Medical Equipment and Supplies Report 2013

A Clearwater Healthcare Team Report

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.

www.imap.com
EVERY BUSINESS DAY, SOMEWHERE IN THE WORLD, AN IMAP ADVISOR IS CLOSING AN M&A TRANSACTION

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

2 0 1 3

Ramesh Jassal

Senior Healthcare Analyst Clearwater Corporate Finance

Contents
Overview..............................................................4 Global market.....................................................6 US market..........................................................16 Indian market...................................................22

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 2ILs purchase of Corin, and Ambus 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 Corporations acquisition of Trauson Holdings Company for 480m; McKessons 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 worlds 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.

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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 2016. 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."

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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. 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. Implants for neurovascular purposes, electrical stimulations, neurovascular equipment, neuromodulation units, and medical devices for the treatment of neurological diseases. Dental equipment and supplies, dental implants and prosthetics, dental imaging systems, dental waxes and mouldings, dental laser systems, and any other dental

Cardiovascular

Neurovascular

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. 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. 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. 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. 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. 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.

Patient Monitoring Equipment & Therapies

Disposable Equipment & Supplies

General Equipment & Supplies

In Vitro Diagnostics, Supplies & Equipment

Ophthalmic Goods, Optical Instruments & Lenses

Page 5

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 worlds 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.

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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.

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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 2011. 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) Average deal size (m)

2011 443 2011 191 28,293 148

2012 330 2012 141 28,820 204 2012 133 7,393 56

Deals less than 500m (with values disclosed) 2011 Number of deals Transaction value (m) Average deal size (m) 181 10,370 57

*It is worth noting that deal values for only 43% of completed transactions were disclosed. Note: currency conversion used $1 = 0.625

Global medical equipment and supplies deals

60 60 50 50 Number of deals Number o f d eals 40 40 30 30 20 20 10 10 0 0 January /F February March January ebruary March
2011 2011 2012 2012

Global medical equipment and supplies deals

April April

May

May

June June

July July

August October August September October November /November D / December ecember

September

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In 2012 trade buyers remained the most active investors by volume with 288 deals during 2012, compared to 382 deals in 2011. Meanwhile, there were 42 private equity (PE) deals in 2012, compared to 61 in 2011.

Who bought medical equipment and supplies companies

Who brought medical equipment and supplies companies

450 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 Trade 61 42 382

Number f D eals Numbero of deals

288

Trade

PE

PE

2011 2011

2012 2012

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.

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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 ofSub-sector deals 2012 breakdown of deals

4% 4% 9%

2%

2012

General Equipment & Supplies

!General Equipments & Supplies

Patient Monitoring Equipment & Therapies Life Sciences Tools & Services

20%

(Pa5ent Monitoring Equipment & Therapies

Disposable Equipment & Supplies

Lifescience Tools & Services

8% 16% 10%

Orthopaedic Implants & Prosthetics In Vitro Diagnostics, Supplies & Equipment

"Orthopaedic, Implant & Prosthe5cs Disposable Equipment & Supplies

Ophthalmic Goods, Optical Instruments & Lenses

*In Vitro Diagnos5cs, Supplies & Equipment Dental

13%

14%

.Ophthalmic Goods, Op5cal Instruments & Cardiovascular Lenses

Neurovascular Dental

Sub-sector monthly breakdown of deals 2012

Sector breakdown of deals 2012

45 40 40 35 35
Number f deal s Number ofodeals
Neurovascular Cardiovascular Dental

30 30
25 25 20 20 15 15 10 10 5 5

Ophthalmic Goods, O

In Vitro DiagnosGcs,

Orthopaedic, Implan

Disposable Equipmen

Lifescience Tools & S

PaGent Monitoring E

General Equipments

January January February .February

March March

April April

May

May

June June

July July

August October August September October November .November December . ecember D

September

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

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M&A highlights
The 10 largest transactions contributed to around 22.4bn (77.6%) of total deal values in 2012. The standout trade transactions in 2012 were: Johnson & Johnson Synthes The largest deal by far was Johnson & Johnsons acquisition of Synthes, a global manufacturer of orthopaedic devices, for 12.7bn. As a result, Synthes will strengthen DePuys trauma line and its joint replacement offering by expanding the product range. The transaction was valued at 4.5x revenue and 10.3x EBITDA. 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 Agilents 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. The 10 largest transactions contributed to around 22.4bn (77.6%) of total deal values in 2012."

