1
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`NUVASIVE 1051
`NuVasive, Inc. v. Warsaw Orthopedic, Inc.
`IPR2013-00206
`IPR2013-00208
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`Bending the Paradigm
`A White Paper on the Spine
`
`Table of Contents
`
`Investing in Orthopedics and Spine .............................................................................
`
`Product Introductions Expected to Drive Robust Spine Market Growth
`
`Orthopedic Sector Valuation ............
`
`Spine Sector Valuation
`
`Top Pick: Kyphon ...........
`Trends and Drivers in the Spine Market ................
`
`Trends and Drivers in Spine.....................................
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`Demographics—Expanding the Market at Both Ends ...........
`
`Increasing Use of Implants .................................................................................
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`Minimally Invasive Surgery—Penetrating All Areas of Spine
`
`New Technologies Broaden the Spectrum.......................................................
`
`Overview of the Spine................................
`
`Overview of the Spine.................
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`Evolving the Treatment Landscape: Ciironologic Overview .....
`
`Consolidation Trend: Recent Acquisitions1n the Spine Market ...................
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`Competitive Landscape ..................................
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`Vertebral Compression Fracture Market .....
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`Vertebral Compression Fracture Market (VCF) ............
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`Current Product Offerings: Pros and Cons
`
`Vertebral Surgery Market 0pporrunity............
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`Expanding Indications—Long—Term Growth Driver.....................................
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`Competitive Landscape...
`Reimbursement Overview..
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`Who Wins? Kyphon Well—Positioned \Vith Endustry—-Lead.ing Growth
`
`Spinal Fusion Market and MIS Fusion Landscape............
`
`Spinal Fusion Market: Estimated 53bit Opportunity.”
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`MIS Fusion: Small Competitors Make a Large Impact
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`Manufaculrers: Who Will Win Out? Spotlight on NuVasive ..
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`Feedback on Competitive Offerings ................
`
`Competitive Overview
`
`Dynamic Stabilization.
`Expect Large Opportunity for Soft Stabilization
`Artificial Disc Market .........................................
`
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`Artificial Discs: New Technology Supports Growtngh ar ets..
`Physician Feedback: \Which Design Will Win? ...............
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`”ricing/Reimbursement.........................................
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`Artificial Discs: What Are They? ............................................................
`Differentiating Artificial Discs ..........................
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`Cost/Reimbursement .......
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`Competitive Landscape...
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`Nucleus Replacement Players ..............................................
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`'h'ch Disc Pipeline Demonstrates Solid Early Results ..
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`Orthobiologics ...................................................................
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`Bone Grafts and Bone Substitutestriving Growth in Spina Surgery.
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`An Overview of Bone Grafting ...........................................
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`Stimulating Bone Growth—Where Are We Now? .......
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`Synthetic Bone Growth Factors ......................................
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`Players in the Orthobiologics /Bone Graft Market
`Initiatives Target Orthobio Opportunity....................
`CompanyModels
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`july 12, 2005
`
`Medical Devices
`
`Lynn C. Pieper, CFA
`415.364.5999
`lpieper@tweisel.com
`
`Bro oke LeVass cur
`415.364.2559
`
`bLeVasseur@tweiseLcom
`
`Kari Hall
`415.364.2904
`
`khall@tweisel.com
`
`W Thomas Weisel Partners
`EfililT‘i’ EESEARfiE-i
`
`
`
`BENDING THE PARADIGM
`
`A \White Paper on the Spine
`
`Executive Summary
`
`the fastest-growing segment within the orthopedic
`the spine market,
`We estimate that
`market, will reach approximately $4.1bn worldwide in 2005, representing yearrover-year
`growth of 21%. We are optimistic that the spine market can sustain growth above 20% for
`the next several years, driven by favorable demographics, new product
`introductions,
`industry consolidation, and advanced surgical
`techniques.
`\Ve expect pipelines
`to be
`dominated in the near term by product introductions in orthobiologics and artificial discs.
`
`Trends within the spine market remain robust, with favorable demographics and the
`introduction of new technologies driving unit volume growth approaching the double digits.
`In addition, the increasing use of instrumentation and orthobiologics is increasing price per
`procedure and contributing to mix benefit.
