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Stryker Corporation (SYK)

September 06, 2012 9:00 am ET

Executives

Curt R. Hartman - Interim Chief Executive Officer, Chief Financial Officer and Vice President

Kevin A. Lobo - Group President of Orthopaedics

Timothy J. Scannell - Group President of MedSurg and Spine

Ramesh Subrahmanian - Group President of International

Lonny J. Carpenter - Group President of Global Quality & Operations

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

Analysts

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Michael Matson - Wells Fargo Securities, LLC, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

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

Bruce M. Nudell - Crédit Suisse AG, Research Division

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

David Keiser - Northcoast Research

Curt R. Hartman

Good morning, everybody, and welcome to Stryker's 2012 Analyst Day. And for those who were here last night at our product fair, we appreciate your attendance last evening. My name is Curt Hartman. I'm the interim CEO and Vice President and Chief Financial Officer, and I'll be your host today. You can see that I am joined by other members of the executive leadership team who I will introduce shortly. Before we begin, I'd like to just point out our forward-looking statement, which is available for further review at your leisure.

Our executive leadership team today, I thought I'd start here because it's a great place in terms of introducing you to the company and its leaders. You can see we have Steven Benscoter, our Vice President of Human Resources, with the company 17 years; Lonny Carpenter, well known within the company, 23 years; Curtis Hall, not present today, our Vice President and General Counsel, 18 years; myself, 22 years; Kevin Lobo, seated behind me to celebrate his one-year anniversary in May; Katherine Owen, many of you know, 5 years with the company; Tim Scannell, seated behind me, 22 years; and Ramesh Subrahmanian, just celebrating his one year this month.

In totality, there's over 100 years of Stryker experience. If you add up the broader med tech experience of the group, it's closer to 150 years. Reason I'd point that out, it is a seasoned med tech team, and I think that's very important in today's environment, that you understand the management and leadership style that this group brings to the table each and every day.

Our agenda today, you might get a little sick of me because you're going to see me 3 different times, I'm going to cover the overview and I'll drive right into the Neurovascular business because that business reports to me. Kevin will get up, and when Kevin get up here, he'll give a further introduction on his background and talk about our Orthopaedics business. Tim will speak on MedSurg and Spine. For those of you who've participated in the past years, you've heard Tim before and you know the credibility he brings to those businesses. This year, in a new format, we've asked Ramesh to speak on behalf of our International business. He's got one year under his belt evaluating and moving this business. We thought we'd take the opportunity to have him share some of his thoughts both where we are today and what we see in the future. Lonny Carpenter will then speak about our global quality and ops, progress and where we see ourselves going. Again, Lonny is past presenter at this session. I'll then wrap up with a financial overview. And in the interest of I'm sure everybody in the room, we have plenty of time for investor and analyst Q&A. In addition, for those who are here in Mahwah, we do have plant 2 rescheduled, and those we'll meet at the end of the session at the bottom of the stairs.

So diving right into our agenda today and what we hope to accomplish. Number one, give you an overview. We would like you to leave here understanding the diversity of our sales footprint. Give you an update, which we do every year, on innovation, new products that have been introduced to the market, the launches and where we see them and where we see them taking us. And that will come from our commercial leaders. As I mentioned earlier, Ramesh will speak about international, driving improvements in developed markets, places like Europe, and how we're going to expand in the emerging markets. Analysis of key market dynamics and the outlook for Stryker, trends, challenges and opportunities. At the end of each section, we will have a slide that covers those. A review of our capital allocation strategy, which I know is on the minds of many analysts and investors. And then we're going to touch briefly on 2012 and 2013. I know there's a lot of thoughts right now on 2013, and we'd like to try to provide a little more clarity. Be warned, we're not going to give you full guidance. We will provide a little more clarity on how we see ourselves getting to the goals we've set out. So hopefully, that makes sense for everybody.

I'm going to start with a little bit of history for those who are not as familiar with the company. 75 years of innovation is the title of the slide. We have over 57,000 products across the 3 reporting segments: Reconstructive, MedSurg, Neurotech and Spine. The slide also serves an additional purpose. If you look in the middle row, at beds and stretchers, and over on your left, the power tools, those 2 products are Dr. Stryker originals. Dr. Stryker invented the first power tool, and he started the company on the basis of the Orthopedic Frame Company. Everything else you see on this slide has come through acquisition. So people who looked at Stryker over the last 3 years have said, "You've become highly acquisitive." The fact of the matter, we've always been an acquiring company. What we've then been able to do is take underrepresented products or underdeveloped products, put them through a great R&D mechanism and execute the heck out of them to take a leadership position in the markets we serve.

This slide is a bit of an eye chart, and I'll qualify it. This slide represents all the individual segments that Stryker participates in. So you would expect, on the horizontal axis across the top, that Stryker would have black boxes in every category. So I don't want to be disingenuous here. But what we're attempting to show is that in the 3 categories, Reconstructive, MedSurg, Neurotech and Spine, of the host of competitors across the top, there's no one in those 3 segments that offers the breadth that we offer in those segments. So the message here is when we dive into a segment, we don't dabble, we go all in. And I think that reflects our acquisition of Ascent, and I think it is reflected in our acquisition of Neurovascular. We went after those, get into a new segment and we did it in a market share-leading approach.

This slide represents the company's history. Again, a little bit backward looking in terms of where we've been. You can see sales on the top, a nice, increasing trend even in 2009 in the midst of a very tough economic environment. Adjusted EPS, always climbing. I'm going to jump over dividends. I'll circle back on that in a moment. And R&D has been in a nice, upward trend. Somewhere in the midpoint of that 5% to 6% of sales range that we have historically targeted, in recent years it's been in the higher end of that. And as we've talked about this year, R&D, on a dollar for dollar basis, will essentially be flat with prior year because of the divestiture of the Biotech business and moving those R&D dollars into other parts of the company.

Coming back to dividends, there is a lot of rhetoric right now about capital allocation strategies. The point of this slide, and I'll circle back in a little bit later, we don't feel compelled right now to make any big change in our approach on dividends. We have had a very consistent and measured and, I would argue, aggressive approach on our dividend policy for the last 5 years. And I'll circle back in a little bit later, but I want to tee that up right now.

This slide is what I'm going to refer to as a transition slide. Escalating costs driving evolution not only in health care but within Stryker. This data comes from the Center for Medicare & Medicaid. In 1980, $235 billion was spent, and a slice of the pie where Stryker contributed or participated was other medical durables representing 6%. Fast forward 29 years later, right in the midst of the deep macroeconomic dive, that pie had increased in revenue spent 10x. Now as a company, we've participated in medical durables. Our slice went to 3%. But on an absolute dollar basis, clearly, the slice of the pie is bigger. And frankly, our customers live in the middle of that circle. They don't care that we only operate in the 3% of the pie. They have to rationalize the spend all the way around that pie. So rather, in 2009, sticking our head in the sand, we said, "How do we help our customers address this expansive growth in spending in health care? And what can we do as a company to reposition ourself?" So I put this chart up here to give you a bit of the impetus for some of the changes that we have made in the company over the prevailing years. And more of that we'll talk about today.

So back in 2009, as we sat around and said, "How do we reposition the company, very successful company? We don't want to ignore our past but no, we have to change for the future," a couple of the key items that came in our agenda. The first 2 really fall into Lonny Carpenter's world: quality and operational efficiency, highly decentralized company. Multiple plants, multiple quality systems, both internal evaluation and external evaluation via the FDA. So that is not going to carry us forward.

So we quickly started moving towards a more harmonized approach on both quality and manufacturing, culminating this year in January with all of our manufacturing networks around the world, every single manufacturing employee now reporting for the first time into one group President, Lonny Carpenter, previously had been dispersed amongst all of our operating division presidents. So now we have all of the projects aligned under one leader in concert with the other members of the executive leadership team.

The bottom half, acquisitions and capital allocation, really the same thing. What do we do with a balance sheet that in 2007, 2008 really was not leveraged? Very flush with cash. And how do we use that to the benefit of the company for long-term growth and for shareholders? And as many of you who've followed us know, Katherine and I have been commenting now ad nauseum that our priorities for our balance sheet are M&A, dividends and buybacks. We have not aligned on a percentage of free cash flow that's going to go into any one of those categories in the year. What we have said is that ideally, you would look back at us in those categories over a 3-year period and say those allocations made sense. Those allocations made sense based on what was in front of you. You can't time M&A. Certainly, you can do buybacks very quickly if you need to. And once you commit to a dividend, you better be prepared to always fund it because you never want to take that away. So hopefully, as you look at the '08 to '11 period that I'll show you, you see a nice, consistent allocation at each of those 3 categories. And all of those, rolled up together, are part of our repositioning in med tech.

Additionally, as we look at our business, and this is more real time, we recognize that it's 65-ish- 35% split. 65% of our revenue out of the U.S. is out of line with broader med tech. Now we're not going to change that overnight, and we don't have a goal to suddenly become 50-50 because if you do the math on that over a 10-year period, it would mean really bad things for our U.S. businesses. And we're not going to let Tim and Kevin and their division presidents off the hook because we like the growth and profitability that they deliver each and every day. What we have asked is that Ramesh and his International division leaders for the first time ever in the company's history put together a strategy that says, "How do we take that International piece of the pie?" which I think, for the first time ever, we've broken out now in the developed and emerging markets. We've never provided that clarity before. How do we take his team and put a strategy together and investment approach that's going to allow us to put the best foot of Stryker forward in all of the key markets we serve? Because arguably in our history, we have not been doing that, and I think it's reflected in that revenue split.

So we've put all those things together. This is how we look at our business from a strategic outlook standpoint. How do we deliver sales and EPS growth? It's faster product, service and model innovation, very much focused on executing on innovation. We're a great company when it comes to execution. Customer service and solutions, I think if you talk to health care providers, you will find consistent messaging from them that Stryker is recognized for its customer service and the solutions it brings in the door each and every day. We know that no matter what happens with health care spend, high levels of service are still critical to our position in the marketplace. World-class quality, it's not an option. It's an absolute essential, and we continue to invest in enhancing our quality systems and recognize it's an $8 billion company and we play a leadership role in helping define what quality looks like in the market. And then finally, something we've always been proud of, which is the high-performance and engaged teams across our organization, whether they're in commercial sales, whether they're in manufacturing or corporate office. If we put all that together and execute on that directly, we think we can deliver accelerating sales growth and 10-plus percent EPS growth, and be ahead of [indiscernible].

