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Longer Term InvestmentsMedical devices

Chief Investment Office WM | 18 May 2018 8:42 pm BSTLachlan Towart, Analyst, [email protected]; Stefan R Meyer, Analyst, [email protected]

• The aging population and growth of the over-65 age groupwill create more opportunities for companies selling medicalproducts and devices.

• Other drivers of the medical device industry includebetter penetration in emerging markets due to improvedinfrastructure, new innovative treatments, increasedaffordability due to rising per-capita GDP, and a growingprevalence of "lifestyle diseases" like obesity due tourbanization.

• We identified five key markets for implantable or wearabledevices, including consumer products such as hearing aids,dental implants and corrective lenses. We estimate their totalmarket size at USD 103.7 billion, with sustainable mid-single-digit growth potential.

• The theme is relatively defensive, and should appeal toquality-focused investors. We recommend exposure to thetheme via a diversified portfolio of stocks across our preferredmarkets and segments.

Medical devices can contribute much to successful treatment ofmany conditions. Some reduce the risk of a treated conditionworsening, perhaps as an alternative to drug therapy; some improveusers' quality of life or functionality; and some can solve problemsthat are untreatable with drugs. Devices like joint replacementseffectively offer long-term, permanent solutions (i.e. a cure).

Medical devices are primarily used by the over-65's, whose growthwill outpace the broader population over the coming decades.Demand is also supported by the rise of "lifestyle diseases" likeobesity, itself related to urbanization.

The medical device industry has matured, but still representsa substantial opportunity, in our view. Penetration in emergingmarkets is low, but local government policy is typically supportive ofhigher healthcare spending. Consumer medical device companiescan benefit from rising affordability in these markets.

We think implantable or wearable devices, including consumermedical devices like hearing aids, dental implants and correctivelenses, are the most attractive markets. The theme is relativelydefensive, and should appeal to quality-focused investors. Whiledividend yield is below the broader healthcare sector average,companies generate solid free cash flow and have room to increasedividends.

Source: Fotolia

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

Medical devices for long-term treatmentDespite advances in drug development, many medical conditionsare still best treated with a physical intervention: a medical device.Some of these prevent conditions from worsening or developingcomplications, potentially contributing to lower total healthcarecosts. This is similar to chronic drug treatment, but in cases such asa hip replacement, the device effectively solves the medical problemon a permanent or near-permanent basis and represents a cure.

Medical devices address a wide range of underlying health issues.As many of these conditions are more prevalent among the elderly,it is no surprise that devices are usually used by older patients. Forexample:

• two thirds of hip implant patients are over 65

• most cardiovascular surgery patients are in their late 60's

• the average age of a first-time hearing aid user is approximately70

We focus here on devices used inside the body (implantable medicaldevices) and those worn or carried by the user (which we refer tocollectively as "consumer medical devices"). We estimate the com-bined present size of the relevant markets at USD 103.7 billion, andthink they could grow in the mid single digits over the long term.

Investors can gain exposure to the theme by investing in a diversifiedportfolio of stocks across our preferred markets and segments. Themain risks to investing in medical devices relate to technologicalobsolescence, the impact of the shift to value-based healthcaresystems and product-specific risks, including failure, withdrawalsand related legal liabilities.

Trends in the medical devices marketRising over-65's population supports device market growthThe primary driver of growth in the medical devices market is theaging of the global population. Global life expectancy has continuedrising, and is expected to reach 76 years by 2050, up from 70 in2015 (Fig. 1). The number of people aged 65 or over, who accountfor the majority of medical device use, will rise by over 60% inthe next 15 years, from just over 600 million in 2015 to nearly 1billion by 2030. Secondary drivers include the rising incidence of"lifestyle" diseases such as obesity and heart disease, side effects ofwhich often require treatment with devices. Urbanization, especiallyin emerging markets, is a strong driver of obesity (see our report"Longer-Term Investments: Obesity" published 13 March 2017).

Many devices have become standards of careThe medical device industry has grown substantially over the lasttwo decades, and in many cases devices are now the standard ofcare.

This has led industry sales growth to slow and become more cor-related with the growth of the over-65 population (Fig. 2), and insome segments with economic growth. Consumer medical devicecompanies have not been immune since, although penetration islower, costs are often borne out of pocket: broader penetrationcomes with higher economic sensitivity. Therefore, for the industryas a whole, we see the aging population, rather than higher pene-tration, as the primary driver of future sales.

Fig. 1: Life expectancy rising worldwideLife expectancy at birth, years

60

65

70

75

80

85

90

1980 1990 2000 2010 2020 2030 2040 2050China Japan Latin America

US Western Europe World

Source: UN, UBS. As of September 2014

Recommended reading• "Longer-Term Investments: Emerging

Market Healthcare," 26 April 2018

• "Longer-Term Investments: Obesity," 13March 2017

Source: UBS

Fig. 2: US medical device penetration hasrisen substantiallyUS medical devices spending compared to over65s population

0

100

200

300

400

500

600

0

10

20

30

40

50

1989 1994 1999 2004 2009 2014US population over 65 (million), left hand axis

Device spend (indexed 1989 = 100), right hand axis

Source: OECD, Barclays research. As of July 2016

Longer Term Investments

UBS CIO WM 19 May 2018 2

Emerging markets penetration has room to growEmerging markets have substantially lower healthcare budgets ona per-capita basis (Fig. 3), which has limited the ability to pay formedical devices. However, in some regions, particularly rural areas,better infrastructure, and not just money, will be needed to supportgreater medical device use. Infrastructure can include people (e.g.suitably qualified surgeons) as well as hospitals and equipment.

We expect structural policies put in place by many developingcountry governments to ultimately support growth in healthcarespending above GDP. For example, the Chinese government hasbroadened healthcare insurance coverage and is working on anambitious program of reforms including raising medical cost sub-sidies, deregulating drug prices and improving quality of care in ruralhospitals. The government's targets imply that Chinese healthcarespending would increase sevenfold over the period 2011–20. Thesepolicies are all supportive of medical device sales. For more details,please see our report "Longer-Term Investments: Emerging MarketHealthcare," published 26 April 2018.

Rising affordability, infrastructure investment and demographicsshould thus support future growth of spending on medical devicesin the emerging markets in years to come.

Innovation at a reasonable costHealthcare systems worldwide are under pressure to deliver betterclinical outcomes, despite budget constraints. In Europe this hasoften meant rationing treatment, while in Japan more costs arebeing shifted to employers and patients. Even the US healthcaresystem is beginning to move away from a fee-for-service modeltoward value-based healthcare: new reimbursement approachesbeing explored aim to use resources more efficiently by shiftingthe cost of over-treatment, re-admissions and adverse clinical out-comes from the payer to the provider. These initiatives will likelylead to greater focus on the clinical benefits and cost-effectivenessof devices. Innovations in the industry that lower costs, such as lessinvasive surgical procedures, will lead to changes in the standardof care. While the current US administration has slowed the paceof government experiments with payment reforms somewhat, weexpect new trials to be announced in due course and ultimately viewthe desire to save costs in the US healthcare system as a bipartisangoal.

