史賽克 (SYK) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2009 Stryker earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). Certain statements made in today's conference 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. For information concerning these risks and uncertainties please see the Company's filings with the United States Securities and Exchange Commission, including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q. The Company does not undertake any obligation to update or revise any of its forward-looking statements.

Today's conference call will include a discussion of constant current rates, performance and adjusted diluted net earnings per share for the fourth-quarter years ended December 31, 2009, and December 31, 2008. Further discussion of these non-GAAP financial measures, including GAAP reconciliations, appears in the Company's Form 8-K filed today with the SEC. The Company's SEC filings may be accessed from the "For Investors" page on the Company's website at www.stryker.com.

I would now like to turn the conference over to your host for today, Mr. Stephen MacMillan, Chairman, President and CEO. Please proceed.

Thank you, Regina, and good afternoon, everyone, and welcome to Stryker's fourth-quarter 2009 earnings report. With me today are Curt Hartman, our Vice President and Chief Financial Officer, and Katherine Owen, Vice President of strategy and investor relations. With 2009 results now complete and as we focus on our commitments for 2010, we thought it would be helpful to put some of the key events over the last 12 months into perspective. Clearly 2009 presented us with considerable challenges, ranging from the impact [tied] to the economic upheaval to concerns over US healthcare reform. And for us we also continued to invest in our quality and compliance initiative where we are now well into year two of our three-year initial program.

Against this complex backdrop, we were able to maintain our history of delivering year over year sales growth, albeit well below historic levels. Amidst the challenges, however, we were actually fairly pleased that four of our five in-plant franchises, including knees, trauma, spine and CMF, achieved double-digit growth in the important US market for the full year and hips continued their improvement with 6% full-year US growth. Although MedSurg 2009 sales were down 7% in the US, owing to the dropoff in hospital capital purchases, we benefited from our broad geographic footprint and continued focus on expanding these franchises outside the US, where sales achieved at 3% constant currency gain in 2009.

Our focus on strict cost controls and leveraging our infrastructure allowed to us achieve adjusted EPS growth of 4% in 2009 and 11% for the fourth quarter, consistent with the commitments we made back in April, and we were also able to successfully deploy a portion of our sizable cash balance in a series of acquisitions, most notably the late 2009 purchase of Ascent Healthcare, which we view as an important strategic move to help us better partner with hospitals to help them achieve their cost savings and sustainability goals.

So in a year where we had to play some needed defense we were also laying the foundation for reaccelerating growth in the quarters ahead. Also as part of our capital allocation strategy, we put in place a $750 million share buyback program in late 2009. Although M&A remains our preferred use of cash, the share buyback gives us additional flexibility. As we sit here today, we believe we've emerged from what has undoubtedly been one of the most challenging years in our Company's history. Although many of the headwinds that were presented to us in 2009 will linger a bit in 2010, we do expect to show improving momentum, as evidenced by a return to more reasonable top and bottom-line growth. To put it another way, our 2010 guidance does not yet reflect what we believe will be our longer-term sustainable sales and earnings growth rates, but we are clearly entering this year with improving momentum.

With that I will now turn the call over to Katherine.

Thanks, Steve. As we've done on prior calls, I would like to provide an update and some additional perspective on several key topics, including hospital capital budgets, pricing and OP-1.

With respect to hospital capital budgets, the environment remains challenging; however, we continue to believe that we are in a period of greater stability based on feedback from our hospital customers. Although we don't expect 2010 to go back to business as usual regarding new hospital capital projects or capital spending in general, we believe the environment will show signs of incremental improvement. Recall that close to 60% of our MedSurg sales are tied to capital purchases and we would expect that business to show continued stability with some incremental improvement in 2010. And note that with roughly 40% of MedSurg sales coming from disposables there is an offset to the hospital capital pressures, which we will -- which will help the total franchise in 2010. Curt will go into more detail regarding some of the key assumptions that will help with your modeling.

Turning to pricing, we continue to experience low single-digit price declines in our domestic hip and knee business, which was not significantly different from prior quarters. Our other implant businesses had varying pricing trends, with trauma and CMS continuing to realize price gains while our spinal implants experienced ongoing pricing pressure. On a geographic basis pricing was flat outside the US given price declines in Japan, which was offset by more favorable pricing dynamics in other regions. All told our global total Company price was down close to 1% in the fourth quarter.

Finally I'll make some comments regarding the status of OP-1. As many of you are aware we have been evaluating various strategic options following the disappointing FDA panel review in late March of 2009. This process has taken longer than we initially anticipated given the myriad considerations, including our existing customer base in the US and Europe, our manufacturing facility in New Hampshire and the early clinical data we have accumulated, which demonstrates potential promising efficacy of OP-1 in the sizable soft tissue market. All of these factors and others are being actively reviewed and analyzed in order to make the appropriate next step. Our ultimate goal is to ensure we are maximizing the potential for future applications of OP-1 while balancing that against the need to ensure acceptable returns on our investments in biotech.

With that I will now turn the call over to Curt.

Thanks, Katherine. I'll open by saying we're generally pleased with our fourth-quarter results. They were in line with our expectations and coupled with our third quarter have us leaving 2009 in far better shape than it began. Overall we feel the operating businesses are on solid footing and importantly, we took some key steps to strengthen the business. To that end in the quarter we were pleased to close on a couple strategic acquisitions with the most notable being the Ascent Healthcare business. Finally, the quarter was very busy in terms of completing a number of changes in our capital structure to include the previously-announced dividend policy change, approval of the $750 million share repurchase authorization and the election to repatriate from foreign earnings $787 million in cash. We view these actions as providing us with enhanced financial flexibility to pursue our strategic objectives.

