Salary and Compensation Trends

in the Medical Device Industry

Ed Speidel, Partner

Rob Surdel, Associate Partner

October 12, 2012

1

> State of the Market

> Labor Trends

> Pay Frameworks

> Pay Mix

> Private vs. Public – Cash

> Private vs. Public – Equity

> Key Takeaways

Topics

State of the Market

3

Economic Forecasts

*Q2 2012

**October 2012

Sources: United States Bureau Economic Analysis,

Congressional Budget Office and Bureau of Labor Statistics

> Overall economic growth remains sluggish

> However, the overall unemployment rate has dropped ~1.8% since its peak in 2010 (9.6%)

Category 2008 2009 2010 2011 2012

GDP Year-Over-Year -0.3% -3.5% 3.0% 1.7% 1.7%*

Unemployment % 5.8% 9.3% 9.6% 8.9% 7.8%**

4

Unemployment Rate

Source: United States Bureau of Labor Statistics

> Massachusetts unemployment rates continue to be lower than the regional and national average

> Unemployment levels in the Northeast have historically been lower than the national average until recently

8.3%

6.3%

8.8%

8.2%7.4%

9.1%8.8%

8.5%

9.9%9.6%

9.1%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

July

August

2009 2010 2011 2012

Northeast Massachusetts U.S.A.

7.8%

Stock Price Recovery

5 Stock price performance relative to 8/1/2009

Source: Yahoo! Finance

> The Dow Jones (DJI), NASDAQ (IXIC) and NASDAQ Health Care Index (IXHC) have been steadily increasing, despite the dip in 2011

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Dow Jones NASDAQ NASDAQ Healthcare Index

2012 News Headlines

6

> “Medtronic is acquiring Chinese medical devices maker China Kanghui

Holdings in a move that could strengthen its foothold in the rapidly growing

Chinese device market. Medtronic will shell out approximately $800 million

for the deal.” - www.money.msn.com (Oct. 4, 2012)

> “Medical device and biotech startup companies experienced a surge of

investments from venture capital firms over the past few years, with a large

majority of these funds being ‘Big Exits’.” - www.kahnlitwin.com (July 31, 2012)

> “Over the past year or two, the competition for talent has hit a fever pitch in

the Boston area and across the country, with companies of all stripes pulling

out all the stops to land their top prospects.” – www.xconomy.com (Aug. 8, 2012)

> “Bausch & Lomb Inc. could be ready to go public as early as the end of this

year, people familiar with the company's thinking said, a move that would

come amid renewed health for the eye-products maker.” - www.wsj.com (July 5,

2012)

Labor Trends

8

Profile

Company Profile

Median

Private Small Public Large Public

Employee Size 47 397 2,593

Revenue ($M) N/A $118M $728M

Number of Companies 40 34 29

> The Medical Device and Diagnostic market was segmented into three groupings from Radford’s Global Life Sciences Survey database:

Source: 2012 Radford Global Life Sciences Survey –

Public Medical Device Companies

Labor Trends: Current Hiring Environment

9 Source: Radford Trends Report – Life Sciences Edition – Q3 2012

> Private and large public companies are more aggressively hiring than smaller public companies…

31%

46%

23%

54%

31%

15%

6%

19%

56%

19%

0%

10%

20%

30%

40%

50%

60%

Hiring Freeze Very SelectiveHiring

Normal Hiring Aggressive Hiring

Perc

en

t o

f C

om

pan

ies

Hiring Practices

Private Small Public Large Public

5.3%

8.9%7.1%

4.2%

8.4%

5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Private Small Public Large Public

Perc

en

t o

f E

mp

loyees

US Turnover

Voluntary Turnover Involuntary Turnover

Labor Trends: Turnover

10 Source: Radford Trends Report - Life Sciences Edition – Q3 2012

> …which translates into higher voluntary turnover among smaller public companies where employees are looking for the next career step or are concerned about the viability of the company

9.5%

17.3%

12.6%

Labor Trends: Salary Increases

11 Source: Radford Trends Report – Life Sciences Edition – Q3 2012

> Private companies experienced higher actual and budgeted1 overall salary increases in 2012

> Median actual and budgeted merit salary increases were 3% for reporting companies

3.5% 3.5%

3.0% 3.0% 3.0%3.0% 3.0%

3.5%

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

3.6%

2012 Budget 2012 Actual 2013 Budget

Perc

en

t o

f P

ayro

ll

Overall Salary Increases

Private Small Public Large Public

1Note: There was insufficient data to report 2013 budget for private companies

Pay Frameworks

Defining a Pay Philosophy

13

Overall Objectives

> It is all the same - attract, retain and motivate top talent

Comparative Framework

> What is our labor market? For what population?

