Zimmer Biomet Holdings Inc (ZBH) 2008 Q4 法說會逐字稿

Good morning.

I'm Paul Blair, Vice President of Investor Relations for Zimmer.

I would like to welcome you to the Zimmer fourth quarter 2008 earnings conference call.

Joining me today to host this call are David Dvorak, President and Chief Executive Officer, and Jim Crines, Executive Vice President Finance and Chief Financial Officer.

This morning we will review our performance for the fourth quarter and full year 2008, provide you with an update on certain key matters, present our outlook for 2009 and conclude our discussion with a question-and-answer session.

Before we get started I would like to point out that this presentation contains forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Based on current expectations, estimates, forecasts and projections about the orthopedics industry, management's beliefs and assumptions made by management.

These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from those in the forward-looking statements.

For a list and description of the risks and uncertainties, see the disclosure materials filed by Zimmer with the Securities and Exchange Commission.

Zimmer disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This presentation also contains certain non-GAAP financial measures.

A reconciliation of such information to the most directly comparable GAAP financial measures, along with other financial and statistical information for the periods to be presented on this conference call, was included in the press release announcing our earnings, which may be accessed from the Zimmer website at www.zimmer.com, under the section entitled Investor Relations.

A rebroadcast of this call will be available from approximately two hours following the conclusion of today's call, through the end of the day on February 12th, 2009 and can also be accessed from the Investor Relations section of the Zimmer website.

At this time I would like to introduce David Dvorak, President and Chief Executive Officer of Zimmer.

Thank you, Paul, and good morning, everyone.

It's a pleasure to be addressing you in this new year, to report on 2008 and to discuss our outlook for 2009.

First, I'll comment on our fourth quarter and full year 2008 results.

Consolidated sales for the fourth quarter of $1.03 billion were down 0.8% in constant currency from the prior year fourth quarter and down 4% reported with a negative 3.2% foreign currency impact.

Adjusted diluted earnings per share for the fourth quarter were $1.00, a decrease of 15% compared with the prior year.

Knee revenues were up slightly in the fourth quarter with a 1% constant currency increase.

Hip sales fell 3% in constant currency during the fourth quarter.

And our remaining business categories for the fourth quarter on a constant currency basis, extremities was up 7% over the prior year period, trauma was up 4%, spine increased by 33% with the inclusion of Abbott Spine, and dental declined 10%.

Finally, our orthopedic surgical products business was down 19% for the quarter, due to the continued impact of the previously announced voluntary suspension of production.

The strength of the US dollar led to a negative currency translation effect of $35 million on sales in the quarter.

As we've discussed before, the top line impact of currency fluctuations is largely neutralized on the bottom line due to our hedging program.

During the quarter, we generated operating cash flow of $207 million.

For the full year 2008, our net sales totaled more than $4 billion for the first time in the Company's history, more than tripling our sales in 2001, Zimmer's first year as a public company.

At $4.1 billion, our 2008 net sales represented an increase of 6% over 2007, reflecting 3% constant currency growth over the prior year.

Adjusted diluted earnings per share for the full year were $4.05, inclusive of one-time gains of $24 million after tax, or $0.10 per share recorded during the second and third quarters.

In a year that could only be described as challenging, we recorded $924 million in adjusted net earnings, and $550 million in free cash flow, evidencing the fundamental strength of our business.

We enter 2009 with confidence that we will re-establish positive momentum in our overall business and restore revenue growth as 2009 progresses.

Our challenges in 2008 included the global implementation of our enhanced business model.

We made significant progress in the fourth quarter on a variety of the related issues impacting our business.

The 2009 needs assessment have been completed and approved.

Key product development programs were solidified.

And a large number of our outstanding payment obligations to consultants were brought up-to-date.

We have an improved royalty model in place and we're moving forward with development teams for new innovative products and technologies.

We responded to our disruption in training and education events by developing a completely new model that we believe sets new standards for the industry.

We resumed surgical skills training events as early as the second quarter of 2008, and are continuing to ramp up other training activities.

If you've been on our website since the consultant payments update was posted earlier this month, you'll see that we made a substantial number of surgeon and other consulting payments that had been delayed as a result of the DPA process.

In 2008, we also executed on our plan to establish third party mechanisms to oversee certain of Zimmer's educational and charitable contributions.

And we're currently developing a new process by which an internal committee of non-sales representatives will assess and act upon requests for other forms of direct financial support and grants, including such things as medical education, unrestricted research, and charitable activities.

We responded aggressively to the issues that we uncovered at our orthopedic surgical products business, and have now begun to return affected products to the market.

We'll be working hard to win back the OSP business that we had to forego for most of 2008.

The Durom Cup matter was clearly another challenging issue in 2008 but again, we did the right things.

Our people responded appropriately, and we continue to offer this product together with a comprehensive set of training opportunities for users.

We moved ahead with investments in infrastructure and instruments that we believe can be leveraged to drive improved service levels with greater efficiency.

We're now in a better position to be responsive to future demand growth in the field and provide the highest possible levels of customer service.

These investments are for the most part complete.

Meanwhile, we didn't stand still in the business development area, concluding an acquisition of Abbott Spine that broadens our product line and adds greater breadth to our sales force reach.

Finally, we've added key management talent to our organization including two seasoned healthcare executives to head our reconstructive and global businesses groups.

In addition, over the past couple of years we've installed new presidents in our trauma, spine, dental and OSP divisions.

For 2009, we're continuing to provide full year guidance rather than breaking out quarterly estimates.

We think this full year approach better reflects how we run the business for long-term success, not near-term expediency.

We expect full year revenues for 2009 to increase between 1% and 3% on a constant currency basis with revenues anticipated to be flat in the first half of the year and improving thereafter.

We're projecting full year adjusted diluted earnings per share to be in a range of $3.85 to $4.00, with negative growth expected in the first three quarters, and positive growth projected for the fourth quarter.

Clearly, 2009 will be a pivotal year, and our top priority is very clear.

We must stabilize our core knee and hip franchises, which are the foundation of our overall business.

New products are key to our business and we're excited about our plans for 2009.

On the knee side, we believe our introductions in 2007 and 2008 give us the most comprehensive portfolio in the industry.

We seek to maximize our potential with what we believe are among the industry's strongest brands.

At the AOS meeting in February, we'll be introducing patient specific instruments to complement these brands.

And we plan to begin marketing these systems in the second quarter of this year.

In hips, we've clearly had some gaps, especially on the Acetabular side.

We look forward to bringing new solutions to the market in the second half of the year to address these gaps and fully leverage our strong portfolio of stems.

We see opportunities in our other businesses as well -- continued expansion of our extremities portfolio, the restoration of our OSP product line to the market.

In trauma, the new nail system you've heard us describe is expected to hit the market this year.

And in spine, we'll continue to grow the Abbott Spine portfolio along with our existing product line through our new, combined distribution network.

Regarding our enhanced compliance program, we expect there will be additional refinements along the way, but Zimmer's guiding principles are clear.

The major disruptions are behind us and we're moving forward.

