Industry s New Customer: Hospital + Surgeon By Marshall Steele, M.D.

PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS STRATEGIC INSIGHTS INTO THE ORTHOPAEDIC INDUSTRY JULY 2010 EDITORIAL Industry s New Customer: Hospital + Surgeon By Marshall Steele, M.D. I NSIDE THIS ISSUE: EDITORIAL 1 Industry s New Customer: Hospital + Surgeon FINANCIAL 4 ROUNDTABLE H.R. 3590: What Follows? FROM OUR 6 NATION S CAPITOL Developments Affecting the Healthcare Industry IPO WATCH: 7 TORNIER I started practicing orthopaedics in 1975, when joint replacement was in its infancy. There is no doubt that, along with arthroscopy, joint replacement has created phenomenal value for patients and our healthcare system. That during the past 35 years, the number of patients having joint replacements and arthroscopy has risen, surgeon reimbursement has dropped quite dramatically, hospital reimbursement has stayed flat and implant prices continued to rise. A quick look to factors from the past helps us understand what fueled this phenomenon. 1. Great technology Device manufacturers developed implants and instruments that were easy to use and very successful, when implanted by skilled surgeons. Arthritis patients who had joint replacements did very well and became advocates for the procedure, thus fueling growth. This encouraged fierce competition in innovation, which demanded that device manufacturers differentiate themselves by providing new technology every year. Competition normally drives prices down, but normal economic forces were not in place here. 2. Vendor/surgeon relationships Surgeons chose an implant based on their relationship with the distributor, not necessarily because of the data. These relationships became very strong, much stronger than hospital/ physician relationships. Device manufacturers didn t have much data on how their implants performed in the hands of their surgeons. All manufacturers could show you why their products were superior. In fact, when distributors changed companies, the surgeon would remain loyal to the distributor, not to the implants they were using. 3. Surgeon power and price insensitivity Surgeons were independent and autonomous. They ordered the products they wanted to use, but it was the hospital that paid for them. Price wasn t important to the doctors, who saw wasteful hospital practices every day. Many surgeons did not feel that the hospital treated them as customers, so tension between administration and surgeons was often high. Woe to the hospital that tried to reduce costs by limiting the implants available to a more costeffective selection. Many surgeons threatened or actually left the hospital if they were not able to choose. The loyalty of the surgeons was to the distributor, who treated them like a customer, not to their hospital, that did not. At times, the distributors chose to help their surgeons battle their hospitals to keep prices up, thus escalating the tension between hospitals and surgeons. 4. Lack of transparency In the past, hospital-reported data on clinical, operational and financial information was not shared or available, was inaccurate or was difficult to easily digest. Benchmarks were not available, either, to compare against best practices. This lack of transparency was further evidence to the surgeons that the hospital was making a fortune on them and not being honest. In addition, to keep other hospitals from knowing pricing, vendors had hospitals sign nondisclosure agreements as to their prices. Ninety-eight percent of physicians never collected or aggregated data on patient-reported outcomes. Everything is about to change. Here s why.