> To whom do we compare practices?

Pay Vehicles > What forms of compensation are available?

> What works for us? (salary, bonus, equity)

Competitive Positioning

> Where do we target each pay element? (25th, 50th, 75th percentiles)

Allocation Strategy

> Are we egalitarian, or do we differentiate pay based on performance?

14

Overall Objectives

> Attract, retain and motivate qualified executives to support growth expectations

> Provide total direct compensation, consisting of salary and short-term and long-term incentives, that are competitive with the market

> Ensure executive compensation program and actual payouts are aligned with financial performance and strategic business goals

> Ensure a substantial portion of each executives’ total compensation is at risk and varies based on both overall company and individual performance

> Align the executive compensation program with both short-term and long-term shareholder interests

Comparative Framework

> Comparative framework is used to define specific peer companies and data sources to be used in the assessment

Compensation Positioning

> The actual targeted total direct compensation for each executive may be above or below the 75th percentile reflecting the executive’s tenure with the organization, overall individual contribution, scope of responsibilities and level of experience

Employee Group Base Salary Target Total Cash

Long-Term Incentives

(within dilution constraints)

Target Total Direct

Compensation

Executives 50th Percentile 60th Percentile 50th to 75th Percentiles 75th Percentile

Research and Development

60th Percentile 60th Percentile 75th Percentile 75th Percentile

Business Functions

50th Percentile 50th Percentile 50th Percentile 50th Percentile

Sales 50th Percentile 75th Percentile 50th Percentile 50th to 75th Percentiles

Employee Group Primary Industry Geography

Executives Medical device companies with less than $300M in annual revenues

National scope

Employees Medical device or broader tech/biotech companies

New England

Example of Compensation Philosophy

Philosophy Comparison

15

Element Typical Private Philosophy Typical Public Philosophy

Peer Group

> Typically, no specific identified peer group

> Focus on comparative companies that

have similar invested capital levels

> Key metrics may include industry and

invested capital

> Specific group of 15 to 20 identified public peer

companies

> Key Metrics: revenue, market cap, headcount,

product phase/stage, profit measures

Cash Approach > Base salary must be “in the ballpark”

> Annual bonuses a “definite maybe” these

days

> Base salary: 50th percentile

> Annual bonus: 50th percentile or above,

emphasizing at-risk nature of compensation

Equity Approach

> Aggressive award sizes, especially to

those risking early entry

> Vehicle: Stock options predominantly

> Metric: Ownership percentage

> 50th percentile and higher based on

performance

> Vehicle: Options, RSUs, performance shares

> Metric: Value

Pay for

Performance > Egalitarian, “all in this together” > Targeted to key roles and high performers

Private vs. Public Peer Group

16

Private Peer Group Public Peer Group

> A public company can be more selective about peers than a private

company

Peer Name Industry

Invested

Capital ($M) Peer Name Industry Employees

Revenue

($M)

Market

Value

($M)

Company A Medical Device $25.0 Company H Medical Device 75 $70.0 $100.0

Company B Medical Device $40.0 Company I Medical Device 100 $200.0 $600.0

Company C Medical Device $30.0 Company J Medical Device 60 $75.0 $450.0

Company D Medical Device $15.0 Company K Medical Device 120 $150.0 $200.0

Company E Medical Device $50.0 Company L Medical Device 80 $200.0 $800.0

Company F Diagnostic $60.0 Company M Medical Device 90 $100.0 $250.0

Company G Diagnostic $45.0 Company N Medical Device 65 $60.0 $300.0

75th Percentile $47.5 75th Percentile 95 $175.0 $525.0

50th Percentile $40.0 50th Percentile 80 $100.0 $300.0

Average $37.9 Average 84 $122.1 $385.7

25th Percentile $27.5 25th Percentile 70 $72.5 $225.0

Client Medical Device $40.0 Client Medical Device 80 $100.0 $300.0

Private vs. Public Compensation Equity Practices Comparison

17

Element Typical Private Philosophy Typical Public Philosophy

Setting Award > Established based on a target ownership

percentage

> Equity grants are established based on a

target value

> Converted to a number of options/shares

based on the current stock price

New-Hire vs.

