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Stryker Corporation (NYSE:SYK)

Q4 FY07 Earnings Call

January 23, 2007, 4:30 PM ET

Executives

Stephen P. MacMillan - President and CEO

Dean H. Bergy - VP and CFO

Analysts

Robert Hopkins - Lehman Brothers

Bruce Nudell - UBS

Tao Levy - Deutsche Bank

Jason Wittes - Leerink Swann

Mark Mullikin - Piper Jaffray

Michael Jungling - Merrill Lynch

Kristen Stewart - Credit Suisse

Lawrence Keusch - Goldman Sachs

Michael Matson - Wachovia

Doug Schenkel - Cowen and Company

Michael Weinstein - JP Morgan

Matt Miksic - Morgan Stanley

Steven Lichtman - Banc of America Securities

William Plovanic - Canaccord Adams

Ed Shenkan - Needham & Company

Jeff Johnson - Robert W. Baird

Joanne Wuensch - BMO Capital Markets

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Stryker Earnings Conference Call. My name is Michele and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions]

Before we begin, the company has asked me to read the following statement. Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon 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 factors that may be discussed in this call, such factors include but are not limited to pricing pressures generally, 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 otherwise that affect the United States Food and Drug Administration approval of new products; changes in reimbursement levels from third-party payors; a significant increase in product liability claims; changes in economic conditions that adversely affect the level of demand for the company's products; changes in foreign exchange markets; changes in financial markets; and changes in the competitive environment. Additional information concerning these and other factors are contained in the company's filings with the Securities and Exchange Commission, including the company's Annual Report 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 continuing operations for the comparative years ended December 31st, 2007 and 2006. Further discussions of this non-GAAP financial measures, including a GAAP reconciliation appears in the company's Form 8-K filed today with the Securities and Exchange Commission, which may be accessed from the For Investors page on the company's website at www.stryker.com.

And I would now turn the presentation over to your host for today Mr. Stephen MacMillan.

Stephen P. MacMillan - President and Chief Executive Officer

Good afternoon everyone. Welcome to Stryker's fourth 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.

At this time last year, we established three broad goals for 2007. One, deliver double-digit sales growth for the seventh consecutive year; two, deliver 20% EPS growth; and three, focus on executional excellence. Strong fourth quarter results allowed us to wrap up a great 2007 and achieve the three goals we had established. Net sales in the quarter of $1.66 billion were up 18.4% and up 14.4% operationally in the quarter despite some hefty comparables in last year's fourth quarter. For the year, total sales just reached $6.0 billion, up a strong 16.6% from last year and above our own expectations. While currency did contribute 2.6 points to our total growth for the year, we were very pleased to reach the $6 billion in revenue, especially when considering that we divested our PT business during the year.

Among the highlights of the quarter were, one, our US Spine business managed to exceed 30% growth for the third consecutive quarter. This is obviously above our long-term expected growth rate for this business, but we will take it. For the year, our US Spine business was up a very strong 29%.

For the first time in many years, our seven largest franchises with some help from currency reported double digit sales growth in the quarter with five of seven at 20% or greater. On an operational basis, six of the seven achieved double-digit sales growth.

For the first time since the third quarter of 2004, every key franchise achieved double-digit sales growth in the US in the quarter. And yes, that means that our hip franchise achieved US growth of 10% for the first time in the last 13 quarters continuing the upward trend that it developed over the year and helped somewhat by the early stages of our hip resurfacing rollout.

With some unusually large orders in a quarter, our US Medical business was very busy, posting outstanding 26% growth in the quarter and up 18% for the year. And finally our international MedSurg businesses also continued the successful run started in the last couple of years. Outside of the US and Canada, these businesses grew over 20% operationally in the quarter and over 30% as reported. Our ramped up efforts outside the US should continue to play a role in sustaining the MedSurg growth in the quarters ahead.

For the year, we are also pleased to report that every one of our implant franchises, Hips, Knees, Trauma, Spine, and CMF along with our two largest MedSurg franchises, Endoscopy and Instruments, all grew faster in 2007 than in 2006. Overall, we feel very good about the fundamentals and trajectory of our business.

We also improved our gross margins modestly showing improvement for the sixth consecutive year. We continue to invest strongly in our future via a 16% increase in R&D and our cash position strengthened considerably during the year, up by $1 billion to $2.4 billion at year end. We continue to be patient with our cash while keeping our eyes open, a position we know has been appreciated by many of our major shareholders.

Amidst much good news in the quarter and year, we are far from perfect and have disappointments and concerns to discuss as well. By now, most of you have had a chance to review our statement regarding the FDA warning letter related to our Mahwah, New Jersey manufacturing facility and the manufacturing issue associated with certain of our Trident Acetabular Cups. So, we would like to emphasize a couple of key points surrounding these matters.

First and foremost, we don't believe there is any clinical evidence to indicate that reconstructive products mentioned in the warning letters or the Trident Cups present a safety issue to patients. We've responded in writing to all of the matters raised by the FDA in both the Mahwah letter and the previous letter received for our Cork, Ireland facility. In both cases, a satisfactory reinspection of the facilities will be necessary including the warning letters and that it is not clear when such inspections may be initiated by the FDA. We take these warning letters very seriously and simply put we have work to do to get our quality and compliance systems where the FDA and ourselves would like them to be.

Another disappointment in the quarter was a delay in the launch of our Sightline flexible endoscopy product following customer preference trials, which highlighted key opportunities to improve the product prior to launch. At this time we anticipate a launch in late 2008. Despite these matters, the quarter represented a great end to a very nice year and we are now keenly focused on delivering strong results in 2008.

As many of you also know, we made a strategic decision a few years ago to ramp up our R&D efforts. And we feel we are now seeing the beginnings of the additional efforts, showing up in our sales results in the last couple of quarters. While there is no grand slam driving the results, a number of singles and doubles have contributed to accelerating growth rates in a number of our businesses over the past few quarters. While Hip Resurfacing is the most visible of these, our other businesses are also benefiting from enhanced new product offerings. And we are also just now in the early stages of launching two additions to our trough [ph] online, a revision option and a partial knee resurfacing offering.

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

Dean H. Bergy - Vice President and Chief Financial Officer

Thanks, Steve. I will begin with the impact of foreign currency on sales. Foreign currency was highly favorable this quarter. The weakening of US dollar added $56 million to international sales and increased the company's overall sales growth by 4%.

In the fourth quarter, the dollar weakened approximately 12% against the euro and about 4% against the yen compared to the prior year. If currency rates hold near current levels, we expect the impact of foreign currency will increase first quarter 2008 sales by about 2.5% to 3% when compared to the prior year.

Now turning to price volume analysis, really here we just have two impacts in the quarter, foreign currency as I said added 4 points and the rest of the growth, 14% came from volume and mix. Selling prices were basically flat in the quarter. Domestic prices were up slightly, but this was mostly offset by a modest reduction in overall international prices attributable to Japanese price declines. Japanese pricing was off 6% in the quarter as a result of the January 1st and April 1st 2007 MHLW reimbursement cuts.

Volume mix growth was 14% in the fourth quarter, domestic volume mix matched the third quarter at 17% and the international volume mix growth came in at 9% for the fourth quarter.

Now, I will turn to our businesses, orthopedic implants represent 60% of sales and sales of orthopedic implants increased 17% in the fourth quarter on a reported basis and 12% operationally. Sales growth rates by product line are included in our press release and I will reference those rates as I provide more detail on our performance niche products category. So, starting with Hips, Hips were up 13% in dollars and 8% in constant currency in the fourth quarter. Operational growth in Hips reached its highest level since the third quarter of 2004. In the US, we were please to record double-digit Hip growth. Domestic sales were lead by X3 polyethylene inserts, Accolade Cemented Hips and Restoration Modular Revision hip products. We continued our education program related to the Cormet Hip Resurfacing products during the quarter and a modest portion of the sales increase was due to incremental sales of this product.

European Hip sales grew up more double-digit rates in local currency with Trident, X3 polyethylene, Accolade and Exeter products leading the way.

In Japan constant currency Hip sales registered a slight decline in the quarter. Mid single digit volume gains were more than offset by price reductions. Our Secur-Fit Hip had a strong quarter partially offset by a decline in sales of bipolar products. Operational hip growth in the remaining international markets came in at mid-to-high single digit levels with Latin America posting the strongest growth.

