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Quarterly Review

Final 1Q12 Results

ORTHOWORLD’s estimates place overall 1Q12 market growth at 4% over 1Q11, as shown in Exhibit 1. Performance highlights follow and pertain to 1Q12, unless noted otherwise.

Exhibit 1
Orthopaedic Sales1 Increases by Product Segment: 1Q12 vs. 1Q11

Notes to Exhibit 1
1 Orthopaedic products; constant currency, pro forma growth
2 Includes biologics
3 For the quarter ended 2/29/12; includes Dental. Spine includes Bone Stim and Biologics; Bone Stim reflects all Bone Healing sales.
4 For the quarter ended 4/27/12
5 Spine
6 For the quarter ended 3/31/12
7 Extremities: extremities + fixation combined; Endoscopy: endoscopic + communications, most of which is orthopaedic; Spine: neuro + spine. Total growth excludes Patient Handling.
8 ORTHOWORLD estimates
9 For the quarter ended 3/31/12


aap Implantate
€9.9MM (~US $12.7MM), +51%
Product sales ~$9.5MM, +18%
LOQTEQ update: presented to potential new distributors in Asia, Europe, Latin America and U.S.; expecting full FDA clearance in 3Q
By year-end, LOQTEQ line should cover ~80% of all trauma indications
Signed contract with Dutch Sanquin Bone and Tissue Bank to process human tissue
20 potential customers in U.S. evaluating cannulated screw system

Alphatec Spine
$48.4MM, -3% (U.S. $32.5MM, -4%; Ex-U.S. $15.9MM, flat)
Growth affected by pricing pressure in low single digits, lower procedure volumes; many stocking distributors reducing inventory
Continued gains from growth in Latin America and Japan (claims #4 market position in latter); Europe and Middle East continue to struggle
U.S. hospital sales +3% excluding Xenon pedicle screw, driven by biologics and MIS products (including Illico SE)
Xenon returned to the market in 4/12
Will take on in-house manufacturing of certain high-volume, high-cost products, 1st to be Trestle Luxe anterior cervical plate
Entered into financing arrangement that will allow company, once strengthened, to become active on acquisition front
Late in quarter, voluntarily recalled deployment instrument for Solus Anterior Lumbar Interbody Fusion device (in beta launch) to improve its performance in surgeries involving extremely hard or sclerotic bone (a problem not dissimilar from other standalone ALIF devices)
Modifications to Solus instrumentation expected to require resubmission of 510(k); expects product back to market by year-end
Physician-owned distributorships account for substantially <10% of U.S. business, and declining

BioMimetic Therapeutics
Received comprehensive post-panel response from FDA regarding Premarket Approval Application for Augment Bone Graft; expects to submit an amendment to application in mid-2012
In 4/12, shipped initial orders of Augmatrix Biocomposite bone graft  to distributors
Evaluating options regarding clinical trial of Augment in treatment of chronic tendonopathy; will decide after filing of PMA amendment

China Kanghui
RMB 82.7MM (~US $13.1MM), +22% (China ~$10.1MM, +29%; ex-China ~$2MM, +18%)
Trauma ~$8.2MM, +23%
Spine ~$4.1MM, +35%
OEM ~$0.8MM, -24%
Added >330 new hospitals domestically, total now ~3,000
Released new cannulated pedicle screw, indicated for treatment of osteoporosis
Product launches for remainder of year include 1 for spine (2Q), 2 trauma and 3 joint (2H12)
Will price TGM Hip and Knee product at a 20-30% discount to JNJ and Zimmer offerings

Globus Medical
$94.7MM, +21%
Fusion $61.5MM, +9%
Disruptive Technologies $33.2MM, +51%
Recent product launches, Coalition and Caliber, represented 11% and 10% of sales, respectively
Will add 24 more direct and distributor sales reps in U.S., expand to 8 additional countries by year-end
Hired 32-rep salesforce to sell interventional pain management products under trade name Algea Therapies

Internal Fixation Systems
$0.15MM, +136%
Released additional sets of redesigned cannulated screw systems, limited release of modular locking small fragment system
Current distribution in 16 states (up from 2 in 1Q11)
Manufacturer of “value priced orthopaedic and spinal implants” focused on existing, commonly used products, selling for 40-60% less than competition
Current customers include ASCs, hospitals, surgeons, GPOs
FDA 510(k) clearance for 25 products, including mini to large cannulated screws, locking plates/screws for use in upper and lower extremities; K-wires, drill bits, etc.

