Shoulder Innovations, Inc. Canaccord Genuity's 46th Annual Growth Conference

Thank you, Caitlin. I appreciate the invitation and the opportunity. Thank you for your attention today. I will just start by reading this forward-looking statement. That is an attempt at humor, but we operate in the shoulder arthroplasty market or total shoulder replacement, which is about a $2.8 billion market worldwide, a couple billion-dollar market in the U.S., but interestingly growing at about 10% or a little bit more than 10% growth rate. Really the most attractive market in the orthopedic space. We are well-positioned to continue to take share in that space, partly because there is a massive transition from the inpatient to outpatient care, particularly to the standalone surgery center, which gained approval by CMS for reimbursement in January 2024.

We have built an ecosystem, like we like to characterize, of products and services, I will put it that way, that put us in a very unique position to take advantage of that transition to the ambulatory care, including the unique, differentiated product portfolio that I will go into in a little bit more detail. That product portfolio is enabled into the operating room with an enabling technology suite, including a robotic platform that we will be filing for 510K clearance early next year. We have built what I believe is a quite differentiated, unique commercial approach to the orthopedic marketplace that is quite different from how others have approached it, and it has been very effective for us. About $34 million first half this year, just under. We have about 60% revenue growth so far this year, and including a material improvement in gross margins up to the very upper 70s range.

Proud of our accomplishments in that respect. It does start with a team. We have been operating in this space literally for decades. You can see there along the bottom a number of the largest brands and most successful brands in the shoulder arthroplasty space. Notably, a number of us came through Tornier and built the product line that exists today under the Stryker moniker, which obviously, or maybe not obviously, but does represent about 40% share in the worldwide space. We have a multi-decade experience in building both product and commercial organizations to be successful specifically in this shoulder arthroplasty space. It is important to understand when you think about the market, there are two main types of shoulder replacement. There is an anatomic shoulder replacement and a reverse shoulder replacement.

The anatomic, you think about the word "works." You are replacing the anatomy that is diseased with effectively replacements that replicate that anatomy. Reverse operates in the opposite in the sense that you put the ball, instead of on top of the humerus, you put that ball on the scapular side, so you have a cup-shaped device on the humeral side. It is important to understand the main reason that you might use a reverse shoulder arthroplasty is because you have some sort of deficiency in the rotator cuff, and that rotator cuff soft tissue feature is a main stabilizing factor in the shoulder joint itself, so that mechanics of the reverse implant helps to overcome that deficiency of the rotator cuff. Today, about 70% of the market is that reverse shoulder replacement.

The market is a couple billion-dollar market worldwide, excuse me, in the U.S., $2.8 billion outside the United States, growing a little over 10%. One thing that is important to understand about the shoulder arthroplasty market is this transition to the ambulatory surgery center that is happening. When you look backwards in time, the number of procedures being performed for hips and knees in the hospital versus the ambulatory surgery center, that has transitioned to a kind of a 50/50 scenario. We are in the very early innings of that transition in the shoulder arthroplasty space, so we expect a very similar transition. In that respect, it is not that we stopped doing hips and knees at hospitals, it is just that the growth that occurred in the marketplace occurred in that outpatient setting.

We expect exactly the same dynamic in the shoulder arthroplasty marketplace in the sense that we are not going to do fewer shoulders in the hospital, we are just going to do many more shoulders, and that growth has all happened in the ambulatory surgery center space. Of course, that company that is well-prepared to support that outsized growth is indeed going to be in a better position to capture a fair number of that growth. There are about 15,000 surgeons in the United States that will perform at least one shoulder arthroplasty. Our commercial approach drives us to focus only on about the 1,800 surgeons that perform a vast majority of those procedures, think about 80% of those procedures. That is about 1,800 high-volume surgeons. That gives us a very targeted commercial approach and the opportunity for a very efficient commercial model.

Unfortunately for patients, but on some level, fortunately for us, there remain significant unsolved challenges in the shoulder arthroplasty space, particularly relatively low rates of implant survivorship, particularly when you put it in the context of hips and knees. That can be a function of implant fixation, if you will, relative to the bone it is attempting to be attached to, but also the actual mechanical device itself. Numerous postoperative complications are possible with anatomic shoulder arthroplasty. Subscapularis tendon failure rates, so that is a tendon that you will repair during the procedure, up to 15%, which is somewhat catastrophic for that anatomic procedure. Positioning is paramount to great outcomes, and if you do not get that positioning correct, you can limit the potential life of that implant. Of course, we are after improving both care and the economics around the procedure. We can do that simultaneously.

