13 May 2013

Lombard Medical is a research client of Edison Investment Research Limited

Lombard Medical has reached a pivotal stage as it gears up to launch Aorfix, its AAA stent graft for aortic neck angles from 0-90°. Aorfix has significant commercial potential and will compete with devices from the established US medtech companies on the basis of its unique label. The size of the US market, with over 50% of global EVAR volumes, means that sales of Aorfix could more than triple in the next two years; our model suggests it will become profitable in 2016. However, Lombard has a cash reach into 2014 and would need to raise funds to take it through to profitability. Our valuation is £98m or 305p per share.

Year end Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/11 4.0 (11.1) (60.1) 0.0 N/A N/A 12/12 3.9 (8.9) (42.2) 0.0 N/A N/A 12/13e 5.1 (14.6) (48.9) 0.0 N/A N/A 12/14e 14.5 (7.6) (21.7) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

US is a significant opportunity The US launch of Aorfix is a very attractive commercial opportunity for Lombard due to its unique label, there is no US competitor licensed for neck angles over 60º. The US, an EVAR market valued at c $600m, is more accepting than Europe of minimally invasive surgical techniques and accounts for c 54% of global EVAR procedures. On this basis, we forecast that Lombard will achieve rapid growth in sales and margin, the device has a 50% price differential in the US, and could become profitable in 2016.

FY12 results Lombard reported flat commercial revenue in 2012 of £3.9m, although this disguised a 13% increase in demand in the four main European markets (Aorfix is sold direct in the UK and Germany only). A total of 382 patients were treated vs 338 in 2011. However, there was de-stocking by distributors in Italy and Spain.

Financial Lombard raised £13.5m net post year end, (tranche two of a funding agreed in May 2011), to support the US launch of Aorfix. Lombard has a cash reach into Q114. Our model suggests that it will have a further funding requirement of £15m–£20m to see it through to sustainable profitability in 2016. We have adjusted down our short-term forecasts to account for the shift in US launch from H1 into H2 this year.

Valuation: Decreased from £104.7m to £98m Our DCF valuation has decreased marginally from £104.7m to £98m, mainly due to the impact of the shift in the launch date from H113 to H213. Our valuation assumes the conversion of a £3m loan with Invesco into 2.1m shares at 140p during 2013. Our valuation per share is 305p.

Lombard Medical Full-year results

US launch in sight

Price 196p Market cap £63m

Net debt/cash (£m) 13.5

Shares in issue (pro-forma) 32.3m

Free float 58%

Code LMT

Primary exchange AIM

Secondary exchange N/A

Share price

% 1m 3m 12m

Abs (4.9) 1.6 49.6

Rel (local) (8.3) (4.1) 23.5

52-week high/low 239p 100p

Business description

Lombard Medical Technologies is a UK medical technology firm principally focused on the development and commercialisation of the Aorfix stent graft system, which is approved in Europe and the US for the endovascular (minimally invasive) repair of abdominal aortic aneurysm (AAA).

Next events US Aorfix launch H213

Analysts Emma Ulker +44 (0)20 3077 5738

Robin Davison +44 (0)20 3077 5737

healthcare@edisongroup.com

Edison profile page

Healthcare equipment & services

Lombard Medical | 13 May 2013 2

Investment summary: Aorfix US launch

Lombard Medical is a medical device company. Its lead product Aorfix is an endovascular stent graft for abdominal aortic aneurysm (AAA). The stent graft provides a unique solution for patients with high aortic neck angulations from 0 to 90º. Aorfix is approved and commercialised in Europe, and was granted a CE mark for aortic neck angulations <90º in 2009. The device received FDA approval in February 2013. Lombard is preparing for the US launch of the device in H213 through a proprietary sales force. Lombard also earns nominal revenue from its OEM manufacturing based in Scotland. The company listed on AIM in 2005, and has manufacturing facilities in Oxfordshire and Ayrshire and a US office in Tempe, Arizona.

Valuation: DCF of £98m Our DCF valuation of Lombard is £98m using an 11.5% WACC. The key catalyst is the US launch of Aorfix due in H213 and we have based our forecasts on Lombard around 3% of the market within the first two years of launch. This compares to the current market capitalisation of £63m. The model assumes the conversion of a £3m convertible loan with Invesco into 2.1m shares at 140p during 2013. Therefore, our valuation per share is 305p. At this stage we have not included any future dilution for any additional issue of equity.