MAKO Surgical
$19.6MM, +51%
Procedures $11.6MM, +79%
RIO Systems $5.9MM, +9%
Service/Other $2.2MM, +87%
<10% penetrated in targeted domestic hospital market
Reduced partial knee replacement procedures, pricing pressure, delays (not cancellations) in customer orders contributed to shortfall in system sales
2,297 MAKOplasty procedures performed (Domestic: 2,008 knees, 211 hips), +76% from 1Q11
260 lateral and isolated patellofemoral procedures, ~13% of new procedure volume in 1Q
122 bicompartmental procedures, ~6% of knee volume
Average selling price ~$5,000/procedure
6.6 average monthly utilization per domestic system
Lower ASP for hip procedure ($4,800) attributed to slightly higher than expected utilization of non-MAKO femoral stem with MAKO acetabular cup, to be mitigated by expanded hip implant product offerings in 2012
6 RIO systems sold, 5 to domestic customers, 1 in Japan; now at 118 RIO systems installed
13 MAKOplasty THA applications sold, 9 as upgrades for current customers; now at 62 hip applications installed
53% of commercial domestic installed base have installed THA application
Introducing next-generation hip application during 2012, will support a direct anterior approach
Pipeline Biomedical’s Restoris tapered femoral stem and PST acetabular cup received 510(k) clearance, will be fully commercialized by year-end
Restoris Z hip (manufactured by Total Joint Orthopedics) launched for use with MAKOplasty
Competition from patient-specific instruments not perceived as a threat

Mazor Robotics
NIS 9.2MM (~US $2.4MM), +45% (U.S. ~$2.2MM, +100%)
Sold 3 Renaissance surgical robotic systems; to date, 12 installed in U.S.
Strong sales of disposable procedure kits (162 vs. 80 in 1Q11)
Lease price $789,000/system
To date, technology used in >3,000 spinal procedures worldwide in placement of ~20,000 implants
In 5/12, commenced global launch of C-OnSite enhancement to enable fast, low-radiation, intra-operative 3D verification of implant placement using imagery from any standard 2D C-Arm
List price for C-OnSite in range of $830,000

Medtronic (for fiscal year 2012, ended 4/27/12)
$3,267MM, -4% (U.S. $2,300MM, -10%; ex-U.S. $967MM, +12%)

·         Core Spinal $2,467MM, -2% (U.S. $1,596MM, -8%; ex-U.S. $871MM, +11%)

·         Biologics $800MM, -10% (U.S. $704MM, -13%; ex-U.S. $96MM, +28%)

Fiscal Year 4Q12 revenue: $818MM, -6% (-2% ex-Infuse; U.S. $557MM, -12%; ex-U.S. $261MM, +8%; Japan +20%)

·         Core Spinal $629MM, -3% (U.S. $394MM, -8%; ex-U.S. $235MM, +7%; Core metal -3%)

·         Biologics $189MM, -16% (U.S. $163MM, -19%; ex-U.S. $26MM, +4%; Infuse $126MM, -26%; Kyphoplasty flat, U.S. -26%; Bone morphogenetic protein -24%, U.S. -26%)

