Durable Medical Equipment Market Update March 2016

DURABLE MEDICAL EQUIPMENT MARKET UPDATE MARCH 2016

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Strong demand drivers continue to support increased demand for DME products worldwide.

. Aging population. . Patient preference for home-based care. . Increase in insured population as a result of the Affordable Care Act.

STRONG FUNDAMENTAL DEMAND DRIVES… …AN INCREASE IN HOME HEALTH CARE PATIENTS

Global population age 65 and older continues to grow rapidly… Increased demand further supported by increasing number of insured… Estimated percent change in population, 2010 to 2050, by age, in the world and the United States 350 United States World Commercial Medicaid and CHIP Uninsured

17.0% 300 281.2 Younger than 15 273.0 273.8 276.0 275.8 279.0 10.0% 30.0 37.0 31.4 30.5 250 54.5 43.4 16.0% 45.0 45.4 46.0 45.0 15 to 64 43.0 33.0% 200 36.0

111.0% 150 65 and older 181.0% 199.4 203.5 205.8 182.5 187.4 193.0

100 (U.S. population, in millions)in population, (U.S. +0% +50% +100% +150% +200%

Global population is increasingly overweight and obese… 50 Top 10 populated countries where obesity affects 25%+ of the adult population 2013 2014P 2015P 2016P 2017P 2018P

POP. POP. …and increased utilization of home health care COUNTRY (MM) COUNTRY (MM) 8.0 6.8 7.0 6.7 6.7 United States 321.4 South Africa 53.7 6.0 5.5 5.0 Russia 142.4 Columbia 46.7 4.1 4.0 3.4 3.4 3.5 3.0 Mexico 121.7 Argentina 43.4 3.0 2.5 2.0 Egypt 88.5 Algeria 39.5 inmillions)(units 1.0

United Kingdom 64.1 Poland 38.6 0.0 2002 2006 2010 2012 2013 The top 10 affected countries account for 13.2% of global population Note: excludes Iran; obesity defined as male or female with BMI ≥30kg/m2 Home Health Users Episodes

Source: Pew Research, World Health Organization, Congressional Budget Office, and MedPAC.

1 …SUPPORT ACCELERATED MARKET GROWTH

U.S. DME expenditures are expected to grow at a 5.3% CAGR from $46.5 billion in 2015P to $60.2 billion in 2020P. . The DME industry is expected to accelerate due to demographic trends, patient preference for home-based care, and the increase in the insured population. . Competitive bidding, an ongoing Medicare initiative to bring its reimbursement in line with other payors, has negatively impacted some DME distributors and manufacturers.

HISTORICAL AND PROJECTED U.S. DME EXPENDITURES PAYOR BREAKDOWN

Medicare 5.3% DME Competitive Bidding CAGR Begins $70

Other Health Other Third $60.2 Party Payors, Insurance Insurance Cash $60 $56.4 Programs, 0.2% 1.7% 4.7% DME accounts for Payments, 57.2% CAGR $53.2 41.1% of Medicaid, $50.6 spend with 12.3% $48.2 $50 $46.5 Medicare 3.9% DME being the CAGR largest payor $40 $37.0 Medicare, 2015P DME 9.2% DME $30.9 16.8% $30 CAGR Expenditures $25.2

($ ($ billions)in $46.5 billion

$20 $15.9 $13.8

Private Health $10 $7.1 Insurance, $2.8 $4.1 11.8% $0.7 $1.1 $1.7 $0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015P 2016P 2017P 2018P 2019P 2020P

Source: CMS NHE estimates, company filings, and ThomsonOne.

2 COMPETITIVE LANDSCAPE

The DME industry is highly competitive and has a dynamic reimbursement environment. . Medicare’s competitive bidding program began in January 2011 with the first round of bidding, and the second round began in July 2013.

− The first round of bidding was done in nine metropolitan areas and resulted in 32% lower pricing, while the second round was done in 91 metropolitan areas and resulted in 45% lower pricing − CMS started to phase in new rates in January 2016, and all regions will be lowered to a regional single payment amount on July 1, 2016 . Industry players with a comprehensive portfolio and low cost manufacturing are most likely to successfully capture market share in this environment.

