Medical Equipment and Supplies Report A Clearwater Healthcare Team Report

Transcription

1 Medical Equipment and Supplies Report 2013 A Clearwater Healthcare Team Report

2 The healthcare sector, breathing life into the M&A market. Identifying strategic M&A opportunities wherever they might be in the world takes a world-class adviser. Clearwater and its international IMAP offices can help identify the right opportunities. EVERY BUSINESS DAY, SOMEWHERE IN THE WORLD, AN IMAP ADVISOR IS CLOSING AN M&A TRANSACTION

3 M E D I C A L E Q U I P M E N T A N D S U P P L I E S R E P O R T Contents Overview...4 Global market...6 US market Indian market...22 Ramesh Jassal Senior Healthcare Analyst Clearwater Corporate Finance Despite the considerable political and economic pressures swirling the globe, M&A activity in the medical equipment and supplies sector continued to hold up well in 2012, largely driven by continued consolidation within the industry, a trend which is expected to continue over the next few years. Indeed as we went to print a number of notable deals were completing such as 2IL s purchase of Corin, and Ambu s acquisition of King Systems from Consort Medical, for a consideration of 104m. The transaction was valued at 1.9x sales and 14.6x EBIT. Other notable deals announced include: medical device maker Stryker Corporation s acquisition of Trauson Holdings Company for 480m; McKesson s purchase of PSS World Medical; and the strategic alliance between Medtronic and Life Tech Scientific Corporation. The latter deal brings together the technologies of the world s largest medical devices company with the local market expertise, brand recognition and growth potential of a recognised leader in the Chinese market. As with so many industries it is the emerging markets such as China, Brazil and India (which provides a particular focus in this report) that are key growth areas for the big multinationals in the sector. Stronger economic growth than in the developed world, government reforms, changing consumer lifestyles, and a rising penetration of medical insurance products are all increasing the demand for quality healthcare services in these countries. The wider drive towards more inorganic growth across the developed world is also being driven by a number of interlinked factors. High operating costs, rising competition, the need to increase geographical presence in key markets, stringent government regulations, high R&D costs, and pressure on bottom-line performance are just some of the key stimuli. Over the next few years we expect a lot of deal activity in fields such as early diagnosis, patient homecare devices, and technologies that provide early detection. Also, expect to see consolidation around technologies that reduce surgical interventions and long hospital stays which in turn reduce waiting times and unnecessary admissions. We hope you enjoy the read. Page 3

4 Overview The medical equipment and supplies sector grew by 5.6% in 2011 and is currently worth 214bn. This is forecast to grow to 276bn by In 2012 the sector saw only marginal revenue growth due to market volatility caused by a range of factors including a decline in private insurance, the public funding squeeze, and reduced demand as individuals and authorities tried to support non-surgical strategies prior to any surgical procedure intervention. Demand for medical devices is expected to register different rates of growth between developed markets such as the US and Western Europe, and the emerging markets of Asia-Pacific and Latin America. Strong growth in these latter markets has contributed to an increase in revenue optimism and, as such, the medical equipment and supplies sector continues to generally be a very attractive segment within the broader healthcare sector. In terms of deal activity, with record levels of cash on corporate balance sheets, more than a fifth of companies in the sector have made multiple transactions over the last couple of years. In fact some of these companies have gone on acquisition sprees acquiring four or more companies, such as Covidien, Thermo Fisher Scientific, Boston Scientific Corporation, Medtronic, Stryker Corporation, Teleflex, GE Healthcare, Henry Schein and United Seating & Mobility. One company that stands out is Essilor International which has acquired 14 companies following an aggressive drive into emerging markets. The medical equipment and supplies sector continues to generally be a very attractive segment within the broader healthcare sector." Page 4

5 Sector split The medical equipment and supplies sector can be broken down into the following sub-sectors: Orthopaedic Implants & Prosthetics Limb, hip, knee, shoulder, ear, nose, throat and mouth implants; jaw prosthetics; and orthopaedic braces, plates, supports and shoes. Cardiovascular Stents and pacemakers; cardiovascular equipment, therapies, and medical devices; solutions in cardiovascular disease, soft tissue repair and critical care management; cardiology, radiology and vascular surgery devices. Neurovascular Implants for neurovascular purposes, electrical stimulations, neurovascular equipment, neuromodulation units, and medical devices for the treatment of neurological diseases. Dental Dental equipment and supplies, dental implants and prosthetics, dental imaging systems, dental waxes and mouldings, dental laser systems, and any other dental accessories. Life Science Tools & Services Any equipment used by laboratories including instruments, glassware and machines. Kits and reagents for life science research, DNA sample storage equipment and technology, and products used in protein interaction. Patient Monitoring Equipment & Therapies Equipment monitoring vital signs e.g. blood pressure monitoring. Imaging equipment (including medical cameras) e.g. MRI, CT, X-ray, ultrasound. Other patient monitoring products including defibrillators. Remote monitoring products and radiography and radiotherapy products. Disposable Equipment & Supplies General disposable equipment and supplies including gloves, syringes, catheters, electrodes, bandages, plasters, first-aid kits, sutures, medical register paper, drainage bags, feeding bags, and wound management and compression products. General Equipment & Supplies Hospital, clinic and outpatient equipment and supplies (including non-disposable durable equipment such as ventilation, patient handling products, rehab and medical furniture). Surgical and electrosurgical devices, instruments and apparatus including carts, tables and consoles. In Vitro Diagnostics, Supplies & Equipment Chemistry, microbiology, immunology and genetic tests, diagnostic instruments and related reagents and test kits including blood diagnostic tests used in the detection and monitoring of diseases and disorders. Ophthalmic Goods, Optical Instruments & Lenses Eye-related products including contact lenses, intraocular lenses, cataract surgical devices, eye tracking devices, and laser vision correction products. Ophthalmic instruments, imaging systems and viscoelastic devices. Optical scanners, coherence tomography diagnostic devices, and optoelectronic measurement devices. Page 5