Sensitivities The company’s ability to exploit the US commercial opportunity for Aorfix is the key investment driver. Sales could be slower or faster to progress than expected, depending on demand for the product. If the Japanese regulatory approval process for Aorfix takes longer than the expected 12 months, this could make a material difference to cash generation.

Although Lombard is funded for the US launch and into Q114, it will be dependent on receiving support from investors for its cash needs to take it to profitability, forecast in 2016. We have modelled sales conservatively and estimate a funding need of £15-£20m.

The company recently filed a petition for an inter partes review of a US patent (assigned to Medtronic) covering the properties of nitinol. This is a pre-emptive move by the company designed to mitigate any future risk of patent claims.

Financials: European demand for Aorfix up 13% in FY12 FY12 commercial revenue was flat at £3.9m. Although demand for Aorfix increased 13% in the four main European markets, this was partly fulfilled from distributor stock. Overall revenue decreased 3% to £3.9m from £4.0m, as US sales declined following completion of the Pythagoras trial. The operating loss in FY12 was £8.2m versus £11.4m in FY11.

The US market launch due in H213 is a pivotal catalyst for Lombard. We forecast that revenue will increase by 34% in 2013 and that Lombard will become profitable in 2016 based on estimates of market share in line with the potential market opportunity. We have revised down our 2013 revenue forecast from £10.7m to £5.1m, largely reflecting the delay in FDA approval of Aorfix, which had previously been expected in 2012, shifting the launch into H213 from H113. A small element of the change is due to slower growth in Aorfix sales in non-US markets, where de-stocking was seen in 2012.

Year-end 2012 cash and equivalents stood at £2.7m. Post year-end, Lombard raised a net £13.5m through the issue of 10.2m new shares (tranche two of a pre-agreed funding) after receiving FDA approval of Aorfix in February 2013. Our model suggests the company will need to raise more cash, potentially from £15-£20m, to take it through to profitability.

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Outlook: Gearing up for commercialisation

The US launch of Lombard Medical’s endovascular stent Aorfix for abdominal aortic aneurysm (AAA), later this year, is set to be a significant catalyst. This is based on the attractive commercial opportunity, the receptiveness of the market and lack of a competitor licensed to treat aneurysms with aortic necks over 60º. Aorfix is also supported by strong clinical data. Lombard will compete with the established companies and could gain a foothold with Aorfix based on the unique label claim. We forecast that revenue will more than triple by 2014, and could take Lombard to profitability in 2016. Nevertheless, the company has a cash reach only into early 2014, and our model suggests that it will require funding of £15-£20m to take it to profitability. Our valuation of Lombard is £98m, or 305p per share, and assumes that a £3m loan will convert to equity this year.

Aorfix and the AAA market The Aorfix stent was approved by the FDA this year for the repair of abdominal aortic aneurysm via endovascular aneurysm repair (EVAR), a minimally invasive form of repair. Aorfix is specifically approved and licensed for patients with highly angled aortic neck anatomies from 0 to 90º (competitor products are only licensed up to 60º in the US). Aorfix was approved and has been marketed in Europe and a number of RoW territories since it attained the enhanced CE mark in 2009. FDA approval means that Lombard is now able to approach the larger US market.

There are an estimated total 70,000 AAA repair procedures a year in the US and a similar number across Europe. Aortic aneurysms usually occur in the abdominal section, ie below the renal arteries (less commonly they can occur above the renal arteries, where they are considered to be thoracic aortic aneurysms, or TAAs). Clinically, an AAA is defined as an enlargement of the aorta of at least 1.5x its normal diameter, or greater than 3cm. Once an aneurysm develops it will tend to expand unpredictably and, if untreated, will eventually rupture. Such an event causes massive internal haemorrhage and in the majority of cases leads to death (the 13th leading cause of death in the US).

Exhibit 1: Diagram showing AAA

Source: Vascular Web

Aneurysms are repaired by open surgical repair (OSR), or on a minimally invasive basis by means of EVAR using a stent graft to reinforce the artery wall. OSR requires dissection of the artery and the placement of a synthetic graft under general anaesthesia. Patients undergoing OSR require a significant period of recovery in hospital, and the procedure carries a 5-6% intra-operative mortality rate. EVAR involves delivery of the stent graft through a small incision in the groin into the femoral artery. The procedure takes up to two hours, carries a much lower risk and requires a significantly

Lombard Medical | 13 May 2013 4

shorter period of recovery than OSR. AAA is repaired either on an elective basis following screening or as an emergency procedure when an aneurysm has ruptured.