Consolidation of buyers and sellersConsolidation of the US hospital market has increased hospitals'buying power, with more central purchasing instead of by indi-vidual surgeons, as hospital groups look to leverage their scaleby standardizing processes and procedures across facilities. Also,responding to the shift toward value, hospitals are focused onthe clinical and cost-effectiveness of devices. In response, themedical device industry has also seen consolidation, for exampleMedtronic's 2015 purchase of Covidien, to gain scale in R&D andmarketing, as well as broadening the range of products a singlecompany can supply. Further, we expect the long-established tra-dition of larger companies buying small, innovative competitors fortheir product pipelines to continue.

Fig. 3: Emerging markets spend less onhealthcareHealthcare spending as a percentage of GDP,2015

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

India Turkey China Russia Brazil World EU Japan US

Source: World Bank, UBS. As of April 2018



Growing regulatory challengesThe medtech industry is faced with rising regulation. While manyindustries face similar trends, this is newer in medtech and maycause unintended risks beyond the targeted quality improvementsfor customers. The new Medical Device Regulation (MDR) thatcame into force in May 2017 requests a MDR-approval for allmedtech products sold in the European Union and Switzerlandas of May 2024. As of May 2020, all newly approved productsneed the new MDR approval. Industry representatives including theSwiss Medtech association are of the opinion that "the time periodgranted for the necessary adaptations until 2020 will probably beinsufficient, and certain products may become unavailable." Indeedpress reports suggest delays and capacity shortages at Europeanapproval locations. Moreover, numerous medtech products cur-rently sold in continental Europe have received a "conformitéeuropéenne" mark (CE) in the UK, and are likely to need new MDRapproval as of the Brexit implementation, causing further regulatorychallenges and costs. At an industry level, we estimate that Europeaccounts for just under one third of global medical device revenues,although some product categories (such as dental implants) aremore exposed.

Defining the "medical device industry"There is no universally agreed definition of what constitutes the"medical device industry." We have chosen to focus on devicesimplanted into, worn or carried on the body, that are used to treat amedical condition. Some devices treat conditions that have no alter-native treatment (e.g. orthopedic reconstruction). Some alternativetreatments are inferior or not suitable for all patients (e.g. dentalimplants), and in other cases they are not medically necessary, butdo provide a quality of life enhancement for the user (e.g. correctivelenses or some hearing aids). We see these sectors as most likely tobenefit from the long-term demographic trends identified above.

In total, we estimate the collective size of our target markets ataround USD 103.7 billion (Fig. 4), with potential for growth in themid single digits over the long term. Key markets include:

• Orthopedic implants and sports medicine. This segmentincludes replacement joints, spinal fusion, plates used to repairinjured bones, and surgical equipment for sports medicine.

• Cardiovascular devices. These include pacemakers andimplantable cardioverter-defibrillators, stents, and productsused to treat damaged heart valves.

• Consumer medical devices. A mixed subsector includinghearing aids, dental implants and corrective lenses. Theseproducts are typically chosen and paid for by a user who mayconsider themselves a consumer, rather than a "patient."

In the appendix below we provide overviews of each subsector. Weexcluded medical and hospital supplies from our target markets;though some products can be innovative, many are commoditizedand less linked to innovation. Equally, we excluded hospital capitalequipment, such as operating room equipment, diagnostic imaging(e.g. MRI) and radio-oncology machines, as these markets are morecyclical. We also excluded technologies used primarily for cosmeticpurposes that do not also have a medical benefit, and in vitro diag-nostics.

Fig. 4: Key medical device marketsGlobal market size estimates, USD billionMarketopportunity

Current size(USD bn)

Long-termgrowth rate

Orthopedics andsports medicine

45.2Low-mid

single digit

Spine 9.0 Low single digit

Knees 7.5 Low-mid single digit

Trauma 7.0 Low-mid single digit

Hips 6.5 Low single digit

Extremities 6.0 Mid single digit

Sports medicine 6.0 Mid single digit

Endoscopy 3.2 Low-mid single digit

Cardiovascular 35.3 Mid single digit

CRM & HF 11.2 Flat-low single digit

Coronary vascular 9.6 Low single digit

Structural heart 4.5 Mid-high single digit

Peripheral vascular 4.0 Mid single digit

Electrophysiology 3.6 Mid-high single digit

Neuromodulation 2.4 Mid single digit

Consumer medicaldevices

23.2 Mid single digit

Corrective lenses 13.5 Mid single digit

Hearing aids 6.0 Mid single digit

Dental implants 3.7 Mid single digit

Note: CRM = cardiac rhythm management; HF = heart failure Source:UBS estimates. As of May 2018



Earnings growth outlookWe screened for companies exposed to our preferred end marketswithin the broader medical technology industry, namely ortho-pedics and sports medicine, cardiovascular devices, and consumermedical devices including corrective lenses, hearing aids and dentalimplants. Broadly, companies fall into one of two categories: stable,mature businesses, and younger companies with innovative newtechnologies but less operating history.

In general, mature medical device companies share many of thedefensive characteristics expected of the healthcare sector, suchas high returns on equity (RoE), driven by sustainable revenuegrowth and relatively high margins. Smaller companies, such asthose focused on developing new technologies in the spine andcardiovascular areas, tend to be loss-making, but can grow salesrapidly if their products achieve widespread clinical adoption. Often,these companies are ultimately acquired by larger companies in theindustry.

Premium valuation reflects low earningsvolatilityOur Medical Devices theme (equally weighted reference list at theend of the report) has historically delivered annual EPS growth of10.5% from 2007 to 2017. This compares favorably to the broaderhealthcare sector (MSCI World Healthcare 7.2% growth) and MSCIWorld (3.3%) over the same period (Fig. 5). This combination ofhigher growth and lower volatility is reflected in the theme's tradingat a higher multiple than the healthcare sector (forward PE of 22.8xvs. MSCI World Healthcare at 15.7x) and the broader market (MSCIWorld at 15.5x). All segments of the theme are trading at premiumvaluations, although multiples are currently highest among thedental implant and hearing aid companies. Compared to its ownhistory, the theme is trading in the upper end of its valuation range,reflecting a strong near-term industry sales outlook and a recentinvestor bias toward healthcare companies without exposure to theUS pharma market. Dividend yield is below average at around 0.8%for the equally-weighted reference list. In a portfolio context, lowerearnings volatility can help to reduce risk.

Link to sustainable investingTo identify whether a Longer Term Investment (LTI) theme qualifiesas a Sustainable Investment theme, we follow a two-step process.The first works top-down. LTIs are assessed according to whetherthey match one or more of the sustainability topics within theenvironmental, social or governance categories (Fig. 6). In general,these themes must contribute to environmental sustainability (e.g. alow-carbon economy), resource efficiency (e.g. energy, water), sus-tainable society (e.g. health, education, poverty reduction, equalityand social inclusion, etc.) or sustainable corporate governance.The second, bottom-up step, consists in considering a thematicallyaligned representative universe of companies. A large majority ofincluded companies (80% or more) must align with one or moreof the ESG categories. For each individual company, a minimumbusiness involvement threshold is applied, e.g. 25% of revenuesmust be derived from the thematic activity under consideration.