So the story is we're positioned -- we believe we're positioned for today, and we're evolving for tomorrow. Thank you.

We're positioned for today and evolving for tomorrow. We recognize health care is very dynamic. Stryker's repositioning to respond. We absolutely believe innovation matters, and it may mean that we have to change our mix of innovation. We've been a good, incremental, fast follower. We may have to do more bigger bets in terms of our innovation portfolio, and we're absolutely focused on maximizing shareholder value through capital allocation as well as EPS growth. And if we do all those things, the items listed here in the blue box, organic revenue growth, greater operational efficiency and optimization, capital allocation, are all part of that strategy. So I'm going to now transition into Neurovascular business. I think I'm going to step behind the podium. It's probably a little easier here.

By way of introduction, Stryker acquired the Neurovascular assets of Boston Scientific in January of 2011. That business is run by Mark Paul, who was a long-term Boston Scientific employee, and the entire leadership team transitioned with that. We have a phenomenal leadership team of our Neurovascular business. They continue to do great things. And the question on the mind of everybody is, "18, 20 months later, are you happy with the acquisition?" And the very simple answer is we couldn't be happier. Everything that we handicapped when we did our due diligence, they are delivering on and delivering on the pipeline better than we ever imagined. So we think that's reflected in the results of that organization starting to deliver.

So by way of overview, the Neurovascular market in 2011 was about a $1.2 billion global market. Now this is a small physician community, a very intimate physician community, very different than the other businesses represented at the podium. When you go to these trade shows, the community is very tight and very collaborative and open, and they're very early in the evolution of technology in this space. When we acquired or looked at assets in this space in 2010, we wanted to take a market leader -- leadership position. I think it's safe to say in 2010 the 3 assets that were available all went to the right parties based on what their needs were. We had no presence here. It was an adjacency for us. And through that, we took in a market share-leading position in the majority of segments. Oils came from Target Therapeutics, which was acquired by Boston Scientific in '97. All the access devices also came along with that. We have a market-leading position there. And then the other devices, which are smaller in terms of total revenue, especially the bottom one, acute ischemic stroke, which is relatively new segment for mechanical treatment, we feel very good about our position in the future as we look at our Neurovascular business.

If we jump into the overall disease state that we're treating, folks it's really about stroke. 15 million-ish people a year, according to WHO, had stroke. 5 million die, 5 million permanently disabled, 5 million in and around are treated in one form or another. There's 2 types: hemorrhagic and ischemic. And you could see hemorrhagic is where all of the treatment has been, but it's only been 13%. It's a small slice of the pie. And hemorrhagic is treated either by aneurysm clipping or coiling, whether it's burst or an unruptured aneurysm. The bottom half, acute ischemic, is clot formation in the vasculature of the brain. That had largely been untreated. It had been treated by IV-tPA. There was early mechanical aspiration devices. Just like any new start-up mechanical device, limited success but clearly saw a path forward. And we got into that space with an acquisition in October of last year of Concentric Medical. So it's a big market. It's a market that has room for lots of treatment and growth through devices.

As we look at our business, we play a prominent role in both sides: hemorrhagic through the Neurovascular business that we acquired; and the acute ischemic, on your right-hand side, through the Concentric acquisition.

Concentric, for those who are not familiar, was the original company in the clot retrieval business with a corkscrew-type device in the early 2000s. So they are the pioneer in clot retrieval via mechanical device. We acquired them, having a very deep look at their pipeline and understanding where they were relative to FDA approval and what we thought that, that next-generation device could do for us.

So you see here we've got a very broad portfolio in the hemorrhagic side, and we have an emerging portfolio on the acute ischemic side based on our most recent approval.

Now I'd like to look at a few of the products, the first one being the Trevo Pro, which was just approved via the FDA 510(K) in August 2012. Critical to the Concentric acquisition was the IDE trial and approval here, which we received in very quick fashion based on the quality of the trial and the clinical outcomes. And it's labeled Stentriever technology. And what we're looking for here with the stent is maximize the clot integration through one pass. Place the stent, get full clot integration so that you're in and out very quickly. There are some technical things about vertical strut orientation, cell area, radial force, all of those very important to the clinician operating the device, and all very important to the long-term outcomes in clot integration.

I feel very strongly about the clinical results. Recently, a study was published in Lancet comparing this device to a competitive device on the market. Now we feel very good about the ability to get that study published that quick after approval. So we're in the very early days of rolling this device out in the U.S. market, probably in about 150 centers at this point from a training standpoint. The day of approval, we had our first case; 2 days later was getting emails about the patient and paralysis on the table and the patient paralysis subsiding while on the table as a clot's being removed. These are phenomenal cases to watch. They're phenomenal cases to present to a selling organization because in a majority of Stryker's business, we restore health; in this business, you're saving lives. So it's a very different aspect for the company. And literally in 20 months, Stryker has gone from no presence in stroke to being the world leader in complete stroke care through acquisitions. So demonstrating the power of the balance sheet and how it allows us to move quickly into a market space.

This is just a visual. Bob could probably give the overview on this slide better than I can. The left-hand side here is the vasculature of the brain. The arrow points to where the clot is. On the right-hand side, after a 25-minute case, one pass full revascularization of the M1. You can see full flow restored. What's also interesting is when they pulled the device out, the clot is fully integrated into the stent. And we have lots of photos of clots on napkins because you want to see the size of the clot. And we elected to pull that photo out of the picture because of the bloody nature and not wanting to offend anybody in the morning, but it really is great medicine when you get mechanical aspiration and full clot and vasculature revascularization.

We also have a very strong line shortly after the acquisition was announced in 2010. The Neurovascular business got approval for their Target Coil. It was their next-generation coil. They have not had a new coil in 5 years. We continue, 18 to 24 months later, to launch expansions on that. On your left-hand side, the Target nano Detachable Coil is the market's only 1-millimeter coil, and it's the smallest and softest sub-2-millimeter coil on the market, the only complex-shaped sub-2-millimeter coil. These products and these extensions in the Target line have been well received by customers and clinicians, and we feel our coiling business is growing above market rates at this point in time. Over on the right-hand side, the Target long Detachable Coil, again there's all kinds of coil and shapes and sizes. You've got to be small and you've got to be large and everything in between. And these extensions are very important as we seek to grow out and capture market share from other competitors who don't have the full range and offering.

Then finally, as I said, the access devices are equally critical. If you're placing devices, you want access devices that work with them and work well. And we recently introduced the XT-27 Microcatheter. It's one of the few dual-lumen catheters on the market. This allows for a side-by-side placement and that you can use a balloon placement while inserting stents to block the blood flow. This is very important in the clinical evaluation and the clinical process. So again, just trying to highlight a few of the key, new products that were in the pipeline that are now starting to come to fruition and giving us ongoing confidence that this business will be at or above market growth rates when we wrap up 2012.

So overall, when we look at this business, the trends and expectations, key market trends, AIS, based on the earlier slides, fastest-growing segment, and we're in it in a big way.

Flow-diverting stents, we don't have one. We're watching and evaluating the technology. It has slowed the growth in the coiling market. It's also expanded the market because large aneurysms and fusiform aneurysms that were previously untreatable are now treatable with this technology, which also allows the placement of more coils. So we continue to evaluate the market, continue to evaluate our steps towards flow-diverting and if we're going to go there. And we believe our continued innovation over the last 18 months has really helped to offset any price pressure that we've seen in this broad neurovascular market.

So what to expect from us in 2012? We're going to continue to drive the story of complete stroke care. Training and education is critical in this market. It's probably got a higher training and education component than the majority of markets we serve. We're going to invest in clinical outcome data because this market demands it. And we're going to be broadly launch the treatable PRO [ph] family in the U.S. and Europe markets, which is already under way by the end of this year.

So with that, I'm going to sit down. I'm going to turn it over to Kevin Lobo, our Group President of Orthopedics. Kevin?

Kevin A. Lobo

Thank you, Curt. [Indiscernible]. [Indiscernible]. As Curt mentioned, [indiscernible]. [Indiscernible]. Sorry about that. Thank you.

So if you look at the pie chart, you can see the big businesses, knees and hips, represent approximately 70% of this $2.2 billion. Next is Trauma and Extremities at 19%. And this piece of the pie has actually been growing in recent years at 19%. The remaining 13% consists of 3 businesses: bone cement, our Craniomaxillofacial business and sports medicine.

Looking over at market share, you can see in hips we have 23% market share. We have actually caught Johnson & Johnson and share the #1 position and market share in hips. In knees, we passed Johnson & Johnson in 2010 and now occupy the second position behind Zimmer with a 22% market share. And in Trauma and Extremities, we are the clear #2 behind DePuy Synthes at 17%.

In terms of new products, I'm going to begin with hips. Our Mobile Bearing Hip System are in the early stages of launch. These provide large-diameter bearing without the issues of metal on metal. On the top you, can see our ADM products, which has a cut-out for the iliopsoas tendon. So this helps sort of guard us against impingements.

The bottom product is our MDM product, which has 3D coated Tritanium. And you can see here on the bottom that we have a 20% competitive conversion rate year-to-date, something we're very, very pleased about, being able to convert so much competitive business.

So moving from cups to stems. We're very excited about our Accolade II product. This is the first Morphometric Wedge featuring size-specific medial curvatures. So what this allows is better fit across a broad range patient anatomy. This is the first time we used an actual database with hundreds of hip scans to design this product. Only 4 months after launch, it's already our #1 selling primary hip stem, clearly the fastest product launch we have ever experienced here at orthopedics. It's created quite a buzz in the marketplace. You can see over 400 new surgeons have trialed the product. And we define a new surgeon as someone who has not used a Stryker stem in the past year. So it's pretty tough test.

Shifting to knees, I want to describe to you our direct-to-consumer campaign. This campaign was designed to really communicate the unique benefits of our single-radius design. In the first quarter of the year, we launched this to health care professionals, starting with academy. We want to give them a few months of head start or advanced notice prior to going directly to patients so when patients approach them, they weren't going to be surprised. And we actually received incredibly positive feedback both from Stryker loyal surgeons as well as competitive surgeons about this advanced notice. In the second quarter, we went direct to patients. May 15th was our first television commercial, which I'm going to show to you right now.