Aneurysms are largely asymptomatic and are usually identified as a result of screening for other conditions. However, AAA is now specifically screened for under health programmes, since a reduction in mortality and cost-benefit has been demonstrated. In the UK, the NHS is implementing a screening programme for men over 65 delivered by primary care trusts. In the US, the provisions of the SAAAVE Act allow a free screening for AAA in men who have ever smoked and for men or women with a history of AAA as part of the welcome to Medicare package. AAA is more common in men than women (c 3x) and the main risk factors are age, hypertension, smoking and family history. 3-6% of men over the age of 60 in the US are thought to have AAA, and some 1.5 million people have a diagnosis, with 250,000 new cases identified per year.

Around 70% of a total 70,000 AAA repair cases are done by EVAR in the US. Further penetration is probably limited with the current range of products. This market has grown to accept minimally invasive techniques much more rapidly than Europe due to a number of factors but largely because of the greater level of specialisation and understanding of the clinical benefit of EVAR. There are a similar total number of total AAA repairs across Europe per annum, but a lower proportion, c 50%, are performed using EVAR, following more slowly growing acceptance of the procedure in Europe. However, the availability of long-term data on stent grafts and evidence of lower mortality emerging from long-term patient registries is driving some growth. Germany and the UK are the two most developed and the most receptive European EVAR markets.

Aorfix a unique device Aorfix is an endovascular stent graft licensed for the repair of aortic aneurysm for patients with aortic neck angulations from 0 to 90º – around 30% of all aneurysm patients fall into the high angle category either due to complex iliac formation or aortic neck angulation greater than 60º. Aorfix is unique since there are currently no other endografts approved or in clinical development to treat high-angle anatomies over 60º in US, or over 75º in Europe.

Exhibit 2: CT scan showing tortuous anatomy

Exhibit 3: Image of Aorfix endovascular stent graft

Source: Lombard Medical Source: Lombard Medical

The standard of care in high-angle cases is to repair the aneurysm by means of open surgery if the patient is suitable, so that old or infirm patients or those with existing co-morbidities are often excluded from AAA repair. Tortuous aortic or iliac anatomy is associated with higher risk factors than for lower-angle patients including more advanced disease. In some cases, patients with tortuous anatomy undergo EVAR with stents implanted on an off-label basis. Such patients tend to

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suffer serious complications, including proximal endoleak as well as stent migration. A study conducted by the American Heart Association showed that up to 58% of EVAR procedures carried out using stents outside instructions for use (IFUs) resulted in 41% aneurysm sac expansion.1 The use of stent grafts on an off-label basis for high-angle anatomy is contra-indicated. However, it has become fairly widespread practice. It is possible that a proportion of patients who are untreatable due to high-angle anatomy will convert to EVAR using Aorfix relatively quickly. The device could garner market share for high-angle cases and potentially for anatomies below 60° if a surgeon prefers to use a single stent across the board.

Aorfix is a two-part modular bifurcated stent graft, designed to flex to fit high-angle aortic or iliac anatomies. The polyester structure is supported by nitinol helical rings, which means that the stent does not kink when it is curved to fit high-angle aortic necks. Its uppermost ‘fish mouth’ shaped opening allows it to form an optimum seal with the renal arteries. Lombard recently launched an enhanced delivery system, Aorflex in the European market and is targeting US launch of the delivery system in H213. It is also developing size extensions for Aorfix so that it can be adapted to fit a broader range of aortic neck diameters.

Exhibit 4 shows data from the Aorfix US PYTHAGORAS trial, which was the first FDA trial of an endovascular stent to include patients with highly angled aortic necks (>60°). This patient group was previously excluded from studies due to EVAR being contraindicated in such cases.

Exhibit 4: Summary of Pythagoras trial data Aorfix entire

cohort Aorfix 60-110

degrees Aorfix 60-90

degrees Aorfix <60

degrees Open surgery control group

Freedom from any MAE* at 30 days 84.4% 81.1% 83.5% 91.9% 56.4% P value <0.0001 <0.0001 <0.0001 <0.0001 N/A Freedom from any MAE at 365 days 79.0% 75.5% 76.7% 87.1% 54.5% P value <0.0001 <0.0001 <0.0001 <0.0001 N/A 30-day mortality 2.0% 2.1% 1.0% 1.6% 2.8% 12 month mortality 6.3% 7.7% 6.8% 3.2% 6.5% Aneurysm shrinkage 74.1% 73.7% 72.6% 75.0% N/A Type I or III endoleak, 12 months 1.6% 2.4% 1.6% 0.0% N/A Migration >10mm, 12 months 1.4% 2.1% 1.4% 0.0% N/A Wire fracture in fixation zone 3.6% 3.8% 3.3% 3.1% N/A Source: Lombard Medical. Note: *MAE = Major adverse event.

