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Stryker (NYSE:SYK)

Q3 2011 Earnings Call

October 19, 2011 4:30 pm ET

Executives

Curt R. Hartman - Chief Financial Officer and Vice President

Stephen P. MacMillan - Chairman of the Board, Chief Executive Officer and President

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

Analysts

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

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

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

Topher Orr - Goldman Sachs Group Inc., Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

Tao Levy - Collins Stewart LLC, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division

Vivian Cervantes - Kaufman Bros., L.P., Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

David Turkaly - Susquehanna Financial Group, LLLP, Research Division

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

Jason Wittes - Caris & Company, Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Stryker Earnings Conference Call. My name is Keisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

Certain statements made in today's conference call may contain information that includes or is based on forward-looking statements within the meaning of the Federal Securities Law that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to: weakening of economic conditions that could adversely affect the level of demand for the company's products; pricing pressures, generally, including cost containment measures that could adversely affect the price of or demand for the company's products; changes in foreign exchange markets; legislative and regulatory actions; unanticipated issues arising in connection with clinical studies and otherwise that affect U.S. Food and Drug Administration approval of new products; changes in reimbursement levels from third-party payers; a significant increase in product liability claims; resolution of tax audits; changes in financial markets; changes in the competitive environment and the company's ability to integrate acquisitions.

Additional information concerning these and other factors are contained in the company's filings with the U.S. Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

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

Stephen P. MacMillan

Thank you, Keisha. Good afternoon, everyone, and welcome to Stryker's third quarter 2011 earnings report. With me today are Curt Hartman, our Vice President and Chief Financial Officer; and Katherine Owen, Vice President of Strategy and Investor Relations.

Before passing the call over to Katherine and Curt to provide more specifics, we know there have been some investor concerns that we'd like to address, including the slowdown in elective procedures, capital budgets and gross margin.

First, with respect to elective procedures. The Recon market continued the softness that began last year in the second quarter. While we look forward to the day the market picks back up, we feel good about our Recon portfolio and our ability to deliver even in a slower environment.

Second, turning to capital budgets and the potential impact of Medicare spending. We believe there has been an understandable but misplaced overreaction. While the current economic environment remains challenged, hospitals do have access to credit, a clear difference versus the 2008-2009 downturn. Our own third quarter MedSurg results, especially our Medical business, are evidence that these markets remain solid.

It's also important to note that since late 2008, we have significantly changed the composition of our MedSurg businesses, including expanding our disposables product offering with the Ascent, SONOPET, and Gaymar acquisitions. Our MedSurg businesses are better positioned now than at any point in our history to drive share gains, engage with hospital customers, leverage new product offerings and expand geographically, a fact that we believe will remain clearly the case in the fourth quarter in 2012 and beyond.

On the gross margin front, we have been negatively impacted in 2011 by a greater-than-expected degree from swings in foreign exchange rates. Although these same swings inflated our gross margin in Q2 and Q3 of 2010, the reverse has been true this year. Beyond FX, we are making the necessary investments to help unlock decentralized inefficiencies that represent a clear long-term leverage opportunity.

With Lonny Carpenter now overseeing global manufacturing since the start of this year, we are investing in various aspects of this multiyear initiative, including our IT infrastructure procurement, vendor consolidation and numerous other aspects, all also absorbing the various acquisitions.

Ironically, it's the strength of our P&L that's enabling us to make these investments that will yield dividends longer term while not deviating from the earnings targets we've provided at the start of the year. Looked at somewhat more succinctly, our underlying P&L performance is enabling us to manage through some unexpected pressures as well as M&A costs that often result in companies trimming guidance. You're not one of them.

It's also worth highlighting the fact that over the past 24 months, we have bolstered our core franchises by leveraging the tremendous strength afforded by our solid cash flow and strong balance sheet via acquisitions. We have entered into key adjacent markets that are on track to help accelerate our organic growth in 2012 and beyond.

With 10 acquisitions completed in the past 2 years and 4 in 2011 alone, we are committed to further broadening our sales footprint with M&A targets. And it's important to note that we are not just buying one-off growth.

Every one of these acquisitions is a platform that we fully expect to grow above the rate of our core markets or the foreseeable future. Our sales mix is also strengthened considerably within our MedSurg businesses, particularly through Stryker Sustainability Solutions and more recently Gaymar. These moves have provided our sales team with a stronger product offering and a greater ability to gain market share despite some ongoing challenges in underlying elective procedure growth. We also remain highly focused on ensuring we are investing in internally driven innovation as evidenced by the 23% increase in R&D in the quarter and year-to-date, on top of a 17% increase in 2010.

Investments in R&D are balanced throughout our portfolio of businesses and include the necessary incremental innovation that's driving our ongoing market share gains in many of our businesses, while also making longer term investments in both product, procedural and service offerings.

This level of R&D is a clear reflection of our confidence and the opportunities we still see for innovation in our markets. Our commitment to a three-pronged strategy relates to cash deployment is reflected in our Q3 results as we further leveraged our P&L via buybacks that totaled $289 million in the quarter, and our quarterly dividend represented a 20% increase year-over-year. We believe this balanced approach will drive maximum shareholder return, both the short and long term as we look to accelerate organic growth while also driving greater P&L leverage.

Overall, looking back on our Q3 results and our financial performance to date in 2011, we are pleased with the unique strength of our company, both our products and our people. Although the global economic environment has proven to be more challenging than anticipated at the start of the year, it's clear that our unique business model is enabling us to navigate the challenges while further building on our strengths. Expansion of our sales footprint through our focused M&A activity will be an important driver of our revenue and earnings growth long term.

Near term, our strength is allowing us to modestly raise our EPS target for the year, while simultaneously absorbing a series of key strategic acquisitions and making meaningful investments in R&D.

We believe this combination of funding our innovation pipeline, augmenting our business with higher -- with additional higher-growth franchises and achieving consistent double-digit earnings growth will ensure we are able to maximize shareholder returns in both the near and long term.

Net -- although there are always challenges and there will inevitably be things we don't like in any given quarter, we feel good about our ability to deliver and see lots of opportunity for growth in all of our businesses.

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

Katherine A. Owen

Thanks, Steve. In light of the relatively high level of M&A activity that's occurred with us in recent quarters, my comments today will focus on some additional granularity around these transactions. As many of you on today's call are aware, our cash deployment strategy has focused on acquisitions along with buybacks and dividends. Our cash flow capabilities, we believe that the ability to execute on all 3 is an important competitive advantage that positions us well to deliver on both our short- and long-term financial targets.

