Ear, Nose, and Throat (ENT) - Fuller Treacy Money

1 Deutsche Bank Markets Research North America United States Health Care Medical Supplies & Devices Industry Ear, nose , and Throat (ENT) Date 6 October 2016 Industry Update Follow Your nose In 2015, we estimate there were 29M US adult chronic sinusitis patients, making it one of the most prevalent chronic conditions amongst US adults. The disease represents a significant cost burden to society, with substantial direct costs related to the management of the disease (we estimate $ $ per annum), as well as indirect costs, as a result of lost productivity (we estimate $10B). With its large societal burden and the healthcare system s shift away from fee for service , we view chronic sinusitis treatment in the midst of a paradigm shift with new treatment strategies, therapies and technologies that drive clinical outcomes, while reducing overall costs, emerging as winners.

2 Paradigm Shift in the Chronic Sinusitis Market Brittany Henderson Associate Analyst (+1) 212 250-1384 Kristen Stewart, CFA Research Analyst (+1) 212 250-8560 _____ Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Distributed on: 06/10/2016 08:30:00 GMT Deutsche Bank Markets Research North America United States Health Care Medical Supplies & Devices Industry Ear, nose , and Throat (ENT) Date 6 October 2016 Industry Update Follow Your nose Paradigm Shift in the Chronic Sinusitis Market _____ Deutsche Bank Securities Inc.

3 Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Brittany Henderson Associate Analyst (+1) 212 250-1384 Kristen Stewart, CFA Research Analyst (+1) 212 250-8560 Key Changes Company Target Price Rating to (USD) NR to Buy to (USD) NR to Hold Source: Deutsche Bank Top picks Entellus Medical ( ), Buy Source: Deutsche Bank Companies Featured Entellus Medical ( ), Buy Intersect ENT ( ), Hold Johnson & Johnson ( ), Buy Medtronic ( ), Buy Olympus ( ), 3,700 Buy Smith & Nephew ( ),GBP1, Hold Stryker ( ), Buy Source: Deutsche Bank In 2015, we estimate there were 29M US adult chronic sinusitis patients, making it one of the most prevalent chronic conditions amongst US adults.

4 The disease represents a significant cost burden to society, with substantial direct costs related to the management of the disease (we estimate $ $ per annum), as well as indirect costs, as a result of lost productivity (we estimate $10B). With its large societal burden and the healthcare system s shift away from fee for service , we view chronic sinusitis treatment in the midst of a paradigm shift with new treatment strategies, therapies and technologies that drive clinical outcomes, while reducing overall costs, emerging as winners. Key Themes to Drive Industry Shift Minimally Invasive Treatment is Large and Underpenetrated: Balloon sinus dilation (BSD) is a minimally invasive alternative to functional endoscopic sinus surgery (FESS). The procedure was introduced in 2005, but remains underpenetrated (we estimate 20% today).

5 We view penetration increasing to 26% in 2021 lead primarily by continued economic and clinical data. From the Operating Room to the Physician s Office: We believe an increasing number of chronic sinusitis procedures will shift from the operating room to the physician s office setting moving forward. This shift provides benefits to all: patients, physicians, and payors. DB Survey Supports View of Market Growth and Penetration We conducted a survey of 30 US based, board certified otolaryngologists. We asked our survey respondents to comment on volume expectations, procedure settings, and market share trends. Our results indicate increased volume across procedure types, a move toward office based procedures, and further penetration of minimally invasive treatment options. Opportunities for Technologies that Lower Costs and Improve Outcomes New technologies that further enable minimally invasive procedures and the shift to physician s office based care are also garnering more attention.