Now turning to Knees, our overall Knee business had another strong quarter up 15% in dollars and 11% in local currency. US knee sales registered their 31st consecutive quarter of double-digit growth matching last quarter's 14% growth rate. Primary Knees posted mid teen sales growth and the Revision category grew up low double-digit levels. Primary growth was lead by Triathlon and X3 poly inserts and Revision growth was also paced by Triathlon.

European local currency knee sales grew at low double digits in the quarter with Triathlon continuing to break out and Scorpio remaining solid. In Japan, knee sales growth was extremely strong reaching high teens operational levels this quarter. The Scorpio energy product lines served as the growth driver here. The remaining international markets posted low single-digit constant currency knee growth led by Canada.

Now turning to our Trauma business, that was up 21% in dollars and 14% on an operational basis in this quarter. Our Trauma business had a very good quarter with the US continuing to lead the way. US Trauma sales grew 24% in the fourth quarter, 25% if military sales are excluded.

The domestic business now has eight consecutive quarters with growth in excess of 20%.

All product categories exhibited strong growth with Gamma3 Hip Fracture Devices, T2 intramedullary nails and VariAx Distal Radius again leading the path from a product standpoint.

International Trauma sales continued to be negatively impacted by MHLW price reduction in Japan, it still managed to grow 8% operationally. Europe grew its Trauma business in low teens constant currency rates and growth in both Canada and Latin America was extremely strong on lower basis.

In Japan, local currency sales declined at mid-single digit levels as the mid-teens price decreased more than offset Japan's volume growth.

And now turning to our Spine business, they were up 27% in dollars and 24% operationally in the quarter and had another great quarter with the US continuing to post exceptional growth. Domestic Spine sales came in with 32% growth, their fifth straight quarter over 20%. Interbody spacers led our US Spine growth, but growth was also extremely strong in the thoracolumbar and cervical categories.

International Spine sales growth was 8% in constant currency with cervical the fastest growing category. Pacific, Canada and Latin America all registered double-digit operational growth, while Japan and Europe grew... both grew at slower rates in the quarter.

And now last, but not least within our Implant businesses, our CMF business was up 10% in dollars and 6% in local currency in the quarter. Our CMF business continued its strong growth trend domestically, sales outside the US were very soft with the primary reason being a distribution reorganization in one market. US sales growth was led by our HydroSet injectable bone substitute line with neuro products, while sales of maxillofacial products were very solid.

And now turning to our MedSurg Group, our MedSurg Group had an excellent quarter. All three products franchises registered nice growth with medical and our international instruments and endoscopy businesses particular standouts this quarter. MedSurg is comprised of three significant product categories. Instruments represents 17% of total company sales; Endoscopy 14%; and Medical, 9% to make up 40% of the total business that MedSurg makes up.

MedSurg Group sales were up 21% for the quarter in US dollars and 18% in constant currency. Although the growth contributions came from a slightly different mix, the overall growth was remarkably similar to our third quarter MedSurg results.

To go through the individual businesses, sales for our Instruments product line increased 21% in the fourth quarter as reported and we are up 17% in constant currency. Instruments had a nice quarter with extremely solid growth in the US and an excellent performance in overseas markets. Domestic sales were led by sales of our System 6 heavy duty power tools and accessories as well as Neptune Waste Management and Steri-Shield products. Navigation sales were softer on the heels of an exceptionally strong third quarter. International sales of Instruments products were up 23% operationally with growth overseas led by heavy duty and micro power tools as well as interventional pain products. On a geographic basis, Europe, Pacific and Japan all exceeded 20% constant currency growth.

Now turning to Endoscopy, that business was up 20% in the quarter as reported and 17% in constant currency and Endoscopy had a very good quarter in the phase of difficult comparables. As a reminder, our Endoscopy business grew 26% domestically and 30% operationally outside the US in last year's fourth quarter. This year's 17% US sales growth was led by strong sales of i-Suites and general surgery products.

International sales registered 15% operational growth in Europe, Pacific and Japan all over 20% constant currency growth.

And then turning to Medical, our Medical business was up 24% in the quarter as reported and 22% in local currency. Medical had its best quarter of the year with US sales up well over 20% and in international sales growth also reaching double digits with a healthy currency tailwind.

We did benefit from some larger than anticipated orders, which came [inaudible] and we were also required to be shipped in the quarter to meet customer needs. Still the 26% growth in the US was impressive and was led by exceptionally strong bed sales with stretcher sales also extremely strong in the quarter. International sales in Medical products were strong in Latin America, Pacific and Europe.

Now I'll provide some comments around the rest of the income statement. Gross margins in the quarter were up 10 basis points compared to last year when we finished the year with a 30 basis point improvement. This marks our sixth consecutive year of gross margin improvement. Spending on research and development was up 12% in the quarter and grew at a healthy 16% rates for the year. Our divisions continue to have a very full plate when it comes to R&D and the spending growth is spread relatively consistently across our various businesses.

As we've said previously, we would expect the rates spending on R&D to stabilize or slow down slightly in 2008. SG&A cost increased by 20% in the quarter and were paced by increases in cost associated with compliance activities and growth in sales related costs. Selling costs include compensation and higher instrumentation, amortization costs, which were helping to drive our top line growth. Operating income increased 19% in the fourth quarter and operating margins increased to 21.9% of sales.

Now for a quick break down of other income and expense for the quarter, that $21.1 million of [inaudible] price of $26.2 million of investment income, $5.4 million of interest expense and a small foreign currency transaction gain of $300,000. The company's effective income tax rates were 28.1% and 28.0% for the fourth quarter and year ended December 31, 2007 respectively. The rate for the 2007 year is impacted by higher than average rate out of tax benefits associated with the patent impairment charge reported in the second quarter. These rates are similar to those for 2006. As we look to the current year, we believe we will be able to get the effective rate moving downward again likely by as much as 50 basis points.

Now just turning quickly to the balance sheet, it finished December in excellent shape. Accounts receivable days and the year at 56 days, down three days in the quarter and in line with the prior year. Inventory days finished the year at 137 days. This betters our 2006 year-end performance by one day and the 18-day decline during the quarter reflects a strong fourth quarter surgery schedule and our normal second half slowdown and flat production levels.

And then just a quick note, we did finish the year with a minimal amount of $17 million of debt outstanding. And I'll complete my prepared remarks with some quick comments on cash. Cash flow was strong throughout 2007 and we had a great year generating just over $1 billion in cash from operations, a 19% increased from 2006. Free cash flow increased 28% from $658 million to $841 million this year and we ended the year with over $2.4 billion in cash and investments.

With that, I'll turn it back over to Steve.

Stephen P. MacMillan - President and Chief Executive Officer

Thanks Dean. And I'll touch on our 2008 outlook. We obviously built a great deal of momentum through 2007 across most of our businesses, and therefore we feel very good about our prospects for 2008. While we've work to do on the quality and compliance front, the underlying fundamentals of our businesses are very good.

We were pleased to deliver on our commitments in 2007, and are now clearly focused on 2008. So, what should you expect from us this year. You'll see our goals bear a striking resemblance to 2007 and are as follows.

One, deliver what will now be an eighth consecutive year of double-digit sales growth. Two, and this one is new, invest in and enhance our quality and compliance systems. Three, despite these investments, deliver 20% EPS growth to $2.88 per share. And four continue to focus on executional excellence while also prudently assessing acquisition ideas.

These goals are simple to articulate, but tough to achieve. But with new products coming on both our hip and knee lines via Hip Resurfacing and two new Triathlon launches combined with great product flow and strong execution across the rest of our businesses, we feel we're poised for another strong year and have the strength to face the various challenges which invariably pop up each year.

To quote one of our own senior leaders, Si Johnson, who many of you know, heads up our MedSurg businesses, " We like our chances."

With that, we'll now open it up for questions. And we would like to remind everyone that we will take one question from each person and allow one follow up. So, with that Michelle we will open it up for questions.

Question and Answer

Operator

[Operator Instructions]. And your first question comes from the line of Bob Hopkins of Lehman Brothers. Please proceed.

Robert Hopkins - Lehman Brothers

Hi, thanks and good afternoon.

Stephen P. MacMillan - President and Chief Executive Officer

Hi Bob.

