Stryker Management Discusses Q4 2012 Results - Earnings Call Transcript

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Stryker (NYSE:SYK)

Q4 2012 Earnings Call

January 23, 2013 4:30 pm ET

Executives

Kevin A. Lobo - Chief Executive Officer, President and Director

Katherine A. Owen - Vice President of Strategy & Investor Relations

Dean H. Bergy - Interim Chief Financial Officer, Vice President and Secretary

Analysts

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Matthew Taylor - Barclays Capital, Research Division

David R. Lewis - Morgan Stanley, Research Division

David L. Turkaly - JMP Securities LLC, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Richard Newitter - Leerink Swann LLC, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Operator

Welcome to the Stryker's Fourth Quarter 2012 Earnings Conference Call. My name is Larisa, and I'll 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 the 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, discussions will include certain non-GAAP financial measures. Reconciliation 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'll now turn the call over to Mr. Kevin Lobo, President, Chief Executive Officer. You may proceed, sir.

Kevin A. Lobo

Good afternoon, everyone, and welcome to Stryker's Fourth Quarter 2012 Earnings Call. Joining me is Dean Bergy, our Interim CFO; and Katherine Owen, Vice President of Strategy and Investor Relations.

In terms of the format for today's call, I will provide opening comments and then turn the call over to Katherine for details regarding our recently announced planned acquisition of Trauson. And then Dean will cover the financials. We will then open the call to your questions where we will be joined by Tony McKinney, our Chief Accounting Officer.

Turning to our Q4 results, we finished 2012 with both revenue and earnings at the high end of our revised targets. Fourth quarter sales increased 5.5% on a reported basis, and up 6.1% in constant currency with no meaningful impact from acquisitions. We did have one extra selling day in the quarter, which added 1.7 percentage points to total company revenue growth. For the full year, sales growth, excluding foreign exchange and acquisitions, came in at 4.2%, which is at the upper end of the 2.5% to 4% target we revised in October. While the challenges in Europe and hospital capital equipment continued in Q4, this was offset by accelerated growth in many of our U.S. businesses. A key focus for our teams globally is accelerating revenue growth, as we look to leverage our diverse product portfolio, including internal innovation and the impact from our targeted acquisitions.

Looking at our 3 segments in more detail, Q4 sales growth was led by 11% constant currency growth for Neurotechnology and Spine, including a strong 10% U.S. Spine growth. Reconstructive posted a 7.4% constant currency gain, powered by a 14% increase in U.S. sales. MedSurg growth, excluding foreign exchange, up 2.7%, reflected the continued pressure on our medical business, as well as the impact from the previously discussed Neptune waste management product recall. However, these challenges were offset by increasing momentum within Endoscopy behind our new camera launch, coupled with solid gains in instruments, excluding Neptune, and double-digit growth for sustainability solutions. On a geographic basis, the U.S. once again led growth in the quarter, increasing 8.7%.

Outside the U.S., we remain challenged, particularly in Europe, which declined in the mid-single digits on an operating basis. We have taken specific steps to address our underperformance in Europe, including filling key leadership gaps and implementing measures to drive better execution. However, as previously mentioned, this turnaround will take multiple quarters and we don't expect to see improving momentum before the second half of 2013.

And while off a relatively small base, we are encouraged by continued strong double-digit growth in emerging markets, which will be further bolstered by the recently announced acquisition of Trauson Medical. As Katherine will discuss shortly, we are excited about the long-term potential of this acquisition, as it expands our offering into the fast-growing value segment of the Chinese orthopedic market.

In addition to solid Q4 sales growth, we delivered a 100-basis point year-over-year increase in adjusted gross margin, which came in at 68.3% of sales. Combined with a continued focus on managing our operating expenses, our adjusted operating margin improved by 120 basis points versus the prior year, coming in at 25.3% and helping to lift our adjusted diluted net earnings per share by 12% to $1.14. For the full year, adjusted per share earnings of $4.07, up 9%, was at the high end of the $4.04 to $4.07 range, which we reset in October.

In closing, we are pleased with our Q4 performance and are encouraged by the momentum we see heading into 2013. Without a doubt, we have challenges that we will need to work through, including driving the turnaround in Europe. But we are also well positioned to capitalize on our diverse product offering and strong presence in a wide range of key markets within medical technology. We are highly encouraged by the impact of our acquisition activity in recent years, which has bolstered our own investments in R&D.

For example, our Memometal acquisition in July 2011 contributed to a robust U.S. foot and ankle growth of 39% in Q4. We have further strengthened our global footprint with the pending acquisition of Trauson Medical, which we believe will be a key component to our long-term expansion in emerging markets. As we turn to 2013, we remain focused on driving sales growth through innovation, cross divisional collaboration and selected acquisitions.

We will continue to drive operating efficiencies in order to ensure continued margin expansion. And we are committed to optimizing shareholder returns through highly selective M&A, continued growth in our dividends and share buybacks. Given the strength of our balance sheet, we are well positioned to pursue all 3 components of our capital allocation strategy, as evidenced by the ongoing deal activity, the recently announced 25% increase in our quarterly dividend and the expansion in our share authorization to $1 billion.

We are committed to delivering on our stated financial targets for 2013, which include sales growth, excluding foreign exchange and acquisitions of 3% to 5.5%, with adjusted diluting net earnings per share of $4.25 to $4.40, up 4% to 8%, which includes the roughly $100 million pretax impact from the medical device excise tax. Excluding the tax, we are targeting an 8% to 12% increase in our per share earnings, reflecting our commitment to both solid sales growth and leveraged earnings gains.

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

Katherine A. Owen

Thanks, Kevin. My comments on today's call will focus on our planned acquisition of Trauson Holdings, which expands our presence in the emerging market. Specifically, last week, we announced that we will make a voluntary general offer to acquire all the shares of Trauson in an all-cash transaction for approximately $685 million. Trauson was founded in China in 1986 and with sales in 2011 approximating $60 million, the company is the leading trauma manufacturer in China and a key competitor in the Spine segment.

As some of you may recall, Stryker and Trauson have maintained a relationship under an OEM agreement for instrumentation since 2007. With this move, we are expanding our presence in the key emerging market through a product portfolio and pipeline that has targeted the large and fast-growing value segment of the Chinese orthopedic market.

Importantly, the acquisition of Trauson is a critical step towards broadening our presence in China and developing a product platform targeted at the value segment of emerging markets. With this acquisition, we gain access to Trauson's R&D expertise, as well as the strength of its distribution network.

Looking at the company's product portfolio, Trauson has over 120 products marketed under its own brand, as well as an attractive pipeline. With well over 2 decades of experience in the Chinese orthopedic market, Trauson has a well-established brand that it leverages to an extensive distributer network. For Stryker, the acquisition is consistent with our strategy of expanding our global footprint and increasing our exposure in the fast-growing emerging market. As part of that effort, we have prioritized China and the value segment of the market in particular as a critical market, given that the device segment is growing at roughly 20% annually, with the overall market expected to more than double in the next 5 years.

To date, Stryker's presence in China has been focused on the premium segment, which is dominated by multinational players. However, the value segment of the market is growing at a faster rate, with local manufacturers the key players. With increased government and private health care spending, the value segment of the Chinese orthopedic market is expected to continue to expand at above global market rates and with the acquisition of Trauson, we will be well positioned as a leading company to capture that growth. We also believe we have the ability to further leverage Trauson's product offering into other emerging markets.

