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Stryker Corporation (NYSE:SYK)

Q3 2007 Earnings Call

October 17, 2007 4:30 pm ET

Executives

Katherine Owen - VP of Corporate Strategy and IR

Steve MacMillan - President and CEO

Dean Bergy - VP and CFO

Analysts

Taylor Harris - JP Morgan

Bob Hopkins - Lehman Brothers

Marc Mullikin - Piper Jaffray

Tao Levy - Deutsche Bank

Raj Denhoy - Bear Sterns

Jason Wittes - Leerink Swann

Joanne Wuensch - BMO Capital Markets

Brian Wong - Broadpoint Capital

Michael Matson - Wachovia

Matt Miksic - Morgan Stanley

Bruce Nudell - UBS

Jeff Johnson - Robert W. Baird

Steven Lichtman - Banc of America Securities

Larry Keusch - Goldman Sachs

Operator

Good day ladies and gentlemen, and welcome to the Third Quarter 2007 Stryker Earnings Call. My name is Katrina, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

The company will like you to know that certain statements made in today's conference call may constitute forward-looking statements. They will be based upon the management's current expectations and will be 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.

In addition to the factors that may be discussed in this call, such factors include, but are not limited to, general pricing pressures, including cost containment measures that could adversely affect the price of or demand for the company's products, regulatory actions, unanticipated issues arising in connection with clinical studies and eventual United States Food and Drug Administration approval of new products, changes in reimbursement levels from a third party payer, a significant increase in product liability claims, changes in economic conditions that adversely affect the level of demand for the companies product, changes in foreign exchange markets, changes in financial markets and changes in competitive environment.

Additional information concerning these and others are contained in the Company's filings with the Securities and Exchange Commission, including the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q. Today's conference call will also include a discussion of adjusted net earnings from the continuing operations for the comparative nine month period, ending September 30 of 2007 and 2006.

Further discussion of this non-GAAP financial measure, including a GAAP reconciliation appears in the Company's form 8-K filed today with the Securities and Exchange Commissions, which may be accessed from the 'For Investors' page on the Company's website at www.stryker.com.

I would now like to turn the presentation over to your host for today's call, Mr. Steve MacMillan, President and Chief Executive Officer. Please proceed.

Steve MacMillan

Thank you, Katrina. Good afternoon everyone, and welcome to Stryker's third quarter 2007 earnings report. With me today are Dean Bergy, our Vice President and Chief Financial Officer, and Katherine Owen, Vice President of Corporate Strategy and Investor Relations.

From start to finish our results this quarter were fundamentally very strong, while additionally benefiting from currency, as well as one extra selling day in the United States. Net sales of $1.45 billion were up 18% and up 15.7% operationally, while net earnings also grew over 20%.

We stated at the start of the year that our primary focus was on executing against what we felt were strong organic growth opportunities. As we began to realize the impact of our R&D and sales force investments from the last couple of years, we believe this quarter's results, on top of two already strong quarters, demonstrate that this exceptional focus is serving us well.

Overall, the 15.7% operational growth was our strongest in the last several years and represented another sequential up tick from last quarter, as the breadth and depth of our unique set of businesses, once again, contributed to strong growth.

A few highlights, which includes an acceleration of international sales from single-digit growth last quarter to low double-digit levels this quarter. This growth was widespread with hips, knees, trauma and our endoscopy franchises all showing accelerating international growth in the quarter.

Our growth was again broadly based and balanced. On a reported basis, growth rates for U.S. and international were both 18%, with the international growth up 11% operationally.

In the U.S., Orthopaedic Implants were up 16% while MedSurg reached 20%. Globally, Orthopaedic Implants were up 13% operationally, and MedSurg was up a strong 20%.

Our U.S. spine and trauma businesses continue to perform exceptionally, both growing around 30% in the quarter. Seven of our eight global franchises again generated global double-digit operational growth.

We also know that a number of you often wonder about the sustainability of our MedSurg businesses. Well, we are pleased to report that these important franchises continue to post stellar growth. In fact, for the first time this decade, our endoscopy and the instruments franchises both posted 20% or greater growth in the U.S. and globally in the same quarter. And medical reached 17% domestic growth in the quarter.

While each of these businesses accelerated versus last quarter and are clearly running above their long-term expected growth rates, they continue to deliver strong underlying and sustainable growth. To provide a little context here, this represented the 33rd consecutive quarter of double-digit growth for our global endoscopy business.

Instruments have generated double-digit growth in 21 of the last 22 quarters. And medical posted its 16th consecutive quarter of double-digit growth. While this quarter may have been exceptionally strong, we continue to feel very good about our ability to deliver strong and sustainable MetSurg growth.

While the quarter brought a lot of highlights, there are always things we can do better. At the top of this list remains our hip franchise, making the July FDA clearance of our hip resurfacing product very welcome news.

We are currently focused on conducting comprehensive surgeon training, and therefore do not expect the meaningful contribution from resurfacing until next year. But, it is very nice to now have this in our bag heading into 2008.

Secondly, while our Japanese business showed some stability in the quarter, the price cuts continue to take a toll.

And finally, we continue to work on enhancing our quality and regulatory systems to better meet the increasing standards at FDA. When we step back from it, however, we are encouraged that despite the softness in one of our largest franchises and year-to-date declines in our second largest country, Japan, we are posting very healthy growth rates.

Finally, the quarter also brought a welcome resolution to the DOJ investigation, which began in 2005. We have now wrapped up two of these investigations, orthopaedic as well as physiotherapy in the last two quarters, and are pleased to be looking forward.

In conclusion, it was a very nice quarter, and while we would like to celebrate, we very much feel the pressure of the high expectations which we have established, and therefore our investors have for us. Our team remains focused on delivering today, while investing and planning to keep the growth coming.

I will now turn it over to Dean for more details.

Dean Bergy

Thanks, Steve. I'll begin with the impact of the foreign currency and sales. Our foreign currency was again favorable this quarter, adding $29 million to international sales and boosting the company's overall sales growth by 2.3%.

In the third quarter, the dollar weekend approximately 8% against the Euro and strengthened about 2% against the Yen compared to the prior year. If currency rates hold near current levels, we expect the impact of foreign currency will increase fourth quarter 2007 sales by about 2.5% to 3% when compared to the prior year, which would bring the projected favorable impact on the total year of 2007 sales to just over 2%.

And now looking at price volume in the quarter, its pretty simple here. Foreign currency, as you have seen in the press release, contributed 2 points of growth in the quarter and the remaining growth all came from volume and mix, so there was 16% volume mix growth or 18% total growth.

Selling prices were flat in the quarter, domestic prices were up modestly, but this was offset by a hit to our international sales volume from the price declines in Japan. Japanese pricing was down 7% in the third quarter, reflecting the impact of the January 1 and April 1, 2007 MHLW reimbursement cuts.

Volume mix growth, as I said, was 16% in the third quarter, a 2 point acceleration from the second quarter. Domestic volume mix came in at 17% and did benefit one extra selling day in the quarter compared to the prior year. International volume mix growth of 12% accelerated from 9% in each of the first two quarters.