Robert Hopkins - Lehman Brothers

Two questions relating to the warning letters and quality control issues, first for Dean and then for Steve. Dean, I was wondering if you could tell us how much you spent in the fourth quarter to address the FDA concerns and how much you plan on spending in 2008 to address those concerns?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, Bob I guess a couple of comments. One, we've been saying for a while with the first warning letter that we had talked about previously that we were going to be increasing our spending in this compliance area. I don't have the exact figure. But I think the way to think about it is the impact that it is going to have on our gross margins, we've been saying that we've had great expansions of gross margins over the years, the last six years we've had expansion. I think you will just… you will see that start to slow down a little bit this year and I would look for gross margins to be up marginally. On the other hand, as you know we've got room in the SG&A line. And the compliance spending that I referenced in SG&A that increased the spending in this quarter was primarily related to spending in relation to the monitoring of legal cost associated with the Department of Justice investigation as well as compliance study that we've been doing in the FCPA area, two other matters that you are aware of.

Robert Hopkins - Lehman Brothers

Okay, so when I was kind of doing the math there, I figured on this issue of improving quality controls, it was somewhere in the ball park of $10 million to $20 million annually, is that roughly right or am I way off there?

Dean H. Bergy - Vice President and Chief Financial Officer

I probably wouldn't necessarily quibble with something in that range. Again I think you will see it in the margin line, but we were prepared for that and what we are going to spend, I don't think is outside of our expectations.

Robert Hopkins - Lehman Brothers

Okay and then for Steve, I have to admit when you read through these warning letters, it's… I have to keep reminding myself that I'm reading about Stryker here, because it feels like I'm reading about one of your lesser quality competitors potentially and obviously Stryker has a wonderful reputation and you personally have a wonderful reputation, well deserved over the last couple years of performance. So in light of all that, I guess I'd ask, how confident are you that these manufacturing issues and these quality control issues have been adequately addressed to the degree that will satisfy the FDA and we don't have to worry about recalls going forward?

Stephen P. MacMillan - President and Chief Executive Officer

Sure, thanks Bob. Obviously, we take this as a business seriously and I take it personally very seriously. As you know, we've worked hard and I appreciate your comments on our own credibility and on our own reputations, and this is a really frustrating one and a disappointing one. I'd say, again say you don't get two warning letters in nine months and feel very good. What I think you should take away is we are taking this very, very seriously. I have personally dug in very deeply to an incredible amount, I can't tell you we've got everything resolved yet to where I'd like to be. We have some work to do frankly in terms of statistical process controls and even our own campus and this and that, but overall I feel very good that our organization has rallied behind this, just like when we get serious about anything, and obviously the language in that warning letter hurts. We could argue or quibble about it, but at the end of day, we got to understand the FDA is a critical customer of ours, and we got to raise our game and you got our commitment that we are incredibly focused here. I would even go one step further and tell you that we have taken every senior executive’s bonuses with the company in 2008 and put 25% of their bonuses length to getting resolution and moving ourselves to not just good enough, but frankly being world class in this area. And that is going to be for all the senior execs of the company as well as all division presidents. So, we are putting our money where our mouth is, we know that's how we motivate folks. We are going to move beyond this. I can tell you that we are not going to be through a little bit more. I don't anticipate any recalls or things on the horizon. I think we feel pretty good that we are already back in production, we have validated the lines. But as you also know the FDA and frankly regulatory bodies around the world continue to raise the bar I think a little bit as well and we got to be there. But we are incredibly focused, and when we focus on stuff, I think you know we tend to come through.

Robert Hopkins - Lehman Brothers

In the plant inspection, you really have no idea when this may happen, is it more likely to be first half of '08 event or second half?

Stephen P. MacMillan - President and Chief Executive Officer

I think we would hope the CORE would be first half, because that was clearly ahead of the Mawa one, and we are still... a lot of it depends on the scheduling. I think we'd like to get them in sooner rather than later. I think we feel pretty good that we have remediated most of the stuff in CORE and we would be ready. Mahwah think we are just finalizing, and while we [inaudible] I think we are hoping that that will be soon, but those typically seem to need to take months to get scheduled.

Robert Hopkins - Lehman Brothers

Okay, thanks, I will get back in queue.

Stephen P. MacMillan - President and Chief Executive Officer

Great, thanks Bob.

Operator

Once again, please limit yourself to one question and one follow-up. And your next question comes from the line of Bruce Nudell of UBS. Please proceed.

Bruce Nudell - UBS

Thanks for taking the call. Steve, when you look out at '08, you kind of have an 11% or 13% operational growth. What's the relevant growth rate of MedSurg and Orthopedic Implants in your planning?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, probably fairly similar to this, I think the way I think about it on a high level, Bruce. We will probably see an acceleration of Hips. Knees will hopefully stay about the same. Spine and trauma, just because it is growing against incredible comps now and two years running and 20% and 30% growth quarter. I think spine and trauma will probably slow down a little bit, but the uptick in Hips will offset it. With MedSurg, what you probably see is fairly similar growth rates, the international business is probably growing a little bit faster than the US. Medical might slow down a little bit, because we obviously had an unusual fourth quarter. But all in, I think we feel pretty good about those being mid teens growth businesses here in '08.

Bruce Nudell - UBS

And just the follow-up with regards to ceramic-on-ceramic, squeaking is not a new issue, I don't think, but what impact is there given whatever product availability you have or have had on US availability and O/US availability today and will that resolve over the next weeks or months?

Stephen P. MacMillan - President and Chief Executive Officer

Our availability really is resolving itself over... I think about it in terms of weeks not months and we are already back in production as we mentioned plus the Mahwah facility was not affected. So, some overall minor little hiccups here and there, but nothing that we think is meaningful.

Bruce Nudell - UBS

So, if the US surgeon wants product, he could get it?

Stephen P. MacMillan - President and Chief Executive Officer

They should be able to get just about what they need.

Bruce Nudell - UBS

Thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Great.

Dean H. Bergy - Vice President and Chief Financial Officer

Thanks Bruce. All right, next.

Operator

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

Tao Levy – Deutsche Bank

Hi. Is it possible to quantify the benefit that you saw in the hip resurfacing and maybe given that early launch and experience, your general thoughts of where that market could go in 2008?

Stephen P. MacMillan - President and Chief Executive Officer

Sure. It was really quite a small tale in the quarter, not even... I call it almost de minimus. We're just getting rolling. Dean and I were taking earlier… I think as we look at our product launches, we think we will probably more like a locomotive, it takes a little longer to get going and once we get going, really starts to roll. So, I think the positive of that is we clearly feel like we're just starting to get into that and it ought to be a big driver here in '08, but clearly did not contribute much at all in '07 and it will still be building through this year. I think back at Triathlon, which took us few more quarters to get going and I think there were a lot questions of whether Triathlon was going to make it or not. It just again... it seems like most of our launches were slow, but as we get there, we really deliver. So, I think that's the mode we're in on resurfacing.

Tao Levy – Deutsche Bank

Do you think it ends up making 10%, 15% of your [inaudible] volume this year. Is that --?

Stephen P. MacMillan - President and Chief Executive Officer

I don't think we see anyone near that. I think we have always assumed that the total market might end up being around 10%, when we use the international markets as a surrogate and we're still gong to be building over the course of this year. So, for our own planning purposes, we still have it very much in the single digit... single digit range in terms of our total hip portfolio for the year.

Tao Levy – Deutsche Bank

Okay. And then my last question. On biologics, I was just wondering any update there and obviously maybe not on... necessarily on OP-1, but your share, your general thoughts on biologics within orthopedics, trauma, spine. I know you were very bullish in that area a couple of years ago, just maybe your general thoughts, thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. Thanks Tao. We continue to think the biologics... this could be a lot of growth in the biologics area. We continue to have our own bed place with OP-1. Obviously it is one of the big areas and then working on some other smaller things, and as we said with OP-1, kind of got back to the drawing board. We are doing some work quietly, and given our track record being not fully delivering there, we've kind of gone quite on that and just continue to say, take it out of your models, but we are continuing to spend and work on it. Thank you. Great. Next question.

Operator

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

Jason Wittes - Leerink Swann

Hello, sorry. Hi, thanks. Couple of questions. First off, in terms of your hip and knee business, you are going a little bit above the market, and do you sense that you are starting to gain some market share there or could you give us a little bit of sense of what the dynamics might be?