Moving to a more in-depth look at our business results I'll begin with the review of the impact that foreign currency had on our sales. In the fourth quarter currency contributed to an increase in top-line sales by approximately $73 million and improved the Company's overall sales growth by 4.3%. This was just over the top end of our expected range of 3.2% to 4.2% in the quarter. Overall in 2009 currency variations cut sales by $110 million, which reduced reported growth by 1.6%. Looking to the first quarter of 2010, currency should remain a positive and if rates hold near current levels, we would expect first-quarter sales to be favorably impacted by approximately 4% to 5% when compared to 2009. Using current rates the full-year currency impact on top-line sales would be an increase in a range of 1.5% to 2.5% when compared to 2009.

Next I'll spend a moment on the impact of price and volume mix on the top line. In the quarter companywide selling prices declined just shy of 1% on a worldwide basis. International pricing was flat while domestic pricing declined by 1%. Domestically hip and knee pricing was once again down in the low single digits while spine experienced another quarter of increased pricing pressure similar to the levels in Q3. Consistent with previous quarters, trauma and CMF implants had favorable pricing that largely offset this pressure. For the year pricing was fictively flat, with marginal gains in international pricing offset by a less than 1% decline in domestic pricing. For the quarter and year volume and mix was generally as expected for our orthopedic implant products while volumes were off across the MedSurg categories. In the quarter there was one extra selling day in most markets compared with the prior year.

Moving to the franchise segments I'll start with orthopedic implants, which represented 61% of our sales in the quarter. Orthopedic implants reported a 10% increase on a reported basis, which translated to a 5% gain in constant currency. Our hip franchise was up 10% as reported in dollars and increased 4% in constant currency in the quarter on a worldwide basis. Consistent with previous quarters Accolade, X3 and Trident products paced our growth. In US hip sales were up 7%, continuing the favorable trends from the second and third quarters. We continue to feel that our momentum in this market is improving; Trident, Accolade and X3 all delivered solid gains. Internationally hip sales were flat on a constant currency basis in the quarter. Positive gains in the Pacific region and Japan were offset by declines in other international markets. Europe was essentially flat in the quarter and top brands again included Trident and X3. Our global knee franchise recorded 11% sales growth in dollars and a 7% increase on a constant currency basis during the quarter.

The US knee business had another solid quarter, reporting growth of 10% against the stiff prior year gain of 16%. Growth was driven by the continued strength of the Triathlon line with strong primary growth being supported by continued acceptance of the Revision line. Internationally knees were down 1% on a constant currency basis. Gains in our Japan and Canadian business were offset by declines in our international markets. Europe knee results were stable and consistent with the third quarter. The Triathlon system continues to gain broad acceptance in the international markets.

Overall the reconstructive implant market in Europe remains challenging, which we believe is principally a macro trend, given the economic pressures that are likely dampening procedure volume in countries with nationalized healthcare. The trend is not new and is likely cyclical, as the inevitable backlog of patients requiring hip or knee surgery will need to be addressed, although the exact timing is difficult to predict and will likely vary by geography.

The global trauma business recorded a 13% increase in dollars and a 6% increase in constant currency in the quarter. Our US trauma franchise recorded 11% growth against an 18% prior-year gain and essentially finished the year at growth rates consistent with the first half. Sales of the foot and ankle, hip fracture and lower extremity products paced our trauma growth. International trauma sales were up 3% on a constant currency basis in the quarter, with sizable gains recorded in the Pacific region offset by softer performance in other international markets. On a product-line basis international trauma sales were paced by growth in hip fracture and extremity products. Our global spine business delivered 9% growth in dollars and a 6% increase on a constant currency basis.

US spine sales slowed to 4% growth in the quarter, which is clearly below our historical average in this market. An increasingly price sensitive market some internal product introduction delays and some Gaps in our offering have us forecasting slower performance over the next couple of quarters for our US spine business. We are clearly uncomfortable with this pace and we note that our team continues to work diligently to address our current shortcomings and we would expect this to translate into stronger top-line results as we move toward the second half of 2010. Our spine results were buoyed, however, by strong international spine sales that delivered operational growth of 14%, representing our third consecutive quarter of double-digit international spinal market growth. Inner body and thoracolumbar devices again paced our gains.

Next I'll turn to the MedSurg group, which represented 39% of our sales in the quarter. As a reminder, MedSurg is comprised of three segments that historically generate approximately 60% of sales from capital equipment. In the fourth quarter, consistent with previous quarters this year, slower capital equipment sales impacted the MedSurg business results. In total MedSurg sales increased 2% as reported and were off just under 1% on a constant currency basis, representing an improvement from the 7% constant currency decline in Q3. Sales for the global instruments business, which historically generates 40% of sales from capital equipment, grew 4% in the quarter and 1% in constant currency. In the US market the instrument segment took a small step backwards from a growth standpoint reporting a decline of 1% against the prior-year comparable of 18%. Sales of single-use consumables, as well as increased sales in the products to serve markets outside of orthopedics, helped to offset lower capital equipment shipments. Internationally instrument sales again posted positive gains, recording an increase of 6% in constant currency with nice gains in the European and Pacific markets.

Our endoscopy segment delivered a nice finish to a challenging year. Fourth-quarter reported sales increase 7% and advanced 3% on a constant currency basis, and we would note that Q4 represented the fourth quarter in a row of a sequential increase in dollar sales. As a reminder, approximately 60% of sales are from capital equipment in this business. Our US endoscopy sales moved into positive territory in the quarter by posting 2% growth. The consumable portion of our main line endoscopy business again delivered solid growth and was supported by a modest uptick in the video segment in the quarter. Internationally endoscopy sales remained positive, recording a 6% constant currency gain with growth spread across all international markets.

Finally our medical products, which generate approximately 90% of sales from capital equipment, saw global sales decline 8% in the quarter as reported and 10% in constant currency. On an absolute dollar basis medical has now posted three quarters of sequential increases in quarterly sales. US medical sales delivered sequentially better results in dollars but still declined 11% versus last year, while our international market sales were down 6% in constant currency.