Fig. 5: Defensive earnings growth profileAnnual EPS growth rate, %

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

2006 2008 2010 2012 2014 2016

Medical devices reference list MSCI World

MSCI World Healthcare

Source: FactSet. As of May 2018 Note: For the medical devices theme weused the median annual historical EPS growth of the companies of thecurrent reference list as an indication for the theme since the year 2006

Fig. 6: Overview of longer-term investmenttopic clusters

* For simplicity, all topic clusters include several subcategories notincluded in the graph. For example: sustainable water includes waterutilities, treatment, desalination, infrastructure & technology, water effi-ciency and ballast-water treatment. Within each subcategory are furtherspecifications; e.g. water treatment includes filtration, purification andwaste treatment. In total, we have more than 100 categories (potentialSI investment themes) in our thematic database Source: UBS



In our view, investing in medical devices developed at a reasonablecost fits our sustainable investing framework, in particular thecardiovascular devices segment. The third UN sustainable devel-opment goal (SDG), good health and well-being, specifically iden-tifies reducing mortality rates attributed to cardiovascular disease asa sustainability target. Companies working to make products moreavailable and more affordable to developing countries would becontributing the most to SDG3. The other forms of medical devicesthat fall into this theme contribute more to general well-being (alsoan SDG3 target), improving quality of life for patients, enablingpeople to return to work sooner after an illness or accident, or forolder people to remain independent for longer. From an economicperspective, as well as directly boosting productivity, this can havethe added benefit of reducing costs for either ongoing or futurecare, offsetting the sometimes high initial cost of procedures.

Along with the question whether medical devices are a sustainableinvestment (SI) theme, we investigated the SI profile of our ref-erence list (which can be found at the end of this report) using MSCIESG Research ratings that rank companies between AAA (best) andCCC (worst). The assessment encompasses the three ESG pillars.Each pillar has sub-categories: in the case of the environment, theyare climate change, natural resources, pollution and waste, andenvironmental opportunities; in the social sphere, human capital,product liability, stakeholder opposition, and social opportunities;and for governance, corporate governance. The research also iden-tifies 37 key ESG issues. For example, under climate change, com-panies are assessed based on their carbon emissions, energy effi-ciency and product carbon footprint.

Our medical devices theme shows a mixed result in terms of ESGratings (Figs. 7 and 8). While the number of companies ratedsingle A or higher, at 19%, is lower than the global companyaverage (30%), the large number of BBB-rated companies meansthe average rating is still BBB, consistent with the overall universe.However, the presence of two CCC-rated companies means theseare more prevalent than in the global universe, at 7% vs. 2%. Onbalance, we think the result shows that investors with an SI focusshould be selective when investing in medical devices.

Investment conclusionWe expect the underlying trends of population growth and aging,combined with increasing prevalence of lifestyle and age-relateddiseases like obesity, to support long-term, mid single-digit volumegrowth on average across our favored medical device markets.While pricing tends to be slightly negative on a like-for-like basis,new product innovation offers some pricing power and a mixbenefit as new products displace old as standard of care, as longas higher prices can be justified by better clinical outcomes. Urban-ization and rising per-capita GDP in emerging markets will alsosupport deeper penetration of more consumer-focused medicaldevices like dental implants and corrective lenses. We recommend adiversified exposure to minimize stock-specific risks. Our referencelist of stocks exposed to the theme can be found below (Fig. 18).Please note that this list is only for reference and is not a recom-mendation list.

Fig. 7: MSCI ESG ratings of the medicaldevices reference listRating distribution in %, 27 companies

AAA4%

A15%

BBB41%

BB15%

B19%

CCC7%

Note: AAA = best possible ESG rating; CCC = worst Source: MSCI ESGresearch, UBS, as of 10 May 2018

Fig. 8: MSCI ESG research corporate coverageRating distribution in %, 5,915 companies

AAA3% AA

10%

A17%

BBB24%

BB23%

B19%

CCC2%

Note: AAA = best possible ESG rating; CCC = worst Source: MSCI ESGresearch, UBS, as of 19 December 2017



RisksMajor risks to investing in the medical device theme include:

• Technological obsolescence/disruption: new technologiesoffering superior medical outcomes may cannibalize existingproduct sales. New drugs may be developed that reduce therisk of the conditions treated by medical devices, shrinkingthe available market over time. Conversely, some consumermedtech markets may see slower replacement cycles as oldertechnology is deemed to be "good enough" by users, reducingthe need to upgrade to the latest products.

• Focus on healthcare system efficiency: while pricingpressure is not new to the medical device industry, a lack ofinnovation could erode the industry's pricing power, becausecompanies can no longer justify higher prices for new productswithout demonstrable clinical benefits at a reasonable incre-mental cost to the healthcare system. In general, the shift fromfee-for-service to value-based care can be expected to be ahurdle to reimbursement of devices. Consolidation of the hos-pital industry could also pressure device manufacturers.

• Price pressure from online retailers: another source ofpricing pressure could be changes in the distribution network.In January 2018, Amazon announced plans to set up ahealthcare technology solutions company, in partnership withBerkshire Hathaway and JP Morgan. Few details are availableabout this JV as yet, but separately Amazon is alreadyactive in medical products distribution via its Amazon Market-place platform. The products impacted are largely low-acuitymedical supplies, rather than surgeon-preference items likeimplants. We expect the greatest impact on more commodi-tized products, and distributors to face more risk than manu-facturers. Some consumer devices, in particular hearing aids,require fitting which is typically done by a qualified specialist,although even in the case of audiology the ability to fine-tunehearing aids remotely is growing. For the moment we expectonly very slow changes to distribution channels, giving com-panies the time to respond, but this risk bears watching in themedium-term.

• US uninsured population rising again: after falling byaround seven million between 2013 and 2016, following theenactment of the Affordable Care Act (ACA), the number ofUS adults without health insurance has begun to rise againsince late 2016, as healthcare exchanges have struggled toprovide affordable policies. This trend could accelerate from2019 as the "individual mandate" (the requirement to havehealth insurance or face a tax penalty) was repealed as partof the tax reforms passed in December 2017. This could nega-tively impact US medtech volumes in certain reimbursed proce-dures, notably spine and other orthopedic surgeries. However,we expect a limited negative impact as the benefit to procedurevolumes in these categories since ACA came into effect wasitself limited: many of the newly-insured population had plansstructured with such high deductibles that in reality their abilityto afford elective orthopedic surgery was unchanged. Morelikely, the strong economy and lower unemployment rates wereresponsible for the growth in procedure volumes in 2014–15,in our view.



• Product risks: medical device companies face the risk ofproduct failures, withdrawals, intellectual property disputes,and greater regulatory burden on new products. Compared topharma and biotech companies, the industry is less exposed topatent expiries, as brand history and loyalty play a much greaterrole in product choice. Product withdrawals for implantablemedical devices can be highly damaging to a company's repu-tation and financial position, especially if corrective surgery isrequired, although this is rare.

Appendix: Key medical device marketsIn the following pages we provide overviews of the markets foreach class of medical devices we have included in our theme. Weestimate the current combined size of the relevant markets to beUSD 103.7 billion, and think they could grow in the mid single digitsover the long term.

Implantable medical devicesOrthopedic implantsOrthopedic implants are used to repair bones or joints damagedeither by age-related diseases or injuries. The causes of bone diseasevary although osteoarthritis, which is linked both to aging andobesity, is a significant factor. More than 1.1bn people worldwidesuffer from osteoarthritis, low back or neck pain, according to TheLancet's Global Burden of Diseases Study 2015, and nearly threequarters of US adults over 65 are affected in some way.

