史賽克 (SYK) 2013 Q3 法說會逐字稿

Hello and welcome to Stryker's third-quarter 2013 earnings conference call. My name is Miesha. I will be your operator for today's call. (Operator Instructions). This conference call is being recorded for replay purposes.

Before we begin, I would like to remind you that discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the Company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.

I will now turn the call over to Mr. Kevin Lobo, President and Chief Executive Officer. You may proceed, sir.

Good afternoon, everyone, and welcome to Stryker's third-quarter 2013 earnings call. Joining me today are Bill Jellison, our CFO, and Katherine Owen, Vice President of Strategy and Investor Relations.

In view of the recently-announced definitive agreement to acquire MAKO Surgical, we have also included David Floyd, Group President of Orthopaedics, and following my opening comments, David will provide some additional perspectives on this pending transaction. Bill will then offer details on our quarterly results, and we will wrap up with Q&A.

Turning to our Q3 results, sales, excluding currency and acquisitions, accelerated to 6.1% versus 2012. With the same number of selling days in the quarter, this represents strong organic sales growth with all three segments -- Reconstructive, MedSurg, and Neurotechnology and Spine -- contributing to the sales momentum. This growth was also balanced geographically with the US up 6.5% and international increasing 5.5%.

In the US, Reconstructive growth was powered by hip gains of 9.3% and trauma and extremities of 22.7%. Trauma and extremities continues to roll, having now recorded seven quarters in a row of double-digit growth, including a 39% increase in foot and ankle this quarter.

US MedSurg saw a pickup in endoscopy at 10.5% as all our integration sales improved but was offset by a decline in instruments due to the Neptune recall and challenging comps from System 7 sales in 2012.

We expect instruments to return to positive sales growth in the US in Q4.

US Neurotechnology and Spine was driven by 14% sales growth in neurotechnology as each of its businesses registered double-digit gains.

Shifting to our OUS sales, for the second consecutive quarter, our European business registered positive year-over-year growth and is growing at market rates. Emerging markets continue to do well with China, Brazil, and India delivering very strong double-digit growth.

We continued to deliver strong operating cash flow and are up 14.4% year to date. Our strong balance sheet has enabled us to pursue an acquisition strategy that is expanding our sales footprint into some of the highest growth and most innovative segments of med tech. With our recently announced agreement to acquire MAKO Surgical, we believe we are well positioned to unlock the long-term potential for robotic-assisted surgery, which will further define Stryker as a leader in orthopaedics.

We also able to continue to grow our dividend while periodically executing share buybacks.

Moving down the P&L, at 68.8% our adjusted gross margin ramped considerably from the prior year due in part to continued benefits being realized from our previously discussed five-year plan to drive greater operational efficiencies.

R&D was up significantly in the quarter at plus 19%, reflecting both timing and continued commitment to investing for the future.

Our adjusted SG&A percent of sales was slightly lower in the quarter compared to Q3 last year, despite costs related to a distributor transition in Asia which adversely impacted our per-share earnings by roughly $0.03 in total. On a per-share basis, Q3 adjusted EPS was $0.98, reflecting solid organic sales growth and gross margin expansion, partly offset by heightened investments in R&D and one-time SG&A costs. We are narrowing our full-year organic sales growth guidance to 4.5% to 5.5%, which, once again, raises the lower end of the range as we did following Q2 results. We remain comfortable with and confirm our full-year adjusted EPS estimates of $4.20 to $4.26.

Before I turn the call over to David, I would like to make a few comments regarding our recently announced plans to acquire MAKO Surgical. As many of you may recall from our recent analyst meeting, we are disciplined regarding the metrics we use to evaluate our acquisition targets, and most of our deals fall within our guidelines as it relates to deal returns. However, occasionally we look to invest in areas that we believe can deliver breakthrough innovation, and these are, by definition, bigger bets with bigger potential rewards. MAKO clearly falls into this category.

And David will now elaborate more fully on this. David?

Thanks, Kevin. Good afternoon and I appreciate the opportunity to join today's call and provide you with additional perspectives regarding our enthusiasm for the recently announced signing of a definitive agreement to acquire MAKO Surgical.

I want to begin by describing our view on the future of reconstructive orthopaedic surgery. We firmly believe that innovation will drive growth and that meaningful differentiation and technology and in business models can drive share gains. The combination of MAKO and Stryker provides an excellent platform for achieving this.

As for innovation, we believe that the key opportunities in joint reconstruction are procedural advancements, significantly improved patient experience as documented in outcomes, and a new generation of implants. Robotics and specifically the MAKO platform is uniquely able to deliver in all three areas.

Procedural innovation must address three key factors. First, the ability of an implant system to enable consistently reproducible superior outcomes in a variety of surgical settings and varying levels of surgical team skill and experience. We think the keys here are bone preparation, implant placement, and joint alignment and balancing. This is the most obvious demonstrated capability of robotics in orthopaedic surgery and the key driver of the near-term value proposition.

Second, advancing procedural efficiency must involve minimizing soft tissue disruption and other factors that increase postoperative pain and complications.

Third, significantly improving overall procedure flow and process efficiency will be essential; however, simply making the surgery faster without making it better has limited value over the long term. MAKO has demonstrated that robotics can deliver on many of these factors of procedural innovation and shows promise on delivering on all of them as the technology platform advances.

Turning to the other opportunities for innovation, these three elements of procedural advancement are designed to address not only the needs of the surgeon and the healthcare system, but we believe will deliver enhanced patient experience and outcomes, especially in knee replacement surgery. MAKO is already demonstrating very encouraging results in unicompartmental knee surgery, and we're convinced that similar advances can be achieved in total joint replacement.

Finally, we're convinced that long-term clinical results can be further enhanced by the next generation of implants. The combination of consistently reproducible precision and bone preparation offered uniquely by robotics, coupled with new implant designs that take advantage of robotics as an enabler, will lead to a significant step forward in improved patient outcomes, especially for the increasingly younger patients that seek joint replacement surgery. Such implants are clearly years from commercialization, but are a meaningful factor in the long-term value of this platform.

As many of you know, I have been involved in the orthopaedic market for over two decades and during that time have seen a variety of innovations in joint replacement surgery. While I am very proud of what we have achieved in partnership with surgeons to innovate in ways that have significantly improved patient outcomes, the long-term potential offered by robotic-assisted surgery holds the promise of transforming reconstructive surgery. As the pioneer in this field, MAKO has demonstrated extraordinary and rapid success in a business that has classically relied on incremental changes.