And now turning to our business segments. Orthopaedic Implants, which represents 60% of our sales, saw increased of 15% in the third quarter on a reported basis and 13% operationally. The sales growth reach by product lines are included in our press release and I'll reference those rates, as I provide more detail on performance in each products category.

So turning to hips, hips were up 9% in dollars and 6% in constant currency in the quarter. The global operational hip growth rate matched that from the second quarter. US hip growth finished at 6% and was led by sales of X3 Polyethylene inserts, Accolade cementless hips and Restoration Modular Revision Hip products.

Although we officially launched the Cormet Hip Resurfacing product line in the U.S. in the quarter, it did not contribute meaningfully to the sales volume, as our primary efforts in this arena were focused on training and education.

In Europe, hips grew at low double-digit operational rates, led by Trident, X3 Polyethylene, MITCH resurfacing and Accolade products.

In Japan, local currency hip sales declined in mid-to-high single-digit levels. MHLW price reductions were responsible for all of the decline, with volumes up just slightly.

A Secur-Fit Hip product saw reasonable volume growth, but this was partially offset by declines in BiPolar, Omnifit and Centaur products.

Operational hip growth in the remaining international markets came in at low double-digit levels, led by strong in Latin America.

Now turning to knees, they were up 16% in dollars and 13% in local currency in this quarter. Knees posted another very good quarter. U.S. knee sales were up 14%, with primary knees registering mid-teens growth and the revision category growing at low double-digit levels. Primary growth was again dominated by Triathlon and X3 and Scorpio led the way in revision.

In Europe, local currency growth came in at low-to-mid double-digits, led by exceptionally strong Triathlon growth and steady sales of Scorpio.

Japanese knee sales grew at mid-to-high single-digits operationally, with the growth attributable to our Scorpio NRG product line. The remaining international markets posted aggregate mid-teens level, local currency knee growth with Triathlon posting excellent results in the Pacific and Canada and Scorpio leading the way in Latin America.

Now turning to trauma, that product line was up 19% in dollars and 16% on operational basis in the third quarter. Our trauma business had another great quarter led by continued strong success in the United States.

The domestic trauma business grew 29% in the third quarter, 28% of military sales are excluded. This represents the seventh consecutive quarter of greater than 20% in the U.S. market. All categories were strong with Gamma3 hip fracture devices, T2 intramedullary nails, and VariAx Distal Radius the leading products.

Despite being weighed down by Japanese price reductions, international trauma sales grew 8% in constant currency. Europe grew its trauma business at mid-teens levels operationally, Japan experienced mid to high single-digit local currency sales declined a solid volume gains will shoot up by an approximate 14% price decrease.

Trauma sales growth was around 30% operationally in the remaining international markets, led by Canada and Pacific.

Now turning to spine, that was up 24% in dollars and 22% operationally in the quarter, our spine franchise obviously had a great quarter led by the U.S. business, which recorded its four straight quarter with growth over 20%. U.S. spine sales were up a robust 31%. Growth was pretty consistent across all product categories and was again led by Xia Thoracolumbar, interbody spacers, and our posterior and anterior surgical products. Outside the U.S., spinal growth was just 4% of local currency with interbody devices, the strongest selling product category.

On an operational basis, specific in Canada have excellent quarters in spine, growing above 20%, the results in Japan, which had mid single-digit growth in Europe where sales declined slightly below our expectations.

Now, turning to craniomaxillo facial products, this was up 20% in dollars and 18% in local currency in the third quarter. CMF sales continue their recent strong trend in the United States market growing 24% on the quarter, their best rate quarter over 20% growth. U.S. sales performance was again led by neuro products and our HydroSet injectable bone substitute. Sales outside the U.S. grew 4% on constant currency, specific in Europe, the leading growth markets.

Now, turning to MedSurg, they had an excellent quarter with accelerate growth from all three product franchises and in both the domestic and international categories. MedSurg is comprised of three significant product categories, instruments makes up 17% of company sales, endoscopy 14% and medical 9% leading to the total 40% of our sales that come from MedSurg.

MedSurg group sales were up 22% for the quarter in U.S. dollars and 20% in constant currency. Domestic growth picked up nicely for instruments in medical on a sequential basis and international growth for instruments and endoscopy demonstrate continued strength.

And now looking at the businesses individually, sales for instruments product line increased 22% in the third quarter as reported and were up 20% in constant currency. Instruments had a great quarter, particularly in the U.S. were sales growth came at 22 %.

Domestic sales were again led by exceptional growth of heavy duty power tools, as well an excellent quarter in navigation. Neuro, spine and ENT products also registered strong growth in the U.S.

International sales of instrument products were up 16% operational with growth overseas led by neuro, spine and ENT product and heavy duty power tools.

On a geographic basis the story was much the same as the second quarter with Pacific over 20% operational growth and Europe posting mid teens local currency growth.

Now endoscopy, which was up 26% in the quarter as reported, and 24% in constant currency had a tremendous quarter, its best since last year’s exceptionally strong fourth quarter. The U.S. posted a second straight 21% growth quarter paced by strong i-Suite and general surgery sales.

International sales were up 35% in local currency, with all product categories exhibiting exceptional strength, in geographic growth led by Europe and the Pacific. And then last, but certainly not least, within our MedSurg group our medical business was up 16% in the quarter as reported and 15% operationally.

Medical put up another solid quarter with accelerating growth on a sequential basis. U.S. sales growth was led by an excellent quarter from our stretcher products, and strong EMS sales. International sales were very strong in the Latin America and Pacific regions.

Now, I'll make some comments on the remainder of the income statement. As expected, the gross margin percentage declined slightly compared to the prior year. As discussed during the last call, our 2006 third quarter gross margin benefited from reduced royalty costs attributable to royalty agreement explorations. Year-to-date margins are up 40 basis points versus last year and remained in good shape to continue our trend of year-over-year expansion.

Spending on research and development grew by 20% in the quarter and reached 6.7% of sales, their highest percentage levels since the fourth quarter of 2005. We continue to develop both internal and acquired technologies and increased R&D spending across most of the businesses at a very healthy rate.

SG&A costs increased 16% in the quarter, slightly lower than the growth rate in sales. Sales related costs accounted for the majority of this increase. Selling costs include compensation and higher instrument amortization costs on with continued overall investment in our sales forces. Operating income increased 22% in the quarter and operating margins increased to 21.1% of sales.

And now for a brief breakdown of our income expense for the quarter, the investment income came in at $23.2 million in the quarter that was offset by interest expense of $11.4 million and a foreign currency transaction loss of $1.2 million, bringing the overall other income in the quarter to $10.6 million in the quarter. Interest expense was higher in the quarter as we reported the higher level of tax interest expense associated with our tax approval balances.

Company's effective income tax rates were 28.1% and 27.9% for the third quarter and first nine months of 2007 respectively. The rate for the first nine months of 2007 is impacted by higher than average rate on the tax benefit associated with the patent impairment charge recorded in the second quarter.

Now we’ll take a quick look at the balance sheet, which finished September in very good shape. Accounts receivable days ended the quarter at 59 days, up one day compared to the prior quarter and consistent with the prior year.