[Presentation]

Kevin A. Lobo

So hopefully, some of you have seen the commercials. We have 3 different spots. Here we have the spot -- the bicycle spot, which is the one you just saw. We also have a bowling ball spot. And we have an SUV spot. We've been rolling those spots last night. I hope you saw those. The verbiage is the same on all 3 spots.

We're going to continue with television through the balance of the year. But in addition to television, we're going to also add social media and app components to our campaign. On the bottom right, you can see the picture of the iPhone. That's our Stryker Hiker app, which will enable a patient to track their movement following surgery. So it's going to be a complete program. And though it's still early in our campaign, the metrics that we are tracking are very encouraging, and we know that our message is resonating very well, both with customers and patients.

Turning now to Trauma, they recently launched a Hoffman 3 external fixation system. Hoffman has long been recognized and been synonymous with external fixation. This third version has stronger, more stable rod and has other features, as you can see with the Thumbwheels, that make it very, very easy to use. This product is off to a very fast start and also enables pull-through of plates and screw sales.

Another product in the Trauma group is VariAx Clavicle plate. This has been a historical product gap within our Trauma portfolio. But you can see that it's not a need to [ph] product. If you look at the excellent early user feedback, you can see that it's rated higher than the competition. And this is one of a number of products that we have launched, smaller products within our portfolio over the past few years that enables us to have a complete trauma bag so that we can take on Synthes at every kind of account across the country, including Level 1 trauma centers.

So while we bolstered all of our core Trauma, Extremities, we also decided to launch a separate Foot and Ankle division. So this division was created January 1st of this year. It combines the top products you see, our existing Stryker products in foot and ankle, with the products that we acquired through the Memometal acquisition pictured on the bottom. That acquisition was completed in the middle of last year. We've put all those products together, created a separate dedicated business unit. That dedicated business unit represents 16% of our total Trauma and Extremities business. Trauma and upper extremities. So the total 16%, growing at a very rapid rate of 17%. And that 17% core growth was a pro forma number, including Memometal from the prior year, clearly growing faster than the market at 17%. The annualizing of that sales is about $70 million. And just as a reference, Wright Medical sells about $100 million in foot and ankle. That's what they're expected to sell in the United States, and they're the market leader. We're not that far behind at $70 million. And we're growing about twice as fast as Wright Medical is growing in foot and ankle. So it's something I don't think everyone fully understand. It's been very, very successful, the decision we made late last year, we feel great about the decision.

We have a dedicated sales model for this. So these dedicated salespeople are calling on foot and ankle specialists. Speaking of the sales models, I told you I was going to talk about the overall picture for Stryker Orthopaedics. In Trauma and Recon, we -- we're quite different than the rest of the competition. Most of the competition uses distributor agents, about 100%, all or virtually all. We're kind of the opposite. We have about 20% agents and 80% direct. And quite frankly, we're agnostic about the model, whether we use agents or whether we use direct sales force for Trauma and Recon. For us, it's really making sure we have the best talent and that they drive high performance. From our standpoint, the costs are really about the same, whether we use agents or whether we use a direct sales force within Trauma and Recon.

Just as I mentioned with Foot and Ankle, we also have specialized direct sales forces that call on specialized surgeons. So in addition to Foot and Ankle, we have specialized direct sales forces for our Craniomaxillofacial business as well as Joint Preservation which is our term for sports medicine. So our sports medicine business also has a direct, dedicated sales force.

And across all of these sales forces, we see significant opportunity to improve field efficiency. Within Trauma and Recon, we are in the midst of a national launch of an automated system, iPad-based application that enables pace scheduling and inventory tracking. And when we combine this launch with the initiative that Lonny is undertaking around distribution, we have this tremendous ability to reduce inventory, reduce costs without compromising any customer service.

So I'm now going to wrap up with trends and expectations. So the first 2 bullets you see here, volume trends stabilizing and price declines moderating, these are both modest improvements versus what we experienced in the prior year. And the marketplace actually is a little bit better than it was last year. And the next 2 bullets are increasing challenges around regulatory, whether it's transparency or longer approval times. And the shifting stakeholder alignment, really this is about physician-hospital alignment. We're starting to see, whether it's ACO structures or other structures, starting to see physicians in hospitals getting on the same page, creating a new dynamic for us in the field.

So what should you expect from Stryker Orthopaedics in 2012 and beyond? We will be growing above market in every one of our U.S.-based orthopaedic businesses. We're going to continue to focus on procedure simplification. We call it simpler solutions for our customers. And we will continue to educate the patient. I'm not sure that we're going to stay on television forever, certainly through the end of this year, but we're very excited and we plan to continue with patient education. And lastly, we're going to continue to drive product differentiation behind power brands. And I listed a few of the power brand here: the Get Around Knee, Accolade II and Mobile Bearing hips. So with that, I'll turn it over to Tim Scannell. Thank you.

Timothy J. Scannell

So hello, and good morning. I will give you a brief overview of the MedSurg and Spine group. I will share our 2012 launches with you and, as Kevin did, share some observations on our market and outlook.

You will see that we have a powerful new product lineup that should drive growth in the days ahead. You'll hear that despite the budding challenges in health care, we remain confident in our ability to execute, to win and to deliver results.

The MedSurg and Spine group is made up of 4 -- of 5 businesses. And they include the largest, Stryker Instruments, followed by Endoscopy, Medical. Spine is the next largest and Stryker Sustainability Solutions is our smallest business.

You can see our market shares, which range from a high of the mid-60s for Sustainability Solutions and a low being Spine at roughly 10%. We believe these shares are all substantial enough to make us meaningful in each of these markets, yet we have plenty of room for growth in the days ahead, both naturally and through share expansion.

Looking to new products and starting with Stryker Instruments, we're delighted to tell you about System 7. And this, our 30th year of operating battery-powered power tools, we launched System 7, and the System 7 stools are smaller, they're lighter, they're quieter and they run longer than our competitive offerings and our prior generations. These tools are powered by lithium-ion batteries that weigh less and run longer than our previous generation. The system features a sagittal saw which is significantly quieter than our previous generation. And this is a very welcome improvement by orthopedic surgeons who have long labored in operating rooms with very loud sagittal saws. The system features a next-generation, high-speed Precision Saw, which can cut over 50% faster than the previous generation saw and utilizes an oscillating tip saw blade. Oscillating tip saw blades facilitate precise cuts in minimum invasive cases.

As much of you are aware, we're very proud of our power tool offering and the 85% share we enjoy in this market. And we do expect that based on the early feedback on this system and early sales, we will take additional share with System 7.

Turning our attention to Stryker Endoscopy. This year, we launched our 11th generation 3-Chip Camera system, the 1488. 1488 takes our camera offerings to yet another level with over 30% greater clarity and over 50% greater brightness. In addition to the obvious benefits of enhanced clarity and brightness to our surgeon customers, the improved light sensitivity offers an important safety benefit. It allows the utilization of lower-intensity light settings on light sources used in concert with this camera. These lower-intensity light emissions may prevent operating room staffs from inadvertently causing drape fires or patient burns when handling hot light cables. Initial feedback on the 1488 has been encouraging. This product was just launched in May with full sampling occurring over the course of the summer and to be finalized this month.

We're delighted to tell you about our newest product in Stryker Medical, which is Power-LOAD. The Power-LOAD clot fastener system is designed to be used in concert with our Power-PRO EMS cot. And Power-PRO will lift and lower patients into and out of ambulances. It improves caregiver and patient safety by supporting the patient throughout the loading and unloading process. With just the touch of a button, an EMS caregiver can lift a patient weighing up to 700 pounds. As you would expect, the Power-LOAD has been greeted with great enthusiasm by the EMS community.

One of Sustainably Solutions' most important 2012 launches has been the Stryker Reprocess LigaSure device. And Stryker is the only company with FDA clearance to reprocess the LigaSure device. This is yet another important offering for our reprocessing customers who utilize our products which our covered by a family of 510(K) clearances that number over 100. Hospital interest in reprocessing does continue to grow as hospitals remain interested in economic savings and environmental sustainability. This market has been further bolstered in the early months of 2012 by the entrance of Johnson & Johnson, who, as you know, bought SterilMed at the end of 2011.

Turning our attention to Stryker Spine. I'd like to highlight the Vitoss product. And Vitoss is part of a family of products obtained in the Orthovita acquisition completed in the spring of 2011. It's been an important addition to the product families in our Spine division and I say round out our product offerings. Our sales force and customer base have enthusiastically embraced it. Vitoss is the #1 synthetic bone graft substitute and features a unique porosity, structure, chemistry and bioactivity. And it has a family of products, including Vitoss, Vitoss BA and Vitoss BA2X. Our Spine division has done very well at this important addition to our bag. Additionally, and not covered in the slide deck but featured last evening, in recent months, we've launched our aerolateral [ph] approach system and our Anchor-C [ph] standalone cervical cage. These products were launched in the second half of 2011 with full launches at our sales meeting in January. These products are doing well and have filled troubling gaps in our product portfolio, and we're delighted to have them as well.

I'll now share a few observations on our markets, and clearly, they continue to evolve as the health care landscape changes. We do see increased supply chain involvement in the purchasing decisions regarding our products. Price pressure does continue in most of our markets. And our customers do expect proof of clinical efficacy and economic justification prior to adopting new products. On a positive note, this year, we have seen a solid uptick in growth of our single-use devices as procedural volumes have grown in most of our markets.

Moving forward, as you would expect, the businesses in the MedSurg and Spine portion of the company will continue to focus on providing the best service and products available in our segments. Our innovation efforts will be focused on driving the innovation that delivers the economic outcomes and innovation needs and clinical efficacy that our customers are demanding, yet increasingly, we are striving to leverage our product diversity and breadth by engaging our customers in strategic contracting discussions.

While we are certain that abundant challenges and pressures continue to face our markets, we are confident that our innovative products, our top-notch quality, our balanced portfolio, which has both base and capital products, our powerful, knowledgeable and highly experienced sales organizations and the long-standing and trusted relationships we enjoy with both surgeons and hospital staff will serve us well and that we will be able to continue to execute, win and deliver in the months, quarters and years ahead.

With that, I'll invite Ramesh to this podium to speak about our International business.

