MD&M West 2017 Why Big Companies Cannot Innovate Stanton Rowe Chief Scientific Officer

R&D Spend by Big 100 Med Device Companies

Pure-Play Med Device R&D Spend

Where the Cash is Spent

The Way the Medical Devices Industry Assesses Innovation and New Technology Has Changed Stakeholder influence, 2012 vs. 2015 Decision factor importance, 2012 vs. 2015 Other Other C-suite Efficacy Purchasing managers Reimbursement 45 Cost 60 Doctors  Clinician preference 2012 2015 2012 2015 Relative stakeholder importance, n=250 C-suite, Purchasing Managers, and MDs are all predicting similar shifts in influence and factors that represent a dramatically different world for device companies Source: McKinsey and Company 1)The old dynamic of the physician as judge of value has been replaced with the government, private insurers, and consumers increasingly determining what sells and at what price point. 2)Consumers refuse to pay for incremental enhancements that add bells and whistles that do not improve health or reduce cost. 3)The faster, better, smaller, cheaper innovations in medical devices are the devices that will maintain a sustainable advantage. CHI-AAA123-20121218-

In 10 Years, Device CEOS Think the Key Characteristic of Winners in the Industry Will Be: Source: AdvaMed CEO Summit breakout sessions / McKinsey and Company

Big Companies Should Be Best at Innovation R&D infrastructure Rich in tools and capabilities Great talent in biomedical engineering and scientific/medical expertise Know technology and the customer Financial strength ü ü ü ü ü

Integrations Fail/Under-Deliver Due to Insufficient Value Capture Good deal, well executed Exceeded value capture expectations Aligned cultures/management practices to deliver value creation expectations Minimal (if any) key staff & key account losses Accelerated decision-making Successful M&A 30%- 40% 30%- 40% Good deal, poorly implemented Insufficient value capture Customer losses Cultural differences undermining value creation/capture Key staff losses Insufficient integration management 45%- 50% 45%- 50% Failed/ neutral M&A Bad deal Erroneous synergy assumptions Limited to no value capture Weak strategic fit Price too high 15%- 20% 15%- 20% Source: McKinsey and Company

Big M&A deals add value, but are risky It’s not whether M&A is good or bad – it’s whether companies are good or bad at M&A and integrations Large acquirers by positive or negative change in excess Total Shareholder Return Number of companies, n=251 Percent change in excess TRS>0 Percent change in excess TRS<0 36 48 2 years post-deal 5 years post-deal 1 Includes companies in Global 1000 from 1999-2010 that did a deal worth over 30% of their market capitalization and had TRS for 5 years; excludes financials, energy and raw materials firms SOURCE: CPAT, Dealogic

Risk-taking in larger companies Choice of investment into incremental, innovative or disruptive technology Timelines and funding Predictability, expectations and persistence

How Much of R&D is Transformational?

Breakpoints for Transformational Innovation

Top Portfolio Management Challenges

Culture of Innovation Risk-taking and killing projects Setting expectations for both management and project teams Incubation Early stage marketing Learning and adapting Speed to FIH

Edwards Research Center Advanced Technology is Set Up Similar to a Start-up and Focused on Innovative Programs in Structural Heart Disease Advanced Materials Strategy & Marketing Engineering Manufacturing Clinical & Regulatory Edwards Research Center Quality Discovery Sapien Intuity Centera Project M Fortis Forma Project A Project R

Lessons in Innovation: J&J Long ride as president of J&J People had to have the faith and persevere to see it through

Success is going from failure to failure without losing enthusiasm Lessons in Innovation Success is going from failure to failure without losing enthusiasm Failure is the tuition you pay for success PVT animal studies First live case SAPIEN was an “overnight” 10-year success

Only those who dare to fail greatly can ever achieve greatly Only those who dare to fail greatly can ever achieve greatly. – Robert F. Kennedy