With the recent adoption of the new AdvaMed code of ethics on interactions with healthcare professionals, many of our practices will now be included in the code of conduct for the medical device industry, and we consider that a recognition that we've been on the right path all along.

Finally, I want to underscore emphasis on quality initiatives.

In 2009, we'll continue with Company-wide implementation of quality system improvements.

Over the past several years, we've greatly enhanced our quality programs, expanded our quality assurance staff, and are now applying these uniformly high standards across our businesses.

So in 2009, you should expect a return to positive momentum from Zimmer.

We relish the opportunity to focus our full attention and energy on realizing our market opportunities, and we're encouraged by what 2009 will bring.

We want to thank the customers who supported us in dealing with our recent challenges.

We look forward to working with them to drive new solutions that address patient issues and our growing markets.

Jim will now provide further details on the quarter, the year, and our guidance.

Jim?

Thanks, David.

I will review our performance in the quarter and for 2008 in more detail and then provide some additional information related to our guidance.

Sales of $1.03 billion for the quarter reflect a decrease of 0.8% constant currency and 4% reported.

These results reflect greater than anticipated headwind from foreign currency, as well as lower reconstructive sales relative to expectations.

The US dollar continued to strengthen during the quarter and as a consequence, foreign currency translations decreased revenue by 3.2% or $35 million in the quarter.

Consolidated pricing was down 0.8 percentage points for the quarter.

In the Americas, price was flat for the quarter, while Europe and Asia-Pacific results include negative price of minus 1% and minus 3.5%, respectively.

Turning to our fourth quarter revenue growth by major product category.

Worldwide reconstructive sales decreased 1.4% in constant currency, and 5.1% reported.

Knee sales in the fourth quarter grew a modest 0.8% constant currency, reflecting slower unit growth across all geographic segments combined with lower pricing on a global basis.

Knee pricing on a global basis was down 1.5 percentage points in the quarter, principally as a result of the lower reimbursement prices now in effect in Japan and Australia.

Flex knees accounted for 52% of our knee unit sales on a global basis in the fourth quarter, maintaining penetration levels above 50%.

As we discussed during the third quarter call, we have lost market share in knees as a result of various factors including the implementation of our enhanced global compliance program.

Looking back at final market results for the third quarter, we estimate that our knee results reflect the loss of approximately half a point of market share in the third quarter.

Our fourth quarter results continue to lag market and, as such, reflect additional share loss which we estimate at 1 point in the quarter.

This brings our total estimated loss in global knee market share to 1.5 points.

As David indicated in his remarks, significant progress was made in the fourth quarter toward enhancing our competitiveness including, for example, the fact that the '09 knee assessments have been completed and key production development initiatives have progressed.

These and other initiatives we have underway are essential to stabilizing our share position in the global knee market.

Countering the effects of customer losses, our natural knee sales increased over 15% in the quarter on a dollar basis following the recent introduction of the Gender Solutions femoral component.

Also with the launch of our new mobile bearing knee, and the new segmental knee, unit sales of these products increased 22% and 6%, respectively over the third quarter.

In the fourth quarter, knee sales in constant currency increased 1.2% in the Americas, 1.2% in Europe, and declined 1.9% in Asia-Pacific, respectively.

The Asia-Pacific results reflect the 5.8% reduction in Average Selling Prices.

Hip sales declined 3.2% in the quarter, reflecting current product gaps and the impact of training disruption, as well as customer losses, which altogether contribute to the shortfall in hip revenues relative to market.

Again, looking back, we estimate the third quarter share loss in hips at 1.5 points.

And with our fourth quarter results continuing to lag market we estimate additional share loss in the fourth quarter of approximately 0.5 point, bringing our total share in the global hip market to 2 points.

As we consider the actions necessary to enhance our competitiveness in hips, among other things we look to the anticipated launch of Acetabular hip products in 2009 to fully capitalize on the hip stem products that have been launched during the past 12 to 18 months.

These hip stem products were primary contributors during the fourth quarter and much of 2008, and include M/L Taper with connective technology, our Avenir stem for the European market and the recently released Fitmore bone conserving stem.

On a geographic basis and in constant currency, fourth quarter hip sales decreased 3.6% in the Americas, 1.9% in Europe, and 5.7% in Asia-Pacific.

The latter of which includes negative pricing of 4.1%.

Extremity sales for the quarter in constant currency increased 6.8% on a challenging comp with 30% in the fourth quarter of 2007.

Dental sales on a constant currency basis decreased 10.1% for the quarter on a challenging prior year comp of 24%.

Disruption in training and education, turnover in our dental sales force, competition from low priced suppliers and turmoil in the global economy continue to impact on dental revenues.

I believe these disruptive factors are temporal and we are taking steps to reposition this business for future growth.

Trauma sales in the quarter were up over the prior year period 4.1% constant currency.

On a constant currency basis, trauma sales in the quarter decreased 0.6% in the Americas, increased 12.3% in Asia-Pacific and increased 8.3% in Europe.

Zimmer spine reported 32.5% constant currency growth in the quarter.

This growth is driven by the Abbott Spine acquisition which was completed during the quarter and contributed $22 million of incremental spine sales in the quarter.

Finally, orthopedic surgical products and other sales declined 19.3% in constant currency in the quarter as a result of the previously announced voluntary suspension in sales of certain patient care products, partially offset by bone splints and accessory sales which grew over prior year.

The remediation efforts at our Dover facility continue to progress and, as we said in the third quarter, we look forward to stocking shelves and putting the OSB products back in the sales bag.

I'll focus now on the rest of the income statement.

Our adjusted gross profit margin of 76.8% for the quarter is up 40 basis points from the prior year fourth quarter.

Foreign currency hedge gains accounted for the improvement in gross margin with idle plant costs and excess and obsolete inventory charges partially offsetting the gains.

Compared to last year's fourth quarter, R&D expense as a percentage of sales decreased to 4.6%, and at $47 million for the quarter is 6.9% below prior year.

The decrease is a result of reduced surgeon collaboration activities in the areas of experimental research, product development, medical education and clinical affairs.

As we are planning to invest in surgeon training and education and in new development programs in 2009, our R&D expense as a percentage of revenue is expected to return to historical levels of 5% to 6%.

Selling, general and administrative expenses increased to $436 million in the fourth quarter, and are up 8.6% over prior year.

At 42.3% of sales, SG&A expenses are 490 basis points above prior year, inclusive of the significant one-time fees and expenses associated with compliance with resolution agreements and the implementation of our enhanced business model.

Acquisition, integration and other amounted to $43.1 million in the quarter, comprised of costs pertaining to the Abbott Spine and prior period acquisitions including an in process research and development charge, facility consolidation costs, legal fees and retention and termination payments.

During the quarter, based on the volume of claims submitted to date, we also revised our estimate for anticipated claims pertaining to the Durom Cup.

This resulted in an increase in our provision for these claims from $47.5 million to $69 million, and a charge to pretax earnings in the quarter of $21.5 million.

This provision is classified as a non-recurring item and is therefore excluded from our non-GAAP earnings measure.