6 Global market Overview China, India and Brazil are the most important emerging markets that will offer the industry the greatest opportunities for future growth. The expansion of business activities in emerging markets is being driven by a number of factors including stronger economic growth compared to other regions of the world, government funding and reforms, changing consumer lifestyles, increasing penetration of medical insurance products, and rises in disposable incomes which have increased the demand for quality healthcare services. Although concern over the implementation of the Obamacare health reforms in 2013/2014 has reduced growth optimism in the US (the world s largest market), the growth prospects are still high among developed countries. With an ageing baby boomer population, high unmet medical needs, and an increase in lifestyle diseases (including cardiovascular diseases, diabetes, hypertension, and obesity), the US medical devices industry continues to grow at a brisk pace. Singapore, Taiwan, Hong Kong, South Korea, Germany and Canada are identified as other important regions for growth in the sector. Market drivers There are several factors driving the market and wider M&A activity: Lower procedure volumes In the US high unemployment, the depressed housing market and other factors are causing many people to forego medical procedures that were once considered non-discretionary. Declining procedure volumes are also due to high deductibles and co-pays that patients now pay as part of healthcare insurance plans. The impact of lower procedure volumes has led hospitals to reduce inventory levels which, in turn, backflows through the entire supply chain. Expectations are that as the economy improves, the demand for healthcare will grow significantly due to the ageing population. Tighter government budgets Compressed economies limit the funds governments can spend on medical care and innovation. There is a widespread recognition that healthcare costs are out of control in many countries. For instance, the US has yet to come to terms with impending shortfalls in funds necessary to pay for how healthcare is currently delivered. European governments are financially strapped too and in countries like the UK alternative options are given prior to any surgical procedure intervention. The result is lower reimbursement rates and margin compression, forcing many companies to seek out new higher growth and higher margin product lines via R&D, in-licensing, strategic alliances and M&A activity. Cost containment and reform Payers, both public and private, will increasingly look towards bundled and value-based payments rather than fee-for-service payments. Either way, economies of scale will matter at the provider level, the distributor level and at the manufacturer level. Containing healthcare costs will benefit large companies that have made themselves lean and efficient, which will drive further consolidation in the sector. Page 6

7 Less invasive treatments Given the economic pressures and sometimes unreliable surgical results, many physicians recommend that patients opt for less invasive approaches such as drugs instead of medical procedures and physical therapy. This is especially the case in the light of safety concerns with certain products which has resulted in a more cautious approach by the US Food and Drug Administration (FDA) and a lengthened R&D and testing process. Stringent regulations There have been attempts by the FDA and the Chinese State Food and Drug Administration (SFDA) to make medical device clearance more stringent. This uncertainty towards regulatory approach obscures corporate planning and escalates development costs for smaller players. New technologies Will continue to win favour, especially those offering minimally invasive approaches, quicker recovery times, and lower procedure costs. Newer technological areas include combination products which integrate devices and drugs, information technologies, and regenerative and tissue remodelling technologies. Competition for technology will remain intense for medical device companies in niche areas such as orthopaedics, spine surgery, minimally invasive devices and coronary. Personalised medicine and companion diagnostics There is significant activity by diagnostic and pharmaceutical firms targeting pre-screened patients with certain therapies. However the list of FDA-approved companion diagnostics is short with only 1% of currently marketed drugs. These are mostly in cancer treatment such as Gleevec, Tarceva, Iressa, Camptosar, Erbitux and Herceptin. Given the economic pressures and sometimes unreliable surgical results, many physicians recommend that patients opt for less invasive approaches such as drugs instead of medical procedures and physical therapy. " European vs emerging markets Given the sovereign debt turmoil and weak economic conditions, the European market will remain challenging. By contrast, emerging markets continue to offer promise as a widening middle class develops and populations require higher levels of care. However, China and India are encountering implementation and quality issues. In addition, larger and medium sized companies are looking for niche areas to exploit. These areas used to be the province of only players that sought less crowded markets. Now the likes of Medtronic and Boston Scientific are increasingly entering this space. Page 7

8 Global M&A activity In 2012 there were 330 deals in the medical equipment and supplies sector compared to 443 in 2011, a decline of 26%. Interestingly deals above 500m accounted for 74% of the total deal value in 2012, and 63% in This has distorted the average deal size and so, in order to understand the underlying trend, for the purpose of this report we have analysed deal activity both below and above 500m separately. Total deals Number of deals Total deals (with values disclosed) Number of deals Transaction value ( m) 28,293 28,820 Average deal size ( m) Deals less than 500m (with values disclosed) Number of deals Transaction value ( m) 10,370 7,393 Average deal size ( m) *It is worth noting that deal values for only 43% of completed transactions were disclosed. Note: currency conversion used $1 = Global medical equipment and supplies deals Global medical equipment and supplies deals Number Number of of deals deals January January /February February March March April April May June June July July August August September October October November /November /December December May September Page 8

