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Good afternoon. Welcome to Stryker's Analyst Meeting. For those of you that are attending on the webcast, I look forward to sharing with you a very exciting day filled with physicians as well as business updates. You can see here on our agenda that we have a number of physicians that will be joining us, some panels, and a spotlight on three of our divisions, Neurovascular, Trauma & Extremities, and Endoscopy. You'll also hear from our CFO and our head of global quality and operations. At the end, as we have done in the past, we're going to have a product fair. In that product fair, you'll not only get to see a lot of products, including our Mako robot, but you'll be able to interact with our management teams as we have a number of our division presidents that are in attendance today.
I always like to start with our mission and values. We launched this five years ago, it is a rallying force among all the divisions and regions of Stryker. We've had some additions to our leadership team over the past year. As you know, Lonny Carpenter and David Floyd retired from Stryker. We have Tim Scannell promoted to President and Chief Operating Officer, as well as two new group presidents, Andy Pierce and Spencer Stiles. We also have Bijoy Sagar, who's been with the company for about four years. His role has expanded to include digital and a much bigger emphasis on digital in partnership with our divisions. Then about six months ago, Viju Menon joined the company, he is the head of global quality and operations, and he'll be presenting to you a little bit later on. Some of those changes created opportunities for promotions.
We have two new division presidents, Dylan Crotty and Brent Ladd. They are both here in attendance and will be at the product fair, and you can look forward to interacting with them. We also have Brad Saar, our President of Medical, and Stuart Simpson, our President of Joint Replacement, who are in attendance and will be at the product fair as well later today. This is our company strategy, which we unveiled at the beginning of the year. It's frankly the same strategy we've had for a number of years, but we've really laid it out on paper that we share internally and externally with four key pillars, Customer Focus, Innovation, Globalization, and Cost Transformation. This is also a common slide that you've seen in the past, just emphasizing the diversity of our business, but yet very strong businesses within our three segments.
Across our businesses, we aim to be a leader, not only a fast-growing businesses, but also strong leadership presence, number one or number two in just about every piece of that pie. This slide shows the history of growth of our company. Since we went public in 1979, we have grown sales consecutively every single year without fail. 38 consecutive years of positive sales growth and of course, this year will be another one of those years based on the guidance we've provided. You've seen the strong top-line momentum for our company with organic sales growth at the high end of the med tech every year for the past six or seven years. How do we do this? Really, our decentralized operating model is a key element of that success with dedicated sales marketing, R&D, and business development in every one of our divisions.
Very strong product pipelines across our divisions. We've made significant bets in R&D and now have leadership positions because of those bets in robotics, 3D printing, advanced imaging, and a number of other areas. Very disciplined and active business development, which I'm sure you've seen. 2018 actually is our sixth consecutive year of accelerated organic sales growth. Six straight years of every year accelerating our organic sales growth. We feel very well-positioned to deliver a strong top line again in 2019. If you look at the last two years, our organic sales growth has been north of 7%, and based on the visibility that we have today, we would expect a similarly strong year in 2019. As well as a strong organic sales growth, we also are focused on driving operating margin expansion.
Here I've listed just a number of the items that have helped contribute to the strong op margin expansion that you've seen this year. You can see product life cycle management, procurement, progress on shared services, and modernizing and standardizing our IT systems across the company. In the little box on the bottom, you can see it talks about our commitment, which Glenn, our CFO, will mention later, of driving operating margin expansion of at least 30 to 50 basis points. We're doing that in spite of significant dilution from acquisitions. This slide shows you the deals that we've announced, the larger deals. You can see how active we've been in BD. You can see there in green the deals that were pending. K2M, you've heard already this morning the release that was issued by them that that deal is very close to closing.
We're very excited about that acquisition, you can see we've been very active. Most of the deals are in blue, which means they're core acquisitions. Occasionally, we do one that's in a bit of that teal color, which really are adjacencies, and then you have the ones that are pending. In summary, 2018 is going to be another strong year of organic sales and earnings growth. You've seen the number of times we've raised our guidance over the course of the year, including at the end of Q3. We're confident that we're going to continue to grow organic sales at the high end of med tech in 2019. Obviously, we will give our formal guidance at the end of January as we customarily do.
We've made great organizational changes, really strengthened our commercial organization, I believe that these changes are going to help us to continue to drive very robust top-line sales. We have a very healthy new product cadence across the company and a continued strong BD pipeline. Our Cost Transformation for Growth is now year three. You can see based on our performance and our results that it is translating into meaningful and sustainable operating margin expansion. Through this entire period over the last six years, our capital allocation priorities have been consistent. First priority for use of cash is M&A, second, dividends growing roughly in line with our EPS growth, and lastly, share buybacks. Really the share buybacks mostly just to offset dilution. If acquisitions don't occur in a timely manner, then and only then will we actually increase the level of activity on share buybacks.
With that, I'm going to now turn it over to Neurovascular. Our President, Mark Paul, joined Stryker in 2011. He came over with the acquisition of Neurovascular, he has done an outstanding job driving the business. As you've seen with the performance of our Neurovascular division, it's been probably the fastest-growing division of our company since 2011, he's going to introduce a surgeon panel as well. Please come on up, Mark. Thank you.
Good afternoon, everyone. It's my pleasure to be here with you today and to share the story of Neurovascular. Again, my name is Mark Paul, President of the Stryker Neurovascular division. This is really a story about innovation. It's a story about clinical leadership, it's a story about a global business where we work very close with our clinicians and they work very close with us as we work on products and technologies and training to make stroke history. Together, you've seen some of those results where we've been able to recently do that. Let me invite our physician panel up to join us here on the stage. If you gentlemen will come up. Thank you.
We have three exceptional physicians here with us today. I'd like to thank them for taking time away from their very busy practices, away from their patients, away from their families. I guess we're sitting in reverse order. I'll start with the way the pictures roll. We have Alex Coon, is an adjunct professor at Johns Hopkins University. Dr. Coon has a unique experience in that he's been a part of every flow diverting stent study in the U.S. and has very rich experience there. He'll be able to speak to procedure in detail. Next is Dr. Brian Jankowitz, assistant professor at the University of Pittsburgh Medical Center, UPMC. Dr. Jankowitz was our co-PI of our ATLAS PMA study and has been published in over 80 peer-reviewed journal articles.
We have Dr. Ryan McTaggart, who is associate professor of radiology, neurology, and neurosurgery at The Warren Alpert Medical School of Brown University. Dr. McTaggart has a very unique experience in that he built a complete stroke system of care all through Rhode Island that leads patients quickly to treatment in a comprehensive stroke center in Rhode Island. He also has a unique experience in that he's been innovative in how to use combination techniques to treat patients with ischemic stroke so you can quickly remove the clot for first-pass efficacy. We'll come back to these physicians here in just a moment. I'll make a few comments about the Neurovascular business. I'll ask some starting questions of each of the physicians, then we'll open it up to the floor and you can ask questions to the physicians and to myself.