Stephen P. MacMillan - President and Chief Executive Officer

In hips Jason did you say?

Jason Wittes - Leerink Swann

Well, I look at both hips and knees, but really have you seen the acceleration? I know part of that is with resurfacing, but also do you sense that you are gaining traction at new accounts, things like that?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, I think we have continued to feel that Triathlon has been gaining new accounts as we track it. Triathlon, really over the last number of quarters kind of gradually keeps grabbing new customers. On hips I can't say where they are yet, got some work to do, but... and I think even frankly looking at a couple of the competitors who reported, it looks like the hip market is pretty robust this quarter. So, I think we are a long way from saying that we are taking any market share there.

Jason Wittes - Leerink Swann

Okay. Well I guess what I was getting at is there are times when within the ortho market, there is a weak player that starts eating share and sort of fueling everybody, I think J&J was doing that a few years ago. Do you sense that situation emerging now with some of your competitors?

Stephen P. MacMillan - President and Chief Executive Officer

Truthfully not much, no. You know it might be, but I don't think we are seeing… I think we are seeing more of that in spine and trauma frankly than in recon.

Jason Wittes - Leerink Swann

Okay.

Dean H. Bergy - Vice President and Chief Financial Officer

Maybe some of the other folks are getting and we are not, and then we will have to dial it up.

Jason Wittes - Leerink Swann

Fair enough. The other thing, part of the Cormet Hip Resurfacing product is that if you decide to balance and just put a regular hip in. Right now, that hip is not compatible with other Stryker products. Is that something that you look to fix as the year progresses?

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, whether that's [inaudible] fixed. It probably will not be fixed within the short-term. Just given that that was a source product. But we think we've got options in terms of obviously the rest of our hip line. So, you could still then cut in and go to more of the total hip while you are in there.

Jason Wittes - Leerink Swann

Did that require you to... the Cormet design to be compatible with Stryker design or are you just saying that you might be able to have a part that might fit with that if...

Dean H. Bergy - Vice President and Chief Financial Officer

We've parts that that could. It's all going to depend on how much... exactly what stage the surgeon discovers it in the process. But for the most part, you should be able to bail it and go to the Stryker hip.

Jason Wittes - Leerink Swann

I guess so, just around this form of questioning out... any changes probably won’t appear till maybe early next year at the earliest?

Dean H. Bergy - Vice President and Chief Financial Officer

At a very minimum in terms of direct compatibility.

Jason Wittes - Leerink Swann

Okay. And one last clarification question. It sounds like; your issues with Trident are pretty much fixed at this point. And I think you are saying at this point, you think within weeks you will have full supply not months, is that the right way to be thinking about it?

Dean H. Bergy - Vice President and Chief Financial Officer

Yes.

Jason Wittes - Leerink Swann

Okay. Thank you very much.

Dean H. Bergy - Vice President and Chief Financial Officer

Great. Thanks Jason.

Operator

Your next question comes from the line of [inaudible] of Bear Stearns. Please proceed.

Unidentified Analyst

Thank you. Just a couple of questions here.

Dean H. Bergy - Vice President and Chief Financial Officer

Sure.

Unidentified Analyst

First one, we've heard a lot of speculation that hospital spending for capital equipment has been slowing down or will be slowing down. We are just wondering if you could comment on how that... how you perceive that to be and if there is going to be any impact on the MedSurg business due to that?

Stephen P. MacMillan - President and Chief Executive Officer

Sure, we continue obviously with the credit meltdown of the last... the summer and everything else. We continue to try to stay close to it. Having said that, everything that we see in terms of hospital construction and plans on the books for the next few years continue to be very strong in terms of what we are seeing, and if you look at our medical business, certainly anything but that. Having... also as a reminder, a lot of our instruments business and even a good chunk of our endo business are disposable that are being used, that these are not big ticket items. Certainly the endo suites and major bed orders are, the other piece we'd say is as an offset is around the world. We also continue to see some very good… you know, a lot of the hospitals that were built back just post World War II being upgraded and certainly in the Far East, new hospitals being built. So, I think on a global basis, we continue to feel pretty good for at least the next few years. Dean, did you want to add something to that?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, yes just one other thing. I think we also continue to feel good about the fact that our products do contribute to efficiencies in the hospitals and also to potentially competitive advantage to the hospitals in terms of the equipment that they are bringing in, and I think we see that as one of the catalysts that keeps us on the top end of spending for hospitals in the MedSurg area.

Unidentified Analyst

Okay, great. And then just a follow-up would be just on the monitors that have been assigned via the Department of Justice investigation, can you just comment on the practices there? Has the monitor impacted the business at all and is the monitor looking at activities throughout the business very broad-based or particularly on Recon?

Dean H. Bergy - Vice President and Chief Financial Officer

I will say the monitors have impacted the business, and just resource wise asking tremendous numbers of questions requiring tremendous amounts of data and paperwork. I think we've probably all been surprised by the depth and magnitude candidly with which they are looking at right down to the exact days that each consultant would work over the course of the year well in advance and needs analysis. There has been a lot of work going into this and certainly contribute to both the cost, but it also candidly probably distracts a few of our people from being with customers to focusing inside. But again this is one of these things that have been thrown up taking all of our bag. We have all got our bag of rocks to deal with, we are working through it and figure that probably right now, we are probably in the biggest crunch periods as all the monitors have been adjusting to the feedback they've gotten from Chris Christie, the Assistant US Attorney in New Jersey and I think hopefully we will get a little bit here in the quarters ahead.

Stephen P. MacMillan - President and Chief Executive Officer

It is the recon business that is the focus of the work that's being done there.

Unidentified Analyst

Okay. Excellent, I really appreciate it. Thanks guys.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thanks.

Operator

Your next question comes from the line of Mark Mullikin of Piper Jaffray. Please proceed.

Stephen P. MacMillan - President and Chief Executive Officer

Hi Mark.

Mark Mullikin - Piper Jaffray

Good afternoon. Hi, how are you?

Stephen P. MacMillan - President and Chief Executive Officer

Great.

Mark Mullikin - Piper Jaffray

Good. Can you tell us what percentage of your mix in the fourth quarter of your Hip unit mix was Ceramic-on-Ceramic?

Stephen P. MacMillan - President and Chief Executive Officer

Ceramic-on-Ceramic, it's in the 10% to 15% range, which is where it spent for a couple of quarters now. It certainly has slipped down from where it was with X3 being... the uptake on X3 has been extremely strong.

Mark Mullikin - Piper Jaffray

Okay. And have any of your customers either surgeons or patients expressed concern about the most warning letter, I mean, are you getting feedback from your customer base, expressing concerns?

Stephen P. MacMillan - President and Chief Executive Officer

There was certainly a lot of media attention Mark as you know towards the end of last week. It's one reason we put out of our clarification press release yesterday, and I think that has really gone a long way to sort the things out, I think particularly being able to reassure patients and doctors on the safety side.

Mark Mullikin - Piper Jaffray

Don't you feel at this point like you won't lose accounts as a result of this?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, we feel pretty good about our ability there.

Dean H. Bergy - Vice President and Chief Financial Officer

The surgeons have been putting these things in for a long time. They know the clinical history, they know the track record, they know there has not been any safety issues, all of that. So, this is one where the surgeons can be your friends.

Mark Mullikin - Piper Jaffray

Okay. Thank you.

Stephen P. MacMillan - President and Chief Executive Officer

Great, thanks Mark.

Operator

And your next question comes from the line of Michael Jungling of Merrill Lynch. Please proceed.

Stephen P. MacMillan - President and Chief Executive Officer

Hi Michael.

Michael Jungling - Merrill Lynch

Him good afternoon everybody. I have two questions. The first can you comment on whether your excellent hip and knee growth rates in the fourth quarter of 2007 have been positively impacted by the recent DOJ settlement in which you probably got off the lighter. And secondly, on SG&A, SG&A to sales has been increasing materially in 2007 over 2006 with the benefit of faster constant currency sales growth in 2007. Should we expect further investments in 2008, i.e., SG&A to sales decline?