We expect the acquisition will close by the end of the second quarter of 2013 and, excluding acquisition- and integration-related charges, the deal does not impact our 2013 adjusted diluted net earnings per share target of $4.25 to $4.40.

With that, I'll turn the call over to Dean.

Dean H. Bergy

Thanks, Katherine. As Kevin indicated, strong growth in our U.S. Reconstructive and Neurotechnology and Spine product segments helped us achieve sales growth of 5.5% on a reported basis and 6.1% in constant currency. With respect to earnings, we delivered adjusted diluted net earnings per share of $1.14, representing growth of 11.8% when compared to last year's fourth quarter.

On a GAAP basis, diluted net earnings per share were $0.71, down 32.4% versus the prior year, primarily as a result of the charge in the quarter related to the rejuvenate and ABG II product recall. A reconciliation of non-GAAP to GAAP net earnings per share is provided in the tables accompanying today's press release.

In reviewing the quarter, I will start with a discussion of the components of our revenue growth. In the fourth quarter, volume and mix contributed 7.5% to our top line growth. Price changes reduced sales by 1.4%, generally in line with the levels experienced throughout the year. In addition, currency negatively impacted our top line by approximately $13 million and decreased our overall reported sales growth by 0.6%.

Looking at our reporting segments, I will start with Reconstructive products, which represented 45% of our sales in the quarter. Reconstructive products include our hip, knee, trauma and other reconstructive lines. Sales in the Reconstructive segment were up 6.7% as reported and grew 7.4% on a constant currency basis. U.S. Reconstructive sales grew 13.9% in the quarter. Trauma and extremities led the way in the U.S. with 26% growth, driven by new products, expansion of our sales force, strong growth in foot and ankle and a pickup related to a competitor's product recall.

In addition, knees continue to benefit from our GetAroundKnee direct-to-consumer campaign, posting 9% growth and hips with a 7% increase also had a very nice quarter. U.S. gains were partially offset by weakness in our international Reconstructive business, where sales declined 0.7% in constant currency with the European sales down mid-single digits and most other developed overseas markets growing at low- to mid-single digit levels in local currency.

Next I will turn to the MedSurg product segment, which represented approximately 37% of sales in the quarter. For reporting purposes, MedSurg is comprised of Instruments, Endoscopy, Medical and the Sustainability Solutions business. Total MedSurg sales increased 2.4% as reported and 2.7% on a constant currency basis. These results were led by growth from our Endoscopy and Sustainability Solutions businesses. Endoscopy is starting to benefit from the launch of the new 1488 Camera, as we have resolved the early technical glitches and are now in full launch mode.

Instruments reported mid-single digit sales growth, as we continue to see solid gains for our Power Tools segment, partly offset by the Neptune Waste Management System recall, which adversely impacted sales by approximately $18 million in the quarter. We expect this recall to negatively impact sales by about $17 million to $20 million per quarter until we obtain regulatory clearance. As we work with the FDA to address the requirements for the Neptune 510(k), we anticipate this regulatory clearance is unlikely to be achieved in the first half of 2013.

As anticipated, medical sales declined by 7.4%, as this predominantly U.S.-driven business continued to be challenged by strong comparables and some belt tightening associated with hospital capital spending.

Our final segment, Neurotechnology and Spine, which represented 18% of company sales, had an excellent quarter. Sales increased 9.7% as reported and 10.8% on a constant currency basis. Our Neurovascular, NSE and Interventional Spine platforms all generated double-digit constant currency growth. Neurovascular saw a continued strong uptake for the Target Coil, as well as nice performance from the recently launched Trevo stent retriever.

Core spinal implant sales accelerated to post mid-single digit constant currency sales growth, helped by a double-digit increase from the Biologics products obtained with our acquisition of Orthovita.

I will now turn to the income statement, beginning with our gross margin performance. On a reported basis, gross margins in the fourth quarter finished at 68.2%, while adjusted gross margins finished at 68.3%. The adjusted gross margin represents 100 basis point improvement on a year-over-year basis and it was in line with the previous 2 quarters of this year. The improvement over 2011 was driven by favorable product mix, continued cost reduction efforts from our global quality and operations group and a favorable comparative impact from currency, all of which were partially offset by the negative impact of pricing. Adjusted gross margin for the full year was 68.1% in 2012 compared to 67.9% in 2011.

Research and development spending finished at 5.5% of sales, consistent with the prior quarter and our overall expectations. Selling, general and administrative cost represented 44.2% of sales. These costs include a $174 million pretax charge related to the voluntary recall of our rejuvenate and ABG II modular-neck hip stems , which was described in detail in the January 9 press release announcing our preliminary 2012 results. The charge establishes reserves representing the low end of the range of estimated probable loss. This recall is still in a very early stage and will continue to be evaluated at a quarterly basis based on information we receive related to the status of the recall.

Adjusting for the rejuvenate charge, as well as restructuring- and acquisition-related charges, fourth quarter SG&A finished at 36.2% of sales. This compares to adjusted SG&A at 36.6% of sales in the prior year. Adjusted SG&A as a percent of sales finished 2012 at 37.2%, in line with the prior year.

Reported operating income for the fourth quarter declined 11.5% compared to 2011 and was 15.8% of sales. Adjusted fourth quarter operating income increased 10.7% and the adjusted operating margin finished at 25.3%, a 120-basis point pickup versus the prior year, primarily as a result of the significant improvement in gross margin.

Other income and expense reduced pretax income by $12 million in the quarter. You'll recall that 2011's fourth quarter included a $27 million reduction in interest expense associated with recording a favorable tax settlement of the IRS' cost sharing arrangement. Adjusting for this, the prior year Q4 expense for this line would be comparable to this year.

Components of the current year's other income and expense included investment and interest income of $10 million, offset by interest expense of $19 million and a foreign exchange transaction loss of $3 million. The company's effective income tax rate was 24.6% for the fourth quarter of 2012, compared to 7.4% in the prior year. The prior year rate was reduced by the settlement of the Irish cost sharing arrangement, as well as tax benefits associated with inventory step up and higher tax rate jurisdictions. Excluding these items in 2011, our adjusted fourth quarter tax rate finished at 25.4%. The current year rate was in line with our expectations.

The effective tax rate for 2013 will reflect the benefit of the adoption in January by the U.S. Congress of the law to extend certain tax benefits applicable to the company. The extension applies to both 2012 and 2013. However, the timing of the adoption dictates the 2000 tax year -- 2012 tax year benefit, must be recognized in the first quarter of 2013 for financial reporting purposes. Hence, we will receive 5 quarters of tax benefit related to the extenders in our upcoming first quarter, which is expected to positively impact adjusted EPS by approximately $0.04. The total year tax benefit of the extenders is expected to be approximately $0.06 to $0.07 per share.

Turning to the balance sheet, we ended the quarter with $4.3 billion of cash and marketable securities, an increase of approximately $870 million compared to year-end 2011. As a reminder, we have $1.75 billion of long-term debt on the balance sheet.

