4th Annual Translational Medicine Symposium

1. 4th Annual Translational Medicine Symposium FEBRUARY 11 & 12, 2014 Dan LemaitreDan@whitepinemedical.com

2. Agenda • Medical Device Retrospect and Prognosis • The Demise of Traditional Venture Capital • What is An Innovator to Do?

3. Medical device industry revenue growth will remain tepid • Emerging market focus will siphon R&D spending required to fund new products • Traditional venture capital market is dead, hurt by prolonged development and approval cycles • Innovator options: • Run lean, particularly early-on • Strategics, although fraught with peril • Private company platforms that have scale/cash flow Executive Summary

4. A Brief History of, and the Outlook for,the Medical Device Industry

5. “Cost Plus” Reimbursement Prior to 1983 Industry revenue growth ~20%

6. Prospective Payment System Launched in 1983 Diagnostic Related Group slows industry growth to ~10%

7. “Failed” Clinton Reform Led to “Managed Care” Industry growth slowed to ~3% in part because….

8. FDA Raised the Regulatory Hurdle Bar …David Kessler effectively “shutdown” the FDA by demanding randomized prospective clinical trials for PMA devices

9. Industry Growth Peaked in 2003-2005 Cardiac Resynchronization Therapy (CRT) and Drug Eluting Stents (DES) lift industry growth to ~15%

10. Recalls, Safety Concerns Stymie Growth Industry growth now in the 2-4% vicinity

11. Disintermediation of Physicians & Vendors Traditional source of medical device innovation is Bedside to Bench which is now being disrupted by hefty scrutiny i.e. The Sunshine Act

12. Evidence Based (i.e. Cookbook Medicine)… Accountable Care Organizations will likely result in more “conservative” care under the guise of “patient safety”

13. …Where Less is More Surgeons, historically incentived to do more, will be motivated to do “better” with less

14. Physicians Staff Models Further Align Interests

15. Companies Shifting Focus to Emerging Markets

16. Which Is Apt to Be Profitless Prosperity

17. Industry growth will continue to be lethargic due to: • More conservative, evidence-based care • Alignment of physician and payers interests • Disintermediation of physician/vendor relationships • Emerging market focus will syphon R&D spending • Developed markets will further atrophy given lack of new products, pricing will worsen • Industry will eventually need to return to “new product roots” • Hence, a superb time to be developing new products Medical Device Industry Summary

18. Developing Products in a Brave New World

19. Traditional Venture Model is Broken • Historically, highest returns went to Series A investors: • Logical given higher risk profile of early stage • Series B investors provided “tasteful” step-up • Exit in 3-5 years with ~$50MM in total invested • Regulatory cycles lengthening, requiring higher levels of funding and multiple rounds • Inability to capture higher investment in pricing, hence returns have dwindled

20. Requisite FDA Bashing Slide

21. PMA Development Times > Than VC Fund Cycle

23. Returns Improving Mostly Due to Technology

24. Now in a “Vulture Capital” Climate Where…

25. …Liquidity Preferences Dictate Returns Last money in typically get a 2x return before earlier investors participate in an exit

26. As Such, Even the “Angels” are Late Stage

27. So What Is An Innovator To Do? It’s not enough to know which way the wind is blowing, you need to know what difference it makes

28. Option 1: Run Lean By Outsourcing

29. Option 2: Partner With Strategics

30. Strategics Not The Best “Early” Investors • Strategics don’t have ability to call “audibles” • Often don’t participate in follow-on rounds • Orphan deals created by senior executive turnover • Exit complicated if rights have been granted

31. Option 3: Private Company with Scale/Cash Flow

32. Medical device industry revenue growth will remain tepid • Emerging market focus will siphon R&D spending required to fund new products • Traditional Venture Capital market is dead, hurt by prolonged development and approval cycles • Innovator options: • Run lean, particularly early-on • Strategics, although fraught with peril • Private Company platforms that have scale/cash flow In sum…

33. Thank You Dan@whitepinemedical.com

34. Appendix

35. Medical Device Revenue Growth Source: JP Morgan

36. Revenue Growth Drives Valuations