That wraps up the business segment so I'll now turn to the remainder of the income statement beginning with our gross margin performance. Fourth-quarter gross margin increased ten-basis points compared to 2008 and increased 30-basis points sequentially from the third quarter. Margins in the quarter continue to be impacted by a favorable mix of product sales and pressured by continued investments in our compliance initiatives. For the year we lost 80 basis points of the gross margin line versus prior year as a favorable mix of product sales was more than offset by a continued quality investment in higher inventory charges. Research and development spending represented 4.9% of sales in the quarter. While this represented the lowest percentage of sales for the year, it did represent the highest absolute dollar investment in R&D in 2009 and for the year R&D represented 5% of sales.

Turning to our selling, general and administrative costs fourth quarter spending increased 7% but was flat as a percentage of sales compared with prior-year levels. This excludes the impact of the patent litigation settlement, which was recorded in G&A. For the year SG&A declined by 90-basis points as a percentage of sales versus 2008 levels. I would reiterate that we remain comfortable with fluctuations in these categories for selective investments. Once again excluding the impact of the patent litigation favorability and the 2008 restructuring charges, our fourth-quarter adjusted operating income increased 11% and the operating margin increased 100-basis points versus prior year to 24.6%. For the year on an adjusted basis our operating margin improved 70-basis points to 23.8%. Other income of $9 million in the quarter was made up of $15 million of investment income offset by interest expense of $6 million and the Company's effective income tax rate, excluding the impact of the repatriation and the patent litigation, was 28.3% of the fourth quarter of 2009. Our full-year 2009 tax rate, excluding repatriation and restructuring charges, was 27.5%, roughly flat with 2008 levels.

In terms of the balance sheet we ended the fourth quarter and the year with $2.95 billion of cash and marketable securities, up $750 million from the $2.2 billion at year-end 2008. Further in the quarter we took several actions to enhance our capital structure to include the repatriation, dividend policy change and share repurchase authorization. In a challenging year I'm particularly proud of our asset management performance as delivered by our divisional business leaders and the divisional CFOs. Our year-end and full-year performance demonstrates sound stewardship here as evidenced by our final metrics in AR and DII.

On that note AR days ended the year at 56, which represents a decrease of three days compared to the prior year. For the quarter AR days averaged 58. Clearly our focus here remains an imperative and it's nice to see the effort paying off. Days in inventory finished the quarter at 145, which was down 19 days sequentially and ten days against the prior year. Although we realized solid improvement our inventory levels and overall inventory management remain a continued area of opportunity.

Finally, I'll provide some quick commentary on cash flow. We continued to perform well, with full-year cash flow from operations of 24% to $1.46 billion and free cash flow up 29% to $1.33 billion. In summary, 2009 finished better than it started. We had solid results from our implant franchises, but incurred a bigger-than-anticipated hit to our capital equipment sales. Our actions to stem the slide were quick, and while our results were not at historic levels, we do feel they represent an important step in returning to growth in 2010 and beyond.

Turning to our outlook, the financial forecast for 2010 includes a constant currency net sales increase of 5% to 8% as a result of growth in shipments of orthopedic implants and MedSurg equipment. This range is inclusive of the impact of the Ascent acquisition, which we anticipate will add approximately 2% to our top line. If foreign currency exchange rates hold near current levels we anticipate net sales would be favorably impacted by approximately 4 to 5% in the first quarter of 2010 and approximately 1.5% to 2.5% for the full year of 2010.

Supporting this outlook I'd like to offer some comments regarding our underlying assumptions for certain key markets. With respect to reconstructive joint replacement, we assume that we will see stability in the domestic markets, which translates into mid single-digit growth plus or minus a point or two. As mentioned earlier, the international reconstructive markets experienced some level of procedure delay and that trend is expected to continue during 2010. Against that backdrop global market growth rates could average low to mid single digits on a constant currency basis in 2010. Globally pricing is expected to remain under pressure, similar to what we have discussed in our 2009 results, but we are not forecasting a further degradation at this time.

Our trauma and CFM -- CMF franchises should continue to perform in markets that appear to be moving in high single-digit ranges. Certainly any meaningful economic recovery could add to growth rates, as procedures here are closely tied to large construction and driven miles. Finally in spine we see high single-digit procedure volumes with forecast increased pricing intensity. We will continue to focus on expanding our product offering in spine and leveraging our sales footprint, with plans to return to our long-term track record of gaining market share.

Turning to our MedSurg franchises, we assume modest growth in capital spending defined as a low to mid single-digit increase. We would underscore that there will likely continue to be quarterly variability as it relates to the growth rates for all three of our MedSurg businesses, given the timing of product launches and the swings in year-over-year comparables. Put another way, we would not model the recovery of our MedSurg franchise as strictly a function of the percentage of sales that are tied to hospital capital budgets. Although that's clearly a factor, it's but one of many that dictates the quarter-to-quarter performance for these businesses. In summary, our guidance assumes 2010 global MedSurg sales growth in the mid single digits on a constant currency basis.

Turning to the P&L, we expect marginal improvement at the gross margin line offset by continued investments in our compliance initiative. R&D spending is planned to increase in 2010, both as a percentage of sales and in absolute dollars, as we move closer to the midpoint of our desired 5% to 6% range. We see continued opportunities for leverage in SG&A as a percentage of sales, as we look to remain disciplined about respect to discretionary spending while making the necessary investments in our salesforce. We expect tax rates will remain substantially in line with 2009 levels, not withstanding the increasing complexities for all in the global tax environment.

Finally we expect diluted net earnings per share for 2010 will be in the range of $3.20 to $3.30, an increase of 8% to 12% over adjusted diluted net earnings per share of $2.95 in 2009. This range includes the interest expense associated with our recently-completed public debt offering. On our current open repurchase authorization I would note at this time that we have not been in an open window to make any repurchases. Further, you should assume that the goal of the authorization is to prevent dilution, as well as position the Company to opportunistically acquire shares if the market opportunity presents itself.