On the asset management side, accounts receivable days ended the quarter at 55, which was down 4 days from the third quarter and 3 days compared to December 2011. Days in inventory finished the quarter at 153, which was down an impressive 30 days sequentially and down 5 days when measured against the prior year.

Turning to cash flow. In the quarter, we generated cash flow from operations of $596 million and we reported operating cash flow of $1.657 billion for the full year, an increase of 16% versus 2011.

Finally, in the fourth quarter, we did not repurchase any stock. For the year, we repurchased 2.1 million shares and spent $108 million to do so. During the fourth quarter, our Board of Directors increased the amount of open share repurchase authorizations to $1 billion from $595 million.

And lastly, turning to the outlook, as we outlined in our January 9th press release for the full year 2013, we are projecting constant currency sales growth at a range of 3% to 5.5%. If foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 0% to 1% in both the first quarter and full year of 2013. As previously communicated, 2013 adjusted diluted net earnings per share, including the estimated $100 million pretax impact from the medical device excise tax, is projected to be in a range of $4.25 to $4.40.

With that, we will now open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bob Hopkins from Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 questions. One on the guidance and one on the U.S. hip and knee market. So maybe I'll start with the U.S. hip and knee market. You guys obviously had an extra selling day. You had slightly easier comps. And yet, even excluding those, you still seemed to produce a really good growth rate in U.S. hips and knees this quarter. I was wondering if I could get your just perspective on the U.S. market. How much of that do you think was share gains? Is there something real going on in the market? Just provide a little more perspective on the U.S. hip and knee results that you put up this quarter.

Katherine A. Owen

Bob, it's Katherine. Maybe I'll just take a stab at it. As you can understand, this is probably a little bit tough to peg because we don't have everybody else's numbers in at this point. We are certainly pleased with the momentum we're seeing in the U.S. in both hips and knees and some of that is on the knee side from the GetAroundKnee campaign. On the hip side, some good products like Accolade, which we launched in the second quarter of last year. I think at this point, at the very least, the market is stable, to maybe modestly improved in the fourth quarter. How much share shifting we've seen, it's just too early to predict until all the numbers come in. But we feel pretty good about the stability of the market and certainly some of the momentum that we're seeing.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then on guidance for 2013, I'm asking this within the context of a fourth quarter operating margin number that was one of your better quarters of operating leverage in quite some time here in fourth quarter, as you stated in your prepared remarks. And so I'd just like to get a sense from you guys as to whether or not that can be sustainable throughout 2013. And the way I'd ask the question is, you gave guidance of -- using mid-points, roughly a little over 4% revenue growth and then 8% to 12% EPS growth, excluding the med tech tax. So to get from that 4%, to the 8% to 12%, is most of that continued underlying operating margin growth? And if the answer is yes, what's allowing you to, finally, enter a sustained period of operating leverage at Stryker?

Dean H. Bergy

Bob, this is Dean. I mean, obviously, we've had 3 quarters of pretty good gross margin numbers. We did have a very good quarter from an operating leverage standpoint. Obviously, this is a quarter where, from a sales standpoint, it's our biggest quarter in terms of the numbers that we put up there. But I think we do feel good about our ability to drive some operating margin into it. Obviously, that was implied in what we had told you relative to guidance. So we feel good about where the business is positioned. We've done things with the Global Quality and Operations to start to give cost savings there. And we're continuing to look at other places in the business where we can reach out for that. So I think we feel generally pretty good about our ability to do that, but it's going to be a steady drumbeat in terms of how we tackle it.

Operator

Our next question comes from Mike Weinstein from JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Just a couple of follow-ups on that. So if we look at the numbers that we've all seen over the last, let's call it few weeks, for the Recon market. There's a suggestion out there that December, in particular, was very strong as patients getting their procedures in before the end of the year, with the whole world becoming more seasonally shifted towards the back of the year. Is that something you'd confirm, or you have a view on?

Katherine A. Owen

I would say at this point, Mike, we didn't see any big end of the quarter push, or anything to suggest a seasonality or a push effect that was noticeably different than anything we've seen in other quarters. Q4 tends to have more seasonality, but obviously, that's going to get reflected as it's in the base in the prior year. So it just felt like a solid quarter again. Don't know what the market did, but I think we feel comfortable saying at the very least the market is stable to maybe modestly better. But it didn't feel like there was any kind of one-timers in there.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

And just as my follow-up, can you discuss a couple of other markets that you're in that are growing very well. You're obviously growing well above what market growth is. But I'd like to get your view of what underlying growth looks like right now in foot and ankle, where you've had an exceptional quarter, and in Neurovascular, where you've also had a very good quarter. Both those markets look like they've accelerated and, obviously, you're growing at some multiple of market growth.

Kevin A. Lobo

Mike, it's Kevin Lobo. I'm going to start with the foot and ankle. Our sense of the market is that it's probably growing in somewhere in the 12% to 15% range, overall. Obviously, we had an exceptional quarter growing at 39%. If you recall, we created a new foot and ankle business unit in January of 2012. And after digesting the Memometal acquisition in the prior year, combining our current products with those products took us about 1 quarter or 2 to get our stride. We had a very strong third quarter and an even stronger fourth quarter. So we're clearly outpacing the market, but it is a good market. The market is growing double-digit. We obviously grew even faster than that. And still see tremendous opportunity for growth in the market where implants historically had not been used. So this is a market expansion story, as well as a share story.

Katherine A. Owen

Yes. On the Neurovascular side, it's certainly seeing very solid momentum in that business. It's what helped contribute to the total Neuro technology business that saw that double-digit growth in the quarter. They -- the Neurovascular group, since the time of the acquisition, has continued to have a really nice flow of new products, most recently the Target Coil and then in August of last year, their earlier-than-anticipated launch of the Trevo device, which we obtained through the Concentric acquisition. So that market is probably still growing somewhere in the upper single-digit vicinity and part of that is procedure expansion and as new patients get identified, and we feel pretty good about the outlook for that type of sustained market growth.

Operator

The next question comes from Matt Miksic from Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

So just -- impressive across a couple of business lines here, so there's lots of questions to ask. But maybe on Spine, you mentioned Biologics being a driver there. But even with Biologics as a driver, that was a pretty -- it was a pretty significant improvement in growth, organic growth, I should say. Should -- and how should we think about that going forward? And maybe, can you talk a little bit about that, the way, the dynamics that the Biologics is driving that business beyond just selling more Biologics? Then I have one follow-up.

Katherine A. Owen

Yes, if I'm understanding the question correct, I would say on the Spine side, I think we'd like to see some more quarters of putting up some improving numbers, but certainly the fourth quarter was an improvement, with that core hardware business up in the single-digit vicinity, mid-single digit vicinity, as we're starting to see some benefits of greater focus on that business, new leadership that was put in place a number of quarters ago. And then when we did the acquisition of Orthovita, a big part of the rationale, similar to Memometal, for doing these acquisitions in our core area is unlocking the value of those products that wasn't really achievable given the limited distribution in sales capabilities of the prior -- of the company as a stand-alone. So putting that into our Spine sales force, our distribution and marrying that with our product portfolio, we've been able to drive greater momentum in that business and really unlock the value we saw in that Biologics product portfolio.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Great. And then on Europe, that's a region that's struggled a little bit for some time now. And you talked about making some changes. You've made some changes. I guess I would ask when we can start to see the impact, the results of those changes coming through the numbers. And what's your confidence level that you've actually, at this point, identified the problems and addressed the problems fully?