From a scorecard perspective, we are pleased with the performance to date of the various acquisitions. Although retrospectively, the 510(k) clearance of our shape-fitting technology obtained by the OtisMed acquisition took longer than anticipated, early read on the rollout is positive and we view the product as the key offering in our Recon sales force's portfolio.

We are also pleased by the reacceleration in Stryker Sustainability Solutions, which delivered strong double-digit top line growth in the quarter.

We completed a number of deals focused on our core markets in 2010, including SONOPET, Gaymar and MEDPOR, all of which are tracking at or ahead of our expectations. Although clearly still early, we're excited about the opportunity for us to leverage our considerable sales and distribution capabilities by adding the terrific product portfolios provided by both Orthovita and Memometal.

Overall, we look for the totality of our M&A activity to help us to generate solid top line growth despite the softer-than-expected orthopedic implant markets.

Turning to the most significant acquisition we have completed recently. Neurovascular continues to execute on the launch of its new products, including the next generation coil and detachment system. We view the long-term growth potential in the treatment of stroke that represent one of the most exciting segments within medical technology, reflecting both the tremendous unmet need and opportunities for device space innovation. This was a key factor behind our move to further expand our market-leading presence in the interventional stroke market with the recent acquisition of Concentric Medical, which allows us access to the ischemic stroke segment.

Although today, the vast majority, nearly 90%, of neurovascular stroke sales are from devices to treat hemorrhagic stroke, this population represents just 13% of stroke patients. Over 80% of 85% of stroke incidents are from ischemic, and we're excited about the opportunity to leverage our core platform in neurovascular via the addition of Concentric, with its long history of device-based innovation and a truly exciting product pipeline. It's a latest generation stent retriever device designed specifically for the removal of ischemic stroke, is CE approved. And Concentric is currently one of just 2 companies with an FDA-approved IDE trial underway in the stent retriever category. We are targeting a late 2012, 2013 510(k) clearance and believe this technology will represent an important long-term growth driver for our Neurotechnology franchise.

In sum, a recent series of M&A transactions reflect our stated strategy of both leveraging our core in order to drive sales and cost synergies while also entering key adjacent markets that can help improve our long-term organic growth rates.

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

Curt R. Hartman

Thanks, Katherine. I'll start by saying we again delivered solid financial results based on the inherent strength of our evolving business mix, financial discipline in a diverse and expanding base of recurring revenue, all of which positions us well in today's challenging global economy and changing medtech landscape.

Overall, in the third quarter company sales increased 14.9% on a reported basis, 11.7% in constant currency, in line with the second quarter. Essentially, core growth excluding currency and acquisitions slowed in the quarter but was consistent with levels achieved in Q1, pushing it at 4.1%.

Despite the lack of any meaningful recovery in elective procedures, we are encouraged by our ability to sustain mid-single digit organic growth, which we are augmenting through our strategic business development activities. Drivers of growth in the quarter included solid MedSurg results, reflecting both continued strength in our medical, instrument segments and an acceleration in our Sustainability Solutions business. Additionally, we saw continued incremental quarter-over-quarter gains in our core Reconstructive business. Although majority of our Neurotechnology and Spine franchises achieved solid growth, this was offset by sequential slowdown in our spinal implants.

Looking at earnings, we delivered encouraging results with adjusted diluted EPS before nonrecurring charges of $0.91, representing growth of 13.8% over Q3 of 2010. On a GAAP basis, diluted net earnings per share were $0.84, a decrease of 1.2% versus Q3 of 2010.

Overall, our 2011 acquisitions as well as those completed in recent years are performing as or better than expected and our integration efforts remain on track. The P&L continues to reflect our investment in systems to support acquisition integration, R&D expansion and the tax benefit driven from our focus on optimizing our operational footprint. Other factors in the quarter include the now typical movement associated with currency on a per share gain of over $0.01, associated with share repurchases and a favorable tax election. Finally, in the quarter, we generated $446 million of cash from operations.

Reviewing the quarter, I'll start with the discussion of the components of our revenue growth. In the third quarter, revenue growth was driven by volume mix, which contributed 6.1% to our top line growth. Company-wide selling prices declined 2%. Overall, pricing remained consistent and in line with recent quarters. Acquisitions added 7.6%. Currency contributed approximately $57 million and improved the company's overall reported sales growth by 3.2%.

Looking at our external reporting segments. Reconstructive products, which represented 44% of our sales in the quarter and include our Hip, Knee, Trauma and other reconstructive lines, recorded an 8% increase as reported and a 4% increase on a constant currency basis. The acquisition added 1.7% to the constant currency increase.

This represents another sequential improvement in our Reconstructive segment, while acknowledging that gains have been marginal and the market remains challenging.

At the segment level, hip sales continue to perform well according to 10% reported gain and a 5% increase in constant currency. International markets accelerated in the quarter, delivering our best hip results since Q1 of 2009. Emerging markets and Japan pace the gains . In the U.S., market hip sales continue to benefit from our MDM offering and recorded 5% growth.

Conversely, new sales remained weak in the quarter with reported growth of 3% and down 50 basis points on a constant currency basis. International markets recorded 2% constant currency growth, mid-single to low double-digit gains in other international markets, offset by softness in Europe. U.S. market remains difficult as evidenced by the 2% decline in the quarter. However, the commercial launch of our ShapeMatching offering is going well, and we expect it to contribute to modest sequential improvement in the quarters ahead, resulting in tougher fourth quarter comparisons.

Globally, Trauma posted 17% reported growth, 12% constant currency growth. Acquisitions added 6% to the top line. Domestic Trauma results recorded a 20% gain, while in international markets, Trauma recorded 5% growth on a constant currency basis.

Overall, we feel good about our Reconstructive results in a challenged market. We remain optimistic regarding our hip lineup, the OtisMed ShapeMatching solution, MMI acquisition and its influence on our broader trauma offering.

Next, I'll turn to MedSurg, which represented 38% of sales in the quarter and is comprised of our instruments, endoscopy, medical and Stryker Sustainability Solutions segments. MedSurg has delivered another solid sales quarter, increasing 12% as reported and 10% on a constant currency basis, with acquisitions adding 2.2%. Once again, the medical segment was the star of the show delivering 31% reported growth, 20% excluding acquisitions and currency.