With that I'll turn the call back over to Steve.

Thanks, Curt. Before we open up the call to Q&A I'd like to offer some closing comments. We're clearly excited about our future, particularly as we emerge from the difficulties presented in 2009, which limited our ability to maximize our sales potential. With that said, we remain cognizant that there will likely be ongoing uncertainty and new challenges presented to us in 2010. We believe our 2010 targets strike the appropriate balance between returning to our objective of delivering superior sales and earnings growth while recognizing that we are not yet back to what we believe will be our long-term normalized growth levels. Our ongoing investments in compliance will strengthen our infrastructure, but will also serve to be an important competitive advantage longer term and allow us to operate more efficiently. In closing, we are committed to not only delivering on our financial targets for 2010, but also reestablishing Stryker as a company that achieves consistent and superior results for all of our customers, physicians, patients and investors.

With that, we'll now open it up for Q&A.

(Operator Instructions). Your first question comes from the line of Derrick Sung with Sanford Bernstein and your line is open, sir.

Hi, thanks for taking my questions.

Sure, Derrick.

Let me start with spine. You saw a pretty substantial slowdown there on a sequential basis, especially in the US. How much of that is Company specific and how much of that is market specific, and if you could just go into a little bit more detail there?

We'd bet it's mostly Company specific.

And could you provide any further color on how that might be?

Yes, it relates to profit flow at this point. I think we were a little bit lower in terms of new product launches in the second half of last year, so for us we view it as a temporary short-term transitional period, but that business will be coming back.

Okay. And do you see any impact of the economy on the spine market as a whole? It seems that spine's been pretty resilient to the economy up to this point, but with unemployment continuing to stay at the current levels do you foresee any lagging effect of economic impact on the spine market?

We still don't see much of a slowdown there. There might be a little bit of market slowdown in our numbers but we always assume that it's us if we have a little bit of a slowdown, and I think a lot of spine surgery, some people call it elective, you have to remember you've got a lot of people that are working age that want to get back to work or want to get back to action and we think it's going to keep that market still relatively healthy. We'll be a little bit slower than it's ever been the last year, potentially, but probably on the margin.

Your next question comes from the line of David Lewis with Morgan Stanley.

Good afternoon.

Hi, David.

Curt, maybe just one question. Following up on the third quarter, maybe you can give us an update of the impact of OP-1 are delayed, but I'm assuming that spending levels are coming down for 2010, so could you provide any outlook or quantification on the relative savings for OP-1 in 2010 versus 2009? You also talked about restructuring in the third quarter and maybe suggest you provide us an update about what the restructuring could mean in 2010 as relates to the savings?

David, just a couple questions embedded in that. I think the third quarter restructurings that we talked through really involved both segments of our business, MedSurg, and the implant category where we had some product obsolescence. We did have some limited restructuring that did touch our biotech division, but really those things were more cleaning up around the edges, I would call them, versus anything material that's going to show up in 2010. I don't think we've gotten into breaking out any of the details on year-over-year savings that we might be anticipating for biotech and I think, as Katherine tried to allude to, we're still sorting through the host of options that are presented with our biotech business at this point in time. So probably not going to get into any breakout here on potential financial gains associated with any changes in the way we're running biotech right now because that decision has fundamentally not been made.

Okay. And then, Steve, you talked a lot about how mix makes you comfortable you can maybe offset some of these pricing pressures. As we look at your 510-Ks approvals track record the last six years 2009 was sort of a trough year for Stryker since, I think, 2003. Do you think 2010 or is it 2011 where we start to see that relative level of 510-Ks begin to turn around and go in the right direction?

Dave, it's probably a little closer to 2011. I think we'll have some good things coming through in 2010. I think part of what I would point to is things like the magnitude of some of the approvals we will have just gotten, for example, the Rejuvenate Hip, that you really should revitalize one of our largest product lines. So it's not just absolute number that will be the magnitude of them. So I think we feel truthfully solid about our flow but not doing back flips thinking we've got it quite as good as we'd like it to be and we'll probably be accelerating through the year.

Okay. Just one last quick question follow up, Curt, on spine. In terms of the sequential change can you share with us how pricing changed sequentially from third or fourth quarter?

Pricing third quarter versus fourth quarter was substantially in line. My comments relative to increased pricing pressure in spine were really second half was more dramatic than first half. It was moving down that low single-digit range that we talked about, really, I think back in the first quarter call. So third and fourth quarter were substantially in line, a little bit worse than what we saw in the first half of the year.

Your next question comes from the line of Rick Wise with Leerink Swann.

Good afternoon, everybody.

Hi, Rick.

MedSurg, maybe we can expand a little bit on the 2010 outlook. First I wanted to make sure I understood your comments. I think you were saying low to mid single-digit growth, if I heard you correctly, does that include Ascent and is that where we're going to see it, or do we layer Ascent on top of that?

Rick, the comment on MedSurg was directly targeted at the traditional MedSurg, which would be the medical instruments and endoscopy franchises. From a public reporting standpoint, the Ascent business will roll up underneath MedSurg in our first quarter results.

Okay. So is it reasonable to think that with the let's call it core MedSurg and together with Ascent we're going to see, as we saw throughout 2010, sequential dollar increases in MedSurg as we go through the year? Does that sound like a plausible scenario?

I think our last two to three quarters would suggest that the trends in sequential dollars are moving in the right direction. I think on the outlook commentary what we were trying to imply here is that we, right now given the variations in new product launches in these businesses, given the certainly depressed comparables that we're now starting to sunset over, you're going to see varying growth rates by the franchises given their mix of capital versus consumables. But all-in we see this mid single-digit level of growth when you put all those factors on the table.

(Operator Instructions). Your next question comes from the line of Tao Levy with Deutsche Bank.

