Department of Commerce Healthcare Panel

1
Department of Commerce Healthcare Panel May 23,
2006
Presented by Robert Larson Director, Business
Development and Marketing Asia Pacific
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Questions to Answer

• What does STERIS do?
• Why did STERIS and why do most other US
  Healthcare companies need an Asia (and
  specifically China) Strategy?
• How did we set STERISs China strategy?
• How is implementation going and what have we
  learned?

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Vision/ Key Facts

• STERIS is dedicated to creating a healthier today
  and safer tomorrow
• Founded in 1987 and headquartered in Mentor, Ohio
• 5,000 employees worldwide, sales offices located
  in 16 countries/dealers in more than 60
  countries, but primarily US sales presence
• Annual revenues of over 1 billion and traded on
  the New York Stock
  Exchange under the symbol STE
• Healthcare is the largest segment

US 85
International 15
4
Surgical Suite
5
Hospital Central Processing
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Questions to Answer

• What does STERIS do?
• Why did STERIS and why do most other US
  Healthcare companies need an Asia (and
  specifically China) Strategy?
• How did we set STERISs China strategy?
• How is implementation going and what have we
  learned?

7
Why an Asian (China) Strategy?

• Obligation (and self interest) to improve health
  standards
• Quality of care is unacceptable, need best in
  class products
• H1N5 is just the latest, source for pandemics
  ''You have the ingredients in Asia right now for
  a public health disaster,'' . . .the region may
  be brewing a worldwide flu pandemic.- Dr. Tim
  Uyeki, CDC, NY Times Nov. 04
• Take advantage of growing, high return markets
• The 2nd largest healthcare market in the world is
  in Japan, China and India are dramatically
  increasing their Healthcare spending
• Returns on investments in Asia for US companies
  better than in Europe
• Growth is key for company performance and Asia
  has it
• Meet competition on their own turf
• Our European competitors are penetrating these
  markets and using profits from them and will use
  lower cost products from them to to challenge our
  NA position
• Asian competitors will be arriving too, surgical
  tables

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Questions to Answer

• What does STERIS do?
• Why did STERIS and why do most other US
  Healthcare companies need an Asia (and
  specifically China) Strategy?
• How did we set STERISs China strategy?
• How is implementation going and what have we
  learned?

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Step 1 Understand the Market 2004 China Market
Dynamics Rapid growth driven by growth of middle
class and government health policy
Current China hospital market has 3 levels (or
classes)

• The HC market is growing at an accelerated rate
  (15) due to the effect of SARS and Avian Flu.
  These pandemics have dramatically increased
  government recognition of the importance of
  sterilization and disinfection
• Growing market strength by local manufacturers
  who have acquired/ developed technology and low
  cost designs. They use imported key components to
  achieve relatively high quality products.
  Examples XXX, XXX
• Our global competitors leverage brand and compete
  via a local presence for distribution. They are
  now adding manufacturing XXX has 12M in sales
  and a factory in Suzhou, XXX (JV in Shanghai)
• Major opportunity for sourcing. Successful
  multinationals have combined local market entry
  with sourcing GE Medical

Level III
977 hospitals
5,198 hospitals
Level II
2,674 hospitals ( 8995 others)
Level I

• Small, local players dominate Level I and II
• Level II is growing dramatically due to
  government initiatives to improve healthcare
  system in response to middle-class growth and
  SARS/Asian flu concerns

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Step 2 Set Basic Strategy Framework STERISs
is 3x3x3
3 key countries China, Japan, India
Build strong local teams Manage distribution,
training, and service, present at trade shows,
develop government. relations
A Strengthen distribution go more direct in key
countries
Develop value chain capabilities (including
design, manufacture and delivery) to sell
appropriate products in key countries
B Deliver appropriate products
Use China or India as a base to source
components and complete products for other low
cost regions and for low- end part of developed
country markets
C Leverage regional capabilities to address
global needs
3 options to achieve each objective
3. JV or Acquire
2. Contract
1. Build our own
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China Levels 2 3 to Start Access Level 2 and
3 Hospitals through combination of distribution
transformation and appropriate products
Alone, Transform Distribution plan only reaches
top tier
. . . but adding Appropriate Products gives
access to larger market
Current China hospital market has 3 levels (or
classes)
200-300 hospitals
100 hospitals
977 hospitals
Level III
AppropriateProducts intoLevels 2 3
Also expect Level 2to Grow
5,198 hospitals
Level II
2,674 hospitals ( 8995 others)
Level I

• Existing STERIS product portfolio only appeals to
  small portion of market

• Appropriate products will target all of Level III
  and much of Level II hospitals

• Small, local players dominate Level I and II
• Level II is growing dramatically due to
  government initiatives to improve healthcare
  system in response to middle-class growth and
  SARS/Asian flu concerns

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Distribution Transformation Common China
distribution structures
Foreign manufacturer

• Usually exclusive
• Provide easy market entry for companies with
  limited resources
• May have pockets of strength but often leave
  large regions poorly covered. Weak hospital
  contacts outside of core territory
• If you use, have a transition strategy upfront

National distributor
Primary distributor

• Often non-exclusive
• More complex structure -- Require local
  management by foreign company
• Far superior geographical coverage by leveraging
  strong local customer relationships
• Higher quality contacts with local hospitals and
  decision-makers

Local dealer
Secondary distributor
Sub-dealer
Tertiary distributor

• Often mandated by the hospital.
• Handle local transactions, day to day service,
  etc.