Ramesh Subrahmanian

So good morning, everybody. And again, thank you for joining us today. I'm pleased today to have the opportunity to present to you an overview of our International business, how we see the growth opportunities that exist ahead of us and some of our approaches and strategies to capture our rightful share of that growth opportunity.

As Curt mentioned, it's coming up to a year since I joined Stryker. Immediately prior to joining Stryker, I ran Merck & Company's Asia Pacific business for 5 years, including leading the integration of the Schering-Plough acquisition in that region. Since I qualified as a chartered accountant in the U.K. in 1987, I spent time working initially in the chemical industry and then in the pharmaceutical industry in a variety of functional and business leadership roles in the U.S. and Europe and in Asia, including leading the urology and then, subsequently, the oncology business of Sanofi-Aventis in the U.S. prior to joining Merck. I'm certainly delighted to be part of this great company and to be part of this great leadership team as we look to drive opportunities for growth outside the U.S. market.

So let me start first with an overview of the -- our situation in the international market. So as you've seen before, the 2011 sales that we indicate here exclude Neurovascular, which is under the Global business, as you heard. And you see that in 2011, our revenues are very well balanced across our critical product segments. You're also aware that market size and market share data are pretty hard to estimate outside the U.S., certainly outside the developed markets, but we do -- we estimate that we have an 18% share in the Recon business outside the U.S., a 22% share in MedSurg, about 11% share in Neurotech and Spine, again excluding the Neurovascular business. I want to point out that these average market shares outside the U.S. mask extremely strong leadership positions that we have developed over the years in markets like Japan and Australia and Canada and, to a lesser extent, Western Europe. And clearly, we have significant room to grow in the emerging markets as we'll talk about in a minute. The main point of this slide here is to indicate to you our confidence that we have a very balanced basis and a balanced platform to drive future growth outside the U.S. across the markets.

What I'd like to do next is to upfront and immediately address an issue that is a significant headwind for the industry at large and certainly has been for Stryker recently.

All of you are no doubt acutely aware of the Eurozone crisis, which brings significant uncertainties and risks, especially to the health care sector. As Curt and Katherine described to you in a recent quarterly call, there are multiple aspects involved in this issue, and while certainly, overall market growth has slowed, the impact we feel is very different and in different degrees across different parts of Europe.

Let me just take an example. If you look at the first half market data for the hip market in Western Europe, the overall market declined 1% in value over the prior year in the first half with a little bit of an accelerating decline in the second quarter to a minus 2% decline. Again, when you look at that detail, you see significant differences across markets. You see the U.K. grew 4%, the Nordic markets and the Northern European markets were flat and then you had a significant challenge in Southern Europe. Whichever segment of the med tech industry you look at in Europe, you see very similar patterns across Europe, certainly a clear divide where you have significant challenges in Southern Europe, but all across the rest of Europe, you see procedural volume challenges, price pressures, capital constraints, all applying to different degrees in different markets.

I want at this stage to clearly acknowledge that Stryker has a significant challenge, and we have lagged the European market situation for sure. And I will share with you shortly the steps that we have taken and are taking to rectify and correct that trend that we've seen in our own business.

The main purpose of this point here, to say, and I think as I spoke with some of you last night, clearly it's challenging and probably even foolish to try to predict the outcome and short-term outlook for Europe in the coming months. But our planning assumptions call for overall market growth rates of 0% to 2% across Western Europe in the next couple of years. And again, I'm talking about the market overall with a modest volume growth offset by price erosion. That said, I want to emphasize again that we believe that Europe does offer significant growth opportunities for us, and I'll cover that shortly.

So if we think about growth in the international markets, where do we see the growth and why, and then where will we focus? So the charts on the left-hand side indicates what the global market breakdown is. And as you've heard before and as you've seen here as well, approximately 37% of our 2011 global revenues for Stryker came from outside the U.S. versus 48% of the market roughly. So clearly, we are underrepresented in the international markets. Secondly, as you look to the right, you will see very clearly that emerging markets will be the key driver for med tech growth. And let me just clarify what our definitions that we're using here. In the category called developed markets, we're basically counting Western Europe, Japan, Australia and Canada. The rest of the markets around the world we've clubbed into the emerging market category. So if you look on the right, you'll see that the emerging market category is expected or anticipated to grow through the end of the decade at more than twice the rate of the U.S. and other developed markets, clearly a significant opportunity for growth. So our excitement about the growth opportunities in the coming years in the international markets is driven by the combination of our underrepresentation as well as the significant growth in the markets of -- in the emerging markets.

So let's talk a little bit about how we approach this. And for the purposes of the strategy and the strategic road map that Curt mentioned, we're looking at this in 2 parts. So let's focus on the developed markets.

Clearly, our first and foremost priority is to improve our share and our margins in Europe. As I said before, over the last few years, our European business has not kept pace with our own expectations. In late April, we made the decision to make some changes, and we have a new leader in place in June -- since June. And the team now has very clearly developed specific action plans firstly to bring stability to the business and to the organization in the short term, but simultaneously, to develop action plans to adapt our business to the significant challenges that we face in Europe as markets change and customer needs change. So these longer-term action plans will include rationalizing our channel, mix and distributor management, especially in Southern Europe, addressing our long-standing weaknesses in some critical markets like Germany, as well as adapting our cost structure and support cost base to the new realities of the European business.

However, the good news is that also, as part of our overall history in Europe, we have probably not leveraged the full portfolio of Stryker to the extent that we should have and we can. And bringing the best of Stryker's portfolio, including timely new launches of new products and the kind of products that Tim and Kevin have covered, are very critical to our ability to grow the market. So in the medium term, certainly we are very confident of the opportunity to gain share and grow the business.

In the other developed markets, like Australia, Japan and Canada, like I said, we have historically built leading market positions in these markets across all parts of our franchise. And what we have to do now is continue to maintain and grow our market share in these markets while, at the same time, anticipating that some of the challenges that you see in the developed markets as well, like Europe and even in the U.S., in terms of price pressures, et cetera, are those that we need to anticipate and start adapting our business model in anticipation of the changes that we will certainly face.

Moving to the emerging market, the picture is completely different, and these markets require both a very focused and a very differentiated strategy. So let me explain the chart on the left. If you look at the overall emerging markets business today, and we've broken it down and the top 5 markets, the next 5 markets and all other markets, the top 5 markets include China, Brazil, Russia, India and Turkey. The next slide include Korea, Mexico, South Africa, Poland and Saudi Arabia. And as you can clearly see, if you look at the market in 2011, approximately a $6 billion market, almost 2/3 of that market is made up of just the top 5 markets. And if you think about and look at the estimated growth that's expected through the end of the decade, almost 3/4 of all growth across all emerging markets are going to come from the top 5. So while the other emerging markets are attractive in terms of growth rates, the clear reality is any serious player in this industry sector must win in the top 5 markets. And you will see how that factors into our strategy choices that we make going forward.

Some of the considerations that we have to take into account as we think about our emerging market strategy is the diversity of these markets. We can club them for ease of discussion, but each of these markets present very different healthcare systems, very different stages of development and very different customer needs.

One of the important learnings for us as we've gone through the analysis is the importance of what we call the value segment, which already represents more than 1/3 of these markets combined. And this is probably one of the few common themes that exists across emerging markets, the importance of the value segment. Clearly, as many of you know the strong local competition in many of these markets, we have to tailor our strategies to local market needs, and these will include things around what's the right product portfolio, what's the right distribution mix, what's the right investment intensity and mix. So if I take a market like India, which is very, very underdeveloped, as an anecdote, there's, by our estimate, only about 600 surgeons in the whole country that do reconstructive surgery, it's thrice for market development activities. So our ability to adapt our strategies to each market is very critical, and we believe very strongly and very clearly that this is also going to require a combination of both organic and business development efforts to win.

So in summary, I am very excited, as all of us on the leadership team are, that over the coming years, the International business can be a significant growth contributor to Stryker. If you at the developed markets, we need to first focus on turning the European business around, leveraging the portfolio that we have for taking steps to be more competitive and adapt our business model also similarly in Japan, Australia and Canada.

In the emerging markets, based on the last slide I showed you, we have very clearly prioritized China, India and Brazil as our top 3 countries, followed very closely by Russia and Turkey, where we are already taking initial steps to establish a presence in those 2 important markets for the future.

We have outstanding products that are important and very relevant for the emerging markets in the premium segment, things that we do extremely well all over the rest of the world. We've got to win in the premium segment. And for this, we have to build scale. In many of the top 5 markets, we have to expand market coverage, we have to build and invest in service and distribution infrastructure as well as organizational capabilities to win. That's going to be very, very critical for us. However, we believe that even if we do that successfully, which we're confident we will, it's a necessary but insufficient condition for long-term leadership in these markets, and therefore, a strong and leadership presence in the value segment is going to be critical. And here, we have a combination of both organic efforts, we have significant number of investments and projects that are going to lead us strongly into the value segment, leveraging both our own in-house product knowledge and development capabilities, as well as the tech center we have established in India and the manufacturing facility we have established already in China.

So as you can hopefully tell, it's a very clearly focused approach across the individual markets and where we have to execute with discipline. And I'm very, very confident that we have the capabilities and the resources to be able to win in these markets in the coming years. Thank you for your attention.

And now I'm going to turn it over to Lonny Carpenter.

Lonny J. Carpenter

Thanks, Ramesh. Well, good morning, everyone. As always, it's good to be with you today, and I appreciate the opportunity to talk with you about Global Quality and Operations for Stryker Corporation.

As you can see from the first slide, there is a consistent theme from the past presentations to this group. Our direction and focus continues to be on, first, enhance compliance and quality as our ongoing Quality First journey; and second, optimizing our operations to our plant and supply chain networks. We are confident that at this multiyear journey, will feel revenue growth, drive strong operating leverage in cash flow and consistently improve the stakeholder experience. And as I've mentioned, that's a consistent theme you would have seen from me in the past presentations.

To add a little more color this year to my remarks, I thought I would give a few specific examples of our progress in the 3 main areas you see pictured in the slide here. So starting at the top of the screen on the Quality First side of things and more specifically on the compliance side, in the past 2 years since the listing of our Warning Letter, we have had over 50 regulatory body inspections around the world at our various Stryker locations. We continue to be encouraged by the favorable results and the very favorable comments we hear from the inspectors on our progress. We've also had success integrating as a result of our acquisitions, many new facilities into our company-wide processes and our Stryker quality culture. And the majority of those facilities within1 year after acquisition have also had favorable inspections.