Good afternoon. Steve, a quick question for you on the 2000 -- in your comments that you said, 2010 your outlook doesn't really reflect what you feel is a sustainable long-term revenue in EPS growth. What do you think Stryker's sustainable growth rates are down the road?

Tao, I think we just want to avoid that until the economy -- until we've got a much better handle on where the global economy is. We don't want to get in a position of putting something out there and then backing off it and I think having just come through the year we've come through, we want to get our footing back and we feel really good about getting our footing back but want to be careful in terms of articulating the longer-term goals at this point. But I would say we think it'll be a little bit better than certainly the guidance that we put out there for this year.

Fair enough. And thanks, Curt, for providing the guidance on MedSurg. Can you just give me the currency compact or benefit that you expect for MedSurg specifically?

Tao, we've not historically broken that out. We just tend to talk about currency in the total Company perspective.

Your next question comes from the line of Matt Miksic with Piper Jaffray.

Hi, thanks for taking our questions. So I have one question here, I guess we've covered. I'm going to clarify your comment on MedSurg, Curt, just to make sure I understand this. Your mid single digit is excluding the impact of Ascent, is that correct?

That's correct.

Okay. So first question on trauma and then I have a follow up just on the regulatory environment. So trauma, we've seen some deceleration, slight sequentially but year over year it kind of came in. I'm wondering how much of that you see as being economy driven, how much is competitive and maybe what kinds of things do you see coming to turn that around?

I think a lot of it is economy. I think the biggest thing we learned, Matt, last year is that a fair chunk of our business goes to construction-related jobs. You hate to say this, both construction and driving and I don't think we had ever drilled it down into our business that much to realize how much that affected and the same in Europe. You saw countries like Spain where suddenly construction starts dropped dramatically and we saw similar dropoffs in our business. So we think that one will actually probably mirror the economic recovery a little bit more in terms of a global basis.

Okay. And then follow up on -- there was a question on 510Ks. I'm curious how you had looked at these potential changes coming to 510K to the 510K process. FDA is spinning up another meeting in the next several weeks. You have, I'm sure, a number of these things in the hopper. How do you think about the risk to your near-term approvals and maybe the impact to your business over the long term should they decide to make some more formal changes?

Probably like everybody else we're assuming that the requirements for some of the products will be a little more stringent. We're waiting to see where it plays out and trying to -- we're obviously putting our own preparations in place, but it's a little bit like healthcare reform. We spent a lot of time thinking about it all and until it's settled and established there's only so much we can comment on it.

Fair enough.

Great. Thanks, Matt.

Your next question comes from the line of Bruce Nudell with UBS.

Thank you. Steve, do you guys -- when you think of the worldwide major joint market now is mid single-digit units and flat ASPs net of price and mix about how you think of the steady state business?

I think that's about it. I think we would like to continue to think that innovation will command a bit of a premium and allow some of that ASP to still ramp up to offset -- or more than offset the pricing declines, the pricing pressures, and ultimately it's probably going to be a little bit more of a share gain than instead of just riding the market for us.

Okay. And then with regards to trauma, that market has historically been marked by relatively-low unit growth, or procedure growth, but very solid ASP inflation net of price and mix and is that likely to come -- that latter component of growth likely to come under pressure or how could you offset that? What's explaining the great ASP capability in the industry?

I think it will come under a little more pressure. I think probably the biggest driver of the ASP growth over the last five to six years if you think about it has been the growth in the lock plating segment that really brought much more premium pricing to that marketplace and premium priced solutions and I think that that growth is probably largely embedded in the base now and the additional growth in that area probably won't be as great going forward.

Thanks a lot.

Thanks, Bruce.

Your next question comes from the line of Mike Weinstein with JPMorgan.

Thanks. It's actually Taylor Harris here for Mike. On the o-US hips and knees, the recon business, can you guys talk about is it really just Europe where you're seeing the impact of delayed procedures? And is there any evidence here at the beginning of the year that budgets are loosening up or not?

It felt primarily for us to be Europe and we don't really -- nothing significant in the start of the year nor do really we want to typically comment within the quarter.

Okay. And then switching to MedSurg, would you guys be willing to give us a general sense of, in 2009, how the business grew segmented between the capital portion and the disposables portion?

Taylor, if I'm understanding your question correctly and I'm not trying to be short here, but I think if you go business by business and go to the earlier comments, if instruments franchise has capital making up 40% of that business you should assume negative growth in the capital segments of those businesses. And on the flip side, the consumables, which are tied more closely to first hip and knee procedures but on a broader basis perhaps other surgical specialties like neurospine, ENT and some other less-invasive procedures, those are going to ride the trend and perhaps be slightly above procedure volume rates. And I think the same methodology would apply to our endoscopy business, where the capital segments, the video cameras, the endoscopy suites that are installed and renovation and hospital construction projects, that capital component is certainly going to be under pressure given all the events of 2009.

On the other hand, the consumable portion, which we tried to comment on here in the last couple quarters, experienced nice single-digit growth, probably in line or slightly above procedure volumes. And then last, but certainly not least, would be medical, which is 90+% capital really tied and focused heavily in the renovation, new construction market, as well as replacement market, and that experienced the greatest pressure and I think that was probably the clearest read-through in terms of absolute reported results versus capital sales.

Your next question comes from the line of David Roman with Goldman Sachs.

Good evening, everybody, just quickly maybe on R&D. How much of a year-over-year decline in 2009 was due to biotech versus just rationalizing spending priorities?

I don't think we've broken that out historically, David. I would point to a couple things, however, that part of the year-over-year decline can be attributed to that we have publicly discussed, which was a year ago we shut down our investment in Sightline, which you should assume was principally all R&D work. And then certainly there is some currency variation in the R&D year over year, but I wouldn't call that the material component of an absolute dollar drop. It's -- the Sightline investment was principally R&D and that certainly came out of the base in 2009.

All right.

Actually very little -- very little change.

I'm sorry? You said biotech was very little?

Very little change.

