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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

Adam T. Feinstein - Barclays Capital, Research Division

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

Michael Matson - Mizuho Securities USA Inc., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Tao Levy - Collins Stewart LLC, Research Division

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

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Kristen M. Stewart - Deutsche Bank AG, 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

Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Stryker (SYK) Q4 2011 Earnings Call January 24, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Stryker Corporation Earnings Conference Call. My name is Regina, and I will be your conference operator for today. [Operator Instructions] Today's event is being recorded for replay purposes.

Certain statements made in this presentation 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 the 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; the company's ability to integrate acquisitions; and the company's ability to realize anticipated cost savings as a result of workforce reductions and other restructuring activities.

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. Stephen MacMillan, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Stephen P. MacMillan

Thank you, Regina. Good afternoon, everyone, and welcome to Stryker's fourth 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. Similar to prior calls, I will make some comments before turning the call over to Katherine and Curt for more details before opening up the call to your questions.

As we look back on our financial results for 2011, both for fourth quarter and the year, we were encouraged on multiple fronts while remaining cognizant of the current economic environment. Our results again demonstrate that our balanced diversification uniquely positions us to steadily deliver top-tier results. Against that backdrop, we would like to touch on several key highlights from the quarter and the year.

We completed 2011 with over $8.3 billion in sales, up 13% on a reported basis and reflecting mid-single digit organic growth, augmented by the benefit from a series of key strategic acquisitions as well as a currency tailwind. Our adjusted EPS came in at $3.72, up 12% and at the high end of the guidance we put forth at the start of the year or adjusted per-share earnings of $3.65 to $3.73. This came despite absorbing additional dilution associated with several acquisitions and the recently announced Biotech settlement.

With 11% constant currency sales growth, our MedSurg segment once again demonstrated the tremendous strength of their product portfolio, customer relationships and ability to drive ongoing market share gains. We head into 2012 with strong momentum, a compelling lineup of new products and a high degree of conviction regarding our ability to continue to deliver strong growth in these businesses.

Shifting to Neurotechnology and Spine, although challenges remain within our Spine franchise, the new product launches for our Neurovascular segment continue to gain traction, resulting in better-than-expected results for a business that we acquired at the start of 2011. And with the acquisition of Concentric in early Q4, we have expanded our stroke presence into the ischemic segment, allowing Stryker to be uniquely positioned with a market-leading total stroke product offering in this high growth and highly innovative segment of med tech.

In addition to Neurovascular and Concentric, we utilized our strong cash flow to execute on our strategy of strengthening our core businesses via targeted acquisitions. This was evident with the acquisition of Memometal, which broadens our offering in the high-growth extremities space, as well as Orthovita, which we are leveraging across multiple Stryker franchises.

Similar to the Gaymar and Sonopet deals that we did in 2010, we are pleased with the performance of all these targets and excited about their ability to both drive stronger core sales growth going forward while also providing important operating leverage as we drive greater sales through our existing teams.

During 2011, we further clarified and strengthened our capital allocation strategy and view it as an important competitive strength to continue to maximize shareholder value. While we believe highly focused acquisitions are the best use of our cash flow, we remain committed to our three-pronged cash strategy, which also includes dividends and share repurchases. Despite our robust activity over the last couple of years, we enter 2012 with a net cash position of over $1.6 billion, so our balance sheet remains an important competitive strength for 2012 and beyond.

Although our Reconstructive implant growth slowed sequentially, reflecting the anticipated impact of difficult year-over-year comparisons and one less selling day, we are encouraged by the ramp in our MDM large head hip offering as well as the traction that our customized cutting guides are now seeing within knees. While we conservatively assume no improvement in elective procedure trends in 2012, we believe that share gains in hips and knees are achievable. And if the economic environment and/or the degenerative nature of osteoarthritis results in a stronger rebounded implant procedures, we are well positioned to capitalize on the volumes.

On a geographic basis, we achieved balanced growth with our U.S. sales up 9% in the quarter and constant currency international gains coming in at 13%. Although challenges remain within our European business, we are seeing strong double-digit growth in other geographies, including Canada as well as emerging markets, which is contributing to our overall strength.

Finally, while we are highly focused on delivering on our financial commitments and quarterly results, we did take actions in the fourth quarter that both strengthen our organization as well as position us for sustained longer-term growth. Specifically, during Q4, we announced a restructuring initiative, which is centered on quality, innovation and cost and reflects proactive actions to address the reality of our evolving healthcare markets. These moves are expected to reduce pretax operating costs by over $100 million starting in 2013 by providing efficiencies and realigning resources. We also expect the savings to help address the impact of the 2013 medical device excise tax, while supporting our commitment to delivering 10% or better EPS growth in 2012 and beyond.

Simply put, 2011 was an extraordinarily busy year for both acquisitions and internal strengthening, which positions us well for 2012 and beyond while delivering in 2011. We believe the myriad actions undertaken over the past few years have positioned us to not only navigate the challenges, but also maximize the opportunities. Today, no single franchise represents more than 16% of our total sales, which affords us the ability to offset weakness in some areas while capitalizing on the better-than-anticipated momentum in other segments.

We are committed to delivering organic sales growth at a minimum of 2% to 5% in 2012, which atop the contribution from acquisitions, positions us to achieve constant currency revenue gains of 3.5% to 6.5%. And while we continue to invest in internal innovation, sales and marketing as well as our ongoing quality initiatives, there's ample P&L leverage that will drive our stated goal of 10% or better EPS growth.

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

Katherine A. Owen

Thanks, Steve. With the sluggish pace of the economic recovery, continued high unemployment and the lack of visibility surrounding a re-acceleration in elective surgeries, we have opted to assume a relatively conservative stance with respect to our 2012 top line growth targets. Against that backdrop, my comments today will focus on providing greater granularity regarding the key assumptions behind our targeted 2% to 5% sales growth excluding acquisitions and currencies and our outlook for the various markets. Curt will then provide specific details regarding some of the key assumptions in our 2012 EPS targets.

Starting with Reconstructive. We approached our outlook for 2012 with the assumption that market growth rates for hip and knee implants remain sluggish and consistent with levels achieved in 2011. Although the degenerative nature of OA underscores our conviction that the current slowdown is a function of a temporary deferral in surgery, it is difficult to predict the timing as to when these patients will re-present.