9 In 2012 trade buyers remained the most active investors by volume with 288 deals during 2012, compared to 382 deals in Meanwhile, there were 42 private equity (PE) deals in 2012, compared to 61 in Who bought medical equipment and supplies companies Who brought medical equipment and supplies companies Number of Deals deals Trade PE PE PE deal highlights Amongst the PE deals in 2012 two particularly stood out. EQT Partners AB acquired BSN Medical GmbH, the German medical supplies manufacturer, from Montagu Private Equity, the UK-based PE firm, for 1.5bn. The acquisition provided BSN with the necessary resources to support and accelerate its growth plans and geographic expansion, and scope to make bolt-on acquisitions. The transaction was valued at 2.7x revenue. Montezemolo & Partners SGR SpA, acquired the whole share capital of Italian renal care equipment manufacturer BellcoSrl, from PE firms Argos Soditic France SAS and MPVenture SGR SpA, for 83.5m. The transaction was valued at 0.98x revenue and 6.2x EBITDA. Page 9

10 Sector breakdown In 2012 half of the deal volume fell into the following sub-sectors: general equipment & supplies, patient monitoring equipment & therapies, and life science tools & services. Sub-sector breakdown of deals 2012 Sub- sector breakdown of deals % 4% 4% 2% 20% General Equipment & Supplies Patient Monitoring Equipment & Therapies!General Equipments & Supplies Life Sciences Tools & Services (Pa5ent Monitoring Equipment & Therapies 8% 10% 16% Disposable Equipment & Supplies Lifescience Tools & Services Orthopaedic Implants & Prosthetics Disposable Equipment & Supplies In Vitro Diagnostics, Supplies & Equipment "Orthopaedic, Implant & Prosthe5cs Ophthalmic Goods, Optical Instruments & Lenses *In Dental Vitro Diagnos5cs, Supplies & Equipment 13% 14%.Ophthalmic Cardiovascular Goods, Op5cal Instruments & Lenses Neurovascular Dental Sub-sector monthly breakdown of deals 2012 Sector breakdown of deals 2012 Number of of deals s January.February March April May June July August September October.November.December May September Neurovascular Cardiovascular Dental Ophthalmic Goods, O In Vitro DiagnosGcs, Orthopaedic, Implan Disposable Equipmen Lifescience Tools & S PaGent Monitoring E General Equipments Neurovascular Cardiovascular Dental Ophthalmic Goods, Optical Instruments & Lenses In Vitro Diagnostics, Supplies & Equipment Orthopaedic Implants & Prosthetics Disposable Equipment & Supplies Life Sciences Tools & Services Patient Monitoring Equipment & Therapies General Equipment & Supplies Page 10

11 M&A highlights The 10 largest transactions contributed to around 22.4bn (77.6%) of total deal values in The standout trade transactions in 2012 were: Johnson & Johnson Synthes The largest deal by far was Johnson & Johnson s acquisition of Synthes, a global manufacturer of orthopaedic devices, for 12.7bn. As a result, Synthes will strengthen DePuy s trauma line and its joint replacement offering by expanding the product range. The transaction was valued at 4.5x revenue and 10.3x EBITDA. The 10 largest transactions contributed to around 22.4bn (77.6%) of total deal values in 2012." Hologic Gen-probe Hologic acquired Gen-probe, a nucleic acid testing products manufacturer, in a 2.4bn deal that enables Hologic to capitalise on the fast-growing molecular diagnostics market. The transaction was valued at 6.6x revenue and 20.7x EBITDA. Agilent Technologies Dako Agilent Technologies acquired Dako, the Danish company that provides cancer diagnostics services and equipment, for 1.4bn. The transaction was made on a debt-free basis and chimes with Agilent s strategy to increase its presence in the life science market. The transaction was valued at 6.7x revenue and 21x EBITDA. Boston Scientific Corporation Cameron Health Boston Scientific Corporation acquired Cameron Health, a Californian-based manufacturer of implantable defibrillators and developer of medical devices, for approximately 869m total consideration. As a result, Cameron Health will provide Boston Scientific with innovation in the cardiac rhythm management segment of cardiovascular devices. Asclepius Zoll Medical Corporation Asclepius (Asahi Kasei) Subsidiary Corporation acquired Zoll Medical Corporation, the Massachusetts-based cardiac resuscitation and automated external defribrillator (AED) devices manufacturer, for approximately 1.3bn. In the medical devices business, the US market leads the world, not only in size and scope but also in technology innovation, so establishing a strong infrastructure in the US is an important step for Asahi Kasei. The transaction was valued at 3.9x revenue and 26.3x EBITDA. Page 11

12 Top 10 deals Based on the available data, the top 10 transactions in terms of deal value in 2012 averaged a 4.4x revenue multiple which is in line with The 2012 EBITDA multiples averaged a 17x multiple, which is higher than Acquirer Target Deal Value ( m) EBITDA multiple Sales multiple Johnson & Johnson Synthes GmbH 12, Hologic Inc. Gen-Probe Inc. 2, EQT Partners AB BSN Medical GmbH 1, Agilent Technologies, Inc. Dako A/S 1, Asclepius Subsidiary Corporation Zoll Medical Corporation 1, Boston Scientific Corporation Cameron Health Inc. 869 n.a n.a Fujifilm Holdings Corporation Sonosite Inc Thermo Fisher Scientific Inc. One Lambda Inc Linde AG Air Products & Chemicals Inc. (Continental-European Homecare Business) 487 n.a 2.8 Corning Inc. Becton Dickinson and Company s Majority of Discovery Labware Unit 446 High Average Median Low Page 12