So if I look at the R&D numbers this year being down 9% for the full year and CapEx being down 10%, can you just help us with how that squares with your comments about investing for the long term and what type of spending levels we're going to see in 2010?

I think I tried to talk about the R&D, that you should expect that number to be more at the midpoint of our historical range at 5% to 6%, so you can probably back into that math. And on the comments relative to investing for the long term, I don't think you necessarily can correlate CapEx investments to the long-term investments that we've tried to make, which have been really over the last 18 to 24 months quality initiative driven and those are major investments for the long term. They don't necessarily require large CapEx investments. In many cases it's process simplification, process standardization. Yes, there's some CapEx investments that are associated with that, but they're not game-changing CapEx investments, they're more focused on process and continuity of process. So I think we've made the right investments and I think that CapEx investments are really driven from the ground up by our businesses as they look at machine and equipment and larger future R&D projects that may have a component of CapEx associated with them.

Just one additional comment on that. If you do look at our R&D, although below normal levels of recent years, in 2009 we're still well within that accepted 4% to 6% targeted range and we would expect it to move up this year. So I think part of the investing for longer term conviction comes from fact we're not in some multi-year period where R&D is running at extraordinarily low rates.

Your next question comes from the line of Doug Schenkel with Cohen & Company.

Hi, good afternoon. In a difficult environment we've heard that a lot of community hospitals are trying to reduce their mix of revision work because of the less attractive economics associated with revisions. Have you seen any increase in concentration of the revision business at larger, maybe academic centers relative to what you've seen in the past few years and, if so, is that having a more meaningful negative impact on price in recent quarters?

Doug, we're all kind of shaking our heads here. We just -- if that's a trend, it just hasn't hit our radar screens, just haven't seen that dynamic playing out.

Okay.

But you can bet we'll go ask now.

Okay. And then maybe just jump in over to another pricing question. Have you heard any new details on the magnitude of Japan and Australia price cuts and what o-US price cuts in those geographies are factors into your guidance?

I don't think we've heard the final out of Japan, but we as a Company are assuming it will be less bad than it was last time. If you recall, we got really whacked in our trauma business, which was a big chunk of our Japanese business so we're assuming marginally -- still declines but marginally better than last round.

Your next question comes from the line of Bob Hopkins with Banc of America.

Thanks, good afternoon. Can you hear me okay?

Yes, Bob.

All right, Great. Just wanted to follow up on spine and make sure I heard you correctly. You were nice to give your assumptions about market rates of growth for various markets and I think for spine I heard you say high single-digit units and then some increasing price pressure. Did I hear you correctly? So you're forecasting maybe a market rate of growth of, I don't know, 5% to 7%, not to put words in your mouth?

I think probably -- number one, you did hear us right, but I think the market growth rate procedure volume number that we would be working off of might be a little higher range than 5% to 7%. I think it's higher than that, I think your low end is a little too low.

No, I meant for total -- so it's for total market growth what you were assuming?

Yes, it's still probably a little bit higher, Bob.

Okay.

Probably total market growth I think we're thinking in the high singles.

Your next question comes from the line of Ben Andrew with William Blair.

Hi, thanks for taking the question. Maybe following in on Bob's logic. So if you think market growth for spine is high single does that suggest that the pricing dynamic you saw in the second half and what you anticipate for 2010 is more a Stryker issue and what products within your portfolio are you missing here that you think are hurting you so much?

There's probably a little bit of pressure our way. Probably the biggest thing we're missing is a cervical plate -- a great cervical plate offering.

Okay. And so just to follow up, again, the pricing in the second half and next year, are you expecting market price to be down?

Yes, that's primarily a -- we wouldn't view pricing pressure as strictly affecting Stryker overall, it's the overall spine market has seen increasing pricing pressure. All in, though, when you put all the factors we're assuming some type of, call it upper single-digit growth plus or minus a few points.

Okay, so the mix dynamic spine remains steady?

We still think the spine market's going to be a very good market to be in.

Okay, thanks.

Thanks, Ben.

Your next question comes from the line of Raj Denhoy with Jefferies Company.

Hi, good afternoon. Wonder if I could just ask a little bit about the pricing environment overall. In terms of your expectations about pricing and I guess I'm just broadly wondering what gives you confidence that given all the macro factors out there influencing hospitals and the like that the pricing environment isn't going to go appreciably worse over the next couple of years?

Really because a lot of those macro factors have been issues that we've been seeing in one form or another year in and year out. I think could some dramatic change in healthcare reform change that dynamic? It's possible, but I think, especially with some of the recent events, that backdrop's more clouded, then you layer into that our geographic footprint and then the mix of our businesses. We've seen pretty consistent relatively flattish, plus or minus a point or so, impact from price overall. So it's going to take a pretty sizable change in a number of businesses to dramatically change that pricing dynamic is how we look at it.

Okay. So long term we should really think about -- your outlook should be maybe 1% pricing overall as a way to think about the long-term trends?

We kind of look at it flattish and put a plus or minus one or two-point parameter around that because we just don't have that level of granularity to give you such a precise target, but something flattish.

Okay, fair enough. Thank you.

Great. Thanks, Raj.

Your next question comes from the line of Glenn Navarro with RBC Capital.

Hi. Just a question on the FDA warning letters. Would you say no news is good news at this point? Any update on the timing of a resolution to any of the outstanding warning letters? And just as a follow up, can you quantify how much you're going to be spending in 2010 on the quality initiatives relative to 2009? Thanks.

I'll take the first part and then Curt will follow up on your second question. I think the way you should look at it is we're well into the second year of this three-year program that we've articulated, both to the listening audience, as well as the FDA, and we feel like we've made some very solid progress on some fronts, but we also have a lot more work to do and we're really going to look at it as when we've got something definitive we can report back to you, whether it's resolution of the biotech, as we've done previously, those are really going to be the data points you should look for. But we're still in the midst of implementing a very comprehensive program.