With respect to decrease in unemployment rates, coupled with an acceleration in the pain associated with OA's downward disease cascade will be necessary to reverse these trends. In the interim, we are excited about the uptake of our recent hip launches, including our ADM and MDM large head offering, which continued to see quarter-over-quarter sequential acceleration and position adoption. On the knee front, our shape cutting technology is also gaining traction and we believe will help drive knee share gains in 2012.

Turning to MedSurg. Our sales guidance for 2012 assumes at least 5% revenue gains for this segment. Driving growth will be a combination of new product launches and the associated expected share gains. Specifically, our instrument segment initiated the early launch of its next-generation System 7 power tool in late 2011 with the full launch slated to get underway in 2012. As the market leader in power tools with a history of launching innovative next-generation products, System 7 underscores our commitment to leveraging our considerable R&D investments.

System 7, which will be highlighted at the upcoming AAOS meeting, incorporates a number of key features and benefits including the smaller, lighter design with the torque, speed and power equivalent to the System 6. Coupled with an improved handpiece shape and grip as well as corrosion resistant coating, we are excited about its expected impact to our instruments division in 2012.

Shifting to endoscopy. In the second half of 2012, we will launch our next-generation 1488 camera, which will offer improved visualization and enhanced image clarity, key components of ensuring optimal outcomes during smaller incision surgery. Medical, which continues to see solid market adoption of its expanded product offering and services by the 2010 Gaymar acquisition, will be introducing new products in 2012 within both the structures and cut [ph] segments.

Finally, Stryker Sustainability Solutions, which was established by our 2009 acquisition of Ascent, has benefited from accelerating top line growth, a trend that we expect will continue into 2012 and is being fueled by strengthening of a leadership team, additional product clearances as well as a continued recognition by the market of the economic and environmental merits associated with medical device reprocessing.

And lastly, Neurotechnology and Spine is also expected to deliver a minimum of 5% growth in 2012. Although the market backdrop in Spine remains challenging and our own segment has struggled in recent quarters, the introduction of new products, including the 2011 rollout of a lateral fusion offering, should help to stabilize the business. And with Orthovita contributing to core growth in H2 of this year, the Spine segment has expanded its portfolio into higher growth segments where our considerably expanded sales and distribution capabilities are being leveraged.

Looking at the Neurotechnology segment, which is dominated by our Neurovascular products, this segment will continue to benefit from product introductions in 2011 as well as additional offerings to be rolled out this year. The early Q4 2011 acquisition of Concentric expands our stroke franchise to include both hemorrhagic as well as the considerably larger ischemic segment, and we continue to anticipate a late 2012 or 2013 FDA clearance of Concentric's next-generation Trevo device. As we stated at the time of the acquisition of Neurovascular in late 2010, we believe we are well positioned to return at least to market growth rates in 2012 which we peg in the high single digits.

In summary, although there are some challenges, the balanced diversification of our product portfolio, coupled with our expanded presence in higher growth segments of med tech via acquisitions and an attractive temple of new products, we believe we will be able to deliver a minimum of 2% to 5% sales growth in 2012.

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

Curt R. Hartman

Thanks, Katherine. In exiting 2011, we are pleased with our fourth quarter and full year performance and encouraged by the momentum we carry into the new year. Our financial discipline coupled with our expanding business mix, operational execution and continued focus on capital allocation have us well positioned.

In 2011, we again delivered adjusted per-share earnings at the high end of our original range, and absent the recent Biotech settlement, a subsequent event by accounting standards, we would have achieved at least $3.74 on an adjusted basis, a $0.01 above our original guidance. Additionally, 2011 has been another year of selective acquisitions that both increased our footprint and broadened our offering, while simultaneously we have focused on total shareholder returns through an increasing dividend yield and continued share repurchases.

Moving to the fourth quarter, sales increased 11% on a reported basis and 10.7% in constant currency. Growth, excluding acquisitions and currency, was 4%. On the earnings side, in the quarter, we generated adjusted diluted net earnings per share of $1.02, an increase of 9.7% over Q4 of 2010. On a GAAP basis, diluted net earnings per share were $1.05, an increase of 41.9% versus Q4 of 2010. Reconciliation, I would point you to our press release as we have provided a table that reconciles reported diluted net earnings and reported diluted net earnings per share to adjusted non-GAAP amounts.

In reviewing the quarter, I'll start with the discussion of the components of our revenue growth. In the fourth quarter, reported revenue growth of 11% was driven by volume and mix, which contributed 5.7% to our top line, while company-wide selling prices declined 1.7%, which is consistent with the trend we have seen in recent quarters. Acquisitions added 6.7%, and currency contributed approximately $7 million and improved the company's overall reported sales growth by approximately 30 basis points. For the year, the 13.5% reported gain was comprised of volume and mix, which contributed 6.1% to our top line growth, while company-wide selling prices declined 1.8%. Acquisitions added 6.8%, and currency contributed approximately $172 million and improved the company's reported 2011 sales growth by 2.3%.

Looking at our reporting segments. Reconstructive products, which represented 44% of our sales in the quarter and includes our hip, knee, trauma and other reconstructive lines, recorded a 1.3% increase as reported and a 70 basis point increase in constant currency. Acquisition added 1.6%. Nice gains in our trauma business were not enough to offset slower performances in hips and knees.

At the segment level, hip sales recorded a 1% reported gain and increased 40 basis points in constant currency. Knee sales remained weak in the quarter, reporting a decline of roughly 2% both as reported and in constant currency. Globally, trauma had another nice quarter, delivering 9.1% reported growth and 8.2% growth in constant currency. Acquisitions added 5% to the trauma top line.

Overall, we entered 2011 recognizing that Q4 would likely be the toughest quarter for our hip and knee franchises given difficult year-over-year comparisons and the impact of one less selling day. That said, with the benefits from the organizational changes implemented during the year, as well as the continued positive market reaction to our new hip and knee product offerings, we feel good about our Reconstructive opportunities in 2012 in a market that remains challenged.

Next, I'll turn to MedSurg, which represented 39% of sales in the quarter and is comprised of instruments, endoscopy, medical and the sustainability solutions segments. MedSurg delivered another strong quarter. Sales increased 11.2% as reported and 11.1% on a constant currency basis. Solid gains were recorded in all segments in both the U.S. and international markets. Acquisition impact in the quarter was immaterial to top line results. Once again, the medical segment was very strong, delivering 17% reported growth, 17.4% in constant currency.