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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 2011. The 2012 EBITDA multiples averaged a 17x multiple, which is higher than 2011. 2012
Acquirer Johnson & Johnson Hologic Inc. EQT Partners AB Agilent Technologies, Inc. Asclepius Subsidiary Corporation Boston Scientific Corporation Fujifilm Holdings Corporation Thermo Fisher Scientific Inc. Linde AG Corning Inc. Target Synthes GmbH Gen-Probe Inc. BSN Medical GmbH Dako A/S Zoll Medical Corporation Cameron Health Inc. Sonosite Inc. One Lambda Inc. Air Products & Chemicals Inc. (Continental-European Homecare Business) Becton Dickinson and Companys Majority of Discovery Labware Unit Deal Value (m) 12,745 2,388 1,452 1,390 1,367 869 624 592 487 446 High Average Median Low EBITDA multiple 10.3 20.7 10.0 21.3 26.3 n.a 23.1 8.7 n.a n.a. 26.3 17.2 20.7 8.7 Sales multiple 4.5 6.6 2.6 6.7 3.9 n.a 2.8 5.1 2.8 n.a. 6.7 4.4 4.2 2.6

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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. 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.

Acquirer split 2012 Acquirer split 2012

US
US 17% 2% 2% 2% 3% 5% 8% 8% 53% France UK Germany Japan Sweden Netherlands China Other

France UK Germany Japan Sweden Netherlands China

Target split 2012

Target split 2012

US
US 23%

Other

Germany

Germany UK UK France 52%

France

2% 2% 3% 3% 4% 6% 5%

China China Sweden Sweden Japan

Netherlands Netherlands Japan Other Other

The majority of acquirers in 2012 came from the US with 53% of the deals.

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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 Danaher Corporation Chiron Holdings Inc. Thermo Fisher Scientific Inc. Endo Pharmaceuticals Holdings Inc. Thermo Fisher Scientific Inc. IVD Acquisition Corporation Dentsply International Stryker Corporation Galderma Holding AB Medtronic Inc. Target Beckman Coulter Inc. Kinetic Concepts Inc. Phadia AB American Medical Systems Holdings Inc. Dionex Corporation Immucor Inc. Astra Tech AB Boston Scientific Corporation's Neurovascular Intervention Business Q-Med AB Ardian Inc. Deal Value (m) 4,248 3,929 2,177 1,795 1,274 1,150 1,120 965 758 508 High Average Median Low EBITDA multiple 8.2 n.a. n.a 16.7 20.4 11.0 16.3 n.a. 10.1 n.a 20.4 13.8 13.7 8.2 Sales multiple 1.8 n.a. 6.7 5.6 4.9 4.9 3.2 n.a. 6.0 n.a 6.7 4.7 4.9 1.8

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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. 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. 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.

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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 2008. 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.

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%.

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."

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 2011. 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

Total deals Number of deals Total deals (with values disclosed) Number of deals Transaction value (m) Average deal size (m) Deals less than 500m (with values disclosed) Number of deals Transaction value (m) Average deal size (m)

2011 212 2011 86 18,531 215 2011 79 4,663 59

2012 174 2012 72 23,179 322 2012 67 5,195 78

It is worth noting that only 41% of completed transactions deal values were disclosed. Note: currency conversion used $1 = 0.625

US medical equipment and supplies deals

30 30 25 25

US medical equipment and supplies deals

Number of deals Number of deals

20 20 15 15 10 10 5 5 0 0

January February -February January 2011 2012

March March

April April

May

May

June June

July July

August September October November -November December -December August October September

2011

2012

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In 2012 trade buyers remained the most active investors by volume with 153 deals compared to 187 deals in 2011. Meanwhile, there were 21 private equity (PE) deals during 2012 compared to 25 in 2011.

Who bought US medical equipment and supplies companies

200 200

187

180 180 160 160 Number of deals

Number of deals 153

140 140 120 100 80 60

40 40 20 20 0 0 2011 2012 25 21 PE 60 80 120

Trade

Trade

PE

2011

2012

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. 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.

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.