The PYTHAGORAS study results showed that the device offers an alternative as safe as the current standard of care (open surgery) despite the proportion of patients in the Aorfix cohort with higher risk factors; in addition to the higher average neck angulation, which is a predictor of more advanced disease, patients in the Aorfix cohort were older than in the control group; the age range was 75.4 ±8 years vs 69.2 ±7 years. There was also a higher proportion of female patients, 35% vs 20% in the control group, who are more likely to have high-angle aortic anatomy and suffer worse outcomes following AAA repair using current methods. The high rate of 12-month mortality in the highest-angle Aorfix group (60-110º) exceeded the control group, but was treated outside the Aorfix label range. The data suggest that patients who might be excluded from AAA repair can be treated effectively and safely using Aorfix.

The US opportunity

While Lombard has achieved relatively significant market share with Aorfix in the leading European markets where it has a direct sales presence, notably Germany and UK, the US market is the key commercial opportunity for Lombard.

1 Schanzer A, Greenberg RK. Predictors of Abdominal Aortic Aneurysm Sac Enlargement after Endovascular Repair. Circulation 2011 Jun; 21,123 (24):2848-55.

Lombard Medical | 13 May 2013 6

The concept of specialised EVAR centres in the US is long-established and there are more than 300 centres of excellence that perform over 50% of procedures. There is greater receptiveness in the US market than in other countries to minimally invasive surgery, due to a higher level of specialisation among clinicians and greater awareness in patients. The higher volume of EVAR procedures is associated with improved patient outcomes and survival. The value of the US market, which represents over 50% of the global EVAR market, is c US$600m and is forecast to grow at a CAGR of 8% from 2011-182 largely due to the ageing population and new product launches. There is also a +50% price differential between US and European endovascular stents; Aorfix is priced at c $13,800 versus $9,000 in Europe, supported by wider reimbursement for EVAR.

Exhibit 5: Summary of commercialised and developing stents Company Product Stent/graft

materials/fixation Angle Development status/notes

Medtronic Endurant Nitinol/woven polyester ≤60° US ≤75º Europe

One-year study data reported in H210, from 150 patients in 26 centres, confirmed zero aneurysm-related deaths or ruptures. Primary safety and efficacy endpoints were major adverse events at 30 days and a composite of technical and treatment success of the device at one year, respectively. FDA approval granted December 2010, launched in US June 2012. Version II CE marked January 2012. Device specifically addresses short and angulated proximal necks. Long-term study underway, results due in 2016.

Cook Zenith Flex AAA Stainless steel/ polyester/suprarenal hooks

≤60° Launched in EU in 1998; US in 2003. Post-market registry data collection due 2015.

WL Gore Excluder Nitinol/ePTFE/ anchors and radial force

≤60° Launched in EU in 1998, US in 2002. More than 87,000 implants worldwide to date. New larger-diameter 31mm version launched in the US (May 2009) has been available outside the US since 2004 and has been implanted in >3,300 patients. Of the 565 patients enrolled in two Phase II studies, adverse events include 1.8% occurrence of aneurysm-related deaths, 0.7% post-procedure migration and 0.2% post-procedure ruptures. The study is ongoing and due to read out in 2014. A range of next-generation accessories allow deployment in broad range of anatomies including a dry-seal sheath and a balloon catheter.

Endologix Powerlink Cobalt chromium alloy/ePTFE/sits on bifurcation

≤60° Launched in EU in 2000, US in 2004. From 2003 to 2008, 157 patients were treated with the Powerlink system at 28 centres across the US according to FDA regulations. Approved protocols showed freedom from aneurysm-related death for up to five years. 231-patient long-term follow-up study completed. The IntuiTrak delivery system for Powerlink, received Shonin Approval December 2012.

Terumo (Vascutek)

Anaconda Nitinol/polyester No angle indication

Launched in EU in 2005. US Phase II trial in recruitment with completion expected April 2014. Magnet wire technology used to facilitate the deployment of the contra lateral leg.

