史賽克 (SYK) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the forward statement and prioritized conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, January 25th, 2007.

Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations, and will be subject to various risks and uncertainties that could cause the Company's actual results to differ materially from those expressed or implied in such statements.

In addition to factors that may be discussed in these presentations, 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 with clinical studies, and eventual United States Food and Drug Administration approval of additional OP-1 applications, the FlexiCore and CerviCore spinal implant products, the PlasmaSol sterilization products or other new product introductions, integration and any other issues that could cause delay, the introduction of the Sightline product line; 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 products, changes in foreign exchange markets, changes in financial markets, and changes in the competitive environment.

Additional information concerning these and other factors are contained in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, and quarterly reports on Form 10-Q.

Today's conference call will also include a discussion of adjusted net earnings, excluding the impact of the year-ended December 31st, 2006, of a first-quarter charge to write-off purchased in-process research and development associated with the acquisition of Sightline Technologies, Ltd., and excluding the impact on the three months and year-ended December 31st, 2005. Of charges to write-off purchased in-process research and development in the fourth quarter of 2005, and the impact of income taxes associated with the reparation of foreign earnings under the provisions of the American Jobs Creation Act. 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 8-K filed today with the Securities and Exchange Commission, which may be accessed from the For Investor's page on the Company's website at www.Stryker.com.

It is now my pleasure to turn the call over to Mr. Stephen MacMillan. Please go ahead, sir.

Thank you, Amy. Good afternoon, everyone. And welcome to Stryker's fourth quarter 2006 earnings report. With me today is Dean Bergy, our Vice President and Chief Financial Officer. We are pleased to report that the year-ended on a strong note, led particularly by great performances in our U.S. Orthopaedic implant businesses, up 17% in the quarter, with four of our five key implant franchises exceeding 20% growth. Additionally, our global endoscopy franchise had a huge quarter. Up over 27% versus last year.

As most of you know, any given quarter brings us a few highs and a few lows. And the clear high this quarter was the strong performance across our U.S. businesses, while the lows are international businesses, where growth was fair, but slower than we would like.

In the quarter, net sales grew 14.4% as reported, and up 12.6% operationally, to $1.463 billion, and we did benefit from one extra selling day in the quarter in the U.S. Adjusted net earnings were up 20% to 228 million, and reported net earnings were up a stronger 28% from last year. For the year, sales of $5.4 billion were up 11% as reported and operationally, as currency was neutral for the year.

This marked our sixth consecutive year of double-digit sales growth. And for the year, both reported and adjusted net earnings growth approached 21%, while we also delivered our EPS goals for the year of $2.02 adjusted EPS, and $1.89 as reported. As we review the quarter and the year, we thought we would step back and review our progress in light of the seven key commitments we outlined at the start of the year.

First, U.S. Orthopedics. With sales growth exceeding 14% in the quarter, our turnaround efforts in this important division are clearly becoming visible, as we have now posted five straight quarters of sequentially improved performance. Consistent with the goal we outlined at the start of the year. While hip growth was only 5% in the quarter, knees, trauma, and CMF were all up at least 20%, leading to the very strong quarter.

And for the year hip growth of 4% was up from 1% in 2005, knees were up a strong 16% in 2006, following 13% growth in 2005, behind the continued strength of Triathlon, and trauma and CMF both also exceeded 20% for the year for the first time. While we still have opportunities in hips, and throughout the business, we believe we can now say that our U.S. Orthopedics division is firmly back on track.

Our second commitment was that MedSurg would continue to be a key growth driver, and that we would accelerate growth for our endoscopy and instruments franchises outside the U.S. We also said U.S. sales would be softer in the first half, ahead of key second half product launches. Well, we are pleased to report that our key product launches are being very well received by our customers. Behind the rollout of our System 6 Power Tool line, our U.S. Instruments business accelerated from 10% growth last quarter to 14% in the fourth quarter, and we expect steady growth through 2007.

Meanwhile, the market acceptance of our new 1188 camera, along with an enhanced light source and new high-definition monitor has been outstanding. As our U.S. endoscopy business went from 6% growth in the second quarter, to 16% in the third, to exceptional 26% growth this quarter, well above our expectations. And not wanting to be left behind, international endoscopy sales also soared 30% in the quarter on an operational basis.

Medical meanwhile, posted its 13th straight quarter of double-digit U.S. sales growth, up 12% on top of last year's very strong 32% growth in the quarter. For the year, our endoscopy business was up 30% outside the U.S., and up 16% in the U.S., as this franchise is clearly gaining more traction internationally. Instruments meanwhile grew 13% internationally, and 12% domestically for the year, and should be poised for continued solid growth around the world in 2007.

Our third commitment was that our trauma, spine, and CMF franchises would continue to grow at above-market rates, especially in the U.S. These franchises were probably our quiet stars for the year, and all three finished with outstanding U.S. performances. In fact, each achieved 20% or greater growth in the U.S. for the quarter and the full year.

Along with endoscopy, our fourth quarter finish for the U.S. Spine business was probably our biggest upside surprise, as we rebounded from two quarters of mid-teens growth, to post exceptional 28% growth in the quarter, and delivered 20% annual sales growth for the seventh consecutive year. In fact, in the last six years our global spinal business increased more than five times, from about $70 million in 2000, to over $350 million in 2006. We clearly feel we have some positive momentum here, and continue to see spine as a major source of future growth.

Globally, constant currency spine sales were up 23% in the quarter, and 18% for the year. Meanwhile, our U.S. trauma business was up a strong 26% in the quarter, completing an unprecedented year of four straight quarters over 20%. Many of you will recall that we reorganized our U.S. trauma business in mid-2004 to bring greater focus to the key U.S. market, and we feel good about the progress we are making here. Globally, sales were up 14% for both the quarter and the year, at solid performances around the world, were partially offset by the price reductions in Japan.

Additionally, our previously beleaguered CMF business is also delivering its own remarkable turnaround story, especially in the U.S., where sales were up 30% in the quarter, and 24% for the year. The organizational changes we made in this business during 2005, also appear to be paying off. Globally, CMF sales were up 27% in the quarter, and 16% for the year operationally. Needless to say, we are pretty proud of what our team has delivered for these three businesses this year, and remain optimistic about their prospects in 2007 and beyond.

Our fourth commitment was to file the OP-1 PMA by the end of second quarter. We delivered on this commitment, and are now in the review stage with FDA. While we do not have a formal update at this time, we are expecting a meeting with FDA in the next couple of months. Following this meeting, we should have a better read on the status and timing, and will likely provide an update at that time.

Our fifth commitment was to continue to increase our investment in R&D, in order to continue beefing up our pipeline for the future. For the year, we boosted R&D spending by 14%, marking the fourth straight year where our R&D spending increased at a rate faster than sales. Now as most of you also know, we tend not to share much about the specifics of our R&D programs until they hit the market, and we believe this approach has served our shareholders well. We will say, however, that the increased spending has occurred pretty well across every division, and the initial effects of this increased spending should begin to be felt this year. Some of which we will outline at our Analyst Meeting next month in conjunction with AAOS.