Dean H. Bergy - Vice President and Chief Financial Officer

Sure, I think on the first one Michael, we don't think there has been any appreciable share shifts based on the DOJ settlement. We are obviously pleased the way we came out of that, but I think it's very early to tell any thing. If you really think about the pragmatic reality of the monitors coming in, I think it’s frozen most of the surgeon relationships, because I don't think anybody is out there trying to throw things around, to woo other doctors around, when all of these agreements need to be wedded and looked at. So, I think our hip and knee growth is really down to the fact that we are getting resurfacing or we are getting a little bit of more momentum in our hip business and Triathlon continues to do really well. On the SG&A line, I think we would probably expect some modest leverage this year. Certainly the monitoring costs are turning out to be higher than we would expect and that's one of those costs that we will be absorbing this year that will probably inflate the SG&A above what it would have otherwise. But again I think we are able to deliver the 20% with that.

Stephen P. MacMillan - President and Chief Executive Officer

You know, just a point I would add, Michael, our instrumentation cost, which is a big portion of SG&A, we had had some pretty significant costs there with the Triathlon loss... launched a couple of years ago and now it was flatter in terms of the spending that we did there this year, and that will start to help us as the sales line goes up, because that will be better leveraged.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, as a reminder, we amortized those over a three-year window.

Michael Jungling - Merrill Lynch

And a quick follow-up question on the consultancy payments. Are you seeing internally that you have to withdraw several consultancy payments that were previously made?

Stephen P. MacMillan - President and Chief Executive Officer

That were previously made, no, not that I am aware of. Again, and I think we feel good about the ones. As you saw from the numbers, I think we probably had the fewest number of consultants on a per sales basis.

Michael Jungling - Merrill Lynch

Great. Thank you.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thanks, Michael.

Operator

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

Kristen Stewart - Credit Suisse

Hi. Good evening.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Kristen.

Kristen Stewart - Credit Suisse

I was wondering if you guys could expand a little bit more on the Sightline. It seems like you guys have delayed the launch, what specifically are you doing with that product and has anything changed your thoughts on potential market opportunities?

Dean H. Bergy - Vice President and Chief Financial Officer

Sure, I think we have two issues. One is we tend to be overly optimistic, I think at the divisional level in forecasting when we can get to market. As you know with Sightline, we are going to be going against a very formidable competitor. And what we've decided is we've got to make sure that because we are going into a new space for us, this product has to be world-beating to get into the market, not just good enough. And as we went through the customer preference trials, we saw some opportunities that the products could have worked if it was a line extension of an existing product probably we would have gone ahead, we would have considered going ahead with the launch, but at the end of the day, because we are growing up against a very formidable new competitor and a new space, we wanted to make sure we really have it nailed and therefore we are kind of pushing it back and saying, let's really make sure of it. We are still very excited about the space. We have a lot of very good feedback about the visualization and part of what we are going to bring to the party on this one, but still have some work to do.

Kristen Stewart - Credit Suisse

And Dean maybe just on the currency side, could you remind us how you have hedged and whether or not any of the currency fall through to bottom line?

Dean H. Bergy - Vice President and Chief Financial Officer

We have a lot of natural hedges in place, I would say based on where we manufacture, Kristen. So, we don't do any active hedging of the P&L. The only thing we hedge is the exchange risk that will naturally occur once our non-functional currency denominated obligation goes or goes onto our balance sheet. So, we will hedge from that point forward, but we don't do anything to actively manage the rust. And again because we manufacture in relationships outside the US that are pretty comparable to relationship of our sales, it tends to work out okay in terms of what happens on the bottom line. So, we will probably get a little bit of benefit when the dollar weakens it drops to the bottom line. But it is not so much that it is a real impactor.

Kristen Stewart - Credit Suisse

Okay. Thank you.

Stephen P. MacMillan - President and Chief Executive Officer

Thanks Kristen. Next.

Operator

Your next question comes from the line of Larry Keusch of Goldman Sachs. Please proceed.

Lawrence Keusch – Goldman Sachs

Hi. Good afternoon guys.

Stephen P. MacMillan - President and Chief Executive Officer

Hi Larry.

Lawrence Keusch – Goldman Sachs

Just a couple of questions. First Steve just a clarification, when you are talking about cups being available within weeks not months. I just wanted to make sure I understand that. Is that if a doc were to want to use a hemicup today that you are saying that's already available, are you really talking about there will be PSLs available for us and then hemi comes up over a period of time?

Stephen P. MacMillan - President and Chief Executive Officer

For the most part in the US, we've got supply on both of those right now, in every case it's not necessarily at every hospital that we need it, but we are literally… I'd say in the US, it's probably more matter of days, not even weeks.

Lawrence Keusch – Goldman Sachs

Okay super. And then just coming back to the warning letter and not to [inaudible] but you guys obviously are operating a very decentralized fashion, you have manufacturing all over the place, and I think if you sort of read the Cork and Mahwah warning letters, part of what I think was going on also was that they were suggesting that there was not consistency between a lot processes in the two facilities and that was a problem for them. So, what are the risks as you start to think even more broadly in some of the other areas that the FDA has really raised the bar and there really is more work to be done than just Mahwah and Cork.

Stephen P. MacMillan - President and Chief Executive Officer

Sure, clearly that is a key issue for us in terms of your doing different things in different places, and I think the probably differences between Mahwah and Cork price are some of the biggest, because it's one of the few facilities where we make the same products. For the most part, the rest of our plans are generally dedicated to certain product lines. So, I think we feel good, but again as we dig in what we are doing now with frankly these warning letters, and recent FDA inspections, anything we had is making sure that every plant around the world sees all the findings that have happened at the other plants, so that we can get much more control and centralization frankly or centralized control within our de-centralized environment. Probably more like we will run the financial organization where it's de-centralized, but there's a lot more centralized control.

Lawrence Keusch – Goldman Sachs

Okay. That's really, really helpful. And then just last one, just sort of so this is more as you look at in the future. You know, X3 and cross-fire have been such great products and you really are seeing particulate matter decreased with these types of bearing materials. What are your thoughts on potential revision surgeries overtime starting to be decreased because of the performance of these new materials?

Stephen P. MacMillan - President and Chief Executive Officer

We would expect in the long run that there would be fewer revisions from the standpoint of these products really should last longer. So, they would typically call 10 to 15 year lifespan, hopefully these things can start to last 20, 25 years or something like that. I think having said that, the growing population base, the younger people getting these… those will all feedback in on the backend. If you think about it in the old days, docs will wait until somebody was 65 or 70 to put them in. So, the amount of revisions you have will be pretty small in terms of people who are 80, in their late 70s getting revised. Now as you start getting more and more people in their 50s getting these things even if they last 25 years, if their life expectancy ends up being 90, we think there is still going to be a revision market out there. So, it will probably tweak down marginally over the long run, but we don't think that much.

Lawrence Keusch – Goldman Sachs

Okay, terrific. Thanks very much.

Stephen P. MacMillan - President and Chief Executive Officer

Thanks Lawrence.

Operator

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

Michael Matson - Wachovia

Hi, I think a lot of the questions on the recall and the warning letter have focused on the cost associated with. I guess addressing those problems with quality systems and actually handling the recall, but one thing that I have been wondering about just looking back at kind of what happened and not to suggest there is anything close to being as severe, but what happened with [inaudible] was that there were a lot of lawsuits that were filed and I believe there was a pretty class action lawsuit. I assume by your commentary around the safety of the products that you don't think this is a risk, but I just wanted to get your views on that specifically. Can we see lawsuits filed, I know there have been some law firms advertising fishing for patients?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, took them all of the 2.5 nano seconds I think to start posting it. We feel very good about the safety. This is a such a different issue as you know with the endotoxin issue and everything else that was involved there. We really... we had the experts and everybody look at this and that's obviously been the part that we feel very good about Michael.

Dean H. Bergy - Vice President and Chief Financial Officer

And I guess I would say in that regard, I mean these products have been in plants coming out of Cork for a long, long time, the revision rates are very much in light if not a little bit better than what you would see from competitive products.

Michael Matson - Wachovia

Okay and then I know MedSurg has been doing very well internationally, how much room is left for... to continue to drive growth there outside the US and is there any opportunity to increase the sales of the hospital beds and medical in Europe and other places? I think it's been pretty limited to just maybe Canada if I recall correctly?