From a market perspective, the bed and stretcher offering continues to perform well in a market fueled by the replacement and upgrade cycle as well as hospitals' increasing focus and the ability of certain capital purchases to improve efficiencies and facilitate better patient outcomes. Finally, our Sustainability Solutions business returned to mid-, high-teens growth, and this remains our expectation given all the opportunity we first identified in this market over 2 years ago.

Our final segment, Neurotechnology and Spine, which represented 18% of the company's sales in the quarter increased 46% as reported and 43% on a constant currency basis. Acquisitions added 42.5% to the constant currency increase.

Highlights in the quarter include strong organic growth from our Interventional Spine and NSE offerings as well as a positive influence of the MEDPOR in neurovascular acquisitions. Obviously, continued pressure on the spinal implant market in terms of both volumes and price influenced core growth in the quarter. Finally, on a positive note, our Spine business did begin its initial launch with lateral access fusion system.

I'll now turn to the income statement, beginning with gross margin performance. Gross margins finished at 67.1% as a result of acquisition charges totaling approximately $18 million. Excluding these charges, gross margins were 68.0% in the quarter, which was lower than the prior year by 140 basis points, which represented a 20 basis point improvement over Q2. Also recall, 2010 third quarter gross margins were favorably impacted by currency.

These comments aside, given our management and operational structure, our efforts remain focused on reducing our material and conversion costs in support of our long-term growth strategy, which we believe will drive operating margin expansion despite the potential for greater pricing pressure as the healthcare environment continues to evolve.

Research and development continued as an area of investment priority, moving to 6% of sales, an increase of 23% versus the third quarter of 2010. In the first 3 quarters, R&D spend is up 23%, influenced by our commitments to increased innovation and the dollars now in the R&D category associated with acquisitions. Stated more succinctly, we believe innovation still matters as a catalyst of long-term growth and we're excited about the current and future flow of new products across our various divisions.

Selling, general and administrative costs represented 37.7% of sales. Adjusting for acquisition and integration-related charges, SG&A finished at 36.6% of sales, a decline of 120 basis points versus prior year. Intangible amortization in the quarter was $31 million and represented 1.5% of sales versus the $14 million and 80 basis point of sales in the prior year quarter. Year-to-date, intangible amortization is $90 million and 1.5% of sales versus $42 million, 80 basis points of sales in 2010. Clearly, the acquisition influence on this line is deleveraging our P&L and the EBIT margin this year. But we expect to see benefit here in the years ahead.

Reported operating income decreased 5.7% over prior year and moved to 21.9% of sales, reflecting the impact of the inventory step-up in other acquisition and integration-related charges. Adjusted operating income increased 8%, while the adjusted operating margin decreased 150 basis points versus the prior year to 23.8% of sales.

Other income and expense decreased pretax income by $13 million in the quarter. Components of this included investment income of $9 million, offset by $21 million of interest expense. The company's effective income tax rate was 24.1% for the third quarter. Excluding the tax benefit associated with acquisition-related charges, our effective income tax rate would have been 25% for the quarter. For the year-to-date, our tax rate excluding the acquisition-related charges, is 25.6%, and we are comfortable with this for the year.

In terms of the balance sheet, we ended the quarter with $3.2 billion of cash and marketable securities, $500 million from the $2.7 billion at the end of the second quarter. We supplemented this balance on September 12 with a $750 million 5-year 2% coupon debt offering and offset the increase with working capital expansion, acquisitions and share repurchases. As a reminder, we now have $1.75 billion of debt on the balance sheet, associated with our January 2010 $1 billion debt offering and our September 2011 $750 million debt offering.

On the asset management side. Accounts receivable days ended the quarter at 58, which represented a decrease of 1 day compared to the prior quarter and prior year. Days in inventory finished the quarter at 176, which was an increase of 12 days sequentially versus the second quarter and 2 days against prior year level.

Turning to cash. In the third quarter, we generated cash flow from operations of $446 million and free cash flow of $389 million. Finally, in the quarter, market volatility created a buy-in opportunity. We repurchased 5.9 million shares totaling $289 million. Year-to-date, we have repurchased 9.9 million shares for a total spend of $539 million. We currently have open authorizations totaling approximately $286 million.

In summary, we delivered a positive third quarter and in general are on track with our annual earnings goal. The objectives remain driving core business growth, continued acquisition integration, operational focus and a sharpened focus on cash generation.

Turning to our outlook. Our guidance, as Steve noted, has been adjusted in a couple of areas. Starting with currency. If rates hold in their current levels, we would expect fourth quarter sales to be favorably impacted by approximately 0% to 1% when compared to 2010. Using current rates, the full year currency impact on top line sales will be an increase in the range of 2% to 3% when compared to 2010.

From a revenue standpoint, we are now calling for a net sales increase of 11% to 12% in constant currency. Excluding the impact of foreign currency as well as acquisitions, our sales growth is now projected to be 4% to 5% for the full year. Adjusted diluted net earnings per share range has been raised and is now anticipated to be in the $3.70 to $3.74 range, representing an increase of 11% to 12% for 2010 adjusted diluted earnings per share and comparing favorably to our prior $3.65 to $3.73 target. We anticipate acquisition and integration-related charges to reduce reported diluted net earnings per share by approximately $0.33 to $0.35.

Overall, we think the year is largely in line with our expectations. With our continued actions to both leverage and further diversify our revenue base coupled with our ongoing investment in quality, significant uptick in R&D investment and more recently our efforts around operational simplification and alignment, we are highly encouraged regarding our near- and long-term top and bottom line growth prospects. Additionally, we've been supporting these efforts with disciplined capital deployment through share buybacks, dividend expansion and strategic acquisitions. We believe we are well positioned to maximize shareholder returns, with a highly focused and balanced approach.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mike Weinstein with JPMorgan.

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

Steve, maybe as a starting point, would like to focus on MedSurg. And given the concerns out there, I'd be interested in your comments in which you made earlier about the health of the various end markets. I'm thinking geographically, I'm thinking Europe and the U.S. as you look at the fourth quarter. And then the second part I'd like you to comment on is where you are in the product cycle for your various businesses. I think our understanding is that you have a new product cycle coming on the endoscopy side of the business in cameras in 2012. So any additional insights there will be appreciated.

