A Solution for Innovation - Bioprinting...Wohlers Report 2013 estimates that the worldwide AM industry for all primary products and services grew by 29% to $2.2 billion in 2012. It

September 5, 2013

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M O R G A N S T A N L E Y B L U E P A P E R

MedTech: 3D Printing A Solution for Innovation

MedTech is especially suited for 3D printing. 3D printing is not new, but improvements in printers and a growing portfolio of materials are making the technology much more relevant. In this Blue Paper, we explore how 3D printing is opening up an age of ‘personalised medical solutions’. Although the broader impact of 3D printing on traditional manufacturing may be limited near term, the potential patient and manufacturing benefits for MedTech are substantial. The sector accounts for almost 40% of patent applications for 3D manufacturing over the past two years – more than any other space.

Orthopaedics and Prosthetics look most promising short term. These subsectors are already using early-stage products and have real opportunities to boost revenues and cut costs. Longer term, research into printing functional organs is well under way – although most commentators agree that it will be at least 10 years before the technology is viable. We look in detail at the implications of 3D printing by subsector – in particular, we highlight Dentistry, where we think the impact will be increasingly significant with winners determined by how rapidly companies can adapt to the changing technology.

Our illustrative example for Smith & Nephew shows scope for upside. Orthopaedics could benefit from lower cost of sales and inventory, with ‘just-in-time’ manufacturing of customised implants. Costing data from AM technology supplier Arcam suggests a hip joint can be produced at ~65% of the cost of conventional methods. Conservatively, 25% lower costs would increase 2016 free cash flow yield from 8.4% to 11.4%, we estimate. A 15% improvement in inventory turn would add another 0.3%, for 11.7% free cash flow yield, and increase our DCF by up to 35%. Ultimately, the impact 3D printing has on S&N’s financials depends largely on how fast it can implement the technology available.

MORGAN STANLEY RESEARCH

G l o b a l

Michael K Jungling1

[email protected] +44 (0)20 7425 5975

Patrick A Wood, CFA1

[email protected] +44 (0)20 7425 4107

Yukihiro Koike2

[email protected] +81 (0)3 5424 5316

See page 2 for all contributors to this report

1 Morgan Stanley & Co. International plc+

2 Morgan Stanley MUFG Securities Co., Ltd.+

Read Capital Goods: 3D Printing – Don’t Believe (All) The Hype

by Ben Uglow, published September 5, 2013

Morgan Stanley Blue Papers focus on critical investment themes that require coordinated perspectives across industry sectors, regions, or asset classes.

M O R G A N S T A N L E Y R E S E A R C H

September 05, 2013 MedTech: 3D Printing – A Solution for Innovation

Global MedTech & Services

Europe

Michael Jungling1 +44 20 7425-5975 [email protected] Patrick Wood1 +44 20 7425-4107 [email protected]

US

David Lewis 2 +1 415 576-2324 [email protected] Steve Beuchaw 2 +1 212 761-6672 [email protected] Jonathan Demchick2 +1 212 761-4847 [email protected] James Francescone2 +1 212 761-3222 [email protected]

Japan

Shinichiro Muraoka3 +81 3 5424 5926 [email protected] Yukihiro Koike3 +81 3 5424-5316 [email protected]

Asia/Pacific (China)

Bin Li4 +852 2239-7596 [email protected] Yolanda Hu4 +852 2848-5649 [email protected]

Asia/Pacific (India)

Sameer Baisiwala5 +91 22 6118-2214 [email protected] Saniel Chandrawat5 +91 22 6118-2215 [email protected]

Latin America

Javier Martinez de Olcoz Cerdan6 +55 11 3048-6039 [email protected]

1 Morgan Stanley & Co. International plc+ 2 Morgan Stanley & Co. LLC

3 Morgan Stanley MUFG Securities Co., Ltd.+ 4 Morgan Stanley Asia Limited+

5 Morgan Stanley India Company Private Limited+ 6 Morgan Stanley C.T.V.M. S.A.+

See page 38 for recent Blue Paper reports.



M P A P E R O R G A N S T A N L E Y B L U E Table of Contents

Executive Summary 4

What is 3D Printing? 4 Why is MedTEch Suited to 3D Printing? 4 Where Does The Opportunity Lie? 5 Limitations to Opportunities 5

Medical Devices – AM Could Drive Innovation and Cost Savings 7

What is 3D Printing? 7 Market Size 7 Why is MedTech Suited? 7 Printing Technologies 8 Materials Available 9 Drawbacks 9 Patent Development – Medical Right Up There 9

Where Do Opportunities Lie? 11

Evaluation Framework 11 Size of Opportunity – Relative Analysis 12 Making the Selection 13 Example of AM Benefits 15

Opportunity or Risk? 17 AM Disruptive Example – Hearing Aids 18

AM Opportunities and Limitations by Sub-sector 20

Cardiovascular 20 Corrective Lenses 21 Dentistry 22 Dialysis 23 Diagnostic Imaging 24 Hearing & Hearing Devices 25 Hospital Supplies 26 Incontinence & Ostomy 27 In-vitro Diagnostics 27 Orthopaedics 27 Radiation Therapy 29 Wound Care 30 Other Areas 31 Japan - Implications for MedTech Space 32 Pharma Companies 33

Limitations to Opportunities 34

Regulatory Issues 34 State of Technology 34 Design and Training 35

Companies Currently Involved 36

3D Systems Corporation 36 Arcam 36 ExOne 36 Organovo 36 Stratasys 37

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Executive Summary

Over the past five years falling R&D productivity and government austerity measures have had a negative impact on organic growth and margins for the sector. In this Blue Paper, we explore whether 3D printing can increase R&D productivity through innovation and drive cost efficiencies going forward.

While 3D printing is not new, improvements in printers and a growing portfolio of materials is likely to make the technology much more relevant. We believe the MedTech sector could be one of the greatest beneficiaries of the technology, with clear patient and manufacturing benefits.

While we acknowledge that 3D printing is unlikely to have a material near-term growth or valuation impact on the MedTech sector, we aim to provide a detailed guide as to which device sub-segments are naturally more suited to the opportunity. We conclude that early-stage segments with high revenue or cost-savings opportunities are best placed. These include Dentistry (focus on restorative), Orthopaedic Reconstructive (hips, knees and small joints), Orthopaedic Trauma (cranio maxillofacial, nails) and Prosthetics. For investors willing to consider a two- to five-year view, we would also include categories such as Corrective Lenses, Advanced Wound Care and Stents. We look at the companies under our coverage, and highlight which, from a fundamental perspective, we think are more likely to benefit.

What is 3D Printing?

3D printing is often referred to as additive manufacturing (AM), which has been defined by the American Society for Testing and Materials (ASTM) in F42 as the process of joining materials to make objects from 3D model data, usually layer upon layer. Wohlers Report 2013 estimates that the worldwide AM industry for all primary products and services grew by 29% to $2.2 billion in 2012. It also estimates that revenues from AM systems and materials were ~$1bn last year, up 20%. AM services seem to be the larger segment at $1.2bn, up 37%. It is unclear, what the size of medical device segment is of the aforementioned $2.2bn market; although Wohlers Report 2013 estimates ~16%.

Why is MedTech Suited to 3D Printing?

We believe AM may play a significantly more important role in MedTech in future, thanks to the ability to provide personalised medicine and improved healthcare. Historically, methods were adopted to push “design to suit manufacturing” barriers. With AM, the focus is on “manufacturing for designs” and

implementing whatever features are needed to optimise the functionality of the device.

Patient Benefits

For patients, we see the following potential advantages (some of which are already in place):

Diagnosis & Therapy Choice – by using digital diagnostic imaging in conjunction with 3D printing, models can be used to help physicians diagnose disease.

Customised Medical Devices – the ability to custom make patient-specific medical devices is likely to broaden. This may include more customised solutions in dentistry, corrective lenses and orthopaedics.

Entirely New Solutions – AM may provide entirely new options for patients, such as organ replacement.

Manufacture Benefits

We see the following potential advantages for manufacturers, with some, again, already in practice:

Low Volume, High Value – most medical devices produced are relatively low volume, but sale value is high. Furthermore, most devices are small, with design complexities, for which small-scale AM manufacturing systems are especially suited.

Reduce Inventory – AM offers the opportunity to reduce working capital by moving towards a ‘just-in-time’ production system.

Reduce Waste – in some MedTech areas, materials used in production are expensive, with high levels of scrap. To make devices with precision could provide cost savings.

Other Savings – AM can manufacture an entire product in a single step by eliminating assembly stages. This eliminates tooling costs and should reduce labour costs.

Design Complexity – AM allows for design flexibility, and thus products can have a higher level of complexity. AM also opens up a multi-material possibility for improved microstructure.

New Growth Opportunities – AM should open up entirely new growth opportunities over the medium to long term, potentially including organ replacement using cell printing.

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Patent Filings – Suggests Strong Future

The second highest number of patent filings involving 3D printing has been in the medical field, at 29% (after manufacturing at 38%). Based on patent applications, medical has ranked first over the past two years. The patent activity, in our view, is indicative of the suitability of AM technology for the MedTech industry, and we believe it could be a strong beneficiary over the medium term.

Exhibit 1

3D Patent Applications – Medical Dominates

Sector 2011 2012

Medical 34% 38%

Manufacturing 33% 38%

Technology 18% 15%

Materials 10% 6%

Tooling 2% 2%

Business methods 1% 1%Source: Castle Island Co, Morgan Stanley Research

Where Does The Opportunity Lie?

We have developed an evaluation framework to help indentify MedTech areas that could benefit most from the AM opportunity. The framework is relatively simple, and looks at ‘Early vs. Late Stage’ and ‘Size of Opportunity’. The sweet spot, in our view, is ‘Early Stage’ medical technology, which relates to devices that should benefit from AM over the short term.

Exhibit 2

Faster Access to AM Opportunity in Early-Stage MedTech – Early, Mid & Late Cycle Comparison

Early Stage (Now) Mid Stage (2-5 Years) Late Stage (+10 years)

3D Models Corrective Lenses Advanced Wound Care

Bench-top Testing Cochlear Implants Blood Vessels

Crowns & Bridges General Capital Equipment Bone replacement

Dental Implants Incontinence Dialysis (kidney replacement)

Dentures Ostomy Aesthetics

Diagnostic Imaging Stents Heart Valves

Exoskeleton Heart Replacement

Hearing Aids Diabetes (pancreas replacement)

Orthodontics

Orthopaedic Recon

Orthopaedic Spine

Orthopaedic Trauma

Prosthetics Source: Morgan Stanley Research

An equally important investment consideration is the size of the opportunity. Given that AM can offer both revenue and cost savings, we include both in our assessment. Sub-segments that we think are most attractive for AM include Dentistry, Orthopaedic Recon, Orthopaedic Trauma and Prosthetics. Least attractive areas include Cochlear Implants, Hearing Aids,

Exoskeleton, Orthopaedic Spine and General Capital Equipment. The most significant longer-term opportunity relates to the potential printing of spare body parts, such as kidneys or hearts, which according to many commentators is over 10 years away.

Which Companies Could Benefit the Most?

From a European perspective, we believe Smith & Nephew could be one of the main beneficiaries of advances in AM technology, with material exposure to Orthopaedic Recon and Trauma. We use S&N in an illustrative example below.

Limitations to Opportunities

We see three major limitations to broad and rapid uptake of AM in MedTech. 1) The existing regulatory framework will need to evolve with emerging technology, which adds a layer of uncertainty. 2) While there have been strong gains in AM in recent years, meaningful technology shortcomings remain. 3) AM is driven by software, which is typically complex and provides a barrier for broader adoption of the technology.

Smith & Nephew: Illustrative Example

We believe the orthopaedics sector could benefit from AM via lower inventory (manufacturing a customised implant ‘just in time’) and reduced cost of sales. Costing data from AM technology supplier Arcam suggests a hip can be made for 35% less than conventional methods. In our Smith & Nephew example, we assume the company can cut its Orthopaedics COGS by 20% and improve inventory turn by 15%.

COGS – we estimate that a 25% reduction in COGS would expand the free cash flow yield from 8.4% to 11.4% in FY16. The 3.1% improvement equates to a ~35% increase in free cash flow yield. We assume that incremental capex on AM technology can be offset by a fall in capex on the traditional manufacturing process.

Inventory Turn – a 15% improvement in inventory turn boosts Smith & Nephew’s free cash flow yield (including the COGS benefit) by a further 0.3 percentage points to 11.7% in FY16e. The 3.4% improvement is a 41% increase in the cash yield.

Based on a simplistic DCF model, the increase in free cash flow generation adds up to 35% to Smith & Nephew’s valuation. Our discussions with the company suggests that it is exploring the opportunities AM has to offer over the medium to long term. Ultimately, the impact 3D printing has on S&N’s financials depends largely on how fast it can implement the technology available.

