史賽克 (SYK) 2005 Q4 法說會逐字稿

OPERATOR INSTRUCTIONS Certain statements made in today's conference call may constitute forward-looking statements. They are based on managements stations and are subject to various risks and uncertainties that could cause the actual results to differ materially from those expressed or implied in such statements. In addition to factors that may be discussed in this conference call such factors include but are not limited to pricing pressures generally including cost containment measures that could adversely affect the price of or demand for the Company's products. Regulatory actions. Unanticipated issues arising in connection clinical studies and eventual United States Food and Drug Administration approval of additional OP-1 applications the Flexicore and Cervicore spinal implant products or other new product introductions changes in reimbursement levels from third-party payors, a significant increase in product liability claims, changes in economic conditions that adversely affect the level of demand for the Company's product, changes in foreign exchange markets, changes in financial markets, and changes in the competitive environment. Additional information concerning these factors is contained in the Company's filings with the Securities and Exchange Commission including the Company's annual report on form 10K and quarterly reports on form 10Q. Today's conference call will also include a discussion of adjusted net earnings excluding the impact of the three months and year ended December 31, of charges to write-off purchase and process research and development in the fourth quarter of 2005 and the third quarter of 2004 and the impact of income taxes associated with the [association] of foreign earnings in the third and fourth quarters of 2005. Further discussion of this non-GAAP financial measure including a GAAP reconciliation appears in the company's form 8K filed today with the Securities and Exchange Commission which may be accessed from the investor page on the Company's web site at www.stryker.com. I would like to turn over the conference to Mr. Stephen MacMillan President and CEO.

Please go ahead, sir.

Thank you, George. Good afternoon, everyone. Welcome to Stryker's 2005 fourth quarter earnings report. With me today is Dean Bergy our Vice President and Chief Financial Officer. Despite all the concerns being voiced about our industry over the last 12 months we are pleased to report another strong quarter and year. In a nut shell, sales for the quarter were up 11%. Adjusted earnings were up 22%. And R&D spending was up 47%. Given the negative impact of the strengthening dollar in the quarter, and the huge boost in R&D spending we believe a close look at these results should clearly demonstrate the deep underlying strength and earnings power of our company. Net sales for the fourth quarter were 1 billion 279 million. An increase of 10.6% over the prior year and up 13.0% operationally. Adjusted net earnings increased 22% to $198 million adjusted Adjusted diluted - net earnings per share increased 20% to $0.48. For the year net sales totaled 4 billion 872 million, an increase of 14.3% over 2004. And up 14% on an operational basis. Adjusted net earnings increased 23% to $719 million adjusted diluted net earnings per share increased 22% to $1.75. We had an exceptional finish to the year in asset management and cash flow. Reaching new record low levels in both days sales outstanding and days in inventory and generating $382 million in cash from operations in the quarter. This brought cash flow from operations up over 16% from 2004 to $864 million for the year. After making unprecedented investments on new facilities, ERP systems, several acquisitions, and R&D, we still built our net cash position to over $800 million at year end.

Our performance in 2005 is a clear indicator of how our unique collection of businesses once again drove superior growth combined with a remarkable consistency. Despite a soft spot in our U.S. hip business, strong global performances at the rest of the implant and MedSurg businesses helped us generate steady and strong overall growth and we believe when all the results are in we are likely the fastest growing company with a major presence in orthopedics for the year. Our strength is built on two simple attributes. Our much more diverse base of businesses which extends well beyond implants and our strong disciplined leaders who are committed to delivering consistently outstanding results quarter after quarter and year after year. And I would add in good times and in challenging times. To underscore the breadth and depth of this growth eight of our nine key global franchises grew at double digit local currency rates in both the fourth quarter and the year. Geographically we achieved double digit sales growth for the first time in many years in all of our major international geographies. Europe, Pacific and Japan as these regions continued to strengthen from very strong bases. Sales in these three regions were up 13 percent operationally and exceeded $1.5 billion in the year. Looking at our fourth quarter sales by franchise, operational growth in our global orthopedic implant business accelerated modestly to 11% in the quarter and exceeded $2.8 billion for the year. As double digit knee, trauma, spine, and CMF growth offset slower single digit hip growth. Globally, hips did show modest improvement in the quarter while global knee growth accelerated very nicely to 16% operational growth in the quarter. Its fastest growth rate in the last six quarters. In fact, our knee business achieved over 20% growth internationally in the quarter. As triathlon began its rollout in other key countries and we are increasingly excited about the future of our knee franchise as just last month we launched our new X3 sequentially cross length polyethylene for use in knees. As you may know, X3 should provide significantly greater longevity and reduced wear rates and we think will bring a nice boost to our growing knee franchise. Moving now to our other implant franchises. Spine, trauma, and CMF sales, all achieved global double digit growth in the quarter with our U.S. spine business hitting 20% growth for the 7th straight quarter.

Collectively these businesses along with biotech exceeded $900 million in sales for the year and are clearly becoming major drivers of growth up over 15% in the year. The changes and serious commitment we have made to these businesses over the last couple of years are really beginning to pay off. We also achieved a separate milestone as our nonorthopedic implant businesses exceeded $2 billion in the year. With MedSurg exceeding $1.75 billion and growing at a very strong 20% rate for the year. These businesses, which are a big part of the foundation of our company, continue to help us generate growth rates in excess of the general orthopedic implant market. While also providing an unparalleled consistency to our results quarter after quarter. In fact, through the 1970s, '80s and much of the '90s MedSurg drove the superior results Stryker is known for. We are pleased to report these businesses continue to drive superior topline growth rates and very importantly are also significant drivers of bottom line earnings. These businesses are also benefiting from two key trends which we believe will continue for some time. First, the growth of minimally invasive surgery which demands better visualization and equipment. And second, solid capital budgets as a result of many hospital expansions and upgrades in the U.S. and around the world. So they continue to be incredibly strong businesses for us. Through that end let's take a closer look at the makeup of our earnings growth in 2005. For even greater insight into the strength of our company. In 2005, our operating income margin exceeded 20% for the first time ever, achieving a reported 20.5% including the Plasma-Sol acquisition. Prior to PlasmaSol we achieved a 20.8% operating margin, a full 1.1 percentage point increase from 19.7% last year.

All in a year where our MedSurg growth rates outstripped implant growth. Consistent with three out of the last five years. A key takeaway here is that while our MedSurg businesses may have lower gross margins they are constantly strengthening and have operating margins surprisingly close to our implant franchises. Perhaps even more impressive is our R&D spending line which was up over 47% in the fourth quarter and over 32% for the year. And we would note that these numbers are before the IP R&D charges for Plasma-Sol which would drive these numbers even higher. This strong earnings growth along with a big boost in R&D spending should be a clear indication of the underlying earnings power in our business today as well as our commitment to ensuring superior growth rates for the future. We have always had a strong history of excellent execution and delivering on our commitments and we are now adding an extra boost of innovation to our formula. To that end we are pleased to have completed the pivotal U.S. OP-1 clinical trial, also enrolled all of our Flexicore patients and in the fourth quarter initiated first surgeries for our Cervicore artificial disk. We will therefore be filing the OP-1 PMA in the first half of this year. Additionally, throughout the year, and even more so in the fourth quarter, we initiated or in-licensed a number of technologies with slightly longer paths to market than some of our base development efforts. Effectively strengthening our pipeline further for the years ahead. Before handing this over to Dean to share more details, I would like to register one more point. We have earned a reputation through the years of delivering consistent yet superior earnings growth. We set very aggressive goals and we deliver on our commitments. We focus our energies on delivering results and we think obsessively about the future but let our results do the talking. Amidst the flurry of headlines around implant pricing and other issues last year we wanted to reinvite everyone to take a deep and close look at our results. I will now turn it over to Dean Bergy for more details.