Kevin A. Lobo

Sure, Matt, I would say that certainly in the third quarter, we highlighted Europe as being a problem for us. And I think we went into detail about the shift that we made from a franchise model, from the country model to a franchise model and now we're sort of rebalancing our organization, picking the best of both systems. We have a whole new reorganization, new country leaders have all been appointed. We're starting to see already some early signs in Germany, which is one of the problem areas, Southern Europe continues to struggle. What I indicated on the last call is the same thing I'll say now, which is it will take us a number of quarters. We should start to see improvement in the second half of the year. You have to remember that in Europe, implants represent a bigger portion of their business than they do in the United States. And implant business historically have been a little stickier than our MedSurg businesses. So it does take time to recover the business that we have lost over the past couple of years. But I'm very confident as [indiscernible] as the new President who was appointed back in May and the number of -- the appointments he's made in the country, I had some time to spend with them recently. I'm very excited about those appointments and feel that we're on a good trajectory. It's just going to take us a bit of time. And so no surprise with the results that we posted in Europe and I would expect similar type of results for the first 2 quarters of 2013.

Operator

Matt Taylor, from Barclays, is online with a question.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to ask you about your restructuring. Certainly, starting to see some of that benefit flow through this year. But can you talk about it qualitatively in terms of how -- what specific projects you're executing? How difficult they are to execute and how many more programs like this you think you might be able to do going forward to be able to offset some pricing pressure?

Dean H. Bergy

Sure, this is Dean. A lot of what we're doing not surprisingly is in Europe. A lot of it is also related to some of the things that we've done in Global Quality and Operations. When we announced these projects, we thought that we'd have about $100 million of annual savings. We think about 1/3 of that will be incremental to 2013. When we initially announced this, we thought that the range of charges that we would take for restructuring would be somewhere in the $150 million to $175 million range. We think now it could be up to $50 million higher than that. And we would expect to get incremental savings ultimately of maybe of another 50% of that, the $25 million that we -- or of the $50 million of additional spending that we might do on the high end of that range. We do expect all of the projects to be completed in 2013. That additional incremental savings will really flow primarily into out years 2014. So hopefully, that answers your question.

Matthew Taylor - Barclays Capital, Research Division

That was great. And I guess I just wanted to ask a cap allocation question. You made the Trauson acquisition, I was curious if you could give us thoughts on just the timing of that. And I'm assuming there's no change to your overall cap allocation going forward, but maybe just remind us what your goals there are, in terms of the split of dividends, repurchase and M&A.

Katherine A. Owen

Yes, there's really no change at all to the capital allocation strategy, as we talked about, and Kevin made in his comments on the call and it is 3-pronged. Our first priority continues to be M&A. And we're going to remain very focused on our core markets and key adjacent markets. And then we're going to do dividends and we announced in December a 25% increase in the quarterly dividend for 2013. And then lastly, buybacks, and we upped the authorization to $1 billion. And so given the strength of our balance sheet, we really have the flexibility to pursue all 3 and we'll continue to do that and given that we really believe optimizing shareholder value is going to come from acquisitions that drives top line growth, get us into fast-growing markets, expand our presence globally, while also looking to return income to shareholders.

Operator

David Lewis, from Morgan Stanley, is online with a question.

David R. Lewis - Morgan Stanley, Research Division

Kevin, just maybe a quick question for you and then maybe one for Kevin or Katherine. Kevin, when you think about trauma, obviously, a significant stand-out here in the quarter. And I appreciate there's a lot of different dynamics going on in the market. You obviously have a competitor recall. But there's also a lot of integration going on across, as many of the players. And I also noticed you mentioned increasing sales reps. I'm trying to figure out how much of this was really competitor recall. How much is you selectively adding to sales and potentially gaining share opportunistically given some of this -- your distraction in the industry and to what extent do you think those gains, if they're happening, are sticky?

Kevin A. Lobo

Sure. So I think you could estimate about 1/3 of our growth was really driven by the recall. So 2/3 of the growth of the 26% you would say was just driven by core momentum. And we really had a very good third quarter as well. Then actually, if you go back the last 4 or 5 years, we've been really strengthening the trauma line. This year, we launched the Clavicle Plate. We launched Hoffmann. So we've been filling out our product bag and we are now able to really compete with Synthes even in Level I trauma centers, something that we weren't able to do about 5 or 6 years ago. So really great management, consistent management, that's filled out our product bag and a winning formula. When -- you're right, there's a lot of movement in the marketplace, a lot of integration with competitors and we've certainly been opportunistic. The stickiness related to the recall, time will tell on that, how sticky that will be. But we feel very good about the momentum in the trauma business. The additional reps were really primarily focused on the extremities areas, in the foot and ankle area et cetera, but really tremendous momentum. We've been, over the past few years, specializing our reps, sometimes just to carry a broader bag to be more focused on trauma. That has definitely paid dividends for us and we are very bullish on trauma going into 2013.

David R. Lewis - Morgan Stanley, Research Division

Okay, very helpful. And then either Kevin or Kath, I wonder, with Trauson, if you could sort of take us through sort of that first 18 months and then sort of thereafter. And I guess what I'm specifically driving at is just, what is the game plan first 18 months in terms of do you use your breadth to drive better growth in China? And is that really the focus, is to accelerate and grow the Chinese market? And to what extent, maybe after 12 or 18 months, do you think about leveraging this asset, R&D and distribution, into other emerging markets, or potentially the value segment in some developed markets?

Katherine A. Owen

Yes, I'll take the question, David. I would say that clearly, as we indicated in our prepared comments, the goal of this acquisition is to be able to leverage the product portfolio into other emerging markets. But it'd be too soon right now, having not even acquired the company to get into specific time lines. And really the goal over the next 18 months is to continue to strengthen our knowledge of the Chinese market. We participate in the premium segment but this gets us into the value segment of the market. And the goal here is to begin to execute on driving more products and leveraging the pipeline that they have available to them. So probably not going to get into a whole lot of specifics, particularly since we haven't closed the acquisition, but the overriding goal here was to continue to expand our footprint globally to get into what we view is the highest priority emerging market of China and in particular, the value segment where M&Cs [ph] don't really participate. It's really dominated by local players and given our existing relationship, we felt that this was a natural next step.

Operator

Dave Turkaly, from JMP, is online with a question.

David L. Turkaly - JMP Securities LLC, Research Division

Was there any meaningful change in your distribution, your sales force, for Recon in the fourth quarter?

Katherine A. Owen

No.

Kevin A. Lobo

No, no change at all to our model.

David L. Turkaly - JMP Securities LLC, Research Division

Okay. And then on Trauson, just quickly. The value segment, can you give us an idea -- I realize it's small -- but what the margin profile of your sales there would look like, versus, say, what it looks like today, in a domestic market?

Katherine A. Owen

No, that's probably a level of detail that we wouldn't go into. I mean, you can certainly look at -- Trauson's a publicly traded company and get a sense for their margin profile, which is very attractive. But we probably wouldn't get into that level of granularity, particularly for a business of this size that, relative to Stryker, is not at a level we would break out.