JULY 2010 PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS Surgeons and hospitals are belatedly discovering that they need each other. Hospitals and physicians are beginning to speak with one voice. Industry s New Customer... The Baby Boomers are becoming senior citizens, and will put enormous demands on the system The first wave of 78 million Baby Boomers is reaching 65 next year, and this will create a huge new demand. Medicare, already cash flow negative, will be unable to meet its financial obligations, thus creating a crisis in healthcare funding. The first chapter of healthcare payment reform has been passed. The growth in joint surgeries will be dramatic. The way these procedures will be reimbursed will be changing. The U.S. government and the employers of this country cannot afford the escalating cost of healthcare The government knows, rightly I believe, that one of the keys to reducing costs and improving quality is to get physicians and hospitals to act as a team rather than as independent entities. They have demonstration projects, such as ACE (Acute Care for Elders), that pay the hospital a discounted rate for all services related to total joint replacement. The hospital and the surgeons must then work together to divide the reimbursement. In this scenario, some device manufacturers in Texas were excluded, and those not excluded had to discount their prices. In order to get patients to choose these discounted hospitals, patients were eligible to receive reimbursement up to $1,000. The website of one of the hospitals stated, Medicare will send the shared savings payment directly to qualified beneficiaries approximately 90 days after they are discharged from the hospital. The other way that government plans to save money is to move away from a transactional pay for procedure system into a pay for outcomes system. This may be the most game-changing part of health reform. Max Baucus, chairman of Senate Finance Committee, is...committed to eliminating the current payper-procedure and replacing it with one focused on quality outcomes. President Obama said, Much of the savings in healthcare can be realized by paying for results, not procedures. Physicians are tired of fighting what they see as a losing battle and are partnering with hospitals Surgeons have no clout with the government and little clout with insurance companies. Practice overhead is rising faster than reimbursement. On the other hand, hospitals are also tired of being pawns of surgeons who play one hospital against another. Surgeons and hospitals are belatedly discovering that they need each other. As a result, many very successful orthopaedic groups are becoming employed by hospitals in an attempt to become even more competitive, gain more clout in the marketplace and deliver a better experience and outcome for their patients. This trend will rapidly escalate. Surgeons are becoming hospital service line leaders with a real stake in hospital success With the emergence of physician-led destination centers providing patient-centric care in a team environment, physicians are finding themselves in positions of real leadership. The old, ineffective medical directorship role is being replaced with a center directorship in which visions are created, success metrics developed and both authority and accountability occurs. Comanagement agreements have emerged, with surgeons and hospitals alike benefitting from efficiencies and cost savings. Transparency is emerging Credible data is now being collected and shared with surgeons. Our performance management system that we have instituted in over 50 hospitals, with over 60,000 data points, reports all of this data in an easy to read dashboard. Trends and benchmarks against best practices are evaluated quarterly and shared with physicians to improve practice in every area. Patient-reported outcomes are also being collected and analyzed. Transparency is forging its way into the vendor world as well, with informed patients wanting to assess the efficacy and safety of various implant options. In the face of these and other changes, the business climate for device manufacturers is rapidly changing. Hospitals and physicians are beginning to speak with one voice. No longer is the surgeon the only customer; the partnership of the hospital and the surgeon is the new customer. In fact, the patients themselves may be the customer of the future. New device manufacturers are springing up that will provide the generic version of our current implants at half the cost. Established device manufacturers have a choice: do they just focus on the technical aspects of their products? Do they compete on price? Or do they partner with hospitals, surgeons and even patients in a new and different way? 2

PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS JULY 2010 Industry s New Customer... Here are a few thoughts for the future. Differentiate yourself by bundling services that enhance the value and use of your product Most of the device manufacturers provide quality implants and products. However, by themselves they cannot produce a good result, a happy patient, a speedy recovery, a successful surgeon, higher volume, low blood transfusion rates or a financially profitable hospital. One of the principles of lean is that suppliers become allies, not cost centers or enemies. Device manufacturers can become allies and help hospitals improve quality while reducing costs by supporting or introducing hospitals and surgeons to the development of destination centers. Led by a skilled surgeon, these destination centers provide a patient-centric delivery system of care, lean processes, blood management programs, outcomes management support, etc. This creates value for all stakeholders and the device manufacturers, as well. Collect outcome data with your surgeons A recent New York Times article, Surgeon vs. Knee Maker, (June 18, 2010) pointed out that when disputes arise about orthopaedic implant safety, there are no independent referees or sources of information to settle disputes, because no one tracks the performance of the devices. As Lisa Markham, the recipient of a failed total hip, pointed out, My doctor knew everything about me, every personal detail, but what did I know on the other side? She said the experience awakened her to how little patients can find out about an implant s track record. In my own experience in over 150 hospitals, I d estimate that less than two percent of surgeons collect and aggregate data on their implant surgery patient outcomes. Even fewer actually use the data effectively to discover issues or do process improvement. Implants and product vendors can differentiate themselves by working with their surgeons to collect, aggregate, trend and benchmark the data. Simple, cost-effective ways to do this have been developed and are in use. Expand the use of mentors There are many new techniques in orthopaedic surgery that have a fairly long learning curve. One of the most recent examples is the use of an anterior hip incision in total joint surgery. Done properly, recovery is faster and patients return to their activities more rapidly. Patients are asking for this technique and putting pressure on surgeons to provide it. However, the learning curve is quite steep, especially in the beginning. This creates higher complication rates. Many device manufacturers provide excellent educational programs, including mock surgery on cadavers. While this is extremely helpful, it is often not enough, in my opinion. Many surgeons would greatly benefit from having an experienced mentor assist in the first few surgeries until the steep part of the learning curve has been overcome. Device manufacturers are in an excellent position to expand the use of mentors, thus benefiting the surgeon, the patient and the hospital, and enhancing their relationships with their customers. Expand the use of telemedicine In the 150 hospitals I ve visited, very few have an ongoing teaching and learning program. Case conferences are one of the best learning tools now available. Further expansion of case conferences via telemedicine would be a great addition and would improve quality. Device manufacturers could play a pivotal role in this. Device manufacturers are vital to the health of nation. Their contribution to healthcare has been and continues to be invaluable. They are well positioned to play not just a role in technology, but also a pivotal part in the continuing improvement of the quality and the cost effectiveness of healthcare. If they choose to do so, they will not only help the nation, they will be helping themselves, as well. Marshall Steele, M.D. is a board-certified orthopaedic surgeon and founder and Chief Executive Officer of Marshall Steele, a healthcare firm that implements Destination Centers in orthopaedics and spine, provides data collection tools for both patient- and hospital-reported outcomes and a nascent national registry for benchmarking and best practices. He is the author of the book Orthopedics and Spine: Strategies for Superior Service Line Performance, Healthleaders 2009. He can be reached at msteele@marshallsteele.com. The partnership of the hospital and the surgeon is the new customer. 3