Thanks a lot, Steve. I'll start by taking a look at foreign currency impact on the quarter. On the quarter, the impact on foreign currency as you see was even more unfavorable than what we projected on the last earnings call. Reducing sales by $27 million or 2.4% in the quarter. In the quarter, the dollar strengthened 9% against the Euro at 11% against the yen compared to the prior year. Right now if currency rates hold at current levels, we expect the impact of currency will produce our first quarter 2006 sales in the range of 2 to 3% compared to the prior year. Turning to a quick look at the overall price volume analysis on the quarter. In the quarter, price contributed a positive 1% to our sales growth as we said foreign currency took away 2 points. Acquisitions added 1 point and bio and mix was up 11% to the quarter adding up to the total 11% sales growth that we registered. Just a quick -- few quick comments here. Prices with a 1% boost in the quarter were up moderately compared to flat year-over-year pricing in the third quarter and price was up in both the U.S. and international markets. And then for the year, volume and mix was up about 12% in both the United States and in overseas markets. Now, turning to orthopedic implants and the sales analysis. Orthopedic implants represents 59% of our total sales. Sales of orthopedic implants increased 8% in the quarter and 11% for the year as reported and 11% for both on a constant currency basis. I'll give you a breakdown of the sales growth rates by product line for domestic and international for the quarter. So for the fourth quarter hips in the U.S. and again these are reported numbers, down 1% domestically. Up 2% internationally. And flat in total. Knees domestically up 12, international up 14, and in total up 13. Trauma, domestic up 17, international up 1, total up 7. Spine, domestic up 20. International plus 9, total up 16. And Leibinger domestic up 16, international up 2, total up 9. And then the total for orthopedic implants domestic up 9, international up 6, total up 8. Now, giving you the same numbers for on a constant currency basis which obviously are going to be stronger. I'll give you the international as a total number. International hips were up 9. Total up 3. International knees up 21, total up 16. International trauma up 11, total up 13. International spine up 16, total up 18. Leibinger international up 9, total up 12. And for the total of hip implants category international up 13 and total up 11. A few comments on each of of the individual categories. As I said, hips was up 3% in local currency in the quarter although flat in dollars and up 4% for the year on a reported basis. As expected, U.S. hip sales were softer than we would like but growth overseas picked up in the quarter and delivered 9% constant currency growth. In the U.S., our accolade cementless products had another very good quarter and we experienced solid growth quarter the[hip strength] restoration modular system. Proper growth in the areas was offset by decline in the sales of [Tridenter] ceramic hip system and our hip fracture products. However, ceramic penetration pricing were stable compared to the third quarter. Also, although early we are very pleased with the market's reception of our X3 polyethylene for hips. In Europe, hips posted low double digit constant currency growth led by Trident, Exeter and Restoration Modular. In Japan local currency hip revenues grew at mid to high single digits and were again led by the Secur-Fit product line. Knees up 16% in local currency and 13% reported in the fourth quarter and 14% on a reported basis year-to-date. Knees had a good quarter with extremely encouraging results in the international markets where we posted operational growth over 20%. In the United States our primary business had a solid low double digit growth quarter led by our new triathlon knee which continues to receive excellent reviews from clinicians. We also launched X3 polyethylene for use with our triathlon Scorpio knees during the quarter. Our revision business was exceptional this quarter with both Scorpio and Duracot. above 20% growth. European knee sales excellerated to near 20% in constant currency growth with excellent gains in Scorpio and some nice early sales in triathlon. In Japan strong sales of our Japanese market dedicated Scorpio NRG product helped the division to post another quarter with better than 15% operational growth and Pacific posted better than 20% operational knee growth led by Scorpio and triathlon. Turning to trauma, that product grouping was up 13% operationally and 7% on a reported basis in the quarter and 15% percent on a reported basis for the year. Our U.S. trauma business grew 17% in the quarter and 21% of military sales are excluded. This represents nice acceleration from last quarter's 14% growth excluding military. U.S. sales were led by growth of around 20% and [intermesulary] nails and hip fracture devices and excellent growth on a smaller base of internal fixation products. International trauma sales were a bit softer than previous quarters but still registered solid, double digit, constant currency growth. Europe and Japan grew trauma sales at a constant currency rate over 10% but Pacific sales were off in the quarter. Hip fracture devices led international trauma sales. Now, turning to spine. It was up 18% in local currency and 16% in dollars in the quarter and 17% on a reported basis for the year. Spine had another great quarter in the United States posting 20% or better growth for 7 straight quarter. This growth was led by inner body devices with great acceptance of our ABS [major] products. Sales of cervical products were also very strong and the oraco lumbar product sales were solid in the quarter. International spine also had a very good quarter every category produced double digit operational growth and performance was strong across most geographies. Europe had an extremely strong quarter and Japan also posted double digit constant currency growth. Leibinger was up 12% operationally and 9% in dollars in the quarter and 12% on a reported basis for the year. Leibinger had another very good quarter and is becoming a consistent performer as evidenced by its 9th straight quarter of double digit growth. U.S growth was led by neuro and hand products and cranio-maxio facial sales were solid. Hand products also registered extremely strong sales overseas for the quarter.