Our sixth commitment was to deliver a sixth straight year of double-digit sales growth. In a year where the overall market proved more challenging, we were proud to achieve this goal. Our seventh and final goal was to deliver 21% earnings growth, on an adjusted basis to $2.02 per share. Once again, we set the bar high and once again we did deliver.

While we obviously finished the year on a pretty good note, we are also far from perfect. After a great 2005, our international divisions were softer in 2006, especially Japan, where the price cuts hurt us in 2006, and will continue to take a meaningful toll in 2007. Additionally, while our hip franchise showed numerical improvement in 2006, we are still a long way from where we would like to be. We do hope however, that you share our enthusiasm about Stryker's overall progress and results across an increasingly diversified set of businesses. Results which coupled with our future outlook, prompted us to double our dividend in the year.

I will now turn it over to Dean for more details.

Thank you, Steve. I will begin with the impact of foreign currency on our top line. The impact of foreign currency on fourth quarter sales was somewhat more favorable than we projected in our last earnings call, increasing sales by $23 million, or 1.8% in the quarter. For the year, the impact of currency was virtually nil.

In the fourth quarter, the dollar weakened approximately 8% against the euro, and was about flat against the yen compared to the prior year. If currency rates hold near current levels, we expect the impact of foreign currency will increase first quarter 2007 sales by about 1% to 2% when compared to the prior year.

And now turning to the analysis of sales on price volume analysis. In the quarter on a rounded basis, we saw currency at about 2% to sales growth, and the remainder of the 14% sales growth we reported really came from volume and mix. Prices in the quarter were actually up about 70 basis points, but with rounding we report them as flat in the quarter. For the year we report prices as up 1%. In the quarter, domestic prices were up, but this was partially offset by lower international prices. International prices were impacted by the MHLW reimbursement cuts in Japan, which took effect on April 1st, 2006.

As a reminder, an additional Japanese price reduction kicked in on January 1st of this year, and we will see another cut on April 1st, 2007. All in, we expect overall Japanese price cuts to reduce our sales to this market by about 7% to 8% in 2007. Volume mix came in at 12% in the quarter, as I have said. Both are domestic and our international businesses provide sequential volume mix upticks with the U.S. finishing at 14%, and international growing 8%.

Now turning to our business lines. Orthopaedic Implants represents, as you know, about 57% of our sales, and sales of Orthopaedic Implants increased 13% in the fourth quarter on a reported basis, and 11% on a constant currency basis. And I will cover the products that are within that Orthopaedic Implants category, giving you the domestic, international and total sales breakdown by the product categories. I will start with the reported results.

Hips in the quarter were up domestically 5%, internationally 5%, in total 5%. Knees in the quarter, domestically up a strong 21%, international up 5, in total up 14. Trauma on a reported basis up 26% domestically, 13% internationally, and 17% in total. Our spinal business up 28% domestically, 19% internationally, and 25% in total. And CMF up 30 in the U.S., 31 international, and 30 in total. And then for the total Orthopaedic Implants category, up 17% in the U.S., 9% in international markets, and 13% in total, again all reported.

And now turning to constant currency growth rates for those same product lines, obviously the domestic numbers are the same, so I will give you the international number in constant currency, and the total in constant currency. So for hips those would be international flat, total up 2, knees international down 1, total up 12, trauma, international up 8, total up 14, spine, international up 14, total up 23. CMF international up 25, total up 27. And for the total Orthopaedic Implants line international and constant currency up 4, and the total up 11.

Now for a little more detail on the product categories, hips were up 5% in dollars, and 2% in local currency in the quarter. U.S. hips registered 5% sales growth in the fourth quarter. Accolade [somalus] hips posted another good quarter. Revision hips had an excellent quarter, led by our restoration modular system, and we again saw extremely strong growth in sales of X3 polyethylene inserts.

U.S. hip sales received a modest boost from sales of our recently introduced LFIT anatomic thermal heads. Our hip fracture business grew at low single-digit levels in the quarter. Hip sales in Europe were up just slightly on an operational basis, with the best performances from Trident, restoration modular, and Accolade.

In Japan, local currency hip sales declined about 10%. The MHLW price reimbursement cuts, and a bit of additional discounting in advance of the January 2007 price reduction, contributed to prices in Japan being down 8% in the quarter. Bi-polar hip sales in Japan were also slow, with much warmer weather in 2006 compared to 2005 contributing to a lower incidence of hip fractures. Total hip sales in the remaining international markets were up mid- to high single digits in local currency, led by a strong performance in Latin America.

Knees were up 14% in dollars, and 12% operationally in the fourth quarter. Knees had an exceptional quarter in the U.S. with growth accelerating to 21%. Primary knees grew by more than 20%, with sales of Triathlon and X3 polyethylene leading the way. Revision products posted mid-single digit growth in the quarter led by Scorpio. European knee sales were down slightly on an operational basis, as growth in Triathlon and Scorpio were offset by declines in sales of our Duracon and Kinemax products. Local currency knee sales in Japan declined at high single-digit levels, primarily as a result of price.

On a unit basis, our Scorpio NRG product posted modest growth. The remaining international businesses grew knee sales at mid-to high single-digit rates. Latin America and Canada were exceptionally strong, but these performances were offset by a decline in Pacific, where we were going against a particularly difficult comparable.

Now turning to trauma, that business was up 17% in dollars, and 14% in constant currency in the quarter. Our U.S. Trauma business had a great quarter, with its fourth straight quarter of growth over 20%. The 26% growth figure would be 25% if military sales are excluded. Growth was 15% or better in every product category, with hip fracture and other internal fixation devices generating the highest levels of growth.

International Trauma sales were up 8% in constant currency, led by other internal fixation devices, intramedullary nails and hand products. Europe grew Trauma sales at double digit operational levels. The Japanese local currency sales were down slightly as a result of the price cuts. Pacific, Canada and Latin America all posted strong local currency Trauma growth.

Now turning to Spine. That was up 25% in dollars, and 23% operationally in the quarter. Our U.S. Spine business had a phenomenal quarter, posting growth of 28% with strength across all product lines. Growth was led by thorical lumbar, and inner body device products. Overseas Spine sales were extremely solid, with operational growth checking in at 14%. Inner body devices and thorical lumbar products led the way here. Europe and Pacific both had an excellent quarter in Spine, and Japan grew sales by low double-digits on an operational basis in this category.

Now last but certainly not least, our CMF business, which was up 30% in dollars, and 27% in local currency in the quarter. Our CMF business had an exceptional quarter around the globe. U.S. led the way with 30% growth, fueled by craniomaxiofacial implants, neuro products, and our recently introduced HydroSet injectable bone substitute. Outside the U.S., Europe and Latin America were standout performers to Craniomaxillofacial facial implants leading product growth.

Now turning to our MedSurg group. This represents 30% of our sales, MedSurg had a strong quarter on a combined basis. And as a reminder, MedSurg is comprised of three significant product categories. Instruments, which represents 16% of total Company sales, endoscopy which represents 14% of total Company sales, and medical which represents 8% of our total Company sales. The MedSurg Group sales were up 19% for the quarter in U.S. dollars, and 18% in constant currency.