COMPETITIVE LANDSCAPE RELATIVE EFFECTS OF COMPETITIVE BIDDING

EST. Base Business Revenue Growth REVENUE LONG- RETAIL / (IN TERM e-COMMERCE 5.4% (5.7)% DME MANUFACTURER MILLIONS) HOMECARE RESPIRATORY SLEEP CARE / DTC (5.7)% $1,501.6 (4.8)% $1,424.6 $1,415.8 (10.1)% $1,142      $1,334.5 $1,270.2 $1,142.3 ~$700     

~$400  

~€350  

~$350  

~$200     2010 2011 2012 2013 2014 2015 Jan 2011: Jul. 2013: ~$175     Competitive Bidding Competitive Bidding Round 1 Round 2

Source: Company filings, company websites, and CapitalIQ.

3 UPDATE ON REIMBURSEMENT ENVIRONMENT: NATIONAL COMPETITIVE BIDDING Since its implementation, the Competitive Bidding Program has re-aligned payments amounts with new market prices, saving Medicare (and taxpayers) billions. . At present, the program is restricted to certain categories of equipment, supplies and services. − Most notably respiratory systems, mobility products (both power and manual), general home medical equipment and beds are all encompassed under the current product categories . In early February, the Obama administration made available its FY 2017 budget, which includes authority to expand competitive bidding to certain DME. − Proposal includes inhalation drugs; all prosthetics and orthotics; and ostomy, tracheostomy, and urological supplies which represent total estimated savings of $3.8 billion over the next 10 years

ROUND 1 ROUND 2

. 9 Metropolitan Statistical Areas. . 91 Metropolitan Statistical Areas. . Bid rates that took effect on January 1, 2011 were 32% lower on . Bid rates that took effect on July 1, 2013 were 45% lower on average than prior pricing in nine select categories. average than prior pricing. . Contracts awarded for January 1, 2011 – December 31, 2013. . Contracts awarded for July 1, 2013 – June 30, 2016. . Round 2 re-compete process closed in March 2015 and will be awarded by Spring 2016.

32% Decline 37% Decline 45% Decline Single Payment Amounts to be Announced

Prior Bid 1 Re-compete Prior Bid 1 Re-compete

Source: CMS, HHS, and company filings.

4 UPDATE ON REGULATORY ENVIRONMENT: MEDICAL DEVICE SALES TAX A two year moratorium on the Medical Device Tax was implemented with the December 18, 2015 signing of the Consolidated Appropriations Act of 2016. . The tax, which imposes a 2.3% tax on the domestic sales of medical devices in the United States, to be paid by manufacturers or importers, was implemented in 2013 as part of the Affordable Care Act.

− Tax applies to all domestic sales of medical devices including MRI machines, hospital beds, and surgical equipment − Does not apply to medical goods sold at retail for individual consumer use . The Tax was originally implemented to generate roughly $30 billion in funds to support the Affordable Care Act. − Assumed that greater access to healthcare coverage would create a larger market for medical devices − Determined to be ineffective, only raising some 60% of funds during initial period . Private companies stand to experience $3.4 billion in tax savings from 2016 – 2017. − Savings will be experienced across the industry with small-to-medium size medical device companies experiencing the largest benefit − Cost savings will allow manufactures to deploy additional spend to R&D and new innovative product launches . The tax is presently set to be automatically reinstated on January 1, 2018.

5 UPDATE ON REGULATORY ENVIRONMENT: PRIOR AUTHORIZATION PROCESS FOR CERTAIN DMEPOS In December 2015, CMS issued a new rule establishing a prior authorization process for certain durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). . Final ruling issued February 2016 addresses concerns related to improper payments for DMEPOS and protects access to necessary care for Medicare and Medicaid beneficiaries. . DMEPOS items that were flagged for unnecessary utilization comprise a Master List of 135 items that will potentially be subject to prior authorization.

− CMS will initially test the new prior authorization rule on a subset of items from the Master List − Items automatically stay on the Master List for 10 years but can be removed earlier if prices fall below the payment threshold . For items on the Required Prior Authorization List, relevant documentation must be submitted for prior authorization before beneficiaries can receive an item and submit a claim. . CMS anticipates ~$150 million in incremental Medicare costs associated with processing prior authorization requests through 2025P, compared to ~$600 million in Medicare Part B savings from a reduction in unnecessary utilization.

MEDICARE POTENTIAL COSTS AND SAVINGS FROM PRIOR AUTHORIZATION

For the Period Ending December 31, 2016P – 2025P ($ in millions) $90 $90 $80

$60 $60 $60 $50 $50

$30 $29 $29 $29 $14 $14 $14 $14 $10 $6 $6 $1

2016P 2017P 2018P 2019P 2020P 2021P 2022P 2023P 2024P 2025P Medicare Costs Total Medicare Part B Savings

Source: CMS.