13 Geographic breakdown The majority of acquirers in 2012 came from the US with 53% (174) of the deals. France, UK, Germany and the Netherlands accounted for 23% (76) of the deals. By contrast, companies in emerging markets like China are predominantly acquiring inbound opportunities. The reason for this is that Chinese regulatory authorities are implementing stringent conditions to improve quality and safety in the sector, and this is driving further consolidation of the market and reducing the number of state-funded companies. Acquirer split 2012 Acquirer split % 2% 2% 3% 17% US France UK Germany Japan US France UK Germany Target acquisitions have been predominantly located in the US with 52% (173) of the deals. Germany, UK, France, China, Sweden, Japan and the Netherlands accounted for 25% (77) of the deals. The majority of the German targets were acquired by domestic companies, showing further consolidation in a healthcare market that is under cost pressures. Chinese companies seem to be gaining interest from France, Japan and Sweden. For instance Getinge AB acquired Acare Medical Science, the Chinese medical equipment manufacturer, for a consideration of 17m. The acquisition is in line with Getinge's strategy to increase its presence in emerging markets and to offer a product range focused on price-sensitive customer segments. Essilor International acquired a majority stake in Jiangsu Seeworld Optical, a Chinese lense manufacturer, and in Jiangsu Youli Optics, an ophthalmic lenses manufacturer. 5% Target split 2012 Target split % 2% 3% 3% 8% 4% 23% 6% 8% 5% 53% 52% Sweden Netherlands China Other US US Germany Germany UK UK France France China China Sweden Sweden Japan Netherlands Netherlands Japan Other Other Japan Sweden Netherlands China Other The majority of acquirers in 2012 came from the US with 53% of the deals. Page 13

14 2011 focus The standout transactions in 2011 were: Danaher Corporation Beckman Coulter Danaher Corporation acquired Beckman Coulter in a 4.2bn deal including debt. Following the transaction Beckman Coulter became part of Danaher's life sciences and diagnostics segment, joining its new partners Leica, AB Sciex, Radiometer, and Molecular Devices. The transaction was valued at 1.8x revenue and 8.2x EBITDA Thermo Fisher Phadia AB Thermo Fisher acquired Phadia AB, an allergy and autoimmunity diagnostic company from European PE firm Cinven, for approximately 2.1bn. The acquisition boosted Thermo Fisher's global presence in speciality diagnostics and in allergy and autoimmunity diagnostic testing technologies. The transaction was valued at 6.7x revenue. Thermo Fisher Dionex Corporation Thermo Fisher also acquired Dionex Corporation, a chemical analysis chromatography and extraction systems manufacturer, for approximately 1.3bn. The deal was aimed at helping Thermo expand its presence in markets such as environmental analysis, water testing and food safety, while also increasing its commercial capabilities in China and other growing markets in the Asia-Pacific. The transaction was valued at 4.9x revenue and 20.4x EBITDA. Endo Pharmaceuticals American Medical Systems Endo Pharmaceuticals acquired American Medical Systems (AMS), a provider of devices and therapies for male and female pelvic health, for 1.8bn, which included the assumption and repayment of approximately 194m of AMS debt. The combination of AMS' and Endo's existing platforms provided additional solutions across the entire urology spectrum. The transaction was valued at 5.6x revenue and 16.7x EBITDA. IVD Acquisition Corporation Immocor IVD Acquisition Corporation, an affiliate of TPG Captial, acquired Immocor, a Georgia-based blood diagnostic reagent and automated systems developer and manufacturer, for 1.2bn. The acquisition enabled IVD to expand its global footprint and further develop innovative products in the transfusion medicine segment. The transaction was valued at 4.9x revenue and 11x EBITDA. Top 10 deals 2011 Acquirer Target Deal Value ( m) EBITDA multiple Sales multiple Danaher Corporation Beckman Coulter Inc. 4, Chiron Holdings Inc. Kinetic Concepts Inc. 3,929 Thermo Fisher Scientific Inc. Phadia AB 2,177 n.a 6.7 Endo Pharmaceuticals Holdings Inc. American Medical Systems Holdings Inc. 1, Thermo Fisher Scientific Inc. Dionex Corporation 1, IVD Acquisition Corporation Immucor Inc. 1, Dentsply International Astra Tech AB 1, Stryker Corporation Boston Scientific Corporation's Neurovascular Intervention Business 965 Galderma Holding AB Q-Med AB Medtronic Inc. Ardian Inc. 508 n.a n.a High Average Median Low Page 14

