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MEDTECH 2014 Opening Keynote

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John Babitt, Partner, Life Sciences, Transaction Advisory Services, Ernst & Young LLP, presented at MEDTECH 2014 on The State of Change: A Look at the Evolving Healthcare Landscape and the Effect on Life Science Organizations Today and Tomorrow.

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Page 1: MEDTECH 2014 Opening Keynote
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John BabbitPartner, Life Sciences, Transaction Advisory ServicesEY

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ProgressionsNavigating the payer landscape

MEDTECH2014

Redefining Innovation in the Face of Healthcare Reform

Global Life Sciences

Report 2014

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A long tradition of industry insights

Progressions 2014Global life sciences reportNavigating the payer landscape

Beyond borders 2014Global biotechnology report

Pulse of the industry 2013Medical technology report

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Headlines

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Global medtech headlines

► The leading challenge facing medtech companies is to find ways to differentiate themselves and their products in an increasingly commoditized market.

► The search for growth takes a few new twists.

► Record fundraising – large debt offerings to fund stock buy-backs, M&A

► Venture backed capital increases and the return of the IPO market

► M&As including megadeals on the rise

► Inversions

► Current market trends point toward sustained M&A activity

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Overview: Follow the money2013 by the numbers

Global market cap

65%

Follow-ons raise

US$9.4b(Second

highest total since 2008)

IPOs raise US$3.5b

(Second only to 2000)

Broader market rally

Product successes

(led by a few US

commercial leaders)

Globalrevenues

10%(best showing

since GFC)

Global R&D 14%

(outpacing revenues for

first time since GFC)

Global net income 15%

Global numbers dominated by strong US performance

In Europe, Canada and Australia product and financing story not as strong; companies more cautious about R&D spending

Variance across key

markets

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Financial performanceBehind the numbers

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Source: Capital IQ and EY analysis

► The medical technology sector is weathering a perfect storm caused by three concurrent trends: the move toward value-based health care, growing regulatory pressures and resource constraints within the industry itself

► Med Tech’s customer base is shifting as payers, health systems and patients become more influential than they have been in the past. This shift undermines Med Tech’s fundamental business model. Companies must find new ways to create, deliver and capture value.

► Unfortunately, companies of all sizes face significant resource constraints precisely when they need to be investing in new kinds of innovation. Financing has become increasingly scarce for small companies.

► Although US continues to dominate the global Med Tech market, China and India have the highest expected growth rates

Global Med Tech/Dx Market TrendsLarge cap Med Tech trends reflect issues faced by pharma more than a decade ago

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

8.7%

7.5%

2.4%

4.6% 4.1% 4.5%

1.1%

3.9%

5.3%4.3%

Top 10 Medical device companies revenue growth story

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2012 20130

250

500

750 Chart Title

Employees (000s) +5%

US/EU financial performance Pure-play companies – 2013

2012 20130

5

10

15 Chart Title

R&D expense (US$b) +7%

2012 20130

50

100

150

200 Chart Title

Revenues (US$b) +5%

2012 20130

5

10

15

20 Chart Title

Net income(US$b) +16%

Source: Ernst & Young, Capital IQ and company financial statement data.

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Medical technology at a glance, 2012-13(US$b, data for pure-plays except where indicated)

GSK Q2’13 results

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Selected US medtech public company financial highlights by region, 2013 (US$m, % change over 2012)

GSK Q2’13 results

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US market capitalization relative to leading indices

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M&As in US and Europe

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Portfolio rationalization

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In both the US and Europe, biotech stocks outperformed broader indices► US market capitalization relative to leading indices

► In Europe, a similar trend. Year-over-year market capitalization of European biotechs increased 60% ( as of January 2013)

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Financial performance: The big pictureRevenues near US$100b

In US$b

Beyond borders − EY global biotechnology report 2014

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Financing: The big picture IPOs return to US, Venture holds steady

Beyond borders − EY global biotechnology report 2014

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Innovation capital rebounds in US & Europe