6 VALUATION OBSERVATIONS: PUBLIC COMPARABLES AND TRANSACTIONS DME public comparables are trading near 5-year highs.

VALUATION OF PUBLIC COMPARABLES AND PRECEDENT TRANSACTIONS

Enterprise Value / LTM EBITDA for the period February 28, 2011 – February 29, 2016

Relevant M&A Transactions 1 20.0x Deals acquired by PEGs 5-Year Maximum traded at a median 5-Year Minimum M.C. Healthcare / Span- multiple of 9.6x 5-Year Median 1 Deals acquired by America Medical (21.4x) Current 17.5x strategics traded at a Harmar Mobility / Cortec Group median multiple of 9.0x 2 (Confidential) 15.3x 15.0x Kinetic Concepts / 3 13.9x ArjoHuntleigh AB (5.7x) 5 12.5x ATG Rehab / Numotion 4 11.3x (9.0x) 8 11.0x 2 10.0x 10.3x Permobil AB / Investor AB 7 5 9.3x (13.0x) 4 9 7.8x 6 Vantage Mobility / Evergreen 7.5x 10 6 7.3x Pacific (Confidential) 3 Altimate Medical / Granite - 7 5.0x RockWood (9.6x)

Sunrise Medical / Nordic 8 Capital (11.0x) 2.5x

National HME/ Tailwind 9 Capital (Confidential) 0.0x

Ohio Medical / Tenex 10 (Confidential) Strategic Buyer PEG Buyer DME Index (1) S&P 500 Index Source: Capital IQ, public filings, and Wall Street Research.

(1) DME Index includes: Getinge, Stryker, ResMed, and Hill-Rom. Note: IVC excluded due to Company issues related to FDA consent decree. 7 NOTABLE INDUSTRY PARTICIPANTS PRIVATE COMPANIES

Company Ownership Description

Provider of home respiratory therapy products and other mobility-focused durable medical equipment.

Manufacturer of standing solutions to support therapy for adults and children with disabilities.

Provider of portable oxygen concentrators and other respiratory related medical devices.

Manufactures and markets sports medicine and rehabilitative orthopedic products and services.

Provider of home respiratory service and medical equipment such as seat cushions, lift chairs, and portable nebulizers.

Branded manufacturer and distributer of home medical equipment and related products.

Manufactures and distributes durable medical equipment in the home healthcare, surgical, and rehabilitation markets.

Manufactures assistive products and solutions for disabled and elderly individuals including manual and power wheelchairs, lift systems, and scooters.

8 NOTABLE INDUSTRY PARTICIPANTS PRIVATE COMPANIES (CONT.)

Company Ownership Description

Designs, manufactures, and markets mobility and accessibility solutions focused primarily on lift and ramp products.

Designs, manufactures, distributes, and services personal mobility Private Company vehicles.

Manufacturer and service provider of patient handling and wound care products for post-acute healthcare settings.

Provider of FDA approved Phase I post-operative orthopedic rehabilitation products and services.

Manufactures and distributes wound care, respiratory products, lab Private Company supplies, and medical equipment.

Provides hospice specific durable medical equipment, customer care services, and cost containment solutions to the hospice industry.

Provides customized mobility, rehabilitation, and adaptive seating systems for individuals who have been diagnosed as having a permanent or long-term loss of mobility.

Provides mobility solutions for individuals with complex medical mobility limitations.

9 NOTABLE INDUSTRY PARTICIPANTS PRIVATE COMPANIES (CONT.)

Company Ownership Description

Develops, manufactures, and sells home respiratory therapy products.

Designs, develops, manufactures, and sells high-end wheel chairs and other mobility products.

Develops, manufactures, and sells wheelchairs and transport systems for individuals with functional disabilities.

Provider of home healthcare products and services including respiratory therapy, durable medical equipment, rehabilitation equipment, infusion therapy and sleep diagnostic testing services.

Designs and manufactures personal mobility products for people with Private Company disabilities including power chairs, scooters, and lift chairs.

Designs, manufactures, and markets medical products and assistive technology devices for the recovery, rehabilitation, and respiratory needs of patients in hospitals and homecare settings.

Provider of respiratory medical devices, catheters, and other home medical equipment.

Manufactures wheelchair accessible transportation and related mobility products

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