HOSPITAL
With a closely managed group of quality local
dealers, the sub-dealers can often be
eliminated.
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Distribution Transformation Typical stages of
growth
Traveling export manager
Distributors are managed from a distant HQ. Often
a single manager based at HQ covers sales
worldwide. All invoicing and shipping from HQ.
Asia-Pacific area manager
Distributors are managed by an area manager based
at HQ or in the region. All invoicing and
shipping from HQ.
Local area manager
Distributors are managed by a local manager with
no other staff. May report to a regional office
elsewhere in Asia-Pacific. Invoicing and shipping
from HQ.
Country Manager model
Country Manager overseas sales and distribution
from a local office with support staff. Some
invoicing from local office. Shipping from HQ.
Direct sales model
Direct sales force work with local dealers
reporting to a local Country Manager. Often
requires direct technical service and support.
Invoicing from local office. Shipping from HQ.
Local manufacturing
Although common, this is not always the most
effective way to enter the Chinese market.
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Distribution Transformation Evolution of a
typical medical sales organization in China
US 15M
4. Large organization including Admin/HR and
multiple branch offices. 30 local dealers.
US 5-15M
3. Country Manager, full technical service and
clinical support teams. 10 local dealers.
US 1-5M
Complexity
US lt1M
2. Country Manager organization. Limited
technical/ clinical support. 3-10 local dealers.
1. National distributor.
Sales
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Creating an Appropriate Products Market Entry
Plan More than just take my existing product and
de-featuring it, need full value chain
Define and evaluate entry options

• Understand
• Market size
• Growth
• Competition

• Features
• Cost
• Prices
• Expected sales

• Quantify the goals and requirements for each
  option (Greenfield, JV, Contract)

• Assess gaps across value chain to deliver the
  appropriate products

• Evaluate financial non-financial criteria

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How to Compete - Define Appropriate
ProductsProducts are NOT de-featured but
performance is reduced

• Key features remain the same. But performance
  is reduced (via alternative, lower-cost designs
  and sourcing)
• Country-specific features need to be added

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Must Understand China product pricing and
Costing Products require significantly lower
costs and average selling prices in China
Manufacturing Cost

• Overall 70 manufacturing cost difference
• Labor and burden rates are significantly lower
• 30 material cost reduction through simplifying
  design and re-sourcing components in China (e.g.
  replace European controls, valves)

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Robust Options Analysis to Determine
ExecutionOptions are often financially equal,
choice depends on execution risk
Greenfield Factory
Contract Manufacture
2
1
Acquire/ JVs
3
0
Criteria
Status Quo
Financial (ranges)
XX-XXX
5-yr NPV
XX
XX-XXX
XX-XXX
XX-XXX
XX-XXX
XX-XXX
Revenue (FY10)
X-X
XX-XX
EBITDA (FY10)
X-X
XX-XX
XX-XX
XX-XX
X
Investment
XX-XX
XX-XX
Qualitative Factors
Time to Market
STERIS Capability Building
Ability to protect IP
Ability to exercise mgmt control
STERIS Ability to execute
Total
Positive Potential
Negative Potential
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Market Size Target Revenues for All Products
actual work just beginning but direction is set
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Questions to Answer

• What does STERIS do?
• Why did STERIS and why do most other US
  Healthcare companies need an Asia (and
  specifically China) Strategy?
• How did we set STERISs China strategy?
• How is implementation going and what have we
  learned?

21
STERIS-SHINVA Joint Venture

• China Joint Venture and Opening of Offices in
  India and China Expand Regional Base
• Mentor, Ohio (September 22, 2005) - STERIS
  Corporation (NYSE STE) today announced the
  signing of an agreement with SHINVA Medical
  Instrument Company of the Peoples Republic of
  China to form a new joint venture company,
  STERIS-SHINVA Healthcare Systems Co., Ltd. The
  joint venture will manufacture and market
  STERISs HAMO brand washers to the healthcare
  market in China. STERIS will own 51 of the
  joint venture. The transaction is pending
  Chinese government approvals and is expected to
  close in four to six months.
• The Company noted that the joint venture will
  also allow STERIS the future alternative to
  establish a manufacturing base for other products
  to be sold in the Asia-Pacific region, and is
  just one in a series of recent actions designed
  to establish a stronger presence there. In May
  of this year the Company opened a direct sales
  and international purchasing office in Shanghai,
  China and in July, the Company opened a direct
  sales office in Calcutta, India. Previously,
  STERISs presence in the region was through
  dealer and distributor arrangements. This more
  direct presence signals the importance of the
  region in the Companys growth strategy.

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STERIS-SHINVA Marketing Launch China Medical
Equipment Fair Shenzhen April 26-28, 2006
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Lessons Learned/ To be Learned

• Avoid national distributors, give out territory
  progressively, get your own local distribution
  manager
• Once you decided to setup some sort of local
  presence skip the Rep. Office stage and sent up a
  FICE (Foreign Invested Commercial Enterprise)
• As far as manufacturing, going wholly owned is
  best if you can do it, but the domestic Chinese
  healthcare market is particularly difficult to
  navigate alone
• US and Chinese corporate culture are tough to
  meld
• Do, correct, do vs. Planning and following the
  process
• General Manager as King vs. Matrix
• Time to Market vs. Quality Reputation Dont
  assume you cant contribute on sales, service,
  local logistics, etc.
• Build trust with Chinese partners but have an
  exit strategy and continually work on it
• Your China strategy should be about creating
  options. Dont put all your eggs in one basket
  until you know the approach is really working