`
`Minimally invasive (MIS) trend sustainable. Our research suggests that the spinal surgery
`segment will continue to trend toward more minimally invasive surgical alternatives. We
`expect that minimum~access spinal surgery will remain at
`the high end of the growth
`spectrLini, driven largely by new surgical
`instrumentation and techniques designed to
`minimize muscle damage and blood loss associated with open procedures. We believe that
`NuVasive stands best positioned to benefit from the ongoing shift toward MIS.
`
`Continuum of carewemerging market. The evolution of care from conservative, non»
`surgical
`treatment to total disc replacement will soon be populated by a multitude of
`offerings to address various states of spinal and disc degeneration. We expect that new
`dynamic technologies
`such as
`flexible rod systems,
`intrabody spacers, and nucleus
`replacements will all see strong acceptance in the market, helping to mold the new
`continuum of care, which we expect to be tilled with many non—fusion alternatives.
`
`Kyphon continues on strong trajectory. The vertebral compression fracture (VCF) market
`continues to present a large, underpenetrated market opportunity. Physician feedback
`indicates that kyphoplasty Continues to lead this market, based on potential for height
`restoration, safety profile, and ease of use. In addition, we believe that Kyphon is beginning
`to expand its geographic presence and make inroads into other untapped markets such as
`cancer and trauma.
`
`Consolidation likely to continue. The spinal market has been a hotbed for acquisition in
`the past few years, With many attractive targets sitting on the blocks, private players with
`solid technology continue to be taken out at premium valuations ranging from 2.5x to 6.5x
`Hailing 12—month sales. \We expect this trend toward consolidation to continue as the larger
`players iook to boost growth rates and ensure a play in hot new technology areas,
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`INVESTING IN ORTHOPEDICS AND SPINE
`
`Over the past several years, the orthopedic device market has grown to approximately
`$20bn. Important trends in orthopedics,
`in our view, include demographics that are
`expanding implant procedure volume, price increases (although moderated somewhat
`from recent years), and mix shift to innovative technology, all of which are sustaining
`strong spine growth at the 20% level.
`
`the fastest-growing segment within the
`We estimate that the worldwide spine market,
`orthopedic market, will reach approximately $4.1bn in 2005, representing year—over—year
`growth of 21%. We are optimistic that the combined spine market can sustain greater than
`20% growth for the next several years, aided in the near
`term by new product
`introductions in orthobiologics and minimally invasive surgery and by the acceptance of
`artificial discs in the United States.
`
`We have identified four primary growth drivers for the spine market, which are the
`following:
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`Favorable demographics. The 4-5-65 year old group is growing as a percent of the
`overall populau'on and continues to expand the patient base. This group is also
`becoming increasingly active, driving procedural volume.
`
`the use of additional spinal
`Increasing use of implants. We estimate that
`instrumentation is growing. The increase in instrumentation per procedure—“as well
`as more adjunctive orthobiological use with InFuse EM? and related bone growth
`factors—increases the revenue per procedure.
`
`9 Minimally invasive surgical approaches are making spinal surgery an Option for
`less serious conditions (i.e., VCF), thus increasing the potential patient population.
`
`0 Orthobiologics. We expect to see continued use of Bilfl’, resulting in an ongoing
`and increased pull-through of caged procedures and more favorable reimbursement
`for next—generation growth factors coming out of the pipeline. We expect Medttonic
`to continue to benefit from this trend via lnFuse with its LT and lnterFix cages, and
`
`we also expect Stryker to receive approval for OP-l in spinal fusions in the next 12—
`24 months.
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`u_____.._._—————-———~_———-"—‘-'—‘““_———
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`PRODUCT INTRODUCTIONS EXPECTED TO DRIVE ROBUST SPINE MARKET
`GROWTH
`
`We expect that strong market trends will complement a robust industrywide product
`pipeline tor the next three to five years, noting powerful demographics driving spinal
`surgery procedural volume growth, increased use of devices in spinal surgery, and add—on
`products such as orthobiologic agents. In addition, our channel checks indicate that spine
`surgeons are enthusiastic, although cautious, about the opportunity presented through
`next-generation spinal disc technology. We believe that, over the next few years, adoption
`of artificial disc technology will be somewhat tempered but will ultimately be the catalyst
`driving sustainable 20%+ growth in the spine market.