JULY 2010 PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS FINANCIAL ROUNDTABLE H.R. 3590: What Follows? The passage of H.R. 3590 has not had an immediate impact on the stock prices of orthopaedic companies...more time is needed to determine how it will impact top and bottom lines. In the October 2009 issue of ORTHOKNOW, we asked financial experts for their perspectives on funding in the economic climate. Here we ve returned to seek their thoughts following the passage of H.R. 3590. Three experts, three questions. We re deeply grateful to these gentlemen for taking the time to bring the readers up to date. Robert C. Faulkner, Redmile Group Rob Faulkner is a Managing Director at the Redmile Group LLC, a healthcare investment management firm, where he focuses on public and private medical device company investments. Before joining Redmile Group, Rob was for 16 years a medical device or biotechnology industry analyst at investment banks, including Thomas Weisel Partners, Prudential Equity Group and Hambrecht and Quist. Prior to Rob s work as an analyst, he was a consultant for The Wilkerson Group, a health care specialist firm, and spent four years at SmithKline Beckman. Rob earned an A.B. at Harvard University and an M.B.A. at the Tuck School of Business Administration at Dartmouth. Bryan Hughes, P&M Corporate Finance Mr. Hughes is a Director of P&M Corporate Finance and leads the firm s Life Sciences team. He has over ten years of business and transaction advisory experience, specializing in assisting clients with mergers and acquisitions, leveraged buyouts, private placements, financings, valuation and strategic consulting. Bryan s clients have ranged from global life sciences companies to small, privately held businesses. In addition to leading the firm s Life Sciences team, he has also completed transactions in business services, consumer and industrial sectors. Mr. Hughes earned a B.B.A. with emphasis in finance from the Stephen M. Ross School of Business at the University of Michigan. He is a licensed securities representative, holding Series 7 and 63 registrations. He has written numerous articles and is a frequent speaker on healthcare investment banking topics. Gary D. Stevenson, MB Venture Partners Gary Stevenson cofounded MB Venture Partners in 2001 after six years in healthcare investment banking and equity research. He also spent seven years in a variety of general management roles with Abbott Laboratories. Gary holds an undergraduate degree in accounting from the University of Missouri. He also received an M.B.A. from the J.L. Kellogg Graduate School of Management at Northwestern University. Gary serves on the Boards of several MBVP portfolio companies including BioSET and Spinal Restoration, and he is Chairman of the Board for Protein Discovery. He is also a board observer for AxioMed Spine and Applied Spine Technologies. He is a past board member for BioMimetic Therapeutics and Anulex Technologies. Question #1: Relative to the financial climate, what has changed since the passing of H.R. 3590, Patient Protection and Affordable Care Act (and/or, what changes have you noted in general since 4Q09)? Bryan Hughes, P&M Corporate Finance: Although the markets are down since the beginning of the year between five and six percent, they are up more than 12.5 percent from a year ago; broadly, the economy is in full recovery mode. Since the passage of H.R. 3590, orthopaedic stocks are down approximately 7.3 percent; however, the S&P 500 is down 8.3 percent and the S&P 500 Sector Indices Healthcare is down 11.2 percent during the same period. Therefore, among other factors, the passage of H.R. 3590 4

PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS JULY 2010 Financial Roundtable... has not had an immediate impact on the stock prices of orthopaedic companies. While Medtronic posted flat sales for the first calendar quarter of 2010, other large players performed well last year, such as DePuy Spine, which recorded growth of 10.9 percent, handily beating analyst estimates. Since many of the policy changes in H.R. 3590 are phased in over the next several years, more time is needed to definitely determine how H.R. 3590 will impact top and bottom lines. Robert C. Faulkner, Redmile Group: The recovery in the fundraising climate seems to have stalled, at least in the public markets. The flurry of IPOs/follow-on offerings faded as volatility came back in late April. There are likely to be a few good quality transactions in the next few months, and I think they will get done at fair prices, but the risk tolerance is low at the moment. The transactions will be more like exceptions that prove the rule, such as Tornier and perhaps BioHorizons fairly mature, selffunding businesses. For private transactions/ venture capital, I do not perceive much improvement since 4Q09, as the level of panic among the venture capital community remains high as they triage their existing portfolios. Many venture capital firms appear to be capitulating to a wind-down mode, a process that can take years, as they fail to raise new funds. Hedge funds have curtailed their private activities, it appears, as well, though they can come back quickly. Gary