Adjusted operating lost in the quarter decrease 16.3% to $308.1 million.

At 29.9%, our adjusted operating profit sales ratio decreased by 440 basis points from prior year as a result of lower revenues and the significant step-up in SG&A costs.

Interest expense for the quarter amounted to $4.2 million, principally resulting from financing the Abbott Spine acquisition.

Adjusted net earnings decreased 18.6% compared to prior year at $224.6 million.

And adjusted diluted earnings per share decreased 15.3% to $1.00, on 224.2 million average outstanding diluted shares.

These adjusted earnings per share are inclusive of approximately $0.06 of share based compensation.

At $0.75, reported diluted earnings per share include certain one-time costs connected with the Abbott Spine acquisition, as well as the additional provision for Durom claims, and as such decreased 33% from prior year fourth quarter reported EPS of $1.12.

At 26.1% adjusted for the quarter, our effective tax rate reflects a favorable year-to-date adjustment to bring the effective tax rate for the year to 26.9%.

This is below our first estimates and 60 basis points below our full year 2007 ETR due to favorable geographic mix of earnings and profit.

During the quarter, we repurchased 1.2 million shares at a total purchase price of $48.1 million, or an average price per share of $40.47.

We used cash to acquire the shares under $1.25 billion repurchase authorization which expires at the end of 2009.

Cash outlays for the Abbott Spine business and surgeon payments reduced the amount of cash available for share repurchases during the quarter.

For the year, we repurchased 10.7 million shares for $737 million.

Approximately $1.13 billion remains authorized under our current repurchase program.

The Company had approximately 223 million shares of common stock outstanding as of December 31st, 2008, down from 225 million as of September 30, 2008.

Operating cash flow for the quarter amounted to $206.9 million, down from $421.9 million in the fourth quarter of 2007.

In the quarter, we resolved a large number of our outstanding payments to healthcare professionals and institutions resulting in substantial cash outflows compared to prior year.

We made substantial payments to third party service providers for work completed in connection with the global roll-out of our enhanced compliance program.

We settled a large number of product liability claims.

And we invested in the build-out of inventory pipeline for certain new products we are preparing to launch in 2009.

Inventory days on hand finished the quarter at 344 days.

Our trade accounts receivable days, days outstanding finished the quarter at 59 days.

Depreciation and amortization expense for the quarter amounted to $79.1 million.

Capital expenditures for the quarter totaled $112 million including $51 million for instruments and $61 million for property, plant and equipment.

Cash outlays associated with investing activities during the quarter also include $363 million for the Abbott Spine acquisition and $109 million for the acquisition of intellectual property rights in place of future royalty payments under certain of our legacy license agreements..

Finally, free cash flow was $94.7 million for the quarter.

I'd like to turn now to our guidance for 2009.

In our press release this morning we announced that the Company expects full year revenue to increase from 1% to 3% in constant currency, when compared to 2008, with revenues anticipated to be flat during the first half of the year and improving thereafter.

At this time, assuming currency rates remain at year end 2008 levels, we anticipate foreign currency translation will reduce our reported 2009 revenues by an estimated 4%.

Therefore, on a reported basis, our revenues are projected to be in a range of minus 3% to negative 1% compared with 2008.

And with currency translation effects expected to be more pronounced in the first half, revenues on a reported basis are likely to be below this range during the first half of the year.

With respect to certain of the underlying assumptions, we are well aware of the various independent research reports projecting a moderate temporary slowdown in elective hospital procedures including knee and hip arthroplasty procedures.

We think it's important not to overemphasize this impact.

Our core knee and franchises remain more insulated than most from the swings in the broader economy.

Moreover, the need for these procedures does not vanish even if the timing is affected.

For planning purposes, however, we have assumed in an estimated stepdown in global market growth of knee and hip procedures of 200 basis points.

With this assumed stepdown of procedure growth we anticipate constant currency dollar growth of 6% for the global knee and hip markets compared with recent trends of 8% to 9%.

We assume pricing across the broader market will be flat.

Zimmer's knee revenues are expected to be slightly negative in constant currency for the full year while our hip revenues given the more significant product challenges we will face, at least in the first half of the year, are projected to decline in mid single digits in constant currency for 2009.

Relative to the fourth quarter of 2008, our full year 2009 forecast for hip and knee revenues implies a further estimated loss in market share of up to one half a point in each of these franchises.

The share loss is expected to stabilize by year end 2009 as we anniversary out of the majority of the 2008 customer and product related losses and as we launch new products in sufficient quantities such that we can begin to recover some of the product related losses in 2009.

Among our other product franchises, extremities and trauma are expected to be in line with market.

Dental revenues, given the weak economy combined with Company specific operational challenges, are expected to underperform relative to market.

And finally, spine revenues on a pro forma basis, assuming Abbott Spine is combined with Zimmer Spine for the full year 2008 are projected to be below market as a consequence of anticipated sales dis-synergies associated with the ongoing integration of the two businesses.

Adjusted earnings are expected to show negative growth in the first three quarters, with positive growth in the fourth quarter.

2009 full year adjusted diluted earnings per share for 2009 are projected to be in a range of $3.85 to $4.00.

Assuming currency rates remain at year end 2008 levels, we expect our gross margin ratio to improve as compared with 2008, principally as a consequence of the anticipated recognition of gains on hedge contracts in 2009, contrasted with the hedge losses recorded in 2008.

Although the ratio is expected to improve, year-over-year comparisons of gross profit dollars are expected to be unfavorable in the first half, and improve thereafter.

Our operating expenses will be impacted by a number of factors which in the aggregate are expected to result in a modest net increase in total expense over 2008.

As we exit 2008, we expect to realize significant savings in third party fees related to compliance with the resolution agreements and the implementation of our enhanced business model.

For 2009, however, we intend to offset those savings with a significant increase in spending in areas that suffered major disruption in 2008, including product development, and medical education.

Our plan also reflects the dilution related to the Abbott Spine acquisition which, in part, is captured in higher operating expenses.

We also continue to step up our level of spending on quality systems to achieve our continuous improvement objectives in the areas of design and process control, as well as ongoing product surveillance.

The interest expense and other line of our P&L is expected to be unfavorable year-over-year as we take on the cost of financing the Abbott Spine acquisition and a portion of our 2008 share repurchases.

Contrasted with the significant capital gains reported in 2008.

This, of course, will be most pronounced in the third quarter.

We anticipate a tax rate of around 27.5%, above our final rate for 2008 due to a higher mix of earnings profits from higher tax jurisdictions in 2009.

We anticipate the diluted weighted average shares outstanding for 2009 to be between 216 and 217 million shares.

This assumes available free cash flow will be deployed principally to repurchase shares in 2009.

To arrive at our GAAP earnings per share you should subtract projected acquisition, integration and other costs of approximately $45 million pretax, and inventory stepup amortization of $13 million pretax, or approximately $0.17 per share.

Turning to cash flow.

We anticipate total capital expenditures in the range of $390 million to $410 million.

Instrument capital in 2009 is expected to be in a range of $160 million to $170 million.