Turning to our MedSurg group. MedSurg represents 36% of our sales and as Steve indicated our MedSurg group represents a large vital part of our overall business. As you know, the MedSurg group is comprised of three significant product categories, instruments represents 43% of the total sales endoscopy 35%. And medical at 22% of those total sales. MedSurg group sales were up 16% for the quarter and 21% for the year on a reported basis and 18 and 20% respectively on a constant currency basis. Sales of our instruments product line increased 10% for the fourth quarter and 16% for the year as reported and 12% and 16% respectively on a constant currency basis. In the fourth quarter domestic sales were up 11%. International sales were up 6%. These were reported numbers and up 10% in total. The instrument business had a solid quarter and built a very good backlog with nice incoming quarters. U.S. and international sales grew at similar low double digit rates on an operational basis. Other OR equipment sales checked in at mid teens growth levels and power instruments mid single digit growth. Growth in other OR equipment was led by the Neptune operating waste management system navigation products [Sercio International Payne] [Hernia] Endoscopy up 20% in the fourth quarter and 24% for the year as reported and 21% and 24% respectively on a constant currency basis. In the fourth quarter domestic sales up 18% and international up 27%. Adding to that 20% reported sales growth. Endoscopy posted another quarter of 20% or more sales growth with excellent growth if video systems, and strong growth in general surgery products and also built strong backlog. Endoscopy's quarterly growth was led by video sales boosted by the first quarter E-trauma acquisition and strong sales of light sources and video accessories. Laproscopes [antisoplators] led general product sales. Endoscopy products did extremely well internationally, were soft in in the U.S. partially as a result of the discontinued sales of the RTI telegraph products. Last but not least, within MedSurg our medical business was up 25% in the fourth quarter and 23% for the year as reported and 25% and 22% respectively on a constant currency basis and medical had a quarter of 32% growth domestically, 1% internationally and 25% in total on a reported basis. Medical obviously had another exceptional quarter. U.S. sales surpassed 20% growth for a 6th consecutive quarter. International sales faced tough comparables and flat in the fourth quarter and shipments extremely strong across all product categories, this quarter, stretchers and EMS leading the way. [Hip]Therapy representing 5% of our sales reported 6% growth in the fourth quarter with revenue growth finishing 2005 at 7%. Startups and acquisitions generated all of physiotherapy's growth this year and they ended the quarter with 488PT centers. Now, turning to the rest of the P&L. our gross profit margins in the quarter up sequentially to 65% and as compared to the prior year, we benefited from nice management of manufacturing and inventory obsolescence costs. Even as we brought inventory levels down sold higher proportion of MedSurg products compared to the prior year. As Steve discussed R&D spending was up 47% in the fourth quarter and 33% for the year. The fourth quarter it should be said includes approximately $8 million in payments to life technologies. We are looking to further develop. As you know, we have placed additional emphasis on our development efforts this year and feel increasingly good about our product pipeline. SG&A costs were up just 5% in the quarter and 10% for the year. The sales related compensation driving a significant portion of the increase. Instrument amortization costs associated with new product rollouts did a strong pace in the quarter and for the year. These increases were partially offset by lower legal, bad debt and sales force sample cost in the quarter. In addition, insurance premiums are growing slower than sales contributing to the decline in SG&A costs as a percent of sales.

As you know, the fourth quarter of 2005 included a $15.9 million charge for purchase in-process research and development related to the December 30th acquisition of Plasma-Sol. This $17.5 million acquisition provides us with the technology for low temperature sterilization that we plan to further develop into equipment that can sterilize certain of our MedSurg products. If you look at all that, operating income when it's adjusted to remove that purchased in-process research and development charges for both 2005 and 2004 increased 18% in the quarter and 21% for the year and as Steve mentioned operating margins are up very nicely from last year.

Turning to a quick breakdown of other income expense for the quarter. Give you those numbers. Interest expense for the fourth quarter was $2.7 million. Investment income $7.5 million. We had a foreign currency transaction gain of $1 million in minority interest was $100,000 actually a pickup in the quarter so that adds up to the $5.9 million that you see on that other income line. Income tax expense for the fourth quarter and the year includes the impacts associated with the repatriation of $722 million of foreign earnings under the American Jobs Creation Act. This resulted in a $27.4 million charge for the year after a $30.9 million fourth quarter reduction in income tax expense to true up the $31.3 million third quarter charge recorded upon announcement of the repatriation plan. The underlying effective income tax rates if the PlasmaSol purchased in-process research and development and the repatriation of foreign earnings are excluded for both the fourth quarter of 2005 and the year were 29.5% and this compares to a 2004 annual underlying tax rate if the spine core purchase in research development is excluded in consideration of 30.0%.

Now, turning briefly to the balance sheet and cash flow. Balance sheet as you can see is in great shape. And our asset management really is excellent. Accounts receivable ended the year. Accounts receivable days ended the year at 54 days. A new record low and four days below the prior year. Our inventory days finished at 114 days also a new record in an impressive 8 days below last year. Also on the balance sheet at December 31, 2005, you can see we have $232 million of debt outstanding which we expect to pay off over the next 6 to 8 months. As you know, this reflects the overseas borrowing we made to complete the repatriation of foreign earnings in the fourth quarter. Cash flow was excellent. Great fourth quarter generating $382 million in operating cash flow. Our year-to-date operating cash flow after adjusting for accounts receivable, securitization reductions in 2004 which we consider to be a financing type activity, increased 16% from $743 million in 2004 to $864 million. We made significant investments in loaner instruments, facilities and ERP systems and still generated just under $600 million in free cash flow. A great cash year no matter how you measure it. With that I'll turn it back over to Steve.

Thanks, Steve. We'll move to the 2006 outlook. Before getting there to wrap up we would like to quickly remind everyone of how we once again delivered on our commitments in 2005. At start of the year we said we would grow earnings 22% to $1.74 per share, while boosting R&D spending and reducing our tax rate to 29%. In fact, we delivered $1.75 per share, one penny higher while actually boosting our R&D much more than planned and absorbing a slightly higher tax rate. We are proud of these results and are poised to deliver yet again in 2006. We continue to believe our broad-based business model will serve us well. We expect foreign currency comparisons may negatively impact the topline but still project Stryker will have an excellent growth story in both absolute and percentage gain terms in the medical technology marketplace. We are planning for healthy 2006 net sales growth in the range of 12 to 15% on an operational basis. Which equates to reported growth of 11 to 14% given current exchange rate levels. We also expect our growth rate to likely be towards the low end early and then strengthening through the year. Our earnings outlook continues a Stryker tradition of strong performance. We are targeting net earnings growth of at least 20% after adjusting 2005 for purchased in-process R&D the tax repatriation charge and cost of expensing stock options the adjusted EPS is $1.67. Our goal for 2006 net earnings per diluted share is $2.02. An increase of 21%. On a reported basis, this represents growth of 29%. And we feel very good about our ability to deliver these numbers. Now, we'll open it up for question and answer session.

Back to you, George.

OPERATOR INSTRUCTIONS Our first question comes from Katherine Martinelli Please go ahead, ma'am.

Thank you. Good evening, you guys.

Hi, Kathy.

A couple of questions. Just first on triathlon and if you could just give us a sense for where you are in getting all the MIS instruments out there. Is that now in place or is that part of why you would expect to see the acceleration more in the back half of the year?

The MIS instruments Katherine will just start to roll out this quarter. We have the initial sets of instruments out there but candidly I don't think we have much in the way of MIS at all. That will be rolling out the end of this quarter and next quarter and will continue to pick up.

And then on price your comments about it being up modestly in the U.S. on the Q3 call you had talked about U.S recon on pricing more on flat down is 1-2%. Is that still your expectation or cold you just talk about - it's hard to believe that [H.J.] is responsible for all of that swing or is there anything different in the dynamic that you are seeing?

Again, I think it is important to say that when we think about pricing we think about it across the total business and you know we were pleased to see a modest rebound of the 1% level that we have really been in the 1 to 2 as you know the last few years. The implant pricing in the U.S. was still slightly negative in the quarter but offset by the rest of our businesses. I think it gets back to we continue to feel good about the total pricing environment that we operate in. Certainly some of the recon under a little bit of pressure but nothing that we are not managing through just fine.

And I think, Katherine, that is right in line with kind of even how we have talked about '06 even with the pieces that we expected a little down ward pressure and still expected that pricing would be flat up a little bit and in the -- for the year and that seems to be playing out what we are seeing in the fourth quarter here.