We believe Stryker's long history in joint reconstruction, capital equipment, and surgical instruments, along with synergistic engineering resources focused on robotics, will help further advance this platform and its commercial success.

Our reconstructive implants have a strong reputation with surgeons and highly successful clinical outcomes.

Additionally, we have a long history in selling capital to hospitals, and we understand the unique aspects of this sales model. Combined, this should help ensure we can both expand penetration for robotic-assisted surgery and joint reconstruction, while also continuing to leverage our know how and MAKO's R&D pipeline to help unlock the longer-term potential in the broader orthopaedics market.

I look forward to taking additional questions at the end of today's call, and we will now turn it over to Bill to discuss our Q3 financials in more detail.

Great. Thanks, David.

Sales growth was positive by 4.8% in the quarter, including a negative 2% impact from FX translation. Constant currency sales growth was a positive 6.8%, which includes organic growth of 6.1%. There was virtually no difference in selling days for the quarter.

EPS on a GAAP basis for the quarter ended at $0.27 per share versus $0.92 per share last year in the third quarter, while adjusted earnings per share was $0.98 for the quarter versus $0.97 per share for the third quarter last year. This quarter's EPS includes negative impacts of approximately $0.05 per share from FX and $0.03 per share from the med tech tax.

The income statement is exposed to both transactional and translational FX risks, while the balance sheet is just exposed to translational FX risk. In the past, we have only hedged transactions once they have occurred; however, in October we have begun to establish a layered transactional hedging program which will help us mitigate some of the transactional volatility caused by changes in FX rates. This program will start to have some effect in the first quarter of 2014 and will be more fully in place by the end of next year.

We are also implementing a net investment hedging program this month, primarily structured to mitigate some of the translational risk associated with our more liquid assets that are held in euros.

The most significant non-GAAP adjustments in the quarter are primarily related to a $213 million increase in the charge associated with the voluntary recalls of Rejuvenate, ABG II and Neptune. These charges may increase or decrease over time as additional facts and assumptions become more refined. No potential insurance proceeds that may be available to cover some of this potential cost have been included at this time.

While looking at sales in the quarter, our organic growth of 6.1% was comprised of a positive 7.1% from volume and mix with price negatively impacting it by 0.9%. Acquisitions added 0.7%, while FX had a negative 2% impact due to significant weakness in both the Japanese yen and the Australian dollar compared to the same period last year.

Looking at our segments, reconstructive represented 44% of our sales in the quarter. Sales of reconstructive products were up 6.5% as reported and grew 9.2% constant currency. US reconstructive sales grew 9.9% in the quarter.

Trauma and extremities had another excellent quarter in the US with sales increasing 22.7% led by new products, sales execution, and strong growth in foot and ankle.

US hips and knees had strong growth in the period of approximately 9% and 4% in the quarter respectively, recognizing that hips benefited in part from easier year-over-year comparisons. Knees continued to feel the impact from the absence of our ShapeMatch Cutting Guides, but the growth in this category still appears to be in line with the market.

Our international reconstructive business was up 8.2% in constant currency and had organic growth of 5.3%. All major regions posted positive gains. However, knee growth internationally was negatively impacted this quarter by a distributor transition in Asia affecting some smaller countries in the region. Outside of Asia, we achieved positive year-over-year gains in all regions.

Next, our MedSurg segment represented approximately 37% of sales in the quarter. Total MedSurg sales increased 1.5% as reported and 2.6% on a constant currency basis. These results were led by high single-digit growth from our endoscopy and sustainability solutions businesses. Medical had slightly positive growth, while instruments declined in the period. Instrument sales growth in the US were hindered by both the strong System 7 sales in the third quarter last year and having the Neptune Waste Management system out of the market this year. However, in the fourth quarter, the Neptune loss sales will be reflected in both periods. We look forward to getting this product obviously back on the market once we have obtained regulatory clearance.

Our final segment, Neurotechnology and Spine, represented 19% of Company sales and delivered another strong quarter. Sales increased 7.7% as reported and 10% on a constant currency basis. Growth in this segment was led by IBS and our neurotechnology businesses where all of these businesses posted solid double-digit constant currency growth.

Spinal implant sales were up slightly in the US and up double-digit internationally on a constant currency basis. Excluding the impact of Trauson, international spine implants still posted growth in the mid single digits.

In looking at our operational performance, gross margins on an adjusted basis in the third quarter of 2013 were 68.8% compared to 68.2% in the same period last year. The rate was positively impacted by improved operating costs, efficiencies, and overhead absorption as inventory levels increased in the quarter.

Product mix was also favorable as Recon sales were very strong in the period, and MedSurg sales experienced more moderate growth. FX and price had a negative impact on the rate this quarter; however, the impact on the gross margin rate was less than in the first half of the year. The med tech tax also negatively impacted gross margins by approximately 90 basis points in the quarter.

As we looked at the fourth quarter, we expect our gross margin rates to run lower than the fourth quarter of last year as we continue to be negatively impacted by the med tech tax, and we also expect operational improvements to be dampened in the period as we bring down inventory levels and achieve less overhead absorption in that period.

Research and development expenses increased by 70 basis points to 6.3% versus 5.6% last year in the quarter. The 19% increase in R&D spending over last year reinforces our commitment to invest in areas where we believe it will help us achieve above-market sales growth in each of our key product categories. Our R&D spending this quarter resulted in an overall higher level of operating expenses in the quarter; however, we believe our total operating expenses will be lower as a percentage of sales in the fourth quarter compared to both the third quarter and last year's fourth quarter, despite our additional investments in R&D.

Selling, general and administrative costs represented 52.8% of sales in the third quarter. However, this included approximately $313 million of costs related to the Rejuvenate, ABG II and Neptune recall. On an adjusted basis, SG&A expenses were $818 million or 38% of sales in the third quarter of 2013 versus 38.2% in the prior year's third quarter. SG&A included charges taken in various countries in Asia to transition away from a key distributor in that region which negatively impacted these expenses by approximately 0.5 percentage point this quarter.

Operating margins on an adjusted basis were 22.8% in the third quarter, slightly lower than last year in the same period. The rate was negatively impacted by the med tech tax, lower prices and higher R&D spending. However, those impacts were nearly offset this quarter by operational benefits and favorable product mix.

Other expenses in the third quarter were $13 million compared to $6.4 million last year in the third quarter. This increase in expense resulted primarily from lower interest income due to lower interest rates and slightly higher interest expense from our increased borrowings.

Our reported tax rate for the third quarter was 24.8%, while the adjusted effective tax rate was 22% for the third quarter, which is consistent with our year-end expectations. This compares to a 20.2% adjusted effective tax rate in the third quarter of last year.