Katherine will do the selection of the questions. People to raise their hand and we'll go from there. Let me talk a little bit about stroke. Stroke is a very complex disease. A stroke occurs every 40 seconds. Every four minutes, somebody dies. There's approximately 800,000 strokes in the U.S. The World Stroke Organization will use the number of 14 million strokes worldwide. We think the addressable stroke market, where people live within proximity of hospitals around the world to be treated, is 5.6 million patients. We're excited about all the work we've done with ischemic stroke and hemorrhagic stroke. You may recall just a few years ago that the leading cause of death was actually number four for stroke. It's actually moved down to number five. It still remains the leading cause of adult disability in the U.S.
Today, in regards to ischemic stroke, where we've had dynamic growth, we're actually only treating 13% of the available large vessel occlusions. Worldwide, there's approximately, in the addressable stroke market, about 1.6 million large vessel occlusions. We'll finish up this year somewhere in the range of only 100,000-115,000 treatments worldwide, all companies. We have a long way to go. We're making great progress in systems of care that are maturing. We have comprehensive stroke centers that are coming up to speed. We continue to innovate new innovations and do clinical trials that are opening up new pockets for patient care. Kevin spoke to our mission statement. This is a powerful statement for the Neurovascular division. Together with our customers, we're driven to make healthcare better. How we achieve that in our division is complete stroke care.
When you work in our division, that's what we talk about every day. Products for stroke, clinical trials for stroke, training physicians for stroke. That's what we do every day. It's our only focus. It's our ongoing promise. I would like to recognize our over 800 employees around the world. We have our headquarters in Fremont, California, where we have most of our functions. We manufacture our products in Salt Lake City, Utah, and in Cork, Ireland, and we have commercial teams in over 60 countries around the world. These are very dedicated employees that are really purpose-driven because they're very dedicated to treating patients and supporting our physicians to treat patients for stroke. Let me tell you a little bit about the story.
The very first procedure was in 1990, our organization had developed the very first microwire, the first microcatheter, and the first detachable coil called the GDC coil. From that first procedure, we'll finish this year, the market size should finish up around $2.5 billion. Our most recent history of our story has resulted in exceptional growth. From when we came over to Stryker gave us the means to operate, they gave us dollars to invest in clinical trials and R&D development. Over the last seven years, we've launched over 22 new devices, as well as we've completed clinical trials whose outcome changed healthcare guidelines for ischemic stroke. The DAWN trial, which we completed for ischemic stroke, proved that you could treat patients beyond six hours.
Remember, for the last umpteen years, everybody was treated for stroke, three hours for tPA and up to six hours with a stent retriever. The DAWN trial studied patients between six and 24 hours. It resulted in a 271% improvement over the medical arm. Supported by the NIH DEFUSE trial, led to the American Heart guidelines being changed just earlier this year to allow treatment up to patients out to 24 hours. Our story is really a strategy that has three legs to it. It's continued R&D innovation. It's investment in clinical trials that open up new treatment cohorts of patients and market development, varying by size and scale, depending on the size of the country. As we look forward into 2019, our strategy's not going to change. We have a very heavy and robust spend in R&D.
We have R&D projects that are working on next-gen concepts in every major category. We continue to work on clinical trials. We just started three new studies that will open up the market even further if the clinical outcome data is there for these new little pockets of stroke treatment, and we'll continue working on market development around the world. Let me talk a little bit about the hemorrhagic side of the business. The hemorrhagic side of the business is aneurysms. We call it hemorrhagic. It's really an aneurysm segment. We treat both ruptured and unruptured aneurysms. About 60% of the market is ruptured aneurysms. We do this through a variety of microwires, microcatheters, coils, and adjunct stents, and other accessories.
Our strategy in this segment is to offer the full range of products to do the complete procedure and to hold a number one or number two position in every major category. What's exciting about the Target detachable coil, it's the leading market share coil in almost every single country in the world. Recently, we've received approval to start selling our Neuroform Atlas stent. You can see the picture of it there. What's exciting about that stent is it's the first stent that can go through an 016 inner lumen, so our smallest lumen. We're talking a lumen about the size of a pencil lead coming up through the right femoral artery in the groin, we can do the complete procedure. We can place the stent and the full range of coils all through one access catheter.
We'll continue working on next-gen products in each one of these categories, we're very excited to enter in a new segment of growth for us, this is the flow diverting stent segment. We recently received FDA approval in the United States. It's only the second flow diverting stent ever to make it through the rigorous trial process and the FDA process. We were excited to gain FDA approval without having to have an FDA panel. It's unique in several ways. One of which is the longest stent on the market. When you're trying to treat these large and giant and large fusiform aneurysms, instead of trying to telescope flow diverting stents through those aneurysms, you can now place one stent.
It's delivered over a wire, if you have to go back through the stent or use a balloon within the stent, it gives you some options for treatment there. We're very excited about this. Launching flow diverting stents is not an easy thing. This will be a controlled rollout of our launch. For every physician that uses a flow diverting stent, they have to be proctored for their first five cases. What we're doing now is we're now training our proctors. Once those proctors are trained and we have inventory that's coming in, starting next week, we'll do our first case. We'll start training all of our accounts around the country. This will take some time, we're very excited to enter this market. This market segment is about $250 million worldwide. The United States is about half of that.
We're excited to be entering into this new growth segment, now we'll be able to offer leading technologies across the entire spectrum in the treatment of aneurysms. Shifting gears quickly to ischemic stroke. We have the same strategy. We want to have the number one or number two product in every single category. Many of our competitors have parts and pieces. We've aimed at building out the full armamentarium of devices. Why is that important? When you look at ischemic stroke, you have a lot of variation in tortuosity of the anatomy, the location of the clot, the size of the clot, we want to make sure we have devices there that allow the physician to use whatever technique they find best in their hands and in that patient's anatomy.
About 50% of the market starts with aspiration, and when aspiration fails, they'll convert to a stent retriever. That happens anywhere between 30%-50% of the time they'll have to convert to get the clot out. Other physicians start on the other spectrum, where they'll start with a balloon and a catheter and the stent retriever all loaded up, and they go in, and they control the flow, and they use these combination of devices to try to improve first-pass efficacy. We are respectful of all these modes and techniques with our physicians. We want to make sure that we have every product available to allow them to treat patients. We're excited about the Trevo XP. It's the first device to receive an indication for stroke and reduction of disability, and it's the first and only device to have a full 24-hour indication because of the DAWN trial.
We're very excited to announce our recent launch into the large bore aspiration segment. This is really our last segment in our full product offering strategy. The AXS Vecta features an 0175 inner lumen. It's designed to go through a long sheath that has an 0.19 inner lumen, and these are designed for physicians who want to go straight into the clot as quickly as possible. Again, 50% of the market will try to aspirate that clot out. If they can't get the clot out, it's designed for the Trevo to come out that tip, grab the clot, and bring it back in. We think this segment is about a $77 million segment in the U.S., $143 million worldwide, and we're very excited. We're just literally getting the first units out the door, so we haven't had a lot of usage yet, about 100 cases.
