seven companies included herein
Source: Capital IQ, Inc.
17

18. Public Companies
Share Prices
The S&P 500 is up over 15% during the last six months, while the orthopedic device companies are
generally flat, which suggests an uncertain near term outlook.
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
Med Tech Index S&P 500
The index is comprised of the seven companies included herein
Source: Capital IQ, Inc.
18

19. Historical Merger Premiums
Mergerstat Review 2011 also breaks down acquisition premiums by industry classification. The
premiums in the drugs, medical supplies and equipment industry ranged from 39% to 78% with
a median premium of 54% (which is essentially in-line with the 10-year premium of 48%
discussed in Section II) as follows:
Number of Median
Survey Year Deals Premium
2006 29 51.6%
2007 38 39.1%
2008 46 78.7%
2009 30 56.2%
2010 37 54.0%
Source: Mergerstat Review 2011
19

20. IV. Extremities Market Multiple Conclusion
20

21. Extremities Market
Multiple Conclusions
Approach Revenue EBITDA Extremities market
Multiple Multiple attractive growth
M&A Transactions prospects should result in
a premium valuation, in-
10-Year Average 4.0x 19.0x line with Tornier and the
upper quartile of our
Select Deals – Average 4.3x 18.6x
select M&A transactions
Select Deals – Upper Quartile 5.4x 28.7x or roughly 4-6x revenue
Public Companies (No Acquisition Premium)
Average 2.3x 8.3x
Upper Quartile 2.6x 8.6x
Business
Tornier 3.7x nmf
Planning /
Reporting
Public Companies (Including Implied Acquisition Premium of 50%)
Average 3.5x 12.5x
Upper Quartile 3.9x 12.9x
Tornier 5.6x Nmf
21

22. V. Carleton McKenna
22

23. Carleton McKenna Overview
• For more than thirty years, Carleton McKenna & Company and its predecessor firms have been
providing merger and acquisition advisory, capital raising and valuation services for small to mid-cap
regional clients – both public and private – with expertise across a broad array of industries.
Merger & Acquisition Capital Raising Services Valuation Services
Advisory
Carleton McKenna specializes in Carleton McKenna assists clients in Carleton McKenna provides
providing M & A Advisory services to capital raising to support plans to grow, objective and comprehensive
small- and mid-cap clients, including consummate acquisitions, address valuations for complex
both public and privately-held shareholder liquidity or effectuate engagements. Our transactional
businesses. Our experience shareholder recapitalizations. Capital experience and industry
encompasses a broad array of alternatives include private equity, expertise allow us to add
industries with diverse transaction senior debt and mezzanine/ substantial value in achieving the
structures typically less than $100 subordinated debt. Funding sources strategic and financial
million in value. include high net worth individuals, goals of our clients.
venture capital funds, mezzanine
lenders and commercial banks.
23

24. Carleton McKenna Overview
Why Us?
Experienced
Carleton McKenna’s thirty-plus years in the investment banking industry
enable us to deliver unbiased, strategic advice and capital solutions. Our
principals have held positions as founders, presidents, board members
and investors providing us the experience necessary to manage and
execute complex financial transactions.
Entrepreneurial
As a regional boutique firm, Carleton McKenna enjoys a creative
entrepreneurial spirit unencumbered by the bureaucracies inherent in
larger investment banks. Our independence allows us to remain free
from potential conflicts of interest, therefore, benefiting our clients.
Client Focused
Carleton McKenna’s principals share a common vision based on
dedication, loyalty and trust empowering us to serve our clients with
uncompromised integrity and professionalism.
24

25. Carleton McKenna Overview
Industries Served
• Carleton McKenna concentrates its efforts on serving corporate clients in seven primary
sectors:
Health Care IT & Software Materials Industrials
Consumer Products Commercial &
Clean Tech & Retail Professional Services
25