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Exhibit 3

MedTech – Sector and Company Overview

Segment Companies Formal Strategy Opportunity or Threat Current Usage Pros and Cons Eventual Significance Cardiovascular Sorin Aware of technology

and using it where appropriate

Accelerates design process

Prototyping for heart valves and CRM housing

Lack of accuracy, absence of implantable polymers limits opportunity

May eventually print artificial heart valves, hearts and blood vessels

Corrective Lenses

Essilor Aware of technology May be more of a threat Little Lack of accuracy limits the manufacture of customised corrective lenses

May eventually be able to print corrective lenses and frame in one go

Dialysis Fresenius Medical Care

Aware of technology Not relevant Small amount of prototyping

Not relevant May eventually print artificial kidneys

Dentistry Nobel Biocare, Straumann

Aware of technology More of an opportunity than threat

Prosthetic prototyping and temporaries

Lack of accuracy and speed for ceramic crowns and bridges

May eventually become the standard of care for ‘chairside’ systems

Hearing Aids GN, Sonova, William Demant

Strong user of technology

Good for custom shell manufacturing

In-the-ear hearing aids

Good accuracy, simple, cost effective

May be able to print a large amount of a hearing aids, including electrics, in one go. Smaller batteries.

Hospital Supplies

Fresenius SE Not relevant Not relevant Not relevant Not relevant Not relevant

Incontinence & Ostomy

Coloplast Aware of technology Not relevant Small amount of prototyping

Too slow May eventually be able to print body parts to get around the medical condition

In-vitro Diagnostics

bioMerieux, Diasorin Aware of technology Not particularly relevant Small amount of prototyping

Not particularly relevant Not that relevant

Orthopaedics Smith & Nephew Aware of technology and exploring opportunities

More of an opportunity than threat

Customised cutting blocks

Customisation, just-in-time production, lower inventory and COGS reduction

Custom implants may become standard

Prosthetics Ossur Aware of technology and using it where appropriate

More of an opportunity than threat

Prototyping and design

Increased speed to market May be able to move into full production use as the technology develops

Radiation Therapy

Elekta Aware of technology Not particularly relevant Stereotactic masks and shells

Not particularly relevant May eventually be able to remove cancerous tissue and replace with artificial tissue

Wound Care Smith & Nephew Aware of technology More of an opportunity than threat

Little Printing skin could help with complex wounds

For complex wounds such as diabetic foot ulcers or burn victims, printing tissue could provide additional solutions

Source: Company Data, Morgan Stanley Research

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Medical Devices – AM Could Drive Innovation and Cost Savings

Where we are today:

– What is 3D printing

– Market size

– Why is MedTech suited

– Printing technologies

– Materials available

– Drawbacks

– Patent development

What is 3D Printing?

3D printing is often referred to as additive manufacturing (AM), which has been defined by the American Society for Testing and Materials (ASTMN) in F42 as the process of joining materials to make objects from 3D model data, usually layer upon layer. Exhibit 4 provides an illustrative example of a 3D printer creating a human heart.

Exhibit 4

3D Printer – Illustrative Example

Source: Christopher Barnatt, explainingthefuture.com

ASTM is a globally recognised leader in the development and delivery of international voluntary consensus standards, and today some 12,000 ASTM standards are used around the world.

Market Size

Wohlers Report 2013 estimates that the worldwide AM industry for all primary products and services grew by 29% to $2.2bn in 2012. It also estimates that revenues from AM systems and materials were ~$1bn in 2012, up 20% year on year. AM services seem to be the larger segment at $1.2bn, up 37%. There is also a secondary market, which includes tools produced directly from AM technology. Over a longer period, Wohlers Report 2013 estimates that the AM industry was around $500mn in value in 2000, which equates to a CAGR of 14% for the period ended 2012. At present, AM is being widely used to build physical models, whether prototype or final, patterns, tooling components and production parts in a wide variety of materials. It is unclear, what the size of medical device segment is of the aforementioned $2.2bn market; although Wohlers Report 2013 estimates it at ~16%.

Why is MedTech Suited?

We believe AM could become very relevant for Medical Technology as it can provide better healthcare through personalised medicine and improved patient outcomes. Historically, methods were adopted to push “design to suit manufacturing” barriers, while with AM it is more about “manufacturing for designs”, implementing whatever feature is needed to functionally optimise the device.

Patient Benefits

For the patients, we see the following potential advantages (and in some instances, this is already happening):

Diagnosis & Therapy Choice – by using digital diagnostic imaging technology in conjunction with 3D printing, models can be used that will help physicians to diagnose disease. This can be especially relevant with more complex structural problems, such as those found in heart disease or orthopaedic spine.

Customised Medical Devices – the ability to custom-make patient-specific medical devices is likely to broaden going forward. This may include more customised solutions in areas such as dentistry, corrective lenses and orthopaedics.

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Entirely New Solutions – 3D printing may someday provide entirely new options for patients such as organ replacement, and could open up entirely new markets in areas such as cardiology, diabetes and dialysis.

Manufacturer Benefits

For medical device manufacturers, we see a number of opportunities (and in some instances this has already started):

Low Volume, High Value – most medical devices produced are relatively low volume/small scale, but the value generated from the sale is relatively high. Furthermore, most medical devices are small, with design complexities, for which small-scale AM manufacturing systems are especially suited. While we believe this to be true for most areas of MedTech, we observe two exceptions: custom-fit hearing aids and dental copings for crowns and bridges, where many million units are produced annually.

Reduce Inventory – medical device companies typically carry high levels of stock, among other things to cater for the different sizes needed. The opportunity to move more towards a ‘just-in-time’ system and reduce working capital is interesting, especially in areas such as orthopaedics. We would argue that working capital can be reduced materially with AM over time.

Reduce Waste – in some areas of medical devices, materials used in the production process are expensive, with high levels of scrap. The ability to make medical devices precisely could provide cost savings opportunities, especially with faster and more efficient AM technology.

Other Savings – AM can manufacture an entire product in one single step by eliminating assembly stages. This eliminates tooling costs and should reduce labour costs.

Design Complexity – AM allows for great design flexibility and thus products can be designed with a higher level of complexity. This, for instance, could include the production of more porous surfaces, which are preferred in orthopaedic implants and that may not be possible with current manufacturing techniques. Furthermore, AM could offer multi-material possibilities when using powdered material; this functionality takes advantage of different materials’ properties to improve the microstructure.

New Growth Opportunities – AM could open up entirely new growth opportunities over the medium to long term, including organ replacement using cell printing.

While 3D printing in MedTech is still in its infancy, we feel the ability to offer more patient-specific solutions could prove a disruptive technology for some companies and an opportunity for others. Later in the report, we provide more detail on how relevant 3D printing is today among various sub-sectors and where the technology may be heading going forward.

Example of Cost Effective Production

Our review of the literature shows that more and more medical technology companies are recognising the benefits of AM. As an example, we cite Andreas Hettich GmbH, a manufacturer of centrifuges, where the process is used for product development and production. As a result, the company was able to increase the value of its products and lower production costs. The typical production volume of the company’s centrifuges is between 10 and 1,000 units per year. Hettich invented and patented a new type of centrifuge that enables the sedimentation and separation of blood components in one device. The ROTOMAT consists of a drum motor with six containers and drip trays. The containers have a complex geometry and are subject to high rotational speeds with acceleration forces up to 1,200g. Manufacturing the container components using conventional methods required complex tools and time-consuming assembly procedures. After a comprehensive technical evaluation, Hettich decided to change its method for producing centrifuge housings, using AM. While the cost of producing the modified component was slightly higher, the company saved the costs for an entire set of tools. Reduced assembly and logistics costs provided further cost savings. If required, AM enables further design modifications or product variants to be implemented quickly at minimal cost.

Printing Technologies

While we do not intend to go into the specific details of various technologies available1, we provide a brief overview of the main technologies available today. A useful guide is the various processes highlighted by the ASTM F42 committee and their key documents such as F2792 “Standard Terminology for Additive Manufacturing Technologies”:

1 For more detail, please see ‘Don’t Believe (All) The Hype’, by Ben Uglow, September 5, 2013

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Exhibit 5

3D Printing Processes

Process DescriptionBinder Jetting A liquid bonding agent is selectively deposited to join

powder materials Directed Energy Deposition

Focused thermal energy is used to fuse material by melting as they are being deposited

Material Extrusion Material is selectively dispensed through a nozzle or orifice

Material Jetting Droplets of build material are selectively deposited

Sheet Lamination Sheets of material are bonded to form an object

Vat Photopolymerisation

Liquid photopolymer in a vat is selectively cured by light activated polymerization

Powder Bed Fusion Thermal energy selectively fuses regions of a powder bed

Source: ASTM, Morgan Stanley Research

From our review of medical device literature, the more popular MedTech processes include stereolithography for medical models, whereby a controlled laser is used to cure a photopolymer resin to shape the product from a 3D CAD model. Other popular methods include using a laser to heat and melt fine particles in a powder bed; dental companies prefer to use this laser system because of the fine, detailed nature that is possible. Some systems use an electron beam as the energy source as this is usually faster, but the finish is less compelling. With some medical devices such as orthopaedic implants, a rough surface is desired, which is why some manufacturers have selected electron beam melting (EBM). While AM can show feature detail and surface finish similar to metal castings, it cannot match the surface quality of CNC-machined parts.

Materials Available

Materials currently available for 3D Printing fall into three high level categories: plastics, metals and ceramics or derivatives.

Plastics Plastics appear to be the most popular material for 3D Printing and can be selected for the functional need in medical devices. Properties to consider include biocompatibility, strength, colour/transparency and sterilisation properties. Plastics can typically be classified into two groups: thermoplastics or thermoset plastic. Thermoplastics retain their properties and can be repeatedly melted, hardened and re-melted. We would argue that in many areas of medical device usage, the property of re-melting is less useful. With thermoset plastics the object is permanently set and cannot be re-melted.

Metals The use of metals has been broadening over the years, and medical device suppliers can chose from a wide range of inputs. Historically, the most used metals from a biocompatibility perspective have been titanium or titanium alloys, cobalt-chrome and stainless steel, all of which are

available. Other materials available but not used widely in medical devices are aluminium alloys, nickel-based alloys, copper-based alloys, gold and silver.

Most 3D Systems that build metal parts melt the materials that achieve close to 100% density. The topic of density is important since less dense material is more prone to fracture toughness and may fatigue earlier. This is an important consideration for implantable medical devices that are load bearing, such as in orthopaedic trauma.

Ceramics Ceramic materials and blends are offered by a number of manufacturers. From a MedTech perspective, biocompatible materials are perhaps of the higher interest, given their suitability for internal use. For instance, ceramics are currently used in joint replacement.

Other Materials New biocompatible materials such as bio-stable resins and bio-degradable composites (comprising polyester/polyether oligomers) can be used easily in AM machines. Other materials that are available include polymeric materials such as PEEK (high performance thermoplastic), which have been used in orthopaedic spine for some time, or FRC (fiber reinforced composite). The FDA very recently approved the first non-metal 3D printed polymer for human implantation, namely the OsteoFab Patient Specific Cranial Device from Oxford Performance Materials. In this instance, an MRI scan is used to acquire the exact shape of the patient’s skull in order to print the best-fit implant.

Drawbacks

While AM can offer a wide range of benefits, there are several weaknesses. At a high level this includes material limitations (although most materials needed in medical devices are now available), accuracy (room for improvement), roughness (requires an additional process to produce smooth surfaces), cost and speed of production, which may limit the uptake over the medium term. We foresee improvements in all of these areas over the medium term.

Patent Development – Medical Right Up There

Data collected by Castle Island Co. and Wohlers shows that the second largest AM related patent filings have been in the Medical field at 29%, after Manufacturing at 38% (see Exhibit 6). In terms of patent applications (see Exhibit 7) Medical has ranked no.1 for the past two years. This patent activity, in our view, is indicative of the suitability of AM for MedTech industry, and we expect the sector to be a key beneficiary of 3D Printing technology over the medium term.

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Exhibit 6

3D Printing Patents Issued – Medical Ranks 2nd Highest After Manufacturing

Sector 2006 2007 2008 2009 2010 2011 2012

Manufacturing 41% 37% 43% 41% 34% 34% 38%

Medical 24% 16% 18% 17% 25% 31% 29%

Technology 24% 27% 19% 26% 26% 22% 19%

Materials 7% 14% 14% 12% 10% 9% 10%

Tooling 1% 3% 2% 1% 4% 3% 2%

Software 1% 1% 1% 1% 0% 1% 1%

Business methods 1% 1% 1% 1% 1% 0% 1%

Utility 1% 0% 3% 1% 0% 0% 1%Source: Castle Island Co. Wohlers Report 2013

Exhibit 7

3D Printing Patent Applications – Medical Ranks Top, Ahead of Manufacturing

Sector 2006 2007 2008 2009 2010 2011 2012

Medical 22% 25% 32% 28% 35% 34% 38%

Manufacturing 45% 40% 36% 37% 33% 33% 38%

Technology 16% 19% 19% 22% 17% 18% 15%

Materials 12% 11% 9% 9% 12% 10% 6%

Tooling 2% 2% 2% 0% 0% 2% 2%

Business methods 2% 1% 1% 2% 1% 1% 1%

Utility 1% 2% 1% 1% 1% 1% 1%

Software 1% 1% 0% 1% 1% 1% 0%Source: Castle Island Co. Wohlers Report 2013

Exhibit 8

3D Printing – Process / Material Matrix

Material extrusion Material jetting Binder jetting Vat

Photopolymerisation Sheet lamination Powder bed fusionDirected energy

deposition

Polymers, polymer blends √ √ √ √ √1 √

Composites 22 √ √ √ √

Metals √ √ √ √ √

Graded/hybrid metals 3 3 √ √

Ceramics √ √ √

Investment casting patters √ √ √ √

Sand moulds and cores √ √ √

Paper √ Source: Wohlers Associates. (1) The sheet lamination system from Solido, which is longer available commercially, used PVC. (2) Includes filled materials. (3) Hybrid materials are most typically produced using ultrasonic additive manufacturing. Graded materials are produced with directed energy deposition systems.