And now turning to those individual categories. Sales of our Instruments product line increased 14% in the fourth quarter as reported, and were up 12% in constant currency. Domestically in the quarter, sales were up 14% internationally, sales were up 13% as reported to get to the 14% reported figure, and then in constant currency international sales were up 8%, and total was up 12% again in constant currency.

Our Instruments business bounced back from a softer third quarter, as we started to gain some traction with our new System 6 heavy-duty powered tools. U.S. sales growth at 14% was more in-line with what we have come to expect from this business, and international sales were on-par operationally with the third quarter, but weaker than our expectations. Canada had an excellent quarter, and Europe and Pacific posted high single-digit constant currency sales growth overseas.

Both powered instruments and other OR equipment posted mid-teens growth in the quarter. Powered instruments saw similar growth in both heavy-duty and Micro, and other OR equipment sales were led by Navigation, the Neptune operating room waste management system, and STAIR shield.

And now turning to endoscopy, the star of this group in the quarter. They were up 29% as reported, and 27% operationally. And that breaks down on a reported basis with domestic up 26%, international up 36, for the total of 29%, and then in constant currency, international was up 30, and total up 27.

Endoscopy had a great quarter across all geographies and product categories. The U.S. had its best quarter since early 2005, and we made it three out of four 2006 quarters, with international endoscopy growth to 30% or better. Video, buoyed by our new 1188 HD camera light source and monitor, led endoscopy's growth charge. Arthroscopy and general surgery also generated growth above 20% in the quarter, and were extremely strong outside the U.S.

And now turning to our medical business, it was up 13% in the quarter, on both a reported and constant currency basis. The business was up 12% in the domestic markets, and 17% international for the total of 13%. Medical had a good quarter, U.S. sales slowed to a still very respectable 12% growth rate, against an extremely tough comparable of 32%. International sales were led by excellent performances in Canada and Pacific. Medicals growth in the quarter was led by beds and EMS [COGS].

Then turning to our physiotherapy business, which represents the remaining 5% of sales. Physiotherapy sales were off 4% in the quarter. And the sales decline is in-line with that experienced in the third quarter, as we put our efforts into resolving the Department of Justice investigation of physiotherapy. At 487, we ended the year with one less clinic than we began 2006 with. As a result, you should continue to plan for flat to slightly down year-over-year sales in this business.

Now I will make some comments on the remainder of the income statement. If you turn to our gross profit margins in the quarter were down slightly on a sequential basis, and up 70 basis points versus the prior year. Compared to last year's fourth quarter, we benefited from slightly improved plant efficiencies, and stronger growth from our higher gross margin U.S. implant businesses. This was partially offset by higher excess and obsolete costs associated with the implant businesses. Both years saw us run the plants slower in the quarter, and bring inventory levels down.

Now turning to R&D, that spending was up 8% in the fourth quarter, and finished up 14% for the year. Last year's fourth quarter included approximately $8 million in payments to licensed certain technologies we were looking to further develop, boosting spending beyond the norm in the comparative period.

Our R&D spending is up at most divisions, and we continue to invest to develop acquired technologies such as the Sightline flexible colonoscope, and our artificial spinal disc programs. SG&A costs increased 17% in the quarter, sales-related costs accounted for the majority of this increase. These costs include compensation and higher instrument amortization costs associated with our Orthopaedic Implant products. After adjusting for last year's $15.9 million fourth quarter charge for purchased in-process research and development associated with the PlasmaSol acquisition, operating income increased 16% in the quarter, and operating margins increased to 20.9% of sales.

And now I will give you a breakdown of our other income and expense for the quarter, which totaled $11.6 million. That is comprised of investment income of $14.4 million, offset by interest expense of $2.5 million. A foreign currency transaction loss of $200,000, and minority interest, which also reduces that figure by $100,000.

The Company's effective income tax rate for the fourth quarter of 2006 was 28.2%. This rate is down nicely from the effective rates for the fourth quarter and year-ended December 31st, 2005, which reflect the impacts of the PlasmaSol purchased in-process research and development, and the income taxes associated with the repatriation of foreign earnings. As we look forward to 2007, we believe we will again be able to move the rate down, with as much as 50 basis points of upside versus the 28.2% rate.

Taking a quick look at the balance sheet, we certainly believe it's in good shape as we close out the year here. Accounts receivable days ended the year at 56 days, a low water mark for 2006, but up two days from the prior year. Inventory days finished at 122 days, that's eight days above the December 2005 level. We worked to aggressively bring inventories down in the quarter, but tried to balance this with our need to support anticipated first quarter sales levels, that run the plants at a steadier state throughout the year.

And then just lastly on debt, we finished the year with $15 million of debt outstanding. That's obviously just some legacy debt that we have hanging on here. Cash flow I think was very good, and as has become our tradition, cash flow was again strong in the fourth quarter. Cash from operations topped $850 million for the year, and free cash flow increased 15% from $565 million in 2005, to $650 million in 2006. We ended the year with a strong balance sheet and cash and investments over $1.4 billion.

With that, I will turn it back over to Steve.

Thanks, Dean. And now a few words on our 2007 outlook. As we described earlier, 2006 was a very good year for Stryker. We went into the year prepared for a tougher environment in the medical technology universe, and we emerged having met our commitments and having delivered another year of strong earnings growth for our shareholders. We have also continued to build for the future, and are well positioned financially to evaluate and capitalize on additional acquisition and technology opportunities that may arise.

Having said that, we view 2007 as a year where our major emphasis will be on execution. Continued execution and payoff from tactical changes we have made in our sales forces, and execution to ensure we begin to deliver on the promise of the research and development projects we have begun in recent years. We see the financial performance for 2007 shaping up much like 2006. We believe sales growth may pick up modestly from 2006, and currently forecast top-line growth in the range of 11 to 13% on an operational basis.

Given the impact of a further Japanese reimbursement cut effective on January 1st, and one less selling day in the international markets in the first quarter, we expect sales growth in the first quarter to be a point or two softer than our overall forecast for the year. Our annual earnings outlook for 2007 projects the diluted net earnings per share will approximate $2.42. This represents projected growth of 20%, compared to adjusted diluted net earnings per share of $2.02 for 2006. On a reported basis, this represents growth of 28%.

Now we will open it up for questions and answers. Amy, if you would take it over.

Thank you. [OPERATOR INSTRUCTIONS] One moment please for the first question. Our first question comes from the line of Mike Weinstein with J.P. Morgan. Please proceed, sir.

Thanks a lot. It's actually Taylor Harris here for Mike. Steve, before just to look back at the second half of the year in the recon market, and there was a lot of talk around mid-year about the recon market accelerating in the second half versus the first.

So looking back, do you think you saw that after you strip out selling days and foreign exchange and things like that? And just how would you characterize that, and perhaps your performance versus the market in the second half of the year?

Sure, Taylor. Great questions. I think we saw a modest improvement in the trends in the second half of the year. And I think certainly for our own performance, you know, the second half versus first half was up, you know, significantly.

You know, obviously each of our franchises were stronger. We certainly attribute some of that to a market pickup. But also think that probably in each major markets of knees, certainly trauma, CMF and Spine probably grew faster than the market. And hips we probably continue to lag a bit.