Stephen P. MacMillan

Sure, Mike. I think we do continue to feel very good about our MedSurg businesses, both in the U.S. and particularly outside of the U.S. I will tell you, Europe was a little rougher in the third quarter, and that was probably our little spot of weakness for our MedSurg businesses in the third quarter. We think that's just a little bit of a market issue, nothing that's had us too concerned. And the bigger issue probably is our product cycle, particularly as it does relate to both endo and to some degree our instruments businesses. But we've got some very good things coming and particularly on the endo side, as you said, things in the pipeline there that we may be a little softer here in the next quarter or so. I'm feeling very good about what's in the lineup. And I would say probably feeling really good about what we have coming in 2012 across all 3 of the big MedSurg franchises.

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

And the visibility on that for the street, would that have to wait for AAOS?

Stephen P. MacMillan

Yes, in terms of...

Stephen P. MacMillan

In the pipeline.

Stephen P. MacMillan

It probably depends [ph] on the product.

Katherine A. Owen

It's probably as we get in -- Mike, as you know, historically, we haven't gone into a whole lot of specificity around exact timing of those launches both for competitive reasons as well as sales force focus. So these are 2012 rollouts. The exact timing, probably not going to be too specific on right now.

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

Okay. And then, Steve, just to think strategically, we've seen medical device at markets become increasingly challenged this year or the last few years, and so it's hard to find end markets that are at this point, at least showing meaningful growth. With that reality, how do we think about your further appetite for M&A given how aggressive you've been over the last 24, 36 months?

Stephen P. MacMillan

Sure. I think what we've clearly tried to do, Mike, as you know is find additional growth opportunities within any overall market that you've got packets of strength and things like extremities, things like orthobiologics, things like surfaces in our medical business or SONOPET, which was great for our NSE, our Neurospine franchise. And I think we've been very active and opportunistic in what's going on there. So that really the way we look at it is those markets should grow faster than the overall markets. And continue to look for those -- dare we call it niches or smaller pieces and then look at the big things like the neurovascular that we feel we'll have a very good growth profile. Going forward, would you expect the same pace of acquisition? I'd tell you truthfully, we're probably largely focusing right now on integrating what we've taken. We've taken a lot on over the last 12 to 18 months. And I think you would probably see a slowdown. We're not going to be serial acquirers, but we are going to take advantage when the opportunities pop up. Katherine, I don't know if you want to add to that.

Katherine A. Owen

No. I think as BD engine flows, and right now we want to make sure that we leverage the opportunity we've had and not muck it up on the integration side. So it's not an on and off switch, but probably one right now, little bit more focused on innovation and execution.

Stephen P. MacMillan

Yes. Mike, to have one other comment to that, I think as a CEO, you have to be careful that you're paying attention to truly the organizational abilities to digest so many things. And we're probably, I don't want to say maxed out, but we're stretched and I think love what we've done, but would want to be careful not to take so much more on at this point.

Operator

[Operator Instructions] Your next question comes from the line of David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Steve or Curt, just thinking about the quarter, margins came in actually better than we thought and actually sort of revenue in many respects. So just thinking about the fourth quarter change to the top line constant currency number, can you just talk about some of the factors in the fourth quarter that are resulting in incremental pressure? Is it orthopedics? Is it the international market?

Curt R. Hartman

David, the second part of your question was the fourth quarter change. Our outlook was the full year.

David R. Lewis - Morgan Stanley, Research Division

Agreed. So I'm just assuming, given this third quarter performance is actually in line, a little better than we were looking for, I'm just wondering what the specific slowdowns would be in the fourth quarter.

Curt R. Hartman

I think our overall full year guidance -- I can't overlay my guidance on your model, but I think our overall guidance is a statement of not seeing any meaningful recovery in the Reconstructive business, but we are personally, incrementally making gains as you look at our Reconstructive business, Hips, Knees, Trauma. That core business has improved each at the past 3 quarters, albeit very incrementally by our historical standards. But certainly that market has not recovered in a way that I think a lot of people would have assumed as we entered this year. And I don't think in the large European, broad European market we've seen any meaningful recovery as well. So those are probably the 2, #1 ,#2 areas that are driving a little bit of core business pullback and overall outlook pullback.

David R. Lewis - Morgan Stanley, Research Division

Okay, very helpful. And then Steve, you made some comments, and I appreciate Katherine's comments, giving us more detail about many of the acquisitions and the growth platform going forward. You talked about beginning to see the evidence of acceleration in the core business in the '12 and '13 timeframe. As you think about sort of mid-single digit organic constant currency guidance for this year, is it too early to think about acceleration from those levels heading into '12?

Stephen P. MacMillan

I think, David, we want to stay away from getting too far in the guidance for 2012. But I think that you should expect that -- and we feel good about the way we've been reshaping the portfolio this year. But the big question really is going to be do the markets come back much or not? But I think we're trying to position ourselves to have solid organic growth despite -- even if the markets continue right where they are. And we'll, obviously, come back with more specific guidance in January. All right. Sorry, I can't give you more at that point -- at this point.

Operator

Next question comes from the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 things I wanted to cover. One, I was wondering if you could give a little bit more color on the endo business because that seems to be the one within MedSurg that declined in terms of its growth rate the most from the trends you've seen over the last few quarters. So if you could talk about that a little bit. And then I wanted to ask a question on operating margins, but I'll save that for the follow-up.

Stephen P. MacMillan

Yes. On endo, I think it's really product life cycle related. And I would tell you Katherine, Curt and I were actually out for that business last week and feel really good about where they'll be headed next year.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Steve, did I hear you correctly when you said you should expect incremental softness in the fourth quarter?

Stephen P. MacMillan

No.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then on the operating margin side, either Steve or Curt, this year we've seen declines in operating margin. We obviously all understand the R&D piece. But in terms of gross margin and SG&A, can you just talk from a top, down perspective about the pressures on those business, or on those line items this year? And as we look forward and then again, I'm not asking for 2012 guidance, but can we get -- at what point can those turn and what allows it to turn the operating margin back up again?