15 Hot sectors Shoulder replacement market Whilst the 2012 growth rates of total hip and knee replacements were in the low single digits at 3% and 1% respectively, the US shoulder replacement market was forecast to grow strongly at 9.7% in 2012 and reach 386m in revenues. The market is expected to be worth 540m by 2016 with growth driven by the increasing use of reverse shoulder replacements, which now comprise over 30% of the US shoulder replacement market (Source: Medtech Insight). Cardiovascular devices The segment is highly competitive and has reached market saturation, but innovations in niche sectors such as atrial fibrillation and ventricular assist devices are poised for growth. For instance the continuous glucose monitoring device is moving closer to becoming a staple effective diabetes treatment, which will impact other products like insulin pumps. We will continue to see opportunities in this space as companies look to develop a closed-loop system or artificial pancreas. Spinal procedures The US remains the single largest regional market in a sub sector that is forecast to grow at a significant pace because of the growth in fusion procedures supported by innovative products, and the availability of advanced minimally invasive technologies. In turn, the Asia Pacific market is expected to register strong growth too, owing to factors such as rising awareness about treatment of spinal disorders, increasing income levels, rising levels of obesity, and a rise in spinal injury cases due to increased use of machinery and motor vehicles. Spinal fusion and spinal fixation devices, backed by sufficient clinical data, continue to dominate the spinal surgery market. Spinal fixation devices represent the largest product segment, while the relatively mature spinal fusion devices segment is forecast to grow the fastest. However, motion preservation technologies such as dynamic stabilization, nuclear arthroplasty, artificial discs, prosthetic disc nuclei devices, and facet fixation will take market share from spinal fusion. A major disadvantage associated with spinal fusion is that it immobilizes the spine movement. On the contrary, the majority of baby boomers and younger patients suffering from spinal disorders demand therapies and devices that preserve spinal mobility. Summary Companies are looking to meet the market challenges with growth strategies that include: Restructuring internal operations By shedding non-performing assets, pruning organisational bloat and increasing margins via productivity gains and more creative approaches. This includes bundling and providing additional services that support good health economics. Diversifying product portfolios To moderate the harsh effects of any one technology faltering and spreading the risk. Penetrating emerging markets To strengthen platforms for future expansion. Smaller companies, especially those with new technology, will find remaining independent to be more expensive and risky and so many will find it beneficial to combine with a larger concern. These firms should realistically assess their future and devise strategies by creating alliances and partnerships with large corporates early, and have a clear exit strategy in place to create value for investors. The other challenge for smaller companies is that the healthcare landscape puts a premium on having sufficient financial ability to fund regulatory, sales and marketing requirements, and build relationships with key opinion leaders. This is especially the case in the current tight economic climate where access to capital can be difficult. Pursuing strategic acquisitions To supplement organic growth, diversify product lines and geographical markets, and to obtain new high-growth, high-margin technologies. With accumulated cash reserves, large companies will increasingly look to M&A activities to reposition themselves. Medium to smaller companies will have a tougher time gaining access to key healthcare call points without a proven and sizeable sales force armed with a battery of products to gain the time and interest of providers. Page 15

16 US market Overview The US manufacturing market for medical equipment and supplies continued its strong growth in 2012 with revenues estimated to be in excess of 66bn, a 5.8% growth rate over 2011 and a continuation of the 5.9% annual growth rate since Revenues are projected to grow to 81bn by 2017 at an annual growth rate of 4.1%, ahead of US GDP which is estimated to grow at 2.1% per year on average. With more than 16,400 businesses in the medical manufacturing industry, growth has been driven by a confluence of new product innovation and continued growth in physician visits which now exceed one billion per year. Recent federal legislation pushing for increases in healthcare productivity is driving much of the new product innovation and creating substantial opportunities. The ageing of the baby boomer population will continue to drive growth in visits to healthcare centres, which is a major driver of equipment and supply purchases. As new products are developed, distribution into the healthcare system becomes a critical success factor and encourages consolidation to take advantage of existing distribution networks. Cross-border activity should strengthen too from its current trend as European and Asian healthcare companies expand their presence in US markets by acquiring developing technologies and distribution networks. Cross-border activity should strengthen too from its current trend as European and Asian healthcare companies expand their presence in US markets by acquiring developing technologies and distribution networks." Industry consolidation Based on data collected by IBISWorld there has been a modest consolidation of industry players over the past few years. This trend is expected to continue as new technologies are developed in smaller firms and absorbed by larger firms. Over the next five years the number of medical device companies will decline at an annualised rate of 1.8% to less than 15,000 operators. For small companies a primary driver of consolidation is access to distribution. Tight financial markets and a drop in venture capital funding to this segment have reduced the ability of firms to obtain the capital needed to build their own distribution capability. For acquirers, the opportunity to obtain new products to add into their current portfolio creates significant leverage from their existing distribution capability. However the influx of deals to look at appears to have slowed the actual rate of acquisitions as many corporate acquirers may be overwhelmed with investment choices. Also, changing regulations and medical device recalls in the US have led to tighter regulation, which has increased costs for industry operators. This will inhibit growth, whilst revenue will remain stable. Foreign outsourcing of manufacturing research and development and other operations, combined with industry consolidation, is forecast to decrease the number of industry operators by 5-10%. M&A activity In 2012 the level of deal activity dropped by 18% with 174 deals in the medical equipment and supplies sector compared to 212 deals in Deals above 500m made up 75% and 78% of the total deal value, in 2011 and 2012 respectively. This has distorted the average deal size, so in order to understand the underlying trend and average deal size, we have concentrated on deals below 500m. Page 16