Medtronic AneuRx AAAdvantage

Nitinol/polyester/radial force anchors

≤45° Launched in EU in 1997; US in 1999. Data registry available on more than 1,000 patients in clinical trials and 70,000 implants since 1996. Primarily sold in the US. Five-year post approval study (ENGAGE PAS) in recruitment, with results expected 2018, measuring longer-term freedom from mortality.

Medtronic Talent AAA Nitinol/polyester/radial force

≤45° Launched in EU in 1998. Approved in US in 2008. Requires proximal aortic neck length of only 10mm. Long-term study published 2011 by Verhoeven et al in the Journal of Vascular Surgery showed primary technical success achieved in 333 patients (91%). Proximal type I endoleak was present in 28 patients (8%) during follow-up, and 14 of these needed additional treatment for the endoleak. The 30-day mortality rate for the entire Talent group was 1.1% (four of 365 patients died). A post-approval study is due to complete in 2014.

Endologix - Nellix Endo-vascular

Nellix Endobags filled with biostable polymer/stent

≤60° Radically different approach to aneurysm exclusion using EVAS, or endovascular aneurysm sealing, which relies on filling aneurysm sac with polymer-filled bags supported by bilateral stents. Should primarily address and ablate type II endoleaks. Initial studies have shown 100% freedom from aneurysm mortality and rupture. CE mark approval in 2012, optimised version in January 2013. FDA outcome expected in 2015. Not likely to be suitable for highly angulated necks.

Trivascular Ovation Abdominal Stent Graft System

Metal stent with two polymer filled rings

≤60° The stent is CE marked and has full FDA approval.

Source: Edison Investment Research

Other market advantages include the lack of a competitor with an approval over 60º, coupled with the focus on ‘on label’ use, given the litigious nature of the country. The strong clinical data for Aorfix supports this commercial rationale. Lombard is able to draw on a large pool of reps with greater experience and stronger existing relationships with vascular surgeons than their ex-US counterparts.

2 Source: iData Research Inc, 2012

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Within this more receptive and higher-value market, the Aorfix high-angle label is a unique selling point for treatment of patients excluded from AAA repair including elderly patients, or those whose only option would have been OSR or off-label treatment. Evidence from a 238-patient US study group with aortic neck angulation from 0-60º+ showed that complications, including proximal endoleak, and re-intervention using intra-operative cuffs, correlated with the increase in aortic neck angle, while sac shrinkage, a key measurement of successful intervention, was much higher in the lower-angle groups.3

The cost per procedure for AAA repair via EVAR is comparable to OSR; patients have shorter hospital stays and recovery time. Aftercare for EVAR patients requires indefinite monitoring by means of imaging. EVAR reimbursement in the US is standardised and widely accepted, whereas in Europe reimbursement varies on a country-by-country basis so that it is harder to gain a foothold in these individual markets.

The global AAA stent graft market is highly competitive, with four dominant companies: Medtronic with c 35% of the global market, WL Gore 25%, Cook 25% and Endologix with 10%. There are four FDA-approved stent grafts and the most commonly implanted is Endurant by Medtronic, followed by Cook’s Zenith, Gore’s Excluder and the Endologix Powerlink. The leading stent in Europe is Endurant. These devices have the advantage of being established in a conservative market by companies with significant marketing resources and broad product ranges.

However, there are currently no licensed or known devices in development to compete with Lombard in the high-angle space. This competitive advantage could enable Lombard to gain a foothold in the high-angle niche in a market with a widely-recognised unmet need.

US launch to target high-volume centres of excellence Lombard is aiming to launch Aorfix in the US in H213, initially targeting the top 300 high-volume sites, which carry out around 50% of EVARs in the US per annum, and it assumes that around 30% of patients have tortuous iliac or aortic neck angles. Lombard intends to recruit a team of 17 reps to cover these accounts. An average rep will build up to maximum capacity within an approximate two-year timeframe. Lombard is in the process of recruiting and training its sales force so that it can deliver the high level of service expected by the US surgeons.

Based on these metrics, it is possible for the original sales force to achieve around 3% of the total EVAR market in year two of launch, which is relatively conservative given the market opportunity.

Lombard will phase in a team of additional reps to target the remaining large number of lower-volume sites, and in our model we include an additional team of 20 reps in 2015, although the size of the team is likely to be adjusted according to progress in the initial launch.