Moving from a compliance to a quality standpoint. We look to our most recent product launches as validation that our investments are making working. You see pictured up here on System 7, as Tim had mentioned and talked about the features and benefits.

Going back to System 6, the previous generation launch. At this point in the launch process, we felt we had a very reliable set of power tools. The return rate was less than 5%. Fast forward to today, System 7 under our new quality systems and the same timeframe has a 0.6% return rate, a significant improvement in quality. And frankly, many other proxies on had less at the product fair, and the products that you heard my colleagues talk about today from a new product standpoint are seeing very similar results from a reliability and quality standpoint.

Next, we move to the middle of this slide and our plant network optimization. We're just finishing what we would call our getting organized phase. And as Curt mentioned, beginning of this year, all of the plants reported into the global quality operation structure, moving from our historical decentralized structure organized by selling divisions and by products to now organizing by manufacturing process supply chain and geography. And we really feel that this is going to help us as we move forward in terms of getting a better alignment and driving better operational leverage.

You can also see that during that timeframe where we've had internal changes, we've also had a unique challenge over the last several years of adding 13 new facilities to our plant network, driving our number from 18 up to 31. But you could also see, as we previously announced, we do have plans in the second half of this year into early 2013 to reduce that number down by 6 and continually looking at the right footprint for our company going forward. These changes allow us to leverage our company-wide volumes and expertise and really be more strategic in our sourcing and manufacturing decisions.

A couple of key points here. As you see on the slide, we have a picture of our Suzhou, China facility. We continue to transfer work and products into that facility from our internal plants, as well as our external supplier base

[Audio Gap]

Operator

Ladies and gentlemen, please stand by.

[Technical Difficulty]

Ladies and gentlemen, please stand by. We are having technical difficulties. Again, ladies and gentlemen, please stand by.

Curt R. Hartman

Focused on the core and looking at key adjacent spaces. What we're trying to do here is give you a little indication of what we view as in the core. then are the circle everything in blue, $70 billion market, you can assess how fast or slow those markets are growing. Those are categories that we view as core to the Stryker business Pharmacy and Map [ph] OR equipment, [indiscernible] Orthobiologics, Patient Handling, Recon, Spine and Neurovascular. Those are not cores of the business. Reincircle.

These are things that we view as adjacent based on where we operate and the customers we interact with today. Those include markets like neuromod, wound care, urology, robotics, ENT, peripheral vascular, UIS [ph]. Those are adjacencies because of the products we have served or overlapped with those markets. We start getting to the yellow and the black, the close in and outside. Those are a bit far away. Not to say we won't do something there at some point in time. But today, as we stand, our focus from an M&A standpoint falls in the core and the adjacent.

So as you think about the expansion opportunities this company has, they're substantial. As long as we keep a healthy balance sheet, we keep good cash flow generation, this company should have a great growth trajectory ahead of it, execute on what we have and expand both through R&D organic growth and M&A expansion.

And if you take a look at what we've done in the last 3 years, these are the names of the acquisitions. In '09, it was OtisMed, which was a core acquisition; Ascent, which Tim referred to as Sustainability Solutions system. That was an adjacent because we actually sold against reprocessing industry, endoscopy and instruments, as part of our trauma business. So we competed against that. We knew that industry.

2010, a big year. We had 4 acquisitions. Neurovascular actually closed in January of 2011, but it was right on the cost. Neurovascular in adjacent because we had opened surgical products for the neuro market. We opened surgical products like drills for cranial perforation, bipolar forceps, ultrasonic aspiration, neuro navigation platform. So we were in those cases. In 2011, Orthovita, Memometal and Concentric, all core acquisitions. Concentric being core because of the Neurovascular acquisition the year before. Now hopefully this gives you a little bit of landscape and flavor how we look at M&A.

It wouldn't be a meeting if we didn't reconfirm 2012 targets. These are well-known targets that are out there. Our commitment on sales is 2% to 5% sales growth excluding FX and acquisitions. From a detailed standpoint, recall we said back in January at the JP Morgan Conference, for the Reconstructive segment, at 3% or less. Arguably at this point in the year through to second quarter, we feel good about our Reconstructive trends in the U.S., a little more challenged in the international markets. We also said Med-Surg would grow at 5% plus. Right at this point in the year through to second quarter we feel good about that statement. Finally, we said the Neurotech and Spine would grow 5% plus. And clearly through in the second quarter, we feel good about where we are in that business.

Putting all of that together, earnings will be 10% plus on an adjusted earnings per share basis. So our commitment in 2012 remains as it was back in January. In spite of the flux that's going on, whether it's Europe or U.S. medical business, the diversity of our portfolio allows us to remain consistent in our delivery on these targets.

As we step forward to 2013, the elephant in the room is the med device tax. The final regulation is not expected to be published until late third quarter, early fourth quarter. For those of you who had the bedtime reading, it's 47 pages in draft form. It gets into immense detail. There's only excise taxes can do. There's been wide discussions around what the impact will be on various companies. I would tell you right now, we have communicated that our impact would be somewhere in the 130 range. You can plus or minus that depending on how the final draft regulation comes out.

There are things in the draft regulation such as you take a product to a trade show, you have to pay the med device tax on that product. You take a product, we sell a System 7, sell our System 6, they send it in for repair and we ship them a loaner. We have to pay a 2.3% med device tax every time we ship that loaner out the door. Inversely, on the other side, there's also a caveat in it. That's the first cross-border transaction. So from a slightly political statement, it is a job-killing bill.

If I want to minimize my tax, I ask Lonny Carpenter to move all U.S. manufacturing outside the U.S. and set up an arm's-length transaction at cost plus and then pay my med device tax when it crosses the border. There's been great discussion on this exact point in Washington, D.C. Stryker, other med tech companies have been very involved in that. So the draft regulation is effectively draft.

So people get pretty wrapped up on what the number is going to be. My point to you on this, it's still very much in flux. And who knows where the election takes it. There's a lot of dialogue in D.C. about the device tax getting caught up in comprehensive corporate tax reform next year or it could get pushed out and delayed or, in fact, what we're doing and every other player in the industry is doing is we're putting the systems in place assuming the January 1 start because that's the rule and regulation that's on the book right now.

So how do we absorb that and get to our long-term commitment of 10% plus? Accelerating sales growth. The easiest way to solve an earnings problem is grow your top line. And all the actions that the group in front here has demonstrated and consistent M&A over the last couple of years are targeted at accelerating our sales growth. Lonny gave you a little more color on GQO. We see that continuing to add to the leverage in the business.

Control of operating expenses. This company has great discipline, great at executing, great leadership through the ranks. And we've demonstrated the ability to control our op expenses depending on the situation at hand. And we've demonstrated the ability to put more into op expenses depending on the investments we choose to make. We will benefit from restructuring activities. Restructuring tends to be viewed as a onetime event. Hopefully, you picked up from today we are constantly evolving our business model. We are looking at things that we do today that we don't need to continue to do. We're also making investments in new areas where we see an opportunity to expand that would benefit the business.

Acquisitions, we've talked. There's a view that the day you close the deal, all the hard work is done. The day you closed the deal is when the hard work really begins. Hopefully, you picked up from Lonny, integrating 13 plants, getting quality systems in place, sampling product, getting sales force and customers educated. We see more accretion from our deals in year 2, year 3 and the periods going forward.

Ongoing reductions in tax rate. We have talked about this. Stryker is, by no means, an aggressive taxpayer. We see the opportunities for ongoing reductions in our overall company tax rate.

Share buybacks, a pretty easy lever to pull based on board support and share repurchase reauthorizations, which we currently have over $500 million open share in repurchase authorization from our board.

If you put that cascade together, we see ourselves in 2013 getting to the 10% plus earnings target while absorbing the med device tax. Hopefully, that gives you a waterfall cascade of how we see ourselves getting there. Obviously, we're not going to put out top line guidance at this point in time. We generally do that in January of the new year.

So with that, before we step into questions and answers, I want to thank the team for all their hard work putting this together. Hopefully, what you saw today was both a little bit of a reminder of the company's heritage and how we run the business. But also, hopefully, you got a flavor for some of the changes that the organization has been working upon for the last couple of years and how those will start to benefit the business in the months, quarters and years ahead.

So what I'd like to do now is move to Q&A. We have a couple of microphones that will be rotating through the aisle, and what I will do is either answer the question or direct it to one of the members of the executive leadership team. So why don't we start right here with Mike.

Question-and-Answer Session

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

Mike Matson, JPMorgan. Two questions. the first question, and Curt, maybe you can start by chiming here. If I look at the last decade of Stryker's performance in Orthopedics, the history is that Stryker had, I guess, gained or market share going above market in U.S. Recon, 9 in the last 10 years. The flip side is that you struggled in Europe historically, particularly in Germany, and as in Europe, generally grown below market. So when you talk about international and what Ramesh is trying to do, why is the structure that you currently have the right structure where international is a separate organization rather than having global organizations within orthopedics, within MedSurg? Because it seems like historically, it's just been pretty clear the company's off in the U.S. in both Ortho and MedSurg but leaves a lot of money on the table outside U.S.

Curt R. Hartman

It's a very fair question, Mike, in terms of our organizational structure. On a historical basis, the way we ran the company was organizational presidents in the international market. And really, they were an extension of sales and marketing office, if you will. If you look at the company today, we acquired Neurovascular, and we kept that as a global business model. We knew that if we drop that into the historical Stryker business, it would probably erode in different markets. So we have some experiments like that in other franchises currently underway. As we look at developed franchises like hips and knees, clearly, it's a global customer base. And Ramesh and Kevin both bring different industry experiences to play. And I would tell you today, Ramesh, Kevin and Tim work closer together than any previous historical group presidents. And we're trying to do this at the top versus a massive organizational change in shift. Now we do have experiments going on. Some of our other franchises are taking on a bigger piece of the globe. And we're evaluating those, and we'll see where we go with the rest of the company. I think at the end of the day, what you're going to see with Stryker is various business models depending on the franchise, depending on the state of development. And I'll ask Tim or Kevin if you guys have thoughts on that. Certainly, you guys are closer to the action than I am today.