The U.S. medical results at almost 16% in the quarter remain impressive and make it 7 of the last 8 quarters recording over double-digit growth. While on the international markets, we are pleased to see our second consecutive double-digit quarter.

Instruments also performed well in the quarter, and we are encouraged by the earlier release and favorable uptake of our next-generation System 7 power tool platform, which represents an important new product offering for the division. Endoscopy reported a nice uptick in the quarter, but will likely face headwinds in the first half of 2012 as we go against the tough Q1 comparable and work through the timing associated with new product introduction cycles.

Finally, our sustainability solutions segment delivered a second straight high-growth quarter with our team really performing well in the second half of 2011. All in, it was a great quarter and year for MedSurg. We are highly encouraged by the momentum they carry into 2012.

Our final segment, Neurotechnology and Spine, which represented 17% of company sales in the quarter, increased 47.3% as reported and 46.8% on a constant currency basis. Acquisitions added 45.1% to the constant currency increase. While we experienced strong organic growth from our Interventional Spine and NSE offerings, as well as the positive influence of the various acquisitions, this was largely offset by continued pressure on the spinal implant market in terms of both price and volumes.

I will now turn to income statement, beginning with our gross margin performance. Gross margins as reported finished at 66.6%. On an adjusted basis, gross margins, excluding acquisition-related charges, were 67.3% in the quarter, down 140 basis points versus prior year. Factors influencing margins in the quarter included a 50 basis point hit associated with the previously mentioned pricing pressure and approximately 70 basis points of erosion associated with our quarterly sales mix and the decision to slow our manufacturing plants to better align inventory levels. Investments directed and initiated in our global manufacturing alignment also suppressed margin performance. Finally, while still negative, the influence of currency moderated in the quarter relative to the prior year.

For the full year, adjusted gross margins finished at 67.9%, down 90 basis points from last year's total. Key factors influencing our gross margins include the cost associated with aligning 7 new facilities into the Stryker network as a result of acquisitions, the shift and mix for the year that favored more of our lower margin segments and geographies and the influence of currency on margins based on our manufacturing footprint.

Overall, our efforts remain focused on reducing our material and conversion cost in support of our long-term growth strategy, which we believe will drive operating margin expansion. We believe this approach will give us additional flexibility to pursue market expansion and penetration, adjust pricing pressures and make strategic investments and overall deal with an evolving healthcare environment.

Research and development finished at 5.2% of sales in the quarter, an increase of 4% versus 2010. The story behind the slowing growth rate versus previous quarters is that several projects moved into the launch phase and we completed our OA OP-1 molecule Phase II study investments. R&D finished the year up 17.3% over 2010, representing 5.6% of sales.

Selling, general and administrative costs as reported represented 37.7% of sales in the quarter. Adjusting for acquisition and integration-related charges, SG&A finished at 36.6% of sales, a decline of 20 basis points versus the prior year. For the year, adjusted SG&A finished at 37.1%, a decrease of 20 basis points versus 2010.

Intangible amortization in the quarter was $32 million and represented 1.4% of sales versus the $16 million and 80 basis points of sales in the prior year. Absent additional acquisitions, the relatively fixed nature of this line provides leverage as we enter 2012.

Reported operating income increased 8.3% over prior year and was 18.9% of sales, reflecting the impact of the acquisition-related and restructuring charges. Adjusted operating income increased 4.6%, while the adjusted operating margin of 24.1% of sales decreased 150 basis points versus prior year. 70 basis points of this decline is attributable to the Biotech settlement.

Other income and expense as reported increased pretax income by $15 million in the quarter. Excluding the benefit to interest expense related to the Irish cost-sharing arrangement, the remaining components included investment income of $10 million offset by $21 million of interest expense and a negligible FX loss.

The company's effective income tax rate as reported was 7.4% for the quarter, driven primarily 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, our adjusted rate finished at 25.4% in the quarter. For the full year, our tax rate, excluding the adjusted items, was 25.6%.

In terms of the balance sheet, we ended the quarter with $3.4 billion of cash and marketable securities, up $200 million from the $3.2 billion at the end of the third quarter and a decrease of $1 billion versus December of 2010. The decrease is primarily driven by the $1.5 billion Neurovascular acquisition we completed at the beginning of the year. As a reminder, we now have $1.75 billion of long-term debt on the balance sheet associated with our January 2010 debt offering and our September 2011 debt offering.

On the asset management side, accounts receivable days ended the quarter at 58, which represented an increase of 2 days compared to the prior year but was consistent with the third quarter finish. Days in inventory finished the quarter at 158, which was a decrease of 18 days sequentially versus the third quarter. Days finished 4 higher against the prior-year level.

Turning to cash. In the fourth quarter, we generated cash flow from operations of $627 million and free cash flow of $563 million. For the quarter, strong gains and working capital, coupled with solid earnings, drove what was clearly our best performance for the year.

Finally, in the fourth quarter, we repurchased 1.8 million shares, totaling $83 million. For the year, we repurchased 11.8 million shares for a total spend of $622 million. We currently have open authorizations totaling approximately $700 million and finished the year with a diluted share count of approximately 383 million shares.

In summary, we delivered a solid quarter and completed our year with adjusted per-share earnings at the high end of our initial range. With that said, our focus remains on driving core business growth, continued acquisition integration, operating leverage and a sharpened focus on cash generation.

Turning to our outlook. The financial forecast for 2012 begins with the projected net sales increase, excluding the impact of currency and acquisitions, of 2% to 5%. If foreign currency exchange rates hold near current levels, we anticipate reported net sales will be negatively impacted by approximately 0.5% to 1.5% for the full year of 2012. At current rates, the impact in the first quarter of currency will be negligible. Completed acquisitions are anticipated to add approximately 1.5% to full year reported sales, keeping in mind the influence will be greater in the first half.

Turning to the P&L. Our expectations for key areas of the income statement, subject to the normal variations that occur in any given year in the business of our size and complexity, are as follows. For gross margins, we are calling for the underlying range to remain steady, with a subtle, favorable bias subject to the variations driven by currency, business mix and global operations investments. With respect to R&D, on an absolute basis, the dollar level will increase in 2012, while the year-over-year growth rate will decrease as will R&D as a percentage of sales.