17 Total deals Number of deals Total deals (with values disclosed) Number of deals Transaction value ( m) 18,531 23,179 Average deal size ( m) Deals less than 500m (with values disclosed) Number of deals Transaction value ( m) 4,663 5,195 Average deal size ( m) It is worth noting that only 41% of completed transactions deal values were disclosed. Note: currency conversion used $1 = US medical equipment and supplies deals 30 US medical equipment and supplies deals 25 Number of of deals deals January -February March April May June July August September October -November -December May September Page 17

18 In 2012 trade buyers remained the most active investors by volume with 153 deals compared to 187 deals in Meanwhile, there were 21 private equity (PE) deals during 2012 compared to 25 in Who bought US medical equipment and supplies companies Number of deals Number of deals Trade Trade PE PE 21 US PE deal highlights SeraCare Life Sciences, the company that provides products and services to facilitate the discovery, development and production of human and animal diagnostics and therapeutics, was acquired by Linden, a private equity firm, for 51m. The transaction was valued at 1.4x revenue and 13.4x EBITDA. Water Street Healthcare Partners acquired Breg, a Californian orthopaedic and reconstructive medical products manufacturer, from Orthofix Holdings, a subsidiary of Orthofix International NV. The consideration was 100m, paid in cash. Bain Capital LLC acquired Physio-Control Inc., a Washingtonbased automated external defibrillators (AEDs) and manual defibrillators manufacturer and wholesaler, from Medtronic Inc., for 310m. The transaction was valued at 1.1x revenue. Sector breakdown Deal activity in orthopaedic implants & prosthetics, general equipment & supplies, and in vitro diagnostics, supplies & equipment fell. The majority of deal activity was in the general equipment & supplies, patient monitoring equipment and life science tools sectors. One key sub-sector that will see an increased level of deal activity will be the cardiovascular segment as elderly people increasingly need cardiovascular surgery and life-saving procedures as they get older. Interestingly, the majority of these procedures are still paid for regardless of whether the patient has any insurance in the US. Hence, cardiovascular technologies will continue to fare better than other therapeutic devices, such as orthopaedic, sports medicine, novel quality-of-life treatments and aesthetic surgery. Essex Woodlands and its equity partners Pantheon Ventures, Spindletop Healthcare Capital, Alta Partners, Ampersand Capital Partners and White Pine Medica, acquired a 51% stake in Bioventus LLC, the company that develops and markets orthopaedic diagnostics and therapies. The transaction was valued at 159m. Page 18

19 The orthopaedic implants & prosthetics segment is also under pressure with fewer deals compared to This is because orthopaedic surgeons are becoming hospital employees, effectively aligning themselves with hospitals to further pressure orthopaedic manufacturers to lower prices to retain business. Deal activity in the disposable equipment & supplies sector is driven by downward pricing pressure on consumables. Contract manufacturing companies are looking to consolidate the market by acquiring more products to remain profitable by spreading their fixed costs across more products. Companies are interested in cross-border opportunities to spread the risk, gain access to other sales channels and fill product gaps. Sub- sector breakdown of deals 2012 Sub-sector breakdown of deals 2012 General Equipments & Supplies 3% Patient!General Monitoring Equipments Equipment & Supplies & 7% 14% Therapies (Pa5ent Monitoring Equipment & Therapies 6% Life Sciences Tools & Services 4% Lifescience Tools & Services Disposable Equipment & 6% 18% Supplies Disposable Equipment & Supplies "Orthopaedic, Implants & Prosthe5cs Prosthetics *In Vitro Diagnos5cs, Supplies & Equipment In Vitro Diagnostics, Supplies & 13% Equipment.Ophthalmic Goods, Op5cal Instruments & Lenses Ophthalmic Dental Goods, Optical Instruments & Lenses Cardiovascular 17% 12% Dental Cardiovascular Neurovascular Neurovascular Top 20 deals below 500m Based on the available data, the top 20 deals below 500m averaged a 3.1x revenue multiple in The EBITDA multiples in 2012 averaged around 13x, with much of the higher pricing in this segment appearing to be influenced more by strategic or IP valuations than by financial ratios Acquirer Target Deal Value ( m) EBITDA multiple Revenue multiple Corning Inc. Becton Dickinson and Company's Majority of Discovery Labware Unit Haemonetics Corporation Pall Corporation's Blood Collection, Filtration and Processing Assets Bain Capital Physio-Control Inc Hill-Rom Holdings Inc. Aspen Surgical Products Inc Angiodynamics Inc. Navilyst Medical Inc. 224 Danaher Corporation Iris International Inc Covidien Plc Bârrx Medical Inc. 208 Convatec Inc. 180 Medical Holdings Inc. 198 Covidien Plc Superdimension Ltd Teledyne Technologies Inc. Lecroy Corporation Biomet Inc. Depuy Orthopaedics Inc (Worldwide Trauma Business) 178 Teleflex Inc. Lma International NV's Assets 176 Steris Corporation US Endoscopy Inc Baxter International Inc. Synovis Life Technologies Inc Ampersand Capital Partners and others Bioventus LLC Laboratory Corporation of America Holdings Medtox Scientific Inc L-3 Communications Holdings Inc. Danaher Corporation's Kollmorgen Electro-Optical Unit 133 The Cooper Companies Inc Origio A/S Rti International Metals Inc. Remmele Engineering Inc Chart Industries Inc. Airsep Corporation 114 High Average Median Low Page 19