Curt R. Hartman

It's obviously a hot topic here in the last couple of quarters, Bob, specifically, as it relates to gross margins. Clearly, currency movement does impact gross margins. But I think in addition to that, when we look at our business, we really start with what's the revenue outlook and what's the earnings target that we're going for. And all the levers in between those 2 are at our discretion to use, to run our business in a way that we think will best help us in the given quarter, the given year, also as we look to the future and where we think the business needs to be. So as you look at gross margins specifically, there's clearly been currency influence there this year. And in addition, and Steve mentioned this in his opening comments, we now have a global executive who is focused on our global operations. Any time you do that, any time you align an operations team, a lot of projects come forward. Those projects all come with a price and you have to make those investments before you see the return. In addition, the M&A that's been discussed also brings cost that hit gross margin. Not all of those cost get called out as acquisition and integration-related charges because some of those costs are investments that we'll use across the company for further leverage in the out-year, specifically as it relates to SG&A. I honestly feel decent about where SG&A is right now. We've had some ups and downs over the last 3 quarters. But in general, I feel pretty good about what we're doing there. I think everybody in the med device base is looking at distribution-related cost and trying to figure out where those are going to move, over what period of time, and that includes Stryker. But in general I think we've got the right approach and the right focus on those right now.

Stephen P. MacMillan

If I could just add one other thing. I think we clarified when we did Boston Neurovascular acquisition. What we're doing is there absorbing a division from a company that was structured very differently than ours. And again, one of the things we've had to do this year is invest in some of the back-office support areas as well to absorb that acquisition and let them focus on what they do well, which is drive the top line, drive the innovation. So there has been additional cost in the SG&A line supporting that this year that we should start to see leverage in the future as well.

Curt R. Hartman

And just from a metric standpoint, year-to-date, adjusted SG&A is identical to what it was a year ago. So that my comment about I think we're doing okay, given everything we put in through the P&L this year to be equal to where we were as a ratio, 37.3% of sales actually feel okay, and think about that in the future periods how we can leverage that as we expand the sales base.

Operator

Next question comes from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart

Just wanted to go over, I guess, the reduction in underlying sales growth. Curt, I think you'd said the new guidance assumes 4% to 5%. I think the old guidance was 5% to 7%. Just want to kind of clarify that.

Curt R. Hartman

Yes. We started the year with core business growth of 5% to 7%. We're moving that to 4% to 5%, and I would just tell you it's a reflection of where we are in the year through the first 3 quarters and the size of core growth we have to deliver in the fourth quarter to stay within our 5% to 7% range. Number one, it doesn't feel realistic after 3 quarters being under our belt. Number two, we think the 4% to 5% is a realistic reflection that some of the core markets i.e., reconstructive, have not returned to a level that we had originally assumed as we started this year. We're as optimistic as anyone and we want to continue to drive our teams to higher growth levels. I think the 4% to 5% more accurately reflects the first 3 quarters and where we see the year finishing up.

Kristen M. Stewart

Okay. And then I guess just kind of the changes mostly you would say is attributable to the slower performance within Recon, mainly Hip and Knee?

Curt R. Hartman

Yes, and Spine. Spine is recorded in our Neurotech and Spine segment. And as I mentioned in my comments, we did not have a good spinal implant quarter. It was, frankly, disappointing. And I think it just reflects the broad pressure in the overall reconstructive market, even though, we report those in a different segment than our Reconstructive business.

Operator

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

Frederick A. Wise - Leerink Swann LLC, Research Division

You talked about the slightly better performance in Hips and sort of acceleration in the second quarter in the U.S. Is this -- the new product you've launched? Is that the primary driver? And should we expect a continued gradual step-up as you've talked about the freight train image in the past? Should we expect that gradual increase going forward despite the tough market?

Stephen P. MacMillan

Yes, I think the freight train analogy is a very good one, Rick. We're seeing MDM take off. I would just remind you, we're going against a tough fourth quarter comp. But overall, the trend here is looking up. And I think we're feeling -- we're hearing very good stuff out of the field and out of the surgeon community on MDM. I think we're in the right place at the right time with that product.

Frederick A. Wise - Leerink Swann LLC, Research Division

So it's all about the new products?

Stephen P. MacMillan

Yes.

Frederick A. Wise - Leerink Swann LLC, Research Division

Okay. Ascent, Kathy, if I heard you correctly, did I hear you say strong double-digit growth? Or I think it's your exact language, if I understood you correctly. J&J has now bought SterilMed. Maybe, Steve or Katherine, you could talk about the dynamics of that business. And is this going to be a more important growth driver, small still, but going forward as we're processing gains, more traction?

Stephen P. MacMillan

Yes. Rick, to clarify, we did have double-digit growth. It was a clear step-up in the quarter, business bouncing back very nicely, and we feel we've got that back on track, continue to feel great about the fundamentals. And frankly, we think J&J's entry into it is going to, a, further validate this is a market. To an enormous degree, I think it's wonderful when you have Stryker and J&J both as now the #1 and 2 players in the market. And I think the underlying fundamentals and healthcare cost and everything else we continue to feel really good about having identified this one a couple of years ago and picked up the market leader with big growth potential in a market that's probably going to become more validated now than ever.

Operator

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

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Wanted to follow up on an earlier question on strategic interest. I know you had taken on a lot recently in your organizations, integrating those acquisitions. But one of the questions on the call earlier today raised a question in my mind about your business. You're pretty much fully exposed across your business lines and sort of government and private pay reimbursed products, maybe with the exception of hospital equipment. And I'm wondering if you've contemplated, if you would contemplate diversifying that, especially given the regulatory and payer environment that we're in to include something that's a little bit more patient pay, commercial pay, self-pay-oriented. And then I have one follow-up.

Stephen P. MacMillan

Matt, I wouldn't say that, that's got to be a strategic driver. We do talk about that a lot, and I would tell you we have looked at some markets that are more exposed to a bigger private paying component. But we feel good still about the markets we're in. And I think over time, ultimately, we would also believe there may become more of a private pay component even to some of the businesses that we're in and ultimately where innovation will continue to drive the business. We think about it, but wouldn't expect a big move. We're pretty good sticking close to our core, as you know.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay. And then the follow-up was on Recon and some of your launches there. Even though you're not calling here for a recovery in orthopedics or reconstructive, it does -- halfway through the reporting cycle, it does seem like you're coming up kind of in the top quartiles of performance this quarter. And I'm wondering , with respect...

Stephen P. MacMillan

As we should.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Pardon?

Stephen P. MacMillan

As we should.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

As you should, that's what I like to see. But in these new product launches, just to set the right expectation, used to be that it would take a good solid couple of years to be into the meat of a new rollout. Given the environment -- I guess what we're hearing is maybe even those timelines had become more a little bit stretched out in the way that you deploy instruments, the way that you train and roll these things out, just maybe because of the market's capacity to absorb new products has changed. Any color on that? Is that something -- should we think about these products that way?