Okay. So the market pickup, I assume, modestly on the unit side as opposed to price?

Yes. I think more so on the unit side.

Okay. And you made a comment relative to being prepared for potentially more acquisition activity. You have made a couple of acquisitions over the past 18 months, and I am thinking primarily Sightline, that are probably diluting your earnings currently. Dean, I'm wondering if you have an estimate of how much some of those investments that you have made diluted you in 2007, and when are we going to start to see the payoff? And then do you think there's room in your P&L next year for further activity like that while still maintaining 20% growth?

Sure, Taylor. Those are great questions, because as you point out, we have made a number of acquisitions that have been dilutive, and Sightline is certainly one of them, and if you noticed we did not take our guidance down, certainly for the years in which we have done those. We will continue to be investing fairly significantly in most of those through '07, and probably don't see most of them starting to break even, or even beginning to pay back probably until 2008.

So there's probably not a lot of room for additional non-dilutive deals in 2007, but I would tell you we invested and absorbed a fair amount of that last year, we will continue to this year, and I think it's what gives us some more confidence about the longer term future as we do start to turn those things from the drains on the organization, into being accretive.

Okay. And last question. You mentioned the issues in Japan in the first quarter, and how that might temper revenue growth. Should we expect an earnings growth figure below 20% in the first quarter?

I would not expect so.

Okay. Thank you, guys.

Sure. Thanks, Taylor.

Thank you. Our next question comes from the line of Bob Hopkins with Lehman Brothers. Please proceed, sir.

Hi. Thanks and good afternoon, and congratulations on the strong results in 2006.

Thanks, Bob.

Just a couple of questions. On your guidance. First, do you have any contribution from Corin assumed in your 2007 guidance?

Not really. I think the way we think both Bob, probably about Corin and even OP-1 and the artificial discs, are we are trying to grow our numbers without those things, and consider that those will be, you know, additive probably more from a revenue standpoint, than necessarily from an income standpoint even in the early years.

Okay. So for '07, there is no real revenue contribution from Corin, that you're not assuming a mid-year approval, or anything and then some contribution in the back half?

We're hoping for an approval but our guidance, frankly if it does launch this year, that the actual revenue is probably not going to be enormous. There's going to be a lot of surge in training and, you know, we want to make sure we pick the right, both surgeons as well as the right customers. So, you know, these are really numbers that --

Okay.

Probably won't change one way or another very much based on the approval. Obviously in the out years, that will start to become a more significant factor for us.

Okay. And then on the Spine side you had particularly good growth, and I'm wondering if you could just comment. What percentage of that growth do you think is coming from share gains from Stryker versus an uptick in the overall market? Just any sense there.

Sure, Bob. You know, when you see a number that strong, we certainly had that, it gave us pause. And we think the market actually rebounded pretty strongly. I would say if we look at the third and fourth quarters, and if you go back to Taylor's question. I think we saw the spinal market in the third quarter. We're not sure, if more spine surgeons took vacations, longer vacations in the summer this year.

But it looked like it was softer in the third quarter, a little more Europeanish. But really seemed to come bouncing back pretty hard in the fourth quarter. So we think it was clearly a market impact on our business. Having said that, you know, we clearly feel we were growing faster than the market too, for one of the major players in that space now.

Okay. And then just last question I have is a little bit bigger picture, maybe longer term thinking. '06 obviously a great year for you guys, and '07 given all the different things that you have going on, looks like another terrific year. So sort of the high-class problem that you are creating a company of very large size.

And I guess my question to you is longer term 2008 and beyond, do you think you can keep up 20% bottom line growth without acquisitions? And also just because this is something that people spend probably too much time talking about, but if you just hypothetically assume that you have no contribution from OP-1 in '08 and going forward, can you still drive 20% on the bottom line, just any longer term thoughts?

Sure. Great questions, Bob. And those obviously are questions that are on a lot of people's minds. I think the way we have been thinking about it all along is obviously the challenge gets significantly greater each year. And it's why we have been significantly boosting our R&D. And bolstering our pipelines. You know, we still see a lot of opportunities for each of our businesses.

You know, when you still look around, our trauma business, particularly in the U.S., is still underdeveloped. Our Spine business, still underdeveloped. So a lot of what we have been doing is investing in technologies that we'll you know, some of which will start to come through really in '08, '09, and beyond. So you know, we also, where I certainly am spending a lot of my time and energy is figuring out how we continue to keep that going.

Will some acquisitions be a part of it? I think they will. And so it is hard to say completely that you know, they won't be a part of it. I think they will. But we don't want to become dependent on acquisitions for that growth. And that is why we will be beefing up the R&D, so we can do as much organically as we can.

But I think, you know, we continue to be bullish. If you think about back to the earlier question, we've absorbed a lot of dilutive acquisitions here over the last couple of years, and still delivering the 20% while we are absorbing that. And I think our hope for the future would be that those start to turn into, you know, moneymakers for us, but then we invest in other things to keep the engine going.

And then just on the OP-1?

Yes. You know, I think we have continued to have it modeled very small. I think the way we think about it is it's an option. It is an option on the upside.

And clearly we have some positives. You know, we have not expected anything before '08 in our models and frankly, even '08, you know, I think our ability to get there with or without it in '08, you know, our plan is to be able to do it again.

Thanks so much, Steve. Appreciate it.

Thank you, Bob.

Thank you. Our next question comes from the line of Raj Denhoy with Piper Jaffray. Please proceed, sir.

Thanks a lot. I wonder if I could just ask a few questions about the hip business. You know, it continues to be the one soft spot I think in the Orthopaedics division. It's been several quarters now that's lagged the market, and I wonder if there's just any more you can offer as to what might be behind that? Is it a continued loss from ceramic on ceramic penetration, that's not being made up by X3, or are there some competitive issues going on there? Maybe you could offer up a little more about what's happening.

Sure, Raj. And you're probably being generous in saying it's been a couple quarters, it has probably been a little longer than that. You know, I think it traces back to a couple things. First off with the ceramic on ceramic launch where we probably pulled forward the business. That launch went faster, sooner than any typical launch, and it was really probably one of the first launches, well, it was the first launch in the industry that was accompanied with a direct to patient campaign. And if anything, if you think about a lot of these launches that may build over, you know, eight quarters. That one built very quickly and really just maxed out in the first four quarters. And candidly, we didn't have much behind it. You know, so we are rebuilding our hip portfolio.

And really just starting to come out now with, we just launched Large head, our large head, anatomic heads right at the very end of the third quarter, and that will be a more traditional rollout, where the sales force is being trained and frankly, you know, really just finishing their training sessions here at the beginning of January, to start to get out and start to sell that.

So you know, I think it was clearly a little bit of self-inflicted, lack of additional news coming through, and we are starting to change that. But I think that will turn around in a steady fashion, not sure it's going to rocket back immediately, but I think we'll be sitting here a year from now with certainly better hip numbers in '07, than we had in '06, than we had in '05.

Do you expect maybe sometime, you know, mid-part of '07 you might see that kind of bottom out, because it does continue to grow at maybe, you know, half of even what the unit growth rate could be expected to be? So clearly there's some sort of either share loss or mix depression going on.