Beyond borders − EY global biotechnology report 2014

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In the US, IPOs bounce back to the future

0

5

10

15

20

25

30

35

40

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Amount raised Number of IPOs

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Am

ount

rai

sed

(US

$b)

Num

ber

of IP

Os

Beyond borders − EY global biotechnology report 2014

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Mergers & acquisitionsBiotechs buying, pharma in retreat

Beyond borders − EY global biotechnology report 2014

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In US, new drug approvals return to historic average

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Point of viewRedefining innovation

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A perfect stormThree trends are disrupting medtech

The move to value-based health care

Regulatory pressures

Resource constraints

1

2

3

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The move to value-based health care

Escalating costs

Budgetary pressures

Large unmet needs

Value-based health care:

►Comparative effectiveness research

►Health technology assessments

►Accountable care organizations

►Disease management programs

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Regulatory pressures

Proposed PMA process for Class III devices in Europe

US 501(k) process reform

Sunshine Act

Increased uncertainty impact on investment

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Resource constraintsInnovation capital in the US and Europe

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Medtech revenue growth has slowed, dragging down R&D spend…

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…leading to “lost” revenues of US$131 billion…

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…and leading to “lost” R&D spending of US$12 billion

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Healthcare budgets have stagnated for the first time in years

Gre

ece

Irela

ndIc

elan

dEst

onia

Portu

gal

Denm

ark

Spain

Unite

d Kin

gdom

Slove

nia

Czech

Rep

ublic

Italy

Austri

aO

ECDFr

ance

Austra

liaM

exic

oNet

herla

nds

Polan

dBel

gium

Ger

man

yNor

wayNew

Zea

land

Canad

aFi

nlan

d

Unite

d Sta

tes

Hunga

rySwitz

erla

nd

Slova

k Rep

ublic

Sweden

Isra

elJa

pan

Chile

Korea

-15%

-10%

-5%

0%

5%

10%

15%

Average annual growth in health spending across OECD countries in real terms, 2000-2011

2000-09 2009-11

Source: OECD Growth rates for Australia, Denmark, Japan, Mexico and Slovak Republic refer to 2009-10 instead of 2009-11Growth rates for 2009-11 are not available for Luxembourg, and Turkey.Growth rates for Chile calculated using the Consumer Price Index (CPI).

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Implications for the Life Sciences business model

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Life Science’s "new" customers:an expanding customer base

► Value-based health care► New incentives Payers

► Greater financial risk► More control over health

decisions

► Consolidation► Centralized purchasing

decisions

Patients

Hospital systems

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Expanding beyond traditional product offerings in three new ways

Beyond the product

► Services and solutions► Standalone offerings or

complementary to existing products

Beyond treatment

► Across the cycle of care► Prevention,

disease management, remote monitoring, etc.

Beyond the hospital

► Mobile products and services that keep patients out of the hospital

► "Health care everywhere"

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Expanding beyond traditional business models

Beyond the product

Beyond the hospital

Beyond treatment

GE Healthcare’s Transforming Cities campaignWorking with providers, payers and patients to monitor and improve health outcomes in selected cities’ populations

Baxter/Chinese National Institute for Hospital AdministrationDeploying sustainable care and delivery models for dialysis patients Medtronic/Cardiocom (acquisition)Medtronic’s moves into services by acquiring a telehealth devices company Covidien’s Sandman programImproving sleep disorder treatment with patient education and encouragement GE Healthcare’s Get Fit campaignVia behavioral economics, urging patients to adopt healthy lifestyles Medline’s Advancing Health Together programTools, services and education to help nursing facilities improve quality Proteus Digital HealthIngestible sensor inside pill to monitor adherence and key health indicators Cardiio Smartphone app that monitors heart rate using camera

Source: Ernst & Young, media reports

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The pace of change

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The pace of change is accelerating

3-5 years ago Today 3-5 years from now

Early debate, uncertainty about move to value

Sweeping reforms in US, Germany, France, UK, others

P4P spreads to other markets; specialty drug prices pressure on drug costs increases