This is driven by 2 factors: one is the anniversary of our acquisition R&D influence on the investment growth rate; and two, most significantly, our completion of the Phase II OA study for the OP-1 molecule. With respect to the OA opportunity, based on the results of the Phase II data, we have terminated all Stryker efforts as it relates to the OP-1 molecule. Reallocating these funds into our core business segments and factoring this into our 2012 assumptions, our core R&D spending is expected to increase in the 8% to 10% range and will again be over our projected rate of sales growth.

In SG&A, we see ongoing opportunities for leverage as a percentage of sales as we look to remain disciplined with respect to discretionary spending and leverage our back office investments across our growing commercial organization. The other income and expense line will turn to more of a headwind in 2012 as we take on the full year expense of the September debt offering. As we look at our expected income tax rate, in 2012, we expect the continued downward bias and would not be surprised by a rate closer to 25% on an adjusted pretax earnings.

Given all of the above and in combination with our commercial plans, we expect adjusted diluted net earnings per share for 2012 will result in not less than a double-digit increase over the $3.72 adjusted diluted net earnings we reported in 2012. Considering all the factors involved in our 2011 performance, we are comfortable with first call consensus estimates for both the quarter and the year at this time. Finally, we anticipate acquisition and integration related charges to reduce reported diluted net earnings per share by approximately $0.22.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Matt Miksic with Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

So first, maybe for Curt, you talked about the impact in the quarter of gross margins mix across some of your businesses and geographies. Could you give us a sense of maybe how that and when over the next several quarters, front half or back half or any kind of color you can provide, as to how that improves and what maybe drives that over the next several quarters?

Curt R. Hartman

Matt, I think I'd answer that first by taking a macro look. When we set out our guidance on gross margins for the full year, it was based on the budgeted growth rates that we had assumed for all of our businesses. And clearly, when you look at our full year results on the implant side of our business, whether its hips, knees or spinal implants, those arguably carry much higher gross margins than the core MedSurg offering. So as the year unfolded and frankly the mix of business, the growing -- higher growth segments were more in MedSurg and in some of the geographies that Steve called out in his opening comments, be it emerging markets, which arguably has lower gross margins as well, that ultimately is going to play a big factor in driving the end reported gross margins. And clearly, if you take that down to the fourth quarter, you see a similar type scenario where MedSurg in an absolute basis was a big driver of growth. And while we don't provide the geographic breakout for everybody to see, I can tell you that our emerging markets business with lower grow margins also was a big driver of growth in the quarter. So as we look at 2012, we start kind of in the same fashion. We have business models for growth on our hips and knees or spinal business just like we do in all of our segments, and we base our assumptions on those original plans. And as the year unfolds, we're hopeful that they stay on track. But we also want to be cautious knowing that it's really difficult to predict a forecasted recovery in the Reconstructive market at this time for all the factors that everybody's pretty well aware of at this point in time.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay. That's understandable. And one follow up on maybe specifically on knees. It's been kind of lagging. Our expectation is a little -- for lots of reasons that we talked about throughout 2011. Could you give us a sense of maybe what's the catalyst or the driver that you look to get that business back to market growth, back to maybe better-than-market growth rate?

Stephen P. MacMillan

Sure, Matt. I think in 2012, I would expect we'll be certainly back to market growth with especially the shape fitting guides really catching traction now. I mean they took up a while to get launched, ramping up certainly month-over-month in the fourth quarter. And I think we feel very good that we'll be at least back at market growth for knees in the year. And frankly, in hips, we hope to be above market growth.

Operator

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

Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division

It's Kim here for Mike. So I guess a couple of questions starting on the MedSurg business. You guys had a great quarter there in the beds and stretchers and came in a little bit better than your competitor

[Audio Gap]

weeks ago. Wondering if you can give us a little bit of color on that business, how much visibility you feel like you have going forward and any commentary around order rates in backlog in that business.

Stephen P. MacMillan

Sure, Kim. We typically don't want to get too much into orders. But suffice it to say, the business ended the year with some very good momentum. And certainly, the medical business, we do have more visibility than probably any other business that we have and feel very good about the outlook coming off a great year, still feel very good about the outlook here for 2012.

Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division

Okay. Great. And maybe before I drop, we can just touch on the Ascent business, and that business has rebounded a bit in the last 2 quarters. You had some remarks in your prepared commentary. But how should we think about the market growth rate for reprocessing? And how to think about Ascent, I guess, competitively?

Katherine A. Owen

I'll make a couple of comments. I think we still, as was the case at the time of the acquisition, given the relatively low penetration rate still for reprocessing coupled with the obvious economic and environmental benefits, we think a double-digit growth rate is reasonable for this market. As you probably know, Ascent, now Sustainability Solutions, is by far the market leader in that segment. And we really have a great new leadership team in there, and they're focused on driving penetration in existing accounts where they already have a presence but perhaps not in the entire hospital, while also going in and converting hospitals that have not yet adopted reprocessing. And as they continue to expand their product offering and they have roughly 2x the number of 510(k) clearances as their nearest competitor, the economic argument only gets more compelling as you continue to lay more of those clearances into the business, and that's going to be their focus going forward.

Operator

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

Michael Matson - Mizuho Securities USA Inc., Research Division

You walk through the products that you're planning to launch and some of the MedSurg businesses instruments in endoscopy. And historically, we've seen a pretty big impact when you've launched the new Powered Instruments platforms and the new camera system. So I guess I'm just wondering why your guidance is only sort of baking in 5% growth for MedSurg overall. Are you concerned about any kind of a slowdown in capital spending or anything out there?

Curt R. Hartman

Mike, I have 2 responses to that. Number one, it's 5% plus. Number 2, I think we'd be foolish to not consider the potential for a capital slowdown, whether it's in the U.S. market or whether it's in some of the international, specifically European markets. Clearly, our penetration there is much lower than in the U.S. But given our footprint in the U.S. market, what's going on in the last couple of years, I think we do have to be very sensitive to the economic uncertainty that to me is still very much present in our environment.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then just -- there was a little bit of commentary around the Spine market, but I was wondering, the fundamentals in that market that you saw sort of consistent with the earlier part of the year. Did things seem to get worse at all in the fourth quarter?