Traditional PP&E is expected to be in a range of $230 million to $240 million reflecting the cash outlays necessary to complete capital expansions initiated in 2008, as well as new product related investments and normal replacement of older machinery and equipment for 2009.

David I'll turn the call back over to you.

Thanks, Jim.

We believe we acted in the best interest of all key stakeholders in addressing the challenges we faced in 2008.

We intend to continue to focus on providing meaningful innovation, effective products and return on our investments.

We've described for you our approach to 2009.

In the short-term, we'll prioritize those activities that will restore momentum in our core business and drive growth in our global businesses.

We're confident that long-term success will follow.

We're bullish about our industry, one that will continue to grow, not just because of demographics, but because we help enable physicians to improve the quality of life for their patients.

Now I'd like to open the call to your questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

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

Good morning, everybody.

Couple of questions.

Can you talk a little bit more about the knee weakness, it was surprisingly (inaudible) First, were you surprised?

Second, you seem to be arguing that the new hips turn things around.

So, one, do you expect to see that turnaround starting early in the year or is this a process that's going to take the full year?

On the knee side of things, obviously there have been a combination of factors that have contributed to the performance declining in the second half of 2008.

The most significant of those really have been the training and education slowdown.

As we said, we got some of the Surgical Institute events back up and running at the end of the second quarter, but that pace continues to accelerate and the full offering of medical education events is now being implemented.

So we'll see improvement on that front.

We have some other offerings that I discussed in my script that we'll be unveiling at the Academy meeting, as well.

And then the collaborative relationships with surgeons contributed to that as well, Rick.

So I think that we have ironed out many of those root causes of the instability in our knee business and we'll see that stabilize as the year progresses.

It's also important to note that even on the knee side, some of these disruptive factors that we faced in 2008 causes the sales force to end up in a pretty defensive mode.

And we're seeing the beginnings of group of sales force folks getting reoriented towards going on the offense, and you're going to see more and more in the sequential progression of our revenue growth in 2009 on that front.

Hips, all the same factors would apply on that side as well.

But here you also have some pretty significant product gaps and some field actions in the Durom area that were disruptive in 2008.

We feel very strongly about the quality of our current stem offering, have some great innovations that are currently in the marketplace.

But the pacing item to restore the growth rate to our hip business we see as being the introduction of the cup side.

On the Acetabular cup side we're going to have at least two significant offerings in the second half of 2009.

So they're not going to help our performance in the first half.

They will in the second half and we would expect to finish the year out with some positive momentum going into 2010 in that category.

Very helpful.

Two quick follow-ups.

You highlighted that you expected the new products to fill in the product gaps in the product lines.

Do the new products totally get you where you need to be?

And the second question, maybe just a little more on 2009 guidance.

Clearly higher R&D spending is going to pressure EPS.

I would just be curious to hear your thoughts about when we start to see the positive leverage and is that more sales-driven fourth quarter or do we have to wait until 2010?

Thanks so much.

Sure, the first question, on the hip side, it will address all of the needs that we have with the exception of resurfacing in the United States market.

But every other need that we have on the Acetabular cup side will be addressed with second half of the year offerings.

Jim, why don't you turn to the leverage question on the P&L.

Sure.

Rick, the first time you would see leverage in the P&L would be in the fourth quarter of 2009.

Is when you would begin to see that return.

If you're looking purely at EPS growth, if you look, on the other hand, at operating profit, and this has a lot to do with the fact that we had significant capital gains reported below operating profit in the third quarter of 2008, you would see some modest leverage, begin to see some modest leverage in the third quarter, is the way we see things developing over the course of 2009.

Thank you very much.

You're welcome.

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

Baird & Company

Thanks, guys.

Can you hear me okay?

Yes, we can, Jeff.

Great.

Jim, maybe you could just touch on -- intangibles up about $130 million on the balance sheet.

I'm assuming that's the buyout on the contracts.

Just wondering how this is going to flow through over the next couple years.

And does that go through the R&D line or is that part of the reason SG&A is up next year, as well?

Well, first of all, as we said before on the buyout of the future royalty obligations under those legacy license agreements, we made a lot of progress on that, obviously, in the fourth quarter, paid out $109 million for the acquisition of intellectual property rights under those agreements.

That has been recorded as an asset and will get amortized over the life of those products.

And that just so happens to line up with the royalties that were otherwise getting recorded under those obligations, so there's no incremental operating expense, if you will.

And because those royalty expenses have historically been recorded in cost of goods, the amortization of those intangible -- those technology assets will be amortized in costs of goods as well.

Now, the other increase we recorded, the other thing we recognized over the course of the quarter was the preliminary purchase price allocation associated with the Abbott Spine deal.

That resulted in the addition of another $75 million in intangible assets and those assets will be amortized over a period of 10 years.

Okay.

Great.

Thanks.

And David, maybe you could just address on the OSP side, I know you had been talking about relaunching some of those products late in Q4 and substantially all of them by the end of Q1.

I didn't hear those same comments this time.

Just wondering if you could update us how you see those products rolling out over the next couple quarters.

I'm glad to do that, Jeff.

We were successful in reinitiating some of the products before the end of 2008.

The balance of the products will be relaunched in the first and second quarter of this year.

So there will be, most the principal products we will be successful at relaunching.

I think the strategically most important of those products will be relaunched before the end of this quarter with the balance coming out in the second quarter of this year.

And obviously it's going to take some time to ramp those sales back up but that may be a bit different than the different subsets of the product offering, Jeff.

Fair enough, and then qualitatively, I guess, David, and I know it's hard to tell, should we think about those products just slowly recapturing some share over the first few quarters?

And maybe taking that process out over a three to a four quarter period?

Yes, I think that that is a fair way to look at it.

It's going to be staggered.

The first of the products that were launched in the fourth quarter of this year, I would expect that we would be in decent shape at recapturing the market share that we have built into our model by the end of the year.

So I do think that kind of a two to four quarter time period, and I don't think that it's reasonable to expect that we're going to recapture all of that market share.

So something better than half, but we'll keep you posted on that progress as we relaunch those products.

Great.

Last question from me.

I know one month does not a trend make, but a lot of questions about what's going to happen as we fall off and hit new deductibles and copays and that in '09.

Anything you can talk about qualitatively industry wide that you're seeing in January, relative to maybe November, December trends on hips and knees?

Well, the best we can do is what we reflected in the guidance, as Jim said, the kind of couple of percent slowdown in the market is consistent with what we've seen over the course of the last, say, four months at this point.

Is that couple hundred basis points that Jim was talking about, would you assume on an annualized basis that maybe gates through a bigger impact in the first half and lesser impact in the back?

How are you thinking about that?

Jeff, this is Jim..

I guess the way we are thinking about it is that stepdown has happened to some degree in the fourth quarter and we'll see how that plays out once everybody's reported.

And that will persist through 2009.

At least for planning purposes, that's how we're thinking about it.

All right.

Thanks.

Very helpful, guys.

Thank you.

Thank you, Jeff.