Katherine A. Owen

Matt, I think you have to -- it's going to be difficult to make a blanket statement. So if you look traditionally in Hips and Knees, those are typically longer, couple years as you fully rollout. And not just the instruments but you train the sales force, train the surgeons. But if you take, for instance, right now MDM, which is our key Hip product launch. It really benefited from a lot of the heavy lifting that went on around both the philosophy and the instrumentation, et cetera, from ADM. So that's probably had a little bit better of initial uptake than you'd see with a traditional Recon product. And also OtisMed, there was familiarity with that shape-fitting technology as it was on the market a few years ago. And there's general familiarity with it. So I don't think you can make a blanket statement. It's going to depend on the type of product and the type of launch, but I wouldn't say from a macro-environment we're seeing stretched-out product uptakes.

Operator

Your next question comes from the line of Tao Levy with Collins Stewart.

Tao Levy - Collins Stewart LLC, Research Division

I had a question on the 1% to 2%, your change in sort of the core growth, is that something that you kind of realized throughout the quarter, you looked into Q4? Or it's been a little bit light throughout the year and there's been some sort of expectation that things would get better and now you kind of just need to readjust expectations?

Stephen P. MacMillan

I'd consider the borderline adjustment at the end of the day when you look at it, 4% to 5% versus the low end of 5%. We're seeing how the year is playing out, clearly the markets have not materialized, but it's a very modest incremental adjustment.

Tao Levy - Collins Stewart LLC, Research Division

What I'm trying to, I guess, figure out is that are things appearing worse than they had in the Hip and Knee market? Or they're just not getting as good?

Stephen P. MacMillan

It's really seeing where things shook out in the third quarter. And being this close to the end of the year, we've got, obviously, more data at this point, and just recognizing the comps for the fourth quarter and product life cycles and everything else. So do not read it at all as a signal that we're concerned about where we're headed.

Operator

Your next question comes from the line of Dave Turkaly with SIG.

David Turkaly - Susquehanna Financial Group, LLLP, Research Division

I know you mentioned the pricing was down 2% in the quarter. And just curious, as you updated the guidance, how is that relative to your expectations? And is that kind of what we should be expecting us we look forward for the company ahead?

Curt R. Hartman

Pricing this year has been in the 1% to 2% down range. So it somewhat fits right in with where pricing trends have been in the last couple of quarters. And I think we're comfortable saying that it will remain in that category, that range as we look forward. I think it's kind of the same old, same old.

David Turkaly - Susquehanna Financial Group, LLLP, Research Division

Okay. And then I know you mentioned OtisMed and having to customize the product coming. Can you tell us what you think with the size of that market is or what the opportunity might be for you? How big that is as a percent of kind of the overall knee market? So what kind of opportunity you have ahead as you launch that?

Katherine A. Owen

Yes. It's tough to get really firm data on penetration rate. Some of the numbers hover around 10% of knee procedures using customized shape fitting. But we obviously think there's opportunity for further inroads. And longer term, some of that may be required to have clinical data that really demonstrate some of the benefits that we believe exists as it relates to higher throughput, et cetera. So no specific target we would put out there, but clearly, we think it's going to be an important part of the sales forces' arsenal of offerings in the knee side.

Operator

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

Topher Orr - Goldman Sachs Group Inc., Research Division

This is actually Topher Orr in for David. Just a follow-up on some earlier questions. I was looking at acquisitions over the past year, and I was hoping you could just give us an update on which of those acquisitions have kind of the biggest overhang on gross margins currently? And over the next few quarters, how you see further integration of these acquisitions kind of shaking out from a gross perspective?

Curt R. Hartman

I don't know if we're going to go acquisition by acquisition here and evaluate gross margins. But I think the key focus here on all the acquisitions is executing well defined integration plan. And as we said in our commentary, we feel good about acquisition integration plans as it relates to most recently Orthovita, Memometal, Neurovascular business at the beginning of the year, and going back into last year the acquisitions that we completed then. We feel good about our integration plans, don't want to overburden the organization with additional integration. So that's a key focus is a focus on the integration, so we don't run into problems and then do image to the revenue outlook, which is really where you bring the P&L pressure. So I think being focused on integrating. Doing it right and doing it in a comprehensive fashion is where our focus is.

Topher Orr - Goldman Sachs Group Inc., Research Division

Okay. Another for Neurovascular specifically, could you provide an update on where you guys stand now and maybe not gross margin specifically, but just kind of overall where you see the timelines for that?

Curt R. Hartman

As Steve said, it's a complicated integration because you're going from a culture that was highly centralized in terms of the back-office support. With company and Stryker that's a little more decentralized in some of the back-office support. It's got 3 facilities that have to be brought over from Boston Scientific to Stryker, and I think we originally stated this would be a 2- to 2.5-year acquisition integration, and we're pretty much right on track with that. Now, obviously as we go country by country, there's different regulatory approval pathways. Some of those are online, some of those stretch out. Those don't materially impact selling revenue. What they do impact is employees who are waking up every day saying; "At some point, I'd become a Stryker employee." And so we're very sensitive to that. The business, we feel very good about the business. The Target Coil, a detachment system rolled out early in the year. We've effectively got a global launch at this point. We recently introduced that to the Japanese market, which was really our final core market there. So I think we feel really good about the team at NV and what they're doing on a global basis and now they're both playing out and winning in the commercial market while dealing with challenges that are inherent with every integration.

Operator

Your next question comes from the line of Michael Matson with Mizuho Securities USA.

Michael Matson - Mizuho Securities USA Inc., Research Division

Yes. I have a question just regarding the ischemic stroke market and the Concentric Medical acquisition. I understand that they're studying their new Trevo product. But I'm just wondering what's really kind of held that market back because their sales so far have been somewhat disappointing.

Katherine A. Owen

I guess a couple of comments. So a big part of the rationale behind that acquisition was their excitement around the ischemic market. The use of device-based innovation for ischemic is in the very, very early stages. And so they have launched in some markets outside the U.S. But candidly part of the rationale for becoming part of Stryker is to have the considerable benefit we bring from sales and distribution capabilities that they were not able to tap into just given their size. And we're really excited about the pipeline there and the potential we see and the early adoption, quite frankly.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then just one question on the share count. I'm sorry if you've already given this, but given the buyback, what share count should we be modeling for the fourth quarter and the full year?

Curt R. Hartman

Let me get back to you on that one. I don't have that right in front of me.