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Where Do Opportunities Lie?

To maximise returns from emerging AM MedTech opportunities, we believe it is important to be selective when choosing the sub-segments to invest in. To rank the most compelling sub-sectors, we provide a framework that looks at early versus late-stage product cycles and the size of the opportunity. Early-stage medical devices should give investors access to the 3D benefits more quickly, while the size of the opportunity helps to determine the relevance to the sub-sector at hand. We conclude that the areas investors should be focusing on are Dentistry (focus on restorative), Orthopaedic Reconstructive (hips, knees and small joints), Orthopaedic Trauma (cranio maxillofacial, nails) and Prosthetics. For investors who are also willing to consider a two- to five-year view, we would also include categories such as Corrective Lenses, Advanced Wound Care and Stents.

Evaluation Framework

Our evaluation framework aims to identify MedTech areas that could benefit the most from the AM opportunity. The framework looks at two key characteristics:

Early versus Late Stage – we believe that medical devices can be categorised as “early” or “late” stage. We feel this categorisation is important since companies that operate in the “early stage” are likely to benefit from the potential AM printing opportunity sooner; and

Size of Opportunity – of equal importance is the size of the AM opportunity for the medical device category. We define the opportunity as broadly as possible and include revenues, costs and working capital benefits. We feel this broad definition is appropriate given that AM has the potential to provide benefits to a company’s P&L, Balance Sheet and Cash Flow. Given that AM in MedTech is still in its infancy, making this prediction requires a degree of guesswork.

Early Stage – Opportunity is Now

We believe early-stage medical technology relates to devices that can benefit from AM over the short term, with no material bottlenecks. This could relate to many different factors, such as: a] availability of appropriate, reliable and efficient AM machines and materials to make the medical device; b] a benign regulatory environment that allows for quick product approval times – as a general rule this applies to medical devices that undergo a 510k approval process (equivalent) versus something that is substantially new and requires a PMA; and c] not R&D intensive nor requiring long-term clinical trials.

In our view, examples of early-stage medical device categories are dentistry (crowns, bridges, implants, orthodontics) where prosthetic teeth can be printed to suit the patient’s needs, hearing aids where customised shells for in-the-ear solutions can be made, Orthopaedic hips, knees, trauma and spine. Other areas include Diagnostic Imaging, 3D models, Bench-top Testing and Incontinence and Ostomy.

Mid Stage – Opportunity Increases Over Next 2-5 Years

We define the mid stage as an opportunity that is not as immediate as early stage and requires another two to five years of investment before the opportunity materialises. Areas that may fall into this category include Corrective Lenses, Cochlear Implants, General Capital Equipment and Stents.

Late Stage – Opportunity Likely to Take +10 Years

This relates to medical devices where there are material bottlenecks to get AM-derived products to the market. For example, in some areas current AM technology is inadequate – including having the appropriate material. We would argue that most of the categories in this segment relate to the organ replacement opportunity, which appears still in the embryonic stage, with many more years of costly research ahead before a reliable and functional product is available. Once a reliable product has been created, regulatory scrutiny is likely to be exceptionally high, requiring large clinical trials over many years to demonstrate that the technology is safe. Examples of late stage opportunities include Blood Vessels, Bone Replacement, Aesthetics, Kidney Replacement, Heart Valves and total Heart replacement, Pancreas and Liver replacement.

Little Opportunity

Areas where we think AM will have little direct impact include Biosciences, Clinical Nutrition, Defibrillators, Injectable Generics, IVD, Pacemakers, Radiation Therapy and Traditional Wound Care. There are likely to be indirect impacts, which we discuss below, such as perhaps a reduced need for defibrillator or pacemakers should it be possible to print fully functioning 3D printed hearts.

Stocks to Focus on – Early vs. Late Stage

Among the stocks under coverage, we feel the areas that are likely to be impacted the earliest by AM are:

11



Exhibit 9

Early, Mid & Late Cycle Comparisons

Early Stage (Now) Mid Stage (2-5 Years) Late Stage (+10 years) Little Opportunity

3D Models Corrective Lenses Advanced Wound Care Biosciences

Bench-top Testing Cochlear Implants Blood Vessels Clinical Nutrition

Crowns & Bridges General Capital Equipment Bone replacement Defibrillators

Dental Implants Incontinence Dialysis (kidney replacement) Injectable Generics

Dentures Ostomy Aesthetics IVD

Diagnostic Imaging Stents Heart Valves Pacemakers

Exoskeleton Heart Replacement Radiation Therapy

Hearing Aids Diabetes (pancreas replacement) Traditional Wound Care

Orthodontics

Orthopaedic Recon

Orthopaedic Spine

Orthopaedic Trauma

Prosthetics Source: Morgan Stanley Research

Dentistry – in a European context it is Nobel Biocare and Straumann; in a US context Dentsply2 and Invisalign.

Hearing Aids – in a European context it is GN Store Nord, Sonova and William Demant.

Orthopaedics – in a European context it is Smith & Nephew. US companies include Stryker and Zimmer and to some extent Medtronic3.

3D Models – there are no stocks under our coverage that are noteworthy.

Size of Opportunity – Relative Analysis

We feel an equally important investment consideration as “Early vs. Late Stage” medical devices is the size of the opportunity. When defining the “Size of Opportunity” we make the following important points:

Relative Size – when sizing the opportunity we are referring to the opportunity relative to the existing market of a company today and not the absolute opportunity.

Revenue and Costs – on offer are both revenue and cost savings opportunities. In some instances, the ability to reduce costs may be more significant than being able to generate revenues from a new innovative product line. Although AM is still relatively new, we believe the greater opportunity for medical devices may be on revenues rather than costs.

2 Covered by Steve Beuchaw 3 Covered by David Lewis

Disruptive Risk – in our forecasts, we are assuming that all incumbents in the various sub-segments will take advantage of the AM opportunity. In reality, some companies will be late adopters and as such the AM opportunity could turn out be a risk, especially if new entrants offer disruptive products. We address disruptive risk later in the report.

High Opportunity – Score of 8 or above

We have defined High Opportunity, to which we apply a score of 8/10 or above, as including heart replacement, crowns & bridges (moving towards a customised patient-specific system), dialysis (kidney replacement compared to hemodialysis or peritoneal dialysis), heart valves (rather than using animal-based or mechanical valves), diabetes (pancreas replacement rather than taking insulin shots) and bone replacement (part of Orthopaedics). These relate to virtually all revenue opportunities from improved technology. Within the high opportunity segment, we feel cost savings are likely to play less of a role.

Medium Opportunity – Score of 5-7

We score medium opportunity at 5-7/10 and this includes orthopaedics recon (hips, knees, small joints), blood vessels (for use in occluded vessels or for transplants), corrective lenses (e.g. printing the frame and lens in one go), dentures, aesthetics, orthopaedic trauma (including CMF to repair missing parts of the skull), advanced wound care (especially printing living skin tissue for burns, diabetic ulcers and pressure sores), prosthetics (customised solutions for people who have lost upper and lower limbs) and stents. For the medium-term opportunity, we feel the benefits are likely to be a combination of product innovation and cost savings.

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Exhibit 10

Size of Opportunity

Segment Size of Opportunity (1 - low; 10 = high)

Heart Replacement 10

Crowns & Bridges 9

Dialysis (kidney replacement) 9

Heart Valves 9

Diabetes (pancreas replacement) 9

Bone replacement 8

Blood Vessels 7

Orthopaedic Recon 7

Corrective Lenses 6

Dentures 6

Aesthetics 6

Orthopaedic Trauma 6

Advanced Wound Care 5

Prosthetics 5

Stents 5

Dental Implants 4

Exoskeleton 4

Orthodontics 3

Bench-top Testing 2

Diagnostic Imaging 2

General Capital Equipment 2

Orthopaedic Spine 2

3D Models 1

Cochlear Implants 1

Hearing Aids 1

Incontinence 1

Ostomy 1

Biosciences 0

Clinical Nutrition 0

Defibrillators 0

Injectable Generics 0

IVD 0

Pacemakers 0

Radiation Therapy 0

Traditional Wound Care 0Source: Morgan Stanley Research estimates

Low Opportunity – Score of 4 or below

We rate low opportunity medical devices as four or lower out of 10, which in our view includes dental implants (e.g. customisation or patient specific implants may not be that relevant), exoskeletons (casts for broken bones, especially if they require digital imaging), orthodontics (customisation is useful, but may be more of a niche product), bench top testing, diagnostic imaging (CT, MRI, PET), general orthopaedic spine (pedicle screws, plates, spacers), 3D models, hearing aids (shell manufacturing benefits from 3D printing have to a large degree already been exhausted) and incontinence & ostomy (customisation less relevant). Similar to the “medium opportunity”, we feel the opportunity is a combination of product innovation and cost savings.

Probably Irrelevant

We also have a category of sub-segments where AM is unlikely to have a noticeable impact, which includes biosciences (blood plasma, IVIG, Factor VIII), clinical nutrition, IVD, cardiac rhythm management (pacemakers and defibrillators), radiation therapy and traditional wound care.

Making the Selection

To help identify sub-segments within medical devices that can meaningfully benefit from AM, we use a scatter diagram (see Exhibit 11) that plots “Early vs. Late Stage” against the size of “Size of Opportunity”. We see the most attractive combination as “Early Stage” with “High Opportunity”; the opposite holds true for the least attractive category, which we believe is “Late Stage” with “Low Opportunity”.

Most Attractive Sub-segments

These segments include dentistry (crowns, bridges, dentures), orthopaedic recon, orthopaedic trauma, and prosthetics. While more details are provided later in the report, we highlight orthopaedic reconstructive as a brief example, where customised hip and knee joints in conjunction with lower manufacturing costs and reduced working capital could provide real upside for investors over the short to medium term.

Least Attractive Sub-segments

These segments include cochlear implants, hearing aids, exoskeleton, orthopaedic spine and general capital equipment. For these segments, we do not expect AM to have any material benefits with respect to revenues or cost savings. For example, within hearing aids AM has been used for the custom shell manufacturing process for well over five years, and thus the cost savings opportunity is already reflected in the P&L. In general capital equipment, we see it as unlikely that AM will provide product innovation or lower production costs for areas such as hospital beds, heart-lung machines, anaesthesia machines and so on.

Interesting Areas

We also highlight some potentially interesting areas that may have huge potential but are subject to high levels of risk and long dated. This category is typically associated with 3D printing of spare body parts in the future, such as kidneys for dialysis patients, pancreases for diabetics, heart valves, bones, or perhaps even entire functioning hearts.

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Exhibit 11

Medical Devices: Stage of Cycle vs. Size of Opportunity

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Siz

e o

f O

pp

ort

un

ity

Esthetics

Bone Replacement

Heart Replacement

Hearing Aids

Early Stage Mid Stage Late Stage

Dialysis

Advanced Wound Care

Diagnostic Imaging

Orthopedic Recon

Heart Valves

Stents

Blood Vessels

General Capital Equipment

3D Models

Orthopedic Spine

Orthodontics

Orthopedic Trauma

Dental Implants

Cochlear Implants

MOST ATTRACTIVE

LEAST ATTRACTIVE

Corrective Lenses

Bench-top Testing

Crowns & Bridges

Dentures

Exoskeleton

Prosthetics


Pancreas

Source: Morgan Stanley Research estimates

14



Example of AM Benefits

To provide more colour on how 3D printing could impact the MedTech sector, we show an illustrative example of the cost savings opportunity in Orthopaedics, using Smith & Nephew as a case in point. As we highlighted earlier in the report, we believe AM could provide two major benefits for the orthopaedic industry:

Inventory Management – being able to manufacture a customised implant on demand at short notice should allow Smith & Nephew to lower its high inventory levels and release cash to shareholders. While we acknowledge that its customised cutting block solution of Visionaire (also 3D printed) had the potential to offer similar benefits, the impact on inventory so far appears immaterial.

Cost Reductions – data from Swedish-based Arcam compared costing data of producing reconstructive implants (in this instance the acetabular cup) using electron beam melting with Ti-6AL-4V instead of the conventional method of cast metal and forging using CNC machines. The cost using its EBM technology was €40-103 per cup (varies with cup size from 44 to 66) or a €20-25 saving over the machined products. This reflects less production waste (when machining 60-70% of original material is scrapped) and no secondary process of attaching the porous coating, which can cost €30-60 per implant. For more detail on the cost savings opportunity, see grey box.

Illustrative Example of Cost Reductions – High Level Scenario

In our high level Smith & Nephew example, we make the following assumptions:

Ortho COGS Share – we assume that orthopaedics makes up 50% of Smith & Nephew’s group COGS. We understand that the gross margin for orthopaedics is broadly comparable to the rest of the business units.