Most people had never heard of “big data”

Growing number of analytics initiatives with large amounts of diverse data

Real-world data, prescriptive analytics pharma’s ability to control message

PI technologies were novelties

Increasingly common;Unobtrusive, non-invasive; payers starting to pay

Drugs increasingly competing with non-drug interventions, e.g., PI technologies

Much data opaque (cost, quality, relationships, clinical trial data)

Transparency (apps, govt. initiatives, “Bad Pharma”, industry responses)

Transparency scrutiny, pressure; Trust a source of competitive advantage

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smart cards

What’s ahead?In 3-5 years, health care could look significantly different

big data

optimal treatments

specialty drug costs

Value-based pricing

variation in care

transparency

pressure from payers

Consumerization

Even after the European economic crisis recedes, the pressure from payers will continue to increase. There simply isn’t enough money to pay for health care in theways of the past.Eduardo Sanchiz, Almirall

Value-based pricing and formal HTA processes are going to become much more visible in Switzerland.Thomas Szucs, Helsana Group

Payers may challenge today’s pricing environment, which allows for annual price increases on products.Adrian Thomas, Johnson & Johnson

Formularies will be replaced by “Population Health 2.0,” where new tools and big data will match individual patients to optimal treatments at the time of diagnosis.Colin Hill, GNS Healthcare

The drive for transparency will accelerate dramatically. Many are unprepared or simplyhoping it won’t happen, but it will — and it’s a game-changer.Jack Bailey, GlaxoSmithKline

Significant variation in care leading to poorer outcomes is just not going to be acceptable.Paul Bleicher, Optum Labs

US specialty drug costs — accounting for only 4% of spending today, but growing at 20% annually — will face unprecedented scrutiny.Robert Galvin, Equity Healthcare

Consumerization is coming sooner than most expect. More and more US employers are going to put workers on insurance exchanges, motivating patients to become engaged consumers.Romesh Wadhwani, Symphony Health Solutions

In the Netherlands, decisions that factor in cost-effectiveness — so far, a politically touchy matter — will become unavoidable and very real.Martin van der Graaff, Zorginstituut Nederland

For the first time, US patients will carry smart cards with all their health information on them — making it easy for providers to quickly access their medical histories.Rita Shane, Cedars-Sinai

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Non-Traditional Healthcare Player Transactions / Alliances

Broad TechnologyDiversified / Government /

Business ServicesMedia/Communications /

Information Services

Sele

ct

Pote

nti

al

Bu

yers

Str

ate

gic

R

ati

on

ale

Sele

ct

M&

A

/ P

art

ners

hip

s

EY

P

ers

pecti

ve

► While strategies may vary significantly, most broad Technology leaders are either actively trying to continue to build existing healthcare platforms or are evaluating the sector to determine appropriate entry point

► Leading multi-national / Diversified / Government companies will continue to view healthcare as a critical end market and should be active in evaluating acquisitions to further build their businesses

► Strategic approach to the healthcare sector has varied as large media / communication / information companies have been both sellers (e.g. Thomson / Walters Kluwer) and buyers (e.g. Verisk / Experian / Harris) in recent years

► IBM / Wellpoint’s JV to leverage Watson to develop evidence based protocols

► GE / Microsoft’s JV focus on healthcare infections and chronic case management

► Oracle’s acquisition of Phase Forward (2011)► Google’s failed Google Health initiative and

success with Google Flu trends► Lawson’s acquisition of Healthvision

Solutions (2010)

► Technology leaders with size and scale see the fragmented, high growth HCT industries as very attractive adjacencies

► Overlap with existing technology applications / capabilities coupled with expertise in technology service and consulting related solutions provide synergistic cross selling opportunities

► Healthcare remains an attractive market for traditional multinational / industrial companies due to growth dynamics relative to more mature business segments