You won't really see material sales till you get into the first quarter of the new year. One quick comment on our Neurovascular clinical leadership. Part of our strategy, it's actually the second arm of our strategy. We've been very successful in running PMA studies with the SCENT trial for flow diverting stents and our ATLAS study for adjunct stents. The data, it will come out whenever we've launched, for example, the ATLAS stent with its performance and its data. It's quickly become the market leader in every country that we've launched in. We still have many countries yet to launch in. The DAWN trial I've made comments to and the Trevo registry that we conducted worldwide, and we're still working on ICAD with the REVEAL study. We continue to do more clinical trials.
We've started studies where we're looking at extremely large strokes and is removing the clot health in those patients. We're looking at mild and small strokes. Does that open up the market? We're funding another study with the Dutch government and the Dutch physicians called MR CLEAN-NO IV, where we skip the IV step and we go straight to treatment. Again, trying to accelerate treatment of ischemic stroke patients. Stroke therapy awareness is critical. Every second counts. Every minute that you're having a stroke, you lose 1.9 million neurons. What does that mean? Every hour is about 3.6 years of accelerated aging of the brain. The average stroke case, the average patient loses 36 years of accelerated aging in the brain. Every minute and every second counts.
We have training and development programs that move from the emergency responders to primary stroke centers to comprehensive stroke centers. We do different training programs in every country around the world. All these systems of care are very, very important, and as these systems of care come up to speed, patients can come to the system quicker and have better outcomes. Even though you have up to 24 hours now to be treated, you want to get to a stroke center as quickly as possible, get on the table, and have one of these physicians remove that clot. All right. Let's take a break here for a moment and shift over to our physician panel. I'll go ahead and ask a few questions to get us started, then I'll turn time over to the audience.
Since we just finished on market development, I'll first turn to Dr. Ryan McTaggart. You have a very unique experience in building a complete system of care through an entire community that moves the patient very, very quickly from primary centers into a comprehensive stroke center. Is that model that you've built in Rhode Island, is that replicable around the rest of the country?
Absolutely. Let me first start by saying it's a privilege for me to be a physician at this time in medicine, because this is an unbelievably effective therapy we have now. We have a cure for stroke. We just really need to execute it. That execution is changing our systems of care so we get patients early access to this therapy. I would just add one thing you said about time. Every time the system moves quicker for patients, we save the healthcare system over $1,000. Changing and transforming our systems of care is very important. Two methods we used in Rhode Island is we changed the point of entry. We have stroke patients now mimicking the same point of entry for level 1 trauma. They come to the state's only comprehensive stroke center.
Number 2, we improve the efficiency of the operations or the care of stroke patients that are partnering hospitals. Not only are these patients identified, but they're shipped to us more quickly. In doing those two things in 2014, we did about 14 cases, and this year we're on pace to do about 300. When you do these things, when you improve access, there's a huge jump in volume. Even more importantly than that, there's tremendous savings to the healthcare system.
That's outstanding. Just so everyone understands, that's an immense sign of progress to get the entire community to align to move patients quickly for care. Shifting gears to your technique. You've been very novel and innovative in how you use different combinations of devices to improve treatment of actually when the patient's on the table. Do you want to share your thoughts and comments about that technique and any products that they have that helps?
I guess my little confessional here is that when there were 14 cases, there were three of us doing them, and now there's still three of us doing them, and there's 300. You can imagine there's great motivation to do the case quickly and do it well. I think when you're faced with that, there's been a sort of an evolution in that we want to go with a primary combined approach to get the vessel open. It matters how fast you are, but it matters how well you open the vessel. We now use stent retriever technology in combination with distal aspiration technology and a balloon guide catheter to get complete restoration of blood flow the first time we attempt to open the vessel. We term that technique CAPTIVE.
Others that are in the same predicament as I am, a lot of cases need to get them done quickly. There's been a convergence. There are other names for this technique, SAVE, TRAP. Those of us that do a lot of cases and are invested in getting the blood vessels open completely and quickly have converged on using a primary combined approach, aspiration stent retriever technology, and a balloon guide catheter, so we get that first mechanical pull done right.
Excellent. Let us shift gears now here to Dr. Jankowitz. Dr. Jankowitz, again, was our co-PI for the Atlas stent, and he's used the product. He's also seen everybody's data from all the enrolling centers. What is it about adjunctive stenting and coiling? How is that important in your practice, and how has the Atlas stent helped contribute to treating your patients?
Also in the interest of disclosure, I'm a dual trained neurosurgeon, I love to treat open aneurysms the classic way we've been treating aneurysms for over 50 years, opening the skull and clipping aneurysms with titanium clips, but I also treat aneurysms from the inside out, from an endovascular treatment perspective. We've seen stents allowing us to treat a greater variety of aneurysms that we never thought possible. Even five years ago, I didn't think it was possible to treat certain aneurysms with endovascular techniques. Stents have really opened up a variety of aneurysms that were not able to be straightforward coiled. I'm a late adopter, I very cautiously started using the Atlas stent to treat distal aneurysms because this stent could be deployed through a small microcatheter into the smallest vessels that harbor aneurysms.
I started applying it to bifurcation aneurysms that I typically thought were only amenable to an open craniotomy. Finally, because I like to leave as little metal left behind in a human body, I started to apply it to cases where many people might flow divert because it has the least metal coverage of any stents on the U.S. market, which has profound long-term implications for long-term dual antiplatelet therapy. I'm a simple neurosurgeon. I like simple, straightforward devices that are designed to do one thing extremely well, I really believe the Atlas stent is really designed near to perfection to treat complex intracranial aneurysms. I've watched my open volume gradually decrease as I've started to treat more of the patients that I thought could only be treated with open surgery, they've shifted to my endovascular practice.
My patients and I really couldn't be happier.
You mentioned flow diverting stents. It's a different stent concept. You could have an aneurysm where you could apply different forms of technology and different techniques. In your practice and with your experience, when do you use a flow diverting stent versus using an Atlas and Target coils? Where do you differentiate between those two technologies for treatment?
I think flow diverting stents revolutionized the market. I think they give us the potential to literally recreate a blood vessel from the inside out. Once again, I'm a minimalist. I really like to leave the least amount of metal left behind inside an artery. If I can, I like to use a stent coiling construct, even for ICA aneurysms that really are the bread and butter of most flow diverting cases. I think that nowadays in my practice, vessels that are completely blown out and destroyed. If you look down the barrel of a blood vessel and over 180 degrees of that blood vessel are diseased or blown out in a fusiform way, that's when I tend to use a flow diverter. I've been able to get away using an Atlas and coil and the standard coils the majority of the times when I've applied them.
Thank you. Dr. Coon, you have this great experience with flow-diverting stents, and you've had the opportunity to use all the different technologies that are available and have been a part of all three studies. What is it about the Surpass flow-diverting stent that would give any unique characteristics to help you treat your patients?
Thanks, Mark, again, I want to thank you for giving me the opportunity to share some of these experiences here. The Surpass flow diverter, the benefits of this device are inherent to its engineering properties. This was not a me-too device. It was a device that specifically was designed to improve on some of the limitations of the original flow-diverting device available on the American Pipeline device. The first thing is the way it's made. Flow-diverting stents are braided stents, braided made out of cobalt-chromium metal. Those of us who deal with these know that unlike Nitinol stents, which have intrinsic opening ability, one of the banes of flow-diverting stent procedures is getting these devices to open. The Surpass device, instead of having a fixed number of wires in the braid across all diameters, increases its numbers.