We estimate the orthopedics and spine market is worth aroundUSD 45.2 billion. The main growth driver is the aging population,although lifestyle factors such as obesity also play a part. The car-tilage in joints such as hips and knees naturally erodes with ageand, since adult cartilage does not naturally regenerate, it must bereplaced when damaged. Bones and joints can also be damaged inaccidents or sporting injuries.

Obesity, itself driven by the trend towards urbanization, is also arisk factor for orthopedic surgery, as excess weight places greaterpressure on the knee joints, increasing the risk of damaged car-tilage. One study (Mihalko et al, J AAOS, 2014) estimated that obesepatients (i.e. those with a BMI over 30, see Fig. 9) had a 8.5x higherneed for knee replacement surgery than those with normal bodyweight. Obese patients are also at greater risk of injuries.

Reconstruction, or the replacement of damaged joints (mostly hipsand knees), is the largest segment of the market (Fig. 10). Traumarefers to the use of plates and screws to fix bones damaged in acci-dents. Spinal fusion aims to stabilize damaged vertebrae in orderto resolve pain; more advanced technologies include motion-pre-serving spinal discs. Most spine patients are over 50. The broaderorthopedic market also includes sports medicine and arthroscopy, ortools and products for minimally-invasive surgery on joints and softtissue. A recent innovation in reconstruction is the use of robotic sur-gical procedures that may help to improve the accuracy of implantplacement, resulting in fewer costly revisions.

Fig. 9: Obesity defined as BMI > 30Classification of patients by BMI

Classification BMI (kg/m2)

Normal range 18.50 - 24.99

Overweight >25.00

- Pre-obese 25.00 - 29.99

Obese >30.00

- Obese Class I 30.00 - 34.99

- Obese Class II 35.00 - 39.99

- Obese Class III >40.00

Note: BMI = body mass index, calculated as a patient's weight (in kg)divided by the square of his height (in m) Source: UBS

Fig. 10: Global orthopedic marketGlobal market, total USD 45.2 billion

Hips14%

Knees17%

Extremities13%

Trauma15%

Sportsmedicine

13%

Spine20%

Endoscopy7%

Source: UBS Investment Bank. As of May 2018



The orthopedic market is mature in developed markets, and wellconsolidated. Market growth in the major categories of large jointreconstruction, trauma and traditional spinal fusion proceduresis in the low to mid single digits, with mid single-digit volumegrowth offset by slightly negative like-for-like pricing. Orthopedicsis in the vanguard of healthcare system's efforts to make hospitalsaccountable for the overall quality and cost-effectiveness of careby introducing new reimbursement structures, such as the Compre-hensive Care for Joint Replacement (CCJR) trial that started in theUS in 2016. The current US administration has slowed adoption ofalternative payment systems in general, and weakened the CCJRin particular. However, given the bipartisan desire to reduce thegrowth of healthcare costs, we still expect progress over timetoward value-based care, which will likely include measures tar-geting orthopedic surgery.

While the move to a single "bundled" payment may be seen asa pricing constraint, we expect the greatest impact of programslike CCJR will be felt in post-acute care, which can account forup to 50% of the total cost of joint replacement. Within recon-struction, there are pockets of higher growth such as reconstructionof extremities (shoulders, elbows and wrists), and newer tech-nologies in spine treatment such as complex fusion and motion-preserving discs. Within large-joint reconstruction, knee proceduresare currently growing more rapidly driven by innovative new surgicaltechniques, including robotic surgery, that are hoped to improveoutcomes. Sports medicine and arthroscopy are also growing morerapidly.

Reconstruction is one of the most economically sensitive segmentsof the medical device market, as most hip, knee and spinal surgeriesare elective and can be put off if a patient loses their job or insurancecoverage (Fig. 11). Trauma is non-cyclical and mature, growingroughly in line with population growth in developed markets, butfaster in emerging markets as healthcare systems develop.

Cardiovascular devicesThe cardiovascular devices market covers a wide range of productsused to treat conditions in the heart and circulatory system, suchas abnormal heart rhythms, vascular disease and valve disease. Inci-dence of many of these problems increases with age. We estimatethe total cardiovascular market is worth an annual USD 35.3 billion.

Cardiac rhythm management (CRM) devices and heart failure (HF)products constitute the largest single segment of the market (Fig.12). These products include pacemakers (used to maintain or speedup the heartbeat), implantable cardioverter-defibrillator (ICDs, usedto correct arrhythmias) and a wide range of devices used to monitorand prevent cardiovascular disease. These markets are largelymature, although new technologies are emerging in the heartfailure monitoring space. For example, St Jude Medical/Abbott'sCardioMEMS heart failure monitoring system is a device implantedin the pulmonary artery that can provide early warnings of wors-ening heart failure, allowing the patient to seek treatment beforesymptoms become apparent. Clinical data suggests CardioMEMSreduces hospitalization for heart failure, saving an average of USD10,500 total healthcare costs in the six-month period followingimplantation, according to one study (Desai et al, JACC, 2017).

Fig. 11: Elective procedures create economicsensitivityQuarterly sales growth of US implantable medicaldevices vs. the employment rate

86%

88%

90%

92%

94%

96%

98%

(4%)

(2%)

0%

2%

4%

6%

8%

10%

12%

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

US implanted device sales growth, left hand axis

US employment rate, right hand axis

Note: index of US sales of implantable cardiac rhythm managementdevices, orthopedic implants as proxy for discretionary medtech volume.Source: Bureau of Labor Statistics, UBS. As of April 2018

Fig. 12: Global cardiovascular marketGlobal market, total USD 35.3 billion

CRM & HF32%

Coronaryvascular

27%

Peripheralvascular

11%

Structuralheart13%

Electro-physiology

10%

Neuro-modulation

7%

Note: CRM = cardiac rhythm management; HF = heart failure Source:UBS Investment Bank. As of May 2018.



The coronary and peripheral vascular segments include balloonsfor coronary angioplasty (a procedure to unblock clogged arteries),drug-eluting stents (metal scaffolds placed inside arteries followingangioplasty treatment to prevent restenosis), and atherectomydevices used to remove plaque, typically due to cholesterol, fromartery walls. Stents and related products are a mature marketgrowing in the low single digits, with negative pricing.

Age-related degeneration of the heart tissue can lead to aorticstenosis, a condition where the aortic valve does not open fully, lim-iting blood flow from the heart to the body, and leading to heartfailure and higher risk of death. Traditionally, treatment involvesopen heart surgery to replace the damaged valve, a highly invasiveprocedure that is not suitable for all patients, but a newer mini-mally-invasive technique known as trans-aortic valve replacement(TAVR) has made surgery possible via catheters inserted through thefemoral artery. Clinical data have shown TAVR produces the samereduction in mortality risk as traditional surgery, while reducingtime (and therefore cost) in both the operating room and intensivecare unit. The potential for TAVR to develop into a multi-billiondollar market makes the structural heart segment one of thefastest-growing cardiovascular markets currently, although tradi-tional open-heart procedure volumes are now in decline as TAVRbecomes the standard of care. Longer-term, minimally-invasiveapproaches to other more common heart valve dysfunctions, suchas mitral valve replacement, will also become drivers of the struc-tural heart market. We expect growth to settle in the mid to highsingle digits.