Looking at the balance sheet, we ended the quarter with $5.1 billion of cash and marketable securities, which is an increase of $853 million compared to year-end 2012. We also have $2.8 billion of long-term debt on the balance sheet.

From an asset management standpoint, accounts receivable days ended the quarter at 57, which are two days better than they were last year in September. Days in inventory finished the quarter at 185, which was an increase of 19 days sequentially and 2 days when measured against the prior-year quarter. Inventory levers levels were built in the quarter; however, we do expect to reduce those levels in the fourth quarter and still show a year-over-year improvement of a few days at year end.

Turning to our cash flow, we had a strong cash generation in the first nine months of the year with cash from operations of $1.214 billion compared to $1.061 billion in the prior year. That is an increase of 14.4% over the first 9 months of last year. Share repurchases were in the first 9 months of 2013, were approximately $252 million during that period, and we still have nearly $750 million available for repurchase under our current authorization.

Based on our solid sales achievement in the first 9 months of the year and the current economic and market conditions, we're projecting organic growth or constant currency growth ex-acquisitions in a range of 4.5% to 5.5% for the year. If foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 1.5% to 2% in both the fourth quarter and for the full year of 2013.

As Kevin indicated previously, we are maintaining our guidance for adjusted diluted earnings per share in 2013 of $4.20 to $4.26.

Thanks for your support, and we'd be glad to answer any of your questions that you may have at this time.

(Operator Instructions) Kristen Stewart, Deutsche Bank.

I was just wondering if we could spend a little bit more time on the MAKO transaction. I know you guys gave some color on just the impact from a financial standpoint for the next year just thinking forward. Can you maybe just go over what you guys are thinking in terms of sales synergies and cost synergies related to the transaction?

In terms of sales synergies and cost synergies, I think this is really a sales synergy-driven value proposition. When we take a look at our implants and the long clinical successful history of our implants, combined with what MAKO has demonstrated in terms of robotics and the ability to precisely position those implants, I think combining those two gives us significant revenue synergies over time.

Kristen, at this point, also, we've obviously announced the signing, but we haven't yet closed. And so we really don't want to get into too many more descriptions of detailed synergies. That is something that we will be able to share much more after we close the transaction.

Okay. And then can you just speak maybe a little bit more on the overall orthopaedic landscape, specifically the hips and knees, and whether or not you think you're seeing a strengthening of the market as we enter into the tail end of the year, and maybe just give an update, too, on the performance within Europe?

In terms of the markets, particularly as we see it in the United States, the third quarter does show some promise, particularly in knees. The knee volume seems to be improving. Ours certainly has, and as we watch the market, we think the knee volume has improved substantially in the third quarter over the first half of the year. And we are optimistic that we will see some continued modest improvement in the knee volume over the fourth quarter. Hip volume has been reasonably strong over the course of the year.

Kristen, just one comment on the seasonality in the fourth quarter. You know, that over the last few years, we have seen this trend with incrementally a little bit more seasonality in Q4 and the offset in the first quarter. Whether or not that happened in this fourth quarter, especially in front of ATA next year, is a little bit of a guessing game, but overall the market appears to be stable to incrementally more positive.

Yes, and Kristen, this is Kevin. Related to your question around Europe, we are really pleased that this is the second quarter in a row where we have had positive growth, and frankly, every country improved in the third quarter, even Italy, which is the one country I've highlighted before, which has been the most challenging. I just had a very, very modest decline year over year. So even that has improved in its trend.

So we really believe that the changes we started to make going back over a year from now are really taking hold, and that is why we can now confirm that we are growing at market rates, which is clearly ahead of the goal that we had set a year ago.

Matt Miksic, Piper Jaffray.

Dave Turkaly, JMP Securities.

Given that we just came out of NAS, I was wondering if I could hit you with a couple of quick spine ones. First off, can you remind us what your MIS or minimally-invasive strategy is there? And then the nice growth you saw, do you think -- do you attribute that to the turmoil from some of the big deals in the space, or are we seeing procedures pick up?

Yes, this is David. In terms of our MIS strategy, we just launched this year the second generation of our percutaneous pedicle screw system, the ES2, and that has been a very strong growth driver for us. In addition, differentiated interbody technology. So that has been our approach on MIS, and we have been able to see better pricing and stronger growth in MIS.

In terms of whether the overall procedure volume is improving, I think it has been pretty consistent in the third quarter, in line with the year. And I think that is -- what we have seen in spine is that differentiated technologies can drive growth.

Thanks a lot.

Mike Weinstein, JPMorgan.

Well, we have got you here, Kevin and both David, maybe just spend some time on MAKO. I think people probably a bit surprised in the proxy to see that it was a one-on-one conversation, Kevin, between you and MAKO and that there weren't other parties involved. So can you talk a little bit about a), how you came about the valuation for MAKO, and b), how people should think about a return on the investment given the purchase price?

Yes, so MAKO has clearly been on our radar screen for some time, and we've believed in the power of robotics. It is something I think we've shared pretty openly with the analysts that we believe in the potential. So yes, the proxy maker just issued their preliminary proxy for those of you that are wondering what Mike is asking about, and in that proxy statement, you can see the cascade of events, which started with me approaching their CEO in early August. And we obviously moved fairly quickly through the process to actually consummate a signing of a deal. And for us, we really see this, as David earlier indicated, as a potential gamechanger in reconstructive surgery. Not just for their uni knee application but clearly beyond that, and I think David outlined all of that rationale.

So for us, as you read that timeline, you will understand that we had a chance to go in and do our due diligence, and we feel that this is going to be a great deal for Stryker over the long term. Clearly, the price represents a premium, but we feel that over the long term this will deliver very strong returns for Stryker. It will differentiate us in the marketplace and will really unlock the potential. And, as you know, in many procedures, the satisfaction level isn't quite as high as we would like it to be. We believe robotics will be a key enabler to be able to meet that need.

Okay. Just one follow-up then. Can you maybe shed some light on the pipeline of products coming out of MAKO, particularly from that they just brought in the pipeline piece of the story. So can you just talk a little bit about what might be in pipeline to pipeline, if you follow that?

And then maybe just another one, just could you spend another minute on the distributor transmission in Asia? Because obviously that impacted the business this quarter. Thanks.

So obviously, when we signed with Meiko, we were very well aware of the pipeline transaction. It was well in the process, and at this point I really don't want to get into a lot of details. Again, between signing and closing, I would rather just let you know that we feel very good about that acquisition. We believe that that complements MAKO very well and will be a complement to Stryker, and I will just leave it at that for now.