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`July 5,005" "
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`Orthobiologic agents are becoming an increasingly important component of spinal
`procedures, and we expect the development of biologic agents to continue to help shape
`the spine market over the next 12-24 months. We broadly define the spinal fusion market
`as metal devices and cages, machined allograft bone dowels, wedges and spacers, all used
`in spinal fusion procedures {i.e., fuse vertebrae or correct spinal deformities and fractures).
`While still a relatively small portion of the total spinal market, we believe that artificial
`discs and minimally invasive solutions will significantly expand the worldwide spine
`market over the next several years.
`
`Our market models indicate that the spinal market represented approximately 20% of total
`orthopedic industry sales
`in 2005,
`including an accelerating contribution from
`orthobiologics. We expect spine sales to continue to increase as a percentage of the
`orthopedic industry over the next few years, as growth in the spine market continues to
`outpace that of the overall orthopedics industry, which is growing in the mid—to—high
`teens.
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`ORTHOPEDIC SECTOR VALUATION
`
`At the present valuation level, the orthopedic industry offers investors a unique opportunity
`for modest capital appreciation with downside risk protection, in our view. Historically, the
`market has placed a premium P/E on the predictable, consistent results and cash flow
`generation posted by industry leaders. More importantly, the industry leaders continue to
`exceed top-line expectations while investing in salesforce enhancements and research and
`development in products to address high-growth markets. Recently, concerns over pricing
`pressure, gain sharing and the scrutiny placed on consulting agreements have put pressure on
`industry multiples. We believe that the decline is unwarranted and that, longer term, the
`orthopedic space deserves to trade at a premium to its medical device peers.
`
`Reflecting conservatism, our model anticipates tempered (but positive) growth in
`reconstructive implants, augmented by strong performance in spine, orthobiologics, sports
`medicine and, to a lesser degree, trauma. We expect a 12~15% top-line orthopedic industry
`growth rate in 2006, coupled with expanding margins and innovation in spine products, to
`support valuations in 2006 and 2007. Moreover, we are optimistic that new premium-
`priced product introductions may push reconstructive segment growth rates above our
`13% estimate for 2006.
`
`We expect the combination of consistency and predictability in earnings and cash flow
`generation and the continuation of high growth in markets such as spine, orthobiologics
`and soft tissue repair to support ongoing outperformance of the orthopedic sector in
`2005-2007.
`
`With the orthopedic sector amentiy trading at nearly 1.3x bottom—line growth rates on 2006
`111’.) estimates, we do not see much room for mediate multiple cxpanston. We Believe that
`upside to estimates in reconstruction and]or further development of spine and orthobiologics
`would warrant the valuadon of the sector remaining at current levels, however.
`
`We continue to believe that the large—cap orthopedic group (at 20x CYOGE EPS) deserves
`to maintain a premium to the large-cap device group (also at 20x CYOGE BPS), albeit with
`tempered enthusiasm, given decelerating revenue growth expectations for 2006 and less
` favorable currency tailwinds.
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`Thomas Weisel Partners LLC
`Lynn C. Pieper, CFA 415.364.5999
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`SPINE SECTOR VALUATION
`
`While we expect a 12-15% top—line orthopedic industry growth rate in 2006, we note that
`our assumption for core reconstructive implant growth lies at the 10-12% level and is
`bolstered by innovation in spine products. We estimate that the spine market will continue
`to post growth at the 20% level as demographics, minimally invasive procedures and
`instrumentation and artificial disc technology further penetrate and expand existing
`market opportunities.
`
`While there has been meaningful consolidation within the spine and orthopedic markets,
`much of the acquisition activity has been of development stage companies with artificial
`disc technologies. Pureaplay spine companies have, on average, carried a significant
`valuation premium to the broader medical device group, reflecting both this takeout
`potential and superior market growth rates.
`
`The pure~play spine companies are currently trading at 4.5x 2006 sales estimates,
`representing a premium to the large—cap orthopedic group (at 4.0x 2006 sales estimates),
`the broader large-cap medical device group (at 3.0x 2006 sales estimates) and to the small»
`to—mid—cap medical device group (at 3.6}: 2006 sales estimates). We estimate blended sales
`growth of approximately 35% in 2006 for the pure~play spine companies, however, with
`sustainable top—line growth at the 20% level. This compares to our expectation for 13%
`growth for largevcap orthopedic companies in 2006, 11% growth for the largercap medical
`device group, and 20% top—line growth for the small—to—mid cap medical device group in
`2006.