As we transition from the hospital to the ambulatory surgery center, many companies that produce a shoulder replacement are not well prepared to support that workflow transition. That remains a very sticky element in the ability to gain that more effective process. I will talk about each one of these. Our approach to solving those problems is built around what we characterize as an ecosystem. Great implants and instruments is paramount, but just one element of that ecosystem. In addition to that ecosystem, we must provide very effective enabling technology. For example, we present one of the only automated preoperative planning solutions. Preoperative planning has been demonstrated in the literature to dramatically improve the potential accuracy in surgery, so we present a very effective platform there.

Instead of presenting many, many trays, lots of metal and plastic into an ambulatory surgery center, we have reduced our instrument footprint to 2 trays. That is very differentiating in the marketplace, both economically and from a simplicity and surgical workflow standpoint. We have built our commercial model around surgeon-to-surgeon interactions. Surgeons can train one another how to clinically affect or cause the operation to happen, but they are also very powerful in overcoming anxieties and resistance to change, so that surgeon-to-surgeon interaction is very, very important in that respect. We are indeed the only publicly traded, well-funded company focused specifically on that high-volume shoulder surgeon call point. We have a very unique advantage in presenting this high level of expertise in the operating room, because this is really the only market that we serve, so that has been a bit of a superpower for us.

As I mentioned, the loosening of the glenoid component or loosening of the components relative to bone has been a challenging and persistent complication, particularly in anatomic shoulder arthroplasty. We have innovated what is called the InSet Glenoid. In a very simple description, you can see the 2 green arrows represent loads that the humeral component will apply to the scapular component during the procedure. You can imagine if you lean on one of those arrows, there is a lifting effect on the other side. Going back and forth, you cause what is called a rocking horse motion, is what we characterize that as. We did not coin or discover that, we just have proven a way to solve that. We do that by creating a pocket in the bone. That implant sits down in a pocket. Very simple innovation, but very effective innovation in that respect.

We stand alone and exclusively in doing that. We have demonstrated now, relative to the mechanism of action of this failure, 100% survivorship at 8.7 years, an 87% reduction in that rocking horse motion, that mechanism of action, and very effective outcomes for patients going from a 23 to a 95 post-op ASES score, which is a phenomenal outcome, as you can imagine. We are really the only company that has produced survivorship outcomes like that in anatomic shoulder arthroplasty, so it puts us in a very, very unique position. Of course, that is just one element of a broad spectrum of products. I characterize how the shoulder arthroplasty market is both anatomic and reverse. We sell numerous products throughout that full spectrum of indications that need to be treated.

I mentioned earlier one of those challenges that we face and one of the reasons you might use a reverse shoulder arthroplasty is because of sub-failure of the rotator cuff. So one element of that rotator cuff is what we call that subscapularis tendon. When you perform an anatomic shoulder arthroplasty, you will adjust the anatomy, you will take down the subscapularis tendon, replace the joint, and then you repair that subscap tendon back to the bone. That fails 5%-25% of the time, depending on the literature that you refer to. But that failure of the subscapularis tendon indeed represents deficiency in the rotator cuff structure. As I characterized earlier, if you have arthritis and deficiency in the rotator cuff, that means you need a reverse shoulder arthroplasty, so a very important segue into what has happened in the space.

You can see early 2000s, a majority, more than half of our procedures were anatomic procedures, and a relative minority reverse procedures. Over the last 15 years or so, we have learned a lot about reverse shoulder arthroplasty, and reverse has now become on the order of 70% of procedures that are performed. So that is a unique circumstance in the orthopedic marketplace in the sense that you are taking a non-anatomic mechanical structure and represents a majority of the marketplace. So it has been an interesting dynamic. As that transition has happened, we have learned a lot, particularly about the biomechanics of reverse shoulder arthroplasty, and transitioned away from what we would call an onlay arthroplasty, you can see up to the right, to an inlay arthroplasty. That is us on the lower right-hand side.