There's certainly, I would tell you we, there was certainly some mix changes. I will tell you, too, we've got some mix shift going on right now even on ceramic, to ceramic to ceramic on X3 polyethylene, you know, which is a price downgrade for the customer. But frankly, is still a great product.

And you know, as we try to partner with hospitals and bring other new technologies, whether it be on Triathlon or X3 in knees, we are occasionally making some trade-offs here, and that has probably affected our hip business a little bit more, and benefiting our knee business. But I think, you know, we'd be disappointed if by the second half of this year, if we're not back at least to market growth in hips. And then --

Sorry. May I have just one follow-up on that. You know, when ceramic topped out several quarters ago I think it was probably in the mid-30s. Where would you peg that now sort of ceramic on ceramic bearing services at this point?

It's down being closer to 20ish.

It's in the 20 to 25 range. Is probably the best place to peg it. On the other hand, as Steve pointed out. X3 has come in nicely and, , you know, I think we have talked about it but there's probably a little bit of a win for the customers in there, and you know, and yet there's a little bit of, you know, there's a balance for us because the margin, the gross margin percentage on X3 is actually higher for us than ceramic, because it is not a vended product. So although we lose a little bit more on price, we don't lose quite as much on total gross margin dollars.

Sure. And one last one on that, and then I'll ask one other question. But is X3 making up the difference to get you back into sort of the mid-30s? You know, is X3 maybe 10 to 15% of the mix on, X3 on ceramic I should say?

Yes. You know what, I think in terms of those high-end customers, yes, what's not being sold in ceramic is certainly being sold in X3, and X3 is also doing nicely in terms of supplanting our cross-fire, which we anticipated.

Okay. Fair enough. Just one last one here there has been a pretty high profile launch from one of your high profile competitors, with gender specific implants. Obviously you guys put up another really good knee number in the quarter. Is there much impact being seen out there or you know, maybe you could just characterize what you're seeing in the marketplace?

Let's just say we just posted 21% knee growth in the quarter.

Fair enough. That's good enough. Thanks.

Thanks, Raj.

Thank you. Our next question comes from the line of Michael Matson with Wachovia Securities. Please proceed, sir.

Hi. Thanks for taking my question. I guess I will start with one of your other competitors, Biomet, with the LBO there. Just wondering if you think there will be any kind of short-term or longer term impact on your business from that?

Yes. That's a great question, Mike. We are not sure. We are so focused, and it is why we talked in our final point about really focusing on execution in 2007. I think we do feel good that, you know, there's some uncertainty going on out there.

And you know, we think certainly uncertainty in other companies, and renewed strength in our Company, probably puts us in pretty good shape if we just focus on the fundamentals, and focus on what we are good at. So you know, we are not going to worry too much about exactly the timing and you know, who's owning who and everything else. But I do think we probably see it as a small opportunity for us.

Okay. And then just curious, you know, the Instruments division put up a reasonably good number, and it certainly was an improvement. But the System 6, I mean it looks pretty good. I have seen it at a conference.

And just wondering, what is holding it back from sort of better growth than that, maybe mid-to high teens growth, and then as a second part of that question, just wanted to get your views of Zimmer's distribution of the Brassler instruments. I mean I realize you all have the dominant share in the space, but just curious if those instruments in the hands of Zimmer's big sales force would be viewed as a threat at all?

Sure, Mike. Great questions. I think we feel good about the trajectory of Instruments. I think what we typically see when we launch new products at Instruments versus new products at endoscopy, you get a much quicker uptake at endo, and clearly we are seeing that with the 1188 camera. And the builds in instruments seem to take a little bit longer.

Having said that, we also did, and we've alluded to this in the past, but haven't made a big deal. We did some reorganizing of our sales organizations at Instruments early last year, to really set us up with some dedicated sales forces going forward to frankly that should make us very strong in '07 and '08.

And there is probably a typical little bit of digestion as we move some of the very good reps, say, away from selling System 6 into selling some of the other products. And I think we are probably seeing that. We've got a slightly younger more inexperienced sales forces in part of the country behind System 6, but again it's all coming together and, I was just out at their sales meeting about a week or two ago, feeling really good about where they ought to be headed. Thanks.

And on the Brassler Instruments, any comments there?

We are not hearing that much. I mean ultimately, I think we think that System 6 is a far better system. And we have confidence that most of the customers can and will see the differences. And the best product will prevail, and we believe that is what we have. But you know, we will see what really plays out. We are not concerned that that's hurting us.

All right. And then just a -- one final clarifying question. Did I hear Dean say that the tax rate should be down by about 50 basis points in 2007?

Yes. I said we have upside up to 50 basis points.

Okay. So it's not a guarantee, but the potential is there?

That's correct.

Okay. That's all I have got. Thanks.

Great. Thanks, Mike.

Thank you. Our next question comes from the line of Glenn Reicin with Morgan Stanley. Please proceed.

Hi. It's actually Matt Miksic. How are you guys doing?

All right. How are you?

Fine, thanks. Thanks for taking the question. I am going to start with a question on MedSurg.

Oh.

Uncharacteristically on MedSurg. And I was wondering if, Steve, you talked about, if I remember, some of the different trends in U.S. and OUS growth in MedSurg. Some of the differences in margins or concentration of business that you have in U.S. and OUS, and maybe if you could give some color as to the differences, and sort of the competitive dynamic when look at the U.S. MedSurg business versus OUS.

Sure. Great questions there, Matt. I think we have clearly decided to focus our international growth on endoscopy and Instruments, as opposed to, for example, Medical, which is a lower margin. So when you think about our MedSurg business, the two higher margin businesses, in MedSurg, are clearly Instruments and endoscopy. And I think where we see outside the U.S. is we just really hadn't focused on these businesses significantly. We have certainly had a presence and a meaningful presence, but we haven't had the focus on them.

And part of what we have been doing is expanding the sales forces, particularly in Europe as well as Pacific, and to some degree Japan but mostly Europe and Pacific, to really drive both Endo and Instruments, because we think we have very competitive product offerings. And the competitive set is some of the same folks, you know, that we see in the U.S. And there are tough competitors abroad as well, but again, we think we can make a lot more progress just by better focus, the products are there.

And when you launch the System 6, that's a worldwide launch? Those are also now rolling in your overseas markets?

They are now. And that's one thing that we have stepped up. We used to do U.S. launches, and then we kind of do the international launch when we get around to it, which would often be several quarters behind. We are trying to accelerate those. The 1188's been launched and System 6 now is also launched globally.

So net/net, if you are able to increase the mix of your international business, and grow that business, you're looking at sort of a margin improvement for the overall MedSurg business?

You know, ultimately it's probably more comparable, I would say. Because, you know, we have got similar margins outside the U.S. but they might be, you know, a little bit lower but because we're not expanding the medical business, so I wouldn't call it hugely margin accretive. But it's not as marginally dilutive as I think people might think on the surface.