Stephen P. MacMillan - President and Chief Executive Officer

Great observation Michael. It's good for us to remind them, but when we were talking about the international MedSurg growth, we've really been focused on endo and instruments. That's been our key thrust, and the key reason there has been profitability. You know Medical has been our lowest margin... lowest gross margin business and by the time you start shipping those things abroad, we haven't thought that as profitable. Now, to answer your question in both pieces, the first part, we think there is still tremendous runway even in endo and instruments. Outside the US, it's still… we are in the earlier stages and I think we see years ahead of us here in terms of very good growth rates being able to be achieved, and I would tell you we are starting as we have been making tremendous progress on the profitability and particularly the gross margin of our medical team. I am just so proud of what our medical team is doing. Their profitability is getting good enough that we may start to look and poke and see whether there are not some opportunistic areas. But we really have not gotten there yet. I wouldn't expect anything certainly, say in the course of this year much in terms of medical beyond for the most part North America.

Michael Matson - Wachovia

All right, and then just one fellow up on medical, the sales were really strong and you mentioned that there was sort of a large order in the quarter. Is that related to this rental contract that you have or is that... and just the accounting under the rental contract, are those going to be... is that going be on your books or will that be on UHS' books?

Stephen P. MacMillan - President and Chief Executive Officer

To answer your question, Mike, it is not related to the rental business and we will be carrying the inventory on our books.

Michael Matson - Wachovia

All right. That's helpful. Thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thanks Michael.

Operator

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

Doug Schenkel - Cowen and Company

How are you guys? This is Doug Schenkel from Cowen. Thanks for

taking my question.

Stephen P. MacMillan - President and Chief Executive Officer

Great.

Doug Schenkel - Cowen and Company

First off, one thing that many have been focused on in the wake of the warning letter and I apologize for going back to this once again, but in the wake of the disclosure, there is obviously a belief that, 510(NYSE:K) hurdles in general will arise for you. Can you speak to what experience you have had with the FDA thus far in the 510(K) front and detail any examples that would suggest this is not a valid concern?

Stephen P. MacMillan - President and Chief Executive Officer

We have not seen anything to that effect yet, Doug. We continue to get things cleared. We continue to have a lot of divisions that have very good track records here with the agency and we have not seen any slowdown. Can I promise that it wouldn't happen, no. But can we promise that we are showing the FDA we are as serious about trying to move beyond this as we are about anything. I can tell you it's my number one issue and concern right now. So, we don't see any real slowdown. I know there have been speculations. We certainly haven't seen it. We are launching two new Triathlon products, literally launched into our sales force last week.

Doug Schenkel - Cowen and Company

Great. That's helpful and just one follow-up, changing gears and shifting over to Hip Resurfacing. I know it's early, but in terms of where the low-hanging fruit is with that opportunity, is it really targeting surgeons who are already active in Hip Resurfacing or is that the real low-hanging fruit represented by surgeons who are yet to move over to Hip Resurfacing?

Stephen P. MacMillan - President and Chief Executive Officer

It's probably a little bit more the people who have already been doing it, and I'd say it's probably some Stryker-friendly surgeons who may have tried it. I think they are going to be our easiest pickings to kind of get back in the fold as it were and then going from there. It's going to continue to build in the US as people get trained, and as you know it's a much more complicated procedure and we think there will be some low-hanging fruit, but this is also going to be one that's going to build overtime.

Doug Schenkel - Cowen and Company

Great. Thanks for taking my questions.

Stephen P. MacMillan - President and Chief Executive Officer

Thank you Doug.

Operator

Your next question comes from the line of Mike Weinstein of JP Morgan. Please proceed.

Michael Weinstein - JP Morgan

Good afternoon.

Stephen P. MacMillan - President and Chief Executive Officer

Mike, you guys had a nice day in the stock market.

Michael Weinstein - JP Morgan

It's good to have one good day. A lot of ground was covered, it is only just a couple of follow-ups. I apologize if I missed this. Your operating commentary on Japan ahead of April and the way the stocks are [inaudible]?

Stephen P. MacMillan - President and Chief Executive Officer

No, we did not. All of our indications Mike are that this round of cuts will not be quite as bad as the last round. Trauma is probably still going to get hit more on the Orizon than necessarily FAT. But Recon appears from what we are hearing to be slightly better.

Michael Weinstein - JP Morgan

Okay. Then let me just switch. There were a couple of questions that were asked relative to the DPA and fall out and things like that. What reaction are you getting or picking up, if any, from hospital administrators to the settlement and disclosure about what some of the doctors have been receiving? Are you hearing anything beyond in surgeons, are you hearing anything from the hospitals, the administrators, how about... how they may be reacting?

Stephen P. MacMillan - President and Chief Executive Officer

We probably heard less than I might have expected at this stage. Will it still be there and will there be pricing pressures and this and that. I think we have all assumed that some of it will. But I do think there has been a ready acknowledgement that a lot of the payments have been royalty based that truly were earned by people helping to invent products that have gone on to become multi tens, if not 100 million in revenue and that kind of stuff. So, it's probably I think to this stage been slightly less than I would have expected. Dean, was that... you're kind of nodding along here.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, I would agree with that Steve. I think you know certainly there are packets of everything, but I think by and large as people have sorted through it, it's not what some people would have expected in terms of that reaction there.

Michael Weinstein - JP Morgan

Has Christie had his date yet with the sales force?

Stephen P. MacMillan - President and Chief Executive Officer

Sorry, what was that?

Michael Weinstein - JP Morgan

Has Christie had his date yet with the sale force?

Stephen P. MacMillan - President and Chief Executive Officer

Yes. Actually, he was with our team last week. And it actually was a pretty good session with our team.

Michael Weinstein - JP Morgan

What did he have to say, what was his reaction?

Stephen P. MacMillan - President and Chief Executive Officer

He is very clear that... he thinks there was a lot going on in this industry that he didn't like. I think with our team, he might have been a little more favorable because I think he appreciated the way we ran the operations. And he actually took questions from them and he also I think indicated that he is not done with this thing yet. It appears that some of the smaller companies are getting roped in and we are not sure about whether some doctors might get individual subpoenas, that we might have been reading something into that, but feeling that he is still looking and I think he wants a legacy of really feeling like he made an impact on this industry. And frankly I think we think in a long run, it's probably going to be a good thing.

Michael Weinstein - JP Morgan

This is been a recon investigation, recon issue. Do you get a sense from him that part of his expansion is outside of recon?

Stephen P. MacMillan - President and Chief Executive Officer

I have not gotten an impression at this point.

Operator

Your next question comes from the line of Mike Miksic of Morgan Stanley. Please proceed.

Stephen P. MacMillan - President and Chief Executive Officer

How are you Mike?

Matt Miksic - Morgan Stanley

Hi it's Matt. Hope it didn’t sound like an abrupt end. So, I feel like I should apologize for that. But first question I have is on medical. Striking right to the heart of the matter in beds. The... we've asked this question before, but I wanted to, particularly given the strength in Q4 you talked about sort of sustainable growth in the mid teens for medical, something like that, is that right?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, at least for the foreseeable future.

Matt Miksic – Morgan Stanley

I am just trying to understand, if you look at the spread between the upper single digit growth of that industry and what that mid teens number, 600 basis points. How much of that is price, how much of that is mix, how much of that is volume or call it unit share, maybe some color on what is driving that? I think it's one of the mysteries of Stryker, I would love to get a little additional color.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. We think there is clearly a volume component. If you look at the number of new contracts and everything else, we feel like we are doing pretty well in terms of growing faster than the market on a unit basis. There is also some mix coming with some of our new products. We come out with some of our beds, have a lot of software in them, are fairly high-tech and really helping the nursing staffs and helping hospitals to deal with staffing shortages by being what we call more smart bed and some of them with surfaces and other things. So, we're definitely still seeing some mix components there.

Matt Miksic – Morgan Stanley

Anything on price?

Stephen P. MacMillan - President and Chief Executive Officer

Not much.

Matt Miksic – Morgan Stanley

Does that go against you?

Dean H. Bergy - Vice President and Chief Financial Officer

It's more on the next slide.

Stephen P. MacMillan - President and Chief Executive Officer

A little bit of a negligible price increase, I'd say Matt.

Matt Miksic – Morgan Stanley

Okay. So, maybe 50% or more volume it sounds like of the spread.

Stephen P. MacMillan - President and Chief Executive Officer

Yes.

Matt Miksic – Morgan Stanley

Does that sound fair?

Stephen P. MacMillan - President and Chief Executive Officer

Yes.