Next question comes from the line of Bruce Nudell of UBS Equity Research.

Good morning, thanks for taking the question.

That was the point I was going to ask about.

It looks to me that US hip market may be like 3% in the quarter, ex US, 5% constant currency, US knees, a little under 7 and ex-US maybe 3% which is closer to the 4% to 5% growth rate for the market.

Is that in line with your thinking and do you think it really is starting -- we're actually starting to see a small procedure dropout?

That is very much in line with what we're seeing and what we're estimating for the fourth quarter, understanding that not everybody's reported yet.

Yes.

But we just plug what we thought was likely.

And what gives you confidence, that we came to the same sort of conclusion that if the trend line was 5 points in units, it would be maybe 2.5 or 3 points of units, which would get us down to mid single digits market.

Have you done any analytics to confirm the exposure to unit growth rate, or is it just everybody's in the same boat and making reasonable guesses?

We're looking at as many sources of data as we can get our hands on, but it is a difficult thing to really pin down.

Some of the data that we're looking at is relatively small samples across a number of hospitals in the US.

And with that information in hand, we're making the best sort of guesses that we can, the best assumptions that we can at this point.

But we do not have really access to hard data across the broader markets at this point.

My final question is, our estimates show the share losses that you've outlined.

We agree with those.

What sort of analytics have you guys done internally to kind of say that half percent further erosion is about where it will end.

It certainly agrees with our survey work but you have excellent access, of course, to the customer base and how have you assessed the turmoil take trajectory of that loss?

It's done on an account by account basis by us Bruce.

Obviously we're rolling up all the information we have in a very detailed fashion those account relationships, the risk accounts, the opportunity accounts and then projecting out things that we're doing to stabilize those relationships to arrive at the forecast that we're providing out.

So it's obviously a major assumption but there are a lot of details that go into that side as opposed to the first line of inquiry which is trying to project out what's happening unit wise across customers that we may not be working with because they're with competitors, obviously.

Thanks so much.

Next question comes from the line of Weinstein of JP Morgan Securities.

Hi, there, can you hear me?

We can, Michael, good morning.

Great.

Thank you for taking the questions.

Let me be a little bit more direct and try and get our arms around this.

On the last conference call in October, you preliminarily thought that 2009 EPS would grow high single digits and now you basically have taken that down by $0.40 to $0.50.

That suggests that there's been a significant deterioration in the business over the last three months.

And your fourth quarter was obviously disappointing, as we look at the different businesses relative to market growth.

But the suggestion relative with your '09 guidance is that it's gotten a lot worse, given that significant cut you're making in the three-month period.

So help us get our arms around that.

Thanks.

Mike, this is David.

Look, we finished out the year and did fall short of what we had hoped to accomplish on the top line.

We have a lot more clarity as to what's happening with those existing relationships.

We also have quite a bit more clarity as to what's happening in the market in general and obviously the economy has changed fairly dramatically.

And the long and the short of it is we went through a months long process to put together the best operating plan we can to drive shareholder returns in the go-forward period and what we find is that we're going to have to spend money to put things back on track.

We don't want to lose further market share and this is a plan that we think is the most constructive way to return the business to an operating pattern that it ought to be at.

So rather than going tight on dollars that are going to be necessary to put things back on track, both in the product development side and the medical education side, we're going to show that kind of leverage as we emerge from this year, but you're going to see leveraged earnings, as Jim laid, out in the fourth quarter, as opposed to something that would reach high single digits across the year on a blended basis.

The guidance on the top line for 2009, obviously is suggesting that ex-currency and ex the impact of spinal concepts that your revenue growth would be relatively flattish for the year, which relative to your markets obviously suggests some meaningful share losses.

Can you help us get our arms around the surgeon base at this point in your core hip and knee businesses and any magnitude of surgeon loss, anything you can help us get insight into, whether it's specific territories or specific parts of the business, where you are most vulnerable right now and you see yourselves losing more shares as you go into 2009.

The issues and root causes are the same ones that we've been describing, and I think that they're quite well-understood in the various markets globally, so there really isn't a particular geographic segment.

Getting the training and education segment back up and running, any delayed payments is obviously awfully frustrating and testifies to the relationships we have with surgeons that have contributed so much in the development of the products and assistance in training and educating other surgeons on the proper use of those products.

Now, we've made tremendous progress over the course of even just the fourth quarter on both those fronts and so yes, on an account by account basis, we feel like we have good visibility into what the additional potential fallout would be.

But we're also very optimistic that as you get into the second half of the year, and some of that disruption anniversaries out, in the form of the lack of training and education from 2008, in the form of the disruption to those surgeon relationships on the collaborative side, in the form of introducing products that are going to fill the gaps that we're currently up against on the hip side, in particular, and then even those field actions on OSP and Durom.

We're going to get to the second half of this year and put the business back on a growth track.

One of the things that you're doing is reducing the size of your product development teams.

To what degree is taking your product development teams from 15 to 20 surgeons down to three to five surgeons and the surgeons that are basically no longer on the team, is that where you're losing your business in those surgeons in particular?

I wouldn't say that it's those surgeons in particular.

I think that those types of moves are all in the broader mix of factors that are contributing to the dynamics that we see right now.

But those are all incorporated into the plans that we're developing to put things back on track too, Mike.

Okay.

Last question.

And this is may be a tough question.

I get this a lot from investors, and obviously your business has gone through a tough '08, you're describing what's going to be arguably an even more difficult 2009.

Describe the Board's patience with this strategic plan.

A lot of people ask how long can this go on with the Company, this direction, before the Board gets frustrated.

Can you give us any sense of the degree to which the Board is on-board with what you're describing here.

We're very confident in what we're going to be able to achieve this year, is the short answer to that.

I don't think that 2009 is a year that anyone ought to be pessimistic about.

We're telling you what we think the milestones are going to look like and we get to the second half of this year and start seeing some of these headwind factors anniversary out and we're going to put the business back on track and exit this year in a very strong fashion.

Okay.

Thank you, David.

You're welcome, Mike.

Thank you.

Your next question comes from the line of David Toung of Argus Research Corporation.

Good morning, thank you for taking the call.

Good morning.

Getting down to a little bit deeper into your relationships with the surgeons, since you're acknowledging market share losses, presumably these surgeons are either temporarily using your competitor's products.

What gives you the confidence that these surgeons will come back to Zimmer and what's the tone of your conversations?

I know you said you've made a lot of tremendous progress in your relationships but do surgeons switch back and forth?

Just describe a little bit more on your grass roots conversations.

Those conversations are improving, as a general matter.

That's certainly the case.

I mean, I'm not saying that there isn't risk of additional losses.

Obviously we're projecting out that there in fact will be some additional losses.

But it's important to note that our assumptions going forward with growth that's built into the model in the back half of the year don't presume that we're going to be restoring all of those relationships.

Many of those relationships will anniversary out.

Every day, we're developing new relationships with new customers and those are improving our performance.

And as some of those significant early losses anniversary out, you're going to see the top line growth be restored as well.