Unlike orthopedic procedures, which are largely elective, most con-ditions addressed by cardiovascular devices are immediately orpotentially life-threatening. Economic sensitivity is therefore lessthan in the orthopedic market, although overall healthcare uti-lization can fall during times of economic stress, leading to fewerpatients being diagnosed and treated. Overall, we estimate the car-diovascular devices market has mid single-digit growth potential,since the more mature categories face modest pricing pressure,while new technologies such as TAVR and, potentially, for mitralvalve replacement, can expand addressable markets.

Consumer medical devicesWe have grouped together three consumer-focused segments, i.e.corrective lenses, hearing aids and dental implants (Fig. 13). Pur-chase decisions for these products tend to lie with the user: oftenthe choice is made to improve quality of life (e.g. corrective lenses)or achieve a better outcome compared to an alternative (e.g. dentalimplants vs. bridges). Collectively, we estimate worldwide sales inthese markets to be USD 23.2 billion, with a slightly higher growthoutlook than implantable devices.

Corrective lensesThe aim of corrective lenses is to improve vision quality. Accordingto market leader Essilor, more than 4.5 billion people globally havepoor vision, but less than two billion of these currently benefit fromvision correction. Of those with uncorrected vision, over 90% livein emerging markets.

Fig. 13: Overview of three major consumermedical device marketsGlobal market, total USD 23.2 billion

Dentalimplants

16%

Hearing aids26%

Correctivelenses58%

Source: Company data, UBS estimates. As of May 2018



The corrective lenses market is currently worth about USD 13.5bn(Fig. 14). The market benefits from several relevant long-termmarket trends, including urbanization in emerging markets, whichleads to lifestyle changes like higher education levels and more useof computers, and the aging global population. Volume growthin developed markets is 2–3%, driven by a combination of aging(which leads to presbyopia) and a rising incidence of myopia(near-sightedness), particularly among the young. The naturalreplacement cycle (around every three years) provides an oppor-tunity for existing users to move to higher-priced lenses, whichshould support higher average selling prices for the industry overtime. In general, this "mix effect" contributes about 2–3% annuallyto industry growth.

Lower penetration in emerging markets means growth in theseregions is currently about double that of developed markets: risingper-capita GDP supports increased market access (as more ophthal-mologists set up shop) and enables more consumers to pay forpremium lenses.

As people age, their vision often deteriorates. Presbyopia describesthe condition where a lens can't focus, causing sufferers to lose theability to see objects up close. This typically begins in the mid-fortiesand gets worse over time. The best solution for presbyopia sufferersis progressive lenses, which allow the wearer to see sharply at anydistance. These lenses can generate a premium of more than 50%compared to normal lenses. Despite being invented in the 1950's,progressive lenses have yet to become the standard treatment forpresbyopia, and still account for less than one third of lenses soldin most developed markets, although use is steadily increasing.

Several factors have contributed to the increasing prevalence ofmyopia (near-sightedness) in developed markets. According to theNational Eye Institute, the prevalence of myopia in the US grewfrom 25% of the population aged 12–54 in 1971–72 to nearly42% by 1999–2004. This has been widely attributed to more timespent reading (so-called "near work") and rising use of computers,leading to eye fatigue. These lifestyle trends look set to continue,especially in emerging markets where urbanization supports highereducation levels, more office-based jobs and wider use of electronicdevices. According to Essilor, more than 90% of 20–65 year oldsin developed markets use digital devices every day and nearly twothirds spend four hours or more per day using computers.

The corrective lenses market comprises many small companies anda few large players, who benefit from scale and global reach in R&Dand marketing. While some countries provide partial insurance cov-erage for vision correction, glasses are usually an out-of-pocket pur-chase, so the corrective lens market exhibits some cyclicality.

The demographic, social and economic trends supporting the useof corrective lenses look set to persist over the decades, as does thegreater use of premium lenses. With these multiple drivers, we seethe corrective lens market as attractive over the medium to longterm.

Hearing aidsThe WHO estimates that 432 million adults suffer from disablinghearing loss, and expects this figure to rise to 900m by 2050.Hearing loss disproportionately affects the old: hearing ability nat-urally deteriorates with age as sensory cells in the ears degenerate.

Fig. 14: Corrective lenses global market shareGlobal market USD 13.5 billion

Essilor42%

Hoya Vision12%

Carl Zeiss8%

Others38%

Source: Company data, UBS estimates. As of May 2018



One third of people over 65 years old have hearing difficulties. Whileaging is estimated to account for 85% of hearing loss cases, othercauses include exposure to loud noise such as music, explosions orgunfire.

We estimate the hearing instrument market is currently wortharound USD 6.0 billion (Fig. 15), and is growing at mid single-digitrates. Trend volume growth is typically 2–4%, although in any spe-cific year growth can fluctuate around this level as product cycleswax and wane. Hearing aid penetration is still relatively low, evenamong those with moderate to severe hearing loss (Fig. 16).

The wide use of bluetooth headsets has reduced the stigma asso-ciated with wearing a hearing aid, but many people are still reluctantto accept they need one: patients spend an average of 3–7 yearsdeciding to get a device. For many patients, financial considerationslimit the ability to buy a hearing aid, despite partial governmentassistance in some markets. Recent moves to improve access tohearing aids by allowing their sale over the counter may help toincrease penetration, but could come at the cost of lower averageselling price (ASP). Therefore, we see demographics (growth ofthe over-65 population) rather than increased penetration as themain future volume driver. Volume growth is partially offset byslightly negative like-for-like pricing. After accounting for the pricingbenefit of new products, we estimate mid single-digit growth overthe medium term.

Hearing aid quality has improved over the years: the introduction ofdigital hearing aids (starting in the late 1990's) was a step-changefor the industry, followed by development of binaural hearing aids,which improve the overall sound reproduction for users with twodevices, in the mid-2000's. The most recent innovation is greaterintegration of connectivity, allowing easier use with mobile phonesand other electronic devices.

Historically, the hearing aid industry was characterized by a smallnumber of manufacturers (no significant new company has enteredthe market since 1967) selling via a large number of independentaudiologists. Recently, larger chains and "big-box" retailers havegained more importance in the distribution channel, which couldpressure average selling prices for manufacturers. As a result someindustry players expanded their own retail networks, a trend whichwe expect to continue. The recently-announced merger of Sivantosand Widex, two privately-held manufacturers, is unlikely to supportstronger industry pricing, in our view, as there are still five majormanufacturers and the industry faces more powerful customers.The shift toward distribution in larger, more price-focused chainstores may make it easier for a new entrant to gain a footholdin the market, particularly if consumers embrace new devices fea-turing communications technology, where branding and connec-tivity with other devices is more important. More positively, loweraverage selling prices (ASP) may boost volume growth.

With few alternative treatment options for the hard of hearing,reliable demographic drivers and a wealthy core customer base (theover 65's) we see the hearing aid market as attractive over themedium to long term.

Dental implantsDental implants offer an alternative to traditional treatment forreplacement of lost teeth. Medically, implants are superior to tra-

Fig. 15: Hearing aids global market shareTotal market USD 6.0 billion

Sonova31%

WilliamDemant

30%

Sivantos +Widex19%

GN ReSound15%

Starkey4%

Others1%

Source: UBS Investment Bank. As of May 2018.