`
`While we do not see room for significant multiple expansion from current levels as the
`spine companies already trade at a premium valuation, we believe that superior growth
`prospects relative to the medical device market, upside to estimates driven by continued
`market expansion and strong gross margin will continue to support
`this premium
`valuation. With our expectanon for BPS growth at or above the 30% level for the next 2-3
`years, we continue to believe that the spine sector offers investors a unique opportunity
`for meaningful capital appreciation with moderate risk stemming from the evolving spine
`market.
`
`
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`TOP PICK: KYPHON
`
`Kyphon’s long—term strategy of focusing on treating spine-related ailments exposes the
`company to one of the fastest-growing segments in orthopedics, which we estimate is
`growing 20u25% annually. While the company continues to serve the underpenetrated
`VCF market with its BOO-person-plus woridwicle salesforce, we believe that it will be able
`to leverage the infrastructure in the US. to provide instrumentation for a variety of
`ailments treated by spine surgeons. On track LU have trained: 4,800 US. surgeons ij} the
`end of 2005, Kyphon’s salcsforce is, we believe, capable of selling additional products
`used to treat vertebral compression fractures, spine deformities and disc-related injuries.
`Moreover, the company’s efforts to expand internationally are beginning to bear fruit with
`the estabiishment of direct selling efforts (the company will have more than 60 direct reps
`in Europe by year’s end) and reimbursement in select countries such as Germany. We
`expect condoned sales growth to be driven by expanding and penetrating the VCF market,
`particularly with the additional marketing clearance relative to outcomes data, higher
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`Thomas
`eisel Partners LLC
`July 2, 2005
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`Lynn C. Pieper, CFA 415.364.5999
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`revenue per procedure as Kyphon’s bone cement is incorporated in an increasing percent
`of procedures, product pipeline addressing additional indications (i.e., cancer and trauma),
`and geographical expansion.
`
`Kyphon Salesforce Continues to Execute
`
`inErastructure of
`We believe that Kyphon is well positioned to leverage its US.
`approxinmtely 200 sales reps to provide instrumentation for a variety of ailments treated
`by spine surgeons. The company has embarked on an aggressive marketing campaign
`targeted at primary care physicians to improve referral patterns for the treatment of VCF
`to the spine surgeon for kyphoplasty.
`
`Expanding Indicadons—Long—Tem) Growth Driver
`
`Kyphon continues to focus an expanding the use of ltyphoplasty to areas outside of
`osteoporosis, in trauma and cancer in particular. Management estimates that the trauma
`and cancer markets for kyphoplasty represent opportunities of approximately $450mn and
`$350mn, respectively. The company has six trials set to enroll (or already enrolling) in
`2005 in trauma, oncology, pulmonary function, and to address the Japanese regulatory
`process. We are modeling $4—5mn in clinical trial expense during 2005, with an additional
`$4-5mn directed at clinical and regulatory efforts in Japan.
`
`International Expansion Ongoing
`
`Kyphon continues to be committed to long-term growth, with focus shifting to more
`aggressive international expansion. Direct operations have been established in Germany
`and Austria, and growth continues to demonstrate strong uptake. Germany continues to
`post very strong growth and comprised approximately 55% of international sales during
`the 1Q05.
`
`Trauma use growing outside the U.S. Kyphon has launched lIauma applications in
`Europe and expects to expand the product line to cover additional applications. The
`company continues to discuss details of a US. clinical with the FDA, but it expects the
`road to approval to take several years.
`
`Reimbursement Landscape: With positive reimbursement in place in Germany and
`with an established presence in Spain and Italy, Kyphon anticipates that Switzerland and
`Austria will
`iikely receive positive reimbursement decisions in 2005. While focused on
`
`building direct efforts where possible, the company also has a distributor model in Turkey,
`Eastern Europe, Mexico, and Brazil. In addition, the company currently has a nine person
`team working on clinical and regulatory issues in japan, with clinical trials expected to
`have begun enrollment in ZQOS, and commercialization slated for 2008.