So as a general matter, the root causes that have led to the disruption are being addressed and it's one of the reasons that we're so optimistic about what's going to transpire as we get deeper into 2009.

Since your agreement, compliance, is mainly in the US, what's been the dynamic in Europe and Asia as far as the market share, because I think your numbers here were across the board below market.

Yes, sorry, David, this is Jim.

The same programs that are governing decision making and how services are getting provided, and how the company goes about entering into relationships where there are bonafide needs, has been and is in the process of being rolled out to all of our business units.

And we talked about that in the past.

It has caused, as we said, some disruption not only in the US but outside the US as well, as we work towards getting the infrastructure in place, among other things, such that these decisions be made in an efficient way and the services can be provided in an efficient way, responding to what we believe are bona fide needs in those markets as well.

Okay.

Great, thank you.

Thank you.

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

Hi, thank you.

Good morning, can you hear me?

Good morning, Bob.

Just two quick questions.

First, following up on some of the issues that have been touched on previously, you guys stated last quarter that you lost some physician relationships to competitors in Q3 and that you felt like that would continue in Q4 and obviously it looks like that did happen.

But if you just look at the absolute number of physicians that you think went to competitors in Q3 and I'm making up a number, let's say it's 50, did you lose more than 50 this quarter or did you lose less than 50 this quarter?

I'm just wondering in terms of absolute numbers, did things get worse this quarter than last?

I would say -- Bob, this is Jim -- that it was less.

I think some of what is in my view impacting, in our view, impacting on our results in the fourth quarter is what we believe is, A, slow down in procedures across the broader market.

I think that will prove itself out as and when all the companies have reported.

I will say that if you look at the data that we provided on our estimates of the market share erosion both in knees and hips it was a bit more pronounced in knees in the fourth quarter.

Maybe lesser so on hips.

Relative to what we experienced in the third quarter.

Okay.

And then just to follow up on Mike's question earlier, talking about the difference between the guidance that was -- the rough guidance, preliminary guidance for '09 that was provided in the third quarter versus this, it's roughly $0.45.

Can you first try to put that into buckets in terms of what's changed?

What are the top two or three things and how much was each one of those things contributing to that $0.40 to $0.45 difference between what you were saying three months ago versus what you are saying today.

Thank you.

Clearly, our view of the market and how the market's going to grow for 2009 is changed.

We've taken down our expectations as we talked about for market growth, down to 6% to where we said it was recently trending at 8 to 9%.

Share loss, share loss being a bit more pronounced coming out of the fourth quarter, relative to what our expectations were at that time.

And finally -- and that really makes up 85% to 90% of that adjustment on the bottom line.

The rest of what makes up that adjustment on the bottom line is what we believe is needed in the way of increased spending in the areas that David touched on, in order to restore growth in that core franchise.

And that spending's going to be focused on both product development and medical education programs.

And then finally, one other thing that I mentioned in my comments was the fact that we are going to be stepping up to a degree our spending on quality systems, as I indicated, to achieve the continuous improvement objectives we have laid out in that area.

Thanks very much.

Thank you.

Your next question comes from the line of Tao Levy of Deutsche Bank Securities.

Good morning.

Good morning.

So you talked a couple times, one of the ways you guys are going to try to stop the share loss is to invest in product development.

But as you walked through what you planned to launch in 2009, I think I heard maybe two products.

And I didn't know if there was more there that's coming that's in the pipeline that will come out in 2010.

A you few years ago there was always some big products that were coming out, this year, the following year, whether it was the Gender knee or some of the hip products.

I'm trying to get a better sense of is there a way, for example, in the knee business, where you can slow down some of the market share losses because it doesn't seem like you're coming out with a knee product, and you have one of your competitors, which looks like it may have taken three, four market share points this past quarter.

We're not going to obviously lay out everything that we have in the pipeline.

The pipeline is robust.

It's diversified across all the different product categories, and the launch dates for those products are obviously spread out as well.

So what we're trying to do is highlight the things in the short term that don't put us at a competitive disadvantage by tipping our hand but give you some visibility as to things we think are going to make the most significant impact in the short term.

The principal category there on the hip side the Acetabular cup offering that will be launched in the second laugh of this year.

On the knee side I think you mentioned instruments.

Is that what's going to help you guys in '09?

Instruments and there's other plans as well.

The trauma product that you mentioned before, when do you expect to launch that in '09?

That rolls out through the course of the year.

The nails for the different anatomical sites will be rolling out on a quarter by quarter basis to largely be completed before the year is out, if not completely out before the year.

Got you.

Okay.

When you look and you reflect back on the issues with Durom, is there a way to quantify what type of impact that's had on Zimmer's reputation and/or doctor loyalty?

As I see the claim numbers start to go up, it seems like a high number.

I assume most of the Durom patients haven't had, or I assume that most of them don't have any problems with the hip.

So I was surprised to see the number go up, unless those patients are starting to have problems and the surgeons who implanted the product are getting frustrated.

So if you could tie those two together.

I don't think that it's the case that there's frustration that's driving that.

The clinical results are what are being used to develop the criteria and make decisions around that.

It's tough, I think, to quantify as you've requested, the impact there.

Obviously, those are situations that we do everything under our power to avoid ever having that kind of disruption for surgeons and patients.

And so we've done the thing that we think is most responsible under those circumstances and we're standing by our obligations with respect to the patients' needs in these circumstances as well.

The direct financial impact is quite quantifiable in the sense of we explained what we thought would happen revenue-wise and then provided updates on that and now the impact on the product liability side.

I think that the thing that is important to consider, though, is that it was one of several challenges that we faced in 2008 and so if nothing else, it's time-consuming.

It drives a lot of energy towards those issues and as a consequence, it's disruptive from everyone's perspective.

And so you have a sales force that is going to be less oriented towards thinking optimistically about the results they can produce with that product line until those types of issues are addressed.

That's why we have such a great deal of optimism as we enter the second half of the year and put some products out that we think will address the gaps we do have on the Acetabular side.

Just my final question.

I was surprised to hear you guys mention that you're going to use most of your excess cash to buy back stock.

I was wondering, are there not any sort of interesting opportunities there in your areas, just given the market conditions, where you might make another acquisition, or is stock buyback now at the top of the list of where you're going to use your cash?

This is Jim.

The focus clearly in 2009 will be on restoring growth in the core franchise and getting the product development programs up and running, so there is a good continuous flow of new product into those markets.

Stepping up our investment and efforts in the area of medical education to be able to respond to what we believe are bonafide needs in the US and outside the US.

So again, that really is the focus for the 2009 operating plan.

And with that, we've just as we've pointed out, built in an assumption that available free cash flow will go principally towards share repurchases over the course of the year.

Okay.

Great.

Thanks a lot.

Thank you.

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

Hi, thanks for taking my questions.

I just wanted to go back to the hip resurfacing comment that you made earlier where you said that you would be out without that.

Are you discontinuing your current program with Durom and do you have any plans to relaunch any new ones?

The study that was underway, Kristen, has been suspended and that's been the case since the middle of last year.