Aorfix’s US launch is expected to coincide with approval of the Aorflex delivery system which is due around mid-2013 having been launched in Europe in 2012. This system is significant for optimum delivery of Aorfix into the vessels and has enhanced torque, which allows precise delivery. There is no requirement for additional testing of Aorflex on patients, as this is a manufacturing approval only, therefore there is limited risk associated with the approval of the Aorflex delivery system for the US market.

Other markets The European market outlook for Aorfix is mixed, driven by the top four markets namely the UK, Germany, Italy and Spain. NICE has only recently recommended UK conversion towards a lower number of specialist centres and this could drive a higher volume of EVAR procedures in future.

3 AbuRahma AF, Campbell J. Early and late clinical outcomes of endovascular aneurysm repair in patients with an angulated neck. Vascular 2010 Mar-April; 18(2) 93-101.

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Germany is one of the earliest European adopters of EVAR and has a developed understanding of patient risk assessment to inform its clinical decision-making. Reimbursement for EVAR procedures in Germany is now standardised and makes it an affordable option for hospitals.

Aorfix has gained slower market traction in other European markets due to the earlier adoption of stents manufactured by the larger companies, less favourable assessments of EVAR and its long-term clinical benefit as well as Lombard’s use of distributors. We forecast that the top four European markets will continue to grow, driven by Germany and the UK based on these key factors. However, Lombard is focusing its resources on the greater US commercial opportunity, and aims to maintain rather than develop its European direct sales forces. Its remaining RoW business, via distributors, derives minimal revenue and we forecast limited growth from these geographies.

Japan is a significant EVAR market and is the second-largest medical device market after the US. Surgeons and patients are open to innovative techniques and the market for AAA repair is valued at c $100m. The FDA approval of Aorfix in February was the trigger event for the commencement of the Japanese approval process for the device. Lombard has an existing distribution agreement with Japan’s Medico’s Hirata to take Aorfix through the Shonin approval process for highly regulated grade III devices and to launch the device, using the existing US data.

While there are always risks associated with medical device development, the Japanese government is incentivised to increase the number of innovative devices in the market, targeting turnaround within 12 months. The current turnaround time for c 80% of devices is 12 months from the time of FDA approval and therefore the estimated approval timeline of H114 is not unrealistic.

Sensitivities

The investment case is linked to the company’s ability to capture market share in the US. Our estimates are based on a gradual build up and assume that an initial sales force will be trained and ready for launch this autumn. While the device is innovative and targets an unmet need, physicians can be slow to adopt new devices and it could take longer than expected to achieve market share. Our assumptions of revenue build and market share are relatively conservative given the market opportunity.

The Japanese approval process takes on average 12 months and if the process takes longer, this could affect revenue and ongoing cash generation.

The company has a cash runway into Q114 including sufficient funds to launch Aorfix. We forecast that if Lombard raises additional funds, estimated at between £15-£20m, this could take it to profitability in 2016, with associated risk and dilution.

In view of the litigious nature of the US market, the company has filed a petition for an inter partes review of a patent assigned to Medtronic connected to the properties of nitinol and its use within medical devices. The filing is a precautionary measure by Lombard and is not based on any current restriction on use of the material.

Valuation

Our DCF valuation of Lombard is £98m, using a WACC of 11.5% and a long-term growth rate of 3%. Our valuation has decreased marginally from our previous £104.7m. The decrease is mainly due to the later FDA approval. US launch of Aorfix is now due in H213 and was previously expected in H113. The valuation implies up to 55% upside compared to the current market capitalisation. We assume that a £3m convertible loan will convert to 2.1m shares in 2013 at 140p/share and in this case, the valuation per share would be 305p.

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Our valuation is based on the following metrics of growth and profitability for Aorfix.

Exhibit 6: Aorfix revenue and margin forecasts £000's 2012 Growth 2013e Growth 2014e Growth 2015e Growth 2016e US 38.0 (74%) 716.0 1,784% 9,021.2 1,160% 16,235.7 80% 24,191.8 Japan 0.0 N/A 0.0 N/A 600.0 N/A 3,000.0 400% 5,100.0 Europe 2,300.0 5% 2,691.0 17% 3121.6 16% 3,558.6 14% 3,985.6 RoW 835.0 (21%) 860.1 3% 884.1 3% 908.4 3% 931.2 Total revenue 3,173.0 (7%) 4,267.0 34% 13,626.9 219% 23,702.7 74% 34,208.6 Gross margin 36% 46% 67% 68% 69% Operating margin N/A N/A N/A N/A 7.0% Operating profit/loss (8,241.8) (1,5016.3) 82% (7,987.0) (47%) (5,485.0) (31%) 2,561.2 Source: Edison Investment Research, Lombard Medical

US revenue growth is the key driver of value and we forecast that it will make up 71% of total sales and 83% of gross profit in 2016. The average gross margin is forecast to reach 69% due to the increasing volume of US sales, with 80% US gross margin (vs 55% in RoW).