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The orthopaedic implants & prosthetics segment is also under pressure with fewer deals compared to 2011. 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 3%

7% 14%
Therapies

General Equipments & Supplies Patient Monitoring Equipment & !General Equipments & Supplies Life Sciences Tools & Services Disposable Equipment &

6% 4% 6% 18%

(Pa5ent Monitoring Equipment & Therapies Lifescience Tools & Services

Supplies Disposable Equipment & Supplies Orthopaedic Implants "Orthopaedic, Implant & & Prosthe5cs Prosthetics

In Vitro Diagnostics, Supplies &

*In Vitro Diagnos5cs, Supplies & Equipment Lenses

13%

.Ophthalmic Goods, Op5cal Instruments & Equipment Dental Ophthalmic Goods, Optical

12%

17%

Instruments & Lenses

Cardiovascular

Dental

Neurovascular Cardiovascular
Neurovascular

Top 20 deals below 500m

Based on the available data, the top 20 deals below 500m averaged a 3.1x revenue multiple in 2012. 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. 2012
Acquirer Corning Inc. Haemonetics Corporation Bain Capital Hill-Rom Holdings Inc. Angiodynamics Inc. Danaher Corporation Covidien Plc Convatec Inc. Covidien Plc Teledyne Technologies Inc. Biomet Inc. Teleflex Inc. Steris Corporation Baxter International Inc. Ampersand Capital Partners and others Laboratory Corporation of America Holdings L-3 Communications Holdings Inc. The Cooper Companies Inc Rti International Metals Inc. Chart Industries Inc. Target Becton Dickinson and Company's Majority of Discovery Labware Unit Pall Corporation's Blood Collection, Filtration and Processing Assets Physio-Control Inc. Aspen Surgical Products Inc. Navilyst Medical Inc. Iris International Inc. Brrx Medical Inc. 180 Medical Holdings Inc. Superdimension Ltd Lecroy Corporation Depuy Orthopaedics Inc (Worldwide Trauma Business) Lma International NV's Assets US Endoscopy Inc. Synovis Life Technologies Inc. Bioventus LLC Medtox Scientific Inc. Danaher Corporation's Kollmorgen Electro-Optical Unit Origio A/S Remmele Engineering Inc. Airsep Corporation Deal Value (m) 446 351 310 258 224 210 208 198 186 186 178 176 172 165 159 153 133 122 115 114 High Average Median Low EBITDA multiple n.a. 8.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 7.7 n.a. n.a. 13.5 19.9 n.a. 16.2 n.a. 17.4 8.3 n.a. 19.9 13.0 13.5 7.7 Revenue multiple 3.1 2.6 1.1 3.3 n.a. 2.9 n.a. n.a. 10.0 1.3 n.a. n.a. 3.9 3.4 2.1 2.1 n.a. 2.9 1.4 n.a. 10.0 3.1 2.9 1.1

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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 units extensive product portfolio and established dealer network will significantly improve Corning Life Sciences offerings to customers and is a critical part of Cornings 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.

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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 Medtronics 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 2012. 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

UK Netherlands Germany China Sweden Other

US buyers acquiring overseas 2012

29% 39%

UK Netherlands Germany China Sweden

16% 3% 3% 10%

Other

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Indian market
Overview
The medical equipment and supplies market is estimated to have grown at a CAGR of 21% for the period 2007-11 and was worth approximately 4.7bn in 2011, just under 10% of the countrys 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 sectors 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"

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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 2001.

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.

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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 MRI Equipment HPLC Equipments Biochemistry Ultrasound Equipment CT Scanners Hematology Cath Labs Patient Monitoring X-Ray Equipment Ventilators ECG Equipment Anesthesia Equipment

161.8 147.4 132.4 112.5 97.9 94.5 69.5 54.5 45.8 45.2 34.7 24.2 23.0

18.9 24.0 12.0 17.9 12.7 10.0 14.2 25.0 13.0 (11.0) 20.0 7.6 12.0

Transasia Bio Medicals, BioMeriux India, Siemens Medical Solutions GE Healthcare, Philips Healthcare, Hitachi Medical Waters Corporation, Agilent Technologies, Shimadzu Transasia Bio Medicals, BioMeriux India, Siemens Medical Solutions GE Healthcare, Philips Healthcare, Trivitron GE Healthcare, Philips Healthcare, Siemens Medical Solutions TransasiaBiomedicals, Mindray, Beckman Coulter Allengers, GE Healthcare, Philips Healthcare L&T Medical, GE Healthcare, Philips Healthcare Allengers, Carestream Health India, GE Healthcare Maquet Medical, GE Healthcare, DraegerMedical BPL Healthcare, Concept Integration, GE Healthcare 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.