Related to the distributor transition, so some small market countries in Asia where this happens in our Company from time to time where we have to go through these transitions, and it's unfortunate but we're actually changing out a distributor in some small market countries. So obviously it does not affect China; it does not affect India, but some small market countries in Asia. And as a result of that transition, we've had to take some charges in the quarter.

Bob Hopkins, Bank of America.

So just to start off, a follow-up on the hip and knee markets and appreciate your comments. But I was just wondering if you could share any anecdotes you are hearing from the field in terms of what is driving the incremental improvement in the market? And I know there are some easy comps here, but clearly things feel a little better. So any anecdotes from the field or any sense from you guys as to what the drivers are of this improvement in hip and knee volumes?

This is David. I've been watching this for a long time, and it can be hard to explain. It seems like all of a sudden the knee patients stay home, and then all of a sudden they show back up.

What we've seen, I think, over the last couple of years is a little bit more consistency with hip patients because, quite frankly, it is a little bit harder to delay hip replacement surgery just from a lifestyle standpoint. Knee replacement patients do have some options to delay the surgery. They ultimately need to have it. And I think economic insecurity and uncertainty about insurance coverage has kept some patients on the sidelines.

It is possible that either they've just gotten to the point where they have to have the surgery or they've gotten just a little bit more comfortable with the future, they've come back.

But you asked for anecdotes, and so you got some anecdotes.

But it is one quarter. So obviously, Bob, we tend not to get too discouraged when we have a soft quarter; we tend not to get too encouraged when we have a strong quarter. But we do believe that the market is gradually improving. It's gradually improving; it's not spiking. But we believe from what we're hearing that the market is gradually improving.

Okay. Thank you for that. And then one follow-up on MAKO. As you did your return calculations, can you give us a sense over time as to how much market share you think you need to take in order to get this to be a positive return? I am just kind of curious as to some of your assumptions there.

And I was also wondering if you could describe what kind of happened to your own internal program and what caused you to shift from an internal-focused program to going out and buying MAKO?

Bob, I will take the second part of the question. And as it relates to the area, we have long talked about having a significant interest in robotics-assisted surgery and any type of technology, whether it is cutting guides, navigation where we play roles in both those markets that kind of assist the surgery. And we use the learnings and our understanding of that market and looked at the MAKO technology and really believe the value proposition by combining the two was going to really allow for differentiation in the market.

And as David alluded to, market share gains that are not within the norm that we traditionally see, or put another way, we're looking for over time meaningful share gains. So that was really how we thought about it as it related to our own internal analysis of the robotics space.

And also maybe just a follow-on comment on that, Bob, as well. From an assumption perspective obviously, we have a number of different assumptions that are included in the broader base model. We're comfortable with those. We are comfortable with the levels that they are delivering on from an overall discounted cash flow analysis for us. The immediate first few year returns are obviously lower for this type of business because it's at a very early stage. But we think this is a gamechanger within this category for us, and we think it is a great fit in our broader base portfolio.

Matthew Dodds, Citigroup.

A couple of questions. First, Kevin, neurotechnology, that business also did really well. What is your take on how the market is doing there? I assume you are gaining share, but what is your view on the overall market?

Maybe I will just jump in there. We are really pleased with the performance within our neurotechnology group, and clearly neurovascular is continuing to see very strong momentum. A lot of that is what we've been able to do in the coiling market, which is about 40% of that segment. We've launched a number of new products there -- standard, long, nano-sized coils, and we're now just in the process of launching the target -- and that is a fatter, larger-diameter coil. And we've been seeing nice pull-through from that, as well. We have had a number of other product launches within that segment. So that's really been the biggest driver of the performance overall in that space.

Okay. And then one quick follow-up. On Trauson, how has that gone? I know you gave a little bit of a breakout of that growth in acquisitions. How has that gone now a couple of quarters in?

Yes, so so far, so good. I think that Trauson momentum is really consistent with our plans and our acquisition models, so we're really pleased. In China we have maintained the sales momentum that had existed prior to the acquisition. We still have work to do in terms of getting Trauson sold outside of China. And I'd say we knew that that was going to take us a bit of time because we have a lot of product registration issues, and we have to get the distribution channels orders out. So that's going to take a little longer, but certainly within China we are pleased with the momentum. And by all accounts, whether it is R&D, whether it is the distributor channel, whether it is customer sales and market share, by every measure we are on track right now.

Jason Wittes, Brean Capital.

Two questions. One, if I can just push you a little bit more on the hip and knee market, is it possible to break out how much of the growth came from revisions versus primaries in both hips and knees?

I think it's fair to say that our revision growth is higher, substantially higher than the primary growth rate just because of the nature of the procedures.

Okay. But is that -- if you at look at where the growth is coming from, are you saying it it is equally distributor, or it is coming a little bit more from the revision side than the primary side, I guess that is what I was trying to ask.

The growth is across both. So we have good, strong healthy growth in both our primary and our revision platforms. The growth rates are typically higher on the revision side, but we have strong growth across both.

Derrick Sung, Sanford Bernstein.

Kevin, we heard earlier this week from Synthes that they in their trauma business were seeing some pressure from low-cost or value-oriented competitors here in the US. And obviously your business in trauma is -- you're doing quite differently here. You are doing very well. But I wanted to get your perspectives on what you're seeing in terms of these low-cost generic orthopedically manufacturers in the US. Do you think it is a long-term threat? Is it an opportunity for you, and might this spread to other areas like hips and knees and spine?

So I will start the answer, and then I will pass it to David. What I can tell you is we have not really seen any of this, and we did see the comments made, and quite frankly, we're puzzled by it. It has really not affected us. As you see, our double-digit growth has been very consistent, very steady, and obviously a spectacular quarter this year in trauma and extremities. So if it was something meaningful, I think we would have noticed. It would have affected our growth rate. So thus far, we're not saying it. But maybe, David, you want to add something.

Yes, I think what we see from our customers is they continue to put a great value on differentiated technology, on better instruments, and on high service levels. So we, quite frankly, just don't see much of an opportunity to go in with some sort of low-cost generic model in trauma.

We occasionally see things in ambulatory surgery centers for simple wrist fractures, but by and large, in the Level 1 trauma centers and even in the community hospitals, the full product line and high service continue to be very, very important.

Okay. Thank you. And as a follow-up, just going back to MAKO, as a company, you have a lot of experience in selling capital equipment. And I was just wondering if you could give us a little bit more color on what gives you the confidence that the market for hospital capital spending, that hospitals will continue to be able to spend at the level that is needed for a MAKOplasty type piece of equipment either today or moving forward, why you think that market can still grow. And just maybe some of your thoughts there on capital spending as it relates to MAKO. Thanks.