And then to Steve, could you talk at all about R&D. Maybe we were not playing enough attention, it was a much bigger number than we expected. Anything in particular you can point to or is this all part of this product flow '07 and '08?

You know most of that will be for '07 and '08 and we will probably touch at it a little bit of it at the academy and give you some flavors but We have seen unique opportunities to in-license technology that are still earlier stage that we are really taking advantage of while our environment is healthy so really jumped on that in the fourth quarter.

Okay. Great. I'll get back in the queue. Thanks.

Thanks, Katherine.

Our next question comes from the line of Milton Hsu from Bear Sterns. Please go ahead, ma'am.

Hi, good afternoon, guys.

Hey Dean, the SG&A was the lowest in almost four years. Is this the normalized rate we should expect going forward or at least the trend directionally?

Well, you know, I think we were probably you know probably ran a little bit lower than we anticipated in the quarter but I think it gives you some sense of, you know, kind of what our flexibility is, across our business in terms of how we, can manage the P&L relative to making some decisions in the business. It will go up some next year because we are going to get the stock option expense top in there but I think on a normalized basis taking that into account if you look at that time for the year, you know, I think we can, you know, I don't think it will go up much and it may go down some. I think it will potentially be in a pretty tight range but you know we have got some things where we are seeing some positives. You know, insurance rates have got -- you know, that market has softened up a little bit after some tough years. And, you know, we just -- you know, as our businesses continue to grow I think we continuously are getting learn that we are getting some leverage that we are taking advantage of.

Milton, I wouldn't read that we are cutting frankly into the numbers. We are continuing to invest frankly in sales force expansions in a number of initiatives. But we did get some leverage and I think as Dean mentioned some of the sales force samples were probably a little heavier in the previous year period.

And that is really just due to the timing of how we are bringing the sales force on.

But as you see both with R&D we are also continuing to invest heavily in our infrastructure to support our growth.

Okay. And then Steve just a bigger picture question here on the R&D and the direction you guys are going. Seems like a lot of products are longer term versus what we have seen over the last four years in the way of investments and perhaps maybe more in biologics but does this change the risk profile of your R&D projects and how do you manage that?

I think we would argue you can look at risk profile in a couple of different ways. If we are trying to go from 5 billion to 10 billion in revenue the bigger risk would be to underinvest. I will tell you, I think what we have really done is we are continuing to stand and work on the project that we call the 18 month and shorter time frames and what we have now taken on are probably a number of projects with that 18 to 36 month window without cutting the ones under 18 and are a couple of those slightly higher risk? Yes. You know, are they dramatically changing the risk profile? No. I think we are starting to think about in the years ahead how are we going to add a billion dollars of growth per year and starting to think that way.

Okay. And just a quick own on OP-1. The data, have you seen that, is that going to be available at the academy and are there any opportunities to sort of buy your way out of that royalty agreement. Thanks.

We have not yet seen the data. We probably will not share it at the academy. Your question about the royalty we have no royalty, we own OP-1 outright. We bought that out several years -- Dean, why don't you.

No, you're exactly right, Steve. We a couple of years ago we purchased all of those rights so we don't have any royalties on that.

Okay, right.

Remind you, Milton as you know we took the acid test study on OP-1 with no instrumentation. This will be the definitive study to show that that product regrows bone. We have not yet seen the results but feel good what we have been hearing clinically over the last couple of years.

Thanks.

Our next question comes from Ben Andrew. Please go ahead.

Good afternoon. Just a couple of questions. Why don't we start with MedSurg. Curious given the real strength we have seen here as we look into '06 do you see the same drivers on [upgraded cycle] being as robust as we have seen in recent periods it.

Thank you for asking a MedSurg question. I think we do. We feel good about product flow coming at instruments and at endo. I would tell you that they will be on slightly different time frames than may be historical so you might see a lumpy quarter or two, you know, out of instruments first and then endo might be a little softer in the second quarter based on the way the flow it but I think we feel really good about the product flow continued to come through those divisions and I think these divisions I think continue to get underestimated and probably people assuming they will snap back to 10% growth rates. We expect these businesses to continue to do well and I'll tell you particular endo business our video and imaging equipment, it is being seen frankly by other specialties and they are almost dragging it in to different parts of the hospital where we don't even normally call on and that is part of the strength that we are seeing in our MedSurg businesses right now and we don't see that stopping any time soon.

Does that business tend to be tightly correlated with hospital budgets in terms of capital budgets or some of these are smaller items but is there risk there if we see a turn in hospital conditions?

No, reasonably but I think this is where you get back to the growth in minimally invasive surgery. What the surgeons are wanting is better visualization. As they go in through smaller and smaller holes the premium on a great camera and great screens and great visualization has gotten a lot higher. And I'll tell you, we don't see that being pared back by hospital -- you know, it is not like they are funding the building for an entire wing here. We are talking about pieces of equipment for the operating room theater that they will continue to demand. The surgeon demand for your equipment right now we feel really, really good about. Follow-up, Ben or ?

Yeah, I do. I'm sorry. Just a question on the gross margin maybe for Dean. You guys have been hovering around 65% for quite some time. Is there an ability based on the mix shift we are seeing to see that move markedly higher because you are well below a lot of your competitors because of mix.

Yeah, well, you know, again as Steve pointed out our MedSurg is a little bit lower on the gross margin side but on the operating margin side we are, you know, as it really counts so to speak, you know, they are probably a little closer and obviously doing some heavier investments in some of our implant businesses. So, you know, that plays out over time. But, you know, I still think as we look into 2006 that we have got room to have the margins expand you now and if I had to give you a target range for the year I would probably say in the range of 50 to 80 basis points and I think we would feel pretty comfortable with that.

Ben, I think we will see that steady uptake. If you go back to 2003 we were at 63.8 and did 64.8 this year so it is really up a hundred basis point basis points in the few year period. Still see some steady growth ahead of us.

Hope you ducked under that plane and thanks for taking the questions.

Thanks.

Our next question comes from the line of Jason Wittes from Leerink Swanns. Please go ahead.

Thank you very much. First off clarification on OP-1 because I think we originally thought that it was going to be a first quarter submission and also I guess curious is that now going to be a second quarter submission?

Jason, a great question. Yes, in fact, we had a meeting with the agency late actually in about October of '05 here and it was a very good meeting for us in terms of some of the additional data they wanted but they did ask for more data that is going to require us to do a lot more work to get it ready and that probably pushes us out probably on the order of a couple of months.

A couple of months, do you in a couple of months you will have the data they are asking for basically?

Yeah, absolutely and frankly we like some of the questions they ask.

Ok, just curious does that mean the data has been unblinded that the point or I'm not clear on that point?

It is being worked on and unblinded as we speak. We have not physically seen it yet.

A couple other questions. Also, what is the -- what is the impact of options expensing for 2006? Do you put that out?

We are estimating it is 8 to $0.09 in that area. Comparable to '05.

Comparable to '05? And I guess spread out evenly throughout the quarters? Hello?

It should be pretty evenly spread. There is no reason for it not to be.