Inventory days finished the quarter at 155 days, up six days in the quarter, but down four days from the September 2006 level. Inventory days are normally reached in a high water mark in our third quarter, given the slower orthopaedic implants surgery schedule in the quarter. We expect to see these days measure decline markedly during the fourth quarter, as surgery schedules falls back, and we continue with our normal second half slowdown in plant production pace.

And as of September 30th, we do have $17 million of debt outstanding, that's all classified as currents.

And then just briefly on cash flow, we continue to have a great cash flow for the year, with $661 million cash from operations in the first nine months, that's a 33% increase from last year's $497 million.

So with that, I turn it back over to Steve.

Steve MacMillan

Thanks Dean. With three quarters down 2007 is heading towards the finish, even a little better than we planned at the outset of the year. We are in great shape to deliver our seventh straight year of double-digit sales growth. As it relates to fourth quarter, many of you will recall that we are facing difficult year-over-year comparisons, given the exceptional growth achieved by several of our franchises in last year's fourth quarter.

However, with a bit stronger than expected third quarter on the Board, we have raised our sales guidance for the year and believe we will hit constant currency top line growth of 13% to 13.5%.

On the bottom line, we continue to forecast 20% adjusted earnings growth, with $2.40 as the projected target for the year.

We've also continued to invest in R&D and sales force expansions this year, while every project doesn't always develop exactly as planned, we believe we benefit from broad approaches in these areas.

Similarly, our business has been built as a unique footprint over time, with measured acquisitions and R&D investments. We would expect this methodology to continue to serve us well, as we evaluate potential uses for our growing cash balances.

We'll now open it up for questions. We will hand it back to you, Katrina.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mike Weinstein representing JP Morgan. Please proceed.

Taylor Harris - JP Morgan

Thanks a lot. Hey, it's actually Taylor Harris here for Mike. So, my question is obviously the top line growth was very, very strong this quarter, and perhaps surprisingly so, and not just MedSurg, but some of the orthopaedic businesses outside of hips and knees. So, just to focus on trauma, spine, CMF, was there anything there that is surprising you this year in terms of how strong those businesses are performing?

And then secondly, I know you made a lot of sales force investments in those areas, is any of the strength you think one time in nature this year due to the sales force investments you are making?

Steve MacMillan

Taylor, I think if you look at particular trauma and spine businesses, historically we probably been underdeveloped from a market share standpoint in the United States. And a few years ago we made a strategic commitment to really strengthen those businesses and it’s happened through both the sales forces expansions, as well as frankly a much stronger focus on R&D and just focused leadership. And the same frankly for our craniomaxillofacial business.

And I think we are seeing the impact of the leaders that we’ve put in place there and really having great impact and while we don’t expect those numbers to continue, certainly trauma and spine at 30%. We think we can be growing significantly faster than the market here still for many quarters ahead, again we would not expect it to continue up close to 30, but certainly can they be better than the market, we certainly think so.

And candidly outside the U.S. we still have some opportunities. Our Spine business in Europe was pretty soft this quarter and so are always looking at the opportunities where we can do better. But it is important to note that those businesses collectively will be well over a $1 billion this year and have probably been kind of quietly overlooked in the aftermath of hips and knees they have becomes sizeable and very profitable and high growth businesses for us and clearly playing a bigger part of our overall growth.

Taylor Harris - JP Morgan

Okay, great. And then one additional question. You referenced the tough comp you have in the fourth quarter. You are guiding, I think organically the growth of 10.5% to 12.5%, which is it’s certainly lower than what you have done in the past two quarters. Is that really just a comparison issue or should we read anything into that as you look forward to 2008 and what type of growth we should expect next year?

Dean Bergy

Purely a comparison issue, do not worry about a slowdown. Here is, as a remainder, the number is probably on closed deal, Last year in the fourth quarter four of our five implant businesses grew 20% or greater. Knees, trauma, spin and CMF globally were all up over 20 and endo just absolutely blew it our with 27% growth.

Frankly, it looks like there is a lot capital that needed to be spent probably in hospitals in the fourth quarter as we had launched the 1188. Last years fourth quarter was clearly a blow out and just as we are going up against that we continue to feel very, very good about the direction, but we just want to be candid in that.

Taylor Harris - JP Morgan

Sure. So as we think about 2008 should we expect performance roughly inline with '07 other areas where you expect to do better or worse and then I will drop.

Steve MacMillan

Well hips will better. I think what we'll give guidance for '08 in January. Let us finish this year first, but I would say on a high level basis what you should probably expect is, things like trauma and spin are probably going to slow down a little bit. Hips will probably accelerate a little bit.

And all in hopefully, Japan won't be quite a drag, that it has been this year, but it may not be a star next year and we'll give you guidance. But I would clearly -- we feel pretty good, there is always challenges, we are always nervous, but we feel pretty good about what you will able to expect in '08.

Taylor Harris - JP Morgan

Great. Well congrats on a very good quarter.

Steve MacMillan

Great. Thanks, Taylor.

Operator

The next question comes from the line of Bob Hopkins representing Lehman Brothers. Please proceed.

Bob Hopkins - Lehman Brothers

Hi good afternoon, thanks for taking the call.

Steve MacMillan

Hi Bob.

Bob Hopkins - Lehman Brothers

Hey guys, just a couple of quick question here. First, Steve you mentioned in your prepared comments that how did MedSurg above long-term expected growth. I think we've probably asked this before, but would you tell us what you think expected growth rate is longer term for this group of businesses as you look out the next two or three years?

Steve MacMillan

Sure Bob. I think we continue to think about medical as a low teens growth business. If you look at the medical marketplace, candidly it’s probably a high single-digit growth market. But we continue to see opportunities to grow at least a factor above that, that which puts us in to the low double-digits.

For instruments I think we think about that as roughly a mid teens growth business. Again that market is probably growing in 10 to 12ish, but we continue to kind of broaden our product line and move out.

Plus again, as we remind you is, our both our endo and instruments businesses have been under developed outside the U.S. and part of the sales force expansions have been investing in those businesses outside the U.S., which should allow instruments to grow really we think in the mid teens level.

And endoscopy, longer terms we think of it as a mid to high teens growth businesses. So I think the 20% are typically going to be the outliers, but we are going to throw a few twenties on the board from time to time, but I think those are probably the best longer term expectations.

Bob Hopkins - Lehman Brothers

That’s very helpful, now in the endo part mid to high teens, is that for you or for the market or both?

Steve MacMillan

That’s for us. Again I we think we – we think we are significantly outgrowing the market and its probably marginally in the U.S. or modestly in the U.S. And again, significant opportunities outside the United States, again those two businesses endo and instruments had been focused really just on the U.S. market for a long, long time and we are seeing that opportunity.

Bob Hopkins - Lehman Brothers

Okay. And then on Japan, if pricing were flat, where would, and I am sure I could do this math, but if you have it, if pricing were flat this year where would have you have grown in Japan?

Steve MacMillan

Well, we're down about 7%, so off in pricing.