Ortho COGS Reduction – we assume AM can reduce the company’s orthopaedic reconstructive COGS by 25%, which is slightly below the cost analyses of Arcam, an AM solutions provider. We also base our observations on a number of different papers including “Application of electron beam melting to titanium hip implants” by M Cronskär.

Costing Comparison

When comparing costing of 3D printing we cite a study on “Application of electron beam melting to titanium hip implants” by M Cronskär et al from the Proceedings of the 19th International DAAAM Symposium 2008. While the data is some years old, it nevertheless provides a useful insight into the economic feasibility of using rapid manufacturing (in this instance Arcam EBM technology) for implant manufacturers including such issues as material consumption, manufacturing time and associated costs in comparison to the conventional manufacturing methods. In this study, the comparison has been done in cooperation with a Scandinavian company (CC) that develops and manufactures customised hip stem prosthesis using CNC methods. This was compared to seven solid customised hip stem prosthesis designed by the CC at its site. In the study, material, file preparation and manufacturing costs are taken into account, while all other costs were taken to be the same in the two cases. The results showed a cost comparison that was favourable for EBM; the EBM-based manufacturing costs constituted about 65% of the conventional costs. The table below provides relative cost comparisons:

Comparing Areas – EBM Costs in % of Conventional Way

Material 15%

File Preparation 8%

Manufacturing 130%

Total Cost 65%

The authors concluded that the study strongly indicates that the EBM manufacturing process of the customised medical implants is commercially viable. The best commercial performance can be realised in customised manufacturing, where most savings are achieved in material costs and pre-processing (file preparation). We would add that this was based on EBM technology from five years ago, and since then significant efficiency improvements have been made.

In Exhibit 12 we highlight that a 25% reduction in Smith & Nephew’s orthopaedics COGS would result in 2016 free cash flow yield expanding from an estimated 8.4% to 11.4%. The 3.1% point improvement equates to ~35% increase in free cash flow yield – significant.

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Exhibit 12

Smith & Nephew – Reduction in COGS Dec Y/E (US$mn) FY12A FY13E FY14E FY15E FY16E

Group Inventory 901 962 1,003 1,040 1,078

Ortho Share of Inventory 70% 70% 70% 70% 70%

Inventory - Ortho 631 674 702 728 755

Sales - Ortho 2,178 2,107 2,165 2,209 2,251

COGS % of Sales 25% 25% 25% 25% 25%

COGS 545 527 541 552 563

Inventory / Sales - Current 29% 32% 32% 33% 34%

Inventory Turn - Current 0.86x 0.81x 0.79x 0.77x 0.76x

Free Cash Flow - Current 740 681 741 819 884

COGS Reduction - Potential -2% -10% -25%

Inventory Turn Improvement - Potential 0% 0% 0%

COGS 530 497 422

EBIT Savings (before Tax) 11 55 141

Tax Rate 32% 32% 32%

EBIT Savings (after Tax) 7 38 96

Inventory Turn 0.79x 0.77x 0.76x

Inventory 674 585 384

Inventory - Cash Released 28 90 201

Free Cash Flow - Potential 776 946 1,180

Free Cash Flow per Share - Potential 0.88 1.08 1.36

Free Cash Flow Yield - Old 6.9% 6.4% 7.0% 7.8% 8.4%

Free Cash Flow Yield - New 7.4% 9.1% 11.4%

Improvement 0.4% 1.3% 3.1%Source: Company data, Morgan Stanley Research; e = Morgan Stanley Research estimates N.B. Excess cash used for share buybacks

We assume that incremental capex on 3D printing technology can be offset by lower capex in its traditional manufacturing process.

Illustrative Example – Improving Inventory Management

In our high level Smith & Nephew example, we make the following assumptions:

Ortho Inventory Share – we assume that ortho inventory makes up 70% of Smith & Nephew’s group inventory. We understand from speaking to the company that orthopaedics is a significantly more intensive inventory business than the rest of its divisions.

Ortho Inventory Reduction – we assume that AM can reduce inventory by as much as 15%. Since we could not find any studies on this topic for guidance, our assumption should be seen only as an educated guess. The reduction in inventory comes from a move to a ‘just-in-time’ manufacturing process, allowing for a meaningful reduction in the number of stock keeping units.

In Exhibit 13 we highlight that a 15% improvement in Smith & Nephew’s inventory turn, in addition to the reduction in COGS,

would boost free cash flow yield by an additional 0.3 percentage point to 11.7% in FY16e, an increase of 41%. Conceptually, we believe it should be possible to raise inventory turnover higher still.

Exhibit 13

Smith & Nephew – Increasing Inventory Turn Dec Y/E (US$mn) FY12A FY13E FY14E FY15E FY16E

Group Inventory 901 962 1,003 1,040 1,078

Ortho Share of Inventory 70% 70% 70% 70% 70%

Inventory - Ortho 631 674 702 728 755

Sales - Ortho 2,178 2,107 2,165 2,209 2,251

COGS % of Sales 25% 25% 25% 25% 25%

COGS 545 527 541 552 563

Inventory / Sales - Current 29% 32% 32% 33% 34%

Inventory Turn - Current 0.86x 0.81x 0.79x 0.77x 0.76x

Free Cash Flow - Current 740 681 741 819 884

COGS Reduction - Potential -2% -10% -25%

Inventory Turn Improvement - Potential 5% 10% 15%

COGS 530 497 422

EBIT Savings (before Tax) 11 55 141

Tax Rate 32% 32% 32%

EBIT Savings (after Tax) 7 38 96

Inventory Turn 0.83x 0.85x 0.87x

Inventory 610 468 239

Inventory - Cash Released 92 142 229

Free Cash Flow - Potential 840 999 1,208

Free Cash Flow per Share - Potential 0.96 1.14 1.39

Free Cash Flow Yield - Old 6.9% 6.4% 7.0% 7.8% 8.4%

Free Cash Flow Yield - New 8.1% 9.6% 11.7%

Improvement 1.0% 1.9% 3.4%Source: Company data, Morgan Stanley Research; e = Morgan Stanley Research estimates N.B. Excess cash used for share buybacks

Valuation Impact – up to 35% Higher

Based on a high level DCF model and other metrics, Smith & Nephew’s incremental cash flow generation in our case study results in a valuation that is up to 35% higher. This assumes the company could implement the AM benefits in full by FY16e, which is unrealistic. Our example is therefore illustrative only.

What Does Smith & Nephew Think?

Our discussion with Smith & Nephew suggests that it is exploring the opportunities that AM could offer over the mid- to long term. While the company did not give specific details, it appears to agree with our view that AM is more of an opportunity in orthopaedics and less so in endoscopy and wound care. Indeed, its customised cutting block for knees, Visionaire, is its first product line produced through AM. Although we do not have any precise information, we believe the company is exploring AM in orthopaedic trauma as well as reconstructive. However, the impact 3D printing has on S&N’s financials depends largely on how fast it can implement the technology available.

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Opportunity or Risk?

In our analysis so far we have assumed that all incumbents will embrace 3D printing and thus that it equates to more of an opportunity than a risk. However, in practice, the situation may turn out very differently, with some incumbents being late adopters, in which case AM may pose more of a risk than an opportunity to the business model. In a worst case scenario, AM could turn out to be disruptive technology. We highlight some potential short-term and long-term examples below.

Short-term Examples – Dental & Orthopaedics

We look at two examples of short-term disruptive potential in dentistry and orthopaedics.

Dental Implants – we believe AM could drive two potential disruptions over the mid term:

1. Increased Competition – smaller implant manufacturers may start to use 3D printing machines to come up with unique dental implant or abutment designs that previously were not possible with CNC machines. Larger companies may not be as nimble as smaller ones in rapidly adopting new technologies, held back by relying heavily on their long-term clinical track record of well established technologies. Furthermore, 3D printing may also open up competition to high-margin product lines of suprastructures (e.g. screw retained dentures, bars, etc), which in the past was limited to only a number of dental implant manufacturers, including Nobel Biocare, which arguably has been one of the pioneers in this field.

2. Customers Internalise Production – as the dental implant chains grow, such as US based ClearChoice (who now has over 30 centres), the ability to print your own dental implant solution could result in significant cost savings; this may be initially more applicable for abutments and later for implants. For instance, the gross margin achieved by Nobel Biocare or Straumann on a dental implant/abutment is estimated by Morgan Stanley to be over 80%. As an example, an implant that is purchased by a dental practitioner for $300 costs no more than $50 to make and package (we think it could be as low as $30). The ability for a large dental practice to print its own implant could therefore be a very significant way of increasing profitability, notwithstanding the regulatory filings that need to be adhered to.

Crowns & Bridges – we believe 3D printing could have two potential disruptions over the medium term:

1. Increased Competition – availability of 3D printing solutions may attract new competitors to the market that are focused on producing customised crowns and bridges. One of the solutions available would be EnvisionTEC, a company that has the ability to build crowns or multiple unit bridges for long-term temporaries. The materials available include E-Dent, which is a glass-filled photopolymer. The French company, Phenix Systems, offers a PXS & PXM Dental that offers rapid manufacturing of dental prosthesis using laser sintering of Cobalt-Chromium. In our view, additional materials would need to be developed to make it more suitable for long-term final restorations. For companies such as Sirona4, this may provide increased competition compared to its chair-side CEREC milling system.

2. Customers Internalise Production – similar to our reasoning with dental implants above, we see it as reasonable that more and more dentists may chose to use chair-side 3D printing solutions to make customised crowns and bridges. This improves customer service and more of the value chain can be kept in house.

Orthopaedics – we believe 3D printing could cause three potential disruptions over the medium term:

1. Competition – it could add new entrants to the market. New competition could come from a variety of different competitors, including smaller medical device companies setting up efficient 3D printing work stations, large medical device companies wishing to enter the recon market in a disruptive way, or hospitals/surgical centres printing their own orthopaedic products.

2. Manufacturing Decentralisation – with 3D printers being small enough, hospitals and surgical centres may find it compelling to print orthopaedic products themselves, partly because it would enhance their ability to provide customised implants for their patients. Effectively, the industry could follow the dental prosthetics market, whereby more and more dentists are using chair-side systems to produce ‘just-in-time’ solutions, rather than outsourcing the production to a dental lab or a centralised manufacturing facility owned by third-party providers, such as Nobel Biocare or Straumann. A decentralised production trend would disrupt the long-established practice of manufacturers such as Smith & Nephew, building products centrally and shipping them to clients. How decentralised manufacturing could work from a

4 Covered by Steve Beuchaw

17



regulatory perspective is unclear, and would require some guidance statements from regulators such as the FDA.

3. Service Model – decentralisation of manufacturing may also have implications for the salesforce service model in the orthopaedics industry. Today, a sales person is very much involved, among other things, in making sure the implants are ready for surgery, lining up the devices neatly on a trolley ready for the nurse to roll into the operating theatre. In a decentralised model, internally produced implants may be handled by the hospital staff.

The aforementioned points may or may not happen, but they provide food for thought as to what changes the orthopaedic industry may see over the mid term.

An Example of Potential Long-term Change

Given that many researchers believe that printing functional human organs on 3D printers is probably over 10 years away, it is fair to suggest that this is more of a long-dated example of AM being potentially disruptive to an incumbent business model. But out of interest we highlight the hemodialysis industry and its key player, Fresenius Medical Care, which has gradually built up or acquired infrastructure to operate 3,160 clinics worldwide at end 2012, to provide blood cleaning services for patients with end-stage-renal disease. This has resulted in a net goodwill balance of $11.4 billion.

Exhibit 14

FMC – Headline Numbers

Dec Y/E ($mn) 2012

Product 3,309

Service 10,492

Group Revenue 13,800

Goodwill 11,422

Clinics (#) 3,160 Source: Company Data, Morgan Stanley Research

The gold standard for end stage renal dialysis patients is to have a kidney transplant, but due to the low number of kidney donors, this is currently not practicable. Theoretically, the creation of a fully functioning 3D printed kidney could reduce the need for hemodialysis services and put FMC’s business model under pressure over time; it could also result in asset write-downs. However, there are several obstacles aside from the actual ability to produce a working organ that may limit the uptake of 3D printed kidneys, such as:

Patient Health – not all ESRD patients are well enough to undergo a highly invasive surgery;

Capacity – limited surgical capacity for doctors to cater for the demand; and

Reimbursement – the cost may be prohibitive for government payers or private health insurers for broader application.

We would not therefore reflect any of these potential longer-term challenges from AM in our valuation of Fresenius Medical Care. In our DCF valuation we continue to use a terminal growth rate of +1%.

AM Disruptive Example – Hearing Aids

Our review of the AM literature suggests that there has been no material disruptive technology that has changed the status quo in the MedTech sector. However, we highlight one area where AM has a material and rapid impact on workflow. In the hearing aid sub-sector, AM has changed the way custom shells are made for in-the-ear hearing aids.

Traditional Way of Hearing Aid Shell Manufacturing

Historically, most hearing aid companies used a 10-step process to produce a custom shell, as shown in Exhibit 15 below (highlighted in Changing with the Times: Applying Digital Technology to Hearing Aid Shell Manufacturing by Richard Cortez et al).