Financials

FY12 total revenue fell 3% from £4.0m to £3.9m (it was higher in 2011 due to US trial sales), although the level of commercial revenue was flat, also £3.9m in 2011. However, there was a 13% increase in demand for Aorfix in the four main European markets. German revenue increased 32%; however, demand in some markets was fulfilled from distributor stock so demand was not fully reflected in sales.

Gross margin fell in FY12 from 49% to 36% due to lower production volumes and some unexpected costs of bringing Aorflex into production, although these issues are now resolved. Operating costs in FY12 stood at £9.6m versus £12.6m as the company reduced administrative spend and cut back its R&D activity as the US trial came to an end. Sales and marketing spend was stable at £2.8m.

US launch is expected in H213 and Aorfix revenue is expected to increase 34% in FY13 and by over 200% in 2014, the first full year of US launch, with an initial 17 rep sales force. Our sales forecast assumes that the average rep will build towards peak sales within 24 months. We have modelled an expansion of the sales force in late 2015, assuming that an additional 20 reps could be recruited. Japanese approval of Aorfix is estimated in H114 and a H214 launch, sales in 2015 are forecast at £3m and this market could become the second-largest after the US. Revenue from the top four European markets is expected to increase 17% to £2.7m in 2013, while we expect minimal growth in RoW revenue. Other revenue from the OEM business was £716k in FY12 and we assume that this will grow at a rate of 12% in 2013.

The higher US price per unit of Aorfix, $13,800 versus £9,000, carries a gross margin of 80%, while the forecast average margin for Europe, Japan and RoW is 55%. Gross margin progression is therefore expected to occur rapidly in line with US revenue growth and due to a degree of production efficiency, trending towards 69% in 2016.

Projected operating costs are set to increase with the US launch. Sales and marketing spend is forecast at £8.9m in 2013 and £9.5m in 2014, including the cost of the initial sales force together with a 2.3% sales and excise tax payable on US sales. The cost of an additional 20 reps is modelled in 2015 (salary and costs of c $325k per rep), taking total sales marketing costs to £13.6m in 2015. Administrative costs are forecast to increase to £2.8m in 2013 due to recruitment of customer service staff, while R&D is set to trend upwards from £4.6m in 2012 to £5.6m in 2013 due to the cost of the investment in a fourth-generation version of Aorfix, and size range extensions to fit a range of anatomies. We forecast therefore that, on these metrics, Lombard will report an operating loss of £15m in 2013 and £8m in 2014. We estimate that the company will report £2.7m of operating profit in 2016.

Lombard Medical | 13 May 2013 10

Cash and equivalents at year-end 2012 stood at £2.7m, while net debt stood at £14k. Lombard took on a £3m convertible loan with Invesco during the year (£2.8m net). We forecast that the loan will convert into 2.1m shares this year at 140p. In addition, Lombard raised £13.5m net through the issue of 10.2m new shares in 2013, so that cash and equivalents are forecast at £2.1m at the end of 2013. We estimate Lombard will have a funding requirement in the range of £15-20m to achieve longer-term goals, based on our current estimates of revenue and cash generation (shown as debt in our 2014 forecast). We currently estimate that Lombard has a cash reach into Q114.