Operator

Your next question comes from the line of Derrick Sung with Sanford Bernstein.

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

Starting with a higher-level strategic question. The markets are clearly slowing, you're facing an environment of increasing cost pressures. Some of it may be cyclical, but I think no one would argue that a good portion of it is secular in nature. Given that context, have you thought about -- or what are the opportunities to further reduce your cost structure and in particular I'm thinking about your selling cost by perhaps altering your selling model here in the U.S. to something more similar to that in -- like what you're doing in Europe? Is that possible at all? Or is that just kind of out of the realm of possibility for this point in time?

Stephen P. MacMillan

You should assume we are constantly looking at all kinds of options, and we operate with different models within our company. Our MedSurg businesses are different than the orthopedic implant businesses, and they give us some different avenues to call upon. And I think it actually creates a competitive strength for us to think about some different models. We've got some lower gross margin businesses with lower SG&A, but still deliver very good operating margins and we kind of know how to play different ways, and you should be assured we're thinking along those lines as we head forward.

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

Okay. And then I guess turning to your international markets, it sounded like what's kind of keeping some of that growth going right now is your Asian sales and your emerging markets there, and you're seeing the continued weakness in Europe. I guess could you kind of split each of those 2 apart and how much of the emerging markets benefit that you're seeing or the Asian markets benefit that you're seeing, how much of that is transient versus sustainable? And then if you can give us a little bit more detail on how bad is Europe really? Is it getting worse? And maybe some examples of you what you're seeing there.

Stephen P. MacMillan

I'll take it on a big picture basis. We've got a lot of really good things going on in our international markets, beyond emerging markets. Our Japan business, Australia, Canada, a lot of our businesses are really performing very, very nicely right now. And I'd say as you think about our international business, we got to think about is Europe from both a market standpoint as well as some of our own issues. We can do a little bit better, and that's a clear focal point, and emerging markets from a growth standpoint that we're focused on sustainable growth as we go into those markets. And we've probably been a little more cautious. Again, trying to build for the long term not just going in and grabbing tenders or this or that in certain markets. So we're very much building to the long haul as we always do within this company.

Operator

Your next question comes from the line of Vivian Cervantes with Kaufman Bros.

Vivian Cervantes - Kaufman Bros., L.P., Research Division

I wanted to drill down a little bit more on beds and the performance in medical. Understanding the move towards increased efficiencies and the hospitals wanting to invest in that, can you drill down a little bit on what the minutia might be? Is it helping nurses out a little bit? Is it reimbursement-related? Is a quality compliance? Anything that will give us something to bite onto on what increased efficiency means.

Stephen P. MacMillan

Really a combination of all of, Vivian. Certainly some of the -- the way we put some of the software into the beds, there's great opportunity for nurses to operate the things more efficiently, but also the never events. We are helping reduce never events, which from a reimbursement standpoint, as you know, under the new healthcare laws and everything else, the hospitals are a big deal. And there's still a lot of hospitals with very outdated beds and stretchers that we are clearly capitalizing on.

Vivian Cervantes - Kaufman Bros., L.P., Research Division

Okay, that's helpful. And my last question, heading into North American Spine Society, you do have that new lateral product. Wondering what else we should keep an eye out for, particularly from the orthopedic side with some of the new products, I think, that may have recently introduced or even pipeline products that may be coming out?

Stephen P. MacMillan

I think you want to see it there. But in the meantime, obviously, the lateral in Orthovita a couple of our big things.

Operator

Your next question comes from the line of Jason Wittes with Caris.

Jason Wittes - Caris & Company, Inc., Research Division

I actually wanted to tack onto the medical question about bed. Is that specifically new products that you're offering? Or is it the new sales approach where you're basically going in there and doing an economic calculation to take advantage of new reimbursement rules?

Stephen P. MacMillan

It's primarily product. And I would say the '08, '09 downturn taught us how to probably sell better and sell value. So it's a bit of both, Jason, as well as frankly, Gaymar and selling surfaces along with our frames now. We used to sell the frames without, really, the surface revenue.

Jason Wittes - Caris & Company, Inc., Research Division

Okay. And in terms of the Ascent, which is also part of that segment I believe, are you focused on reprocessing your own products? Or have you sort of opened it up for pretty much anything that you can handle?

Katherine A. Owen

Remember, Jason, that the time of that acquisition, the vast majority over -- well over 95% of the revenue that they were achieving was from products that had nothing to do with Stryker. So there are some Stryker reprocessed products. And we do think longer term, there's opportunity to leverage our MedSurg offering. But the bulk, the vast majority of what they reprocess is not Stryker.

Operator

Your next question comes from the line of Charles Chon with Stifel.

Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division

First question is just a follow-up on pricing. So I can appreciate that there are some moving parts as the company plans 2012, and while you wouldn't wanted to provide a glimpse into next year, but the things that we do know, can you verify for me whether the biennial reimbursement cuts in Japan are expected to take effect in 2012?

Stephen P. MacMillan

Yes.

Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And now is it coming in the April timeframe?

Stephen P. MacMillan

Usually, yes.

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

Okay. And then the second question is I'd like to dig a little more into the performance in Spine. We were expecting a significant contribution from just the Orthovita acquisition. Maybe you could just give us a little bit more color as to what exactly happened during the quarter there?

Curt R. Hartman

Well I think the Orthovita acquisition performed as we expected, my comments were more specific. Spine as it relates to Memometal, the implant piece of that business. So I think we feel very good about Orthovita broadly speaking because as we said in our acquisition announcement, that product offering will be sold by multiple parts of Stryker selling organization be it CORTOSS, Vitoss, Vitagel. And we've, in fact, done that and feel very good about the distribution patterns right now across all of those franchises. Because it relates specifically to the Spine business and our hardware franchise, it's a little tougher going in the third quarter than what we had anticipated, and it's probably a combination of both some market dynamics and perhaps some self-induced factors. So disappointed with that growth rate overall. Excited about lateral access fusion product and reenergizing that organization.

Operator

Your next question comes from the line of Matthew O'Brien with William Blair.

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

Just curious on the Trauma business. It was again pretty strong on an organic basis in the quarter. I know you said last quarter that there was some exuberance around Memometal really driving that performance, are we seeing a carryover of that effect? Or are you seeing some benefit from the proposed, this J&J deal? Just some more granularity on the performance will be helpful.