Okay. And just one clarification again. On the med -- I guess from what you mentioned, Steve, MedSurg should kind of be the bigger driver in 2006. Is that the way we should be thinking about this year?

You know, I think we feel good about most of it, I we feel that we will see some steady improvement in our U.S. recon business, our international recon is doing very well. Our trauma business we think is going to continue to do well. Spine continues to do well. CMF continue to do well and MedSurg. We are just feeling pretty good across the board. We had a little rocky period on hips in '05 but again, I think we are starting to put that behind us and putting some things in place we should see upticks in hips and knees over the course of the year in addition MedSurg we're staying strong.

You were mentioning it will be progressing throughout the year. In other words, I guess the first couple quarters not as strong as the last two quarters is that the way to think about it in terms of the modeling for the businesses.

I think we are figuring a steadily uptick through the year is based on the product flow and getting our particular U.S. organization ramped up and we are feeling better and better about the direction they are headed. Two years ago that divisions numbers were probably better than they had a right to be and right now I think their numbers are worse than what their underlying talent level and commitment is. I think we -- as the leading indicator I would put them where kind of CMF was two years ago when we felt good about the CMF sales force and division but the numbers weren't quite there and then the numbers came through. I think that is what we expect to to see in their coming forward.. [ OVERLAPPING SPEAKERS ] And take a quick peek at triathlon and our knee business We feel pretty good about the fourth quarter knee number.

I agree. Just -- sorry. I guess you're saying it is going to be more -- a lot of the reason you are thinking it is an upward ramp as we progress is mostly due to sales force restructuring or some big products there are going to be drivers potentially in the second half?

It's going to be the rollout on the MIS instruments on triathlon that Katherine asked about earlier, we will really just be starting that. Everything we are hearing on triathlon frankly is that this is a great implant. And the instrumentation we probably slightly over engineered it and we didn't have an MIS offering when we launched it. The feedback on the implant has been outstanding and now we are going back and simplifying the instrumentation and coming out with the MIS rollout. That will be rolled out over the coming quarters here. I think as more and more people get experience with that plus as X3 poly continues to roll out on hips but also on knees and this is a real positive product to bring to the knee marketplace. Again, as those things continue to roll both domestically and internationally we feel pretty good about where we should be headed there. But it will continue to build momentum.

And I guess one last follow-up on that. How long is the rollout for the new instrumentation test going to take? A two quarter event? Three quarter event?

I don't have the exact answer. I'm thinking it's about two to three quarters.

I think that is fair.

And we might want to just check and get back to you.

Thank you very much.

Thank you, Jason.

Our next question comes from Pat Pace from UBS. Please go ahead.

Great, thanks. Just a follow-up o OP-1 is there a chance that that filing slips beyond a year?

I'll probably slit my wrists! [ LAUGHTER ] We don't think so. There is nothing I can see on the horizon.

So the additional data is pretty minor stuff like dosing or safety stuff.

Additional data points that just require going back in and relooking at a lot of the data in ways that we had not originally planned to do it but frankly in ways that we think will strengthen our case for approval. A couple of extra months to get the files in but we believe it will make the approval process smoother along the way.

Okay. So no new trials just recutting the existing tables.

Absolutely nothing, no.

And then to switch over another question on MedSurg. You talked earlier about your endoscopy products being used in other specialties and maybe I'm reading too much into this but when you talk about some of the stuff that you are -- the in-licensing and activities like that are you thinking about leveraging the MedSurg strength in other specialties in terms of new product flow over the next 18-24 months outside of orthopedics?

That is a great question. I would tell you we are thinking about that and some of what you see and may see in the quarters ahead will probably lead us that way and what we are really doing, frankly, is almost following our technology that we are being pulled almost with different customer bases and we want o be disciplined in terms of where we go and make sure we can have a more competitive offering. But we are looking at setting up some smaller dedicated sales forces just here and there and slightly different specialist groups and want it make sure that we have products to be able to deliver on that. But I think you might see that again ,that is a lot of how we built, the $1.75 billion MedSurg business over the years. So we'll continue to invest there as we invest on the implant side.

Okay. And I guess it would be probably correct to assume those would be the obvious minimally invasive surgery arenas like ENT, general surgery,urology, gynecology?

I think that is a reasonably safe bet.

Great, thanks.

Great questions. Thanks, Pat.

Our next question comes from Robert Faulkner from JMP Securities. Please go ahead.

Good evening. I wonder if you could first tell us on OP-1, where and when you think the data will be presented publicly or we'll see it?

Candidly we would probably hold off until at least NAS and we will see when we will get the approval. We could even wait until the academy next year While we know the investment community would like to see that data we don't see a lot of advantage sharing it too far in advance.. You know we are going up against a very formidable competitor, a competitor that we have great respect for and we don't want to give away our marketing strategy that we think some of which will be in that data. So, you know, we will certainly think you will get a feeling for where we are along the way but don't expect us to roll the full data out any time real soon.

Great. And I can't resist a pricing question for Dean or any of you. Can you answer a question I get asked all the time, which is, talk about the dynamics of the to and fro's around pricing and we we might see sequentially up-pricing. Was that in orthopedic implants and recon specifically and how much of that might have been affected by HCA et cetera. Any color you can give on what you're doing as a company to resist pricing pressure.

Well, you know, Robert, we do look at it pretty holistically. We're a total company here and we have to look at the total company pricing aspect again, pricing has kind of been in the 2% range for us. It ticked to 1% it is normally the quarter when you see the impact of some price increases that we put in as we start to negotiate a contracts for '06 come into play. So you know this quarter is often the one where we as we kind of see as a leading indicator for what we would see for kind of the next three quarters into '06. There is a lot the factors into this. HCA the situation was static with them in the fourth quarter from what it is then in terms of the agreement that we entered in to them for some volume which as you know is still in a situation that is being sorted out so there is no real positive impact from anything from HCA in the fourth quarter. You know, but again there is a lot of ups and downs in all of this stuff crossed all of our product lines and really the best way to look back or look at it from your standpoint is step back and look at the total company because there is a tremendous amount of moving pieces here and again I think we feel like pricing is probably not going to be quite as good as it was but still not going to be something to as Steve said slit your wrists over.

I hope not. So can you comment on recon specifically in the U.S.? What trends you are seeing there?

As Steve said it was down a little bit in the quarter. As he said to a lot of people you have to look at this very, very carefully because there is a lot of factors that go into this and one of the of the things I think that we see that the impacts is just the impact of when we roll over from a new product to product going into its second year and how we priced it coming out of the gates and the volume of it and the various time periods. For instance when we bring out a product and price it initially the volumes are very, very low and by the time we get to the point when it goes into the pricing comparison for the first time the volumes are often much higher and that influences on a waiting basis what that number ends up being. My counsel here would be to be very, very careful how you guys look at this stuff because I think that number can be deceiving and the way we step back and look at it is what are we doing as a total company and sales and that over time is what we are going to be measured by in the marketplace and I think that is the -- the way we have to look at it.

Okay. Thank you.

Our next question comes from Larry Keusch from Goldman Sachs. Please go ahead.