Exhibit 15

Traditional Hearing Aid Shell Manufacturing

Source: “Changing with the Times: Applying Digital Technology to Hearing Aid Shell Manufacturing” – Francis Kuk

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In the Exhibit above, a] highlights a cost of the impression being made; b] ear impressions trussed to the model size; c] the impression is dipped in wax; d] a hydrocolloid cast of the impression is done; e] acrylic resin is poured into the hydrocolloid cast; f] excess acrylic resin is drained from hydrocolloid cast; g] trimming of faceplate end; h] vent is laid into the shell; i] finished shell is ready to have electronics inserted. The process overall is time consuming and labour intensive, making the production of a custom shell expensive.

AM Way of Shell Manufacturing

With AM, the impression is scanned and the custom shell is made in a more automated way. Specifically, three steps are typically used to create a custom shell: 1] an ear impression is scanned by a 3D printer; 2] a modeller make adjustments to the virtual model in the software package; and 3] shell is printed on a 3D printer.

Exhibit 16

3D Printing of Custom Hearing Aid Shell

Source: Copyright Widex

The advent of digital technology in conjunction with AM has increased the accuracy and consistency of custom shell manufacturing. With the added benefit of lower production costs and faster turnaround times, this has led to mass adoption of AM technology in recent years.

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AM Opportunities and Limitations by Sub-sector

In this section we provide more detailed commentary on AM applications by MedTech sub-sector, examining opportunities and limitations. We also provide feedback from companies under our coverage on the degree of AM utilisation today. The details provided are not meant to be comprehensive but rather a broad overview of which areas of medical devices may be more suited than others. Areas covered are:

– Cardiovascular

– Corrective Lenses

– Dentistry

– Dialysis

– Diagnostic Imaging

– Hearing Aids

– Hospital Supplies

– Incontinence & Ostomy

– In-vitro Diagnostics

– Orthopaedics

– Radiation Therapy

– Wound Care

While there are many other areas of MedTech, we have focused on areas that broadly fall under our coverage.

Cardiovascular

For cardiovascular, we have found interesting literature on aneurysms, heart valves, entire heart and blood vessels. We suspect other areas of cardiovascular are also being researched for AM.

Aneurysms

Aneurysms cause a high of number of deaths around the world. In the US, abdominal aortic aneurysms are one of the 10 most common causes of death in men over 55. They are an enlargement in the lower part of the major blood vessel supplying the body; if an aneurysm splits, or ruptures, it can lead to life-threatening internal bleeding. Researchers are working on patient-specific diagnosis and treatment for the condition. The diagnosis goes beyond just diagnosing the aneurysm; once a patient has been diagnosed the question arises whether the aneurysm is likely to rupture at some point.

Dr. Chandra at the University of Rochester has been tackling this problem by using patient scans to create a 3D printed version of the patient’s own aneurysm, allowing the physician to make a better assessment of the medical condition. This can be done by taking the 3D model of the aneurysm and stressing it to rupture. This patient-specific diagnosis allows the healthcare system to avoid unnecessary surgeries, which is good for the patient and reduces costs. Dr. Chandra highlights that the longer-term goal is to be able to repair aneurysms tailored to the specific patient.

The ultimate long-term goal would be, as science identifies the characteristics of the patient’s blood vessel, to quickly create medical devices that are compatible in material properties with those of the patient’s blood vessels, to allow for the most natural replacement for their aneurysm.

Heart Valves

Efforts are underway to use 3D printing in heart valve replacement. Different technologies are being pursued, one of which is embryonically inspired heart valve regeneration engineering. The aortic valve is a complex, heterogeneous structure designed to ensure unidirectional blood flow and to provide blood to the heart through coronary ostia. At Cornell University’s Department of Biomedical Engineering, hydrogels are being used to develop a tissue engineering strategy that combines micro CT imaging, custom algorithms and 3D printing to generate cell-seeded valve constructs.

Entire Heart

Efforts are already underway to create a total “bioficial” heart, a goal that could be attained within 10 years, according to Executive and Scientific Director, Professor Stuart Williams of the Cardiovascular Innovation Institute (a collaboration between the University of Louisville and the Jewish Heritage Fund for Excellence). Professor Williams was involved in building a 3D printer called BioAssembly Tool, which uses human cells and biologically safe glue, with the main interest in creating blood vessels, cardiac structures and ultimately hearts to fight cardiovascular disease.

Tissues are created using cells derived from an individual’s fat and extracted with a machine. The cells go into the BioAssembly Tool, and the living cells are mixed with glue that eventually dissolves inside the body. The printer rebuilds the structure, which can than be implanted into the body. According to the researcher, building the heart requires five parts, namely valves, coronary vessels, microcirculation,

20



contractile cells and the organ’s electrical system. Professor Williams thinks the bioficial heart could cost about $100,000 in today’s dollars.

Blood Vessels

Provided in Exhibit 17 below is an illustrative example of a 3D bio printer, which replaces the "normal" printing materials with "Bio-ink", which can be made out of living human cell culture in a gel medium to promote cell growth. The cells eventually grow together forming the desired shape.

Exhibit 17

3D Printer – Illustrative Example

Source: Christopher Barnatt, explainingthefuture.com

Our discussion with Sorin suggests that within its Heart Valve business unit, 3D printing is extensively used for rapid prototyping. The company uses external vendors for this, which provides a fast and reliable service. Sorin also highlighted some limitations, including that accuracy is pretty limited but improving, mechanical properties are low, which makes it difficult to predict the final performance, surface finishing is modest and only a few polymers can be used, none of which it believes is suitable for implantation.

The feedback for its Cardiac Rhythm Management division highlighted that 3D printing is used more for prototyping, comparing shapes and sizes of implantable devices, and challenging and optimising integration of sub-systems.

Overall it appears the cardiovascular industry is using 3D printing primarily for prototyping, which is not expected to change over the short to medium term.

Corrective Lenses

Unsurprisingly, the development of 3D printing in the ophthalmological glasses market has been almost exclusively focused around the frames for glasses. Indeed, we have been told by Luxottica management that the company uses 3D printing extensively in the product design stage of its frame manufacturing. Despite this, there has been little focus on the development of 3D printing technology for the more complex task of lens production. The principal difficulty in the production of 3D printed lenses is one of precision, where even the lower end for ophthalmological glasses is a standard that 3D printers struggle to match. There has been a degree of work attempting to resolve this issue with interpolation5, where a sheet is stretched over the lens to smooth the surface; however, these experiments appear to have failed to reach the necessary level of accuracy for prescription lenses.

In June 2013, however, the world’s first 3D printed glasses with lenses were produced by LUXeXcel. The company’s proprietary “Printoptical” technology allows for the printing of smooth functional lenses and frame in a single print job. The technology prints optical structures using modified wide format industrial inkjet equipment, where transparent droplets of a UV-curable polymer are jetted and then cured by strong UV-lamps that are integrated onto the print head.

Exhibit 18

LUXeXcel has produced the first set of fully 3D printed glasses in the world

Source: LUXeXcel,

Even though the material is deposited in discrete drops, the resulting surface is smooth, as the time between jetting the droplets and the application of the UV light gives the polymer time to flow and for each droplet to lose it spherical form. This means that optical quality surfaces may be formed with no post processing

5

Producing Lenses with 3D Printers, Christopher Olah

21



Exhibit 19

LUXeXcel’s Printoptical technology allows for 3D printed lenses without the need for post processing

Source: LUXeXcel,

Lenses under LUXeXcel’s Printoptical system can be printed to a thickness of up to 2mm, which we believe could accommodate the majority of Rx prescriptions. Despite this, we have yet to see another operator make progress on printing quality prescription lenses, and there is minimal information available on the underlying quality of the product. Although Wohlers Report 2013 highlights LUXeXcel’s technology as an ‘emerging technology’, it is unclear whether modern lens films that offer properties such as anti-reflection and scratch can be applied to the process. Over time we expect research to focus on this area, as well as the development of vari/multi-focal lenses; however, it appears unlikely that AM will have a material impact on the corrective lens industry short term.

Our discussion with Essilor suggests that it monitors the 3D printing space closely but doesn’t foresee any major changes in its supply chain or manufacturing.

Dentistry

Dentistry is a broad area, and as such we explore 3D printing in the various sub-segments such as Prosthetics, Implants and Orthodontics. At a high level, the interest in 3D printing comes with the general shift in digital dentistry, helped by oral scanners. By combining oral scanning with CAD/CAM and 3D printing, dentists and lab owners may one day be able to accurately and quickly produce crowns, bridges, stone models and a range of orthodontic appliances for the dental office. The benefits could include savings on labour, improved quality, precision and less rework. Going forward, the most significant advances in 3D printing may come from new materials.

Crowns & Bridges

AM is well suited for making crowns and bridges, which are typically high-value items and require customisation to suit the individual’s needs. The German company, EnvisionTEC, is one example of a company that has the ability build crowns or multiple unit bridges for long-term temporaries; the materials available include E-Dent, which is a glass-filled photopolymer. Phenix Systems’ PXS & PXM Dental offers rapid manufacture of dental prosthesis using laser sintering of Cobalt-Chromium.

Implants/Suprastructures

A number of companies have been using AM to produce dental implants or suprastructures. For instance, LayerWise through its division DentWise allows for design freedom for implant-supported restorations. The materials used are a high strength titanium or cobalt-chromium alloys, which can be produced with high accuracy of better than 20 micron.

Exhibit 20

LayerWise Uses AM for Suprastructures

Source: LayerWise/Dentwise

We are also seeing the emergence of custom-built implants using AM, with the Italian company Leader Italia offering an interesting product. The company claims that Tixos is the first and unique implant in the world manufactured through a direct laser metal forming technique by microfusion of titanium particles.

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Exhibit 21

Leader Italia – 3D Printed Dental Implant

Source: Leader Italia

Orthodontics

3D printing is already used in orthodontics, where US listed Invisalign offers a 3D printed alternative to fixed braces. We understand that Invisalign prints over 60,000 sets of transparent custom-made moulds, which the wearer changes every two weeks to realign the teeth. One of the more talked about companies that produces solutions in digital orthodontics is Stratasys.

Dentures

Partial and full dentures are seeing an increased usage with 3D printing. EOS is launching a partial framework solution using its direct laser metal sintering technology. Technicians who want to use AM to produce dentures are able to access 3Shape’s Denture Design software.

Other Areas

3D printing solutions from companies like EnvisionTEC are able to make drill guides, temporaries and models. For guides, the company offers the material called Clear Guide, which is a water clear material. For models, the company can offer E-Denstone. It should also be noted that until recently most drill guides have been limited to larger companies, such as Nobel Biocare, which had custom software and invested in expensive equipment. That is changing, with one of the larger 3D players in dentistry, 3D Systems, offering the MP3000, which when paired with open drill guide software allows virtually anyone to start producing guided surgery templates.

At this stage, it is hard to see 3D printing replacing milling in dentistry. The two technologies are likely to exist side by side for the foreseeable future, as there are some things that milling can do that 3D printing cannot. We suspect one of the ultimate goals would be to have 3D printing produce the final restoration straight from the machine, but it appears that we are many years away from that.

Straumann highlighted that it is a user of 3D printing technology but more for use in temporaries, models and prototypes. It currently finds that the technology is not precise or fast enough to make it suitable for ceramic crowns and bridges. Our discussion with Nobel Biocare suggests that it is using 3D printing as a testing device for its Procera.

Dialysis

The kidneys are two organs that perform life-sustaining roles of cleaning the blood by removing waste and excess fluid and maintaining the balance of salt and minerals in the blood. In some patients, the kidneys become damaged, usually as a result of diabetes and / or hypertension. The kidneys could eventually stop functioning, which would lead to death. To survive, these patients either need a kidney transplant or to receive dialysis treatment. Since there is a significant organ shortage, most end-stage renal disease patients visit a dialysis centre three times a week to remove waste and excess water from their blood. 3D printers may hold the key to successfully producing the first transplantable kidneys for humans. Before 3D bioprinting hit the market, researchers were using pig kidneys as scaffolds to hold human kidney cells; however, this never resulted in a kidney that could be successfully transplanted into a human.

Today, it appears that several research groups are spearheading the development of a kidney using 3D printing, with The Wake Forest Institute for Regenerative Medicine receiving a great deal of media attention. Dr. Anthony Atala is the lead researcher at Wake Forest. Currently the clinician is using a 3D bioprinter to create small prototype kidneys (see Exhibit 22) to study their performance; at this stage the organ produces a urine-like substance. Limitations today include an uphill battle to get around a patient rejecting the organ and getting it to function as well as real kidneys.

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Exhibit 22

3D Printed Kidney

Source: Wake Forest School of Medicine

Michael Renard (Executive VP for commercial operations at San Diego based Organovo) commented in the dezeen magazine (19 May 2013) that it is currently possible to print small pieces of tissue, but that the problem lies in scaling this and creating a vascular system that delivers oxygen to the cells and removes carbon dioxide. He further added that printed organs such as kidneys are a long way away: “In the next 10 years it is possible that printed supplemental tissues, ones that aid in regeneration – such as nerve grafts, patches to assist heart condition, blood vessel segments or cartilage for a degenerating joint will make it to the clinic. But more advanced replacement tissues will most likely be in 20 years or more”.

Our discussion with Fresenius Medical Care suggests that 3D printing is only used in prototyping parts, design and a little bit on the R&D side. Overall it appears that 3D printing may not have a meaningful impact on the dialysis industry over the short to medium term.