So we will pursue a resurfacing product and we have plans on a couple of different fronts in that regard.

Will it include Durom or it's going to be completely new?

It will likely be a new cup.

Okay.

And then just going back to the -- I hate to harp on it but the customer versus product related losses.

Is there any way to split it out to your loss share, 50% is customer losses versus you think another 50% is product related issues?

Well, obviously, you're trying to climb inside the minds of the decision makers there and I think it is difficult to disaggregate the two.

I think they're quite interrelated.

I will tell you that a significant driver for those losses has been the disruption, as opposed to the product gaps.

I think we've been pretty specific as to the side of our business, that is the hip side, that has been most impacted by product gaps.

I don't think that the majority of the losses and the slowdown on the knee side have been product gaps, although there have been elements of that, just far less significant than hips.

And are you surprised in this tightened environment with the DOJ and different investigations that you've seen as many customer losses given the environment?

Overall, obviously this is a pretty dynamic period of time.

I don't know that anyone could have predicted with absolute certainty going into things a year and-a-half ago, but I think we have great clarity now as to where things are headed and what kind of a job we can do to drive the restoration of our performance in the sequential quarters in 2009 and where we'll end up as we march into 2010.

I think what's important to us at this point is that understanding and our confidence level to do the right things to put this business back on track as this year progresses.

Just to make sure I understood you, I think you had commented that there was a slowdown across the broader market, and as other companies report this will become increasingly evident.

We heard from two of the same size competitors talk about them not seeing a slowdown.

Is there anything different about your mix of business that would make you more apt to be seeing a slowdown versus others?

I think that anyone's visibility, and this is the question that Bruce was posing too, you have views into pockets and there are pockets that have slowed down.

There are other pockets that don't seem to be affected by the general economic downturn.

But it is the case that when you do the math on the numbers of the companies that have already reported, it's fairly irrefutable that there's been an overall market slowdown.

And then you start drawing analysis into assumptions about how much of that is a unit slowdown.

And the tough thing I think about coming to a definitive and all-knowing position on that front is, as I said, all you have is anecdotal information and geographic pockets or accounts that have slowed down, rather than anything that is all that broad-based.

It could be happening at different paces across different geographic locations as well, with the economy having gone through what it's gone through and continuing to go through what we're seeing right now.

So in the fourth quarter, you felt there was a slowdown in your core business due to the economy?

Yes, I think it's clear that the market did drop off.

Okay.

My last question, then, and I know there were many, you had commented also that there was some dilution associated with the Abbott Spine deal within operations.

How do you break out the difference between what you're including in operations versus what you're going to include in this acquisition and integration charges which is I think about $0.13 in earnings that is excluded from the adjusted range?

What's included in our adjusted results related to Abbott Spine are the sales and operating earnings or losses of that business.

What is excluded, as you pointed out, is the inventory step-up amortization and any significant one-time integration costs as we work towards putting the two businesses and the two organizations together.

So the $0.13 for the full year is just one-time related to distributors or what's specifically is the $0.13?

A big piece of it is related to the integration of the sales networks around the world.

Okay.

I'll drop off.

Thanks so much.

Thank you.

Your next question comes from the line of Doug Schenkel of Cowen and Company.

Hi, good morning.

Good morning.

Do you feel you are where you need to be in providing visibility to your consultants on the structure of royalty and consulting agreements.

Generally speaking, do you believe you can make a good case to surgeons that they're not going to make any less working with you rather than your competitors?

And how important has progress in this effort been in attempting to stabilize share?

I'm absolutely confident of our ability to be able to recruit and engage the very best design talent in the world on our projects.

We went through a quite elaborate process with outside help to develop a royalty model that we think is appropriate going forward and competitive within the marketplace.

That model has been signed off on by the oversight that we're currently receiving with our monitor and others, and I will tell you that we already have been successful at engaging world class teams to move forward with projects.

So the answer is yes and we've proven it out.

Okay.

Thanks for that.

It sounds like your long-term strategy, to try to simplify this a little bit, in hips and knees is based largely on trying to stabilize share loss in 2009 and then getting back to market levels of growth while maybe doing what you've done in the past, which is getting a relatively higher mix benefit.

Assuming this is correct, recognizing that hospital administrators are always trying to control pricing and do their best to limit surgeon discretion, is there anything you're seeing recently that's different, given the current environment?

I'm trying to get to how you're thinking about the potential for mix benefits longer term.

Our plan is to not only stabilize our hip and knee business but as we progress through 2009 and enter 2010, to go back to taking market share, obviously.

And that means new accounts, not just mix.

I think that mix has already become a bit more challenging.

And I think it will continue to be so.

I think that there is going to be greater scrutiny placed on the introduction of new products and ones going to have to prove out in a clinical empirically driven manner, that we're creating better patient outcomes, taking costs out of the system to be able to get that mix benefit.

And our development programs are designed with that aim in mind.

So yes, I think that mix has already gotten to be more challenging over the last operating period or two and will continue to be the case.

So one's going to have to do a better job in their development efforts to prove out the benefits.

Last question.

You talked about knee share loss being relatively more pronounced than hip share loss in the quarter.

Is it right to assume that this is somewhat a function of the fact you that had earlier challenges in the year on the hip side, both because of the lack of resurfacing and also because of mid-year?

I'm just trying to get at whether the knees being a little bit worse than hips is not necessarily suggesting that hips are holding up better?

I think that the pacing could be a bit different.

Those moves have been a little bit lumpy, obviously, beginning in the third quarter and continuing in the fourth quarter.

I think that we now have a good understanding as to what we think will occur going forward and what we can do to optimize our performance relating to those risks.

Okay.

Thanks for taking the questions.

You're welcome, Doug, thank you.

Your next question comes from the line of of Raj Denhoy of Thomas Weisel Partners.

Good morning.

I just have a couple questions.

It's pretty clear you guys are going to be aggressive in spending to try to stem the share losses you're seeing.

Is price a lever you're willing to start to play in order to get business back or in order to stabilize business at this point?

I don't think our pricing strategy has changed or will change going forward at all, Raj.

I mean, the areas that we're going to be concentrating on is getting innovative products out the door and ramping up our training and education so that surgeons understand how to use those products in a safe and effective way.

And I'll tell you that on the training and education front, as those programs ramp up and we get new technologies out, we are seeing successes in the adoption rates of those products.

Jim pointed out a couple of those pockets and so, those are the basics for the business going forward as opposed to price.

Okay.

Along those same lines, we're nearing the end of the monitoring period here, the Department of Justice settlement, and you guys have, unfortunately, endured probably a tougher path than your competitors through this time.

Do you feel the playing field has been leveled here?

Is the compliance standards constant across the industry at this point, or do you feel that the other orthopedic companies need to maybe come up to where you guys are or will have to over time?

Well, I think that different competitors are going to go about this at different speeds and in different locations within their geographic segments.

I don't know that there's ever going to be a magical day that rolls around where it's a perfectly level playing field across all geographic segments.