Bob Hopkins - Lehman Brothers

In pricing.

Steve MacMillan

Yeah.

Bob Hopkins - Lehman Brothers

So, what I mean that be. In other words, I am just trying to get a sense for once pricing anniversaries, what kind of growth out of Japan we can expect?

Steve MacMillan

We will see where it plays out. Keep in mind, there is yet another round of price cuts coming. This was sort of a biannual thing that usually just hit any even numbers years. This year because they or the past biannual one because it was so draconian and they spread into three pieces over two years.

So, unfortunately, we are going right back into another one next, but we hope that it will not be as significant as what we've been through. We also have been probably getting better about trying to get some products registered and some other things to ultimately do a better job ourselves in Japan going forward.

So, I don't think there is going to be a dramatic turnaround but we feel a little bit better about where we are heading, but there will be still more price cuts on the horizon in a more likelihood.

Bob Hopkins - Lehman Brothers

And then just really quickly on the spine, do you think you have the critical mass to really take on the top three share players?

Steve MacMillan

Yes.

Bob Hopkins - Lehman Brothers

Okay.

Steve MacMillan

Yeah, we feel very good about where we are there.

Bob Hopkins - Lehman Brothers

Great, thanks for your time.

Steve MacMillan

Thanks, Bob.

Bob Hopkins - Lehman Brothers

Yeah.

Operator

The next question comes from the line of Marc Mullikin representing Piper Jaffray. Please proceed.

Marc Mullikin - Piper Jaffray

Good afternoon.

Dean Bergy

Hi, Marc.

Steve MacMillan

Hi, Marc.

Marc Mullikin - Piper Jaffray

Hey, just to start off on actually the bed's business, you signed the agreement with Universal Hospital Services a few months ago, and just wanted to find out how that agreement is structured and what sort of impact you would expect it to have?

Steve MacMillan

Sure, I don't think we will give any details on how it structured. We would tell you that overtime, we think it opens up a very nice play into the rental market, where we've never historically played. We would also tell you we are probably still in the top of the first inning in terms of any real impact as that goes out. It's a new business for us. It's a little bit new for them in terms of being partnered with us.

We feel very good about all the initial feedback, but the impact really hasn't yet been felt and we think that's one of the reasons that we will be able to grow our medical business again faster than the overall market, because we are entering a market that we are not in today.

Marc Mullikin - Piper Jaffray

What portion of the bed's business is rental of the market overall?

Steve MacMillan

Mark, I don't think it’s a big portion today. A lot of what you see in rentals really have to do with surfaces. This is a little bit of a new avenue. So I think we’ll have to see how it develops. But we like our relationship and we think it will be a broad perspective to allow us along with UHS to talk about a broader offering to products with the ability to rent products as well as volumes.

Marc Mullikin - Piper Jaffray

Okay, fair enough. And then on the hip resurfacing business in Europe with the MITCH product, can you just give us an idea of what sort of traction you are getting with that and maybe any lessons learned for the launch of format in the U.S.?

Steve MacMillan

Sure, where it is going, it's going reasonably well. I think the challenge candidly and the differences in the U.S. were number two to market and we come from a strong position. And mostly in the European and foreign markets, we've been sixth or seventh player and so it's doing okay for us. It's been a nice round up, but probably hasn't had the impact that we would hope and expect that it will in the U.S.

Marc Mullikin - Piper Jaffray

Okay. And then just one final one and I’ll hop off. It looks like the instrument sales in the U.S. jumped quite a bit sequentially. I don't know if that's just artifact in my model or not, but if that's correct, is there anything a product launch or anything that's driving that?

Dean Bergy

System 6 heavy duty power tools are really driving the business right now.

Marc Mullikin - Piper Jaffray

And how long does that been out on the market?

Dean Bergy

We initially launched it in the third quarter of last year, but I would say it's really hitting its traction, it's kind of I would tail end the third, it was probably September. It's really hitting our traction and we see it usually hit the traction a few quarters after it's been out and I think that's right the sweet spot that we just hit this last quarter.

Marc Mullikin - Piper Jaffray

So you would expect it to continue for another couple of quarters then?

Dean Bergy

Probably whether it's a quite that level, we never want to plan that is quite that level, 20% plus growth in our instruments business is clearly a little more stratospheric, but I think we do see it being healthy certainly coming forward here for a few quarters.

Marc Mullikin - Piper Jaffray

Hey, very good. Thank you. Nice quarter.

Dean Bergy

Thanks Marc.

Operator

The next question comes from the line of Tao Levy representing Deutsche Bank. Please proceed.

Tao Levy - Deutsche Bank

Good afternoon.

Steve MacMillan

Hi Tao.

Tao Levy - Deutsche Bank

Hey, two couple of quick questions, first maybe you could share about that on the U.S. side on the orthopaedic implants looks specially in knees you guys are performing very well. Can you comment how you think you guys are doing relative to the market growth and if you taking share who is most vulnerable out of your competitors?

Steve MacMillan

We'll answer the first part, not to say this. The first part, I think we continue to be very pleased with Triathlon, particularly going against multiple years now a very difficult comparables.

And at a stage in the life cycle when typically a product would have slowed much more significantly than where we are and I think that speaks to the overall traction in interest that Triathlon has had.

So, I think again, we preferred just to really talk about probably how we are doing relative to the market. We know there has been a lot of buzz and a lot of talk about a lot of other knee systems, but we continue to feel very, very good about Triathlon.

Tao Levy - Deutsche Bank

You can get that share in that in the quarter?

Steve MacMillan

Probably not much. I think we probably grew ever so modestly faster than the market, as we have here, I think for a number of quarters, but its just on the margin.

Tao Levy - Deutsche Bank

Got you, okay. And maybe you could comment a bit on the pipeline product, is that, I recall that’s supposed to be a Q4 launch, if was correct and what are the expectations that we should be thinking about for that?

Steve MacMillan

Sure. We are still working through some final commercialization issues on that and it may or may not be fourth quarter, I'd say candidly its probably going to shift in to next year, and the great part is that business is strong enough, healthy enough that we have the patience.

I think the key here is because we are going in to a new market we want to make sure, and we are going against a very formidable competitor, we want to make sure that we really had everything buttoned up from a complete manufacturing, product execution, as well as the customer trials and frankly have the sales force and everything geared up.

And I think in all likelihood it's probably shifting late enough end of the year, that will probably move in to next year to be more effective.

Tao Levy - Deutsche Bank

So like a second quarter '08?

Steve MacMillan

Probably a reasonably, we are still sorting out, that’s probably a fair.

Dean Bergy

Yes, I think sometime in the first half is fair.

Tao Levy - Deutsche Bank

Okay. And then for Dean, in the third quarter you talked about the interest expense that you had on, I guess you tax accrual. Is that something that’s going to continue going forward or do you pay that down, you just every quarter other line have been progressing increasing, this quarter its down about $6 million. I am just trying to think going forward you obviously have a larger cash balance, how should we be modeling that?