Stephen P. MacMillan

I think it's actually neither. I think it's just the core blocking and tackling still of our Trauma franchise. That I think that team has been winning really, frankly, for 5 or 6 years now, and continuing to have good momentum there. There is some excitement around the Memometal acquisition and that helped the overall numbers. But the core Trauma business still posted some good growth. And I think the Memometal is a nice, certainly a nice add-on, and we're excited about where that will be going for us. And on the J&J, seeing this thing, I think it's still too early to really tell, and we know they're going to be a formidable force.

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

Okay. And then the follow-up question I had. Steve, 6, 7 straight quarters now some pretty accelerated R&D spending, when should we start to see some more of these new product flow out, I don't know if you want to call it bolus, but new product is coming out. But when should we start to see more and more of those products coming in? How would you characterize them? Would you say they're more product iterations. I know there are some M&A additional spend associated with the deals that you've been doing, but would it be more product iterations or additive new products adding to the bag?

Stephen P. MacMillan

It'll be a bit of both. And I think, obviously, as we commended 2012, you'll see some new things coming. But a lot of that -- we talk a lot about hitting a lot of singles and doubles. We're certainly making some other investments, but it should be the stuff that we've been really good at.

Operator

Your next question comes from the line of Rajeev Jashnani with UBS.

Rajeev Jashnani - UBS Investment Bank, Research Division

Just on gross margin, is 68% about the way we should be thinking about it for the fourth quarter? And then in the past, I think, you've talked about gradually increasing gross margins over time, and I was just wondering if that was contingent on "normalized" Recon growth? Or is there an opportunity in near to intermediate term to see gross margin expansion based on mix or perhaps other in this -- excuse me, efficiency initiatives that might be underway?

Curt R. Hartman

So the gross margin in the third quarter was 68% adjusting for all the acquisition-related costs. And I think going back to the second quarter at the end of that call or somewhere during that call, we said that we anticipated gross margins to be in the 68% to 68.5% range as it relates to the full year, and I think we're still comfortable with that guidance. As it relates to gross margins longer term -- my commentary in the gross margin discussion was around our operational focus and looking at everything from procurement cost, material cost, manufacturing cost independent of which franchise the product falls into. And really, as a company, this is our first time taking a hard look, broadly speaking, at our manufacturing operations. So that's what gives us confidence that there's a lot of opportunity in the years ahead. Again, keeping in mind, as the business expands, be it in the emerging markets or there's additional cost pressures, which everybody likes to talk about, you may need those gross margin points to offset that. You may want to fuel those gross margin gains into R&D or other areas of investment for the business. So I think our walking around sense is gross margin expansion remains an opportunity in the quarters and years ahead. Keep it in mind, we have areas of investment within manufacturing that do influence gross margin. So I don't want to lock people into this steady stairstep. We're going to manage the business across the entirety of the P&L. We strategically make investments where we believe there are most important at a given point in time.

Rajeev Jashnani - UBS Investment Bank, Research Division

Okay. That's helpful. And if I can follow up on SG&A. It's sort of a similar question, but SG&A margins held flat year-to-date, inclusive of a lot of things going on at the company. Would you expect to see some leverage there going forward, I guess particularly in '12?

Curt R. Hartman

I think we're very focused, broadly speaking, on financial disciple across the company. And whether that's in SG&A or gross margins, we're taking a hard look at every dollar we spend and how we spend it and whether there's leverage opportunities across multiple parts of the company or a shared services opportunity, things of that nature. So we continue to look and be very diligent, ensuring that we don't disrupt the culture of this company that's made us so great over time.

Operator

Your next question comes from the line of Steve Lichtman with Oppenheimer.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Two questions. First, is the company taking advantage of your diversity versus some of your peers in terms of getting more hospital business and certainly more -- talk about approaching the C-Suite more broadly? Can you talk about how you guys are getting synergy across your business line? And I have a follow-up.

Stephen P. MacMillan

I'd say we're still at the very early innings to that. I think we've been building the capabilities to do that. But there's still -- a lot of our businesses are still hand-to-hand combat down in the operating rooms. So I think what you should think is we're positioning ourselves for when that day really comes. I think we're well poised to capitalize on that. We're having some discussions with the certain hospital systems on that, but I would call it very early innings.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Okay. And then on MedSurg, the EU markets obviously soft today and your exposure there in MedSurg is just small, which is good today. But when should we think about the international expansion for MedSurg being a growth driver for Stryker in the coming years?

Stephen P. MacMillan

I think it has been -- really for the last couple of years, our endo and instruments business has been growing pretty nicely outside the U.S., and they continue to win a lot of the market. So I think you should expect those to grow pretty nicely here and probably be growing faster than some of the domestic markets for a good period. There's always going to be some quarterly bounces as you well know on our MedSurg business as well over the years.

Operator

And your final question will come from the line of Jeff Johnson with Robert Baird.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Curt, just wanted to follow up on maybe Charles' question on the spinal implant side. You described that as maybe some self-induced issues as well as market-driven. Do you feel like that there's a step-up at all in payer pushback issues and some of the commercial payer issues on the self-induced side? Was it product-driven? I know you've lost some sales reps there over the last few quarters, any more color you could provide there?

Curt R. Hartman

I don't think we saw a meaningful change in payer pushback. I think that's been tough going back to the fourth quarter of 2009. So there's not a new dynamic there. I think, again, the self-induced challenges are more than right products, the organization waiting for products, and we're getting encouraged by our lateral access to buy skidding out. But self-induced stuff is probably internal execution. And before we wrap up, I do want to get back on the share count question. We finished the quarter at 386 million shares, so I think people from a modeling purpose should use that for the fourth quarter and then again heading into 2012.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

And then can I ask my follow-up question there? Steve, just for you, on organic growth. I know you don't want to get into 2012 guidance, understandable at this point. But is it fair to think as target in some of this roll-off from being acquisition to then in your organic growth number, even if your end market, especially ortho implants, don't really change at this point. I think I understand that low single-digit growth range. Your natural company-wide organic growth maybe picks up 0.5 to 1 point, maybe even a little more than that next year just based on some of these higher growth areas now layering into the organic side?

Stephen P. MacMillan

I think we will probably hope that, Jeff. And again, we will give that guidance in early January.

And to that end, we want to thank everybody for joining us today, and we will report our fourth quarter results and talk about 2012 on January 24. So thank you, everybody, for joining us today.

Operator

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect your lines. Good day.

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