Hi, good evening. A couple of questions. First, Steve, I want to just make sure that you're not communicating that you expect the year to be extremely back-end loaded into the third and fourth quarters and more of what you are communicating is that you expect, you know, general improvements as we move throughout the year?

Correct. Yes. No, this is not a huge hockey stick. We think we are leaving the year with a little bit of momentum here in '05 and we think there is runway ahead of us, Larry. Okay. Great. And again, just a quick comment. Look at our fourth quarter numbers and stack them up. When all the dust settles we feel really good about these numbers and we think we will be moving from here.

Super.

We are exiting on a week note.

Right. And then as a relates to EPS gating obviously no mention that I saw of first quarter EPS growth but should we again be thinking traditional 20% per quarter?

Probably a fairly safe bet.

Okay. Super. And then I guess just lastly here, what do you -- you know, now you had more time to digest what is going on in the hip market and can you give us any thoughts as to how much do you think of this is specific to Stryker and your current offering and you know need to introduce some new other than X3 poly product into the market versus some other dynamic that's going on in the marketplace generally?

I think overall we probably have seen a little bit of a throw down in some procedural volume in hips. But at the end of the day I think we been fairly candid on ourselves. We beyond Ceramic on Ceramic we didn't have a great pipeline to keep the flow coming and we had some confidence issues in our sales force. I think the stumbles with the triathlon launch and not a lot in the hip portfolio. I think Dean articulated once that they lost a little confidence in the inside and product flow and I would tell you we feel really good that Mike Mogul (ph) and his team out at orthopedics interest had that back together, getting the product flow and commitments coming through. We still need tomorrow more some more new products and that is why the hip business will build over time but they are working on some nice things that should start to come forward here in the quarters and year ahead. You know, not in the weeks or month ahead.

And could we see a new hip product this year or is it safer to think farther out?

I think you will see some additions to the line. I wouldn't say a dramatically new hip system. I could also remind you we are seeing some pretty good growth internationally. 9% growth operationally in the fourth quarter on our hipline outside the U.S. Again, we feel pretty good about that as well.

Okay. Super. Thanks very much.

Thanks, Larry.

Our next question comes from the line of William Libinich First Albany Capital. Please go ahead.

Good evening.

Good evening, Bill

Two quick questions. First, I was wondering if you could quantify your comments in terms of the sales force expansion plans for '06?

We have decided, Bill, to stop giving specifics on numbers just because, while helps you guys it gives a lot of granularity to the competitors. If you look at it we really stopped expanding our recon sales force for most of the 2000 to 2004 period and are back into the expansion mode at our U.S. orthopedics division just as we have historically been consistently expanding at our MedSurg businesses so we will be -- you know, we expanded towards the end of '05 and we will be continuing that into '06. Really across every division in the U.S. and around the world.

Okay. Great. And then the second question I have is you know, we have heard that the OIG has stepped up their investigation and are starting to subpoena surgeons. Wanted to hear what your comments might be on that?

As you know, there is not much we can really comment but I would tell you we feel very good about our compliance program and feel really good about the approach we have taken to this issue over time. And are hopeful the way it will ultimately play out.

Do you think that you might be more or immune or more immune or have less exposure due to the fact that you typically deal with the direct sales force versus the independent agent rep model?

That is a great question. We would like to think we have pretty good controls and I feel good about our position. Having said that, you know, it just -- we don't really know where the U.S. attorney in New Jersey will fully go with this. But I would tell you, you know, I think we have been called over the years probably pretty strict in how we have approached these things and we feel really good about being in that position today.

Great, thank you very much.

Thanks, Bill.

Our next question comes from the line of Greg Halter from Great Lakes Review. Please go ahead.

Hello Guys, Great results and congratulations on another record year. On your guidance of the 202 I was wondering if that includes the stock option expense.

Yes, that would be two-tenish on the old model.

Okay. And looking at the data that is in your annual report or 10K I'm wondering if you would have the segment net earnings available for the orthopedic implant and the MedSurg sectors at this point?

Really do not, Greg. Unfortunately, I have to wait for the 10K to see that.

Okay. And one last --

Craig, as you may know when you look historically I think our MedSurg earnings are surprisingly stronger than I think most people, you know when you really cut through it, give us credit for. There is so much focus on hips and knees not realizing the true underline profitability. As you can see from some of the past filings.

I'll try to be fair with my answer, Greg, I tell you you can see the 9-month trends by looking at the Q and I wouldn't expect those trends to differ significantly. MedSurg earnings are up quite a bit, and are growing very fast this year. Implants are not growing as fast and it really comes down to you know, we made more investments in the implant side to the business with, what we are doing with OP-1, the continued investment in spine and, you with some of the R&D things but probably are still waiting a little more heavily on implants this year and I think you'll see that trend continue when you see the 12-months results.

And that is one thing we have been telling our clients is if you look at the numbers since '96 the return on earnings for orthopedic has gone from 20 then down to the single digits after Helvetica and up to16.2 in '04 with a return on assets that is only around 13% but you look at MedSurg and they have gone from a return on earnings of 8% up to 14% over the time period with a return on assets of close to 30% from 11 or 12 so yeah, the numbers do bear out what you are saying and I appreciate that clarification. One final quick clarification. Did you say the total debt figure is 230 million?

Yeah, there is a current you probably can't see it is about $47 million. But 232 is the -- will be the total debt on the balance sheet when you see it.

232.

232, yes.

Great, thank you.

Thanks, Greg.

Ladies and gentlemen, as a reminder to register for a question press the one followed by the four. One moment, please, for the next question. The next question comes from the line of Mike Weinstein from J.P. Morgan. Please go ahead.

Hi, Taylor here for Mike. Steve, I'm going to give you another MedSurg question which you talked in the past about the collaboration between the Ortho and MedSurg divisions and I know bundling is a dirty word but to what extent does that activity occur or maybe in a different way to what extent do you think the Ortho division is helping you know the great MedSurg results that we are seeing?

You know, we don't, you know, we do stay away from the bundling and all that kind of stuff. I would say we are connecting the dots more and more and as we are in negotiations with some of our customers around pricing we take the discussion in a lot of cases to a different level which is lets look at your total P&L at a hospital. Look at your efficiencies and we think we do bring a lot to the party in terms of being able to help the overall efficiencies of the OR by introducing some of our products particularly out of endo but a little bit out of our instruments division as well. I think we are connecting the dot s and probably opening more doors today for our MedSurg Business via our implant business. We have a lot more spine reps in there now as the spine business is becoming a pretty big business for us they are seeing opportunities to introduce the spinal surgeons to a number of Stryker MedSurg products where the spinal community typically was not exposed much to our products. There are more what I call introductions happening but that we do think is really helping our business. And internationally, you know, we are starting to see the same thing particularly where our MedSurg businesses have been significantly underdeveloped I can tell you as I think Dean read off the numbers our global endo number local currency was over 30% growth in the fourth quarter. As we start to really see some uptick there.

So when you say that you look at the -- at pricing holistically for the whole company is that the way that it plays out at hospital contractual level, is that the implication there or not?

You know, it varies customer by customer. They're still mostly individualized contracts. Dean if you have anything to add.