Stephen P. MacMillan

I don't think the market fundamentals got any worse, no.

Operator

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

David R. Lewis - Morgan Stanley, Research Division

Steve, I wonder if you could talk us through guidance a little bit here. I think the guidance is set conservative and appropriately, which I think investors appreciate. But if we look at organic growth in 2011, we kind of have here roughly around 4%, and that's kind of flattish at the midpoint of your guidance, which as we said was appropriate. But if you think about organic acceleration as sort of the top end of that guidance and you kind of want to point us to the guidepost we should be looking for if things were to go your way, the factors that could contribute to the upper end of guidance and drive organic acceleration, what would some of those things be here for 2012?

Stephen P. MacMillan

Sure. The factors that would drive upside would be a re-acceleration of the orthopedic implant market, and we'd say both certainly Recon as well as Spine, or our ability to start to maybe take a little more market share in those markets. So I think those would be a clear one. I think the other piece is, to pick up on Curt's comments answering the previous question, if the capital spending is fine in hospitals, we are coming into a very nice product cycle at MedSurg. And so I think there's some upside there. Again, given the last few years where every year plays out a little differently, we wanted to be appropriately cautious coming into the year, but I think feel pretty good. And then businesses like Sustainability Solutions have some real momentum, but they're still very small in the grand scheme.

David R. Lewis - Morgan Stanley, Research Division

Okay, very helpful. And Steve, maybe another one for you. 10% earnings growth, that commitment is becoming increasingly rare among some of your peers. So I guess the question we get a lot from investors lately is why now? Why go forward with that restructuring initiative today? Was it more of a factor of the medical device tax? Was it where you saw your operating performance on the revenue side coming in for 2012? Was it your gross margin dynamics? Just help us understand sort of why today or heading into '12 is the right time. Was it commitment to 10%, or a variety of other factors you were seeing?

Stephen P. MacMillan

As everything we do is probably multifactorial, David, but let's try to prioritize it. First off, I would say it underscores our longer-term look at where the markets are going, and particularly trying to recognize that we are staring at a huge tax coming in, in 2013 and we weren't going to just duck that. So in so doing, looking at what can we be thinking about in some [indiscernible] efforts, combined frankly with some of the acquisitions that we'd done in certainly the 2010 time frame and relooking at some of the facilities that we picked up there, as well as some of the fundamentals in both Europe and even, say, our orthopedics division in the United States with some slowdowns, frankly just trying to be realistic and say what can we do to be planning for the future. So I would say that is much more a 2013 and beyond play and so that we can power through for years ahead with double-digit earnings growth. And we are very focused on that and think that, that will be increasingly a differentiator, particularly as people start to look from 2012 to 2013.

Operator

Your next question is from the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Just one on Spine and then one on guidance. Just to start on Spine, if we exclude acquisitions and look at just kind of your core Spine growth, is it safe to say it's still in that negative mid single-digit territory?

Stephen P. MacMillan

Yes.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And about a similar growth rate to what you saw last quarter?

Stephen P. MacMillan

Yes, I think so, right? Yes.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then on the guidance, could you just give a little more color, what kind of operating margin -- adjusted operating margin improvement are you assuming in your guidance? And if you would, also what kind of buyback or share count reduction are you assuming in that guidance as well?

Curt R. Hartman

I'll start with the second one first, Bob. Right now we do have an outstanding share repurchase authorization that could take us up to about $700 million. Our current guidance assumes no influence from buybacks. And again, you don't do buybacks just as a matter of routine and you can see that through the last couple of years that we've been fairly judicious and when we executed on the open buyback authorization. So right now our guidance does not assume any influence from buybacks. Second, I probably not going to give any real specific numbers here on operating margin leverage. But I think when you look at the totality of what we put in to our guidance, number one, we have a good range on the revenue side and I think it really reflects some of the steps we've taken the last couple of years to strengthen the core businesses as well as add things like Sustainability Solutions and Neurovascular. With that, those -- as everybody on the call well knows, they bring intangible amortization. And with increasing sales year-over-year, there's very implied leverage on that. There's also, when you do acquisitions, there's acquisition charges that you call out, and then there are other just inherent charges or expenses that the company takes as you try to put these businesses into the mainstream of your broader organization. And as we get further downstream from these acquisitions, those expenses should be dropping off. So there's leverage that we start to see and start -- comes to the benefit of the company. So I just -- I still remain confident that there's leverage in our overall operations on a global basis, and that gives me confidence in our outlook.

Stephen P. MacMillan

Bob, if I could just pile on there. If you think about the earnings power that we generated both in the fourth quarter but even for the full year on what is probably some slightly lower gross margins, then people would have expected at the start of the year the earnings power is there through the P&L.

Operator

Your next question is from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Curt, your guidance includes a slight improvement in gross margins, is that correct?

Curt R. Hartman

That's correct.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And what sort of pricing are you assuming for 2012 given that we'll presumably see Japan start to have their price cuts beginning in April?

Curt R. Hartman

Our pricing outlook is consistent really with what we've seen over the last 2 years, arguably understanding that the Japan price cuts are on the horizon. However, those are factored into our outlook as well. Now we're not 100% certain exactly what those rates are going to be. We have some best estimates. So to the extent that they are materially worse than what we've planned, we'll have to find a way to absorb those through other parts of the business. But right now, last 2 years, price has been down 1.7%, 1.8% and our outlook calls for a continued trend in that direction.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then just on the restructuring. I know you guys announced the program in November, and then obviously you've had the operations journey you talked about last May. When -- I guess are those 2 separate events? And then when might we get some more details on operations journey just in terms of longer term how much cost can come out of the system?