Fig. 16: Hearing aid penetration ratesPercent of hearing-impaired using hearing aids, bydegree of hearing loss

70%

50%

10%

30%

50%

90%

0%

20%

40%

60%

80%

100%

Profound Moderate Mild

With hearing aid Without hearing aid

Source: Sonova. As of March 2018



ditional bridges as they help to preserve the underlying jawbone;they can also have aesthetic advantages. It is estimated that approx-imately half the population in developed markets are missing at leastone tooth. We have included dental implants in the "consumer"category since they are not reimbursed and the decision to opt foran implant, vs. traditional treatment with a crown or bridge, is takenby the patient.

We estimate the dental implant market to be worth around USD3.7 billion annually. Growth has decelerated from double digits inthe last decade to mid single digits currently, as implant penetrationhas risen in developed markets.

While penetration is still generally low (still below 15% of toothrestorations in the US, for example), many patients cannot afforddental implants, which can cost USD 3,500 for a single toothreplacement and up to USD 10,000 for a full denture in the US,and instead receive traditional treatment. Urbanization in emergingmarkets, which supports the desire and financial ability to improveone’s looks, and continued penetration of developed markets, arenear-term drivers of the market. In the long term, we expect themarket to grow in mid single digits as the value segment of theindustry grows in importance.

As implant penetration has risen, the market has become morecyclical. Also, a value segment of companies has emerged whichare less innovative but can provide functional implants at a reducedprice. Value players account for nearly one third of the globalimplant market (Fig. 17), and established premium-quality implantmakers have launched or acquired their own discount brands.

We expect this trend to continue, but it should support increasedpenetration of implants. As long as premium manufacturers areable to innovate and differentiate their premium brands to maintainprice, we think the industry can grow in the mid single digits in thelong term.

Fig. 17: Dental implants global market shareTotal market USD 3.7 billion

Straumann24%

Danaher(Nobel

Biocare)19%

ZimmerBiomet

7%

Dentsply14%

Henry Schein8%

Others &value brands

28%

Source: UBS Investment Bank. As of May 2018



Fig. 18: Medical devices companies reference listThis is not a list of recommendations nor is it comprehensive

Company name ISIN CountryMarket

cap(USDm)

Share pricecurrency

PriceEstimated

salesexposure

Orthopedics & minimally invasive surgery

Johnson & Johnson US4781601046 UNITED STATES 331,272 U.S. Dollar 124.8 30%

Stryker Corporation US8636671013 UNITED STATES 62,555 U.S. Dollar 167.5 60%

Zimmer Biomet Holdings, Inc. US98956P1021 UNITED STATES 23,612 U.S. Dollar 116.6 95%

Smith & Nephew plc GB0009223206 UNITED KINGDOM 15,432 British Pounds 13.0 75%

Integra LifeSciences Holdings Corporation US4579852082 UNITED STATES 5,040 U.S. Dollar 61.0 50%

Globus Medical, Inc. Class A US3795772082 UNITED STATES 4,815 U.S. Dollar 49.9 100%

NuVasive, Inc. US6707041058 UNITED STATES 2,540 U.S. Dollar 50.2 100%

Wright Medical Group NV NL0011327523 UNITED STATES 2,223 U.S. Dollar 24.0 100%

CONMED Corporation US2074101013 UNITED STATES 1,909 U.S. Dollar 68.3 70%

Orthofix International NV ANN6748L1027 UNITED STATES 999 U.S. Dollar 53.3 100%

Cardiovascular

Medtronic plc IE00BTN1Y115 UNITED STATES 113,933 U.S. Dollar 84.2 45%

Abbott Laboratories US0028241000 UNITED STATES 104,139 U.S. Dollar 59.5 35%

Boston Scientific Corporation US1011371077 UNITED STATES 41,160 U.S. Dollar 29.9 90%

Edwards Lifesciences Corporation US28176E1082 UNITED STATES 28,504 U.S. Dollar 136.0 100%

Terumo Corporation JP3546800008 JAPAN 20,600 Japanese Yen 6,080.0 55%

ABIOMED, Inc. US0036541003 UNITED STATES 15,893 U.S. Dollar 362.8 80%

LivaNova Plc GB00BYMT0J19 UNITED STATES 4,084 U.S. Dollar 85.3 60%

iRhythm Technologies, Inc. US4500561067 UNITED STATES 1,625 U.S. Dollar 69.0 100%

Dental implants

Straumann Holding AG CH0012280076 SWITZERLAND 10,846 Swiss Franc 686.0 100%

DENTSPLY SIRONA, Inc. US24906P1093 UNITED STATES 10,139 U.S. Dollar 46.0 25%

Corrective lenses

Essilor International SA FR0000121667 FRANCE 29,966 Euro 115.1 90%

HOYA CORPORATION JP3837800006 JAPAN 20,103 Japanese Yen 5,897.0 50%

Cooper Companies, Inc. US2166484020 UNITED STATES 11,103 U.S. Dollar 226.7 80%

Hearing aids

Sonova Holding AG CH0012549785 SWITZERLAND 10,792 Swiss Franc 165.9 100%

William Demant Holding A/S DK0060738599 DENMARK 9,542 Danish Krone 237.6 100%

Cochlear Limited AU000000COH5 AUSTRALIA 8,339 Australian Dollar 194.0 100%

GN Store Nord A/S DK0010272632 DENMARK 5,689 Danish Krone 245.4 60%

Source: FactSet, UBS. Market data as of 10 May 2018.

Important note: This is a company reference list with relevant medical devices stocks worldwide. We screened theMSCI World Healthcare, NASDAQ and major European country indices for companies active in the medical devicemarkets, based on sales exposure larger than 25% and market capitalization of more than USD 1 billion. Please notethat this list is only for reference and is not a recommendation list.



Appendix

ContactIf you require information on UBS Chief Investment Office WM, its research publications and UBS disclosures withregard to financial instruments and/or issuers, please contact the mailbox [email protected] (note that e-mailcommunication is unsecured) or contact your client advisor for assistance.

Frequency of updatesEquity recommendation lists can be updated on a daily basis, and are refreshed at least every two weeks. Risk viewson bond issuers and instruments are affirmed sporadically and changed ad hoc, subject to market developments.

Competent authority of the producerUBS Switzerland AG is regulated by the Swiss Financial Market Regulatory Authority (FINMA). UBS Europe SE,Succursale Italia is regulated by Commissione Nazionale per le Società e la Borsa (CONSOB). UBS AG Tokyo Branch isregulated by the Financial Services Agency (FSA). UBS Asesores Mexico, S.A. de C.V. is regulated by Comisión NacionalBancaria y de Valores (CNBV). UBS AG Singapore Branch is regulated by the Monetary Authority of Singapore (MAS).UBS Europe SE, sucursal en España is regulated by Comisión Nacional del Mercado de Valores (CNMV). UBS AG LondonBranch is regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). UBS AGHong Kong Branch is regulated by the Securities and Futures Commission (Hong Kong) and the Hong Kong MonetaryAuthority. UBS Brasil Administradora de Valores Mobiliarios Ltda is regulated by Comissão de Valores Mobiliários.

Competent authority of the disseminatorThis publication has been disseminated by the UBS Group entity you have a banking relationship with. The full nameof the disseminating entity and its competent authority can be found in the country-specific disclaimer at the endof this document.