For example, the Pipeline device has 48 strands across all diameters. Surpass starts with 72 and makes its way up to 96 wires at its biggest diameters. This gives it intrinsic extra opening strength, which is a necessity in these procedures. There's an expression, Surpass always opens. It's true. It always does open, and that portends safety for the patient. The second feature of it, going along those same things, more metal strands. If Dr. Jankowitz is a minimalist, I might consider myself a maximalist. More metal strands across the neck of these aneurysms promotes healing. By adding additional metal strands, it was designed to give, for lack of a better word, a bigger flow diversion effect.
This is something we saw in the American Surpass study, where we were able to achieve similar occlusion rates as were with Pipeline, but using only one device versus the three devices used on average in their study. Finally, the other feature of the design, the preloaded over-the-wire nature of it allows for these devices to be made in long lengths. The longest Surpass device is a 50-millimeter long device, versus a Pipeline, it maxes out at 35 millimeters. This allows for spanning these tremendous lengths of fusiform aneurysms and other pathologies that we treat with these technologies with a single device. That, at the end of the day, adds safety, it adds cost effectiveness for the center, and I honestly believe it also adds increased efficacy.
In regards to ruptured or unruptured aneurysms, how do you make a decision on what to use with, say, a flow-diverting stent or a coil and Atlas case? How do you make your decision?
In the setting of a ruptured aneurysm, we try to avoid using antiplatelet medications that are needed when you put metal stents inside the lumen of the artery itself. We try to only place things within the sac. Typically, we try to coil these aneurysms using adjunctive devices such as a balloon if we need to hold them in. Sometimes we need to use stents in that setting of a ruptured aneurysm to do that. One of the key things about flow-diverting technology and even Atlas stent technology is that sometimes when we're treating ruptured aneurysms, you can't get the perfect outcome at that first go. This allows for a 2 stage procedure where you can come back and finish the aneurysm off with curative therapy using Atlas or Surpass or whatever device you use in kind of a staged fashion.
The bottom line is that cerebrovascular is very heterogeneous, we see a lot of different types of pathologies and a lot of different situations. We need the tools to be able to handle a lot of different situations, the toolbox that you're developing and offer to us really assists with that.
Thank you. Coming back to Dr. Jankowitz, I'm shifting gears to ischemic stroke. You're a physician that starts with aspiration, and that's always been your belief. We have doctors that have different beliefs and the various techniques. Very different than Dr. McTaggart's. They're both effective. You've recently used the new Vecta catheter, and what was your experience with that new technology?
I think that you've long made the best device in just about every category that you explore, your aspiration catheter finally caught up. I like simple devices, as I said. I train fellows, four fellows at any given time, I will let them use a Vecta catheter and a microcatheter and a wire because it is safe and simple. Even in a fellow's hands who's done only a few cases, I find they can consistently thrombectomize the patient quickly and cheaply when you compare it to the use of other adjunctive devices. I'll go toe to toe with your technique any day, Dr. McTaggart.
Dr. McTaggart, you're a big balloon user. Why is using a balloon in ischemic stroke cases important to you?
I think it's just a bailout if you're CAPTIVE or TRAP with this primary combined approach isn't 100%, and that flow reversal that the balloon guide allows, I think is important.
These conversations reflect how we work with our physicians. Their techniques can be unique. They have different perspectives. They have different experience bases. It's important for us as a company to make sure we offer the full range of devices so that we have a number 1 or number 2 performing device in every category so the doctors can take whatever devices they feel is important for that customer to treat them. Why don't we open up the floor now to questions.
Whether it's the physicians or Mark, if you just give us a second because we've got a lot of people on the webcast to get a microphone to you, Larry, and just name and affiliation again for the webcast.
Thanks a lot. Larry Biegelsen, Wells Fargo. Just one question for Stryker and for the clinicians. Just on the mechanical thrombectomy market in the U.S., there's not a lot of good data available. I think you talked about 100,000-150,000 procedures worldwide. If we just focus on the U.S., we estimate about 35,000 in 2018, about 30% year-over-year growth, and about 17% penetration. I'm just curious, from Stryker's perspective, how close are we? From the clinician perspective, where do you see this going, let's just say over the next three to five years, given the number of 800,000 strokes in the U.S., about 750,000 ischemic strokes. How big can this market, where are we in the evolution of the mechanical thrombectomy market? How big can it be?
I threw out a lot of numbers, just whichever is easiest for you guys, for the clinicians to speak to. Thanks.
Yeah. Excellent question. Thank you. The U.S. market, we think it'll finish somewhere between 33,000 and 35,000 cases. We don't get the data immediately. It lags. We find out about March or April, but it looks like the trends are moving in that direction. We've been experiencing exceptional growth. This year was no different. We had high double-digit growth, and probably at the higher end of the range versus our competition. I think moving into the next few years, I think that the growth will be non-linear. It's been non-linear the whole time, that the quarters can vary greatly as we move along. I do think that we'll be in good, solid double-digit growth for the next few years looking forward. It really is the amount of physicians that can treat the systems of care as they mature. The patients will keep coming.
It's our ability to capture them and move them there quickly. Three years ago, when we bought U.S. data, there was over 160,000 ischemic stroke patients, eventually arrive at a U.S. hospital too late or the wrong hospital. We've been trying to address that through training, through systems of care to move the patients quickly through, the DAWN trial changes everything. Where they used to say, "Well, it takes 3 hours to transfer a patient from hospital A to hospital B," now with the DAWN trial, you have up to 24 hours. That opens up the greatest cohort of patients, not only in the United States, but in countries around the world where you have great traffic difficulties in getting patients to move quickly. Who would like to take a shot at answering? You want to take it, Ryan McTaggart?
It's a very difficult question to answer because the Achilles heel for this cure we have for stroke right now is really systems of care. A real feather in Mark's cap, quite frankly, is that I think they have probably the best stroke therapy team, the best educational team out there, which I think is just as important as equipment right now because that's what's getting patients access. In addition, the needle for who should have the procedure is also moving. These trials were designed to really find some sweet spot signal, a lot of trials are now finding that, well, we sort of overshot the goal. There are patients that would've been excluded from those trials that are benefiting from mechanical thrombectomy. The Achilles heel is changing our systems of care.
There's also going to be a lot of growth because the target is actually, the bar is going to get lowered because everyone seems to be benefiting, even patients with large amounts of significant amounts of dead brain when they arrive.
Thank you.
Thanks very much. It's Bob Hopkins from Bank of America. Quick question. I'll start with Mark and then a question for the physicians. First, Mark, I was curious on this Vecta catheter, can you just highlight where you are in the commercial launch of that product? It sounds like it's coming, being priced at a discount. Maybe if you could just talk about that a little bit. Then for Dr. Jankowitz or whoever else has experience with the catheter, with the aspiration catheter, can you maybe compare and contrast it to the current market leader with Penumbra? Thank you.