Timothy J. Scannell

Yes, I think it's a very fair question. And we have work to do. And it begins with closer collaboration and more ownership on the part of the product divisions for international growth. And I do agree with Curt, that we'll have to keep assessing it and just think that the criticism is fair and we have work to do.

Kevin A. Lobo

And the only thing I'd add is we've changed some of our incentive processes to really drive more global attention from the R&D standpoint. So some of the products Ramesh referred to. Certainly for Orthopedics, we are looking at specific products for emerging markets. We have a pipeline of those kind of products in development, which historically wasn't the case. But you're right. I mean, this is something that we're all totally committed to, is changing the story in the international markets.

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

And then just maybe across all the commentary on capital allocation and the adjacency slide and -- some of which I can say surprised me, and some of which didn't. I guess the takeaway to that, that we have is the company has continued to grow its dividend north of -- obviously north of earnings growth, well north of earnings growth in the next several years. But primary use of cash is going to be M&A. The company went through a period in which it was fairly active and aggressive on M&A to take in a bit of a breather to digest, and now you're showing us adjacencies. Are we entering another period here in which the goal is to accelerate the diversification of the company and we'll see a lot of activities over the next 12 months?

Curt R. Hartman

It's a great question. It's a fair question. We have commented that this year would probably a bit of digestion. The acquisitions run through the back office functions, things like tax, treasury, accounting, all of those integrations, HR systems and people. That does take time, and it all falls on the same group as you pile up the acquisition. So we have been in the digestion mode. I would tell you, our BD team's through that, have been very active this year. It takes a lot of deals and a lot of reviews to get one through the hoop. There has been no slowdown from Katherine on the BD front or each of the commercial leaders, BD teams. They are -- our BD team is bigger today than it was a year ago, it's as active, if not more active today, as it was a year ago. And it continues to turn over rocks, looking for the right targets, keeping in mind we want long-term growth platforms for items that tuck right into an existing franchise. So that is the focus. Katherine, I don't know if you have any other color on that?

Katherine A. Owen

I think it's fair comment given how many deals happen to hit, which as Curt pointed out, we can't predict it. Physically, mathematically, it seems it makes sense that we would probably do fewer over the ongoing 18 months versus the prior 18 months. But the teams continue to look at things, and sometimes the opportunity is there and you have to move forward. I would say we're probably further along in that suggestion phase that we feel better about our ability and our bandwidth internally based on -- we're really focused on post acquisition because if you look at the track record, why deals don't work, they really fell apart on integration a lot of the time assuming you pay the right amount, et cetera. So we want to make sure we don't get caught in that trap and not fully leverage the deals that we've done just to make sure that we're maximizing that component of the capital allocation.

Curt R. Hartman

Bob?

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Just to follow up on that theme, Curt, in your prepared remarks, you did make a comment that you might need to change the way you think about innovation. And you also said that you might need to make some bigger bets. And that goes directly to this conversation about M&A. So can you just flush that out a little bit for us in terms of what kind of innovation you're referring to? And I'm especially curious about the comment about potential for bigger bets.

Curt R. Hartman

That's a fair question. And I think as these folks who run the R&D functions look at their pipeline, so what's in development, the company has a long history of being somewhat focused on the D side of R&D and being a very good execution best [ph] follower company. Once we get into a market, we kind of set our sights. We find the features and benefits. We drive product iteration very fast. That's very important to this company. It's what puts up buildings like this and pays for light bills, et cetera. We will not step away from that in mass. So I think where the organization is today given some of the broader macroeconomic challenges and the health care challenges, so we're seeing a slice of that pie has to be allocated at some longer-term, bigger bets that will be perceived as either procedural changing innovation or procedural enhancing innovation. And we have not historically spend a lot of time there because those bets take a long time. And you have to be patient, and you have to be willing to fail and learn from your failure. I can tell you that everybody up here has allocated some portion of their R&D spend into those categories. It varies by business right now. And in fact, at the corporate level, we have spend that is protected from the operational ups and downs that is dedicated 100% into this category. And this is the review panel for what that group is focused on because at the end of the day, they're funding that R&D. So we're trying to change the model a little bit. We don't want to be radical and aggressive. We're not going to shift to all big bets. That's too up and down. But we are changing a little bit the innovation look of our pipeline.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then as a follow-up question. I'm just curious, especially since this second quarter was the first quarter you guys show an operating leverage in quite a while. As part of that equation, that waterfall to use your word, what sort of operating leverage -- putting aside the medical device tax, what kind of underlying operating leverage are you assuming you can achieve in 2013?

Curt R. Hartman

We haven't got that far out, Bob. Actually, sometime after 12:00 today, we'll be reconvening with all of our group CFOs in this team to continue to refine our plans. But we'll put that guidance, that more detailed guidance, out in a historical fashion more towards the end of the year. So we believe there is operating leverage to be had. We're not going to quantify that right now.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Maybe just go into a little more detail. Because we didn't get a lot of discussion on the Q2 call given that we were focused on some other issues. But what really drove the operating leverage this quarter? And should we expect that the rest of this year?

Curt R. Hartman

Well, I think there's a couple of things that drove it. Lonny clearly has a lot of projects underway and some of those start to materialize as the benefit shows up. When you look at the 3 other folks sitting here and how they manage their P&Ls, we run a pretty tight responsible businesses, and they know what their investment trends are and what they need to do or don't do. So I think it's a combination of good discipline investment at the op expense level and being judicious about how we spend our dollars but also looking at our business models and saying where do we need to make changes and how do we get more work done, spending less. And we see the company operating expenses this year as a company. Clearly, you guys can do a straight-line math, it's going to be north of $3 billion. It's a massive number. There's waste in $3 billion. They know it. I know it. The people in the organization know it. And we're challenging the organization to eliminate ways. And the company is pretty good at that. So right here. Let's switch sides. Sorry.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Matt Miksic from Piper Jaffray. So one follow-up on Ortho. Kevin, you talked about sort of sustaining the this kind of market leadership, market-leading growth. And looking at specifically in the U.S, periods of time when you've picked up above trend growth, for example, on Hips and in Knees. We've seen other companies come after that leadership with product, competitive products, similar products. We've seen this specifically in Hips. We're starting to see that now in hips, people coming after the mobile bearing segment getting ready to launch large, new knee systems over the next year. I guess what things can you do beyond the DTC, beyond important but some incremental asset of portfolio to drive growth? What sustainable strategies do you have? Is there a sustainable strategy for extended market-leading share gaining growth in Orthopedics? Or is it year-on-year gain of sort of above trend, that trend above trend, below trend?

Kevin A. Lobo

Yes. It's a great question. So what we've really done here, if you look at our first 6 months of this year, we're off to a very good start both in Hips and Knees. If you look historically over the last 15 or so years, the companies would tend to do well in one category and not well in another category. We actually really refined our portfolio. There's notion of power brands. I think we're absolutely invested in power brands. What that does is it focuses our investments to a narrow range of products. That also focuses on our field to really execute and drive. And so what we're seeing there, we have a pipeline of innovation centered around power brands. So while we don't have a new system to replace Triathlon for our knee, we have a number of incremental innovations that will bolster and reinforce that brand. So based on that focus and our tremendous execution in the field, we'll be able to stay ahead. If you look at the Get Around Knee campaign. So that's -- we already have a proven need for us to be in the market for 7, 8 years. We've done over 1 million cases. We're marketing this, but if you look at the new knees coming from [indiscernible] and DePuy, those are moving more towards a single radius. And we own single radius. So we need to stake our claim. And frankly, imitation, even if you look at volume as in mobile bearing hips imitating us, it's a form of flattery. And frankly, it also does lean credibility to the fact that it's going to grow the market. So it's going to continue to be a very competitive market, as it always has been, but I think we're much more focused than we ever have been on this notion of Power Brands. And through that focus with the existing terrific execution that we have, we see no reason why we can't continue to gain market share in every category.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And one follow-up for Tim on the MedSurg business. One of the things coming out of the second quarter was commentary on things like budget, IT, health care IT, EMR projects sort of hitting these milestones, maybe getting behind on their milestones or on their budget. Can you talk a little bit about is that something that we should be looking to improve in the next couple of quarters? Is that something that's going to take more than a couple of quarters to sort of shake out and help these folks get through their project? And are the new launches that you have in endoscopy and instruments, are those enough for you to offset that? Or is this going to be sort of a broader multiquarter period of sluggish growth there?

Timothy J. Scannell

I think the answer is varied by segment and that we've seen the most impact on our medical business, and that's been reflected in our results. Our surgical business has been buoyed by System 7, and we feel good about the outlook there. The camera, I think, with the life of those products and the demand and the excitement around new technology, that, that should be okay. In the medical business, capital has been constrained, as you noted. It's been hurt by reprioritization. I think the crux or the core answer to your question is we do see in the second half stabilization. We don't think it will get worse. And as Katherine and Curt had given outlook, perhaps a stable outlook for the Medical division in the second half is appropriate. And without a doubt, capital is tighter than in previous years. But again, we see it stabilizing and not getting lower. Kristen?

Kristen M. Stewart - Deutsche Bank AG, Research Division

Kristen Stewart from Deutsche Bank. I just wanted to, I guess, circle back on Lonny. For the first time, you've given explicit numbers in the audience, I appreciate it. But we've also heard about -- it sounds like a little bit more on the innovation side and taking larger bets, which I would assume they add to R&D investments required in emerging markets, and it sounds like you're up. So how should we just frame some of those savings in terms of what is just cushion room to make the appropriate investments versus what may give you actual operating leverage?

Curt R. Hartman

Cushion room, that's a new term for our budgeting process. I think what you heard folks speak about is a reprioritization of the R&D portfolio. Some of those longer-term bets may not necessarily be edited to the current activities. They may be a reprioritization. We may narrow the field. I think Kevin just spoke about this with power brands, narrowing the focus, eliminating some of the ancillary activities and reprioritizing those dollars. Clearly, when we look at emerging markets, it is an investment opportunity. And there have been investments going out in those markets. But I also think, as Ramesh tried to highlight in his slides, business model evaluation and a recasting of the business model to allow some of those investments but also supplemented by investments from the company is how we're going to get there. And so when you look at Lonny's effort at the manufacturing level, how much of that drops through, its -- you call it a cushion, I call it a bit of a plug, so to speak. Whatever we need to fund the right activities, we'll lean on Lonny. But we'll also lean on the other folks at the table to challenge them to make the right decisions and narrow the focus where appropriate. So I can't give you an exact percentage of what's going to drop through, what's going to stay in the P&L. It's going to be situational, and it's going to be laid out in the annual basis. So what I think you should expect is when we get to a point of talking about 2013 guidance, that we give you a little bit of a little bit of color around the net contribution, the EBIT margin and the leverage that we expect to see.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Is it safe to say that you see savings and the revaluation initiatives give you better confidence for sustaining a 10% top line growth for the longer term?