Disclosures (19 May 2018)

Within the past 12 months UBS AG, its affiliates or subsidiaries may have received or provided investment servicesand activities or ancillary services as per MiFID II which may have given rise to a payment or promise of a payment inrelation to these services from or to each company mentioned in the publication.

Abbott Laboratories 1, 2, 3, Abiomed 1, Amazon.com 1, 2, 3, 4, Berkshire Hathaway 1, 5, 6, Boston Scientific Corp. 1,CONMED Corporation 1, Danaher Corporation 1, 8, Dentsply 1, 5, 11, Edwards Lifesciences Corp 1, Globus Medical,Inc. Class A 1, Henry Schein Inc. 1, Integra LifeSciences Holdings Corporation 1, Johnson & Johnson 1, 2, 3, 5, 7, 9,10, 11, JPMorgan Chase & Co. 1, 2, 3, 5, 11, 12, Medtronic, Inc. 1, 5, 7, 8, 11, 12, 13, Nobel Biocare 14, NuVasive 1,Orthofix International 1, Siemens 4, 5, 7, 9, 10, 13, 14, Smith & Nephew 1, Sonova 5, 11, 12, 13, 14, 15; Straumann5, 9, 10, 11, 12, 14, Stryker Corporation 1, 2, 3, The Cooper Companies 1, 2, 3, 7, Wright Medical Group NV 1,13, Zimmer Biomet Holdings, Inc. 1,

1. UBS Securities LLC makes a market in the securities and/or ADRs of this company.2. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.3. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services otherthan investment banking services from this company.4. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month'send (or the prior month's end if this report is dated less than 10 working days after the most recent month's end).5. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products andservices other than investment banking services from this company/entity.6. The equity analyst covering this company, a member of his or her team, or one of their household members hasa long common stock position in this company.7. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investmentbanking services are being, or have been, provided.8. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.9. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment bankingservices from this company/entity or one of its affiliates.10. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement ofsecurities of this company/entity or one of its affiliates within the past 12 months.11. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or have been, provided.12. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securitiesservices are being, or have been, provided.



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13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equitysecurities as of last month's end (or the prior month's end if this report is dated less than 10 days after the mostrecent month's end).14. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment bankingservices from this company/entity within the next three months.15. UBS Fund Management (Switzerland) AG beneficially owns more than 3% of the total issued share capital ofthis company.

UBS CIO WM equity selection systemWe provide two equity selections: Most Preferred (MP) and Least Preferred (LP).

Most preferredWe expect the stock to outperform the benchmark in the next 12 months.Least preferredWe expect the stock to underperform the benchmark in the next 12 months.SuspendedSometimes legal, regulatory, contractual or best-business-practice obligations restrict us from issuing research on acompany. This situation normally stems from UBS Investment Bank's involvement in an investment banking transactionassociated with that company.Equity selection: An assessment relative to a benchmarkEquity selections in Equity Preferences lists (EPLs) are assessments made relative to a sector/industry, country/regionalor thematic benchmark. The chosen benchmark is disclosed on the front page of each EPL. It is also used to measurethe performance of the individual analyst. Including a stock in the EPL constitutes neither a view on its expected,standalone absolute performance nor a price target. Rather, EPLs are meant to support the UBS House View, with thestocks included in them selected for their superior risk/return profiles.Our selection is based on an assessment of the company's fundamental outlook and valuation, the risks owning thestock entails and the diversification benefits it provides in an investment portfolio, among many other factors. UBSWM CIO‘s selection methodology enables wealth management clients to invest in a specific investment theme orfocus on a sector/industry or country/region.Stocks can be selected for multiple EPLs. For consistency's sake, a stock can only be selected as either Most Preferredor Least Preferred, not both simultaneously. As EPL benchmarks differ, stocks do not need to be included on every listto which they could theoretically be added.Only stock views prepared by UBS Financial Services Inc. (UBS FS) which are compatible with the above equity selectionsystem are provided. A stock cannot be selected as Most Preferred if it is rated Sell, while a Buy-rated stock cannotbe selected as Least Preferred.Whenever CIO has an investment view (such as with the tactical asset allocation TAA) on an entire country/region, orsector/industry on a three to 12-month time horizon, we state our preference by using the terms overweight, neutraland underweight.For more information about our present and past recommendations, please contact [email protected]

Current UBS global rating distribution (as of last month-end)

Buy 47.14% (25.02%*) . . .Neutral 37.44% (22.79%*) . . .Sell 13.32% (13.42%*) . . .Suspended 1.92% (69.77%*) . . .Discontinued 0.18% (0.00%*) . . .

Terms and AbbreviationsTerm / Abbreviation Description / Definition Term / Abbreviation Description / DefinitionA actual i.e. 2010A COM Common sharesE expected i.e. 2011E EPS Earnings per shareGDP Gross domestic product MP Marketperform: The stocks expected

performance is in line with the sectorbenchmark

NAV Net asset value Shares o/s Shares outstandingUP Underperform: The stock is expected to