Dean Bergy

Yes, again it does relate to our tax reserves and it probably was a little heavier this quarter than I would anticipated being, but it is a more specific calculation than it used to be under the new accountings rules that we adapted at the outset of the year under the FIN 48 pronouncement. So, its probably going to be more volatile than its been in the past, but I would expect that this quarter is probably a little heavier on the margin in that category, than you might normally see.

Tao Levy - Deutsche Bank

Great. Thanks a lot. Good quarter.

Steve MacMillan

Thanks Tao.

Operator

The next question comes from line of Raj Denhoy representing Bear Sterns. Please proceed.

Raj Denhoy - Bear Sterns

Good evening, guys.

Steve MacMillan

Hey, Raj.

Dean Bergy

Hi, Raj.

Raj Denhoy - Bear Sterns

I wonder if I could ask little bit on the strategy behind the spending. You guys put up a really good quarter again, on the top-line. And you increased spending sort of across the board in selling and marketing as well R&D, and your returned just 20% again on the bottom, which I say just (inaudible).

Steve MacMillan

Just 20, come on.

Raj Denhoy - Bear Sterns

Where I get, when it comes right down to it, if you guys keep doing this well on the top-line we come a point where, you start allowing more to fall through in the sense, because you are really not to get out of the park in the top-line here?

Steve MacMillan

Yeah, Raj, our goal is to keep this going for as long as humanly possible. And I think what we’re seeing is, we continue to find more ideas on the R&D front to be able to spend and little pockets of sales forces here and there. And when times are good, I think we want to continue fuel this, so that we've got more and more things to carry us into '08, carry us into '09 in the 2010. And so, I probably would expect more of it to continue to be reinvested, given that we've already set such an aggressive earnings goal. I think relative to most same companies. And we’re thinking about just trying to keep it going for as long as possible.

Raj Denhoy - Bear Sterns

Fair enough. Then if I could just ask one on the resurfacing side. You mentioned your training surgeons this quarter, is there any matrix you can give us around that, how many surgeons you have trained and if we can expect these guys to start ordering implants here in the fourth quarter?

Steve MacMillan

Yeah, the numbers so far are very small, and we tend to not give specific numbers. But I’d remind you that the product was cleared in July, by the time we got our final labeling and all of that and then prepared to do the sales training, it really didn’t start until the end of August. And we’re doing a lot of fairly detailed training so that, it was almost insignificant in the quarter. I think here over the fourth quarter we will certainly start to see a little bit more.

And, Raj if I go back to just elaborate on your previous question too. Again, what we probably remind is this healthier than usual top line growth that you are seeing right now is really the reflect of some of the additional investments we’ve made over the last couple of years. Again, well, times were good so that we could keep investing and that’s what our hope really is here.

Raj Denhoy - Bear Sterns

Right, well, fair enough it does seem to be working. I guess just lastly another kind of product question on MedSurg, when I think what things are sort of distinguishes you guys is your very broad offering in that segment and we are hearing some rumblings in hospitals signing exclusive contracts and things that you guys sort of outfit hospitals and in those sort of things. Is there anything to that, the fact that you guys are able to offer such a broad product sweep and so that’s allowing you kind of really outpace the market here?

Steve MacMillan

We think that is a key part of our success. I mean it’s start’s product by product but when you collectively put together our various businesses we do think it’s helping us.

Raj Denhoy - Bear Sterns

Great, fair enough, thanks.

Steve MacMillan

Great. Thanks Raj.

Operator

The next question comes from the line of Jason Wittes representing Leerink Swann. Please proceed.

Jason Wittes - Leerink Swann

Hi, thank you very much.

Steve MacMillan

Hi, Jason.

Jason Wittes - Leerink Swann

Just wondering first of the general question, I know we all you gave the general impressions on pricing for the reason that I know we always pick on hips and knees, but clearly your are coming out as more diversified company especially this quarter. Can you give us an indication of were pricing actually be strong quickly in your implant business and your MedSurg business. I'd love to get sort of landscape in terms of where you think you have some decent pricing and all that stuff?

Steve MacMillan

Jason, it's really not that distinguished, it's in a reasonably tight range. So I don't -- obviously we wanted to be a little more circumspect with our comments on pricing and I think it's in a tight enough race that it's not even really fair to distinguish.

Jason Wittes - Leerink Swann

So, I mean, are you implying that there is not a big difference between the hip and knee business and say spine or trauma business at this point?

Steve MacMillan

Not a real significance. Obviously, the one thing that we do call out is Japan and that's the one area where we are seeing significant price decline, as you all know, but the rest of our businesses are in a reasonably tight ranges.

Jason Wittes - Leerink Swann

Okay. I guess I won't push further on that, but I guess you implied that you think you have enough critical mass to go after the spine market in a big way and certainly that seems to be the case looking at the numbers. For trauma, it's been the last couple of quarters you really took off, and is that also a situation of critical mass, or is it largely because you hired, I would say quite a few sales people about a year ago and they are starting to finally pay the dividend?

Steve MacMillan

Its pieces above, I think we really had six great quarters over 20% now.

Jason Wittes - Leerink Swann

That's right. I'll correct myself.

Steve MacMillan

Over the last two, we had a couple of 30 there, so you are in good [shape]. I think it's seven straight quarters right at 20. I think we probably moved into the number two position we think in the U.S. marketplace and have a pretty good offering and yet we still have some gaps in our product line that we are working to fill here in the coming years.

Jason Wittes - Leerink Swann

Okay.

Steve MacMillan

So I think we feel good both about where we are come from and still feel like there is one way ahead of us.

Jason Wittes - Leerink Swann

In terms R&D, can we assume that the focus of your R&D projects over the next year are certainly need to be still in those areas that are really growing fast right now, spine, trauma, and (inaudible), is that the way we should think about the focus or?

Steve MacMillan

It's everywhere. It's all going to be in hips and additional things in knees and across our endo and instruments businesses. We really are reinvesting in everyone of our franchises right now. And again we remind people constantly that a lot of our success is build on singles, not home runs and a lot of this is just quietly introducing another product, whether it's a cervical plate in spine or different spacer for the interbody space or a hand plate, a Distal Radius plate for example and trauma.

One of these things are, this incredible breakthrough that's worth highlighting, but collectively across the business, they really add up and they start to load the basis and constantly bring some runs in for us.

Jason Wittes - Leerink Swann

Okay. And in terms of next year, I guess for more guidance we're going to wait till January, but I suppose we can assume that you are still sticking to the 20% role on the bottom line?

Steve MacMillan

Yes, I think it's probably a reasonable assumption.

Jason Wittes - Leerink Swann

Fair enough. Thank you.

Steve MacMillan

Great, thanks Jason.

Jason Wittes - Leerink Swann

Thank you.

Operator

The next question comes from Joanne Wuensch representing BMO Capital Markets. Please proceed.

Joanne Wuensch - BMO Capital Markets

I am still lost again the 20% being reasonable.

Steve MacMillan

Thank you, Joanne.

Joanne Wuensch - BMO Capital Markets

Anyway, your spine business in the U.S is quite strong and outside United States in the single digits. What do you need to do to get your OUS business sort of pumped up?