Extensively reiterated growth strategy that focuses upon emerging market expansion, improving R&D productivity and enhancing execution, with strong focus on demonstrating economic value to stakeholders
Stated goals for spine: differentiate, protect price, enhance value
Joint venture with Weigao in China delivering solid results; seeking to extend this past 2013
Acquired AMT, German manufacturer with wide portfolio of interbody systems in new shapes, geometries, materials; aggressively increasing number of sets available to surgeons
Solera ~45% rolled out in U.S. (larger rod diameters used in more complex spine and deformity procedures rolled out less than that), represents ~20% of thoracolumbar revenue; launch should reach apex in FY13
Atlantis Vision Elite cervical plate getting nice price uplift; ~100 sets in field
Pulling share with MAST MIDLF that combines screws/rods, interbody devices, access instruments and biologics (“minimally invasive for the masses”): 100 sets in field, trained ~200 surgeons, more than half of which are competitive; global rollout expected in 2Q of FY13
To bolster biologics, investing in localized product development around the globe, expanding into neuroscience, incorporating economic value into marketing messages
~60% of FY4Q decline driven by Infuse
Not seeing smaller number of accounts using Infuse, just more selective use around indications and smaller kit sizes
U.S. DOJ closed Infuse investigation
Results from independent Yale Infuse study expected this autumn
Continuing to invest in launch of Inductos in Europe, plus investing in new carrier and new indications for BMP-2 molecule
Osteotech segment annualizing at >$100MM
MagniFuse, Grafton driving double-digit growth in Other Biologics
Introduced InflateFX, a balloon kyphoplasty-like product to repair tibial plateau fractures in extremities
Believes that PODs will be ruled illegal in the face of anti-kickback laws

Seikagaku (for fiscal year 2011, ended 3/31/12)
¥27.0BB (~US $339MM), -1% (Domestic ~$225.7MM, +0.1%, ex-Japan ~$43.9MM, +9%; U.S. +7%)
Artz brand benefiting from introduction of plastic delivery syringe
U.S. Supartz sales increased as sales reps focused on differentiation from competitors
Exports to China, Italy continue to rise
Commenced case registration for Phase III clinical trial in Japan to investigate SI-6603 condoliase enzyme in the treatment of lumbar disc herniation
In 5/12, entered into exclusive agreement with Kaken Pharmaceutical for Japan marketing rights for SI-6603

ChondroCelect €0.7MM (~US $0.8MM), +123%
Leading private healthcare insurance company in the Netherlands has ruled treatment with ChondroCelect as compulsory for its insured

$74.5MM, +9% (U.S. $39.7MM, +7%; ex-U.S. $34.7MM, +11%)

·         Total Extremities $58.1MM, +11% (Upper $47.0MM, +13%, Lower $7.0MM, +7%, Sports Med/Biologics $4.1MM, +8%)

·         Large Joints/Other $16.2MM, +1%

U.S. growth affected by changes in distribution: moved to direct selling in one market, replaced 2 underperforming territories
Launched direct sales in Japan at very end of 1Q
Extremities led by shoulder and elbow arthroplasty
Expecting to launch 2 additional Ascend shoulder products in 3Q and 4Q
Making progress on new pyrolytic carbon shoulder
Lower extremities led by Salto total ankle, Stabilis ankle fusion system
BioFiber synthetic scaffold performance helped mitigate declines in Conexa sales
Expanding BioFiber with larger sizes, collagen coating, to launch 4Q
Large joint offset by lower instrument sales
On track to launch 14 new products in 2012 (6 in 2Q)
Entering 5 additional countries in 2012: Argentina, Ecuador, Israel, Mexico, Taiwan

$3.8MM, -26% (U.S. $3.5MM, -24%; ex-U.S. $0.3MM, -50%)
U.S. AxiaLIF revenue $3.1MM: 58% 1-level, 42% 2-level
Non-AxiaLIF revenue ~$450,000, including ~$300,000 from VEO direct lateral cases
295 AxiaLIF procedures, 222 in U.S.; volume weak due to denials, limited physician reimbursement
No update on OIG subpoena from 10/11
Expecting announcement of value for Category I CPT code to be announced in 11/12 in Medicare final rule
Positive early adoption of VEO; surgeons like 2-stage retraction
In 2Q, will commence patient enrollment in RAMP trial comparing AxiaLIF to TLIF
Planning an IDE clinical study to expand labeling for AxiaLIF to include use at base of fusion constructs of 3 or more levels (no current lumbar interbody fusion device offers this labeling)

Sources: Company press releases, earnings calls, filings with the Securities and Exchange Commission

Julie A. Vetalice is Editor, Information Products for ORTHOWORLD Inc. She can be reached at 440.543.2101 or julie@orthoworld.com