Curt R. Hartman

Certainly. I think the prioritization of what's going on in our company right now. When you take 31 manufacturing facilities to 25 and optimize that footprint. Your vendor, distributor, supplier relationships in the way we're organized today gives me a much higher degree of confidence that we have the path forward, not only next year but in the years ahead. At the end of the day, the easiest way to get there is top line growth. So the 3 guys sitting right here and Katherine are very focused on finding "fuel" for the top line. And that is far and away the easiest way to consistently deliver the 10%. And so it's a combination of both activities. We're not going to be all focused on expense and cost leverage. We're not going to be all focused on just top line growth. Its a combination of both. And that's what we're trying to demonstrate here.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And that commitment doesn't change with acquisitions, that would still lead in the focus with acquisitions of 10%. So...

Curt R. Hartman

Yes, yes. Exactly. Right in the middle.

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

Jason Wittes from Brean Murray. A couple of -- 2 questions. First off, on emerging markets, you talked about product integration or better product integration overseas. But 2 things just stuck out in the slide that I had noticed for a while, and the main one was the product mix hasn't really been appropriate for a lot of both Western Europe and emerging markets. And I think a lot of that has to do with the price points that they're at. And then secondly, it seems like there's quite a bit of infrastructure that needs to be built that you pointed out too. Both of those items seem like they're pretty long-term strategies. So can you give us an idea on sort of the timing that you see in terms of fixing up those regions and getting them to where you want to be?

Ramesh Subrahmanian

So I think, first of all, in the developed markets, our portfolio has actually been very relevant for those markets. We probably haven't leveraged them as fully as we can. In the emerging markets, I think that as pointed out, there is a segment of the market that actually values the innovation and the technology that we bring. it's a relatively small part of the market more than 1/3 of that market. We haven't scaled our presence in that segment as well as we might. So whether that's a regulatory issue around getting the right registrations, et cetera. Clearly, the price point is a challenge, if you want to expand that market widely. But there is a segment that we haven't yet fully captured. So the premium segment is that's why we will leverage scale, build up the distribution, et cetera. In terms of how long it will take, I mean, this is a long-term play. In the premium segment, we've made a start in places like China, which we can ramp up pretty quickly. Markets like Russia and Turkey, we were just starting to establish a foothold that will take a few years. And the question around the value segment, which is another very important component here, is that will be part of the combination of internal projects, which are moving along and which we need to need to accelerate and then really accelerate by looking at business development opportunities. So the emerging market story is a long-term play, but there are things we're doing right now, and we can continue to accelerate. And if you look at our history in markets like China and India, albeit from a very small base, we've actually been outperforming the market and grow quite significantly over the last 2 years.

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

And just a quick nuance question for you, Curt. You did mention -- and I heard you mentioned in the past that you were focused on sort of annual growth, not quarterly growth. At the same time, you guys are sort of like clock-working in terms of making quarters. Is there a change in strategy? Or how do we think about how you model the year and how we should be modeling the year and the quarters?

Curt R. Hartman

Our guidance is always on an annual basis. There are nuances one quarter over another. There are -- if I look at what I would call the evolution of med tech over the last 4 years, I think, by and large, not just Stryker but everybody, the second and third quarter have become tougher. The first and the fourth quarter have become -- I'm cautious about using this word, I don't want to say easier because there's no easy quarter right now in health care, but the second and third quarter seem to feel like they're a little harder to work through. I don't know if that's the pressures in health care and vacation scheduling. And anecdotally, I had a conversation with a gentleman who runs our Canada business and orthopedic surgeons in Canada know what the funding is. So they do a lot of surgeries up until May. They take the summer off, and they come back in September because they know if they work through the summer, from October to December, they're not going to have anything to do because of funding is done. So those nuances have crept into the market and I think made Q2, Q3 a little tougher, which probably supports Katherine and Mike's comment on the second quarter call that we thought people are a little bit ahead on the third quarter and maybe a little bit behind on the fourth quarter in terms of earnings expectations. Our goal here is still the annual commitment, and that's how we line up everyday. Mike? Right here.

Michael Matson - Wells Fargo Securities, LLC, Research Division

Mike Matson from Mizuho Securities. I guess, Curt, maybe you can talk a little bit about Trivo and how you're going to launch that product? Because it's obviously a huge market. It's very exciting. But I think it's going to probably require some market development. So maybe how you're going to go about training surgeons. And are you going to do anything to try to get more Stryker centers established and things like that?

Curt R. Hartman

Great question. So a couple of things. When we acquired Concentric, we fully integrated their current selling organization into NV. And everybody in both organizations sells the entirety of the bag. That's number one. Number two, when we set about on this path to be a complete stroke care company, we know that the stroke market from a mechanical device aspect has to be developed. You can go around the U.S. market and other key international markets and see where they have done stroke therapy market development. And when you partner with those folks, it gives you a very good roadmap on how to build a stroke therapy protocol. And it really starts with a patient because you've got to have the first responders who understand what's going on with the patient. You've got to know where to take the patient. You've got to have the clinicians and staff trained, and it is a different approach. So Mark Paul who runs our NV business has created a therapy development group within the Neurovascular business that works on a global level. And they are doing exactly what you described, which is key select markets, therapy development, partnering with leading institutions to help them develop or enhance their stroke therapy programs. Trevo, when it was improved, was on a Monday. We had our first case on Wednesday, and we had product in stock available for distribution. We had fully trained our selling organizations. We had done some didactic work in clinical training with a few key customers. And that's why in my prepared comments, I was able to say we've touched 150 customers with this device in a very short period of time, keeping in mind it was just approved in August. Internationally, we've had approval in the European market. Concentric is the only approved device. They're first-generation Merci device, the only approved device in Japan right now for stroke treatment. My numbers are probably a little off here, but I think there's something like 400 stroke centers in Japan. So we have a very nice presence there and a great platform to launch this next generation and once all the regulatory approvals come through. So we are learning from these different centers. We're learning from key U.S. centers. And it's absolutely part of the roadmap. It's not a 1-year event. This will continue. Stroke is a major cost to the U.S. and international markets, and we've got something that we think will really benefit patients in the cost side.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then I know you've answered this question in the past, but just given the timing of when the J&J and Synthes deal closed, I was just wondering if you've seen any competitive dynamics there related to that acquisition. Has there been any kind of fallout that's helped and/or hurt you guys in the Trauma or Spine business?

Curt R. Hartman

So In other words, you don't like Katherine or Mike's answer on that. So I'm going to take you right to the man and let Kevin answer that.

Kevin A. Lobo

So it's still fairly early. The Synthes team is running on the Trauma side. The Synthes team is really running the Trauma business. But we've been able to pick up some share and pick it up fairly quickly. It was in the transition of the J&J trauma business to BioMed. BioMed really wasn't as well prepared to take on that Trauma business, and we were able to take some accounts pretty quickly. So we see this window of opportunity as opportunistic. But certainly, within the J&J side, they're integration is reserved, are still in front of them. As they move to common compliance systems, as they move to common manufacturing systems, in the short term, we've seen less disruption there than we had at BioMed.

Timothy J. Scannell

Just real quick. There has been a slight fallout J&J and Synthes and ourselves and others of that slight pickup. In general, it's been fairly quiet.

Curt R. Hartman

David?

David R. Lewis - Morgan Stanley, Research Division

It's David Lewis, Morgan Stanley. Curt, the only piece of 2013 guidance that we haven't got all the qualitative comments are obviously the top line. So it goes -- I know you're not going to give us the top line today. So at least to the extent that some of the issues in the second quarter, which largely include international Recon, as well as the capital businesses, if those were weak next year, would you at least be willing to use buybacks or get more aggressive on buybacks to maintain a 10% earnings?

Curt R. Hartman

Yes, I certainly think our company has demonstrated in the past that we will pull all the levers necessary to deliver on our commitments. I commented earlier we have open authorizations right now in excess of $500 million. You can do the math on what that would mean from an earnings pickup. We're not going to long term deliver our earnings number via a lot of big buybacks. It will be part of the approach, and that's what we tried to demonstrate over the last couple of years. We hadn't been super active this year through the first 2 quarters in the market. I think we're rounding numbers here, about $100 million of buybacks year to date. So as we head closer to 2013 and as we evaluate what's going on in the international marketplace and the U.S. Medical business, we'll see if we need to pull that lever in a bigger fashion than we may have previously indicated. I would also just remind everybody, when you look at our second quarter results, there were some pretty good numbers in there. Everybody went to Europe and Medical U.S. But our Hip, our Knee, our Trauma U.S. numbers, our Instruments number in the U.S., even globally, we have some pretty good numbers. So we got a lot of leverage and benefit out of those, big businesses delivering. And we have every reason to believe that those should continue. And I have all the confidence in the world that our business leaders, not only those sitting here but the division president of Europe and Medical, these are not new employees. these are long-term performers. They know what they're doing. And we'll be back on offense.

David R. Lewis - Morgan Stanley, Research Division

Okay. Maybe just one quick follow-up. Ramesh, you were out of the room when there was some commentary about emerging markets. And I guess there's still one thing that is a little confusing. It sounds like the message today is not so much that we're not doing as well as we'd like in emerging markets. It's almost as if we weren't focused at all on emerging markets. If you look at Stryker versus peers, you're 6%, half of where peers are. You haven't been with Stryker as long as some of the other members of the panel up there this morning. So I wonder, it almost seems to some of us that there's some structural barriers to why Stryker has not been interested or not been able to penetrate those markets. And I guess maybe you can help us understand how much of these things in your mind were executional, how much of them are structural and how quickly they can change.