► Businesses with strong service capabilities (e.g. BAH, SAP, Deloitte) are attracted to healthcare due to ability to utilize core consulting expertise to impact the highly complex and inefficient healthcare end market

► Media / Communications companies have traditionally viewed the healthcare sector as a natural end-market for their core businesses (e.g. Reed Elsevier, Thomson)

► Information Services companies have recently been aggressive in building healthcare segments via acquisition (e.g. Verisk, Experian)

► Verisk’s acquisitions of Bloodhound Technologies (2011) and MediConnect (2012)

► Experian’s acquisition of Medical Present Value (2011)

► Harris Corporation’s acquisition of Carefx (2011)

► Reed Elsevier’s acquisition of MEDai (2008)

► Multi-nationals have large healthcare IT segments built in part through acquisition:

► GE’s acquisition of IDX Systems (2005)

► Philips’ acquisition of VISICU (2007)

► Other Diversified / Government focused companies remain active healthcare acquirors:

► General Dynamics’ acquisition of Vangent (2011)

► ADP’s acquisition of AdvancedMD (2011)

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Surveying the payer landscape

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Understanding payers

Payers want cost containment and budgetary certainty

… they are less interested in outcomes-based approaches

but

Drugs are 10% of health care spending

… payers see drug costs as the biggest problem

but

Pharma is generally well aligned with payers on data and CER measures

… there is a disconnect on comparative trials

but

Payers are preoccupied with implementation challenges and need help

… pharma has a trust deficitbut

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Payers want cost containment and budgetary certainty

… but they are less interested in outcomes-based approaches

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Drugs are 10% of health care spending

… but payers see drug costs as the biggest problem

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Pharma is generally well aligned with payers on data and CER measures

… but there is a disconnect on comparative trials

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Payers are preoccupied with implementation challenges and need help

… but pharma has a trust deficit

88%

78%

57%

47%

43%

20%

15%

13%

42%

67%

75%

67%

67%

50%

50%

25%

Drug prices are a major driver of health care cost increases

Boosting drug adherence is critical for lowering health care costs

Pharma companies have data that is vital for measuring and improving outcomes

With beyond-the-pill services, pharma companies can be trustworthy partners

Pharma companies have data that is credible for measuring and improving outcomes

Pharma products are significantly differentiated from the standard of care

With beyond-the-pill services, pharma companies can be unbiased between their products and those of competitors

Pharma companies bring affordable products to market

Payers Pharma

Source: EY Progressions 2014 Payer Survey. Length of bars indicates percentage of respondents who strongly or somewhat agree with each statement

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Navigating through complexity

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A complex and fragmented landscape

The devil in the details► Different standards and implementation► Behavioral attributes

It’s all relative► Disease segments► Product types► Influence of other KOLs

We’re all payers now► Coverage Pricing Prescription► New “payers”: providers, employers, patients

The challenge: understanding and strategically approaching a large, fragmented market

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Personalized medicine

Value dossiers

AdherenceDecision support

m-healthPrescriptive

analyticsCapitated models

Drugs/devices Services and solutionsHealth care

delivery

Universal adoption Ad-hoc experiments Little/no activity

Where’s pharma/medtech?

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Payers and health care systems are changing rapidly. Focus on where the ball is going to be, not where it has been.

Make the right comparisons1

A complex, rapidly changing payer environment demands a strategic and comprehensive approach.

Approach payers strategically and comprehensively2

Build the complete picture, target the small share of patients driving the bulk of costs.

Develop data-driven insights and interventions 3

Payers want solutions that look across disease franchises, span the cycle of care and are unbiased between the products of different manufacturers.

Create customer-centric solutions4

Without trust, pharma’s data and solutions will get little traction with payers.

Rebuild trust through transparency5

Guiding principles for navigating the payer landscape

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Thank you

Stay tuned!

Download the report:ey.com/medtech

Participate in our blog:LifeSciencesBlog.ey.com

Follow us on Twitter:@EY_LifeSciences

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Pulse of the industry 2014:October 6th @ AdvaMed 2014

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