Curt R. Hartman

Those are very appropriate questions, Kristen. On the restructuring that we announced, which just going back to Steve's earlier comment, a lot of that was directed towards continuing to evolve the business be it through the acquisition side or through the internal restructurings that we announced in the fourth quarter. And as you can see from our press release, we took about $76 million of actual charges in the quarter against that restructuring, which the original plan called for around $150 million to $175 million. So we've taken about half of it. The rest of it will flow through throughout the course of 2012. And the benefits, as we said at the outset, would principally accrue as we hit 2013, and that remains the way we're rolling this program out. As far -- and I want to make sure that we talk about the efforts on global manufacturing. Some of the restructuring does involve some of the global manufacturing work. However, I would say in general on global manufacturing, people ask, "What inning are you in?" And I would tell you, we're still in the batters box. We've got the team lined up. They fundamentally all work for Lonny now starting January 1. We've got a lot of programs lined up. But as everybody knows, when you start getting into global manufacturing, you've got lots of constituents that you have to satisfy from a regulatory standpoint. And given our recent history on the quality journey, we're not going to move so quick that we stub our toe and get back in the penalty box on the quality standpoint with any regulatory body around the world. So it's probably a little premature to talk about benefits from anything that comes out of our global manufacturing network. Though I would tell you, part of our plan does assume a slightly better cost reduction drive out of our manufacturing network in 2012 than what the company has historically seen, and I'm confident saying that, and that with the efforts that we have right now, we should achieve that.

Operator

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

Tao Levy - Collins Stewart LLC, Research Division

On the Neurovascular business, you indicated that you started to get back to sort of market growth rates, I think upper single digits. Where does that stand now? And is that -- do you, as you exit 2012, you expect to get to those rates, or it's beginning here in Q1?

Curt R. Hartman

I think what we're trying to discuss there when we announced the deal back in 2010, 2011 was about stability, new product launches, folding as much of the organization into Stryker as we could and I think we've been successful in all fronts. We've had a very successful global launch of the new coil. Obviously, when we enter 2011, we didn't anticipate the Concentric acquisition, but it clearly became apparent to us that there was a great opportunity here and we're excited to have that onboard. And so as we hit 2012, our goal is to be back at market growth rates. So you should assume that, that means day one of 2012 we're back at market growth rates. Getting into the specifics of how you define the market, there's obviously been a lot of new technologies that have come into that market, that have slowed some segments down and increased growth in other segments. So it's a blended number, and as Katherine said, it's kind of in the high-single digits that we're looking at as the number we have to achieve or beat to call ourselves successful this year.

Tao Levy - Collins Stewart LLC, Research Division

And sorry if I missed this earlier on. You're heading into AAOS next month. Any new big products that you're expecting to be talking more about?

Katherine A. Owen

We highlighted a couple of them on the call as it relates to the next-generation power tool. And similar to prior years, we'll have a smattering of new products mostly, as you know, tend to be singles and doubles as you think about the company in totality with respect to revenue contribution. So we'll have booth tours where folks can come around and see the products. But beyond that, probably wait for The Academy to really walk through in detail.

Operator

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

Adam T. Feinstein - Barclays Capital, Research Division

Just wanted to ask just in terms of -- everyone's been trying to figure out when is the market going to rebound here. And clearly, it's been difficult making any sort of call there, and you guys have a lot of flexibility and just a great balance sheet in terms of the ability to take one more leverage. So I guess just as in the past, you guys have talked about acquisition opportunities, and you've done a great job in terms of finding those acquisitions and getting better than industry average growth as a result. But I guess how do you contemplate in terms of thinking about running the balance sheet 2x leverage, which would be very comfortable and just buying back -- I mean, you once again, you guys have been buying back a lot of stock, but you could buy back significantly more and generate a lot of earnings growth from that. And then when the ortho rebound does come, you could certainly contemplate capital structure in the future. But just curious as you weigh the acquisitions against doing something like that?

Curt R. Hartman

Well, I think it's one strategy, Adam. I don't think it's our strategy. We've laid out that our strategy for the balance sheet is really 3 avenues. First and foremost, we're all in it for the long term, and that implies that we want to go out and do acquisitions of platforms that provide long-term growth. And that's, I think, arguably what people would say if they look back over the last 3 years that we've done as a first priority. With that said, we do recognize the strength of our balance sheet and the ability of our organization to generate a lot of cash. And that gives us the flexibility to be opportunistic as it relates to share buybacks, which I think we've also demonstrated over the last couple of years. And then also at the same time, we've tried to embark on a more consistent approach to the dividend yield and trying to move the dividend to where it's a more meaningful contribution for shareholder return. We have not yet identified an exact percentage of cash that we're going to put into these efforts, and I'm hesitant to do that in the near term because I think we're still evolving the company's use of its balance sheet. But right now, I will tell you we're not going to run out and do a great, big massive share buyback. That's just not our stated strategy. Not saying it's a bad strategy. It's not just ours.

Adam T. Feinstein - Barclays Capital, Research Division

Definitely. I understand that. But at some point, do you feel like the balance sheet's under levered? I mean, I guess in a difficult market environment, I know people like balance sheets that don't have much, much leverage. So certainly, you guys benefit from that, but then at the same time, it's just once again, you can run the company very well at 2x leverage and have more ability to either buy back stock or pay a bigger dividend and still do the acquisitions?

Stephen P. MacMillan

Adam, we like where we are in terms of leverage. We sleep really well at night with conservatism. And frankly, go back to the summer of '08 where we were criticized quite highly I think for having so much cash on our balance sheet. And that cash came in real handy during the downturn. We've been able to scoop up a lot of assets, $2.5 billion plus of acquisitions over the last 25-ish months and still have a net position. So I think we like it. We don't feel a need to be over levered as it is. It could be more efficient, but we like where we are.

Operator

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

Raj Denhoy - Jefferies & Company, Inc., Research Division

I wonder if I could ask, I know it's a difficult question, but you look at the orthopedic growth rates now and it's been I think 7 quarters where things have kind of been running below what we would expect to be trend. And there's been several companies, including your own, kind of saying that things are not getting much worse but we're still waiting for things to improve. I guess, I know it's a very difficult question, but 7 quarters is a long time, particularly given some of the trends that you've mentioned in terms of people being unable to withstand the pain for long periods of time and just the natural demographic trends here. So when do you contemplate we'll see something?

Katherine A. Owen

I think what we've learned is trying to predict when you see a re-acceleration of these patients is extremely hard to predict. We haven't seen this magnitude of a slowdown in elective procedures in past economic recessions to use as a reference point. I would go back to our initial comments; it's clearly a function of unemployment rates. They need to come down. What the magic number is, we don't know. But at some point, as those unemployment rates come down, there is a lag effect where people either get healthcare coverage with their new job or they're comfortable taking the time off. And then there's the natural disease progression, which underscores our conviction that you just simply can't defer it permanently. But in order to make sure that we delivered on our top and bottom line targets for the year, we're going to go with the assumption that there's no change from 2011 rates and that they may remain fairly consistent with those levels.