20 Notable deals below 500m in 2012: Baxter Synovis Baxter acquired Synovis, a leading provider of biological and mechanical products for soft tissue repair used in a variety of surgical procedures, for 165m. The deal expands Baxter's regenerative medicine portfolio and biosurgery franchise, which includes a number of devices and biological products for hemostasis, tissue sealing and adherence. The transaction was valued at 3.4x revenue and 19.9x EBITDA. Steris US Endoscopy Steris acquired US Endoscopy, a leader in the design, manufacture and sale of therapeutic and diagnostic medical devices, and support accessories used in the gastrointestinal (GI) endoscopy markets worldwide. With the acquisition Steris will significantly expand its presence in the GI market. Steris agreed to pay 172m in an all cash deal. The transaction was valued at 3.9x revenue and 13.5x EBITDA. Haemonetics Corporation Pall Corporation Haemonetics Corporation acquired the assets of the blood collection, filtration and processing product lines of Pall Corporation, a New York-based filtration, separation and purification equipment manufacturer, for 351m. Pall's business assets provide Haemonetic with leading filter technology and manufacturing capability, a broad portfolio of manual collection and processing products, and relationships with major blood authorities. The transaction was valued at 2.6x revenue and 8x EBITDA. Corning Discovery Labware Corning Inc. acquired the majority of the Discovery Labware unit from Becton Dickinson and Company, a New Jersey-based medical device manufacturer, for 446m. The Discovery Labware unit s extensive product portfolio and established dealer network will significantly improve Corning Life Sciences offerings to customers and is a critical part of Corning s longterm growth strategy. The transaction was valued at c.3.1x revenue. Danaher Corporation IRIS International Danaher Corporation acquired IRIS International Inc., a California-based automated in vitro diagnostics systems manufacturer, for 210m. The move will expand the industrial conglomerate's diagnostics business. The transaction was valued at 2.9x revenue. Hill-Rom Holdings Aspen Surgical Products Hill-Rom Holdings acquired Aspen Surgical Products, for 258m. Aspen is a provider of surgical consumable and speciality medical products. The deal further develops Hill-Rom's surgical business, adding a portfolio of consumable products and expanding its position in North American and European surgical markets. The transaction was valued at 3.3x revenue. Page 20

21 Notable deals below 500m in 2011: Synergy Health BeamOne Synergy Health acquired BeamOne, the largest provider of outsourced e-beam medical device sterilisation services in the US, for 34m. The deal was Synergy's first expansion into the US sterilisation market and a platform from which to research and develop the provision of its central sterilisation services to American hospitals and healthcare providers. The transaction was valued at 3.9x revenue and 20.4x EBITDA. Boston Scientific Corporation Sadra Medical Boston Scientific Corporation acquired Sadra Medical for 249m to compete in the implantable cardiac valves market, in line with its broader strategy to expand into the asthma, diabetes, obesity and heart valve segments. It followed that deal with the acquisition of Atritech, a maker of products to treat atrial fibrillation, for 230m. Vista Equity Partners Sage Healthcare Vista Equity Partners acquired the Sage Healthcare division of the Sage Group to form a new company Vitera Healthcare Solutions. Vitera serves more than 400,000 healthcare professionals including 80,000 physicians. Its products are used by a fifth of all community health centres in the US. The transaction was valued at 1.3x revenue and 6.7x EBITDA. Stryker Corporation Orthovita Stryker Corporation acquired Orthovita which competes in the market for orthobiologics which are proteins and other agents designed to boost the body's healing process, for 198m. In particular Orthovita is a leader in synthetic bone grafts. The deal helped Stryker better compete against rivals such as Medtronic and Johnson & Johnson. The transaction was valued at 3.3x revenue and 11.9x EBITDA. Medtronic PEAK Surgical / Salient Surgical Technologies Medtronic acquired two privately-held companies, PEAK Surgical and Salient Surgical Technologies. Both companies are focused on advanced energy surgical technologies and the deals broadened Medtronic s portfolio of innovative surgical products. China, Germany, the Netherlands and the UK were the main points of interest for strategic US buyers." Cross-border activity In total there were 31 overseas deals by US acquirers in China, Germany, the Netherlands and the UK were the main points of interest for strategic US buyers. The UK made up 29% of these deals with China, Germany, the Netherlands and Sweden accounting for 32%. US buyers acquiring overseas 2012 US buyers acquiring overseas 2012 UK 29% UK Netherlands 39% Netherlands Germany China Germany China 3% 16% Sweden Other Sweden 3% 10% Other Page 21

22 Indian market Overview The medical equipment and supplies market is estimated to have grown at a CAGR of 21% for the period and was worth approximately 4.7bn in 2011, just under 10% of the country s healthcare sector by value. In 2012 the market was expected to top 5bn. The sector remains largely unregulated with more than 700 manufacturers primarily focusing on mid to low end products. Multinationals have around a 65% share of the market and dominate the hi-tech end because of their extensive networks. Indian companies in the sector are challenged by both a lack of R&D skills and the global funding crunch, particularly as the sector is viewed as highly-capital intensive with a long gestation period. As such the majority of domestic manufacturers continue to focus on low-margin, low-technology products like disposables and medical equipment, or rely on imports of highend products. Despite strong growth rates the market remains disproportionately small, with an extremely low per capita spending of 2. Like most developing countries, India is also predominantly a manufacturer of Class I & II devices, i.e. devices which are not considered to be high risk and which do not need extensive clinical trials. Two thirds of the sector s manufacturers are SMEs, while the higher end of the market is dominated by foreign manufacturers, many of whom have established subsidiaries in India such as GE, Siemens and Philips. Indian companies in the sector are challenged by both lack of R&D skills and the global funding crunch" Page 22