I will tell you that I think the trends are all very much in that direction, whether it comes in the form of enforcement or updated codes of ethics, either AdvaMed or UCAMED, practices that we see are beginning to conform much more consistently with these higher standards.

Hospital administrators are driving this.

State legislators are driving it, as well as legislation that's pending at the federal level.

So all the trends are very consistent with the decisions that we made.

And again, what we were doing strategically was ensuring that for our organization we weren't going to incrementalize this process.

I think it's important to note that cultural changes are necessary in these times and the approach that we took drove a cultural change through the organization.

There is absolute buy-in to what we're doing.

We're going to get our business back on track and have a healthy environment for this new world that we're going to be operating in, and I think it's going to be one of the reasons that we're going to be so successful.

Then just one last one on the Abbott Spine business.

I think you mentioned, if I wrote this down correction, you did about $22 million in the quarter, 88 or so on an annualized basis.

If I'm not mistaken, that business was doing north of $100 million, $110 million when you acquired it.

I guess that implies that you've seen some disruption in the distribution.

What should we think about as a normalized run rate for the Abbott Spine business now that you guys own it?

As I indicated in my comments, we think about that business on a combined basis.

As I said, on a combined basis, compared to 2008, we do expect that spine revenues are going to lag market growth.

As a consequence of the dis-synergies that we had built into our model and fully expected as we put those two sales networks together and the major market here in the US and other markets outside the US.

But has that disruption in the sales infrastructure in the distributor base, has that been more than you thought it was going to be?

Have you lost more salespeople?

I would tell you that that $22 million that we saw in the fourth quarter is in line with what we had in our model.

Okay.

And then just one last one, broadly on the sales force for the Company in general, the sales infrastructure.

In this rough time, have you seen a greater disruption in your sales force?

Have you lost people because of what's going on out in the marketplace?

We have not seen any turnover beyond what we have experienced in more normalized times, so the answer is no.

Great.

Thank you very much.

Thanks, Raj.

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

Actually, all my questions have been asked, thanks.

Thank you, Ben.

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

Good morning, everyone.

Thank you for taking the question.

Just a couple things on the guidance.

Jim, did you bake in anything on the earnings line for contribution from share repurchases?

Yes.

And if you go back to the transcript, I think you'll see that we actually gave guidance on what our expectations are for the average share count for 2009 at 216 million to 217 million.

So that clearly does take into account the effect that the share repurchase program will have and what we have assumed in in the way of interest costs or lower interest income for 2009.

And can you give us some sense for '09, I know you gave an expectation for free cash flow but what the outflows will be from surgeon payments for the full year?

Well, as David indicated, we made very significant progress in the fourth quarter.

There are still some payments that remain outstanding and we have in our plans to bring all of those payments up-to-date through the course of 2009.

Having said that, there's some of these arrangements where the settling out of those payments may be a bit complicated and it's difficult to predict how and when exactly, some of them may ultimately settle out.

But that is all reflected in the expectations that we laid out regarding cash flow.

And is it fair to say, are you closer to 30% of the way there or 80% of the way there?

I'd say we're closer to 80% of the way there.

Okay.

And then David, on several occasions now at conferences you've talked about the need to increase investment spending either through research and development or external investments to generate premium price products.

Can you maybe talk about, maybe give us a little more detail behind that thinking and then what Zimmer is doing to address that?

Well, I think that it's clear that we're entering an environment where one is going to have to prove out in an empirical way that products that are being introduced where you're expecting premiums in the way of pricing, that is mix, you're going to have to provide better patient solutions.

So our R&D efforts and the allocation of our resources are very consistent with that.

Obviously, on the extreme end are biological solutions that would introduce earlier interventions to the disease state for that patient, but there are other material advancements short of biological solutions that can be made, and we're working on those actively within our current efforts.

And do you think that 5% to 6% of sales for R&D is sustainable to support those efforts over a longer period of time?

I do.

I think that the mix of the R&D spend will change but I think that that level or roughly that level is probably going to be adequate.

Okay.

Thank you very much.

Thank you, David.

In the interest of our caller's time, let's take one more question, please.

Your final question will come from the line of Joanne Wuensch of BMO Capital Markets.

This is Matt for Joann.

Can you hear me?

Yes.

This was touched on but could I just delve into the sales force a little bit more.

You talked about the synergies at Abbott, some turnover at dental.

In the past you've talked about some disruption in the focus of your hip and knee guys.

Could you just expand on those ideas a little bit more and tell us a little bit more about the turnover in dental, what the dis-synergies are, how you're getting the hip and knee guys back on track and what their current feeling is about the business.

Let me start with dental because it's a bit more discrete, obviously.

I think that we explained probably in prior conference calls, when asked the question about sales force stability, that we weren't seeing any changes other than in dental.

And some quarters back we did see excessive turnover in dental.

That has now stabilized.

I don't think that currently we're seeing anything beyond what would be a normal turnover level, so I think that that situation has been remedied and the sales force is stabilized there.

The Abbott Spine side of things, I don't know that we have a lot more color to add there, Matt.

Obviously, one of the key strategic assets that we were picking up through that acquisition was an enhanced channel.

And so we went through a very deliberate process over the course of the fourth quarter to determine which distributors we were going to continue on with and which geographic segments, and ended up integrating the best of each into our go-forward distribution channel which we feel is a very strong one.

Obviously, in sheer size, there's a lot more critical mass in those distributorships as you layer on top the Abbott Spine revenues, and so it's one of the strategic areas that we were after in that deal.

I think that that promise is going to be realized and has already been solidified in the go-forward distribution group that's been put together there.

And so it is a combination of legacy Zimmer and legacy Abbott Spine folks that have been assembled.

On the hip and knee side of things, we went through a year where there was pretty significant disruption due to the implementation of our enhanced compliance program.

We slowed down for periods of time, training and education, and then went through a lot of content development and process development as well, to be able to get that ramped back up.

Those activities have progressed to a large extent.

And I would say now in certain geographic segments we're ironing out the final wrinkles that will be necessary to go full bore, and I would expect in all geographic segment to have things up and running completely by the end of the first half of this year.

But some geographic segment are ahead of others.

You layer on top of that disruption, though, the frustration, the justifiable frustration among some of the surgeons that we had collaborated with in the past.

We're doing a better job in providing clarity in our communications with how their issues will be resolved.

As Jim said, we're better than three-quarters of the way there, I think by any measurements, whether it's on the royalty side or the general consulting side, so that helps in those relationships as relationships, as well.

And then as we move forward and move past OSP, Durom, and some of the other product gaps that we already talked a lot about on this call, I think all of those things allow a sales force to get reoriented on going to the offensive side, and that's just what we're planning to do in 2009.

So again, one of the reasons that we're very optimistic about the progress that we're going to make with this business over the course of this year.

Thank you very much.

You're welcome, Matt.

Thank you.

And let me say thanks again to everyone for joining us today and for your continued interest in Zimmer.

We look forward to speaking to you on our first quarter conference call on Thursday, April 23rd at 8:00 a.m.

With that, I'll now turn the call back to you, Carrie.

Thank you for your participation in today's conference.

You may now disconnect.