Lombard Medical | 13 May 2013 11

Exhibit 7: Financial summary £’000s 2011 2012 2013e 2014e Year end 31 December PROFIT & LOSS Revenue 4,013 3,889 5,069 14,485 Cost of sales (2,035) (2,489) (2,755) (4,809) Gross profit 1,978 1,400 2,314 9,676 Selling, marketing & distribution (2,895) (2,792) (8,934) (9,470) R&D expenditure (6,571) (4,598) (5,610) (5,049) Administrative expenses (3,107) (2,252) (2,770) (2,936) Operating profit (11,445) (8,242) (15,016) (7,987) Goodwill amortisation (42) (42) (42) (41) Stock option charge/other (260) 258 (250) (250) Exceptionals 0 0 0 0 EBITDA (11,042) (8,333) (14,606) (7,421) Operating profit (before GW and except) (11,143) (8,458) (14,724) (7,696) Net interest 59 (398) 80 80 Profit before tax (norm) (11,084) (8,856) (14,644) (7,616) Profit before tax (FRS 3) (11,386) (8,640) (14,936) (7,907) Tax 1,282 350 673 606 Profit after tax (norm) (9,802) (8,506) (13,971) (7,010) Profit after tax (FRS3) (10,104) (8,290) (14,263) (7,301) Average number of shares outstanding (m) 16.3 20.2 28.6 32.3 EPS - normalised (p) (60.1) (42.2) (48.9) (21.7) EPS - FRS 3 (p) (61.9) (41.1) (49.9) (22.6) Gross margin (%) 49.3% 36.0% 45.7% 66.8% EBITDA margin (%) N/A N/A N/A N/A Operating margin (before GW and except) (%) N/A N/A N/A N/A BALANCE SHEET Fixed assets 2,883 2,825 3,565 3,549 Intangible assets 2,275 2,235 2,193 2,152 Tangible assets 608 590 1,372 1,398 Investment in associates 0 0 0 0 Unquoted investments 0 0 0 0 Current assets 12,472 6,413 6,902 17,003 Stocks 2,312 1,959 2,543 5,086 Debtors 1,465 1,138 1,667 3,360 Cash 7,545 2,747 2,124 7,988 Other 1,150 569 569 569 Current liabilities (2,972) (5,084) (2,403) (3,539) Creditors (1,501) (1,201) (1,281) (2,417) Other creditors (1,471) (1,122) (1,122) (1,122) Short-term borrowings 0 (2,761) 0 0 Long-term borrowings 0 0 (1,563) *(17,563) Other long-term liabilities 0 0 0 0 Net assets 12,383 4,154 6,502 (549) CASH FLOW Operating cash flow (10,842) (8,274) (15,639) (10,522) Net interest 59 (161) 80 80 Tax 832 931 673 606 Capex (526) (137) (900) (300) Acquisitions/disposals 0 0 0 0 Financing 12,208 0 13,500 0 Dividends 0 0 0 0 Other 0 (157) 0 0 Net cash flow 1,731 (7,798) (2,186) (10,136) Opening net debt/(cash) (5,814) (7,545) 14 (561) HP finance leases initiated 0 0 0 0 Other 0 239 2,761 0 Closing net debt/(cash) (7,545) 14 (561) 9,574 Source: Lombard Medical, Edison Investment Research Note: *Funding requirement in 2014 shown as long-term debt.

Lombard Medical | 13 May 2013 12

Contact details Revenue by geography, 2012 4 Trident Park, Didcot, Oxfordshire OX11 7HJ, UK +44 (0) 1235 750800 www.lombardmedical.com

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 10-14e N/A EPS 12-14e N/A EBITDA 10-14e N/A EBITDA 12-14e N/A Sales 10-14e 48.1% Sales 12-14e 93.0%

ROCE 13e N/A Avg ROCE 11-13e N/A ROE 13e N/A Gross margin 13e 45.7% Operating margin 13e N/A Gr mgn / Op mgn 13e N/A

Gearing 13e N/A Interest cover 13e N/A CA/CL 13e 2.8 Stock days 13e 183 Debtor days 13e 120 Creditor days 13e 92

Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

Management team CEO: Simon Hubbert CFO: Ian Ardill Named CEO in January 2011, having joined Lombard as vice-president of sales and marketing in June 2010. Before that he worked at LMA International, and earlier held various sales and marketing roles at Johnson & Johnson and Medtronic.

Appointed CFO of Lombard in January 2012. Prior to this he was FD of Biocompatibles for around six years until its acquisition by BTG in 2011. His earlier career included a variety of financial and administrative roles at Novartis.

Chairman: John Rush Joined the board of Lombard as CEO in October 2009, and became chairman in January 2011. Previously president and CEO of North American Scientific and MicroTherapeutics, and held management roles at Scimed Life Systems/Boston Scientific.

Principal shareholders (%) Invesco Ltd 39.5 Abingworth 18.9 LSP 6.6 Fidelity International Ltd 5.9 MVM 5.2 evYsio Medical Devices LLC 3.5 Directors 2.0

Companies named in this report Cook, Endologix (ELGX), WL Gore (GOWL), Medtronic (MDT), Trivascular, Vascutek

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