Thank you. We're just virtually starting the launch process. I had seen some earlier write-ups that perhaps we had launched a while ago. We're actually just starting the launch process now. We're just going through our, what we call the PPE process, where we have the first devices used to make sure that the performance is what we saw before seeking approval, just to make sure everything works. From a pricing perspective, we're not discounting the product. We are working through all the VAC committees. It takes a while to work through the VAC committees. That will take a little bit of time as we're scaling up inventory. I expect to be in full launch really by January as we work through the next few weeks on getting through all the VAC committees. Did that answer the question you had on my side? Okay. To the physicians?
I've had the luxury of using that device in 10 separate stroke intervention cases. For the first time, I've seen an aspiration catheter now surpass the newest generation Penumbra aspiration catheter. Their new product line, I think, has achieved a size and dimension that actually has hurt its ability to get onto distal vessels. I think the Vecta 71 now is the pound-for-pound the best aspiration catheter. I'm attuned to aspiration catheters because that's the way I like to treat acute stroke. I know the aspiration catheter market very well.
Bob, another element to this is, to get these catheters to become large bore, you have to hold the same outer diameter. All of us, manufacturing-wise, are trying to thin that wall out. What we're very excited about this is when aspiration doesn't work the first time, and it depends on what study you use, it can be 40%-73% success. When they don't, when you take the stent retriever out and you come back in, sometimes these stent retrievers can crunch up on the distal tip. We designed the Vecta so it can both work as an access catheter aspiration, but also allow the retrieval device to go in and out without damaging the distal tip. That's one of the unique features about it.
Thanks. Over to Rick.
Rick, a little bit off the wall question. I'm just wondering, Mark, I'll ask you, and I'd be curious if the doctors would chime in as well. Is there any place for robotics in treating stroke? Is that something important to you? Just reflecting on the need for precision, predictability, when you talk about your volumes and the requirement to process a lot of procedures. Is there a role? Is this something you're contemplating that the doctors would be intrigued by? It seems like robotics are important elsewhere at Stryker.
Yes. Personally, we would love to have a robot help us with our procedures, guaranteed. I don't see anything on the horizon that I've seen. At Stryker, robotics is important to us. We're looking to expand robotics to a lot of our systems of care. Currently in the Neurovascular space, I haven't seen anything yet on the horizon for us. I would say, as a big, broad statement, I don't see anything in the first five years. Perhaps from that five to 10-year segment, when robotics continues to refine and the motor skills required to move these catheters up into the microvasculature in the brain, which is very tortuous, could there be a role down the road? Yeah, I think so. What do you think as physicians?
As it stands now, I don't see the application for endovascular treatment of stroke. One segment of the stroke population that we didn't talk about was intracranial hemorrhage. I have a grant that is utilizing a different robot, because that's the only robot we have at the University of Pittsburgh, to aid in the treatment of evacuating intracranial hemorrhages, as in spontaneous intracranial hemorrhages, non-aneurysmal and non-ischemic. I do think that the utility of robots is already in the field of stroke care. I think it's only a matter of time before we figure out ways to utilize it in more creative ways.
Yeah. I mean, the way this world is headed, who knows. Just for some perspective, it takes me about, on average, 14 minutes to do this case from start to finish. I think that's going to be difficult to top.
Go to David.
Thank you. David Lewis, Morgan Stanley. Just two questions maybe for the doctors. Dr. Taggart talked about the stroke care pathway being adopted in his particular medical region. I wonder if the other two physicians could comment on, we all know the technologies work. Access is the real dynamic. In your particular markets, are you doing everything you can do from access? What can the industry do to help you improve access? What are the key barriers to getting these patients, frankly, in your hands faster?
Coming from Baltimore, I can honestly say that Maryland is incredibly underrepresented, the state of Maryland, from the stroke numbers that actually receive mechanical thrombectomy. It's a function, and it's attributed to by the fact that, to be honest, stroke care doesn't pay in the state of Maryland. People who have stroke are treated locally. You don't go out of state, and it brings a challenge. It's something in a lot of places where the systems of care are not there. When we say systems of care, it's not just does the ambulance bring it, but are the payer systems set up for it? Are hospitals competing? Whatever that may be.
I think that is a multi-prong element of this access, not just can you get the patient to the comprehensive stroke center, but can the system at the state and government levels be the same? In Maryland, they have probably the world's most advanced trauma system in the world in the state of Maryland with the Shock Trauma Center. Stroke care lags behind that, and I think that it's going to be partners such as Stryker and Mark's group that can convince these municipalities that this is the way it has to be. It affects all of us. Stroke is everywhere.
Let me add a follow-up to that. Just last decade was the decade of coils. This decade, the decade of stent retrievers, aspiration. We haven't heard much about the coil market yet today. Maybe for all of you or whoever wants to comment, what needs to be done in the coiling market? Is there a level of differentiation amongst coils in your hands, do you believe? What new technology or enhancements are needed in the coil market? Thank you.
Brian? I was intrigued by the idea of bioactive coils or augmented coils for many years. Time and again, I think we've seen that Target coils, it simply doesn't get any better than that. I have my weekend warrior package. I love to train fellows. I love to use innovative coils and other lines. On a weekend, when I want to get in and out as fast as possible, I grab a Stryker microcatheter wire and Target coils because they are simple and effective and consistent. I personally don't see modified or new generation coils significantly displacing the current coil market.
I'll follow up on that question. The coil market is the largest of markets, certainly. It's probably growing 2%-3%. The role of coils will change over time, where first it was the primary treatment. Now it's primary, now it's an adjunct. Now you have some doctors that will use it with flow-diverting stents before they put in the flow-diverting stent. Coils will never go away. The role of coils will change over time as all these different devices come up to speed and we have clinical data that justifies their application.
Thank you very much. Joanne Wuensch from BMO Capital Markets. A question for management. At the beginning, you had a slide up there of three different clinical trials that you are working on. Briefly, when can we expect readouts of those? Do you perceive any of them doing what the DAWN trial has done for the ischemic stroke market?
That's a good question. Some of them are done, some are almost finished, some are still in process. The DAWN trial is done. That data's been released and shared around the world. Same with the Trevo clinical registry data, that's been also released as well. The PMA data from the SCENT trial is released, because we just received approval. The DAWN study data, hopefully mid-year next year, we should have all that data released. Right now, in the U.S. with the ATLAS study, we have an HDE indication. We can sell under that humanitarian device exemption approval. We'll soon have full FDA approval. I think it's Q3 of next year is our rough estimate when the PMA process will be completed.
Thanks. Dr. Jovin?
Sorry. No. There's new studies. Did you want me to comment to the new studies?
Yes.
Okay. The new studies, we're sponsoring two studies, which are unique in that DAWN opened up the late stage in wake-up strokes. Many strokes happen while people are sleeping, the physicians didn't know when to start the clock to treat them. That was the greatest barrier. There's still cohorts of stroke patients that we need a lot more data up with before we start treating. Some of those are large strokes. Do we treat large strokes? How large does it need to be? Is it too late? We have a study that's focusing on that pocket of patients. That study's just started. The other study that just started is mild strokes. Do you let the patient to see if they can resolve? Do you just give tPA, or do we go get that clot and pull it out? Small strokes.