Operator

Matthew Dodds, from Citigroup, is online with a question.

Matthew J. Dodds - Citigroup Inc, Research Division

In knees, it looks like, Kevin, you made good progress with the DTC campaign, with GetAround. Is there any potential to expand that into hips maybe, or anything else?

Kevin A. Lobo

Great question, Matt. The hip team is actually looking into it. I mean, clearly, you need to have a compelling concept if you're going to go on television and we have a compelling concept with knees. Something that's very differentiated and something that's resonating with consumers, as well as with our customers. I can tell you we are planning to continue the knee initiative. The hip team is studying it. We have, at this point, not yet made a decision. Because we really do need to have the concept that's very compelling before we would launch into that. But it is under consideration and we'll keep you posted.

Matthew J. Dodds - Citigroup Inc, Research Division

GetAroundHip is cool enough that [indiscernible]. I just have one quick...

Kevin A. Lobo

We can see why you're not in marketing, Matt.

Matthew J. Dodds - Citigroup Inc, Research Division

Good point. Katherine, just quickly, on the med tech tax, is it in SG&A or is it somewhere else? I don't know if you said that earlier.

Katherine A. Owen

It's going to be somewhere else.

Matthew J. Dodds - Citigroup Inc, Research Division

Could you say where the somewhere else is? It seems a lot of people are putting it in gross margin, is that not the case?

Katherine A. Owen

Yes, it was a -- you have the flexibility based on the latest rules to either put it in SG&A or COGS. We'll be putting it in COGS.

Operator

Michael Matson, from Mizuho Securities USA, is online with a question.

Michael Matson - Mizuho Securities USA Inc., Research Division

I guess I just wanted to get your perspective on your knee competitive position, given that we do have some new products coming from several of your competitors. I know I've asked you this in the past, but just given that they've shed a little more light on some of the features and benefits of their products, I was wondering if you could give us an update on how you're planning to kind of fend off those new products.

Katherine A. Owen

Yes, I think we're going to continue to execute on the strategy that we've outlined. We're really pleased with the concept behind the GetAroundKnee campaign, which is based on the fact that we have the only single radius knee on the market. Triathlon is not a new knee. But what's new is really differentiating and detailing in a much easier way to both customers and physicians the benefits of a single radius design. And I think that's why this knee campaign has resonated so strongly. So undoubtedly, any new competitor coming out, especially with existing surgeons, they're going to see some receptivity to that. But our focus remains on continuing to drive the features and benefits of that product, which are, really, it is the only single radius knee on the market right now. We wouldn't be continuing with the DTC campaign if we weren't really pleased with the metrics we're seeing. And obviously, the most important one being the revenue growth number. So I'm not trying to be naive about new products coming on the market, but feel really comfortable with the platform that we have and the attributes associated with Triathlon.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay and then on the Neurovascular business, obviously, some really strong growth there. And I think Trevo was mentioned as one of the drivers. But is that the primary driver of the acceleration? Because I guess this was the first full quarter where that product was available in the market.

Katherine A. Owen

I would say it was a contributing factor, but I wouldn't say it was the driving factor. We have a new coil on the market. We launched the nanocoil earlier in the year, which is the smallest coil in the market and is very helpful, particularly as a finishing coil. So it's -- they've had some good product momentum. I wouldn't necessarily say Trevo was the driver, but certainly a contributing factor to that business.

Operator

Derrick Sung, from Sanford Bernstein, is online with a question.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

I wanted to ask a question on your medical -- your beds business and the kind of environment for CapEx spending. There have been some speculation that, maybe, CapEx spending was going to be shifting from -- within the hospitals coming from IT, or to other areas. And I guess maybe that doesn't look like it was the case this quarter, but I was wondering if you could just give us some more color on how the hospitals are thinking about CapEx spending, maybe how to think about it for the year. Any color there would be great.

Katherine A. Owen

Thanks, Derrick, I'll take a stab at it. And I think as you see from our fourth quarter results, clearly, medical is still challenges we had expected following Q3. Some of that is a reprioritization of hospital capital spending around IT, as we've talked about previously and some of it is smaller budgets and people really trying to understand what are going to be the actual implications of the Affordable Care Act and it's, obviously, very early in the year to understand all of that. So we are not assuming a big rebound in that business. Initially, we're going to look at it cautiously and continue to flex -- or test flex what's going on with hospital capital budgets. But it's an area of the business that I think is inherently going to be periods where capital spending is stronger and then there's going to be periods like we're in right now where it is more challenged. We love being in this business, but going along with that means a lot more volatility in this segment than we see in some of our other businesses.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Just a follow up on pricing, in Recon, it looks like maybe it got 100 bps worse this quarter than last quarter. Are you seeing anything different? Is that just kind of variations in quarter-to-quarter and any color there would be great.

Dean H. Bergy

Derrick, actually in the U.S. it was pretty comparable quarter-to-quarter. We did see a little bit of a fall-off in the overseas markets. Keep in mind that we do have, for one more quarter this Japan price decrease and that was probably a little bit more of a driver in this quarter than it has been, although it's obviously been with us for 3 quarters now and will sunset after the first quarter. But the U.S. Recon pricing was reasonably in line with where it's been all year.

Operator

David Roman, from Goldman Sachs, is online with a question.

David H. Roman - Goldman Sachs Group Inc., Research Division

I was hoping we could start with gross margins. Obviously, you had a nice performance in the quarter, and Dean, you've provided some of the moving parts around the gross margin line. But can you maybe help give a little bit more detail on magnitudes of some of those pieces, underlying performance versus FX and then maybe put that into context of longer-term growth within the business and how you're thinking about higher-margin segments growing versus lower margin segments, and what that actually means to the trajectory of the gross profit line?

Dean H. Bergy

Well, gross margin, I don't want to belittle the topic, but it is a very, very difficult thing for us to fully get our arms around, particularly when you talk of -- start talking about 20- or 30-basis point movements. In terms of the pickup from the prior year last year, I think we did call out a couple of things that impacted it quite a bit. One was our mix and the other thing we had last year was a negative impact that we said was about 70 basis points from our decision to slow our manufacturing plants down. So certainly, on a comparative basis, year-over-year, you're seeing that. I think in this year, we called out the things that I think are important to us and I don't think there's any one that are significantly driving it more than others. Obviously, our implant business is our higher-margin businesses. And those were pretty strong this quarter. So certainly, you can assume that's part of it. But we're also, as we've said, we've got our Global Quality and Operations group continuing to make operational improvements. And we think that will continue to help us. And that's a piece of it, but these are all small incremental pieces. And certainly, currency is one that's in there that kind of moves around from quarter-to-quarter and is a little bit harder for us to peg.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And then maybe on the guidance, the 3% to 5.5% revenue growth for 2013, can you just provide -- maybe just go into a little bit more detail on some of the assumptions in terms of the end markets that underpin that guidance? The right way to think about it that, you're basically taking the 2012 operating environment and assuming that stability is sort of the normal and that is the basis for the guidance? Were there any assumptions on the various businesses improving or deteriorating in your outlook?