Ramesh Subrahmanian

So I'm not 100% sure what you mean by structural, but I think, for sure, the level of focus and investment and building of infrastructure has perhaps gone more slowly than one might have anticipated. Having said that, I think one of the positive surprises for me coming into Stryker is that we do have a tech center in India, which is coming off a pretty good scale. We have the manufacturing plant in China. For a company of our size, that's supposedly one where we did not focus on the emerging markets. These are fantastic investments to have. So I think it's a mixed bag, perhaps not as much focus and drive in some of those markets as we needed. But again, some foundation investments. So I think we're in a pretty good position to ramp that up compared to the part.

Curt R. Hartman

Okay. Let me just go right here. We'll go the sides in a little bit. I'm sorry.

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

Steve Lichtman, Oppenheimer. Kevin, you mentioned a couple of numbers that surprised me, one on mobile bearing, 20% competitive conversion, and then on Accolade 2, 400 new surgeons. I was just wondering, either quantitatively or directionally, are you being able to bring over the whole Surgeons business, Recon business, when you're converting them on those products or just specifically to those products? And in general, should we be thinking about Ortho, Recon being less sticky today than we have over the past 10 years or so?

Kevin A. Lobo

Yes. Obviously I don't have as much of the history around stickiness. It's clearly the market share didn't move much -- if you look in the past 15 years, we had a launch plan with Accolade 2 that was very, very focused on competitive surgeons. And we are getting more trials than we had historically. The feedback on how fast we're getting competitive conversions is very different than it used to be. It's still tough. We don't get their entire business. Sometimes we'll just get their primaries. We won't even get their revisions. We won't their get knees right away. So it's a dog fight. But certainly, surgeons are a little bit more open. It all has to do with how we sell them. And we really have to give the sales force confidence that we have something differentiated. And then the small [indiscernible], we have data. We have a lot more data and collateral when we launched products than we used to have. There are iPad apps that are very compelling and very engaging for surgeons. So I don't think that the business will flip as easily as

certainly when I was in the general surgery world, you could flip business much more easily than you can in Orthopaedics. But I would say its definitely less sticky. We've gained market share in Hips. Now this is not just a new phenomenon with Accolade II. Over the last 1.5 years to 2 years, we've caught J&J, and we're just hopefully we're in the process of passing J&J. That didn't happen 5, 10 years ago. So make those kind of moves in that kind of the timeframe. So that's why I feel optimistic about the pipeline we have, the sales force execution that we have and the focus that we will be able to continue to gain share.

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

Now, just one other one. On DTC, obviously, the decision cycle for a patient is a fairly lengthy one. But at what point do you feel you have the metrics to determine whether this has been successful and you're going to continue with it?

Curt R. Hartman

I think in Q3, we're going to have a pretty good early read. Right now, we're tracking our surgeon locator visits to our websites. We can actually see exactly after the television ad what kind of volume we're getting. The agency that we worked with works also with a lot of other consumer products and pharmaceuticals, and we're very pleased with the metrics that we're seeing right now. Q3 will give us an early read. And I think by Q4, we'll really have a good handle of what kind of media mix we want going forward. So when I say media mix, we're not going to give up on this get-around positioning. It is differentiating. Now whether we stay on television or at what level of GRPs we want to have, that's something in the fourth quarter we'll be able to communicate on. So Bruce?

Bruce M. Nudell - Crédit Suisse AG, Research Division

Bruce Nudell, Crédit Suisse. A question for Ramesh. Just to put some flesh on the bones, I mean, you have enormous share in the U.S. in power tools, let's say. And it's obviously much weaker ex-U.S. Could you give an give an example, just a practical example of what you can do to kind of like frame the ex- U.S. markets off to the kind of share you enjoy in the U.S. or maybe some other product line where there's some specific strategy that could help us understand what you guys are about?

Ramesh Subrahmanian

So I'll try here to be crisp. So first of all, I think we have to acknowledge that there are some markets outside the U.S. which we have actually even better share than we have in the U.S. If I take Australia for example, we have outstanding shares in many of the segments. So in those markets, we have taken the same technology, the same capability and been able to successfully launch that. In Europe, which is slightly different story, I think our choice of how to leverage the Stryker portfolio has been pretty varied by market. So you look, we might have a very strong presence in, let's say, Hip in the U.K. but practically no presence in Germany. We might have a very strong presence in Spine in Germany but nothing in Southern Europe. So it's been a bit of, going back to the point that Curt made, very decent choices were left up for individual markets perhaps not leveraging the portfolio as well. In the emerging market, different story, lack of scale. These products, if you take the example you use, they're very relevant and they're very desirable. I mean, customers are clamoring for the technology. Many of these guys are visiting tradeshows and medical events around the world. They're aware of our technology and dying for us to bring in it in there. The challenge for us in some cases has been lack of scale to penetrate that segment, and in some cases, simply affordability and purchasing power. So part of the challenge we have in some projects that we have working with Tim's team and others in his group are how do we take life cycle. Some of these older products that we have which we tend to phase out from the technology upgrade are extremely valuable in some of these markets. They don't want the latest one. They just want something valuable. How do we prolong the life cycle of that? And how do we perhaps change the way we design products so that we can engineer our products with similar features but not with all the bells and whistles at a much more affordable price point, which is what we're calling value segment? That's the work that I think will eventually differentiate us.

Bruce M. Nudell - Crédit Suisse AG, Research Division

And Curt, a follow-up to you. Just -- looking at the kind of list of levers you have next year, I was just listening to your response, I think, to David. It sounds like The Street's may not -- The Street's focus on share repurchase and stuff in your view might be misplaced simply because you think there's more room for top line acceleration given the compares in Medical and Recon and x U.S. major joints. Was I mishearing that? Or was that what you intended?

Curt R. Hartman

Well, yes, let me be really clear. There's no Stryker leader in this room right now that thinks next year's a layup. It's going to be tough. You can look them all in the face and say, "Is your number next year going to be easy?" It's not going to be easy. We're going to have to make some hard choices across the P&L from an investment standpoint. You can clearly hear from Ramesh investments we want to make in emerging markets, some infrastructure changes that we need to make. Tim and Kevin would clearly talk about R&D and selling organization expansions. Lonny, Lonny has got a list of priorities. If we could fund them all, he'd have more projects going than we could count because of the historical decentralized nature. So there's nothing easy about next year. What I was trying to demonstrate with that slide is we have a -- it's not all -- our outcomes next year are not all focused or predicated on just the top line or just buybacks. We're going to use every single one of those levers to deliver that 10% commitment while absorbing the med device tax. So it's a bit of everything. And we're going to have to make some tough choices. But what I was trying to imply is that top line growth is the single best driver of leverage earnings growth. And so our focus in the business is, number one, on top line growth while doing all these other activities to buttress that commitment. So hope that makes sense. Joanne?

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

Joanne Wuensch from BMO Capital Markets. Going back to emerging markets, it sounds like it's products, it's infrastructure. But obviously, it's feat on The Street. How do you think about your allocation of sales force resources over the next 3 or 5 years?

David Keiser - Northcoast Research

So the feet on The Street's story is also about expanding distribution capabilities. And so it's not just about having our products promoted, but it's also being able to service the accounts and reach out with the solution, et cetera. So that's what we need to build in parallel. And as you know, on many of the markets outside the U.S., particularly in the emerging markets, we actually don't have a direct model. We have an indirect model. So we need to figure out exactly where we would leverage that. If I take just China for example, we can anticipate a significant increase in our headcount in China over the next 3 to 5 years just to keep pace with our ability to scale and achieve geographic coverage.

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

Will you start pulling back from the United States as you invest out there. I'm just -- I'm actually asking a bigger-picture question.

Curt R. Hartman

No, no. And that's why I tried to say at the onset. Our U.S. business, our U.S. revenue and profit, we're not going to back off of that. These are U.S. market. For all its challenges, it's a phenomenal market. We're not going to walk away from that. Tim and Kevin love the challenge. The people in the organization love the challenge. They want to keep growing and taking market share in the U.S. We're going to make some priorities across this leadership team about investments. Ramesh is going to have to find a way across his team to do some self-funding by killing other priorities and starting up new ones. But we're not going to -- please do not misread. We're not going to walk away from the U.S. market.

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

And more specific nature, in Neurovascular, you talked about pricing pressure. Is there a way to quantify that pricing pressure? And can you discuss the transition in manufacturing from Boston Scientific to Stryker?

Curt R. Hartman

Sure, sure. And then we're going to have to wrap up. So pricing pressure in Neuro has been, I would call it, more geographic in a sense. Last year in Brazil, they did -- driven really by neurosurgeons who were losing clipping volume. They pushed through the government a price reduction in coiling. That was pretty substantial. That stuck in Brazil. This year in Germany, at the beginning of the year, they did a coil price reduction, and it stuck. We've seen it geographically but not necessarily on a widespread basis. Our technology and consistency of the pipeline is allowing us to absorb that and work our way through that. The second half of the question was manufacturing. So in the NV transaction, 3 physical sites had to transfer over to Stryker: the headquarters in Fremont, a small manufacturing site in West Valley, Utah. Those are both transitioned. They're large manufacturing was in a Boston Scientific facility in Cork, Ireland. That facility, those products will actually be picked up and moved into a brand-new facility that is currently being built. That transition will happen -- or is in process and should be complete by mid-next year. Obviously, Boston today serves us as a supplier. When we become the direct manufacturer, there are obviously different cost components. We haven't comment on how that will work through the P&L. But there's also a lot of the costs when you stand up a facility and things of that nature. Quality Systems have to be the revalidated, put in place. Registrations because of change of address have to be redone. So we're in process and feel good about the 20 months worth of integration we've done and the remaining months ahead of us.

So with that, folks, it is 11:00. Let me just talk through a quick summary. I appreciate all of you who attended last night. I appreciate all of your time and attention today, the questions. Sorry we couldn't get to all of them. Again, hopefully, you found the session valuable. Please provide comments to Katherine and myself. And hopefully, you walk out of here with a renewed confidence in Stryker Corporation, our ability to deliver on our commitments and fundamentally -- fundamental strong belief in the leadership team, which I would argue is one of the best in the industry, if not the best in the industry. So with that, for those of you who go on the tour, we have to get on that right now. So please exit. Go to the bottom of the stairs. We have tour guides. And with that, we are adjourned. Thank you.

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Source: Stryker Corporation - Shareholder/Analyst Call
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