`
`We expect international sales to increase to i5.4% of sales, with growth ahead of US.
`growth rates in both 2005 and 2006. We have modeled international sales growth of 65%
`in 2005 and 35% in 2006, to which we believe there may be modest upside.
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`Valuation
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`Kyphon is trading at a 4.7x our 2006 sales estimate, compared with the small cap medical
`device group at 3.7x. On a P/E basis, shares of Kyphon are trading at 39:: our 2006 EPS
`estimates versus the small cap group multiple of 33x 2.006 estimates. We continue to
`anticipate Kyphon to post (1) longer term EPS growth at the 30% level and (2) carry a
`spine/takeout premium. We believe that Kyphon can continue to execute on its strategy
`to increase market penetration, grow referral patterns, and expand through its competitive
`strength. We believe that recent concerns surrounding the Disc-O-Tech litigation,
`reimbursement, and competitive threats are largely overblown and expect to see multiple
`expansion over the next few months as fears are put to rest. We reiterate our Outperform
`rating‘
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`Lynn C. Pieper, CFA 415.364.5999
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`TRENDS AND DRIVERS IN THE SPINE MARKET
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`17,“;2050
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`.. .Thoms WCiseletncgs LLC
`Lynn C. Pieper, CFA 415.364.5999
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`TRENDS AND DRIVERS IN SPINE
`
`Over the past 10—15 years, we have seen a momentous shift in the spinal landscape, Spine
`fusion procedures have become largely instrumented (we estimate that more than 95% of
`fusions currently employ some form of instrumentation). In addition, we are seeing an
`increase in the use of multiple instruments during a procedure—for example rods, screws
`and cages. We believe that the primary drivers of this trend are better technology and
`better outcomes.
`
`The spine market has represented one of the fastest~growing sectors in medical devices,
`with spinal fusions growing in the mid—teens over the past few years. More than 12 million
`people in the United States alone have chronic back pain, almost half of which (6 million)
`are in some way disabled by such pain. In addition to being the number-one reason for
`physician visits in the United States, chronic ‘back pain is the second-leading cause of
`worker’s disability. According to spineuniverse.corn, the treatment of degenerative disc
`disease in the United States is estimated to cost due healthcare system more than $60bn
`annually.
`
`Solid Growth Prospects
`
`\ll/e expect the spine market to continue to experience robust growth above 20% over the
`next several years. We suggest that the impetus for such growth will be demographic
`trends and new technology innovation. Demographic tailwinds include the increasing
`prevalence of spinal disease and injuries, an aging and elderly population and a more active
`patient population; leading to an increasing prevalence of spinal surgery. Technological
`innovation is driving the use of more devices and products per procedure to drive better
`outcomes, peer-reviewed clinical studies are illustrating superior outcomes in instrumented
`fusion procedures versus bone—graft‘only procedures, and an increasing number of
`surgeons are now specializing in the spine.
`
`DEMOGRAPHICS—EXPANDING THE MARKET AT BOTH ENDS
`
`Favorable demographics are expanding the demand for spine treatments, according to our
`research, and we expect this trend to support continued strong unit growth in the spine
`market. We are currently modeling an increase of base unit growth of approximately 6-
`12% per year, based on positive demographic trends, with overall market growth of 15—
`22% supported by increasing cost per procedure (largely the result of an increase in the
`use of instrumentation) and modest price contribution (26%). Census calculations
`indicate that the population of people aged 65 and over will grow by approximately 70%
`over the next 20 years, which we suggest Will benefit the orthopedics cleVlce market vra
`increasing demand. We expect the total number of surgical interventions in the spine to
`increase from an estimated 1.1 million in 2002 to more than 1.3 million by 2005. We
`project that spinal fusion procedures will increase from an estimated 508,732 in 2003 to
`641,208 in 2006, representing 26% growth.
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`Lynn C. Pieper, CPA 415.364.5999
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` U.S. Population Over 65 Years (millions)
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`2020B
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`2010E
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`Sources: Social Security Association and Thomas Waisel Partners LLC estimales
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`Among seniors, the number of spinal procedures is growing because of more active
`lifestyles among the elderly (cg, golf and traveling) and longer life expectancies.