Sure. I'd be happy to. I think it's helpful to break it out into the near-term, the next few years, or the longer term in the future.

In the near-term, you have to appreciate that for most hospitals, if not nearly all hospitals, the orthopaedic service line is one of their premiere profit centers. Joint replacement surgery is a highly profitable procedure and a great growth driver for the hospitals. And what MAKO has successfully done is demonstrate that with the robotic program, hospitals that have a robot and a strong robotic program have driven substantially increased patient volume and substantially improved payer mix. So those hospitals in our survey work as we studied this, indicate the hospitals that acquired a robot and drove a strong program were very, very happy with the results and definitely felt like the capital expense was well worth it.

Over the long term, however, I think what will be necessary to improve the value proposition, particularly is the way healthcare has paid for changes, are demonstrated superior patient outcomes in ways that not only give the patient better clinical outcomes but superior economic outcomes. So we are confident based on the trends of the early data, as well as the promise of the platform as it develops, that robotics will deliver on both of those over the long term.

Raj Denhoy, Jefferies & Company.

I wonder if I could just ask about the foot and ankle performance you noted in the quarter. I think you mentioned it was 39% growth. I think that business is probably trending well above $100 million for you now, and I'm curious if you could just offer anything in terms of what's driving that growth. Is it still the underlying market is supporting that kind of growth, or do you think there's a share capture story happening here?

I think it's both. We do believe we're capturing some meaningful share. We also think the market is growing at a very healthy rate. This is a market that it's very difficult to figure out exactly how much the market is growing. It's not like major joint reconstruction where you can calibrate it pretty tightly based on reported results.

But we think there is strong growth. I think there's strong procedure growth. And also as we introduce new products and new technologies that yield better results, we see surgeons doing procedures that yield higher implant ASPs than the lower implant ASPs of yesterday's technology. But we do also believe we've been able to capture some share.

I would just make one cautionary comment, though, as you start to think about Q4, just be aware of the magnitude of the year-over-year comparisons that we will be going up against in the fourth quarter, which obviously are going to temper the growth rates from a percentage basis.

That said, we still feel very bullish. This is a market that has tremendous room to expand. And obviously, the decision to create a separate business unit at the beginning of last year and dedicate sales force specifically for the podiatric surgeon is bearing fruit. And we are seeing tremendous growth with that dedicated sales force with a new call point that we, frankly, had not called on in the past.

Okay. That's fair. And maybe just ask one about Neptune. I think you noted that next quarter will be the first quarter you won't be comping against it. And I'm curious if you can just remind us of what magnitude or how big that has been -- how big of a drag that has been for the last couple of quarters -- last four quarters for you?

In the first half of the year, it was probably averaging somewhere in the $15 million to $20 million a quarter range. And in the third quarter, because, again, at least the month of September had a year-over-year equal comparison, it was really July and August. There was probably only about a $7 million impact in comparison for the third Q. So, as we move forward into the fourth quarter, that will be obviously out of both periods.

Glenn Novarro, RBC Capital Markets.

Two questions, one on price. I notice price was down 0.9% here in 3Q, and 2Q was down 1.5%, so less pricing pressure. Was there anything specific that led to slightly less pricing pressure, or is that just part of the fluctuations that you will see during the course of the year?

And then second, some of my companies are starting to go to cash EPS after they do some big dilutive transactions. Have you thought about going to cash EPS for 2014 and beyond? Thanks.

Sure. So two questions there, both on the price and the cash EPS. From a price perspective, obviously that can move between different quarterly periods with especially strong sales in comparison to the prior periods, I think, that there's obviously less impacts associated with what's going through in any one specific quarter.

I think the price increases or the negative price impacts of between 1% and 1.5% or 1% and 2% range, I think is pretty consistent, and I think that that's what we would expect moving forward.

As far as cash EPS is concerned, obviously anytime we would do an acquisition, we would take a look at both ends of it. I think as we complete the acquisition, we will talk more specifically about what we're planning on doing there. But it's at least something that we will consider at the point in time that we close the transaction.

David Roman, Goldman Sachs.

David, in your prepared remarks, you referenced the need for both business model and product innovation. I know you talked little bit about the MAKO opportunity and also how the hospital landscape is changing, but maybe you could go into a little bit more specifics about what you envision business model change to actually mean.

And I know, Kevin, that's been an area of focus for you in talking with investors about the evolving needs of orthopaedics. So maybe you could just -- I think we understand what the hospital looks like. Maybe you can give us some perspective as to which way you are going with your strategy.

Well, I think so, first of all, I spoke of business model differentiation as opposed to business model change. One of the things that we find very attractive about MAKO's business model is they sell capital equipment in order to sell implants. And that's very different than the standard business model in reconstructive implants where companies provide capital free of charge in order to sell implants. So that shows the unique model, and I think that's an example of a different kind the business model that can help drive value, growth and share gain over time.

Okay. And maybe just as a follow-up on emerging markets. You obviously spoke a little bit about Trauson, and that's obviously a big focus for you in those geographies. Maybe you can just speak a little more generically about the performance of emerging markets and whether we're at a point where Trauson has become additive to your overall growth, how you see your portfolio emerging in those geographies, and any thoughts on what the sustainable growth profile might be?

So I will answer that. Just from an overall perspective, Trauson obviously is a key acquisition for us in that region. We would expect that business to put forth some very solid growth performance. The numbers that we broadly talk about as far as how well the emerging markets are doing, those are all doing very well for us, in the double-digit range, obviously, even excluding Trauson, and Trauson continues to deliver based on our overall expectations for that business.

So we would expect it in the future to continue to help stimulate our broader-based emerging market growth, but we also expect our base business to continue to put forth some very good numbers in those regions, too.

Yes, what I would say on emerging markets is just to repeat what I've said in the past -- and this is Kevin speaking -- that 6% of sales at the end of 2012, that was our representation of emerging markets. And clearly we have an ambition to me that number much higher to get into the low teens over time, and we expect Trauson to be one of the ways we're going to get there, but also growing in the premium segment very rapidly in China, in Brazil, in India. And Russia and Turkey are two other priority markets where our presence today is very small, but there are markets that we, frankly, exited a number of years ago, and we have clear plans to get back into those markets, and in the quarters ahead, we will have more to share on our progress in those markets.

David Lewis, Morgan Stanley.