Matt Miksic – Morgan Stanley

Okay and then also just wondering in the past, in Q3 you saw a very strong quarter, of course you saw a strong quarter in Q4. But I mean looking ahead to '08, is there a seasonality we should be aware of in this business?

Stephen P. MacMillan - President and Chief Executive Officer

In medical?

Matt Miksic – Morgan Stanley

Yes.

Stephen P. MacMillan - President and Chief Executive Officer

I think what we saw here in the fourth quarter was potentially a couple of customers that might have had some money that they want they... they needed to spend before year-end. It might have spiked a little bit. But I think we've seen that even historically. So, I am not sure it is...

Dean H. Bergy - Vice President and Chief Financial Officer

I wouldn’t say there is any seasonality in the medical business Matt. I mean certainly we see it in the implant businesses where there are a lot of surgeries in the summer in the third quarter and we've talked about that, but nothing in the... nothing really in the MedSurg businesses.

Stephen P. MacMillan - President and Chief Executive Officer

Matt, part of what you see is frankly our product launch cycle. In this particular year, we launched a product at mid-year meeting and particularly in the Crystal Care area, and that picked up in the third and fourth quarters.

Matt Miksic – Morgan Stanley

Okay. Anything that you mentioned is the sort of urgent orders. Does any of that come out of Q1 potentially? Should we look for sort of a reversal or just nothing like that?

Stephen P. MacMillan - President and Chief Executive Officer

We think... no we don't think it came out of Q1.

Matt Miksic – Morgan Stanley

Okay.

Stephen P. MacMillan - President and Chief Executive Officer

I feel very good about that. Whether we can jump over that by that magnitude next year in the fourth quarter is a separate issue. I would expect that fourth quarter of this year in '08 for Medical would probably be a softer relative quarter, but I think first quarter would be fine.

Matt Miksic – Morgan Stanley

Okay. And then just a couple of quick ones on the recalls also pretty well traffic question here. But you talked about supply being impacted maybe weeks not months, and also in the release, this non-material effect on results to earnings, say in the year. I mean fair to... is it the way we should read that in Q1 there could be some sort of fluctuation in hip revenues, but nothing that's really going to take you off your pace in earnings. Is that the right way to think about that?

Stephen P. MacMillan - President and Chief Executive Officer

I think that's a pretty good way.

Dean H. Bergy - Vice President and Chief Financial Officer

I think that's probably fair. And I think the way to really think about that is, we'll be fine for the year. First quarter might be a touch light, but nothing that is going to be dramatic. In that regard, I mean to remind you our guidance is for the year, not for quarters.

Matt Miksic – Morgan Stanley

Of course. And anything on the cost side we should look for in Q1 as you pull easy units back and replace them in the field?

Stephen P. MacMillan - President and Chief Executive Officer

I think probably nothing that we won't be able to absorb within our usual way of doing business.

Matt Miksic – Morgan Stanley

So, nothing visible or no charges or anything like that?

Dean H. Bergy - Vice President and Chief Financial Officer

We don't anticipate any special charges of any nature.

Matt Miksic – Morgan Stanley

Okay and then just looking forward the kinds of things, I know the serious issue you talked about a number of times in the Q&A and you are focused on it. What would be the next sort of thing that we can look for just to get some comfort that you are starting to turn the corner with the FDA?

Stephen P. MacMillan - President and Chief Executive Officer

I think ultimately it will be when we can get probably the Cork warning letter. If I were to say what are we thinking about in terms of wanting to show some progress and I think in order… probably that and then hopefully followed by Mahwah.

Matt Miksic – Morgan Stanley

And then any... I know you don't want to guess on timing, but that feels like something that you would hope to get done this year, right? Is it possible in the first half?

Stephen P. MacMillan - President and Chief Executive Officer

I think we would certainly hope to get it done this year. I think we will be striving for the first half Matt.

Matt Miksic – Morgan Stanley

Got it, and then last, just couldn't resist. You have changed your key objectives for the year to include, prudently consider acquisition opportunities. Can you help us think about where you like to invest, you talked before about sports medicine or about extremities maybe. Any sense of where you are looking to flush out the bag?

Stephen P. MacMillan - President and Chief Executive Officer

You know, we are continuing to look at a range of things, and I think what we started to say is we are not going to keep directed by… every time we say a particular category, we see certain company’s stock prices run up ridiculously. So, we have about seven different categories we are looking at and will be opportunistic as to which one, two or three we go into.

Matt Miksic – Morgan Stanley

And any limits or ranges on size that we can think about?

Stephen P. MacMillan - President and Chief Executive Officer

You heard me talk before we are still byte sized, don't expect a transformational deal.

Matt Miksic – Morgan Stanley

Got it, I will jump out and thanks again for taking all the questions.

Stephen P. MacMillan - President and Chief Executive Officer

Thanks Matt.

Operator

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

Steven Lichtman – Banc of America Securities

Thank you. Hi guys. Just want to touch base on knees on the new opportunities opening up here with Triathlon. When was the last time you guys launched a revision line in knees, and then also if you could just talk to about the ramp of the launch here in the coming quarters.

Stephen P. MacMillan - President and Chief Executive Officer

Good question. Last time we launched a revision system.

Dean H. Bergy - Vice President and Chief Financial Officer

We go back to Scorpio, but I can't tell you exactly when that was. It was in... It has been a long, long time.

Stephen P. MacMillan - President and Chief Executive Officer

It has been a while, and I think that will be a... that will be a slow ramp, again, I think what we will be doing, I think there is a lot of momentum obviously, but by the time we roll out sets and all of that stuff, I think this will be a gradual build through the year.

Steven Lichtman – Banc of America Securities

And then I guess a good problem to have within Recon, now you have two new product launches with these two in Triathlon and obviously with Cormet. Can you talk a little bit about the bandwidth of the sales force, where the focus will be and do you think you have enough heat on the street to handle new product launches on both sides?

Stephen P. MacMillan - President and Chief Executive Officer

We think we feel pretty good, Steve. It is a great question because of the question can you do both. History would suggest that the Recon, you see companies doing usually well in one side of the business or the other. We think because the Triathlon is extensions of something with a lot of momentum that they will be able to bring those in. The resurfacing, that's still taking a little more surgeon education, and that is a more complicated sale and still taking some time from the sales force. So, we are going to have to balance it and monitor it.

Steven Lichtman – Banc of America Securities

But from a sales force perspective, no major additions expected this year?

Stephen P. MacMillan - President and Chief Executive Officer

We think we are in pretty good shape, gradual expansions but nothing dramatic.

Steven Lichtman – Banc of America Securities

Okay. Great. That's all I have got. Thanks guys.

Stephen P. MacMillan - President and Chief Executive Officer

Thank you, Steve.

Operator

Your next question comes from the line of Bill Plovanic of Canaccord Adams. Please proceed.

William Plovanic - Canaccord Adams

Great. Thanks. Good evening.

Stephen P. MacMillan - President and Chief Executive Officer

Hi Bill.

William Plovanic - Canaccord Adams

I will keep it very short. Just in terms of Hip Resurfacing, do you think that opens up to new younger patients as kind of been talked about, or is it just really just replacing existing systems? And then just quantify, if you can, kind of when you expect full launch of that Cormet product, and than also kind of when you kind of have full launch of the Revision System for [inaudible]. That's it. Thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. I think we do see resurfacing opening up to younger patients in bringing people in that would not otherwise had total hip put in at this stage. What we are hearing a lot in terms of the profiling is, particularly males in their 40s and 50s, who are very active, who still have generally healthy bone stock, and once that might otherwise not have total hip. So, we think there will still be an incremental nature whether it is 50% incremental, 70% incremental, 30%, yes that we are not fully sure. But I would say we are probably assuming a good solid half of these might be incremental. And the ones... they are also generally the ones that do cannibalize, existing will be cannibalizing a high-end systems, because they will be the hard on hard where people are looking for long-term nature, given the age of the patients. Your second question, when will we be ready to roll out. I think in both cases, you probably ought to assume more the second half of the year. Just given our reference earlier to being slow starters and getting rolling, by the time the sets get out, everybody gets educated, the sales force gets confidence being able to really sell, I think Hip Resurfacing is probably a little bit faster, because we call it a quarter, maybe three or four months into that one. So, it is probably slightly ahead. But Triathlon will probably pick momentum up a little bit quicker. But I think really second half of the year before there was any meaningful impact.