Stephen P. MacMillan

Also, Raj, we love our diverse footprint, probably liking our cash and leverage position, feeling really good that the percentage of business that's associated that way.

Raj Denhoy - Jefferies & Company, Inc., Research Division

Sure, sure. Just as sort of follow-up kind of the Recon market. I know you gave overall corporate-wide pricing of negative 1.7%. But when you look specifically at Recon within orthopedics, have you seen any change in the pricing in those particular markets, hips and knees?

Katherine A. Owen

No. Very consistent with prior quarters.

Operator

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

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

Curt, I just wanted to clarify something on the P&L guidance with respect to R&D. I believe you said it will be up in absolute dollars, but then down as a percentage of sales. And I think you also made a reference to it being up in the 8% to 10% range. Did I mix that all up?

Curt R. Hartman

Yes -- no, it's a fair question, David. The R&D guidance for next year is that in absolute dollars, it will be bigger than this year. As a percentage of sales, it will probably be a little bit below where we finished this year. And my reference to 8% to 10% is that given our decision to terminate anything related to the OA program or our Biotech business, the decision was made to reallocate those dollars into the core of the business and on an apples-to-apples basis, it implies an 8% to 10% increase for the broad business R&D increase. You will not see an 8% to 10% increase in our reported numbers.

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

Got it. That's very helpful. Then in a commentary surrounding gross margins being about flattish or slightly up for 2012, it sounds that there are some factors that are transient, such as manufacturing variances on lower volumes and some that may just be a reflection of the changing mix of your business as it relates to the MedSurg business growing faster than the Reconstructive business. Can you maybe help us think about the gross margin dynamic on a longer-term basis and then also how new products fit into the trajectory for gross margins?

Curt R. Hartman

It's a great question. And clearly, when you look at MedSurg, when you look at expansion in emerging markets and everybody's talking about that, those businesses are on the lower side of our company gross margin. And we're okay with that. We know how to operate lower gross margin businesses and still generate a lot of profit and a lot of cash. So that movement does not concern us and does not inhibit our thoughts that we can still generate double-digit earnings growth. And so longer term and especially when you consider all the things that are evolving in healthcare on a global basis, you may be looking at healthcare that has a lower overall gross margin. And I think what I would tell you and others may tell you is we're comfortable with that trend. That said, all of our efforts from a global manufacturing standpoint, a plant network simplification standpoint, a vendor simplification standpoint, a harmonization of quality systems, are all geared at driving higher gross margins across the business. So we're not afraid of it going in one direction, but we're also lining up a number of initiatives today, tomorrow, next 5 or 10 years, that are geared at driving higher gross margins.

Operator

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

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

Appreciate your comments on gross margins and the different factors that are driving it. With 7 acquisition facilities being ingrained to slowing down utilization to absorb and come up with appropriate inventory levels and then having a lineup of initiatives that would improve gross margins over time. If we were to sort of wrap this together and try and come up with a takeaway, can you say that maybe some of the heavy lifting may be behind us now and that what we're looking for going forward would be more refinements?

Curt R. Hartman

No. I don't want anybody to think that at all. I think our simplification of the plant network is very much in front of us. And as I said, we're just getting started with those efforts. They are long-term efforts. They are complicated efforts. I'd noted 7 facilities. Keep in mind, the Neurovascular acquisition brings 3 facilities, none of which have yet transferred to Stryker. So we have 3 more facilities coming into our network. So the thought about simplifying the business plant network, while at the same time absorbing 3 new facilities, still sits in the very near-term horizon, nevermind the long-term opportunity to consolidate core competencies into different manufacturing campuses and simplify the business. So there is a journey there and it's a long journey. And frankly, when I look at it, I get excited because I can see what the potential is and I can see how it can benefit the company over the long term. But again, we're going to move cautiously because any time you move a product, you open up a whole can of quality potential issues. And we are going to do everything we can to avoid that.

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

That's helpful. So then...

Stephen P. MacMillan

And to pile of there, Vivian. I think at the end of the day, what you should be taking away certainly from Curt's comments is we see significant cost improvement abilities over probably the next decade. We're probably still in the early -- the very early stages of cost savings opportunities. Where that plays out in gross margin based on business mix, pricing, everything else, who knows exactly. But I think there's also a tremendous confidence that we have, that frankly, whether gross margins improve by 10, 30, 50 basis points in a year or decline by that same amount, we're actually in great shape to be able to deliver on the operating line. So again, we think it's going to modestly improve next year as we've said, very modestly, but we're prepared and can deliver in different scenarios.

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

Okay. That's helpful. And as a follow-up, there was a comment made that there is earnings power despite the gross margin performance. Is this where we see SG&A leverage coming in from the volume of products that you're able to put in front of customers with not just Recon, but MedSurg? Is that how we really should think about the sustainability of your operating leverage going forward, just more SG&A leverage as gross margin works itself out through the journey over time?

Stephen P. MacMillan

Very much so, Vivian. And again, let's take some specific examples. As we -- I think the hidden part and the hidden magic of a lot of the acquisition work we've done over the last few years of product tuck-ins have been we're putting more volume through our existing sales channels. So the Gaymar acquisition now gives our same medical sales force the ability to sell surfaces in addition to frames. Orthovita drops in and we have existing selling organizations that are now able to sell that in addition to hardware. So a lot of what we're doing on the acquisition fronts are giving our salespeople more to put through the same amount of people. And there is a hidden leverage there that will be coming, and again, frankly, because a lot of these are just recent, that will be coming in the years ahead as well.

Curt R. Hartman

And I think just to pile on that and to kind of emphasize a long-term view here, in 2008, our adjusted gross margins were 68.3%. This year, we finished at 67.9%, 40 basis points lower. If I would have told everybody that in 2008 they'd only be down 40 basis points in 3 years, I think everybody would have doubted me. And then the other factor is SG&A in 2008 was 39.1% of sales. This year, adjusted SG&A will finish at 37.1%, so 200 basis point improvement. So I call those out because I want to underscore our commitment to the longer-term outlook, and I'm not tracking this quarter-over-quarter because none of these projects are quarter-over-quarter. They're long-term projects that we commit our organization to, our resources, our people, and it gives me great confidence that we'll achieve the leverage we need to get to make the earnings hang together.