Katherine A. Owen

No, David, I think your comments are appropriate. We have not assumed any type of acceleration or meaningful deterioration beyond the current trends we're seeing. Kevin talked about not expecting a meaningful turnaround in our performance in Europe until the second half of the year. But as it relates to the overall markets, we're not assuming any big change, no bolus of patients representing themselves. I think most people have gotten comfortable with the fact that that's probably not the market dynamic we're going to see.

Operator

Rick Wise, from Stifel, Nicolaus, is online with a question.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

First, a follow-up on the trauma and the nail pickup in the quarter. I think I missed it, did you comment, Kevin, about how sticky, or how you could hang on to some of this share you picked up just in the short run? Is it something -- is this a sustainable door that opened, or an opportunity going forward?

Kevin A. Lobo

At this point, it's too early for me to be able to tell you how sticky that will be. And I think the honest answer is it will vary. I think some customers who are very loyal to Synthes and who we've obviously bailed out in the short-term will go back. But I think it's allowed a lot of other customers to see what Stryker can offer. Because the Stryker they remember from 5 years ago in trauma is nothing like the Stryker of today. So it really does depend on the receptivity of the account and our sales force's ability to show them the breadth of our offering, which has increased dramatically over the past 5 years. So I would expect some of it to stick, but clearly not all of it. But it will take some time before that plays out.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

And my second question, sort of a two-part to it, I'd be sort of curious to know how you're thinking in larger picture, Kevin, about this whole value segment part of the world. Yes, because they are priced in developed markets, you guys are targeting the value segment in China. Maybe talk about how this opens the door to offering a broader value product offering outside the United States, or even in developed world markets and how we can think about that theme playing out in years ahead for you.

Kevin A. Lobo

Sure. So, obviously, for us, it's a very strategic move. As you know, the emerging markets only represents about 6% of total Stryker sales. And even though we're very excited about the growth that we're experiencing in China and India and Brazil, it's off a very small base and it's only in the premium segment. So I would say initially, the goal is clearly to operate these products in the emerging markets initially. Over time, clearly, we could see and imagine certain markets that would have room for premium and value products. I think that will take time before that plays out. But in the short term, we have tremendous opportunities in the emerging markets. We're going to focus our energy in the short term, the next sort of few years, on the emerging markets. But over time, this does open the door and provide us with a strong brand and a history and a heritage of products that could one day land up in developed markets around the world.

Operator

Joanne Wuensch, from BMO Capital, is online with a question.

Joanne K. Wuensch - BMO Capital Markets U.S.

First one, big picture, Kevin, now that you've been there since October, can you give us an idea what you're seeing and how you want to make your mark on Stryker?

Kevin A. Lobo

Well, it's been a pretty active 100 days, I would say. I've had a chance to tour all over the world with Stryker and met many of the 22,000 employees. It's been really exciting for me to see how strong our businesses are, the strength of our leadership. I would say that we really have 4 areas of opportunity, and globalization is clearly one of them. And you've seen with the -- not just the acquisition of Trauson, but otherwise we have a lot of room to grow. There's a lot of products that have been a great success within the United States that we have yet to really operationalize outside the United States. So globalization, innovation, is a big area of opportunity in terms of broadening our lens beyond product only innovation, looking at different business models. Collaboration, as a third area, collaborating across divisions to drive value for customers, we're seeing some of our divisions get together, especially in the Neuro space, as well as even in Ortho, to drive value for the customer. In the past, Stryker was very decentralized and you wouldn't see that degree of collaboration. So that's a cultural change that I'm extremely excited about, still early. But there's terrific opportunities there. And then the last area I would say is cost optimization. And Dean alluded to the Global Quality and Operations improvements that we expect to flow through the gross margin line. But I would also say that inventories are a significant opportunity for us, as well as in G&A. We are later than many organizations in moving towards shared services. So despite the strength of our P&L, the strength of our balance sheet, we still see significant opportunities for improvement coming from a very strong position. In my first 100 days, I see a lot of opportunity and teams that are very passionate and excited about getting after these opportunities.

Joanne K. Wuensch - BMO Capital Markets U.S.

And then on a specific question. In Spine, your revenue growth, particularly in core products, is poking it's head up a little bit, so to speak. What's going on there? Is it new products, or new feet on the street?

Katherine A. Owen

Yes, Joanne, I would just -- we're pleased with the fourth quarter results, but it's a quarter where we're starting to see improved momentum. So probably too early to say we've got it all figured out. We've put new leadership in some time ago, as I mentioned, and starting to see the benefits of a renewed focus there, leveraging the broader portfolio that we were able to augment with the Orthovita acquisition. But I think we need to put up a few more quarters of showing that type of improved momentum before we really think we've got this definitively on the way to rebounding.

Kevin A. Lobo

Yes, and there were a couple of new products, but nothing major in addition to, obviously, the Orthovita products. So we -- they do have a little bit of a fuller bag, but there wasn't, sort of a blockbuster product, that was the impetus. Just terrific performance in the field.

Operator

Glenn Novarro, from RBC Capital Markets, is online with a question.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Two questions for Dean. First, Dean, I was wondering if you can help us out with 1Q EPS guidance. You're getting the benefit of the R&D tax credit, which I think you said was $0.04. The consensus for 1Q is $1.03. Should we be raising our estimate for the tax credit, or will that be reinvested? Now that's my first question. The second is related to share buyback. You didn't do a buyback in 4Q. I believe you did over $100 million for 2012, then you've got the $1 billion authorization. So should we assume a meaningful buyback in 2013?

Dean H. Bergy

Sure. On the R&D tax credit, what I would tell you is that, that legislation was passed in early January. Obviously, we put out our press release on January 9, so we were certainly aware of that. And we have our guidance outlined there in terms of kind of the way it flows by quarter. So obviously, it helps us in the first quarter, but we were aware of it. Certainly, probably some level of it will be reinvested. And we have a whole year to think about that. But there are opportunities always to do things to help invigorate our business. So I think the answer is, I'm not going to comment on the specific number, but you'll certainly see the way we've outlined -- the way our guidance progresses and we're comfortable with that. On the share buyback question, I think we've been pretty clear that, that's part of our plan, but it's kind of #3 in line. So we certainly have some powder there and we would look to deploy that, but I guess meaningful is in the eye of the beholder. And I think you can expect to use some of that, but it's certainly not something that we're saying you should think about as a meaningful -- a big piece of the driver of our EPS growth in 2013.

Operator

Larry Biegelsen, from Wells Fargo, is online with a question.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

One question on 2014 and then one question on the 2013 guidance. First, for Kevin, on 2014, an incremental 12 million people or so will gain insurance in the U.S. In your view, do you think this could have a meaningful impact on the market? Or is it going to be kind of negligible? And then just had one question on the 2013 guidance. But go ahead, Kevin, please.

Kevin A. Lobo

Sure, so as I think about this impact in 2014, I would say it's either neutral or maybe a modest positive. I certainly think for our implant business, the vast majority of these patients are being treated today. There's not going to be an influx of new patients, I don't think, in that side of the business. There could be a pickup in some of the MedSurg businesses, potentially, as you have more patients coming through, possibly in beds, et cetera, where, if you look at patient satisfaction being a key metric for Medicare reimbursement, I think some of the hospitals that are looking to prolong may want to really invest because a bed is really seen as a very, very key element of a patient satisfaction metric. So I think we could say neutral to modest positive, but certainly in our business, there isn't -- we're not very excited by what this offers to us, based on our patient demographic and the types of products that we sell.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

And on the 2013 guidance, what are you assuming for the medical business? Is it in terms of just does it get to flat for the year? And second, on the Neptune relaunch, are you assuming that it is -- in the guidance, that it's relaunched in the second half of the year? Katherine, it wasn't clear, kind of what you're assuming for the guidance.