Steve MacMillan

Get better. It's I think greater focus and we've been, we probably shifted the balance a little bit towards the U.S. and I think it's been a little bit quicker to launch products in the U.S. Candidly, we probably have some opportunities to strengthen our sales team dedicated to spine, particularly outside the U.S.

I think we still had not as dedicated resources in outside the U.S. in lot of cases the spine people being carrying some other products and we're probably where we're in the U.S. several years ago when we Recon people and spine, Recon and spine under the same rep. And so, there is probably some opportunities there to do what we do pretty well which is better focused.

Joanne Wuensch - BMO Capital Markets

Okay. So, it's fair to say we should see U.S. sales growth temper close to the markets, mid-teens growth rate and OUS growth may be strengthened over the next period?

Steve MacMillan

Probably though, I would say international may take a little bit of time. I wouldn't expect that in the fourth quarter. I also wouldn't expect us to revert to the mean to the market in the U.S. quite as quickly either.

Joanne Wuensch - BMO Capital Markets

Okay. And someone has asked, how are you feeling about acquisitions these days?

Steve MacMillan

We continue to be looking and frankly since Katherine has joined us, she is surfacing a lot of good ideas, and I would tell you we've been fairly active poking around and yet we're in such a position of strength that we feel very patient and comfortable not to overpay.

We still think there is a lot assets out on the market that candidly are premium priced or priced to perfection at this point in time. And we are going to buy out our time and still look at to broaden our footprint overtime and we will see where it plays out. But we don't feel any burning urgency to have to deal with deal this year or whenever.

Joanne Wuensch - BMO Capital Markets

Okay. And the last, when might we see some clinical data on your artificial disc program?

Steve MacMillan

On the artificial disc, we have filed the FlexiCore, the lumbar disk. So that is…

Joanne Wuensch - BMO Capital Markets

And probably cervical, sorry.

Steve MacMillan

Yeah, the cervical, we are close to wrapping up that study.

Joanne Wuensch - BMO Capital Markets

Okay.

Steve MacMillan

And that hopefully the enrollment on that certainly should be completed this quarter. So then we’ll be in a position start to analyze. That was also the two year follow-up as you well know. So, we are still a little bit away from that, but all the initial anecdotal feedback we are hearing is positive.

Joanne Wuensch - BMO Capital Markets

Okay, thank you.

Steve MacMillan

Great, thanks Joanne.

Operator

The next question comes from the line of Brian Wong representing Broadpoint Capital. Please proceed

Brian Wong - Broadpoint Capital

Thanks for taking my question. Most of my questions have been taken, but I just wanted to ask, now that we are closer to the 2008, if you might be willing to give us any sort of progress on your OP-1 product?

Steve MacMillan

I think what we continue to say with this Brian is just taking out your models. It may be quite a while. And as we’ve given that most of what we have said over the last 10 years is probably not been -- probably been rosier than what we expected. This could be a while and we just continue to say take it out and we’ll be back to get some points.

Brian Wong - Broadpoint Capital

Okay, fair enough.

Steve MacMillan

Thanks.

Brian Wong - Broadpoint Capital

And then in terms of, you mentioned what you might be thinking about for acquisitions, any other uses of cash such as the buyback that might be in store?

Steve MacMillan

We would – we continue to look more on the acquisition front. And we don’t mind building up the cash position at this point to be ready to pounce when the time comes, but obviously, if that would have continue to build we'll certainly be thinking about possibly both dividend, buyback those kinds of things.

Brian Wong - Broadpoint Capital

Okay. And then given the fact that you guys have settled with the department of justice on the hip and knees side, I was wondering if you would heard any rumblings in terms of the similar source of investigations on spine across the industry?

Steve MacMillan

Not that I am aware of.

Dean Bergy

No

Brian Wong - Broadpoint Capital

Okay, fair enough.

Steve MacMillan

We know there was one a few years back with one of the other companies.

Brian Wong - Broadpoint Capital

Right.

Steve MacMillan

But have not heard, we are not aware of anything now.

Brian Wong - Broadpoint Capital

Okay. Great well, nice quarter, thanks guys.

Steve MacMillan

Great thank you, Brian

Operator

The next question comes from the line of Michael Matson representing Wachovia. Please proceed.

Michael Matson - Wachovia

Hi thanks for taking my question. It looks like you had obviously really strong growth in your more capital intensive part of your business. I am just wondering given what we've seen in the credit market over the summer, the late summer here, if there is any risk that hospitals may have a more difficult time in financing their capital budgets over the next 6 to 12 months?

Steve MacMillan

We've asked ourselves a question Mike and frankly we think that our stuff is enough under the radar screen that lot of our stuff is as you know smaller relative to major, major expansion. And we think we are in reasonable shape there, but it’s a great question one that we've been kind of wondering a little bit ourselves, but we think that the fundamentals of our MedSurg businesses are still in good shape.

Michael Matson - Wachovia

Okay. And then just in your spine business, I was wondering if you've seen any kind of an impact from or if you are concerned about any kind of impact from Medtronic's cervical disk products, because it seems like they have – the numbers they put out for their training program seem pretty aggressive, it seems like they've trained a lot of surgeons in a short amount of time and there may be some risk of cannibalizing some of the cervical products?

Steve MacMillan

Yeah. They are obviously the 800 pound gorilla in this space and a company we have tremendous admiration and respect for in the spinal role. I think we still see enough opportunities. We are obviously little concerned by it and I think its probably why our, we are probably not going to be posting a bunch more 30% growth quarters. But I think we continue to feel good about our underlying strength and where we are going with our own portfolio, to be able to grow at greater than market rates.

Michael Matson - Wachovia

All right. And then in the knee area are there any plans to pursue an approval for a mobile bearing knee. And then just any updates on where are the reclasiification of mobile bearing knee stands at this point?

Dean Bergy

Mike, we do have a trial that’s underway with our mobile bearing knee, it's actually our mobile bearing knee which is called a Scorpio Plus, does extremely well overseas and we have a trail that’s underway in the U.S. So we are not completely enrolled at this point in time.

Relative to down classification, I haven’t heard anything more recently and I think we are assuming that may not happen, so we are going to continue along the path that we have been on. But, obviously there is reasonable follow-up here so reasonable it will be some reasonable period of time before we would have that product on the market in the U.S.

Steve MacMillan

And we also don’t feel a need to have every offering that every competitor has. We feel very good about Triathlon and the benefits and the patient satisfactions frankly with Triathlon.

Michael Matson - Wachovia

All right, that’s all I have got, thanks a lot.

Steve MacMillan

Great, thanks Mike.

Operator

The next question comes from the line of Matt Miksic representing Morgan Stanley. Please proceed.

Matt Miksic - Morgan Stanley

Thanks for taking the questions.

Steve MacMillan

Hi, Matt.

Matt Miksic - Morgan Stanley

So we are getting around to the bottom of the barrel here, but a lot of great questions and I appreciate the time, but couple on may be some of the product lines, Triathlon. You talked about improving your growth and penetration trend on overseas in Europe and Japan.

Can you give us an idea, may be what has been the dynamics there, what you changed, if anything, and over the long run, is there anything, what's the penetration look like, is there anything different about that market that, what kind of legs does that have? No pun intended?