Kevin, just a quick one for you; maybe a follow-up to David. But speaking to trauma specifically, I know you talked about the low-price competition, but just your business momentum, I think we started several quarters talking about perhaps this was the result of competitive recalls. But you are clearly passed that now.

And I wonder, what do you think is driving the business here? Is it breadth of product? Is it specific distributor wins? Is it a change in your selling model? Because all we have seen is multi quarter accelerations. So what specifically is driving this improvement, and how sustainable do you see it?

So, this is the kind of question I'm sure David would love to answer, but I will take a little bit of the beginning part of the question, and then I will turn it to David.

It's been a great story, without a doubt. Frankly, it's been a multi-year process, which starts with the pipeline. So we really have completely blown out our R&D capabilities and launched a number of products to now have a broad product portfolio that can compete with Synthes, which, frankly, none of the other players were able to do that, including Stryker, five years ago. So building out the product bag was a huge part of it.

And frankly, our sales force execution has been just outstanding, and we have a combined sort of direct -- we have dedicated reps. In some cases, we have combined reps. And under common management, we've just driven tremendous performance with outstanding execution in the field.

So maybe I will turn it to David for other color commentary.

Yes, Kevin, I think that's right. If you can summarize why we have been successful in trauma, I think it is consistent focus. This is not a business that we get excited about and then cut back and get excited about and cut back. We've had consistent focus on trauma year over year with the long-term plan to meaningfully build strength in this segment.

I would say three key components are, as Kevin said, the product line. We have a fantastic full and complete product portfolio that continues to expand and grow and develop.

Our specialized sales model, where we have increasingly trauma sales reps calling on these as opposed to full-line sales reps, particularly in the major metro area.

And finally, our integrated field sales management approach. So even though we have dedicated trauma reps and dedicated trauma sales managers, our branch general managers are responsible for growth and bringing a united front. So I think that focus, that product line, and our sales model are delivering extraordinary results.

Great. And then David, maybe sticking with you, maybe two questions related to MAKO. The first is, how does a Otis strategy progress in a post-MAKO world? That is part one.

And then part two is, I doubt we're going to get you to give us time lines on product approval, so I won't go there. But can you give us any sense of what level of clinical work you think is going to be required to bring Stryker implants up on the MAKO system? Thank you.

Yes, so in terms of our ShapeMatch product line, we still think that it's a very strong and healthy business segment. We look forward to getting that product back on the market. It's different than robotics, and quite frankly, there won't be a robot in every hospital in the near future. It will take some time to penetrate that market. And we think there is a great opportunity for ShapeMatch as there is a continuing opportunity for our navigation product as well. There is I think a good appetite for a variety of approaches for how to use computer-assisted surgical techniques in one shape or another to deliver improved patient outcomes.

We think the timeframe in terms of transitioning Stryker products over to the RIO platform is probably about a year or two when you consider the engineering work, development work on the robotics side and the regulatory timeframe. We will have probably more clarity about that in the future.

Michael Matson, Needham & Company.

We've heard from Biomet that they are planning to launch a [bicroshitz] bearing knee, and I just wanted to get your thoughts on that potential opportunity. Maybe this fits into the reasons that you bought MAKO, but do see this as a viable product category?

Sure. Today the benefits of a bi-cruciate retaining knee is, quite frankly, based on a theory, and there's some intuitive appeal to this theory that preserving the ACL will significantly improve patient satisfaction. However, there's nothing like a broad consensus on this. And as you look at the procedure, there's significant surgical complexity. To date in our view, it's a highly technique-dependent procedure.

We are committed to evaluate technologies, which includes implants, instruments, procedural modifications and potentially robotics to enable new procedures, which could over time include bi-cruciate retaining knees.

All rights. And then given the high level of R&D spending, I understand there were some timing issues. But Kevin, what do you feel is the right level of R&D spending as a percent of sales? Is it going to stick around the 5.5% level, or could we see it creeping up towards 6% over the longer term?

So clearly you saw the neurotechnology business growing very, very rapidly, and they are larger consumers of R&D dollars. So our guidelines right now are in the 5.5% to 6% range. Obviously this quarter we were little higher than that, but I think that's a good operating assumption is we will be in the 5.5% to 6% on an ongoing basis.

Matt Taylor, Barclays.

Just wanted to explore two things here. One is if you can help us understand the timing of the MAKO transaction. I know that you approached this summer, but you have been talking about it for a while. So I am just curious if there was something that you saw in the data or something that made this really the right time for you to approach them and do the deal.

I think with any transaction, there's always different events that lead to when you eventually pull the trigger. We've long had a interest in robotics, as Kevin spoke to on the call, and felt the time was right to approach them, went through our normal due diligence, and that resulted in us announcing the transaction.

Okay. Thanks. And then for the last few quarters, you talked about trying to get back to prior growth rates in Europe and recons. Curious for an update there on how the reorganization is going and how the results were in Europe.

Well, I think, as you all know, the implant percent of sales is much higher in Europe than it is in the United States. So this turnaround has been really an implant story for the most part. And as I mentioned, this is the second consecutive quarter of positive growth. And it has taken a bit of time, but certainly certain countries we were like the UK and France, we were well ahead. Other countries like Germany and Spain, it's taken a little longer, but we are now running very, very well. We've had some good conversions; we've won some tenders. So that business has really turned.

And in Italy, we've had a number of problems over the last few years, and we're starting to -- that is starting to bottom out.

So I would say that the turnaround has been largely an implant turnaround, and we're very pleased with our performance that is now growing at market rates.

Larry Biegelsen, Wells Fargo.

One for Bill and then one for Kevin.

So Bill, I may be reading too much into this, but the full-year guidance implies about 3% to 6% constant currency growth in the fourth quarter if my math is correct. Any reason to expect a deceleration in Q4?

And then I had just one follow-up for Kevin after that.

No, I would say our year-to-date overall organic growth -- and it is the organic growth that we're talking about, not constant currency in our guidance. So the organic growth that we're looking at is pretty consistent with how we've run on a year-to-date basis, and we're expecting it to still be in that similar range.

That is helpful. And then Kevin, it would be helpful to hear from you how you are thinking about M&A moving forward. Should we expect a pause now as you digest the MAKO deal. Thanks.

Yes. So as I think we have mentioned in the past, every one of our businesses are constantly scanning for acquisitions. We have a very, very strong balance sheet. So even after the MAKO transaction closes, we're still in a very, very strong financial position. So I would not assume that we are slowing down at all.