Katherine A. Owen

Yes, we're probably not going to give -- well, not probably. We're not going to give growth expectations for 2013 by segment. It's just a level of granularity that's a bit too specific. You could -- probably safe to assume, though, that we're not expecting right now a dramatic turnaround in our medical business, part of that just the inherent uncertainties that I talked about before tied to IT prioritization and also the implications of the Affordable Care Act, which we're yet to see play out. So I think you should probably be fairly cautious as you think about modeling the medical business going forward. In terms of the revenue impact from the Neptune recall, the Q4 impact was about $18 million, and we expect it to be somewhere in the $17 million to $20 million per quarter until the product's back on the market. So that will be 2 more quarters before we anniversary at Q1 and Q2. We're not assuming anything before the second half of this year in terms of being able to relaunch and even that, I would be -- I would say that, that's an approximation just given the inherent vagaries of trying to time product relaunches with FDA.

Operator

Rich Newitter, from Leerink Swann, is online with a question.

Richard Newitter - Leerink Swann LLC, Research Division

I was just wondering if -- within the context of your comments on capital equipment spending and the environment there, Endoscopy picked up a little bit. You have a new product cycle starting there, can you, one, just talk about, kind of, it sounds like we're kind of in quarter 1 now, with the delayed launch. How long do you think the tail should be for that product cycle? And how should we think about Endoscopy and the HD camera within the spectrum of spending and budgets and what you see for '13?

Katherine A. Owen

Yes. Clearly, what we've learned is not all capital is the same. And there are much bigger ticket items and those that can be deferred and within all of our businesses, medical is the most deferrable just given the nature of the type of products, beds and stretchers, et cetera, that they sell. Our other business, Endoscopy and Instruments, to lesser degrees, have capital components. But it's a different type of capital product. Endo is, as you mentioned, launching their new camera. It officially launched very late in the second quarter. As we talked about previously, there were initially some technical glitches that is very common as we've been in this market for a number of years when you really get it out in big numbers, a brand-new launch. So that is not uncommon for us. Those have been addressed. So we are in full launch mode. And you typically, historically, have seen 3-year type product cycles when we launch a new camera. We think there's a lot of great features and benefits associated with this camera, including the visualization, as well as its ability to be used in multiple procedures within a hospital. So we're very excited about it. You saw some of the benefit tied to that in the quarter. But I do think you need to differentiate between capital related to medical, as opposed to our other capital businesses.

Richard Newitter - Leerink Swann LLC, Research Division

And then just a quick one on Spine, would you say that the incremental improvement in performance in Spine is all Orthovita? And if so, to what extent is that the hardware pulling through Orthovita and/or are you leading with Orthovita and that's actually pulling through your core Spine instrumentation?

Katherine A. Owen

Yes, I mean, we broke out on the call the growth contribution so that core Spine implant business was seeing growth in the mid-single digits and that we were seeing double-digit growth from Orthovita. Obviously, off of different bases. I would say Orthovita is benefiting from our much broader sales and distribution and that was a key part of the rationale. So we are definitely seeing some improvement. Kevin mentioned some of the product launches, although no blockbusters. But again, we're early in the turnaround. Really thrilled with what that leadership team and the sales force is doing. But I'd like to see a few quarters of sustained improvement.

Kevin A. Lobo

And like we saw with trauma, I think a more full bag has a wonderful impact on the field. And whether it's one help -- which one helps which one, kind of hard to go back and actually say which one is helping pull through the other products. But the more full a bag is, the more vital it is, the more the field, obviously, respond. The reaction of the customers improved and we certainly have strengthened our Spine bag, primarily with Orthovita, but also a couple of other smaller launches. And that's having an impact. So we need to see that sustained, like as Kevin said, we don't want to get ahead of ourselves after one quarter but certainly we're pleased with the fourth quarter results in Spine.

Operator

Rajeev Jashnani, from UBS, is online with a question.

Rajeev Jashnani - UBS Investment Bank, Research Division

And Katherine, I certainly appreciate your comments on the U.S. Recon market, stable, modest improvement. But I was just going to push a little bit more and if you could provide any more color I would certainly appreciate it. And perhaps there were any new accounts that you've penetrated in the quarter, or any perspective you're hearing back from existing customers in terms of procedures per day improvement? Or any other metric that you might track, would certainly be helpful.

Katherine A. Owen

Yes, I would probably going to largely echo some of the prior comments. I think we're seeing good momentum tied to the GetAroundKnee campaign. Some new product launches on the hip side. My comments about the market are somewhat guesstimates because we need everybody's numbers to come in to determine whether or not we gained share or we kept pace with the market certainly as it relates to the U.S. business. So I don't think I can get much more specific. Yes, we do track other metrics, but that's probably a level of granularity in terms of new accounts that we wouldn't get into on this call but overall we feel good about the market right now and certainly about what we're seeing in our business.

Kevin A. Lobo

And if you look at our Recon business over the full year, it was a very strong year. So obviously, this call is focused on the fourth quarter. But if you go all the way back to January, we've had pretty much a strong year across knees and hips throughout the year. Knees, more accelerating. hips, obviously, had a little bit of a dip in the third quarter and then picked it right back up. Hips has been on a pretty good roll for almost 8 quarters now. So it's kind of sustained strong performance. I'm very happy with the leadership team we have out there. And so really have a good outlook going into next year.

Rajeev Jashnani - UBS Investment Bank, Research Division

And this maybe kind of a, maybe a dumb follow-up question, but is there any reason to think that the DTC campaign would be a driver of share, or would that just be principally increasing volume at existing customers?

Kevin A. Lobo

Well, it's very difficult for us to be precise on a metric like that, but I can assure that we have won new business with the knee. There are many anecdotes that I have, I can't put a specific number on it. But certainly, the attention that it's created, both with customers, as well as with consumers who have come in and asked for it, has driven some competitive volume without a doubt. So again, the exact amount, I can't be precise with you. But the fact that we're continuing with the program, obviously means there's a cost associated with a program like that. We're pleased and we're getting a return on that investment. That would not be the case if we were only selling to our existing customers.

Operator

Bruce Nudell, from Crédit Suisse, is online with a question.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Kevin, could you just comment on, broadly speaking, on developed x U.S. versus emerging x U.S. markets in terms of major joint volume growth? And the trend lines you see going forward for those?

Katherine A. Owen

Yes, Bruce, maybe I'll jump in here. Clearly, in the developed -- the emerging markets, the growth is much greater than the developed markets o U.S. If you look at places like China, what we're seeing is very low penetration rates, low-single digits, whether it's trauma, hips, knee, Implants, but they're also in a very different place in terms of health care spending per capita. I don't think we see -- or once you get into developed markets, you're going to see much greater penetration rates, obviously, just given where they are in the market development. I think o U.S. and some of the Southern European countries, there's different pressures on those businesses, where, given the single-payer environment, you literally have hospitals that were doing hundreds of hip and knees a year ago and are doing a fraction of those right now, but that's a function of budgetary constraints as opposed to underlying patient demand.