23 Growth drivers There are a number of significant drivers in the Indian healthcare market: Expansion of hospital sector The sector in India is growing at a rate of 22%. The expansion will encourage the demand for medical equipment as about 45% of the cost of setting up a hospital is accounted for by medical equipment. Increase in outsourcing Indian companies have started to comply with ISO and GMP standards to increase confidence levels among foreign companies interested in outsourcing manufacturing to India. For instance Philips Healthcare plans to make India its production hub to serve the emerging markets in Asia Pacific, while about 70 multinational companies including Eli Lilly, GE and Delphi now have R&D facilities in India. Rising prevalence of lifestyle diseases Unhealthy dietary patterns, lack of physical exercise and rising stress levels have led to an increase in the incidence of lifestyle disorders such as cardiovascular diseases and diabetes. These are expected to spur the demand for orthopaedic devices, cardiovascular devices, ophthalmic devices, diagnostic imaging products and in vitro diagnostics. Evolution of India as a medical tourism hub Medical tourism in India is expected to grow at a CAGR of 19% leading to demand for world class equipments. Spread of telemedicine The market is expected to grow at a rate of 20% over the next five years. With the growth of telemedicine services in India, demand for diagnostic medical equipment such as X-rays, CT scanners, dopplers, ultrasound and electrocardiographs is expected to grow. This will also bring healthcare to remote places in India. Ageing population Will add to the use of medical devices and also boost the home healthcare market. It is estimated that 11% of the Indian population is presently aged above 60 compared with only 7% in Key issues The market is facing a number of pressures that are becoming an impediment to it realising its full potential: Over reliance on imports Of the total medical equipment market in 2011, imported products accounted for 65% of sales. Import duty exemption for devices and technologies that are not available in India encourages imports rather than local manufacturing, while the low level of R&D spending by the Indian medical devices industry is another reason for the high dependence on imports. Lack of access to technology Indian companies face a lot of competition from global players who are spending much more on R&D and are thus able to innovate at a much faster pace than their Indian counterparts. R&D spend in India is about 1% of revenues, whereas in the US companies on average spend 12%. Regulatory system The regulatory structure in India is not very clear or effective with respect to medical devices, resulting in inferior quality products flooding the market and putting price pressures on genuine manufacturers. The Drug and Cosmetics Act, under which a few devices are regulated, is outdated while an insufficient amount of regulations in the country hampers the standing of the Indian market in the global space. Access to capital The scale of operations of most companies is too low to attract a significant amount of PE investment. The Indian venture capital industry is in a nascent stage and government funding has also been limited. Page 23

24 Key segments Almost all product segments in the Indian medical devices industry are witnessing growth, both in value and volume terms. Top product segments include immunochemistry, MRI equipment, cath labs and ventilators. Expansion of the hospital sector, increased outsourcing of R&D, government initiatives for providing affordable healthcare, an increasing proportion of senior citizens, and the evolution of India as a medical tourism hub, are just some of the factors contributing to this growth. Product Segment Value ($m) Value Growth (YoY%) Key Players Immunochemistry Transasia Bio Medicals, BioMeriux India, Siemens Medical Solutions MRI Equipment GE Healthcare, Philips Healthcare, Hitachi Medical HPLC Equipments Waters Corporation, Agilent Technologies, Shimadzu Biochemistry Transasia Bio Medicals, BioMeriux India, Siemens Medical Solutions Ultrasound Equipment GE Healthcare, Philips Healthcare, Trivitron CT Scanners GE Healthcare, Philips Healthcare, Siemens Medical Solutions Hematology TransasiaBiomedicals, Mindray, Beckman Coulter Cath Labs Allengers, GE Healthcare, Philips Healthcare Patient Monitoring L&T Medical, GE Healthcare, Philips Healthcare X-Ray Equipment 45.2 (11.0) Allengers, Carestream Health India, GE Healthcare Ventilators Maquet Medical, GE Healthcare, DraegerMedical ECG Equipment BPL Healthcare, Concept Integration, GE Healthcare Anesthesia Equipment GE Healthcare, Philips Healthcare, Maquet Medical M&A activity The Indian medical devices industry has witnessed increased deal activity in recent years as players try to gain access to foreign markets while also consolidating their position at home. At the same time foreign companies are increasingly entering India through acquisition or by setting up their own operations in the country. Several Indian medical device companies have also enhanced their competitiveness by joining up with international companies for research and development, technical innovations and for marketing the products of international players in India. Deal activity is expected to increase further in the future with foreign players taking more interest in the industry and Indian companies making more acquisitions abroad. Examples of recent deals include Opto Circuits making acquisitions in the US of businesses such as Cardiac Sciences and Unetixs Vascular. Global giants such as Philips, GE Healthcare and Siemens have made acquisitions in India in the mid to low end product segment to gain market share, and provide products across a multiple price range. For instance Philips has historically been in the premium segment, but to cater to emerging markets like India, China and Brazil, it has specifically introduced mid-segment priced products. With this in mind Philips India has in recent years acquired Meditronix and Alpha X-ray, two X-ray and imaging product manufacturing companies which cater for the mid-segment price point. Page 24