Ongoing/

Refresh

> Large new-hire grant

> Refresh grants delayed until IPO

approaches, or 3-4 years after hire

> Refresh guidelines set anywhere from

25% to 33% of new-hire awards

> New-hire award typically 1.5x – 2x ongoing

award size

> Most employees eligible for ongoing award

after one year of service

Vehicle Mix

> Stock options predominantly

(A few notable exceptions have used

RSUs pre-IPO recently, however,

requires cash reserves to address

employee taxes)

> Mix of stock options and RSUs

> Emphasis towards RSUs with maturity over

time

> Prevalent use of performance shares for

executives

Participation

> New hires: nearly 100%

> Refresh awards: targeted at key

performers and those employees greater

than 50% vested (25% to 30% of

population receives)

> New hires: participation decreases as

company increases in size (may eliminate

eligibility altogether below certain level)

> Ongoing awards: Broad eligibility is

maintained, although awards targeted at top

performers (40% to 60% of population

receiving annually)

Pay Mix

The Employee Value Proposition Has Changed!

19

Salary Equity

All Employees

> Everyone got equity

> Employees were bullish on IPO likelihood

> Annual bonuses were non-existent

> Lower cash vis-à-vis public companies was an acceptable tradeoff for equity wealth opportunity

> Pre-IPO employee proposition from the dot-com bubble days…

20

Pay Mix – Private Company

Equity

Executives

Salary Bonus

Salary

Non-Executives

Equity Bonus

> Equity is concentrated at the top, and for key contributors only

> Annual bonuses are much more prevalent

> Lower cash vis-à-vis public companies is no longer an acceptable tradeoff for all employees!

> Today’s private company employee pay mix…

Pay Mix – Public Company

21

> As organizational level increases, so too does at-risk pay

– Note: the charts below do not consider the overall “size of the pie”

Source: 2012 Radford Global Life Sciences Survey

83%88%

8%7%

9%5%

0%

20%

40%

60%

80%

100%

Small Public Large Public

Scientist

Base Bonus LTI

78%83%

9%9%

13%8%

0%

20%

40%

60%

80%

100%

Small Public Large Public

Manager

Base Bonus LTI

50% 50%

14% 17%

35% 33%

0%

20%

40%

60%

80%

100%

Small Public Large Public

Executive

Base Bonus LTI

Percent of Total Direct Pay

Private vs. Public – Cash

23

Dispelling Myths About Private Cash

Category

Medical Device

Base Target Total

Cash

Executive 90% 88%

Management 103% 104%

Professional 103% 103%

Support 112% 113%

Pre-IPO/Venture-Backed Cash Compensation as a Percent of

Global Life Sciences Surveys Totals

Global Life Sciences Survey - Oct. 2012;

Radford Pre-IPO/Venture-Backed Survey - April 2012

Executive Compensation

24

> Unlike broad-based employees, executives are still willing to take a

discount on cash for higher ownership

Position: CEO

Base Salary (50th)

Target Total Cash (50th)

Ownership (50th)

All

Founder

Non-Founder

Medical Device

Private Small Public Large Public

$350,000 $478,950 $825,200

$467,750 $733,815 $1,390,461

4.65% 2.54% 1.86%

5.86% 5.90% 4.82%

4.19% 2.32% 1.67%

Radford Pre-IPO/Venture-Backed Survey - April 2012;

Global Life Sciences Survey – October 2012

25

Annual Bonuses

Category

Medical Device

Private Small Public Large Public

% of EE’s Eligible 68% 72% 84%

% EE’s receiving bonus

60% 45% 73%

Avg. cost as a % of payroll

7.2% 8.9% 8.4%

Avg. cost as a % of revenue

3.7% 1.5% 0.7%

> There is no doubt – bonuses are officially in the mix

Radford Pre-IPO/Venture-Backed Survey - April. 2012;

Global Life Sciences Survey - Oct. 2012

26

> Salary differences disappear below the executive level

- Scientists and managers appear to be fair game, regardless of size

> Bonus targets become more formalized and richer as a company evolves, particularly at the manager level and above

Source: 2012 Radford Global Life Sciences Survey

Evolution of Pay Practices – Cash Compensation

$203 $213 $234

$106 $103 $101 $92 $89 $88

$56 $60

$78

$14 $11 $11 $9 $8 $7

$-

$50

$100

$150

$200

$250

$300

$350

Private Small Public Large Public Private Small Public Large Public Private Small Public Large Public

Executive Manager Scientist

To

tal

Cash

Co

mp

en

sati

on

Cash Compensation ($000)

Base Bonus

27

Evolution of Pay Practices – Cash Incentives

Bonus Metric

Prevalence

Private Small Public Large Public

New Product Introduction 65% 45% 5%

Other Non-Financial 73% 85% 57%

Sales 62% 80% 81%

Profit 42% 80% 95%

Quality 35% 15% 10%

Customer Satisfaction 23% 10% 5%

> Bonus metrics have a very different “look and feel” as a company grows in size

Source: 2012 Radford Global Life Sciences Survey -

Practices Report

Private vs. Public – Equity

Equity Considerations

> The development of a sustainable equity strategy must take into consideration a host of inter-related factors:

29

Employee/ Shareholder Perception

Aggregate Equity Use

Share Pool

Funding

> Shares available in the pool

> Future share requests

> Burn rate

> Overhang

> Equity mix

> Growth

> Retention value

> Wealth creation

> Vehicle economics (leverage)

> Participation rates

> Time vs. performance triggers/vesting

Defining Total Equity Pool Size – Private Company Practice

30

> In general, earlier-stage private companies demonstrate higher total overhang levels than later-stage private or public companies due to:

- Financing rounds that dilute the pool after the equity plan is initially established;

- Employee exercises removing outstanding options from equity pool; and

- In the case of public companies, increased shareholder control over equity plan funding and pressure to reduce dilution

> Whether to include founder grants in the overhang calculation when comparing to market data is open to judgment

- Exclude if intended to recognize intellectual capital brought to the table at inception, as opposed to reward for go-forward service and contributions

> Typically only applies to one-to-three key incumbents only

> Founder awards typically have no vesting requirement (again, under the intent that these are not for future service)

- Include if “founder” award concept was used liberally for many employees

Fully-Diluted Total Overhang – Private Company Practice

31

> As invested capital increases, employee ownership as a percentage of

company decreases

Radford Pre-IPO/Venture-Backed Survey - April 2012 and

Radford proprietary database

24.8%

14.8%

12.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Private - Under $40MInvested Capital

Private - Over $40MInvested Capital

Recent IPO -Immediately Prior to IPO

Fully-Diluted Total Overhang – Life Sciences

32

The Private Grant Model

> Current Model:

- Large grant at time of hire

- Refresh grants starting in year 3 or 4 that may be 25% of new-hire levels

> Employees are very heavily vested by time of IPO

Parameter Time of Hire Year 1 Year 2 Year 3+

IPO at

$12.00

Equity Grant 400,000 - - 100,000 -

Exercise Price $0.25 - - $4.00 -

Vested Shares - 100,000 200,000 300,000 400,000

Unvested Shares 400,000 300,000 200,000 100,000 100,000

Vested Paper Value NA - no market until IPO

$4.7MM

Unvested Paper Value $800K

Should we consider layering in equity over time to provide a more balanced approach to retention?

Example data for illustrative purposes

Burn Rate and Overhang – Public Company Profile

> Larger Medical Device Companies have lower rates of annual burn rate and equity overhang.

33

4.0% 4.0%

3.0%2.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

LFY GrossEquityBurn Rate

3 -Year AverageGross Equity Burn

Rate

Small Public Large Public

12.7%

16.4%

9.6%

14.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

LFY Issued EquityOverhang

LFY Total EquityOverhang

Small Public Large Public

Radford proprietary equity database

Burn Rate Overhang

34

Position

Annual Equity Participation

Small Public Large Public

Executive Function Head 88% 90%

Director 70% 60%

Manager 60% 55%

Career Scientist 53% 45%

Beginning Scientist 35% 35%

> Companies try to hold on to broad-based ownership as long as they can while managing dilution

Equity Participation – Public Company Practice

Source: 2012 Radford Global Life Sciences - US Long-

Term Incentive Report

> Just as with cash compensation, there is little differentiation of LTI value below the executive level

> Due to competitive pressure, the value for directors and below is similar across the market

35

Position

Median Annual LTI Value ($000)

Small Public Large Public

Executive $199.0 $251.0

Director $30.7 $32.4

Manager $17.3 $17.3

Career Scientist $10.1 $11.9

Beginning Scientist $6.2 $7.0

Note: LTI Value = the sum of option Black-Scholes value, full-value share face value and any long-term cash value

Annual LTI Value – Public Company Practice

Source: 2012 Radford Global Life Sciences Survey

36

Key Takeaways

> Determine which framework is right for you based on your situation and use it as a tool to guide compensation decisions

> The value proposition to employees has changed! – It is one market below the executive level

> Variable pay increases as organizational levels increase

> Understand which LTI vehicle is right for you

> Know where your company is on the continuum and what’s to come; start planning ahead to not be reactive

> There is no “one-size fits all” approach. How is your organization “different”?

Thank You!

Questions?

Ed Speidel, espeidel@radford.com, +1 (508) 628.1552

Rob Surdel, rsurdel@radford.com, +1 (508) 628.1551