I think another deal of this size may not happen in the next month or two, but -- and that is not typical of us. The deals of this size, this is obviously larger than a typical deal, but I would be surprised if we didn't do another deal or two or three over the next six months. You should assume that we're still in the normal deal rhythm.

Richard Newitter, Leerink Swann.

This is [Robbie] in for Rich. Most of the questions have been answered. Just a little bit more I'm curious about any MAKO strategy in terms of OUS rollout, how that might or might not change in Stryker's hands?

I would say that it's probably fair to assume that there will be some meaningful synergies over time. MAKO has been very -- you see from their results, very US-focused. They do have some independent distributors OUS, and that is something that we will be taking a look at.

Thank you.

Bruce Nudell, Credit Suisse.

As part of our diligence, we were calling around, and one of the first guys we ran into doubled his procedure volume, drove his hospital profitable with MAKO, bought a second machine, and it is a regional center of excellence for partials.

And my question is, are there any low-hanging fruit in terms of underused procedures that we should be thinking about that could really drive share gains over the coming three to four years?

I'm not sure what you mean by underused procedures. I think one of the things that we see as an opportunity for growth is we did our research on surgeons' interest in robotics. One of the things that, quite frankly, made them hesitant and one of the most significant things that made them hesitant was they were reluctant to move away from implants with a long-term clinical history in a company that has been around for a long time.

So we think Stryker and MAKO together help address that very effectively.

And I guess my follow-up based on the strength that seems to be occurring in the US market today is we've been assuming around a 4% trend line in units as the natural US trend line. Should we be rethinking that in any way? I know one quarter does not a trend to make, but secularly, where do you see the volume trends in the US market?

Bruce, I think it would probably be premature to be getting ahead and trying to tweak the models to that level of specificity. I think we feel pretty good, as David alluded to on the call, about the recon market showing signs of stability to modest improvements. Now whether that ends up being 3%, 4% 5% unit growth, it's a little difficult to thread the needle that closely. But we feel good about the market, our position in it, and the outlook. But overall I don't think it's one where we're going to say, it's time to revise upward in any kind of meaningful way. At the risk of sounding like Debbie Downer, I just want to emphasize that we feel good, but it's not some major inflection point.

Matt O'Brien, William Blair.

This is [Kayla] in for Matt. Just another follow-up on the MAKO deal. And I understand you guys don't want to go into too much depth, but we noticed that the first offer price is $21 per share and the deal obviously closed at $30. So that assigns roughly an incremental $500 million in valuation. We're just curious as to what changed your views through that process. What sort of new product applications maybe came to mind that might validate that higher price point?

Yes, I think the way to think about it, as with any deal, as you start out, you have one sense of valuation, but that is based on limited information. You go in; you do due diligence; you pressure test it with assumptions; you look at how you might drive synergies; you look at potential longer-term growth values. And all of those ultimately end up in the end valuation. And that is similar to what played out here.

Yes, I wouldn't assume, as happens in other deals, that the first price that we put on the table is the price we were expecting to pay.

Okay. And then we would expect further information then as to those synergies further out. But what sort of value would you assign to MAKO's current applications as compared to potential future applications?

Yes, we are probably not going to get into that level of detail. Clearly we see value in their current indications and our ability given our broader distribution and marketing capabilities to drive those penetrations. But, as David talked about at length, we also see significant longer term potential for robotics-assisted surgery and orthopaedic applications, more broadly speaking.

Steven Lichtman, Oppenheimer & Co.

I wanted to ask you about the instrument business in the US. Obviously, a step down. You talked about growth in the fourth quarter, but given that the comparable doesn't ease significantly relative to Neptune, can you talk a little bit more about the dynamics there? What is going on, and what gives you the confidence that you are going to go back to growth in the fourth quarter in the US?

Well, if you look at the different components of it, the System 7 has a capital component and a disposable component. And the capital component was very significant; we had very significant comps in Q3 of last year. And those comps eased a little bit in Q4. So it's just simple math. If I look at the trends on how the business is performing and we just do some simple math on year over year -- obviously we don't break out every subcomponent in our disclosures, but it's just doing that math that gives us the confidence. Our underlying business is performing well, and we're optimistic that we will be able to return to growth.

Okay. And then Kevin, on the knee business, you didn't mention I don't think today, the DTC. Have you renewed that program? Where are you at in the evaluation there on the knee side? Do you see that program continuing?

Since we have the benefit of David here today, I will ask David to respond on that.

Sure. We do plan on continuing that campaign in 2013 and into 2014, but with changes to that media mix as planned last quarter.

Joanne Wuensch, BMO Capital Markets.

Can you please remind us of the timing of the return to the markets of the Neptune fluid management system, as well as the cutting blocks? Has there been any change in that?

No meaningful change. We're still hopeful sometime possibly this year, end of the year as it relates to Neptune. Obviously, it depends upon the government review of the 510(k) and sometime in 2014 the earlier part of 2014 as it relates to the cutting guides.

Okay. And I need to throw in a MAKO question here. It strikes me that this would be if you call it the long pole in a tent to a bundling strategy for orthopaedics. Is that the right way to think about it, and is that part of the thought process and pulling it into your franchise? Thank you.

Well, I wouldn't say that that is the primary driver here, but leveraging our breadth and depth is a Stryker strategy. So obviously the broader that we get and the fact that we are in capital equipment and disposables, we see that as an advantage for Stryker. And obviously, this adds to that. But I wouldn't say that that is the primary focus at all. I would go back to David's remarks earlier about how this can really transform orthopaedics surgery.

Jeff Johnson, Robert Baird.

I've been jumping between a couple of calls, so forgive me if I ask questions that have already been asked. But did I hear right, Bill, that there was a $0.02 or $0.03 hit in the quarter from exiting a distributor relationship in Asia? Is that about how you would quantify it, and were those one time in nature or any color you could give there would be helpful?

That is correct. It was about a $0.03 impact on the quarter, and it really was pretty much contained just this quarter.

Okay. That's helpful. And Kevin, one question for you just on the broader MedSurg platform, as I see Nav IIIi that you just launched, it looks to be a pretty impressive system. I don't think you've had anything out like this for 6, 7 years since Nav II was launched. Anyway, so wondering how do I think about the impact that could have on your instruments business over the next 12 months or so? It just seems like that's a pretty big opportunity that might be flying under the radar screen a little bit.

We are really excited about this product. In this product, we haven't really sold anything yet. So the sales will start in the fourth quarter.

Within our overall instruments business, obviously Nav is not the largest portion of that, but we really believe it is a winner, and that should help to contribute to growth over time.

Matt Miksic, Piper Jaffray.