Okay. And then on Spine. Question following up on some of the questions about the strength there. Just wondering if you can tell us what your, what the composition of that growth is, how much of this sort of resurgence in the fourth quarter, as you describe it, was volume? It sounds like a fair amount of it was. But wondering if you can give us a handle on what you are seeing in terms of price and mix?

Sure. Certainly a big chunk was volume and to some degree mix for us. Pricing, Dean, was --

Price is reasonably limited. It's really volume and mix with, you know, the premium on mostly volume, I would say.

Okay.

Spine is one of those businesses we have quietly boosted our R&D. The visible stuff, obviously like artificial discs have been there. But our team there has been quietly filling out the bag, and bringing in a lot of what we call, you know, singles in the products. You think about our business a few years ago, we really just played in the thorical lumbar space with Zea.

We have gotten much more active in filling out the bag in the cervical space, in the inner body space, and really are now becoming more of a complete choice for the surgeons whereas in the past we weren't called into as many surgeries, because we didn't have as many options. And I think we're finally getting to that point that we are now kind of a first tier spine player.

And on that, the pipeline question. I am hearing something about a posterior stabilization device. I know you play your cards pretty close to the vest in your pipeline. But is that a market that you are interested, something you are expecting to pursue?

Like a dynamic stabilization?

Yes, yes. You know, we clearly are, that's one of the areas we are certainly working on, and have not launched anything yet.

And when do you think we'll hear more about that?

Probably this year.

So NAS maybe?

Possibly you know, we tend to keep our discussions at NAS to products we have already launched to the sales force. So we are probably on the cusp of that one. I'm not sure.

Okay. And then, finally, if I might just, a quick clarification on SG&A. I think I may have missed some of it, Dean your color on SG&A. But I am assuming that you continue to invest there in the U.S. sales organization. Was there anything else in there that you could quantify for us?

You know, it is really all sales. The other piece, and this has been true throughout the year. It's been really higher instrument amortization costs, particularly with some of the new product launches we had coming in out of last year, particularly Triathlon and some of the other products in the implant area, we just have a lot more sets out there, and that's driven the amortization cost up throughout the year, but obviously we're expecting the payoff on that, and obviously have started to come, and we expect that to continue.

About another --

Can you quantify that at all or give us an idea of what, how much that might be, just because it sounds like that's something that would continue for a few years?

Well, yes. You know, if you look at amortization year-over-year, it's you know, our amortization is probably up, I want to say in the 15% range or so, probably, , just the cost is going through the P&L.

Clearly the bulk amount of the investment, of the SG&A is the selling forces.

Yes.

That I think we continued through the year based on the performance, and based on some of the opportunities we see, to probably continue to overinvest, to pave the way for the future, and some of that was also outside the U.S. in terms of, you know, MedSurg reps outside the U.S. and certainly that's part of what's driving the 30% growth for Endo, and some of those things. So we still see pockets of opportunity that we continue to invest in for the future.

Yes. And in that regard, you know, I think we have talked about what we're doing and the U.S. Orthopaedics division, particularly on the recon side, and you know, the thing that Steve talked about earlier with what we did at Instruments. That was clearly an investment in the future. And we think that will pay off.

Given the market trends, it sounds like it could be a good bet. Anyway, thank you for the questions.

All right. Thanks, Matt. Tell Glenn we love recon.

Thank you. Our next question comes from the line of Scott Kohnen with Edward Jones. Please proceed.

Thank you for taking my call. First, great quarter again. Following up on Matt's call about the SG&A. Given you have invested so much in the sales force, sort of imagine that they don't hit the ground running all of a sudden selling a lot. How much do you think that the costs that you're seeing are just trying to get them up to speed, but you're really not seeing the benefit yet on the top line from some of the newer reps, and then given that also, how much leverage do you think you have moving in '07 on that line?

Scott, that's a great question. I don't know that we've got a complete handle on it, but it would we invested, we expanded, thoroughly significantly a number of our sales forces through the year. And clearly, they don't hit the ground running. And we think we will start to get some leverage on that coming into this year.

Well, I'm sorry, Steve.

Go ahead.

I was going to say one of the things that obviously happens, particularly in the MedSurg side when you bring out the new products, we launched the System 6 for Instruments, and the 1188 HD camera for endoscopy, as we put a lot of samples in the field. And that drives up that cost. And that tends to be, unlike Instruments a pretty quick write-off because, you know, we write-off a fair portion of that cost right away. So you know, that will not have the same continuing impact that Instruments do.

I think over time you could expect certainly some leverage in the SG&A line. I think the way we almost look at the SG&A line for this year, is the fact that it didn't leverage at all was our confidence and continuing to invest. And we know that we can start to get some leverage on that line. And probably will certainly try to here in the years going forward. But, you know, frankly, where we keep seeing the opportunity to invest in the top line, we are still trying to be prudently aggressive in doing it.

I understand. That helps a lot. Thanks for taking my call.

Great. Thanks, Scott.

Thank you. Our next question comes from the line of Milton Hsu with Bear Stearns. Please proceed, sir.

Hi, guys.

Hi, Milton.

Hi, Milton.

A couple questions on the knees, knee business and then one in MedSurg here. Was there anything unusual about this quarter that led to this, you know, above 20% growth in the U.S.? Was it just uptake of X3, or just market-share gains?

We think the knee market probably Milton was a little bit hotter than it might, that it probably certainly accelerated. Our volume, you know, gains were pretty good. We also are frankly seeing a lot of excitement around the combination of Triathlon and X3, because of the longevity story. The motion fit and wear story, but particularly longevity.

It's a great story and we are seeing, I would tell you, some more doctors trying, Triathlon that are newer to us. So we are feeling pretty good. But clearly there is a good market component to it. I'm sure when the other folks report there will be some half-decent numbers.

Okay. And then on the flip side, the international knee business. The first time I think you guys have reported a negative number. Was there anything unusual in the quarter there?

You know, that was clearly as we highlighted one of the disappointments. I think when you really sort through it, Japan was certainly one of the negatives. The price cuts in Japan have hurt us a lot. The Pacific was probably just a little squirrelier, in terms of some strong, we had a strong third quarter, you know, it bounces back this quarter because that's a distributor market I think that's a little lumpier.

And I think the reality in Europe is we have done a half-decent job with Triathlon, but we've had a lot of legacy systems over there. And we have probably frankly just cannibalized more, and are getting rid of some of the legacy systems that we've had there. And not executing probably quite as well to get incremental doctors on board with Triathlon. So I think that will be a key focus for us going forward.

Okay. And then just one last question here on Endo. You know, this launch with the 1188 just got underway I guess a quarter and a half, maybe two quarters ago. But should we see this level of growth, and maybe rolled into that question is your commentary about the international markets, and in the past you've always mentioned that they've been fairly underpenetrated, but since it's tough for us to, you know, get a lot of details on those particular markets since they are so fragmented, if you could just fill us in on, you know, where the opportunities are, which countries to focus on?

Sure. I think to take both pieces of the question. First off, I wouldn't expect 26% growth again. That was a clear outlier in our minds. And we would expect that comes back probably to the high teens, maybe 20ish here. That's one of those quarters you sit there and you think about, okay, what about next year, this quarter. Because it's better than we expected.