Diagnostic Imaging

Diagnostic Imaging is principally composed of MRI (Magnetic Resonance Imaging) systems, Ultrasound systems, X-ray systems, Mammography equipment, CT (Computer Tomography) systems, and nuclear imaging systems. There have been a number of recent examples of diagnostic imaging equipment being used, in conjunction with 3D printing, to prepare surgeons more effectively for complex surgeries.

For example, doctors at the Children’s National Medical Centre in Washington are using data from CT or ultrasound scans of patients to replicate the organs of those individuals, reflecting their particular intricacies and deformities. These replicas have been made of a number of different materials, allowing doctors to place a suture or push a needle through it, with realistic tissue structure such as soft heart valves and intermittent bone. This allows practice of procedures, without involving the patient, as well as diagnosis of complications and conditions.

Exhibit 23

3D printed patient hearts, using data from MRI scans, are helping doctors prepare for surgery

Source: © Materialise

Another example is provided by the Kobe University School of Medicine, which is also using 3D printing to model facsimiles of patients’ organs in preparation for surgeries. The use of CT and MRI diagnostic imaging equipment, with 3D printers that can handle multiple materials, has allowed the creation of transparent textured organs that provide doctors with an intricate view of the internal structure of patient’s organ.

Exhibit 24

A 3D printed liver, with clear tissue to allow examination of the internal structure

Source: Photo credit: Tech-On!, Nikkei Business Publications, Inc

We expect the integration of 3D printing and diagnostic imaging to continue over the long term. However, the cost of producing implantable products for the time being still appear very costly. For instance, Dr Sugimoto at the Kobe University School of Medicine created the printed liver in Exhibit 24, with an Object Connex printer that costs between $250,000 and $500,000 depending on the model. As 3D printing evolves, we

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expect relative costs to decrease, pushing the use of diagnostic imaging in this area forward. Overall it should be noted that 3D printing is unlikely to drive a material increase in the demand for diagnostic imaging equipment. Rather, we think the installed base should be sufficient to enable the adoption of 3D printing.

Hearing & Hearing Devices

The hearing aid industry has been one of the early adopters of 3D printing technology with customised shells. New areas of research include battery technology and ‘growing’ ears.

Custom Shells

3D printing has been widely used in the manufacture of hearing aids for over five years to make customised housing for in-the-ear hearing aids and is now widely adopted by most hearing aid manufacturers. For example, Starkey introduced 3D printers 10 years ago and now has 30 printers across seven facilities worldwide. One of the first was Materialise, which collaborated with Phonak in 2000. Since then a large range of biomedical materials have been approved with various skin tones and other colours.

Exhibit 25

Hearing Aids – 3D Printing of Custom Shells

Source: EnvisionTEC, Inc

One of the AM manufacturers whose products have become quite widely used in hearing aids is EnvisionTEC, which has been working with Sonova since 2005. The Perfactory 4 DSP XL with ERM is capable of producing 65 shells / 47 ear moulds

in just 60-90 minutes. The machine is relatively small with a weight of 85kg. Depending on the build size and complexity, the cost of a hearing aid 3D printer can vary from $20,000 to $150,000. In 2013, Widex appears to have manufactured the world’s smallest hearing aid using CAMISHA (Computer Aided Manufacturing of Individual Shells for Hearing Aids).

Batteries

The standard shape of batteries available for hearing aids today has a material influence on its size and look. With 3D printing this could change. Scientists at Harvard University and the University of Illinois appear to be among the first to fabricate a battery using a 3D printer, focusing on the creation of a very small microbattery as highlighted in Exhibit 26 below.

Exhibit 26

3D Printed Battery

Source: Jennifer A. Lewis, Harvard University

A custom 3D printer was used with a printing nozzle size of 30 microns, to produce two comb-like shapes and laid down in an interlocking pattern to function as the two electrodes. The finished battery, less than a millimetre wide, was placed in an electrolyte solution. In the Harvard press release it stated: “The electrochemical performance is comparable to commercial batteries in terms of charge and discharge rate, cycle life and energy densities. We’re just able to achieve this on a much smaller scale”. With the onset of such technology, batteries could be made to conform to the shape and size of the desired hearing aid. Furthermore, it could also impact how the integrated circuit with a battery could be manufactured.

Ears

In February 2013, Cornell University in New York announced it has used 3D printing to create an artificial ear for treating a congenital deformity called microtia, where the ear is underdeveloped or had to be removed due to cancer or was

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lost in an accident. Later in the year Princeton University developed a bionic ear that could offer more than just improved cosmetics and offer improved hearing (Exhibit 27).

Exhibit 27

3D Printed Bionic Ear

Source: Frank Wojciechowski/Princeton University/[email protected]

Researchers 3D printed a blend of calf cells, hydrogel and an integrated coiled antenna made from silver nanoparticles. The assembly does not resemble a natural ear that closely, but it does an interesting job merging organic and synthetic material. The rudimentary solution also allows the possibility of expanding hearing beyond normal human levels; in this case it can pick up radio waves.

Our discussions with GN Store Nord, Sonova and William Demant suggest that their current involvement with 3D printing is on the custom shell side, which has been a core part of their business practices for years. William Demant highlighted that it started back in 2006/07 and it now has 3D printing technology in all of its larger production facilities. This has resulted in the consolidation of ITE production facilities into larger hubs, since overhead for support & maintenance and utilisation of the equipment is better in larger facilities. Sonova made similar comments that 3D printing has led to consolidation of custom shell manufacturing. GN Store Nord highlighted that all of its custom shells are made using 3D printing technology and that, going forward, more 3D technology will be used in its R&D functions. Overall, outside of custom shell manufacturing, there appears little other excitement within the industry for other applications in hearing aids.

Hospital Supplies

Hospital supplies is a broad category and, for the purposes of the stocks under coverage, includes injectable generics, clinical nutrition, infusion pumps, syringes and other general supplies. There has been little evidence of material development of 3D printing in hospital supplies to date;

however, research work by Chenlong Zhang et al.6 points to the potential. The work done by the team was to assess the cost reduction opportunity from creating optical laboratory equipment from 3D printing as opposed to purchasing from a manufacturer. The study found that this method could reduce the cost of many optical components by 97% or more.

Exhibit 28

Optical equipment produced in the test using 3D printing

Source: Zhang C, Anzalone NC, Faria RP, Pearce JM (2013) Open-Source 3D-Printable Optics Equipment. PLoS ONE 8(3): e59840. doi:10.1371/journal.pone.0059840

While not directly comparable to hospital supplies, the successful production of optical equipment suggests that there is potential for an expansion into hospital equipment.

While Getinge did not provide detailed feedback on 3D printing, it is our view that it may be used for prototyping for some of its capital equipment. However we do not believe that 3D printing is used in the actual production process.

For Fresenius SE, AM has no implications for its German hospital business, which makes up 18% of its Group EBIT adjusted for minorities. For its FMC subsidiary, which makes up 31% of Group EBIT, 3D printing is only used in prototyping parts, design and marginally on the R&D side. For its hospital supplies business called Kabi (51% of EBIT), which is primarily focused on clinical nutrition and injectable generics, AM is in our view irrelevant. As such, we think AM is likely to have no material impact on Fresenius SE.

6 Zhang C, Anzalone NC, Faria RP, Pearce JM (2013) Open-Source 3D-Printable Optics Equipment. PLoS ONE 8(3): e59840. doi:10.1371/journal.pone.0059840

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We have found little evidence for the development of 3D printing within the Incontinence & Ostomy markets; however, there are some signs that it may develop in the medium term. We note that Coloplast has a 3D printer, used for prototyping, in its product development department, though it is unclear how widespread this is or the degree of its use.

Exhibit 29

3D printer at Coloplast (LFS), Polyvinvl Alcohol (RHS)

Source: Coloplast, Wikipedia

We would also note the high level of compatibility between 3D printers and plastics, which are mostly used for Incontinence & Ostomy products, including Polyvinyl Alcohol (PVA).

Our discussion with Coloplast suggests that 3D printing is more of a prototyping opportunity and is unlikely to have a material impact on the company or its market segments over the medium term.

In-vitro Diagnostics

Following our review of the literature, we found little evidence that AM is a useful technology in the in-vitro diagnostic sub-sector. This has been confirmed by our discussions with IVD companies, where the use is limited to rapid prototyping of some hardware devices and components. Specifically our discussion with bioMerieux suggests that the 3D printing is limited to the machines.

Orthopaedics

Orthopaedics is a broad based area, and as such we explore 3D printing in the various sub-segments of joint replacement, trauma, craniomaxillofacial, spine and prosthetics.

Reconstructive Joints

With orthopaedic joint replacements, we are currently observing two avenues for 3D printing:

Guided Surgery

Customised Implants

Guided Surgery – 3D printing is already used as a visualisation tool to pre-plan surgery in joint replacement. Surgeons use a patient-specific drill and saw guide to improve accuracy in placing hip & knee implants, with systems offered by all major competitors. In a European context, Smith & Nephew offers Visionaire, which was launched in 2009.

Physical Joint – a number of products are already available. For instance, Stockholm-listed Arcam AB offers a metal powdered bed fusion technology called Electron Beam Melting (EBM). The company states that EBM is used for production of standard as well as custom orthopaedic implants, with a cost-efficient production process for both press-fit and cemented implants. The cost efficiency is particularly noticeable for volume production of press-fit implants with advanced Trabecular Structures. Solid and porous sections of the implant are built in the same step, eliminating the need, for example, to apply plasma sprayed porous materials through expensive secondary processes.

Exhibit 30

Arcam: 3D Printing of Custom Implant Surface (EBM)

Source: Arcam

Arcam documented in a recent investor presentation that producing a Ti-6AL-4V acetabular cup was more cost effective than the conventional method: the cost using EBM was €40-103 per cup (varies with cup size from 44 to 66) or a

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€20-25 over the machined products. This is the result of less production waste (when machining 60-70% of original material is scrapped) and no secondary process of attaching the porous coating, which can cost €30-60 per implant.

The Arcam EBM machines utilise a high power electron bream, which splits into more beams and generates the energy needed for high melting capacity. According to the company, the process results in stress-relieved components with material properties better than cast and comparable to wrought metal. In Europe orthopaedic implants containing EBM technology were CE marked in 2007, and in February 2011 implant manufacturers using EBM received regulatory approval from the FDA for certain products. Orthopaedic companies that are using the EBM technology are Adler Ortho, Lima-Lto and Exactech.

Trauma / Craniomaxillofacial

AM already plays an important role in craniomaxillofacial (CMF), following an accident where part of the bone structure around the head may have been destroyed. Using 3D printing in titanium powder allows, for example, the production of a lower jaw, with cavities that allow for muscle reattachment and grooves for the regrowth of nerves. In this case the product was produced by LayerWise, who produces products for medial and dental indications.

Exhibit 31

LayerWise uses AM in Orthopaedics

Source: LayerWise/Dentwise

Earlier in 2013 the FDA for the first time awarded 501(k) clearance for an AM polymer implant, for a product called OsteoFab Patient Specific Cranial Device, manufactured by Oxford Performance Materials in the US. The implant is made from PEKK, which is an ultra high performance polymer used in biomedical implants. While Oxford Performance Materials sold PEKK as a raw material or in semi-finished form, it began developing AM technology in 2006.

Exhibit 32

OsteoFab Patient Specific Cranial Device

Source: Oxford Performance Materials, LLC

Spine

The use of 3D printing appears to be less proficient than in joint reconstruction. While some companies have launched spinal spacers printed in titanium, most of the focus appears to be on printing 3D spine models to help in the diagnosis or planning for surgery, especially in deformity cases.

Prosthetics

US-based Bespoke Innovations creates custom prosthetics using a 3D printer, which builds a solution based on the unique shape of a particular user.

Exhibit 33

Custom Made Prosthetics – Bespoke Innovations

Source: Bespoke Innovations

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Exoskeleton

JAECO Orthopaedic and Stratasys produce a WREX (Wilmington robotic exoskeleton arm) which is a functional upper limb orthosis designed to enhance movement for individuals with neuromuscular disabilities. The device is made up of a customised butterfly-patterned jacket and arms that are 3D printed in durable ABS plastic.

To help broken bones, researchers are looking at 3D printers to produce an exoskeleton brace as an alternative to the traditional cast, offering lightweight, lifestyle benefits such as having a shower. As highlighted in Exhibit 34 below, the Cortex developed by Victoria University graduate is a prototype, which could offer such benefits. The idea is that a patient fitted with the Cortex has an X-ray taken of the injured arm or leg. A computer would then assess the optimal pattern and structure for the cast.

Exhibit 34

3D Printed Cast – Replacing Traditional Cast?

Source: Victoria University

Bone Replacement

Researchers are using 3D printing that could aid the regrowth of damaged or diseased bones. At the Washington State University, the research group’s optimised ProMetal 3D printer builds dissolvable scaffolds utilising a ceramic compound coated with a plastic binding agent, which serves as a blueprint for tissue growth. Although the team has already spent four years fine-tuning the process and having achieved positive results testing on rats and rabbits, there are still 10-12 years to go, according the project’s co-author, before orthopaedic and dental surgeons could be offered a printed bone replacement for use in humans.

Our discussion with Smith & Nephew suggests that AM is an area it is very familiar with, given its Visionaire product line that is made with the assistance of 3D printing technology.