So many moving pieces here and hospital by hospital and we are obviously involved with a number of different buying groups on the MedSurg side but many have the ability to buy under varying contracts as well. So many moving pieces here that it is difficult to shake out but at the end of the the day we kind of look and see reasonably steady trends across the board with pricing, you know, being up.

Modestly over really the last several years. As a total company for us and that is across all geographies and across all our businesses.

Last question. Did -- have you noticed any impact of -- of folks not flying down to Florida and so weaker elective procedure trends in Florida in particular or the southeast you know with the fourth quarter and is that something that you expect to change in the first quarter just like any color like that?

Well, a good question. Think our recon business is probably still suffering in the Louisiana area. Not aware of anything particularly related to Florida that way but again it is probably that Dean and I are looking at it on a slightly higher basis. In terms of we know our MedSurg business down there is doing well and there was nothing notable that got called out to us about a weakness in that part of country.

Great, thanks a lot, you guys.

Thank you, Taylor.

Our next question comes from the line of Matthew from Star Fire Capital. Please go ahead.

Hi. Just wanted to ask a couple of questions on cash flow. Cash flow for operations and capital expenditures for 2006?

You know, I think as we said on Cap Ex we have been in a reasonably aggressive mode for additions here and I think that will probably continue for at least another year. I would expect Cap Ex to be in the same range that it was this year, Matt, probably 250 to 280 range but by the same token given the normalized growth in our business you know I would expect us to have a nice up year and cash from operations and you know I don't have that -- a number that I would tell you right off the top but I would expect it to grow reasonable in nicely as earnings grow although obviously we had nice trends in asset management this year but we are a company that likes to keep making progress so you can bet that we will be talk about all the divisional folks and I think we still got pockets particularly in inventory where we can still make progress.

Should be north of 6.

625 or 650 in that range. The cash from operations is 864 so I won't say a billion but we like to set nice goals and you can bet we will have interesting discussions about what our goals will be there.

And then add that to the cash, you know, I mean if you are going to be like a billion five by the end of next year in terms of cash what are are you thinking about in terms of utilization of that cash?

You will still see us making more technology based acquisitions. Some of the things this year with both E trauma and Plasma-Sol we feel pretty good about most of our businesses and it is about filling out additional technology platforms rather than automatically saying we have money let's go make a big acquisition. We talked about still liking an approach of smaller acquisitions that you can integrate easily and grow from there and we will certainly be looking at those kinds of things but we will be a disciplined acquirer and not just spend it because we have it.

How about stock repurchasing?

We're not at the stage that we are really thinking about that. Look at the results over time and they are kind of mixed. We continue to think we will find other ways to redeploy it. If it continues to build and gets really different we might revisit that.

We are referring more to your evaluation is totally off what it used to be so it would continue to be accretive.

Yes, it does raise that question for us. And if the stock stays where it is, you know, we might look at it a little harder.

I appreciate it. And thanks for the great results.

Thank you, Matt. Any other questions, George?

Yes, the next question comes from Jo Ann from Harris Nesbitt. Please go ahead.

Jessica Gladstone. How are you?

Great, jessica.

Most most of my questions answered. I want it see if there is an update on pricing in Japan. We won't find out until spring or have you been hearing anything.

We are in ongoing negotiations with Japan. Safe to say 2006 will probably net out in the range that we have been talking about and probably the lower end and the bigger challenge probably will be '07 because rather than '07 being a flat year we will come back and take another hair cut in '07. That is where we feel good about the pipeline of the company and being able to withstand that kind of a hit in '07.

Great, thanks. And then lastly on MedSurg is there any way you could quantify what percentage of the MedSurg businesses kind of shorter term maybe multiple time of the year purchases from hospitals and what percentage are larger longer term capital purchases?

Off the top of our heads.

Very roughly.

I don't have a great answer to that.

Jessica, you know, we have got certain parts of our business that are more capital equipment and certain pieces that are more, you know base business as we call it and it really varies across the various businesses that we have got in MedSurg. But you know if you add it all up it, you know, capital equipment type items it may represent, you know, 50% or so of our MedSurg business. But you know I wouldn't say that, you know, those are ongoing type -- those are still ongoing type normal capital equipment purchases for hospitals so I think it is you know but obviously bigger type orders and a little diff'rent call pattern in terms of how you make that sale. That is on going and has been for time immemorial no real changes there other than if we flesh out those businesses than we can change those mixes a little bit but that is the only change there really. Medical is probably the business that is the most, you know, bigger capital and then.

Yeah.

And then instruments and endo have real combinations.

Great. Thank you very much.

Thank you, Jessica.

Our next question comes from the line of Glen from Morgan Stanley. Please go ahead.

Go ahead, Glen.

Yes, hi, good evening. Matt is on the phone and had a list of questions. Matt? Matt? He is not on. We'll catch you again. Thanks.

All right. Thanks, Glen.

Actually I'm on.

There we go.

Boy, that was close. I was just speaking to the operator to see if I was if queue. Thanks for taking the question.

A lot of my questions have been answered but I do have a couple. So first just we talked a little about this before but and I know you don't want to get into the specifics of the sales force but help us understand as you increase the number of sales folks in the U.S. what does that look like in terms of getting someone productive, understanding that these are long-term relationships with the surgeons that drive these individual sales people's effectiveness over time?

A great question, Glen. For a recon rep to get start to get humming it will probably be 12-18 months the way we are focusing on it. We are focusing on getting folks in and groomed under some of the more seasoned reps as opposed to going out and hiring more competitive people and bringing them over and applying a lot of the principals that have driven our business over the years where we got away from it for a few years that is why I think it will be quarter over quarter gains as opposed to a huge rubber band and all of a sudden off and running here in the first quarter.

Then I know you are looking for MedSurg questions but I'm afraid I have another recon related question.

That's okay.

For hips. Just I understand I think what is happening in -- with Trident but what should we look to for a catalyst to sort of start that business moving again kind of in a meaningful way? Is there a product? Is there annualizing of price that we can talk about? When does that happen?

In terms of hips?

Yeah. In the U.S. in particular.

Yeah, you know, we expect the restoration modular to continue to boost. The X3 poly is rolling out now. And then I think there will be some smaller things that we start to roll into the fold over the course of this year and as you may be aware we, also signed a deal with Coren to bring the hip resurfacing to the U.S. market and that will probably be an '07 event we have that slightly further on the horizon. And then we are working on other, what I call more in incremental and modest things before we get to probably a few years out having bigger stuff.

Okay but is -- should I read that as maybe you know the next couple of quarters we're looking at the kind of performance in the U.S. that we can expect to continue to see or do you see this thing turning sooner?

Think we feel that we will start to turn it this quarter.

Okay.

But, you know, also want to keep the expectations. We have a long ways to go and we still got some work to to. The way we look at it is we are firing on about 9.5 out of 10 cylinders and that is the one we are working on. At any given point in in company there has always been a few parts of the business that aren't strong and right now it happens to be U.S. hips and we are in the process and every time we have one that falters we get it fixed and we come roaring back. And we will.