underperform the sector benchmarkCIO UBS WM Chief Investment Office



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Appendix

Disclaimer

you and/or persons entitled to make the request on your behalf. Should you have received the material erroneously, UBS asks that you kindly delete the e-mail andinform UBS immediately. The material may not have been reviewed, approved, disapproved or endorsed by any financial or regulatory authority in your jurisdiction. Therelevant investments will be subject to restrictions and obligations on transfer as set forth in the material, and by receiving the material you undertake to comply fullywith such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investmentobjective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Israel:UBS Switzerland AG is registered as a Foreign Dealer in cooperation with UBS Wealth Management Israel Ltd, a wholly owned UBS subsidiary. UBS Wealth ManagementIsrael Ltd is a licensed Portfolio Manager which engages also in Investment Marketing and is regulated by the Israel Securities Authority. This publication shall not replaceany investment advice and/or investment marketing provided by a relevant licensee which is adjusted to your personal needs. For the avoidance of doubt, any use ofthe word "advice" and any of its derivatives in this publication shall be construed as "Investment Marketing" as defined in the Israeli Advisory Law. ) UBS AG and itsaffiliates incorporated outside Israel are not licensed under the Israeli Advisory Law. UBS AG is not covered by insurance as required from a licensee under the IsraeliAdvisory Law. UBS may engage among others in issuance of Financial Assets or in distribution of Financial Assets of other issuers for fees or other benefits. UBS AGand its affiliates may prefer various Financial Assets to which they have or may have an affiliation (as such term is defined under the Israeli Advisory Law. Italy: Thispublication is distributed to the clients of UBS Europe SE, Succursale Italia, Via del Vecchio Politecnico, 3 - 20121 Milano, the branch of a German bank duly authorizedby the “Bundesanstalt für Finanzdienstleistungsaufsicht” to the provision of financial services and supervised by "Consob". Jersey: UBS AG, Jersey Branch, is regulatedand authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Where services are provided from outside Jersey,they will not be covered by the Jersey regulatory regime. UBS AG, Jersey Branch is a branch of UBS AG a public company limited by shares, incorporated in Switzerlandwhose registered offices are at Aeschenvorstadt 1, CH-4051 Basel and Bahnhofstrasse 45, CH 8001 Zurich. UBS AG, Jersey Branch's principal place business is 1, IFCJersey, St Helier, Jersey, JE2 3BX. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available forinformation purposes to clients of UBS Europe SE, Luxembourg Branch ("UBSL"), a branch of UBS Europe SE, a credit institution constituted under German Law in theform of a Societas Europaea, duly authorized by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). UBSL issubject to the joint supervision of the BaFin, the central bank of Germany (Deutsche Bundesbank), as well as of the Luxembourg supervisory authority, the Commissionde Surveillance du Secteur Financier (CSSF), to which this document has not been submitted for approval. UBSL, with place of business at 33A, avenue John F. Kennedy,L-1855 Luxembourg, is registered with the Luxembourg Trade and Companies Register (R.C.S. Luxembourg) under the number B209123. Mexico: This document hasbeen distributed by UBS Asesores México, S.A. de C.V., a company which is not part of UBS Grupo Financiero, S.A. de C.V. or of any other Mexican financial group andwhose obligations are not guaranteed by any third party. UBS Asesores México, S.A. de C.V. does not guarantee any yield whatsoever. Netherlands: This publication isnot intended to constitute a public offering or a comparable solicitation under Dutch law, but might be made available for information purposes to clients of UBS EuropeSE, Netherlands branch, a branch of a German bank duly authorized by the “Bundesanstalt für Finanzdienstleistungsaufsicht” for the provision of financial services andsupervised by "Autoriteit Financiële Markten” (AFM) in the Netherlands , to which this publication has not been submitted for approval. New Zealand: This notice isdistributed to clients of UBS Wealth Management Australia Limited ABN 50 005 311 937 (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2Chifley Square, Sydney, New South Wales, NSW 2000, by UBS Wealth Management Australia Ltd. You are being provided with this UBS publication or material becauseyou have indicated to UBS that you are a client certified as a wholesale investor and/or an eligible investor ("Certified Client") located in New Zealand. This publication ormaterial is not intended for clients who are not Certified Clients ("Non-Certified Clients"), and if you are a Non-Certified Client you must not rely on this publication ormaterial. If despite this warning you nevertheless rely on this publication or material, you hereby (i) acknowledge that you may not rely on the content of this publicationor material and that any recommendations or opinions in this publication or material are not made or provided to you, and (ii) to the maximum extent permitted bylaw (a) indemnify UBS and its associates or related entities (and their respective directors, officers, agents and advisers (each a "Relevant Person") for any loss, damage,liability or claim any of them may incur or suffer as a result of, or in connection with, your unauthorised reliance on this publication or material and (b) waive any rightsor remedies you may have against any Relevant Person for (or in respect of) any loss, damage, liability or claim you may incur or suffer as a result of, or in connectionwith, your unauthorised reliance on this publication or material. Nigeria: UBS and its branches and subsidiaries (UBS) are not licensed, supervised or regulated in Nigeriaby the Central Bank of Nigeria (CBN) or the Nigerian Securities and Exchange Commission (SEC) and does not undertake banking or investment business activities inNigeria. UBS (Nigeria) Representative Office Limited in Lagos is licensed by the Central Bank of Nigeria (CBN) to operate as a representative office of UBS. The investmentproducts mentioned in this material are not being offered or sold by UBS to the public in Nigeria and they have not been submitted for approval nor registered with theSecurities and Exchange Commission of Nigeria (SEC). If you are interested in products of this nature, please let us know and we will direct you to someone who canadvise you. The investment products mentioned in this material are not being directed to, and are not being made available for subscription by any persons within Nigeriaother than the selected investors to whom the offer materials have been addressed as a private sale or domestic concern within the exemption and meaning of Section69(2) of the Investments and Securities Act, 2007 (ISA). Singapore: This material was provided to you as a result of a request received by UBS from you and/or personsentitled to make the request on your behalf. Should you have received the material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately.The material may not have been reviewed, approved, disapproved or endorsed by any financial or regulatory authority in your jurisdiction. The relevant investments willbe subject to restrictions and obligations on transfer as set forth in the material, and by receiving the material you undertake to comply fully with such restrictions andobligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite andpersonal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Clients of UBS AG Singapore branchare asked to please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensedunder the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysisor report. Spain: This publication is distributed to its clients by UBS Europe SE, Sucursal en España, with registered office at Calle María de Molina 4, C.P. 28006, Madrid,entity supervised by Banco de España and the Bundesanstalt für Finanzdienstleistungsaufsicht. UBS Europe SE, Sucursal en España is a branch of UBS Europe SE, a creditinstitution constituted in the form of a Societas Europaea authorized and regulated by the Bundesanstalt für Finanzdienstleistungsaufsich. Sweden: This publication isnot intended to constitute a public offer under Swedish law, but might be distributed by UBS Europe SE, Sweden Bankfilial with place of business at Regeringsgatan 38,11153 Stockholm, Sweden, registered with the Swedish Companies Registration Office under the Reg. No 516406-1011. UBS Europe SE, Sweden Bankfilial is a branchof UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial SupervisoryAuthority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). UBS Europe SE, Sweden Bankfilial is subject to the joint supervision of the BaFin, the central bank ofGermany (Deutsche Bundesbank) and the Swedish financial supervisory authority (Finansinspektionen), to which this document has not been submitted for approval.Taiwan: This material is provided by UBS AG, Taipei Branch in accordance with laws of Taiwan, in agreement with or at the request of clients/prospects. Turkey: Noinformation in this document is provided for the purpose of offering, marketing and sale by any means of any capital market instruments and services in the Republicof Turkey. Therefore, this document may not be considered as an offer made or to be made to residents of the Republic of Turkey in the Republic of Turkey. UBS AGis not licensed by the Turkish Capital Market Board (the CMB) under the provisions of the Capital Market Law (Law No. 2499). Accordingly neither this document norany other offering material related to the instruments/services may be utilized in connection with providing any capital market services to persons within the Republicof Turkey without the prior approval of the CMB. However, according to article 15 (d) (ii) of the Decree No. 32 there is no restriction on the purchase or sale of theinstruments by residents of the Republic of Turkey. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under thelaws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including theUAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market orany other UAE exchange. This material is intended for professional clients only. UBS AG Dubai Branch is regulated by the DFSA in the DIFC. UBS AG/UBS Switzerland AGis not licensed to provide banking services in the UAE by the Central Bank of the UAE nor is it licensed by the UAE Securities and Commodities Authority. The UBS AGRepresentative Office in Abu Dhabi is licensed by the Central Bank of the UAE to operate a representative office. UK: Approved by UBS AG, authorised and regulated bythe Financial Market Supervisory Authority in Switzerland. In the United Kingdom, UBS AG is authorised by the Prudential Regulation Authority and subject to regulationby the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential RegulationAuthority are available from us on request. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Whereproducts or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. Ukraine:UBS is not registered and licensed as a bank/financial institution under Ukrainian legislation and does not provide banking and other financial services in Ukraine. UBShas not made and will not make any offer of the mentioned products to the public in Ukraine. No action has been taken to authorize an offer of the mentioned productsto the public in Ukraine and the distribution of this document shall not constitute financial services for the purposes of the Law of Ukraine "On Financial Services andState Regulation of Financial Services Markets" dated 12 July 2001. USA: This document is not intended for distribution into the US, to US persons, or by US-basedUBS personnel. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc., UBS Financial Services Inc. is a subsidiary of UBS AG.Version07/2017.© UBS 2018. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.



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