Internationally, I think really we see the opportunities, particularly in Asia. And really throughout Western Europe, particularly for additional opportunities for the 1188. And, you know, frankly the accessories that come along with it. So I think we would hope to be growing our international business at rates at least equal to , or well above the U.S. here for probably a couple of years.

Great. Thanks.

Great. Thank you, Milton. Next question?

Thank you. Our next question comes from the line of William Plovanic with First Albany. Please proceed.

Hi. Actually, it's Brian Wong standing in for Bill.

All right, Brian.

Hi. I just have a couple questions regarding your physio segment. It has not been doing too great. I was just wondering if there was any thought about what you might be doing with that segment of your business this year.

You know, as Dean mentioned we are really focused right now on profitability and not necessarily expanding the top line on it. And really getting the DOJ matter wrapped up.

Any clarity on that?

No. You know, when we get there, we will certainly let it know, but as you know we tend to not talk about those things while they're ongoing. So sorry about that. But we will hope to have that wrapped up this year.

Great. And then I know that the Japan pricing kicked in this year, and you said there was another reimbursement cut coming in April in Japan. Is there any pricing cuts that we should be looking at in Europe this year?

You know, nothing beyond the usual.

I mean you always see certain countries whacking certain product lines here and there, but there are some rumblings out of Italy, and here and there and we hear various rumblings. I think nothing else significant. Japan is clearly going to be the big one, because we get the double hit here, both the January price cut followed immediately by an April price cut. You know, and that's where you know, other than that, we'd be even more bullish on our revenue forecast for the year.

Okay. And then lastly, you mentioned that your X3 is basically taking over Crossfire. I was wondering if you could give us a little more color on, you know, how much of that is happening? Do you anticipate Crossfire going away, or whether that will be kind of mostly sales of X3 versus that, you know, just some color you could give us on that.

I think at the end of the day we think X3 is clearly a superior product, and frankly if I was going to have a surgery I would certainly want to demand X3. So I think over time, you know, we are still giving hospitals and patients a choice. But, , I think ultimately there will be more and more migration to X3. You know, a few years from now do we still sell Crossfire? Maybe, maybe not.

All right.

But clearly the bulk X3. Thanks, Brian.

Great.

Thank you. Our next question comes from the line of Larry Keusch with Goldman Sachs. Please proceed, sir.

Yes, hi, guys.

Hi Larry.

So a couple questions. You know, Steve, if you examine your large joint recon business, or your overall implant business, you are obviously missing an extremity offering. And you know, I just want to take your temperature on how important do you think that is to have for you guys, or do you have any interest at all being there?

That's a great question, Larry. And we will probably touch on that a little bit at the Academy, to be honest. So that is a hole, and it's one that we probably will have some activity in.

Okay. Great. And then I am wondering, you know, you mentioned OP-1 in terms of circling back to the FDA in the next several months. I'm wondering if you could just touch on what the nature of that meeting is going to be, and then you know, there has obviously been a lot of questions around, whether the product is commercializable in the indication that you guys are seeking with the data that was generated.

And I know you're not going to again outline the data for us, but, you know, if the FDA came back and said, listen, this is isn't exactly what we need, and we need some incremental data here. I guess I'm just taking your temperature on how committed you are to this? You're obviously spending money to be in the biologic space, but ultimately how badly do you want to be there with OP-1?

We are very committed to it, Larry. I would tell you, we probably want to be there more than ever based on the data. And, you know, this product has now been used in over 30,000 patients. It's probably one of the most used products. You know, that doesn't have a broad scale approval in the country's history. With great results.

So I would tell you our resolve and increasingly what we are seeing frankly also in soft tissue indications, and I don't want you to think we're naive on this. But we remain very, very committed, and think that OP-1 is going to be a great part of our future, exactly when that future begins on a broad-scale basis is probably the bigger question.

Okay. And then the last one. You know, as you think about the February panel meeting coming up for the Corin hip resurfacing product. Those clinical trials were obviously not yours. And I know you've been looking over their shoulder, and helping with the submission. But what -- what do you think the FDA is going to focus in on? And again do you feel confident that you guys have the data that they need to get that thing across the goal line?

You know, Larry, that's a great question. It's a harder one to fully comment on, because as you know, Corin is a publicly traded company and it is their submission. But I think you know, we think they have got some good data. It probably could have been done better. And I think the FDA has really just been getting questions back to them. I think particularly in advance of the panel just coming back to them right now. So I don't have the full extent of the questions. So just again because they are a publicly traded company and it's theirs, I probably don't want to comment further at this point.

Okay. But again you guys weren't looking for much in revenues for this year regardless.

No, no. It's certainly not what we're banking our business on for this year.

Okay. Fantastic. Thanks very much, guys.

Oh. Thank you, Larry.

Thank you. Our next question comes from the line of Ed Shenkan with Needham and Co. Please proceed.

Thanks, Steve. I wanted to ask you a little bit about your guidance for next year. You gave a range which we would expect going into the year of 11 to 13%. Could you give us color on what would move it, the revs closer to the 13%?

You know, I think if we're executing well and things are coming through, you know, then we would hope that we will be certainly more at the high end of the range. You know, if you look at the low end of the range, it is essentially what we delivered this year. So I think you ought to think about it as say we think we are going to do modestly better. Frankly, despite Japan being a big dragon, and the fact we told you we don't expect you to grow our PT business, so it probably says some fairly good things for the rest of our businesses, and you know, it really all comes down to then how well we execute, and you know, what happens across the board. So I think we'll be in a better position, we certainly would like to be at the high end of that range and are planning for it. But as you also know, you always get a few unexpected surprises and things throughout the course of the year.

We're hoping you hit the top end, too. If you do, could we think of you getting more than 20% bottom line, or will you just plow the extra dough into R&D, and into the business?

You know what, we will probably continue to reinvest in the business, Ed. There are some additional opportunities that we see that you know, we may not be fully funding, that you know, if that comes in, we might plow a little bit there. You know, we want to continue to keep it going for as long as we can.

Thanks, Steve.

Thanks, Ed. Great questions.

Thank you. Our next question comes from the line of Jason Wittes with Leerink Swann. Please proceed.

Thank you very much. So a couple questions on these. First off, you are the, I guess Zimmer, or one of your competitors is not the only company that is sort of focusing on female products. You guys somewhat have that planned, too. Curious if it's having any resonance in the marketplace, or if it's something you're even focusing on at this point? Sure.

Great question, Jason. Clearly our Triathlon knee was developed specifically with the female anatomy in mind, and we've talked in the past about how the posterolateral fit and shape and design were factored in at the smaller sizes. That is clearly part of the message but I think what we see is the Triathlon story is so much bigger, that that's a component of it. But the bigger message is motion, fit, and wear. And, you know, what we've brought with X3 is you know, incredible improvement in longevity.

The fit component and therefore the motion component where people are really starting to say, boy this knee feels very different, particularly people who have had a knee insert, implanted two or three years ago and now have a Triathlon. They can tell the difference. We are hearing that from the surgeons. And you know, we think that's a much more powerful story ultimately for us. Having said that, I'm sure you know, our friends will do reasonably well with it, but we are feeling just great about the surgeon reaction. And the patient reaction at Triathlon right now, and frankly the numeric reaction.