I look forward to seeing it. And last question is with respect to the pipeline you talked about there is a number of sort of 18 month and under programs that you have in motion and that you have been sort of looking at or thinking about or building out the 12 to 18 month or I'm sorry the 18 to 36 month investments.

Right.

Can you give us an idea of where in particular some of those fall across your businesses? Spine or trauma or MedSurg?

We would tell you I would tell you honestly it is in every single division. We have new -- every single division. New things going particularly spine and trauma probably have the most in that range because you know those are businesses you know as we mentioned becoming significant contributors to growth and with still a lot of runway ahead of us so they probably proportionately have the most of those but we have got good things going now in every single division in that 18 to 36 month range.

Great. And then just a follow-up on this someone asked a Japan pricing question. After this ministry meeting yesterday you sounded like you are thinking it is a the the low end of your range. Is that, are you fairly -- I mean it that is after seeing some as results that you feel are pretty final or still have a ways to go here before the final negotiations are done?

We think we are pretty close at this point and we think we have it dialed in that it is within our range of manageability.

For '06.

And we are thinking for '06 and we immediately thinking about what we will do for '07. I would remind you, our Japan business is very, very strong right now. For us to have posted double digit growth in Japan in what has still been a tougher environment over there we have a lot of good things going on in the hip business, knee business spinal business. trauma business I'm sure people You know, almost particularly in the orthopedic implant businesses very good things going on. Matt, I should come back real quick on your R&D question and I'm sure people would like a little more visibility on what some of those projects are. I would remind you just a cultural aspect of Stryker which is we don't manage our R&D by press release. We have quietly done a lot of deals that we don't necessarily choose to share. Sometimes it would be fun to let that out of the bag, but we come up with things like X3 poly that we launched for knees in December we weren't hyping that in advance we just watch the results and that's kind of the approach we want to continue to take. Keep looking at the overall results and we expect they will be there.

Any other thig things coming out of the bag at AOS.

Probably a little insight into where we are going.

Thanks for taking my questions.

Great, thank you.

Our next question comes from the line of Jeff Johnson from Robert W. Baird. Please go ahead.

Hi, guys. Most of my questions have been answered. One quick one here if I could Steve clarify some of your Japanese comments. You talked about an '06 price cut and then maybe another hair cut as you said I think in '07. I thought that was a biannual event. What would cause Japanese pricing to fall again in '07.

Typically it has been a biannual event. What spooked the investment community back in the autumn was the Japanese were talking about 25% price reductions over the next three years so we are seeing a rougher cycle this time where it probably won't be quite that bad but instead of being biannual they have in this particular cycle gone to annualized where they probably didn't give us as huge a hair cut this year but then introduced it for '07 as a way to help ameliorate and allow us to phase in and adapt to it.

At the low end of the expectations in '06? Talking low single digits? Conversations we've had maybe a couple of weeks ago with Consultants in Japan, we are still thinking mid to upper-single digits at the very least for '06.

We, Jeff, we had given a range of 6 to 10 percent so what we are saying is that we see the lower end of that range.

Lower end of '06 and then maybe again another cut in '07.

Correct

Got it.

So still solidly into the mid single digit.

Clears that up. Thanks so much, Steve.

Thank you.

The next question comes from the line of Mark Moken from Piper Jaffray Please go ahead.

Good evening. Thanks for taking the questions. I have three questions. First of all, what level of growth in orthopedic implants are you factoring in to 2006 guidance? Secondly, What are the factors driving the medical business in the U.S.? We saw another quarter there of greater than greater than 30% growth and maybe if you could outline if that is product driven or capital budget driven and then finally, on the Coren hip resurfacing product do you think that will require a panel?

Great questions. Take them in reverse order. We would probably expect there would be a panel particularly if we end up being closer to the second one up as opposed to the third we will see where we shake out on that. Our medical business is a combination of great products and great sales force and you know some reasonable capital budgets but we had great new product flow and a great team that stands we behind and we are making quality products and back them up every day and we think executing well. On the orthopedic implants for the year I think we are figuring in the low double digits, you know, collectively when you add spine, trauma, CMF, hips and knees probably I think Dean.

Yeah, I think that is a fair expectation.

And that is a reported number in the low double digits?

You now, it will probably be slightly higher operationally

Right.

Touch lower reported.

Okay.

But right in that range.

Okay. Thanks a lot.

Thank you, Mark.

Our next question comes from the line of Tao Levy from Deutsche Banc. Please go ahead.

Thank you for taking my call or my question. On HCA I was wondering if maybe you could walk through a little bit the dynamics that took place at the end of the year. Did you end up going back to higher prices if they -- if they hadn't met the compliance levels? And is that the type of tone you are going to take going forward with other contracts that maybe don't make the same compliance levels?

You know, Tao a the the end of the day we don't like to negotiate publicly. We made a commitment to a pricing level based on a commitment they made to us. As of this point they have not delivered on the commitment and it calls for the price to revert back if they did not. That is our intention. We would love to support them hitting the commitment but again we are working d don't want to negotiate this publicly but they have not yet delivered what they committed to do.

Gotcha. And on the hip resurfacing side have you guys been given any insight into a panel, a potential panel date or your comfort in that 2007 approval or launch that you mentioned earlier on?

It is still early. What we probably are seeing to be candid is the classic situation of a smaller European company that may have thought they were further along. There cleanup work that we are doing with that study. We still feel good about it but I think it is too early to fully conjecture on exactly what dates for panel and those kinds of things would be. Collectively we are working nicely together with coren and with the agency to get the submission to world class standard.

Great. Thanks a lot.

George, we probably only have time for about one more question.

Okay. Our last question comes from the line of Michael Madison from Wachovia Securities. Please go ahead.

Hi. I have got a question regarding your other income category. You mentioned $7.5 million in investment income. I was wondering if you could add a little bit of color on what that is exactly?

You now, I guess it is -- it is the things you would normally expect in there. Obviously we have some investments we always have, you know, income tax things that move around and there is a probably a little bit of income in there. From an income -- from income tax items as we settle up on that but also as I said investment of securities and we also, you know, sometimes have securities that we trade where we have gains and losses but very conservative investments always. So that is really what makes up that number and I won't give you any further color on the exact makeup of it.

All right. Well, that is helpful. Then just on X3. Did you say that was in both Scorpio and triathlon knee products?

Yes.

Yes.

Yes.

Okay. And then finally on PlasmaSol I imagine that is going to be a capital equipment type product eventually once it is through the development process or what have you. Is that, correct? Or?

You know it will actually be both. Mike. There will be a -- you know there will be a disposal piece to that, I believe.

I appreciate it.

George with that I think we will wrap it up and I would like to thank you all for your time and questions tonight. Sorry if we haven't gotten to everybody but a lot of good questions and I think hopefully you take away here that we feel good about the year we just finished and continue to deliver on our commit and feel good about where we are headed. We will host the annual meeting in Chicago since it was move moved from New Orleans and that will be at 8:00 a.m. Central time on Thursday, March 23rd. So for those that want a little more insight into the new and stuff we will probably look forward to seeing you there if you can attend and if not that meeting will be accessible by phone or on Stryker website and finally, the conference call for first 2006 operating results will be held on April 20th of 2006.

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