Glenn, on the investments I go back to the higher level comments. We originally announced this is a $200 million investment, anticipated that to be over about a three-year period. In looking through our plans that investment really started to accelerate in the third quarter of 2008. As we got into 2009 and plans further materialized across the manufacturing network, I think it was the second quarter or third quarter call that we said the anticipated 2009 range was in the midpoint of the $60 million to $90 million category. Certainly there are puts and takes on that number and I would tell you that in 2009 we're very comfortable with saying that it was right near the mid point of that number and as we head into 2010, we anticipate a similar level of spending.

All of that said, we're as good as our last inspection and something that goes wrong in any one of these sites that requires additional investment we're committed to making that. But right now the plans, as we've laid them out, remain with us consistent to the $200 million, remain consistent with a three-year plan and obviously it's not a perfect calendar plan. It's going to spill into 2011 giving that our spending really started here in the third quarter of 2008.

Okay, great. Thank you.

Great. Thanks, Glenn.

Your next question comes from the line of Adam Feinstein with Barclays Capital.

Okay, thank you, just a couple of questions here. First, maybe just if you think of the o-US markets within your ortho, recon business seeing the weakness there but within MedSurg you're actually seeing better growth there, so just curious to get your thoughts in terms of why you're seeing more equipment purchases outside of the US but the procedures aren't down? And then secondly, just wanted to get you to talk a little bit more about some of your recent deals. You guys have done some acquisitions recently, Ascent being the biggest, just curious if you can just give us some feedback about how you plan to integrate those businesses and some of the opportunities in 2010? Thank you.

Sure, Adam. On the MedSurg piece outside the US I think the better way to think about that is the strategic context that we articulated a few years ago that we were going to be ramping up our salesforces for MedSurg products outside the United States, so we're really coming from much more significantly-lower market shares there. So even if the markets slowed down, we were on the -- call it on the growth curve, as it were, more so outside the United States where our shares are very small. So that's probably the answer to that. On Ascent we really, really like this business. One of the first things we're going to do is try not to mess it up because it's been doing really well, so it's going to be pretty much run as a stand-alone business, consistent with our decentralized operating model but as part of the MedSurg team, and we'll connect the dots, obviously, where appropriate. But day in, day out going to stay very much on its own.

Okay, thank you.

Thanks, Adam.

Your next question comes from the line of Michael Matson with Wells Fargo Securities.

Hi. I was wondering if you could give us an update on the letter that you got from the IRS. I think you announced this probably in early 2009, if I remember correctly, just any implications for your tax rate? And then my second question would just be around your latest thoughts on metal-on-metal hips?

Sure, Mike, this is Curt, I'll cover the IRS letter. And what you're referring to there, just as a reminder for everyone, was an issue that we discussed in the first quarter call last year and it has to do with cost sharing arrangements and certain high-risk subsidies -- subsidiaries of Stryker. As we said at that time, it's an ongoing issue that we're dealing with the IRS on and we also anticipate that it would continue to take a long period of time to resolve these matters. We commented that if we had anything of substance to discuss we would do that and at this point in time we don't have anything to discuss. It has no impact currently on tax rates. Certainly there is always that risk that should this issue go the wrong way from our chair that tax rates could be impacted, but at this point in time that would be inappropriate to make that statement or to model that.

And then on the metal-go-metal, we continue to actively evaluate all the offerings on the hip market and clearly there's a benefit to having larger head sizes. Whether or not that's always going to be best addressed through strictly metal-on-metal or other materials I think is one of those areas of R&D that we'll continue to focus on. It does appear that the penetration rate for metal-on-metal, which has clearly been a challenge for our hip business since we're not in that piece has stabilized somewhere around a third of the market. So we'll continue to actively monitor it, not going to make any definitive statements whether or not we'll ever get in or not get into that, but do recognize the importance of being able to address that larger head segment.

Your next question comes from line of Steven Lichtman with JMP securities.

Thanks. Hi, guys, two questions, the one on -- one on MedSurg and one on instruments. Within -- and one on orthopedic implants. Within MedSurg the increase in 2010 versus the decline in 2009 in CapEx to what extent is that new customer orders and perhaps you benefiting from some new construction versus more of a replacement cycle kicking in? And then within US hips and knees, what is driving a positive mix for you guys right now, either products or product categories, and what gives you the confidence that you'll continue to be able to generate that, either through runway of your current products or through new products? Thanks.

I think the 2010 MedSurg capital numbers, should we see growth in those markets I think our first assumption is going to be that it's coming from product replacement cycles because the capital that our instruments and endoscopy divisions sell is central to the procedure actually happening. So in terms of keeping that hospital moving and operating, having replacement cycles executed in 2010 would be where we first and foremost would see that capital growth coming from and I think any return of new construction or renovation is probably more variable in nature.

And the mix?

On the mix if you play the recon piece, Steve, it's certainly within the knee franchise over the last year with the Triathlon partial knee replacement and also the Triathlon revision were probably the two big drivers on our knee business, which, as you guys all know, continues to truck along at ballpark 10% growth well into that franchise. And I think what we're really excited about this year will be a couple launches in the hip, particularly the Rejuvenate basically our first entry, really big entry into the United States market as it relates to a great modular offering.

Your next question comes from line of Kristen Stewart with Credit Suisse.

Hi, thanks for taking my question, just a bigger picture one. To the extent that you do see a greater recovery within orthopedics or MedSurg, would you be more inclined to maybe accelerate some of the investment spending in R&D or sales positions in SG&A,or would you basically be inclined to just let it flow through?

Kristen, we would probably look to some additional expansions. If you think about it and what we've said historically, in times of really strong growth we've often used that to more significantly accelerate hiring in both our salesforces and our R&D investments. In a year like last year candidly we pulled back. As we went into the year and realized the year was unfolding very differently than any of us were imagining and everything else, we got more restrictive, so I think we would -- there are probably some salesforces here and there we'd look to boost and maybe some other R&D projects. So we would have some flow through but probably not 100%.