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Recent deal highlights: Trivitron DiaSorin In July 2012 DiaSorin, an Italian clinical diagnostics company, entered into a joint development agreement with Indian firm Trivitron Healthcare. The agreement provides an entry for DiaSorin into the Indian IVD market which is estimated to be worth 312m and is growing at a rate of 15%. DiaSorin holds 51% of the business and Trivitron the remaining 49%. Manipal Group Everist Genomics In May 2012 Everist Genomics, a US based manufacturer of monitoring and cancer diagnostic products, formed a joint venture with Manipal Group in India to gain greater share in the mobile monitoring devices market. Opto Circuits Innovint Aircraft Interior In February 2012 Opto Circuits announced that through its subsidiary Cardiac Science Corporation it would enter into a partnership with German-based Innovint Aircraft Interior for supplying Cardiacs Automated External Defibrillator (AED) to various aircraft manufacturers, including Airbus. Garuda Med Equipments Welch Allyn In 2011 Welch Allyn, a US manufacturer of diagnostic products and medical devices, announced that it planned to ramp up its presence in India. The company has a range of products such as stethoscopes, ophthalmoscopes, BP monitors, cardiopulmonary and thermometry devices. Welch Allyn has chosen Garuda Med Equipments as its exclusive marketing and distribution partner in India. Trivitron Hitachi In August 2011 Trivitron Healthcare entered into a partnership with Hitachi Medical Systems to market the latter's high-end medical imaging solutions in India. Trivitron now imports and sells Hitachi's high-end imaging products like CT, MRI, digital X-ray and ultrasound systems in the country.

2012 deal activity

Acquirer Target Deal Value (m)

Techtran Polylenses Ltd Nipro Corporation Siemens Ltd Trivtron Healthcare Private Ltd Barwale Group Leica Microsystems AG Fil Capital Advisors (India) Pvt Ltd Accel Management Company LLC Norwest Venture Partners and Accel Management Manipal Education And Medical Group (Memg) International India Pvt Ltd Peepul Capital Transasia Bio Medical Fidelity Growth Partners India Trivitron Healthcare Pvt Ltd CX Partners Transasia Bio-Medicals

Hemarus Therapeutics Ltd Tube Glass Containers Ltd Siemens Healthcare Diagnostics Ltd Kiran Medical Systems Ltd John Fowler Ophthalmics Pvt Ltd Labindia Instruments Pvt Ltd's Microscopy and Histopathology Business Xcyton Diagnostics Ltd Forus Health Pvt Ltd Perfint Healthcare Everist Genomics Inc. and Manipal Education and Medical Group (Memg) International India Pvt Ltd's MedicalTechnology Wholesaling Joint Venture Company in India Cura Healthcare Pvt Ltd Maxmat Trivitron Healthcare Private Ltd Ani Labsystems OY Sutures India Drew Scientific and JAS Diagnostics

n.a. n.a. 23 n.a. n.a. n.a. 2 3 n.a. n.a.

16 n.a. 22 13 23 n.a.

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Public Private Partnerships (PPP)

The market has seen an increasing number of partnerships between the Indian government and foreign players. For instance in the Madhya Pradesh and Gujarat states, GE Healthcare has set up diagnostic centres at select government medical colleges. In another example B Braun, in partnership with the state government of Andhra Pradesh, has set up 11 centres equipped with haemodialysis machines within medical colleges and hospitals to provide treatment to patients suffering from chronic kidney diseases.

Private Equity and Venture Capital funding

The Indian PE market for medical devices is in its infancy compared to the global scenario with only $120m invested by PE funds in the sector for the period 2008 to 2012. PE firms have typically focused on Indian hospital chains and related healthcare providers, but medical equipment is now increasingly becoming an area of interest, driven in part by expectations of consolidation in the industry.

Summary
International sales, joint ventures and M&A activity are becoming more frequent. In order to facilitate expansion, medical device companies are increasingly looking at developing economies as an opportunity for future growth. At the same time, Indian companies are also looking for global partners. The Indian medical devices market is expected to see increased deal activity over the next 12 months.

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