Stevenson, MB Venture Partners: I think it is still early after the passing H.R. 3590 to feel the effect on what we do. We finance early stage start-ups in the medical device industry, particularly in the musculoskeletal industry. We commented in 4Q09 that generalists who tend to invest in late stage companies, like hedge funds, are spooked by the prospect of healthcare reform and as a result, have stopped investing in medical device start-ups like they were a few years ago. This remains largely the case today. Question #2: Relative to H.R. 3590, what is the impact to the orthopaedic industry from the Wall Street perspective? When do you expect money to flow more freely? Bryan Hughes, P&M Corporate Finance: Wall Street needs to calculate the net result of the numerous changes imposed by H.R. 3590 for each orthopaedic company, those that are potentially negative (e.g. the revenue tax or further restrictions on relationships with surgeons) and those that are potentially positive (e.g. the addition of approximately 32 million Americans to insured status). The IPO window has been virtually closed for the past two years; however, two orthopaedic-related companies have recently filed to go public in just the past month, Tornier and Bio- Horizons. Assuming the companies do not withdraw or postpone their filings, they will each act as a barometer for the financial market s appetite for pure play orthopaedic/dental companies. Money is out there, but it is very selective. Robert C. Faulkner, Redmile Group: I think the healthcare specialist investment community has been surprised by the dramatic selloff of healthcare stocks after the passage of the bill. Most expected a relief rally as investors realized it wasn t so bad for the industry. The market ignored healthcare as the economy improved for more growth in cyclicals, but then, when fears about a stall in the recovery arose, the focus shifted to assumed cuts in government spending. I suspect that, instead of being viewed as defensive, healthcare investments are viewed as a proxy for government spending, which is expected to be cut. That the healthcare bill actually allocates a lot MORE money to healthcare is being ignored, since most do not believe such increases are feasible. This all coincides at this moment with very negative psychology in the market in general, especially around governments, of course. Generalist investors drove this aversion to healthcare and are the same people likely not allocating to healthcare venture capital funds, as well. It is safe to say that early-stage capital will be scarce for a long time. In public markets, I think the money will flow more freely starting with the next real rally, and much will be absorbed by existing public entities, like last time. For private companies, we will need to see IPOs and perhaps a turn in sentiment toward healthcare investments. There are likely to be a few good quality transactions in the next few months, and I think they will get done at fair prices, but the risk tolerance is low at the moment. 5

JULY 2010 PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS Revenue-stage companies in our portfolio have had a little bit more luck, but insider-only rounds are more the norm than the exception. Financial Roundtable... Gary Stevenson, MB Venture Partners: The financing environment remains very challenging for musculoskeletal start-ups. This is particularly the case for clinical stage companies enrolling PMA studies. Revenue-stage companies in our portfolio have had a little bit more luck, but insider-only rounds are more the norm than the exception. It is encouraging to see selected financings involving strategic players and the large recent financing between K2M and Welsh Carson. So maybe we are at the beginning of an improvement in financing alternatives for musculoskeletal start-ups. Question #3: What advice do you have for the orthopaedic industry, moving forward? Bryan Hughes, P&M Corporate Finance: Learn to play by the new rules. Even though the American Association of Orthopaedic Surgeons alongside 32 state and regional orthopaedic associations and 17 orthopaedic specialty societies formally opposed H.R. 3590, industry s best path is to comply with regulations pertaining to relationships with surgeons, identify expenses that can be reduced in order to counteract the new tax on revenues and use comparative effectiveness as an advantage. In comparison to the time before the passage of H.R. 3590, orthopaedic companies should place greater emphasis on devices primarily for non-medicare patients (those under age 65) and even those for patients under the age of 45. Of the approximate 32 million uninsured American patients who will be added to insured population, an estimated 75 percent are under the age of 45. If a company has a choice