Operator

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

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

I have 2 questions. One, do I understand you right that you expect your SG&A management to offset all of the med tech tax 2013 so you can deliver double-digit EPS growth?

Curt R. Hartman

We expect to be able to deliver double digit or greater growth in 2013 inclusive of absorbing the med device tax. So if you do a fast-forward math on that, it implies we have to grow earnings about 17% give or take depending on how the med device tax spills out and what our U.S. sales are.

Stephen P. MacMillan

But Joanne, that will come from a combination of cost of goods, SG&A, maybe a little bit tax rate, just kind of everything. The restructuring that we announced, so it will be in various buckets on the P&L.

Curt R. Hartman

Yes. It's not just SG&A leverage.

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

That's very helpful. My second question is, I think if I heard you correctly, you gave 5%-type plus of revenue growth rate for MedSurg and Neuro, but didn't comment on Recon for 2012, or maybe I missed it.

Katherine A. Owen

Yes, Recon we said it's going to be up to 3% growth in terms of the assumptions behind the 2% to 5% growth x acquisitions and currency. And then MedSurg and the Neurotech segment, 5% or better.

Operator

Your next caller is Jason Wittes with Caris.

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

If you could just help me out on how to understand some of the product launches in MedSurg. I know that you just -- it sounds like in the fourth quarter some of the upside was due to the launch of the new series 7 tool set. Is that -- when you launch these new tool sets, do you normally get a replacement cycle sort of precipitated? Or are there other factors that can kind of lead to that? And related to that, are these generally long cycles in terms of upgrades when you have a new product? Is this something that can generally run a year or more in terms of seeing those upgrades occur in the market place? And likewise for endoscopy too with your new cameras.

Curt R. Hartman

Jason on System 7, that's a Stryker instrument's product, and the last new power tool, the previous generation was introduced in 2006. So the answer is yes, they have long cycles, number one. Number two, I would not read into the fourth quarter for instruments as benefiting substantially from the System 7 introduction. It was a limited introduction. We more fully launched it at their National Sales Meeting in January, and we'll show it broadly to customers at AAOS. So I think what you're just seeing there is a good performance overall by the instrument segment on a global basis. On the endoscopy side, it's very much a similar approach. The cycle is a little bit shorter. Cameras -- the last camera we introduced was January of '09. You could argue that our timing was not great, but those cycles are little bit quicker than on the power tool side. And there is a natural uptick because the technology makes the procedure more efficient to staff, more efficient, and obviously, we're putting both incremental and real innovation into those products to drive customer and patient benefit.

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

Okay. And then as a follow-up, I don't want to put words in your mouth, but I think I heard you say that you're anticipating some share gains in hips this year based on some new products. Did I hear that correctly? And if that's the case, is that -- would that also be something that would be more back-end loaded in terms of seeing a share gain?

Stephen P. MacMillan

You heard us correctly that we expect share gains in hips, not necessarily linked to new products. It's the growth of MDM really particularly getting, and I think we gained share here in 2011 and it will be a continuation. Hopefully, we'll have some things. We probably got Accolade coming later in the year as well, but I think it's the ramp from MDM right now.

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

Okay. But not necessarily the case for knees, I assume, at this point based on what you're saying?

Stephen P. MacMillan

That really is shape fitting, the growth of shape fitting coming on. But we're not expecting to necessarily be taking share, but at least be at market.

Operator

Your next question is from the line of Glenn Novarro with RBC Capital Markets.

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

I had a question on Europe. I was hoping you could provide a little bit more color for us on Europe. We read about the potential for recession and austerity. And I'm wondering if we go into a recession in Europe, does it hurt your ortho more or your MedSurg business more? And then maybe provide us some color with how you expect both ortho and MedSurg to grow in 2012 and does it assume a recession.

Stephen P. MacMillan

We're assuming continued softness in Europe. I think the positive for us is, frankly, on both our Recon and our MedSurg businesses, we're significantly below our standard market shares in Europe. So that even if it slows down, we still have share gain opportunities, frankly, among our implant businesses and our MedSurg businesses. So we don't see it having a material impact even if Europe slows further.

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

And is your share -- the percentage of your business in Europe on average the group is about 25%. Are you at that level?

Stephen P. MacMillan

No. We are below that.

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

Okay. So if Europe goes into a recession, you think there's areas outside the U.S. that can pick up. Is that correct?

Stephen P. MacMillan

Yes.

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

And then one last question, just on CapEx spending. Do you expect CapEx in Europe to be stable, worse? And perhaps any thoughts on U.S. CapEx spending for 2012.

Stephen P. MacMillan

Europe, we're certainly not anticipating an increase, and again, our MedSurg businesses are underdeveloped there. So we see opportunity even in a lower CapEx environment. I think in the U.S., we're assuming things are reasonably fine, but again being cautious in our outlook as we start the year.

Operator

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

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

But just thinking about extremities a little bit with your Memometal acquisition last year, is there any thought -- and I know you have a shoulder system already, but any thought to really increasing your presence in what's the larger of the 2 extremity markets?

Stephen P. MacMillan

Yes.

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

And is that a 2012 or later time frame?

Stephen P. MacMillan

We've got a shoulder now, and obviously, the extremities piece we'll continue to refine and expand that offering over time.

Katherine A. Owen

I would just recognize that as a percent of our total business and even as a percent of our Recon when you look at the shoulders and that extremity segment, it's really not that material at this point.

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

Okay. And then just any kind of update on Orthovita uptake among your sales reps. I mean, are you starting to benefit somewhat from the dynamics that are playing out in the biologics market in Spine?

Stephen P. MacMillan

Yes, we really -- VITA's line has been a tremendous addition. Certainly, some opportunities to restart CORTOSS, and Vitagel is a nice little gem in that bag as well.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I'd like to turn the conference back over to management for some closing remarks.

Stephen P. MacMillan

Great. Well, thank you. We certainly appreciate your time today, and hopefully, you feel good about where we're headed here in 2012. We certainly do. And the conference call for our first quarter 2012 operating results will be held on April 17 of this year. So we'll talk to you in a few months time, but we'll see a lot of you at The Academy in a couple of weeks. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you so much for your participation in today's call. You may now disconnect.

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