Although the company did not go into specifics, it did suggest that 3D printing may have an interesting future in orthopaedics, both from a production and inventory management perspective.

Our discussions with Ossur suggests that the company uses 3D printing technology extensively in its R&D setting, mostly for testing new ideas and product development. The company comments that it has already seen a decrease in its time to market, and should the technology advance to the point where it can print structural reinforcements and multiple materials, it would use the technology for direct manufacturing.

Radiation Therapy

There are two key areas in which 3D printing has begun to manifest itself within Radiotherapy: compensator blocks and shells. Prior to the advent of asymmetric collimators, compensator blocks offered the only means of varying dose intensity across the treatment beam area. Compensators offer the advantage that they are not subject to the temporal fluctuations of smaller sub-fields associated with Multileaf Collimators (MLCs). The conventional way to manufacture the blocks, using milling machines, has been an important drawback when compared to the MLC method, due to high operational and production costs.

Exhibit 35

Compensator blocks used in Radiotherapy treatment

Source: dotdecimal

A recent study performed at the Biomedical Engineering Department of the University of Brasilia7 suggests that this key drawback may be addressed using 3D printing. A fluency map was generated by a commercial treatment planning system, which was then converted into a mould and printed using a 3D printer, while the final block was achieved by filling the mould with cerrobend alloy. The block was tested using dosimetric films to compare the measured dosage to that predicted by the

7 Use of 3D-printers to create Intensity-Modulated Radiotherapy Compensator Blocks, Biomedical Engineering Department, University of Brasília, 2012

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planning system. This comparison showed good conformity among eight dose profiles from each situation, with a maximum RMS error of 8.84 % for the tested profiles. This suggests that the 3D printers can be effectively used to manufacture IMRT compensator blocks. The main advantage of this approach is that it can be fully conducted inside a radiotherapy facility, resulting in lower costs and production times.

3D printing has also been using in the production of shells. Immobilisation of patients undergoing brain or head and neck radiotherapy is normally done through the use of Perspex thermoplastic devices that require direct moulding to the patient anatomy. Mould rooms can be distressing for patients and shells made in this manner do not always fit perfectly. Tests by a group of UK researchers8 managed to successfully create fitting shells from CT and MRI data for two volunteers, using a 3D printer, with the group hypothesising that virtual patient data could replace mould room visits.

Exhibit 36

Examples of finished shells for radiotherapy

Source: Patient information website of Cancer Research UK: www.cancerresearchuk.org/cancerhelp

Our conversations with Elekta indicate that the company has a 3D printer which uses lithography to create plastic models of mechanical parts. The company makes life size or reduced scale plastic components that allow it to physically evaluate its designs before committing to expensive tooling and manufacturing investment. The type of 3D printing that is used is not new emerging technology but more of what has been around for some time. From our perspective, given the nature, complexity, and scale of linear accelerators, we do not consider

8 Production of 3D printer-generated radiotherapy treatment shells using DICOM CT, MRI or 3D surface laser scan - Acquired STL files: Preclinical feasibility studies

the prospect of a material movement into 3D printing as a likely game-changer for the industry. We can, however, envisage a number of other ancillary products to the radiotherapy process, much like with patient shells / masks, being tested in a 3D printing environment.

Wound Care

Wound care covers a number of different indications, ranging from simple cuts to more difficult-to-treat areas such as burn wounds or pressure ulcers. There have been a number of interesting developments in 3D printing that have the potential to shake up the current treatment method of wound care, though we believe the technology is at least three to five years away from human testing.

Skin Printing

A team of bioprinting researchers led by Anthony Alata at the Wake Forest School of Medicine have been developing a skin printer. In initial experiments, 3D scans of test injuries were taken from mice, the data from which was used to control a bioprint head that sprayed skin cells, a coagulant, and collagen onto the wounds. On average, the wounds healed in two to three weeks compared to about five or six weeks in a control group – a promising result. Indeed, funding for the project has come, in part, from the US military, which is keen to develop in-situ bioprinting to help heal wounds on the battlefield.

Exhibit 37

Skin printing on mice wounds showed a material improvement over the control group

Source: Wake Forest School of Medicine,

Wake Forest has also been working on burn wounds. With traditional skin grafts, many burn patients do not have enough unburned skin to harvest for grafts, which the developing 3D printer addresses. In the project, the group places cells in vials that are then printed directly onto the wound, after a laser first scans the wound to “map” its dimensions. Again, mice with burn wounds healed in 3 weeks versus the control group of five weeks.

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Exhibit 38

A test for 3D printing on burn victims using an artificial limb

Source: Wake Forest School of Medicine,

While current research in the area is encouraging, tests on human patients remain around three to five years away. We would also highlight that it is unclear how 3D printing may interact with other complex wounds such as pressure ulcers. Much of the current research in the space surrounds creation of vascular skin (such as that carried out at the Aalto University BIT Research Centre), as well as the challenge of how to ensure skin receives a ready supply of nutrients. Although there are some clear hurdles to overcome, in the long term it is possible that 3D printing may play a disruptive role in the wound care space, assuming these difficulties are overcome.

It appears that Smith & Nephew’s wound care focus is less on 3D printing and more about growing its market share in negative pressure wound therapy and executing on its Healthpoint acquisition. With the recent acquisition of Healthpoint, the company strengthened its position in the bioactive wound care business. Besides purchasing Collagenase SANTYL (enzymatic debrider) for dermal ulcers and burns, it also acquired pipeline product HP802-247, which is its next generation bioactive therapy.

Other Areas

Other areas that we have come across during our research include bench top testing and a broader discussion on organ replacement.

Bench Top Testing – R&D Productivity and Time to Market

Traditionally, bench top models in medical devices, particularly for cardiovascular applications, have either been made of blown glass for rigid parts or out of silicone for softer tissue. Medical device researchers at companies would take the glass or the silicone model and use it for early product performance

testing. While glass and silicone offer good transparency, the accuracy of the models place limitations on the validity of the results produced, and the process is expensive as the models are either made by hand or injection moulding.

Regulators in the US have recently made recommendations for using more clinically relevant bench top models, in which 3D printing can play a major role. Although not new, there is a greater push to use digital human data captured via diagnostic imaging technology such as computed-tomography (CT) or magnetic resonance imaging (MRI). This method allows engineers to identify design flaws more quickly, which otherwise may only become apparent at a later stage in animal or human clinical trials. Hence, R&D productivity and time to market could potentially help the MedTech industry going forward.

One company that is focused on 3D models is Belgium-based Materialise, which offers a service called HeartPrint (Exhibit 39 below) which makes, among other things, cardiovascular bench top models.

Exhibit 39

Materialise HeartPrint 3D Heart Model

Source: © Materialise

The Materialise technology is not limited to cardiology; it can be used for virtually any human organ, including the brain (Exhibit 40). These models are also likely to have an impact on education and training, as well as address an ethical dilemma. Animals are still widely used for training and are often involved in R&D. Animal experiments are difficult to realise in large numbers, for reasons of cost and ethics. Hence, a major effort is under way to move towards biomodels for surgical training.

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Exhibit 40

Materialise HeartPrint 3D Brain Model

Source: © Materialise, courtesy of Masayuki Hirata, Department of Neurosurgery, Osaka University Medical School, Japan

Organ Replacement

The idea of using 3D printing for creating replacement organs has been much debated over the years. Indeed, scientists have long been experimenting with 3D printing of cells and blood vessels, building up tissue structure layer by layer with artificial cells. Dr. Jordan Miller at the University of Pennsylvania highlighted in June 2012 that the big challenge in understanding how to grow large artificial tissue is how to keep all the cells alive in the engineered tissues. It has been noticed that when you put a lot of cells together they take nutrients and oxygen from neighbouring cells, which then suffocate and die. The body’s cardiovascular system, i.e blood vessels, solves this issue with natural cells and tissues. Provided below is a brief overview of some of the developments that have come to our attention:

Synthetic Vascular System – a group of scientists from the University of Pennsylvania and the Massachusetts Institute of Technology built a synthetic vascular system that mimics a human cardiovascular system, by creating a place where the future artificial blood vessels would be located. The technique is similar to creating the shape of a vase in wax, surrounding it with molten metal and then melting the wax away. But instead of using wax, the researchers used sugar. Professor Bhatia stated that so far it has been difficult to make organs big enough to provide useful function. The clinician highlights that if you implant tissue thicker than about a millimetre it becomes difficult to provide enough nutrients without also engineering

blood vessels into the tissue. As a result, the scientists created a network of places that they wished vessels to grow into, so they would be ‘piping’ into the tissue and these were printed in 3D out of sugar. Sugar was described by the researchers as useful material, which can be dissolved away in the presence of living tissue and is very friendly to biological tissue.

Liver – the same researchers highlighted that with sugar, thicker tissue could be built, such as a liver. Although the printed liver was never implanted, they could show that one could use a 3D printer to print an arbitrary network of vessels for any tissue shape or any network of blood vessels, and then surround them with liver cells. Professor Birchall, a surgeon scientist at University College London, highlighted that the researchers answered a lot of the fundamental problems in tissue engineering. Organovo, a US-based company that specialises in the development of 3D-printed biological materials, prints functioning human liver tissue.

Japan - Implications for MedTech Space

The competition to develop 3D printing is focused largely in Europe and the US, with Japanese makers appearing to lag behind. The Ministry of Economy, Trade & Industry, conscious of the need for government to push development, plans to build multi billion yen funds into the overall budget appropriation request for fiscal 2014. A super-precision 3D system development project is underway from the current year (fiscal 2013), which aims to develop Japan-made 3D printers with a ten-fold improvement in productivity in five years.

The trend for medical applications of 3D printing outlined earlier can also be seen partly in Japan. A point to add is that many of Japan’s medical device makers excel in products that exploit electronic technology, such as X-ray CT scanners, MRI scanners and endoscopes, and that 3D models of internal organs using 3D printing should contribute significantly to simulations of surgical procedures that involve such devices.

A Role in the Spread of New Surgical Techniques

In particular, surgical techniques using endoscopes have proliferated rapidly in recent years, and 3D models of internal organs generated by 3D printing now play a key role as a training tool for doctors regarding new techniques. Operations using laparoscopes have hitherto been performed for appendectomies and cholecystectomies, but the scope has recently been broadening to new areas including splenectomy, prostate removal and ovarian resections. If 3D printing helps to reduce the training hurdles for doctors, the benefits in terms of medical economics will be considerable as these methods of treatment spread and become more familiar to patients.

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Exhibit 41

Covidien: Composite Data - Still Considerable Scope for Spread of Minimally-invasive Surgery

Procedure % Minimally Invasive

Surgery % Energy

Procedures Cholecystectomy >80% NA Hernia Repair <20% NA Hysterectomy <20% <30% Colorectal <20% <20% Thoracic <20% NA Head & Neck NA <25% Bariatric NA <60% Source: Covidien, Morgan Stanley Research

Exhibit 42

Penetration Requires Clearing Technological Hurdles

Pros Cons

Reduced scarring Technological hurdle for doctors Reduced post-op pain Lengthy surgery Shortened hospital stay Requires electric scalpels and other

special equipment Early return to normal activities Requires general anaesthetic Fewer post-op adhesions Specific complications in laparoscopic

surgery Expanded surgical field Can be hard to recover removed items Source: Morgan Stanley Research

Exhibit 43

Range of Endoscopic Surgery has Broadened in Recent Years

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1

Abdomen (inclu. GI) Respiratory Gynecology Urology Others

(thou. cases) Endoscopic Surgery by Type

Note: Figures are based on survey by Japan Society for Endoscopic Surgery. 2011 survey involved 1,244 institutions. Source: Journal of Japan Society for Endoscopic Surgery, Morgan Stanley Research

A role in Customised Surgery Devices that allow stereo viewing of the relevant organs during surgery have recently been gaining attention, with Olympus launching a 3D surgical endoscope this April for the first time in 18 years, and Sony launching a head-mounted monitor able to process image signals from an endoscope as a 3D/2D display in July. In 2D imaging to date it has been difficult to identify the depth of internal organs, but 3D imaging can lead to improved accuracy and speed in operations.

For example, if a pre-op 3D model of the diseased organ is produced by 3D printing based on biological data from a patient that has undergone an X-ray CT or MRI scan, the organ

structure, tumour size, and thus the potential risk (of haemorrhaging, etc.) can be identified. 3D printing can also provide a decision-making tool in selecting the optimal surgical treatment for patients.

Exhibit 44

Head-mounted Monitor Launched by Sony

Source: Sony, Morgan Stanley Research

Exhibit 45

3D endoscope from Olympus

Source: Olympus, Morgan Stanley Research

Summary For the Japanese MedTech space, we see there no direct beneficiaries from 3D printing. However with the help from 3D printed models, physicians should find it easier to learn new surgical techniques. In this context, we believe Olympus would benefit as it is one of major players in minimally invasive treatment using endoscopy.

Pharma Companies

Our European pharma team did a brief survey with the pharma companies under their coverage. Overall, it appears that 3D printing is currently not much of a discussion point in the European pharma industry and thus less relevant compared to MedTech. Both Merck and Novartis suggested that 3D printing was not meaningful for their businesses. Novo Nordisk highlighted that it has used 3D printing technology in the medical device R&D function for a number of years and found the technology quite useful. But it does not see many other areas where it would use 3D printing technology in the near term.