`Increasingly, aging patients are demanding new joints to maintain their active lifestyles. In
`addition, patients are becoming more aware of available options and are taking a more
`proactive role in determining their own healthcare. We believe that this trend continues to .
`help grow the overall market, particularly benefiting players such as Medtronic and
`Johnson 8c johnson, which continue to devote a significant amount of resources toward
`patient education and adveru'sing.
`
`Highlighted Demographic Statistics
`
`Roughly 90% of all people over 30 years old are afflicted With some form of back
`problem.
`
`There are more than 49 million back pain iniuries in the U.S. annually, many of which
`involve missed days from work.
`
`the leading reason for physician visits and accounts for more
`Back pain is
`hospitalization than any other musculoskeletal condition.
`
`Back deformity/impairment is the most frequently suffered impairment for people
`under the age of 45 years.
`
`Total back pain costs worldwide exceed $100 billion annually.
`
`According to the National Osteoporosis Foundation, the lifetime risk for getting an
`osteoporotic fracture is 50% for women over 50 and 25% for men over 50
`
`There are more than 700,000 spinal fractures from osteoporosis every year in the
`United States
`
`Over the next 20 years, the 40-64 year old group is expected to increase at a rate of
`more than 2% per year, while the overall US. population is expected to post growth
`of 1% annually.
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`Thomas Weisel Partners LLC
`July 12, 2005
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`Lynn C. Pieper, CPA 415.364.5999
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`INCREASING USE OF IMPLANTS
`
`Our research suggests that instrumented spinal fusions have significantly increased as a
`percentage of overall procedures from the last few years. In the past, non—instrumented
`spinal fusions were performed in which an autograft (using a patient’s own bone tissue,
`usually harvested from the hip) or an allograft (using cadaver bone tissue) is used to
`promote the fusion of two vertebrae at an unstable vertebral joint. However, bone fuses
`more effectively in an environment with minimal motion, and bone grafts are prone to
`shift once in place. Thus, spine surgery instruments, commonly referred to as interbody
`fixation devices (IBFD), are now used in essentially all fission procedures as an adjunct to
`bone grafts in order to limit motion and promote successful spinal fusion.
`
`What Is Being Used?
`
`In instrumented fusion, pedicle screws, rods, hooks, clamps, wires, and plates latch onto a
`vertebral segment to limit
`its motion. Interbody cages (titanium cylinders), machined
`allograft bone dowels and spacers are also used. They screw into a disc space and allow
`bone to grow through them. Bone graft is often packed around the implant or into the
`center of the metallic device to promote adjacent vertebral bone fusion.
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`MINIMALLY INVASIVE SURGERYWPENETRATING ALL AREAS OF SPINE
`
`The majority of spine surgery continues to be performed via large open incisions with
`major dissection of the muscle tissue overlying the spine. These techniques are fraught
`with post—operative morbidity. With the recent advent of minimally invasive spine devices,
`the promise of shorter hospital stays and less post—operative morbidity is in sight for
`patients with spine disease. Lfinimally invasive techniques have been introduced
`suceessfully into most surgical fields. Patients have reaped the benefits of less»invasive
`techniques, enjoying shorter hospital stays, less post—operative pain and faster recovery
`periods (often, such procedures are performed on an outpatient basis). We expect that, as
`in other surgical specialties, utilization of minimally invasive techniques in the spine will
`continue to increase.