Great. I guess related to that. It sounds like you also think that X3 is basically going to go to about 100% penetration in the next few years. Maybe I am overstepping what you said. But where is it now, and curious as to how much of a differential in price there is between X3 and just regular [prothnic] poly?

Sure. I think you know, it might get to a 100 within the next few years. We'll see. We are over 50% right now.

I think within the context you have to, we would still assume that there will be some ceramic there, too. Jason.

Sure. That's 50% in both hips and knees at this point or -- ?

No, no. That's just on the hip side.

Yes, that's the hip side. Knees are still just getting rolled out.

Yes, exactly.

I don't think we have the exact number on that right now.

Is it safe to assume that, I mean I think you've just, putting the pieces together from what you said earlier on the call that you had a strong hip, excuse me knee number in the U.S. and safe to assume a lot of that was volume, or was some of that X3, or a little more clarity on how we should be thinking about that number?

A good chunk of that was volume, certainly some mix. But it was virtually all volume and mix, with no real price in that one.

Fair enough. Great. Thank you very much.

Great. Thanks, Jason.

Thank you. Our next question comes from the line of Joanne Wuensch with BMO Capital. Please proceed.

Hi. I will try and keep this short. If memory serves, you had a hip resurfacing product you're developing internally, as well as the one you are developing with Corin. When do you expect the internal product to be into the market?

Sure. The internal product we should clarify is for non-U.S. markets. And that is actually launching as we speak. You know, we began customer preference trials actually really late third quarter, early fourth quarter last year, and we're going to be rolling that out internationally really at the start of this year. So I think that's part of what we hope will start to turn around our international business. But in the U.S. we are banking on the Corin product.

And if I had to put a quarter, are we thinking Corin in the fourth quarter of this year?

You know, given the way approvals have been going at FDA, I just don't like diving into specific dates. You know, the last I knew there was going to be another hip resurfacing product approved about two years ago, and we are probably not comfortable trying to guess which quarter at this point, Joanne. Sorry to be evasive but I am just not sure. Just trying to be honest.

That's fine. And as we are taking a look towards the upcoming medical meetings, can you give us a sneak preview of what else you will be looking at at AAOS?

You know, I will show you some of the stuff we're just rolling out right now. I think.

It's not that far away, Joanne.

That's right.

Closer than it was last year, so --

That's true. It's only a few weeks away. We'll see you there.

Okay. Thank you very much.

Great. Thanks, Joanne. Any last questions?

Yes. We do have a follow-up question with Ben Andrew with William Blair. Please proceed.

That was a follow-up, and I will be very brief. If you look at the '07 sales performance here, projecting 11 to 13. Is there any reason to think we'll see a significant change from the '06 growth rates for Orthopaedic Implants and MedSurg?

Overall, you know, probably just modestly. I think we will see the Orthopedic Implant business in general probably ticking up a little bit. I think we certainly would hope to see our hip business ticking up. Knees were very strong, and I think frankly if we sustain that growth rate, if we sustain our you know, Trauma and Spine rates, you know, those are probably going to be very good performances again.

And I think in MedSurg, you will probably see Medical a little slower for the full year than what they were this year, as they come back to earth and, but still solid. You know, Instruments will probably be the same to maybe modestly better. And Endo will probably be equal to modestly better. I think Dean would you --

I think that's fair. Maybe Instruments they finished this year at 12%, we probably expect them to be a little bit stronger than that. Endo, you know, 19% for the year is very, very good, and then Medical will probably be a little bit slower. So you think if you add that all , you know, their total was up 16% reported this year for MedSurg. They would probably be off a little bit, and we might get a little bit of that back at Orthopaedic Implants.

Great. Thank you.

Thanks, Ben. All right. Amy, was that it for questions?

We do have one last question from Steven Lichtman, Banc of America Securities. Please proceed.

Made it. Thanks guys. Real quickly. Steve can you talk to us about where we are in the rollout of the new product lines in Instruments and Endoscopy. Is it still early? Can you maybe characterize how the rollouts typically work here? Is it 12 months timeframe to get fully rolled, or is it 24 months? Could you characterize that for us?

Sure. It's a great question Steve, because clearly the Endo rollout is going a little faster than we expected. You know, but I think we're still, we should still be in for, you know, hopefully three or four good additional quarters here for Endo. You know, not all of them at 26%, I think. But still very consistent with their long-term growth rates, which we frankly feel are in the high teens.

And Instruments I think we feel even better that that is going to be a more consistent rollout with not quite the firm uptick and therefore, frankly, for all four quarters this year, I think ought to work pretty well. There were some people that just came into the System 5 system, call it this time last year, they're not going to be quite ready to upgrade to a System 6. So a lot of it is, you know, kind of on the cycle of when they might evolve, just because we're bringing a great product doesn't mean that the customer base is automatically going to jump over to it. If they're only, you know, six months into owning a previous system. So you know, oftentimes we do think about it as a two-yearish cycle. But you know, Endo probably certainly a little more accelerated.

Okay. Thanks, Steve. And then a couple of quick follow-ups for Dean. You guys talked about the first quarter being perhaps a point or two slower on the top line due to Japan and the one less selling day, was that on a constant currency basis, and then depending what the dollar does, some ethics, maybe a little stronger in 1Q that balances out a little bit?

Yes. That's a fair way to look at it, Steve.

Okay. Great. And then just lastly on the tax rate if you are able to get it down to that up to 50 basis points. Should we think about that occurring during the year, perhaps not in the first quarter but, you know, maybe second, third, or fourth quarter later in the year?

Probably fair. As you know, we evaluate the tax rate for the whole year. You know, that's certainly our plan right now. And we will look at it as we normally would at the end of the first quarter, and forecast what it is for the year. That's what we report. So you know, hard for me to say.

This year I think we started the year at 28.5%, and then we did drop the rate in the second quarter, you know, as we went through it. But, you know, certainly our plan is to get it, hopefully get it down up to 50 basis points by the time we get down to the end of the year.

Okay. Fair enough. Thanks for taking the questions, guys.

Thank you, Steve. Appreciate it. All right. Well, with that we will just make a couple of very quick comments. Again, we felt pretty good about the year, and we feel very good about where we are headed in '07. And we have been putting a lot in place I think over the last couple of years to hopefully continue our great trajectory here into '07, '08 and beyond. You know, we will certainly have a few hiccups along the way probably, but continue to feel good about other positive surprises, that will keep hitting us certainly like a couple of our fourth quarter performances here.

We will host our Annual Analyst meeting at the American Academy of Orthopedics Meeting in San Diego California at 8 a.m. Pacific time on Thursday, February 15th. So that's next month. We look forward to seeing you if you can attend. If not, the meeting will be accessible by phone, or via Stryker's website.

And one final note. The conference call for our first quarter 2007 operating results will be held on April 18th, 2007. So thank you everybody for your time. We appreciate it. Take care.

Ladies and gentlemen. That does conclude your conference call for today. We do thank you for your participation, and ask that you please disconnect your lines. Have a great day, everyone!

Thank you, Amy.