That's another study that just started. The other study with MR CLEAN that did the first successful study with stent retrievers. We sponsored that study because it's exploring, do we need IV tPA? It's an expense. It has a risk of bleeding in the brain. Should it be like cardiology where you skip that step and you just go right to treatment? All those studies will take really the next one and a half to two years to enroll. Those studies are probably two years out before we get data. They're important.
Thank you. For the physicians, can you briefly describe how DAWN has changed your practice in terms of volumes and how your centers have adapted to it? With the launch of Vecta, how are you going to change your aspiration practice? Do you just completely move from your previous catheter, or do you start dividing amongst different manufacturers? Thank you.
Well, my mentor, Tudor Jovin, was one of the PIs of DAWN. We've been treating patients with that paradigm for the last decade, ever since I was a fellow in 2008. I didn't think that our volumes would significantly increase because we were early adopters of treating people well beyond 24 hours without the randomized trials to prove it. What we've seen is our volume continuously increase from 260 strokes in 2016 to 340 strokes to 2017 to a stroke a day this year. That has nothing to do with what we're doing in the hospital, because you can't get better than a 15-minute stroke intervention. That's flat. What we are doing is changing the perspective of the outside ERs, because it's all about now getting the right patient to the right hospital in the right amount of time.
I appreciate what Dr. McTaggart's doing in getting the word out at a statewide level or a countywide level to get those patients to bypass their primary stroke centers and getting them right to interventional stroke or comprehensive stroke centers. I've just been astounded as our stroke volumes continue to increase, even though institutionally, we've done nothing different for the last five to 10 years.
Yes. CT angiography is sort of the test that you need to do to make this diagnosis. I have this sort of line I use that CT angiography is to ELVO, this large vessel occlusion stroke, what ECG is to STEMI. One of the great benefits of DAWN, quite frankly, is that I now was an author on the DEFUSE 3 study. DAWN and DEFUSE 3 really empowered us to go to these primary stroke centers and say, "Look, if you have a code stroke, you have to get a CT angiogram. You have to get imaging because time no longer matters. It's the tissue." The tissue is the issue. That was what's really helped us sort of proselytize all this, is that data to say, "Look, time doesn't matter. Throw away the clocks. These patients need imaging.
Let the imaging determine their candidacy for this procedure, and not practice variability on whether something's available or not." That's been a real key, and I thank you guys for funding that trial to help save so many patients.
Yeah. A question was also asked about how hard is it for you to switch from one technology to another. Switching can be challenging. What's your thought when you switch from one catheter to another, or a system to a system?
I'm sort of an old dog, doesn't like new tricks. Once I find something that works, I stick with it. For me, there's a reciprocal relationship between the size of that aspiration catheter and how often you're going to be able to get it up to that stent retriever where the clot is. The CAT 6 aspiration catheter, which I use in this primary combined approach, goes up every time. My ability to remove that clot on that first pull is 80% of the time. It's a great feeling for me. It's a great thing for the patient. I've got something that works. I'm unlikely to change, quite frankly, being honest. I do know the system I'm using works.
Yeah.
My fundamental belief is that I use the largest internal diameter catheter I can get to the clot. I agree that technology has pushed catheters perhaps beyond their efficacy. I'm not here to bash, but I think I've lauded Penumbra for really pushing the boundaries of what an aspiration catheter can do and how big it can get. I think we've seen this magical transition where you can make a catheter that's so big, you just can't get it there. I think that we've seen that the 0.70 or 0.71 inner diameter catheters are finally that largest diameter catheter you can get into a clot consistently. I just use the biggest aspiration catheter that I can get to the clot, and currently that's the Vecta 71.
I want to be clear too that I use aspiration because it's the cheapest method, and I'm under tremendous pressure to save money in my hospital when it comes to treating acute stroke. And if our volumes are going from 13 a year up into the hundreds, well, you multiply that by a device that can cost thousands of dollars. Limiting it to an attempt at aspirating first, that is not only can be quite efficacious, fairly simple, but also it can equate to tremendous cost savings for a hospital.
I would add two things. In this space, simplicity drives a lot. Things that are simpler and easier to use, ease of use in the Neurovascular space oftentimes drives it. You got to understand that Pittsburgh and Brown, these are comprehensive stroke centers doing 300 strokes per year. Most centers aren't doing 300 strokes or a stroke every single day. They might only be doing 50 in a year, or maybe 30 in a year. Those surgeons or interventionalists, they're not as experienced. Some of the subtleties are there between these devices. In general, something which is simpler and easier to use will drive people to it.
The Vecta, getting a big catheter up there, this is kind of as Mark said, you're reaching that point where you've got this big inner diameter and you've reached the limit of what the wall thickness can be. This is the biggest ID. It goes up very easily.
Thank you.
Hi. Vijay Kumar from Evercore. Maybe, on that last question on volumes and penetration, I think you mentioned 13% penetration. If you had to guess in five years, what do you think is the penetration? What do you expect your volumes to grow over the next five years? What is the key pain point for you to Well, why shouldn't this be 50% penetration?
Anybody but Mark.
I guess I'd first ask, what do you mean when you define penetration?
Of all the patients you could treat, the 160,000 that eventually made it into a hospital system in the U.S., he's asking where does that level out? Where do you get to the model?
As someone who doesn't do a stroke every single day like these, my esteemed colleagues here, one of the things that's always caught my eye is that we're talking a lot about the cases, these large vessel occlusions, these ELVOs. These are the things where the trials have focused on a lot. As Mark showed in the slide, stroke goes well beyond that. It goes into small vessels as well. No one can say magically where the growth is. When I sit around the dinner table with my wife and we talk about how much call we take having to go in and do these cases, she goes, "This is going to get better, right?" I'm like, "I don't know if this is getting better.
I think there's a lot of dinners we might be missing here in the coming years." We're not sitting there going, "No, I think this has peaked out, and that's it." At the dinner table on Sunday, we're talking, we're in for the long haul. Stroke is something that looks like it can be treated, and treated very well. The question's not going to become should we, it's going to become how much further do we go out in time, in distance in the brain, and will those tools be developed to be able to do that? I haven't seen, and Dr. McTaggart is probably the expert and be the one to say. I haven't seen a study recently that shows opening a vessel that's closed is particularly bad for anybody. That's something we're facing as a field.
Since you brought it up, there's actually a study that says pound for pound, if you take someone with the exact same size amount of injury to the brain, the person that got the thrombectomy versus didn't, does better. I don't have an explanation for that, but that seems to be the data. To answer your question, I think, somewhere between 200 and 250 ELVO patients per year, per million people, is the benchmark. I proselytize every day, all day. I talk to colleagues that don't even approach that, as far as an incidence rate. I'm not going to rest, and I'm hoping when I retire, I'm on a beach somewhere and everyone's able to say, "Oh, yeah, we're doing 200 to 250 per million people." Then I will have felt that I did my job during my lifetime.
I think the physicians of our prior generation had organ transplantation to sort of celebrate. For this generation of physicians, this procedure is what medicine for this generation is all about. We've got a cure for stroke. We just need to execute it.