William Plovanic - Canaccord Adams

Great. Thank you. That's all I have.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thank you, Bill.

Operator

Your next question comes form the line of Ed Shenkan of Needham & Company. Please proceed.

Ed Shenkan - Needham & Company

Thanks Steve. Just wanted to ask about the impact maybe on the knee business from the recall. Could you just remind us what is the sales force people and time divided by hips and knees?

Stephen P. MacMillan - President and Chief Executive Officer

I don't think that there could be any real... our sales people sell both. So, do they spend a little more time on knees, if there is a hip issue potentially, but frankly I think they have been doing a lot of surgeon handholding over the last week. So I don't think there is going to be a spike in our knee business.

Ed Shenkan - Needham & Company

So, would you... as far as the downsize goes, the guys are completely distracted with the hips, I just want to try to figure out how much impact on the knee?

Stephen P. MacMillan - President and Chief Executive Officer

They will still find a way to get the knees taken care of.

Ed Shenkan - Needham & Company

All right. Thank you.

Stephen P. MacMillan - President and Chief Executive Officer

Great.

Operator

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

Jeff Johnson - Robert W. Baird & Company, Inc

Good afternoon guys, thanks for taking my questions.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Jeff.

Jeff Johnson - Robert W. Baird & Company, Inc

Couple of things here. Just on the manufacturing side, it sounds like you guys are feeling the risk of further recalls, here it is somewhat limited, but where is your level of concern that recall on the Trident might have to happen for design issues, things like that? Whether it is the squeaking issue that obviously we all know about or the... maybe the impingement, ways you try to get around the impingement there with a [inaudible] or what have you?

Stephen P. MacMillan - President and Chief Executive Officer

Jeff, actually design issues are probably the last of our concerns. I think we feel good about the design.

Jeff Johnson - Robert W. Baird & Company, Inc

Okay. Great. And does it at all change your stance or is it just with the manufacturing concerns here on ceramic, all [inaudible] on metal and metal. Any thoughts on getting into that side of the hip business sooner rather than later?

Stephen P. MacMillan - President and Chief Executive Officer

You know, we kind of continue to monitor that, we don't have any immediate plans, and therefore I wouldn't assume anything certainly in the course of '08.

Jeff Johnson - Robert W. Baird & Company, Inc

Okay, and last quick question here and it's a minor point, but what is the approval status of Cormet in Japan, and then what would you do with the Birmingham system there, if you were to launch the Cormet product?

Stephen P. MacMillan - President and Chief Executive Officer

You know what, I'm not totally sure, I think we have to check into that.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, I don't know that I can answer that question off the top, Jeff.

Stephen P. MacMillan - President and Chief Executive Officer

We will have to look into that Jeff and get back to you.

Jeff Johnson - Robert W. Baird & Company, Inc

Not a major point, thanks guys, I appreciate it.

Operator

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

Stephen P. MacMillan - President and Chief Executive Officer

Hi Joanne.

Joanne Wuensch - BMO Capital Markets

Hi, it's Joanne Wuensch. Quickly, could you remind us what in 2008 you expect to receive FDA approval on?

Stephen P. MacMillan - President and Chief Executive Officer

In 2008, we've just got a number of five, ten cases across all of our product lines I would say. So, we've got stuff and as you know we do not talk about any of our advanced pipeline until they come.

Joanne Wuensch - BMO Capital Markets

Okay. Will we see them AAOS, do you think or you don't know?

Stephen P. MacMillan - President and Chief Executive Officer

You'll see typically… first half is a reminder, we're going to do our analyst meeting in May, this year as opposed to doing it at the academy, and I think though still our general approach will be as it's always been, which is we talk about new products that have been launched. I think as opposed to talking about the new things that we're working on, especially given things like Sightline and OP-1 that over the years we probably haven't been as good at predicting exactly, when the stuff is getting launched, but we'll continue our typical pattern.

Joanne Wuensch - BMO Capital Markets

Okay. And are you showing how many doctors you've trained on the Cormet Hip?

Stephen P. MacMillan - President and Chief Executive Officer

We have not done that historically, and I think frankly it just feels like people start to manipulate those numbers, and we are focused on developing the surgeons and building it from there, so we are not sharing that at this stage. Joanne, I'm sorry.

Joanne Wuensch - BMO Capital Markets

And then final question, I wanted to just clarify, you do not expect the warning letters to impact significantly your revenue or EPS in the first quarter?

Stephen P. MacMillan - President and Chief Executive Officer

Not significantly. We are still talking more yearly guidance, we don't give... as you know we don't give quarterly guidance, but again given the broad base of our total businesses, the broad base of our portfolio, the fact that Trident comes to less than 5% of our revenue, there should not be any major shock or big surprise to anything that you would expect from us in the quarter.

Joanne Wuensch - BMO Capital Markets

Okay. Thanks and have a good night.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thanks Joanne.

Operator

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

Kristen Stewart - Credit Suisse

Hi, just as a follow-up Dean, I just wanted to talk a little bit about the SG&A line. You mentioned obviously there is flexibility there. Where specifically do you see that, especially in light of some of the added cost related to one, the warning letters and then monitoring?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, again as you note Kris, that line has been an area of... a fair amount of investment for us over the years. Particularly the sales force, I've mentioned instrumentation cost previously. Those are probably the best near-term opportunities, but I can tell you the insurance market has softened over the years in this area. So, as we look at that, I would tell you that we would think that there is probably at least 50 to 60 basis points of maneuverability on that line that probably can pretty naturally occur.

Kristen Stewart - Credit Suisse

And I think earlier you had mentioned on the gross margin side, you expected some improvement?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, some. We would like to keep our track record alive, but again that's the area where I would caution you not to be overly aggressive in thinking about it. We will be trying to get some, but if it's 10 basis points, that maybe it for the year, but we would intend to see our leverage coming more from the tax rate and more from the SG&A line in 2008.

Kristen Stewart - Credit Suisse

And R&D, you are pretty reasonably comfortable with where is that now or do you really need to increase it or perhaps there is some room to move it down without sacrificing?

Dean H. Bergy - Vice President and Chief Financial Officer

As I said the pipelines are extremely slow, our teams are working hard. They saw sales go up and it is possible that percentage of sales actually comes down in 2008. But again I don't think that is at the expense of doing all the right things in terms of moving the pipelines forward.

Kristen Stewart - Credit Suisse

Thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thanks, Kristen.

Operator

Your next question is a follow-up from the line of Bruce Nudell. Please proceed.

Bruce Nudell - UBS

Yes, sorry to keep you. My question pertains to what are the initial Sightline products, the way they look like? Who is the major competitor in your view and what's the size of the flexible Endoscope market?

Stephen P. MacMillan - President and Chief Executive Officer

Sure, the initial product will be Colonoscope that we will be going really into the market where Olympus is the major player, and I think that market is certainly hundreds of millions of dollars depending on how you define it, probably in excess of $0.5 billion Bruce. So, that's kind of how we are thinking about that.

Bruce Nudell - UBS

And in terms of... is it more an easily sterlizable scope, is it more robust, thinner and is….

Stephen P. MacMillan - President and Chief Executive Officer

The goal will be that it's going to have a disposable sheath on it. So, it will not need to be sterilized the way that typical products do.

Bruce Nudell - UBS

And the user feedback pertained to that issue, to the sheath itself, was that the user feedback? There were some issues there.

Stephen P. MacMillan - President and Chief Executive Officer

You know I'm not going into the specifics of what the feedback was on.

Bruce Nudell - UBS

Okay. Thanks a lot.

Stephen P. MacMillan - President and Chief Executive Officer

Great. Thanks Bruce. I think is that it, Michelle?

Operator

Yes sir.

Stephen P. MacMillan - President and Chief Executive Officer

Great. All right. Well, with that I think we'll again thank everybody for your time tonight. And we just want to remind you that our first... the conference call for our first quarter 2008 operating results will be held on April 17th. So, make sure that April 17th, 2008. And again we wanted to remind you, I think we mentioned when Joanne was asking the question that our 2008 analyst meeting this year will be on May 8th in New York City rather than in conjunction with the AAOS meeting. We hope you'll be able to join us at that time for a thorough review of our businesses and we will once again have presentations from the leaders of the businesses at that time. So, thank you all very much and we are back focused on 2008.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a good day.

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