Steve MacMillan

Probably nothing dramatic Matt, I think to be candid we think the international markets probably were little healthier this quarter and I am not sure we did anything really and we are seeing some uptick certainly from Triathlon as people shift over. We've also got a lot of very loyal Scorpio users.

Dean Bergy

I think just as a point of clarification, the product is not approved in Japan. So, the main results in Japan are coming Scorpio energy product.

Matt Miksic - Morgan Stanley

Got it.

Steve MacMillan

So, I think its -- but I think we will continue to see certainly uptick from Triathlon, more surgeons would see it, the acceptance is certainly very good. But I wouldn't say we did anything magical this quarter by any stretch.

Matt Miksic - Morgan Stanley

So, in terms of your innings analysis, I mean where are you in terms of innings in Europe and then does this get approved and when in Japan?

Steve MacMillan

Obviously, the product has been well received in the market where it's launched, but I think we're still probably in earlier innings in Europe Matt. In Japan, I think we would certainly see approval there although.

The energy product, which was designed specifically for the Japanese market and the Japanese anatomy, is doing very, very there. So, I think we're very comfortable with our offering in the market today.

Matt Miksic - Morgan Stanley

Okay. And just on Japan, follow-up to some of the questions earlier on pricing, did you mention what exactly the cuts going to be, is it come again in January, or does it come again in April and we just don't know?

Steve MacMillan

We think it will be in April, but we don't know who they are yet. They have not been resolved yet and that's really a lot of chewing and throwing that will happen over the next few months.

Matt Miksic - Morgan Stanley

Okay. And if I remember correctly, if this is the typical biannual cycle, it's like we start to hear noises in like January, February and May be a final number at the end of February and March something like that?

Steve MacMillan

Yes, and so it usually kicks in April 1st.

Matt Miksic - Morgan Stanley

Got it. A follow-up on spine, you talked about having critical mass and it's certainly looks like the investments in the line and everything else is paying off. Is there anything in particular that's really stands out, that's driving the business, and then maybe also is there anything in your bag of products in spine, that you feel like you don't have gap that seem like you don't have much, the way you are performing, but what else do you think you need to have a full bag in spine?

Steve MacMillan

I think we are there now. I think it's really what's driving the growth. When you think about what's happened in spine, again we've gone from four years ago having a spine division is essentially sold alongside our Recon folks. We have some dedicated spine reps.

We had some multi-baggers and we basically had a thoracolumbar business. And so a lot of our success over the last few years had been dedicated sales people. And then filling out the line and I think there are now a lot more spine surgeons who feel comfortable being able to walk into the OR, knowing that Stryker can serve all of their needs and instead of just being a specialist, therefore just a scoliosis surgery.

So now as we have gotten much more of a cervical line, much more of an interbody line, we've put ourselves I think in a much better position and there are no gaping holes. There are still products improvements and ideas obviously ultimately the disks will be there, but most of the holes we feel we've done a pretty good job of filling or have plans to continue to fill in and round it up. But I call it now there is no gaping holes, now it's a matter of icing on the cake.

Matt Miksic - Morgan Stanley

Okay. So waiting for sort of the total disk replacements motion, dynamic stabilization might be another area that we could expect something from you?

Steve MacMillan

Yeah, that will be one of the obvious ones. Again that's an area that was incredibly hyped a couple of years ago. It's there and it'll be will certainly and should be there with a lot of other folks.

Matt Miksic - Morgan Stanley

I have been waiting for this for a while, but do you think we'll see anything new in that area at last, are you going to keep us waiting until the very last minute?

Steve MacMillan

Probably not much this year, I wouldn't expect anything from much this year.

Matt Miksic - Morgan Stanley

Okay, that's good to know. Just couple of follow-ups on hips, you talked about the resurfacing having an impact sometime next year. In between, now and then, do we get domestic hip growth up to market, or is that happened in concert with resurfacing like second quarter say next year?

Steve MacMillan

Probably it happens in conjunction with resurfacing. But we like it to happen a little faster. Yes, will it actually happen, I wouldn't commit to it until we have resurfacing.

Matt Miksic - Morgan Stanley

Okay, fair enough. And then on trauma just last question, you obviously doing great there as everyone has noted and it's an area where I think we have a industry meeting this weekend. A similar question to spine, I mean is there any place there that we can expect a new push in products or gap that you are filling or is it just you feel its like execution, you are just going to keep hitting with the bag you have got?

Steve MacMillan

Well its going to be a lot like spine, which is continuing to introducing singles in terms of product lines and continuing to fill out the bag, to also be able to serve the trauma surgeon as we are now serving the spine surgeon, which is them having the confidence that they can go in to any trauma case. And we have the products there for them. And we are close to being in that situation, but I wouldn’t say we are a 100% there yet.

Matt Miksic - Morgan Stanley

Okay. Great, well thank you for taking the questions.

Steve MacMillan

Oh, great thanks Matt.

Matt Miksic - Morgan Stanley

You bet.

Operator

The next question comes from the line of Bruce Nudell representing UBS. Please proceed.

Bruce Nudell - UBS

Hi, thanks for taking the question. I just, about two of the MedSurg markets. I had a question about trauma. We've actually counted procedures where we actually blend in kind of codes. And there has been virtually no unit growth for the last five or six years across the states we measured.

Could you explain, is there enough mix shift left in that category to keep the underlying market growing at 10%? And the second question I have is about the instrument business. It would seem to be fundamentally a replacement business where you have never won market share, is it just so dominated by surgeon preference that you come up with a better drill or other power tool and the surgeon has the wherewithal to basically purchase off, basically guarantee mix up shift every year? Thanks a lot.

Steve MacMillan

Sure. I want to take the second one first, I think the surgeon still is very critical in the instruments precision. Now these are the products that are in their hands, while they are cutting into people and everything else and it really does matter, they are the ones who need to make those decisions.

On the trauma side, I think we continue to see some mix, opportunity is clearly with introduction of lot compression place and all that stuff over the last few years, probably drove it, that mix piece higher than maybe long-term sustainable growth rate. So, we might be even thinking about it as certainly high single-digits maybe right around 10. But that’s probably where our general thinking is.

Bruce Nudell - UBS

Thanks so much.

Dean Bergy

Yeah, Bru, if I could add just a little bit to that. On trauma, I would that, at least relative to the mix up shift and unlike plenty we haven’t a lot of that in our business specifically, because it is not going to be a -- as bigger part of our offering.

And then on instruments just one follow-up point there, I would remind you that a reasonable proportion of that business is a disposable business that’s blades and attachments that go on to the capital equipment that some its used in the procedures everyday. So, that part of the business is really based on procedural growth and is very repeatable.

Bruce Nudell - UBS

So in terms of the disposable component, what is the unit growth? The underlying surgical unit growth, is it the mid single-digit?

Dean Bergy

Its very comparable to what you are seeing in hip and knee surgeries because its primarily used there and in other procedures.

Bruce Nudell - UBS

Thanks a lot.