To that point, I would add, just to take it back to the Maryland story as compared to Rhode Island, which is doing the cases at the scope you're doing. In Maryland as a state, there's 4 million people in Maryland. If it's 250 per, that means you need 1,000 of these in the state. There's three comprehensive stroke centers. Probably combined, they might have done 200, 250 cases last year. If that tells you where some places are, and Maryland I consider a pretty sophisticated state as well. If you go other places outside of the East Coast where there's focuses of tertiary academic centers, I don't think those numbers go up. I think they probably only go one direction.
When we look back at our data for the last couple of years, for patients that arrive within six hours without an intracranial hemorrhage, and they have a large vessel occlusion by the symmetrical study of CTA, we treat over 90% of those patients. We're nearing a point where we're treating almost 100% of these patients as we're getting more comfortable treating patients with the faintest trace of blood or already presenting with a large infarct. We don't necessarily have the data to prove that, but we're accumulating the data to push the limits of what we can do to the point now where the only limitation is getting the patient to the hospital, period. We treat about 30% of patients between six and 24 hours with an LVO, and about 10% of patients beyond 24 hours with an LVO.
I think that I don't know that we really can put a cap on the total number of patients that we're going to be treating in the next five years.
Systems of care. That's what needs to change and help us make that change.
I think that's helpful. Then maybe one on the flow diversion stent. I'll make this quick. When you think about flow diversion, is that cannibalizing coils, or if you're using coils in addition to that, you're using flow diversion stents? Can you just explain where flow diversion stents fit in? Thank you.
I think I'll take that one. You can't say no, because obviously, historically, a lot of these aneurysms which are now treated with flow diversion, were treated with coils. The story of flow diversion in cerebral aneurysm treatment is the expansion in the treatment of cerebral aneurysms, being able to offer treatments to aneurysms that couldn't be treated with coiling. A very large number of cases that flow diversion is being used for are ones which maybe before we would have thrown our hands up and said, "We can't even treat that one," or, "We have to do some exotic open microsurgery to do that." On the other side of it, I've published a paper out of our experience at Hopkins that adding adjunctive coils can even further benefit flow diversion technology.
Flow diversion was once this thing where instead of coiling for these certain type of aneurysms, now we use it for aneurysms that are beyond what could be offered for coiling, and even sometimes we're using it with coils to even get greater efficacy and speed the occlusion of the aneurysm. Is it going to cannibalize it? That's probably the wrong word to use. There definitely is a role for them in the world of flow diversion.
You see a synergistic approach for ruptured aneurysms. You coil an aneurysm, you may leave some remnant of that aneurysm behind. You come back in a week or two later you flow divert that aneurysm. You get the best of both possible worlds.
Hi, Isaac Ro, Goldman Sachs. For the surgeons on the panel, was interested, you're all from various parts of the country, different regions and states, and I think Dr. Coon touched upon how things are in Maryland. I'm curious if you talk to colleagues elsewhere in the country, my understanding is that the guidelines for treatment here can vary quite significantly. I'm curious if you've seen anything that would suggest other states, other parts of the country are going to start becoming a little more supportive of these technologies and when we might see evidence to support that.
There are a lot of campaigns right now. There's a Get Ahead of Stroke campaign being run through SNIS and others that are trying to tackle at a legislative level, a point of entry for stroke. Tennessee, Arizona, Colorado have sort of adopted what we've done in Rhode Island. It's complex. It's a very political issue because even though this mechanical thrombectomy procedure is very economically dominant for the healthcare system, the money we spend comes back in reduced downstream healthcare costs. Hospitals that don't offer the procedure are very threatened by losing business. For example, I sat at a committee of hospital CEOs in Rhode Island, and they were complaining that they were losing business. I said, "Well, what % of your business do you think you're losing?" They said 25%.
I said, "That's the exact amount you should be losing." Because about 25% of the patients in the field that EMS professionals encounter are going to have either a hemorrhagic stroke or will have a large vessel occlusion stroke. It's those 2 types of patients that need comprehensive stroke or level 1 stroke care. It's happening, but like I said, systems of care change is the biggest battle we face. We all need to work together so that we do what's right for patients, and more patients get this procedure.
Great. Just a follow-up, maybe for Mark. The topic of cost was brought up earlier. I'm interested as you guys think about leveraging all the assets in the portfolio, to what degree is cost part of the game here? It seems like it's still very early in the market adoption curve to really be aggressive, but why not think about creative ways to bundle or other things economically that you can do to help get your share of the market and help the physicians get the technologies they want?
We do all those things today. Cost is always an issue. We're fortunate in the reimbursement levels for both ischemic and hemorrhagic stroke are healthy and hospitals do well with those reimbursement codes. The costs are always a burden on hospitals overall. We do all the things that you mentioned. We do bundling deals, we do various forms of discounts as we work within each hospital system and try to tailor our product offering to try to meet the financial metrics they're trying to achieve.
I probably have time for one more question from Raj, then Mark will be around later at the product fair if anyone has some follow-up questions.
Thank you. Raj Denhoy with Jefferies. Just so the clinicians know, you mentioned the necessity for imaging to identify the patients that'll benefit from these interventional technologies. There's been some companies and folks looking at artificial intelligence or automated ultrasound and even putting some of these technologies in EMS and ambulances to sort of identify patients faster to get them to you guys to actually do stuff. Are you guys seeing these technologies? Do you think these could have a big impact in getting patients into your respective facilities faster?
That's a loaded question. This primary stroke center ELVO protocol we created, we wanted to employ machine learning. There is a company that's trying to leverage machine learning to improve or speed downstream care. They spent some time with me in February 2017. I certainly hope that that does happen. I do think that augmented intelligence has the capacity to really prevent medical errors. In any capacity that it can do so, I'm totally in favor.
I think it'll help more the primary centers or the first hospital to receive, so they can have something that helps aid them in choosing which patients are suffering ischemic stroke and how quickly to move them. For the customers and physicians that we have, they can see it immediately. It's for the untrained eye, which is a lot of hospitals around the world. I think it will eventually get there. We want it to get there, and we think with all those little things all add up to quickly diagnosing the patient and moving them through to treatment as quickly as possible. Let me do this. Let's shift gears. I wanted to introduce you to a patient. Her name's Sandy, and she was actually a patient from UPMC, which is a part of the DAWN Trial. She was a wake-up stroke.
Like I mentioned before, a majority of strokes happen while patients are sleeping, and quite often they're not found till much, much later in the stroke cycle. This is a patient that was found in that environment and treated at UPMC. Let's roll the video.
I went to bed. I was tossing and turning and not going back to sleep, I looked down at my hand. It was very heavy. It was like a block. I couldn't move it. I picked it up, and I turned it this way and this way twice, and I said, "I'm having a stroke." That's the last thing I remember for days.
I pull in her driveway. I come into the house, I go upstairs, there she is on the floor. It was bad. It was a stroke. She was totally paralyzed on one side. Her mouth was drooped. She couldn't talk. Her eyes were not focusing. The ambulance came. In speaking with the ER doctor, he was very accommodating to Sandy, and I realized then that this was grave. He said, "There's a DAWN study going on in Pittsburgh." He said, "Would you like to speak to the people on the phone that are running that study?