Kevin A. Lobo

Yes, I think outside of Southern Europe, pretty steady market volume. No big increase, no big decrease. Southern Europe clearly is more depressed. When we give our commentary on Europe, right now, we're much more focused on improving our performance, understanding that it is a challenging marketplace. But we -- our goal is really to get back to market growth in Europe. But outside of Europe, we have very good market shares in the developed markets and we're seeing pretty consistent volumes, frankly, over the past few years.

Bruce M. Nudell - Crédit Suisse AG, Research Division

And I guess my follow-up is on knees. The GetAround campaigns focused on your design philosophy. Zimmer and J&J have announced more natural-feeling knees. Are any of these claims going to be backed up by objective measures of performance and/or patient satisfaction so that it's more substantive? And maybe more sustainable?

Kevin A. Lobo

Well, in our case, obviously, we've had our knee on the market for a number of years. Our revision rates are well documented, well published. So we know we have a very strong performing product. And so competitive products will have their advantages that they will tout. We know what our knee does. We know how it feels. We have enough of experience to really comment very clearly on what we're offering. And of course, we'll pay attention to the competitive offering and they'll have to demonstrate their points of difference just the same way we would. So we are aware of their features and what's different about their knees. And it's not something at this point that is overly concerning. Of course, never want to underestimate the competition, but we feel like we're in a very good place with our existing product and the innovation that we are designing around it.

Operator

Kristen Stewart, from Deutsche Bank, is online with a question.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I have, actually, 2. The first, just going back to the med tech tax. I think you'd said it's about $100 million in 2013. I recall initially that was a higher amount. Is the difference just simply due to the classification and cost of goods sold and will that run through, I guess, according to how inventory goes through? So maybe that effect happening more beginning in call it, maybe the second half versus the first half of the year? And in light of that, kind of where can we look for gross margins and operating margins in 2013? And I have a follow-up.

Dean H. Bergy

Okay. Kristen, this is Dean. The number did come down, but that was from very early on. I mean, we haven't changed the number since October. And in terms of the way it'll work for us, and I think this will be different for different companies. So you'll have to ask them. It really depends on -- it's driven by when the first sale of the product occurs. And the way it works for us, it's going to tie right to our sales. So it's going to go through the P&L right away and it will go all through gross margins we've talked about. So if you want to get an estimate of what it's going to be, you can take $100 million against our top line. That's close to 100 basis points on our gross margin.

Kevin A. Lobo

Some of the competition have different structures, right?

Dean H. Bergy

Correct. So for some companies it will get stuck in inventory and roll through in a different way, but ours will go through as the sales are occurring.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And just in light of that pressure, which will probably be, I guess, maybe about 100 basis points on the gross profit line, as well as operating margin, do you think that you can still show some growth and operating margin improvement? And then the second question is just, I appreciate you don't want to give specific product line guidance, but I was wondering if you guys would be willing to kind of offer your view on what your overall top line assumption for growth is broken down by the major divisions of Recon, MedSurg and then the Neurotech and Spine.

Dean H. Bergy

On operating margin, certainly, I -- we've kind of alluded to it. But you can see from the way our top line guidance falls relative to the way our bottom line guidance falls. You can see that there is implied operating margin improvement in there. And we expect there to be some. So we are going to be able to offset the device tax by getting additional leverage there. And relative to your other question, we really don't want to get into that level of granularity. I know we talked more about that last year, but we're comfortable we're going to be able to deliver 3% to 5%, and we believe that all 3 of our segments will contribute meaningfully to helping us get there, 5.5%, sorry.

Operator

Matthew O'Brien, from William Blair, is online with a question.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

A couple of them real quickly here for you. With respect to the recalls, and I think it's kind of played out at this point, but just can you give us a sense for the level of commentary you're getting back from your sales force, either with Neptune or with the 2 hip products, as far as customer dissatisfaction and any kind of impact you anticipate here in Q1?

Katherine A. Owen

Yes, I would just say on the hip side, I would note that we have got about 28,000 of those implanted since launch, so a relatively small product. Obviously, any physician dealing with this, it's never a positive thing. But I would go back to what we're putting up in terms of a revenue number for our hip business and I think just given our relative size, not to diminish what some patients may be dealing with, or physicians, but given our relative size, we believe this is a manageable item. Clearly, Neptune, our sales force would rather have it on the market than off the market and we'll be working through the issues associated with that to be able to return it as quickly as possible. In the interim, we're fortunate that Instruments has a broad product offering and seeing very good momentum with the launch of their latest generation power tool that's now going into year 2 and is helping to offset some of that impact from Neptune.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay, and then just one more for me. And Katherine, and I'd be interested to hear Kevin's thoughts as well, if possible, but I know you don't want to talk about product pipeline too much, but historically, you've talked a little bit about robotic surgery for orthopedic applications as an area of interest that you've been monitoring. Have your views on that space changed in -- over the last several months? Are you more or less compelled by it today than you were maybe 6 to 12 months ago?

Katherine A. Owen

I would say that our external comments have not changed, as it relates to robotics. We think there is a role for robotics in medical technology that's been proven by what intuitive surgical has done. We think the role for it in orthopedic surgery is still evolving and has not yet been optimized. But we haven't commented about whether that means we do or don't have an internal program. I think, like anybody, we watch this space and we make those evaluations, whether it's robotics or other areas that long-term could impact the orthopedic market.

Operator

Josh Jennings, from Cowen and Company, is online with a question.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

I guess, first, just on the gross margin line, thinking about some offsets to the med device tax, can you just comment on where you are in the formal completion of the integration of Boston Scientific manufacturing and whether, upon that completion, there would be any positive impact to the gross margin line for the Neurovascular business?

Kevin A. Lobo

Yes, we still have some integration work to do relative to that. That will happen later this year. I think in the second quarter, that will be pretty much complete in terms of the full changeover of the plants there. So we'll see. But that has gone reasonably smoothly, and we would expect, as we complete that, that will be the case.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

And any meaningful impact to the gross margin in terms of a benefit there to offset med device tax, or has most of that been realized with the...

Dean H. Bergy

I think it's...

Katherine A. Owen

One of the factors.

Dean H. Bergy

It's a factor, but it's not -- I wouldn't say it's overly significant.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Okay, great. Just one more, sticking on Neurovascular. Maybe your Surpass acquisition, any follow-up in terms of beginning of enrollment of the ID trial in Q4? And then just any commentary on commercialization in Europe?

Katherine A. Owen

Yes, taking the latter part first, the revenue outside the U.S. is very, very minimal at this point and I would not view that as a big driver. We did start enrollment in the trial in the fourth quarter and we continue to anticipate it's going to be a few years before we have that product on the market. We are excited about it because we think a diverter's important product long-term, but it's obviously, this was still fairly early stage as we work towards getting ultimate approval.

Operator

I have no further questions at this time. I'll now turn the conference over to Mr. Lobo for closing remarks.

Kevin A. Lobo

So thank you all for joining our call. I look forward to continuing to meet with you in the months ahead. Our conference call for the first quarter 2013 results will be held on April 24, 2013. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.

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