And then just in terms of the gross margin I think when you gave guidance commentary I guess there was a phrase about some marginal improvement but offset by continued investments in compliance initiatives. Should we assume then that the gross margin is going to be more down relative to this phase and what sort of level -- I guess the other question would be affects impacting that, why wouldn't we expect to see that maybe positively?

Kristen, I think the comment on gross margin was to cover two things that probably get you to a sideways movement in gross margin. We do think there was some great actions taken this year by our various manufacturing entities and really excited by the appointment of Lonnie Carpenter to head of our global manufacturing and regulatory and quality affairs function because I think it's just bringing a lot of the opportunity together on the table and we think that will translate very well into the manufacturing network. Conversely, every dollar we find there, there's a potential offset in our quality for investments and compliance initiatives and we're not going back off of those under any circumstances. So I think we see the opportunity for improvement, but we're going to model it fairly conservatively given the work that we still have to do on this quality journey.

Your next question comes from the line of Joanne Wuensch with BMO Capital.

Thank you very much for taking the questions. What are you dialing in for the Ascent contribution in your guidance?

That's the 2% at the top line.

And what about at the bottom line?

We haven't broken that out beyond saying that we expected it to be neutral to earnings in 2010.

Okay. And then just as a quick follow up, which new products would you like us to be focusing on? I know that's funny to say quick follow up because there's a list but highlighted in at least hips and knees? Thank you.

Steve touched on the Rejuvenate on the hip side, which is clearly an important addition to that business. We're really going to beg off going into any more product highlights until the academy. That's typically where we walk through some of the newer product offerings followed by the May analyst meeting.

Thank you.

Thanks, JoAnne.

Your next question comes from the line of Jeff Johnson with Robert Baird.

Thank you, good evening, guys. Wonder if I could ask two questions here, one kind of intermediate in nature and, Steve, just your thoughts around MedSurg and orthopedic implants over the next one or two, three years. Which do you think has the greatest growth potential and how do you think about those in the next couple years? And then Katherine, I hear what you're saying about no new product discussions, just wondering, though, if you can touch on Restoration ADM. I know that's a product you guys have been thinking about launching here over the last year or so and I think it's moving into X3 in the next few months. Any thoughts on that product for 2010?

Why don't I take first one here, Jeff. I think as we look at all of our franchises over the next few years we think they're all going to be great growth franchises. Every one of the implant businesses we're in we still feel good about, every one of the MedSurg businesses that we're in we feel good about. The key question will be at what rate do the MedSurg ones rebound? But cautiously we feel like they'll be coming back and this year we've basically baked in similar growth rates on a macro basis for MedSurg and orthopedic implants. Would we be hopeful that maybe even MedSurg starts bouncing back a little bit better? Maybe. Again, from where we were last year just want to be very careful there, but we still feel great about every business we're in.

And I think on the new product side we're going to beg off of the product-specific question that you asked there, Jeff, and steer folks to try to attend the AOS and walk through the booth.

Your next question comes from the line of Bill Plovanic on the Canaccord Adams.

Great, thanks. My questions are, one, on Ascent business, is that going to be a separate line item on MedSurg. or are you burying it into one of the other businesses? And two, is Rejuvenate -- did that already get the 510K approval?

Yes, the Rejuvenate product is already out and it's not 100% fielded to our salesforce but we're beyond the 50% mark and your question on Ascent, that will not be a separate line item broken out.

Which division will you bury that into?

It will be under MedSurg.

Your next question comes from the line of Matt Miksic with Piper Jaffray.

Hi, thanks for the opportunity to follow up here. Just one -- two quick follow ups on a couple of questions other folks had asked. On that last question, just to be clear, Curt, so within MedSurg are you not being specific about where Ascent is going to if?

Ascent isn't being included in any of the three divisions of MedSurg. From a reporting standpoint we're going to report it as part of our total MedSurg results, but it's not getting lumped in with any of the other three.

Yes, we're not going to hide it.

So it'll be sort of like an other MedSurg -- implicit other MedSurg line or something?

The public reporting here will continue to look very similar to what you see today. However, growth of MedSurg will reflect the addition of the Ascent business.

Your next question comes from the line of Mike Weinstein with JPMorgan.

Thanks, it's Taylor again, thanks for the follow up. So, Curt, on the tax rate even excluding the repatriation it was a few points above what we were thinking for the quarter. Why was that and then what are you dialing in for 2010?

Start with the last one, Taylor. The 2010 rate I think I commented should be substantially in line with 2009 and the little-- I think it was -- probably if you do the backwards math a couple million dollars higher in overall tax when you back out those one-time items. And I think what I tried to imply in some of my other comments was the global tax environment is very dynamic right now and I think other companies have talked in their quarterly calls about some tax controversy that they've worked through that has put more variability in their quarter-over-quarter tax rates and I think that's just a reality of where the economy is and the activity levels that you're seeing from the various tax authorities and as you resolve or settle issues, you may see variability, both up and down, in tax rate on any quarter-over-quarter basis.

Okay. So just to make sure we have the right adjusted numbers, I have something like 28.4% for 2009, is that right, and about what you're expecting for 2010?

You said you had 28.4% for all of 2009?

That's right. I just want to make sure we calculated --

No, the 2009 number was 27.5%.

27.5%. Okay, thanks.

Your 28.3% was Q4.

This concludes our question-and-answer session of the call and I'd like to turn the call back over to Mr. MacMillan.

Okay, great. Actually, Regina, can we go to one more question or no? Might be too late. Looks like we're too late. Okay. Well, we will -- we certainly appreciate everybody's time today. Again we feel good about where we're headed. We came out of the year stronger than we entered it and as we come into the year we'll report on our first quarter, 2010 operating results on April 20th of this year. Thank you, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation and you may now disconnect. Thank you and have a great day.