33



Limitations to Opportunities

In this section we explore some high level limitations to the AM

opportunities for Medical Devices. These include regulatory issues,

which are likely to evolve over time, the current state of the technology

and design & training. These challenges are not insurmountable, but will

take time to address. We feel the regulatory environment offers the

greatest uncertainty.

Regulatory Issues

On initial inspection, the regulatory environment for the 3D printing of medical technology devices appears well developed. Over the past five years there have been a number of 3D printed products that have gained marketing clearance from the FDA through its 501(k) pre-market notification or full pre-market approval (PMA) process. Examples include:

Metal Hip Implant - the first FDA clearance of a metal 3D printed implant in September 2010, when it approved a hip implant produced by orthopaedic firm Exactech.

PEKK Cranial Implant - the first FDA 501(k) clearance of an AM polymer implant. The cranial implant is made from PEKK (polyetherketoneketone), and was manufactured by Oxford Performance Materials.

PEEK Spinal Implant - FDA approval of DiFusion Technologies’ PEEK (polyetheretherketone) based spinal implant system.

These developments hide the lack of progress made on more fundamental questions of control surrounding 3D printing. The recent level of press attention regarding the world’s first 3D printed gun (e.g. The Telegraph, Wall Street Journal, The Economist), has brought control and ethical considerations into focus, and while we recognise the fundamental difference to medical devices, these too have the capability for harm if not controlled. With no current regulations surrounding the ability for consumers to print replicate 3D medical devices, we would expect the FDA and other bodies to examine the area in more detail over the coming years.

Under the current regulatory system there also exist other practical issues and considerations. As an example, on the 19 November 2012, the FDA updated its proposed rule covering unique device identifiers (UDI). The proposed rule (77 FR

40736) establishes a UDI system, whereupon every device is required to have a unique identification code physically marked on the device. The code is to help facilitate a number of factors, including consumer information, FDA tracking, and product recalls. The UDI is set to be phased in over the next six years and will bring with it a number of complications:

How will a UDI apply to home printed goods? As an example, 3D printed prosthetics – and other class I devices – will need their own UDI, the application of which in the users’ home seems difficult / improbable.

In February 2013 a woman received a 3D printed implantable replacement jaw (Telegraph). If hospitals are to print 3D customisable devices on the fly, how is this to work with a UDI system?

Exhibit 46

An example of a code-based UDI label from the FDA’s Unique ID System

Source: Medtronic

While these challenges are by no means insurmountable, we believe they adequately illustrate the degree of work and thought remaining to be done on the regulatory side. We would argue that further penetration of 3D printing into medical devices is predicated on the development of a strong foundation of regulatory control, as with the rest of the medical device industry.

State of Technology

While there have been strong gains in 3D printing development over the past number of years, the capabilities of the technology remain a limiting factor on adoption. Key weaknesses in the technology preventing penetration include:

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http://www.telegraph.co.uk/technology/news/9066721/3D-printer-builds-new-jaw-bone-for-transplant.html

http://www.telegraph.co.uk/news/worldnews/australiaandthepacific/australia/10083664/Australian-police-demonstrate-catastrophic-dangers-of-3D-printed-guns.html

http://online.wsj.com/article/AP975d429da4684f1898bb2e0ef3749857.html

http://www.economist.com/news/united-states/21571910-regulatory-and-legal-challenges-posed-3d-printing-gun-parts-ready-print-fire

http://www.economist.com/news/united-states/21571910-regulatory-and-legal-challenges-posed-3d-printing-gun-parts-ready-print-fire



Structural Strength – Traditionally manufactured parts remain stronger than those created from 3D printing. With processes like injection moulding, there is an even strength across the part due to a consistent material structure. In 3D printing, however, because items are built up in clean “layers”, there is a laminate weakness as the layers bond less strongly on the Z axis as they do on the X and Y plane. This may prove a significant issue for implantable devices, which are expected to last a number of years and withstand a range of different stressors.

Surface Finish – While many pictures suggest 3D printed plastics offer a gloss or smooth finish, this is normally the result of post-processing, often involving labour and / or chemicals such as acetone. For medical grade devices, a smooth finish may be required and, if products are printed in a hospital, additional staff / training may be required to manually finish the device.

Speed – Many items printed can still take hours or days to print. While the process could be expedited by increasing layer thickness, this comes at a cost of surface and finish quality. While future developments may overcome this hurdle, it should be noted that the chemical properties of materials such as ABS (Acrylonitrile butadiene styrene) currently present a challenge. These materials can only be extruded at a certain rate before key chemical properties are destroyed, a barrier facing Fluid Deposition Modelling for top-end machines at the moment.

Materials – Current 3D printers can broadly only print in one material at one moment in time. Metals and plastics normally cannot be printed together for example, as their melting temperatures are hundreds, or indeed thousands of degrees apart. We would argue the inability to print multiple materials together is a key hurdle facing the adoption of the technology.

This list is certainly not exhaustive, and while we expect technological development to overcome many of these hurdles, it is not a given that all will be dealt with, or in the immediate future. With many of the devices produced by our coverage universe featuring a broad range of intricate electronics and moving parts, we would argue we appear quite some distance from, say, 3D printing a functioning hearing aid in totality.

Design and Training

3D printers naturally need a model, normally a CAD model, of the design of the required product in order to be able to process

it. This represents something of a barrier to entry for consumer and hospitals, especially in the production of bespoke or customised medical devices.

Exhibit 47

CAD software complexity remains a barrier to entry for mass acceptance and design

Source: Graphic provided courtesy of Gemvision Corporation, LLC (www.gemvision.com). All rights reserved

Hospitals – Using the example of an orthopaedic implant, while MRI or other input data may be able to give a base CAD (computer aided design) model for the hospital, adjustments to this will likely be necessary to accommodate for errors and unique design issues. Doctors are unlikely to have the time or inclination to learn how to use CAD software, or the intricacies of design, where for example things like tolerances must be taken into account – i.e. a 15mm shaft will not fit into a 15mm hole. This suggests that hospitals may either have to send base scans offsite to experts, or to employ them in-house, both of which add to the relative cost of the end device and the time it takes for production.

Consumers – Consumers face a similar issue. While the end-user is unlikely to attempt to design their own implant or hearing aid, even basic medical devices would require a degree of prior knowledge. For example, consumers could download pre-designed CAD files from open-source websites; however, this would require knowledge of precisely what is needed, while many of these files are currently unmoderated and may well not be safe to use.

While we acknowledge that software usability is likely to improve over time, and that the quality of predesigned CAD files online are likely to improve, we continue to see the training and expertise required to design bespoke medical devices as a key barrier to entry.

35



Companies Currently Involved

Below we list the publicly quoted companies that have a material

exposure in healthcare 3D printing. It is not an exhaustive list, but rather a

high level summary of companies that we have come across in our

research. None of the companies is a pure play in Medical Devices.

3D Systems Corporation

Description

3D Systems is a leading global provider of 3D content-to-print solutions, including 3D printers and materials. The company is listed on the New York Stock Exchange under the ticker DDD, and in July had a market capitalisation of $4.3bn. The company saw full year revenues of $127mn in fiscal 2012, and currently has around 226 worldwide sales, application and service staff.

Areas of Focus

3D Systems is focused on providing 3D content-to-print solutions including 3D printers, print materials and on-demand custom parts services for professionals and customers. The company also provides CAD, reverse engineering and inspection software tools and consumer 3D printers, apps and services. The company is well spread across its business units, with around one-third of group revenues accounted for by each of Printers, Materials, and Services. 3D Systems’ significant recent launch was its second generation of a home 3D printer, the Cube, as well as its next generation desktop printer, CubeX.

Arcam

Description

Arcam provides Additive Manufacturing solutions for the production of metal components, principally for the Aerospace and Orthopaedic Implant industries. The company is listed on the NASDAQ OMX Stockholm, under the ticker ARCM, and in July had a market capitalisation of SEK1,743mn. Revenues in full year fiscal 2012 were SEK139mn, up 29% from 2011 sales of SEK 108mn. The company employs around 50 full time staff.

Areas of Focus

Arcam continues to focus on its Electron Beam Melting technology, where fully dense metal components are built up layer by layer from metal powder that has been melted by a powerful electron beam. In 2013 Arcam released its Q10, designed for industrial production of orthopaedic implants, and specifically created to meet the implant industry’s need for high

productivity, with a simple interface and high resolution printing.

ExOne

Description

ExOne is a global provider of 3D printing machines and printed products to industrial customers. The company is listed on the NASDAQ under the ticker XONE, and in July had a market capitalisation of $817mn. Full year revenues in 2012 were $29mn. ExOne currently employs 131 full time staff.

Areas of Focus

ExOne’s business primarily consists of manufacturing and selling 3D printing machines and printing products to specifications for its customers using its in-house 3D printing machines. The company offers pre-production collaboration and print products for customers through its PSCs, located in the United States, Germany, and Japan. ExOne focuses on printing capacity, where it believes it has the leading-edge (as measured by build box size and printhead speed).

Organovo

Description

Organovo designs and creates functional, three-dimensional human tissues for medical research and therapeutic applications. The company is listed on the NYSE MKT under the ticker ONVO, and in July had a market capitalisation of $239mn. The company saw full year revenues of $1.2mn in fiscal 2012, and currently operates with around 35 full time employees.

Areas of Focus

Organovo’s current focus is on research and development, progressing towards the commercial launch of its first product, expanding the applications of its platform technology, and improving the capabilities of its 3D bioprinter. The company’s most prominent achievement has been surrounding its 3D Liver project. As a world first, three-dimensional human liver tissues were generated, consisting of multiple cell types arranged in defined patterns that reproduce key elements of native live structure and biological behaviour.

36



Stratasys

Description

Stratasys is a global provider of three-dimensional printing solutions, offering a range of 3D printing systems, resin consumables and services. The company is listed on NASDAQ under the ticker SSYS, and in July had a market capitalisation of $3,335mn. Revenues in the full year fiscal 2012 were $215mn, and the company currently employs around 1,130 staff in 17 facilities around the world.

Areas of Focus

Stratasys Ltd. was formed in 2012 by the merger of Stratasys Inc. and Objet Ltd. and is materially focused on the continued integration of these two entities. The company’s business model is centred on manufacturing 3D printers and materials that create prototypes and manufactured goods directly from 3D CAD files or other 3D content. The company’s 3D printers are based on its proprietary FDM and PolyJet technologies, and is one of the world’s largest publically quoted pure-play players in the 3D printing space.

37



Morgan Stanley Blue Papers

Morgan Stanley Blue Papers address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe. Analysts, economists, and strategists in our global research network collaborate in the Blue Papers to address critical themes that require a coordinated perspective across regions, sectors, or asset classes.

Recently Published Blue Papers

Commercial Aviation A Renewed Lease of Life July 22, 2013

Wholesale & Investment Banking Outlook Global Banking Fractures: The Implications April 11, 2013

Emerging Markets What If the Tide Goes Out? June 13, 2013

Releasing the Pressure from Low Yields Should Insurers Consider Re-risking Investments? March 15, 2013

Japan and South KoreaThe Yen Tide Does Not Lift All Boats May 30, 2013

Global Autos Clash of the Titans: The Race for Global Leadership January 22, 2013

Global Steel Steeling for Oversupply May 23, 2013

Big Subsea Opportunity Deep Dive January 14, 2013

US Manufacturing Renaissance Is It a Masterpiece or a (Head) Fake? April 29, 2013

eCommerce Disruption: A Global Theme Transforming Traditional Retail January 6, 2013

Natural Gas as a Transportation Fuel Energy Market Wild Card April 16, 2013

China – Robotics Automation for the People December 5, 2012

Global SemiconductorsChipping Away at Returns April 15, 2013

Global Emerging Market Banks On Track for Growth November 19, 2012

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Social Gambling Click Here to Play November 14, 2012

Financials: CRE Funding Shift EU Shakes, US Selectively Takes May 25, 2012

Key Secular Themes in IT

Monetizing Big Data September 4, 2012

The China Files The Logistics Journey Is Just Beginning April 24, 2012

Chemicals ‘Green is Good’ – The Potential of Bioplastics August 22, 2012

Solvency The Long and Winding Road March 23, 2012

MedTech & Services Emerging Markets: Searching for Growth August 6, 2012

Wholesale & Investment Banking Outlook Decision Time for Wholesale Banks March 23, 2012

Commercial Aviation Navigating a New Flight Path June 26, 2012

Banks Deleveraging and Real Estate Implication of a €400-700bn Financing Gap March 15, 2012

Mobile Data Wave Who Dares to Invest, Wins June 13, 2012

The China Files China’s Appetite for Protein Turns Global October 25, 2011

Global Auto Scenarios 2022 Disruption and Opportunity Starts Now June 5, 2012

The US Healthcare Formula Cost Control and True Innovation June 16, 2011

Any

To find downloadable versions of these publications and information on Other Morgan Stanley reports, visit www.morganstanley.com

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For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

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% of Rating Category

Overweight/Buy 978 34% 400 38% 41%Equal-weight/Hold 1280 44% 491 46% 38%Not-Rated/Hold 114 4% 28 3% 25%Underweight/Sell 510 18% 137 13% 27%Total 2,882 1056

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