So I had one follow-up on MAKO, sorry, and one more general strategic question for you, Kevin. I think someone asked the question earlier as to how quickly you might be able to get some of your own implants up and running on the robot. And I just wanted to understand that on the knee side obviously, there's a bit more engineering and approvals that would have to happen to those implants, and my guess would be to optimize them for the robot. But is it fair to say that things could possibly move a little faster on the hip side?

My comments in terms of moving Stryker implants on the robot -- I should have mentioned this -- were specific to unicondylar knees and total hips. Because those are the applications that they have approved today. There is no total knee application today approved for the robot, so I can't give you a timeline for migrating Stryker products onto a platform that doesn't exist yet.

Right. Understanding that the hips don't have the physical differences between a robotic implant and a traditionally cut implant. Is it possible potentially to have the hips move a little bit faster, say, than unicondylar knees?

I think it's probably premature, Matt, at this point, to -- we really try to capture the ranges by saying post-closing we're probably looking at a year to two before we would have our implants, whether it is hips or knees. If one of them is sooner or later in that range, I think we will have a better sense of that as we get to closing.

Yes. And following the closing, we will be able to share more of our perspective on it.

Josh Jennings, Cowen.

The first question was on spine. I was hoping to get some insight from you on where we are at with the special fraud alert by the OIG against PODs. Are you seeing any benefit there from your business or your hospital customers continuing to sign up with PODs, or are they leaving PODs? And what is your sense of next timeline for the next event by the OIG or Senate Finance Committee, et cetera?

Sure. How I would characterize the special fraud alert is that it does seem to have slowed down the growth in PODs. We did see some number of customers issue policies that they would not do business with PODs, but we certainly haven't seen them go away. We have heard of the potential of a lawsuit against the government by PODs, trying to get them to clarify their position on that. So the battle is still going to play out over time.

In just on your knee unit, you called out a headwind from ShapeMatch being off the markets. I was just wondering if there was any headwind from two competitive launches. I know at your Investor Day, you commented that you weren't seeing much at that point. I just wanted to make sure that that wasn't the case for any -- you have been gaining share in knees over the last number of quarters, and it was just -- you mentioned in competitive pressures. Thanks a lot.

I think that is right. We've not really seen any significant headwinds from competitive knee launches. We didn't really expect to see them. I think over time we have to see how that plays out over the next few quarters. Those launches are still fairly fresh. We feel very good about our knee growth. I think it is in line with the market, maybe a bit ahead of the market.

We hear noise a bit here and there about trialing of new knees, but it still seems to be minor at this point.

Yes, I would just like to add a comment that, getting back to our salesforce execution, which we don't talk about a lot, but if you look at our performance across hips, knees, and trauma and you go back over the last two years, we've been pretty consistent across all three segments, which is quite unusual. And we haven't really talked a lot about that. And I think if you look at most companies, one part will be going well; the other part will sag. Even if you go back in Stryker's history, in the past, we would really have strong growth in one, in hips, and then it would be softer in knees. And I'm really proud of our team's efforts in driving hips, knees, and trauma pretty consistently quarter after quarter.

Rick Wise, Stifel Nicolaus.

Just a couple of quick follow-ups. You mentioned a couple of points about the Asian distributor switch, but did you quantify how much it impacted your constant currency worldwide growth?

You are talking about the distributor change in Asia?

Yes, Katherine.

There was a modest top-line impact, but not material enough to break it out.

Okay.

Yes, obviously, it turned our knee performance because the bulk of those sales were knees. Knees are the biggest part of that business. So we've turned our international knee business to slightly negative. If you excluded that, our knee business outside the US grew at roughly the same rate as our knee business inside the United States. But outside of knees, it didn't really have much of an impact, and given the size of Stryker, it's very, very minor to our overall growth.

But still encouraging -- that's good color. I appreciate that. And you mentioned you are back to EU market rates of growth. Just thought maybe you would be kind enough to remind us what that growth rate is. Is it still declining, but now you are declining less or --?

No, no. We're registering positive growth year over year. Now, I wouldn't say in every country, but in the aggregate. Again, Italy, still slightly negative, but in the third quarter, every other country was positive. In the second quarter, Spain was about flat, and that has turned positive. But overall, look at our overall Europe business, in Q2 and in Q3, in constant currency, we had positive growth. It is low-single-digit, but I believe that the market based on what we can discern is roughly growing at low single digits. So we believe that we are growing at market rates from Q2 to Q3.

Last quarter I didn't want to celebrate too early since it was just one quarter, but I said, let's see if we can do it again in the third quarter, which we just did. So now we are feeling confident that we are growing at the market.

Matt Miksic, Piper Jaffray.

So the question, Kevin, I wanted to ask you is just around strategy for robotic surgery and more technology, there's a number of companies investing in more technology for the OR and more technology in acute care. From a distance, I guess the debate has been, gosh, this is an expensive robot and how is that actually fitting the system and how might that take costs out of the system over time in a way that is favorable to the healthcare system, improved outcomes and so on.

I'd love to just get your view on how you think robotic surgery I would imagine benefits and transforms this in a way that is cost effective, as well as clinically effective. Thanks.

I think David touched on some of this, and we don't look at it just buying cool technology. That is not the way we look at this. We look at this as really being able to transform orthopaedic surgery so it can be less invasive to the patient; much more consistent positioning of the implants; more reproducible; more consistent so you can be running more cases in a day. It can drive better efficiency. It doesn't matter where the procedures are done in the country. Today we have tremendous variability in procedures and procedure times in the way procedures are done.

So we believe that this is a neighbor to bring standardization to orthopaedic joint reconstruction and hospitals are looking for that. Patients are looking for that. So that is what -- we really believe this is a systematic change. And I think David talked a lot about the overall -- how profitable this service line is, and we have to demonstrate economic value. And MAKO has shown that. They don't just sell the technology; they are actually selling an economic story.

And I think one of our earlier callers commented on how speaking to a surgeon has actually driven business for the hospital.

So the hospital is concerned with making money, not just driving down costs. So if they get a better payer mix; if they are able to attract more patients; patients who are on the sidelines who feel confident -- I'm going in for surgery and it's being done with a robotic approach and a Stryker implant, I feel pretty good about the outcome I'm going to get -- that will drive more business.

And that is what they are concerned about, and we really believe this fits that.

We will need to demonstrate over time both clinical and economic evidence, but by no means do we believe this is just a high-priced, cool technology. It's much more than that.

Great. Thank you.

We have no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.

Well, thank you all for joining our call. Our conference call for the fourth-quarter 2013 results will be held on January 22, 2014. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.