Steve MacMillan

You are welcome. Thanks, Bruce. Yet a few more, it looks like Katrina?

Operator

Yes, sir. Your next question will come from the line of Jeff Johnson representing Robert W. Baird. Please proceed.

Jeff Johnson - Robert W. Baird

Thanks for taking the question guys. Couple of things here, MHLW reps what, two weeks ago seem to be stepping up the radar a little bit on pricing in Japan next year in that. Do you have any feeling that those comments were directed specifically at orthopaedics and other parts of devices? I guess that’s the first part of the question.

Then second, any insight into, are these price cuts something that are just going to continue to go on over the next decade, or they are going to continue to reduce the overall percentages at lower price markets for the market basket or, is it something where we finally could reach an end at some point in a year, in two years, in three years?

Steve MacMillan

Sure Jeff. Regarding their comments I think they are directed more broadly at all medical device companies. And regarding the price cuts, I think we are assuming for our strategic planning purposes that they pretty well go on in perpetuity. And we'd hope that it will be just another year or two, but I wouldn’t plan on it.

Jeff Johnson - Robert W. Baird

So, they just always find a way to meet those percentages down or add more countries to the market, basket or something?

Steve MacMillan

We think they do and frankly we continue to feel that they are not really dealing with some of the underlying issues in their healthcare system. For example, the average sick patient is spending 20 to 25 days in the hospital.

Jeff Johnson - Robert W. Baird

Right.

Steve MacMillan

Whereas as in the U.S. that’s two to three days, but there are certain parts of their healthcare system they are not yet wrestling with the fundamental realities. There’s only so much we are going to be able to change that. We certainly are trying as an industry and, but I can’t promise that we’ve got nail and having corrected quite as well as we like to yet.

Jeff Johnson - Robert W. Baird

All right thanks. And then just qualitatively I guess, on volumes for large joints in the U.S. hips and knees specifically. Obviously, some questions on where volumes were in ’06 and it seems like in the early part of ’07 you were talking about volumes seem to have picked up. Do we still see volume trends stable or improving in the U.S. this year?

Steve MacMillan

I think modestly.

Jeff Johnson - Robert W. Baird

Yeah.

Steve MacMillan

Nothing breakthrough, but seems to be a reasonable year.

Jeff Johnson - Robert W. Baird

Okay, great. And last question just on spine with the [exploit] product over in Europe, is there any opportunity to bring something like that in the U.S., is that kind of stay European product?

Steve MacMillan

Jeff, I can't comment specifically on that, it's obviously very, very new to Europe and something we're exploring, no comment on what it might look like in the U.S. at this point.

Jeff Johnson - Robert W. Baird

All right, fair enough. Thanks guys. I appreciate it.

Steve MacMillan

Great, thanks Jeff.

Operator

The next question comes from the line of Steven Lichtman representing Banc of America Securities. Please proceed.

Steven Lichtman - Banc of America Securities

Hey guys. Just a few quick ones here. First, just in terms of the level of investment, obviously you mentioned continuing to plow back, but is it fair to say that the level of investment on the SG&A and R&D side may be a little wider here looking forward than it has been over last couple in that, so we think about the P&L, the leverage will be more there and may be on the gross margin side a little flatter in terms of that leverage?

Steve MacMillan

Great observation, yes I think that's how we probably see it.

Steven Lichtman - Banc of America Securities

Okay, great. And then in terms of the couple of acquisitions you made in MedSurg to turn a consistent level of consciousness, I mean would you characterize those as single opportunities and will they begin to contribute next year, just trying to get a scale for those acquisitions?

Steve MacMillan

Yes, they are again singles and I think the tourniquet probably be a little bit more meaningful next year than necessary level of consciousness. I think we think the level of consciousness monitor will be a slightly longer ramp, but I think it's those kind of things that probably allows us to have our instruments business growing a couple of points faster than the market, and again probably get us into that mid-teens range instead of call it 8 to 12ish or whatever that the market might be growing.

Steven Lichtman - Banc of America Securities

Okay, great. And then last one Dean on the tax rate, is this a good tax rate to use for the fourth quarter, do we see a still downward bias maybe into next year?

Dean Bergy

I think we would see downward bias for the longer term, but probably it is fair to say at this point in time in the year, the rate will be very close to where it is year-to-date at 28.1.

Steven Lichtman - Banc of America Securities

Fair enough. Thanks guys.

Dean Bergy

Great, thanks Steve.

Operator

Our final question comes from the line of Larry Keusch representing Goldman Sachs. Please proceed.

Larry Keusch - Goldman Sachs

Hey guys.

Steve MacMillan

Hi, Larry.

Larry Keusch - Goldman Sachs

Just want to ask one sort of big picture question, and this is sort of thinking over the next several years. This industry obviously has been characterized a lot a by service levels among sales organizations and close ties to physicians and who's going to get up in the middle of the night to deliver the product et cetera.

But I want to explore a little bit about how you guys are thinking about the importance of innovation. And what makes this challenging is obviously the long timelines that physicians major outcomes in this space, I am talking primary large joint Recon.

So maybe you could just talk a little bit about how important innovation in that space is going to be over the next several years, and just an update on how you are thinking about whether we are going to revisit types of cost reduction modalities, maybe not gain sharing specifically, but where is that ultimately going to, to go to that resurface as well?

Steve MacMillan

Sure Larry, I think we continue to see the service component as a very important part of this business and really ultimately, we think the key to success is a combination of clinically relevant innovation and great service levels.

There will be innovations and as you know with us, we are not always going to be first with the innovations and orthopaedic surgery, particularly total joints are very successful. So, we are trying to do is to be careful that anything we bring really is enhancing the surgical experience and the patient experience.

But I think there will continue to be opportunity for additional innovation as we get better design, better materials. But there is also going to be candidly probably some marketing stuff out there and, we probably won't be on the leading edge of that kind of stuff. But again, its going to be a combination of both service and innovation and we think we’re pretty well poised to cross all of our businesses to deliver against that model.

Regarding pricing, we just assume its going to be long-term pricing pressure. The unit growth is going to be there. There will be pricing pressures, certain meaningful innovations. We will probably continue to be able to garner mix upgrades and some of that.

Larry Keusch - Goldman Sachs

Okay. That’s terrific. Thanks very much guys.

Steve MacMillan

Great, thanks Larry. And I think that wrapped it up there for questions, Katrina?

Operator

Yes, sir.

Steve MacMillan

All right, we will just make a couple of final comments. Our conference call for our fourth quarter 2007 operating results will be held on January 23rd, 2008. And at that point, we will discuss our outlook for 2008 sales and earnings.

We also wanted to make you aware that we are planning a change of timing and venue for our annual analyst meeting, which is traditionally being held in conjunction with the American Academy of Orthopaedic Surgeons meeting. We now plan to hold our 2008 analyst meeting on May 8, in New York City, and hope that you will be able to join us at that time.

And again, we feel good about where we are and we are very, very focused on delivering a solid fourth quarter and wrapping up the year and moving into 2008. So, thanks everyone.

Operator

Ladies and Gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Stryker Corporation Q3 2007 Earnings Call Transcript
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