6 Medical supplies and devices companies have taken note with recent launches of more compact navigation systems, steroid eluting stents, and more compact surgical tools and technologies. Initiate Coverage of the Two ENT Pureplays: ENTL at Buy and XENT at Hold We are initiating coverage of two pure play ear, nose , and Throat (ENT) medical supplies and devices companies. For Entellus (ENTL), we see upside from current levels as the company continues to enable the shift of procedures from the operating room to the physician s office and expands its product portfolio to become a one stop shop for in office ENT solutions. For Intersect ENT (XENT), we believe risk around execution and reimbursement offsets the company s differentiated product platform in the near term. Valuation and Risks We value the two pure play ENT medical supplies and devices companies using a peer group enterprise value to sales metric.

7 Upside risks include market expansion, increased sales force productivity, reimbursement wins, and product pipeline acceleration. Downside risks include increased competition, product failures and / or adverse events, market contraction, sales force disruptions, reimbursement losses, and additional capital raises. Page 2 Deutsche Bank Securities Inc. 6 October 2016 Medical Supplies & Devices Ear, nose , and Throat (ENT) Table Of Contents Executive Summary .. 3 DB Otolaryngologist Survey .. 4 Chronic Sinusitis .. 5 Highly Prevalent .. 6 Significant Cost Burden to Society .. 6 The Treatment Continuum .. 7 Medical Therapy .. 8 Functional Endoscopic Sinus Surgery (FESS) .. 9 Balloon Sinus Dilation .. 10 From Open to Minimally Invasive .. 11 Underpenetrated Market with Opportunity to Expand .. 11 Future Drug Eluting Stents Could Replace Revision Surgical Procedures.

8 14 From the Operating Room to the Office .. 15 Company strategies are shifting .. 15 Current In-Office Penetration Varies, but Will Shift More in that Direction Over Time .. 15 Procedural Volume Should Continue to Increase .. 24 DB Survey Suggests Increasing Volume across Procedures .. 24 New Technologies to Drive Further Growth .. 32 Recreating the Surgical Suite in the Office via Image Guided Navigation .. 32 Steroid Eluting Intranasal Implants .. 35 Competitive Landscape .. 39 DB Survey Shows Surgical Market Shares Sticky .. 41 DB Survey Shows Acclarent Continues to Lead in Balloons .. 42 Reimbursement Dynamics .. 43 Sinus Surgery Reimbursement is Well .. 43 Proposed 2017 Medicare Changes Could Drive More Procedures in Office .. 44 Balloon Sinus Dilation: Reimbursement Generally Established .. 45 The Stock Opportunity .. 48 We View ENTL as Best Positioned.

9 48 XENT: Shares Fairly Valued Given Near Term Risks .. 49 Deutsche Bank Securities Inc. Page 3 6 October 2016 Medical Supplies & Devices Ear, nose , and Throat (ENT) Executive Summary In 2015, we estimate there were 29 million US adult chronic sinusitis patients, making it one of the most prevalent chronic conditions amongst US adults. The disease represents a significant cost burden to society, with substantial direct costs related to the management of the disease (we estimate $ - $ billion per annum), as well as indirect costs, as a result of lost productivity (we estimate $10 billion). With its large societal burden and the healthcare system s shift away from fee for service , we view chronic sinusitis treatment in the midst of a paradigm shift with new treatment strategies, therapies and technologies that drive clinical outcomes while reducing overall costs, emerging as winners.

10 Our industry thesis is driven by the following key themes: Chronic Sinusitis is a Large and Costly Disease The Centers for Disease Control (CDC) estimates that chronic sinusitis occurs in approximately 12% of the adult (18 years and older) population. In 2015, we estimate there were 29 million US adults with chronic sinusitis. The disease ranks as one of the top ten most costly healthcare conditions in the US with more than 12 million physician visits each year. The Shift from Open to Minimally Invasive Treatment Should Aid Growth The shift from open surgical procedures to minimally invasive surgical procedures, in our view, continues to accelerate across a number of medical supplies and devices subsectors, including ear, nose , and Throat (ENT). While we estimate there is a total addressable adult patient population of approximately 630,000, we believe it is approximately 20% penetrated at present.