between two otherwise equal projects, a device for the younger patient population may be more wise to pursue. Robert C. Faulkner, Redmile Group: I think the orthopaedic industry is fortunately situated, especially the reconstructive segment. The switching costs for surgeons is perhaps highest among common medical devices, making share and prices very stable, even now. Recon has among the best pricing trends of any major category. Of all the spaces, I expect orthopaedics to do better than average and to attract capital. For now, the days of another ordinary spine startup are over, as we all know. However, a real clinical-value-added product is likely to attract capital. Devices with unclear FDA paths (e.g., new materials) are going to be tough to finance because of the erratic and at times unreasonable behavior of FDA trying to find its footing after years of abuse and criticism. Likewise, long paths with big trials are currently not fundable, for the most part, but these should come back because they are where the outsized returns lie over time. Gary Stevenson, MB Venture Partners: Well, I hardly feel qualified to offer advice for the whole industry, but you asked. It is easy to see the challenges we all face in the industry and lose focus on the industry positives. The worldwide demographic trends favor companies in the orthopaedic industry. Innovation has never been more important to address unmet clinical needs and provide better care at a lower cost. The venture industry s contribution is to help provide innovative product solutions to the orthopaedic industry if we do that, patients will want them, surgeons will use them and payers will pay for them. FROM OUR NATION S CAPITOL Developments Affecting the Healthcare Industry The President Signs H.R. 3962: The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 2.2% Medicare Physician Fee Schedule Update for June 1, 2010 Through November 30, 2010 On June 25, 2010, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010. This establishes a 2.2% update to the Medicare Physician Fee Schedule (MPFS) payment rates retroactive from 6/1/10 through 11/30/10. The Centers for Medicare & Medicaid Services (CMS) directed Medicare claims administration contractors to stop processing claims at the negative update rates and to temporarily hold all claims for services rendered from 6/1/10 and later, until the new 2.2% update rates are tested and loaded into contractors claims processing systems. CMS has begun processing claims at the new rates as of 7/1/10. 6

PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS JULY 2010 Developments... While claims for services rendered prior to 6/1/10 will continue to be processed and paid as usual, those claims containing 6/10 dates of service which have been paid at the negative update rates will be reprocessed as soon as possible. Under current law, Medicare payments to physicians and other providers paid under the MPFS are based upon the lesser of the submitted charge on the claim or the MPFS amount. Claims containing June dates of service that were submitted with charges greater than or equal to the new 2.2% update rates will be automatically reprocessed. A summary of HR 3962 is available at www.gop.gov/bill/111/2/hr3962. Please find additional relevant information at www.cms.gov/physicianfeesched. IPO WATCH: TORNIER In June, it was reported in ORTHOFLASH that: Tornier filed to raise up to US $205MM in an initial public offering. Net proceeds will be used to repay debt and may support the acquisition of businesses, products or technologies. The company will trade on NASDAQ under the symbol TRNX. (Form S- 1 for Tornier B.V., SEC.gov, 6/7/10; Reuters, 6/8/10) The following summary shares highlights from the company s SEC filing. Company Information Founded ~70 years ago in France by René Tornier; acquired by an investor group in 2006 U.S. HQ in Edina, Minnesota; global corporate HQ in Amsterdam, The Netherlands Focused upon treatment of musculoskeletal injuries and disorders of shoulder, elbow, wrist, hand, ankle and foot (extremity specialists); sells >70 product lines in ~35 countries Products address joint replacement, trauma, sports medicine and orthobiologics; in certain ex-u.s. markets, offers joint replacement products for hip and knee; does not actively market large joints in U.S. and has no plans to do so History includes introduction of porous orthopaedic hip implant, application of Morse taper for orthopaedic implants and introduction of reverse shoulder in U.S. Believes worldwide market opportunity increased from ~$2BB in 2006 to ~$7BB in 2009 Claims #2 market position worldwide for shoulder joint replacement products; #1 market position in U.S. in foot and ankle joint replacement systems in 2009 (as measured by revenue) Currently aware of several private