`
`MIS Takes All Forms
`
`Minimally invasive surgical alternatives have developed in several different areas over the
`last few years. Vertebral compression fractures, which were once only treated with
`conservative care, can now be addressed with minimally invasive alternatives, such as
`kyphopiasty and vertebroplasty, that offer better outcomes. LeSs invasive, muscle-sparing
`fusion techniques and platforms are creating a new gold standard for ideal surgery length,
`blood, loss. and recovery time
`
`Large Competition Benefits Market
`
`We continue to receive feedback that salesforce relationships will he key in increasing the
`use of minimaliy invasive spine surgery. We have been told that every new competitor that
`enters the MIS market brings with it a set of loyal surgecuns. We have noticed a significant
`increase in the number of M13 fusion platforms on the market over the last six to nine
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`Thomas \«eeisl
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`this charged competitive atmosphere could boost overall
`that
`months and expect
`awareness and adoption of MIS, benefiting all participants in the market. In addition, we
`believe that each competitive offering brings with it a unique set of advantages and that,
`longer-term, surgeons will seek out a combination of treatments to address various spinal
`ailments,
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`NuVasive Pioneering MIS Fusion Market
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`to join the MIS revolution, NuVasive has quickly leveraged its
`While not the first
`proprietary nerve monitoring technology and Maximum Access (MaXcess) platform to
`rapidly gain share within the spinal fusion market. Surgeon feedback is overwhelmingly
`positive, indicating that the company’s technologies are much more physician friendly and
`useful than previous offerings from larger competitors, such as Medtronic. Our physician
`contacts indicate that there are several important factors involved in selecting a minimally
`invasive platform,
`including ease of use, availability of training, and familiarity with
`offering/manufacturer. We believe that NuVasive stands positioned to address these
`needs, as the company is increasingly making a footprint for itself in surgery centers and
`operating rooms through its approximately 200 sales reps. In addition, the recent focus on
`training is likely to benefit adoption rates, as the new training facility in San Diego is now
`equipped to train multiple surgeons at once and is filling spots quickly.
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`Kyphoplasty Alters VCF Landscape
`
`Kyphon has rapidly grown to be a market ieader in the minimally invasive spine market.
`Different from its predecessor, vertebroplasty, kyphoplasty utilizes an expandable balloon
`to create a void for cement injection. Theoretically, hyphoplasty may carry the potential to
`restore some of the height lost to VCF. We expect that, as referral patterns continue to
`improve, more patients will turn to kyphoplasty to relieve pain. We currently believe that
`the osteoporosis VCF market alone represents a $1bn—plus opportunity.
`
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`NEW TECHNOLOGIES BROADEN THE SPECTRUM
`
`We believe that new product introductions in the areas of dynamic stabilization, artificial
`discs and orthobiologics (i.e., InFuse BMP, allograft and synthetic bone graft substitutes),
`will likely help sustain spinal industry growth of more than 20% over the near term.
`
`Continuum of Care: Dynamic Stabilization Makes an Entrance
`
`The evolution of care from conservative, non—surgical treatment to total disc replacement
`will soon be populated by a multitude of offerings to address various states of spinal and
`disc degeneration. We expect that new dynamic technologies such as flexible rod systems,
`intrabody spacers, and nucleus replacements will all see strong acceptance in the market,
`helping to mold the new continuum of care, which we expect to be filled with many non—
`fusion alternatives. We believe that Zimmer stands to benefit from this trend, having been
`one of the first companies to spearhead this market with its Dynesis flexible-rod system.
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`hmosWeisel Patners LLC
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`Lynn C. Pieper, CFA 415.364.5999
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`Artificial Disc Opportunity Holds Promise
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`Although data are still being collected, the opportunity for both lumbar and cervical discs
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`could be quite large. Feedback indicates that the keys to adoption are longer-term data,
`greater understanding of motion in the spine and better revision options. Technological
`differences between the various discs are likely to take a back seat as physicians become
`more at ease with dise implantation in general We believe that an important element of
`this evolving market will be proper patient selection and a grasp of all the various data.
`
`Orthobiologics
`
`We believe the future of the orthobiologics market remains in the hands of bone
`morphogenic proteins (BMPs)—eventually to be joined by gene therapy products—both
`of which seek to promote safe and effective bone growth. While Medttonic now
`commands this market with its InFuse EMF product, several other companies have
`products in development that are likely to contribute to growth in this area over the next
`few years.
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`Thomas eisel Parnrtes LLC 7
`Lynn C. Pieper, CPA 415.364.5999
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`SPINAL FUSION MARKET AND MIS FUSION LANDSCAPE
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`Images courtesy of Zimme: Holdings, reproduced here with permission
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`M J
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`Thomas Weisel Partners LLC
`Lynn C. Piepez, CFA 415.364.5999
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`uly 12, 2005
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`SPINAL FUSION MARKET: ESTIMATED $3BN OPPORTUNITY
`
`Over the past 10—15 years, we have seen a momentous shift in the spinal landscape. Spine
`fusion procedures have become largely instrumented (W