insurers that classify procedures using Salto Talaris Prosthesis and Conical Subtalar Implants as experimental or investigational and have denied coverage and reimbursement for such procedures Single U.S. sales channel comprising network of ~23 independent commission-based sales agencies, >300 sales reps as of 4/4/2010; ex- U.S. sales covered by 9 direct sales offices, ~32 distribution partners Use of Proceeds Net proceeds will be used to repay all existing indebtedness of ~ 80.7MM (US $108.7MM) and for general corporate purposes, including acquisition of other businesses, products or technologies Business Strategies Introducing new products/technologies to address further extremity needs Product introduction stats: 2007: 4 new 2008: 9 new 2009: 18 new (6 primarily in U.S.) Noted robust pipeline of orthobiologics products under development, actively pursuing new product additions Expanding ex-u.s. business In large, relatively underdeveloped international extremity markets (e.g. Japan and China), the same sales channel sells company s hip and knee portfolios and extremity joint products, thus providing sufficient product breadth and economic scale In 2009, signed agreement with Weigao for distribution of products in China 7

JULY 2010 PRIVILEGED INFORMATION FOR MEMBERS AND SUBSCRIBERS THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT is coming! Updated version available after July 21 Access to the electronic version of this comprehensive overview is a benefit of Membership to ORTHOWORLD. Watch for our email announcement or stay tuned to www.orthoworld.com. Pre-order your professionally-printed, bound copies using the enclosed order form. Tornier IPO... Achieving and improving profitability through operating leverage Expanded manufacturing capacity with 2 new plants in Ireland and France, now at 5 manufacturing facilities EXHIBIT 1 GLOBAL REVENUE 2009 VS. 2008 (US $MM, Constant Currency) Region $MM Growth U.S. $114.2 +23% Ex-U.S. $87.2 +3% Total $201.5 +14% Product Category $MM Growth Upper Ex Joints/Trauma $125.4 +15% Lower Ex Joints/Trauma $20.4 +12% Sports Med/Orthobiologics $6.5 +162% Large Joints/Other $48.9 +2% Total $201.5 +14% 2009 Highlights Commenced ex-u.s. launch of HLS Kneetec knee implant (contains a 3rd condyle for additional stabilization) Launched nearly all of sports med and orthobiologics products in 1H09, only in U.S. Launched ArthroTunneler in 2H09 EXHIBIT 2 GLOBAL REVENUE 1Q10 VS. 1Q09 (US $MM, Constant Currency) Region $MM Growth U.S. $34.1 +19% Ex-U.S. $27.6 +25% Total $61.8 +22% Product Category $MM Growth Upper Ex Joints/Trauma $36.6 +16% Lower Ex Joints/Trauma $6.2 +21% Sports Med/Orthobiologics $3.4 +201% Large Joints/Other $15.4 +19% Total $61.8 +22% 1Q10 Highlights Upper extremity joints/trauma impacted by increased sales of Aequalis and Affiniti Biologics growth attributable to increased sales of Conexa ArthroTunneler contributed $0.5MM Timeline of Select Material Transactions 2007: Acquired Axya: sports med products (suture anchors, arthroscopic instruments for shoulder repair) Distribution agreement with Bioretec for private-label rights to NexFix Resorbable Fixation System Acquired assets of DVO Extremity: trauma, including hand/wrist; shoulder replacement (now marketed as Affiniti) Acquired Nexa Orthopedics: strong portfolio of foot/ankle implants; next-generation shoulder replacement pipeline (now marketed as Ascend); pyrocarbon biocompatible material Exclusive license/supply agreement with Tepha for poly-4-hydroxybutyrate polymer, branded as Biofiber for use in suture applications, soft tissue repair development projects 2008: Agreement with BioSET to develop, distribute products using F2A synthetic growth factor technology for soft tissue repair Exclusive distribution agreement with Life- Cell to commercialize xenograft reconstructive tissue matrix for orthopaedic and podiatric applications (rotator cuff, tendons, cartilage), marketed as Conexa 2009: Agreement with Anova (spine surgery company) for sale of certain suture welding technology assets and licensed related IP Definitive agreement with TAG Medical to license ArthroTunneler suture-passing device Aforementioned agreement with Weigao 2010: Acquired C2M Medical: Piton Knotless Anchor for rotator cuff repair is published monthly by ORTHOWORLD Inc. and is available only to Members of ORTHOWORLD or by standalone subscription. 1992-2010 ORTHOWORLD Inc. All rights reserved. Reproduction, storage or transmission by any means electronic, mechanical, photocopying, recording or otherwise is strictly prohibited by law. BARE BONES, ORTHOKNOW and ORTHOWORLD and ORTHOFLASH are trademarks of ORTHOWORLD Inc. ORTHOWORLD Inc. 8401 Chagrin Road, Suite 18 Chagrin Falls, OH 44023 USA T: 440.543.2101 F: 440.543.2122 E: knowledge@orthoworld.com W: www.orthoworld.com 8