Sandy arrived at UPMC. She's what we call a wake-up stroke. A patient who goes to bed normal and wakes up with a neurological deficit. You don't know when the stroke occurred, but these patients have been so far excluded from any type of acute stroke treatment. The conventional wisdom, the dogma had been that patients only benefit from treatment if they are within six hours of their stroke onset. In fact, by the time she got to us, time of last seen well was about 18 hours. What we have shown with DAWN is that if you still have substantial areas of brain that is still salvageable, then it really doesn't matter how far out you are in time.
He says, "Well, come on, let's go see her." We go into the room, and there you are laying there, and he says, "Sandy, raise your right hand." Bang, she raised her right hand. Are you kidding me? Unbelievable.
My motivation for my speedy recovery was life, was my football games, my baseball games. I was a part of that data that would carry this to the American Heart Association and make it a standard. I appreciate every moment, every step that I climb. I wanted to walk 13 steps to my upstairs and downstairs. I appreciate every one of those people more than I have the words to say because they gave me my life back and restored my ability to live. I appreciate all of their efforts, everything that they did for me.
Here's my ask. I actually am going to ask for two favors from each of you. I need each of you to know the symptoms of stroke. Stroke is a deadly disease. You'll lose your ability to walk, talk, swallow, feed, take care of yourself, clean yourself. You need to understand the word FAST. Remember FAST. Remember F, the face is always involved. Half the face will not function or move. A is for your arms. The arms and the hands are almost always involved. Speech is always involved. Slurred speech, repeated speech, nonsensical speech, and time. I need you to know for each of you and your family members, wherever you live, the symptoms of stroke and where to go to be treated in your community. You can't assume that the ambulance will take you to the comprehensive stroke center.
We're working on that, it will take time for that occur. My second ask is you need to educate your readers. Thousands upon thousands of readers follow your advice and counsel. You need to talk to them about stroke. They need to know the symptoms of stroke and where to go to be treated in their communities. That's my ask of you, I will promise you this, you will save lives. At Stryker Neurovascular, we've dedicated our lives to this disease with these physicians. Thank you for your time. I appreciate it very much, I'd like to excuse our panel, and I'd like to introduce our next speaker, Xavier Berling, who's the President of Trauma and Extremities. Thank you very much.
Good afternoon. I am thrilled to be in front of you this afternoon to give you a snapshot about our strategic journey on what makes Trauma & Extremities unique. After my presentation, Gordon will give you much more detail about our extremities opportunities before we move into the Q&A sessions. Trauma & Extremities is capturing and will continue to capture meaningful market share. We are an undisputed number 2, closing the gap to number 1. Since more than a decade now, Stryker Trauma & Extremities is the fastest-growing corporation in this space. Trauma & Extremities is, or maybe I should say are, values and complex businesses which are different. We are covering, obviously, trauma, as well as shoulder, foot and ankle, and many other small joints. In fact, if I look at the implant area, Trauma & Extremities at Stryker is everything but total hip, total knee, and spine.
This means that on top of those market spaces, we have to have a lot of different products. It means that a single rep cannot cover or be trained or sell everything, which is the reason why we strongly do believe in focus and dedication in the field. Beyond this market complexity of product diversity, we also are calling on a lot of different customers, a lot of different MDs, which have sometimes not a lot in common on different needs. We are calling, for example, on trauma level 1 surgeons, but also trauma specialists, community surgeons who are doing sometimes trauma, or to sometimes shoulder, or foot and ankle, or spine, or total hip or knee replacement. We are also calling on foot and ankle surgeons specialists, shoulder specialists, and last but not least, DPM or podiatrists.
Again, beyond the product and market spec complexity, these customer sophistications who have different expectations means that reps have to be focused and specialized. Our uniqueness is coming from our ability to combine things in order for our customers to make healthcare better. It starts with our dedicated services. By services, I do not mean what our reps are bringing as service on a day-to-day basis to our customers. I mean specific programs customized and designed for every specific customer to answer their different expectations. We combine those services with a unique, comprehensive, and advanced product portfolio, which means that if you combine those unique services plus this unique product portfolio, this is why Stryker Trauma & Extremities is able to make full conversion of some centers away from the competition.
Beyond this winning proposition, in order to continue to be fast-growing, continue to grab market share in this changing environment, we are focusing on a few things. We have identified three we will be focusing on the foreseeable future more than anything else. It is not one or the other. It is about everything, because you have interdependencies. It starts by building capabilities to demonstrate financial benefit to the C-suite. In our market, in our business, we have a two-step selling process. It starts with convincing the technical staff about the technical acceptance of our products, this is what the rep does. Then, as a second step, you have to be able to go to the C-suite and demonstrate arguments, explain how much financial benefits, how much savings working with Stryker will generate to the GPO, the IDN, the hospital, or the healthcare community.
Coming back to the Trauma space specifically, we also have decided to change gear and move forward much faster into aggressively targeting level 1 hospital in order to consolidate our position in this market space. It means that we are developing and executing specific programs fitting each of those individual hospitals that we have targeted. The Extremities space. Shoulder, even if we are extremely successful and growing much faster than the market, Shoulder is a space where we have to be a much bigger player if we would like to claim, and we will global category leadership in the Extremities space. Speaking about Extremities, I would like now to introduce our Vice President and General Manager of Extremities, who will give you much more detail about this market space. I would like to welcome on stage Gordon Van Ommeren.
Thank you, Xavier, and good afternoon, everybody. It is truly a pleasure to be able to share with this audience the journey that we have been on and continue to be on relative to the Extremities marketplace. I'll stand over here. I like to keep the competition behind me, but not my boss, so I'll stand over here. Extremities to Stryker has been and continues to be a growth engine. We have a tremendous track record, which I'll share with you on the Foot and Ankle space, and we have a great opportunity in the Shoulder space, as Xavier points out. I'll share with you some of the strategy that we look to put in place to continue to win and to take market share and to bring solutions to our surgeon customers and their patients.
One of the things that we get very excited about in the Extremities space, when you look at Foot and Ankle and you look at Shoulder arthroplasty, these are disciplines where there is still plenty of room for innovation. These are procedures where there is still opportunity to really drive clinical value. The Foot and Ankle side, I think in Roger Mann's kind of seminal textbook on Foot and Ankle surgery, there's over 100 commonly done Foot and Ankle procedures. Amongst that landscape of procedures, there's so much innovation that can be brought to each and every one of them, and we are committed to do that.
On the Shoulder arthroplasty side, unlike the Hip and Knee side, where long-term outcomes have really elevated into the high 90s, there still is opportunity in Shoulder to improve patient outcomes and is our commitment to do that going forward. I'll now show you the slide that you probably know very well, obviously, that follow this space. These are great markets. These are fast-paced markets. These are some of the highest growth markets in Orthopaedics, and thus we are committed to continue to win in these spaces. You see the way that we look at these markets over the last several years, really high single-digit growth kind of leveling out in the 8% range for both Foot and Ankle and for Shoulder. Really, when you dissect these markets, you see a great deal of energy around them.
You see companies that have invested in specialized sales forces, knowing that dedication to the customers in these spaces really is very meaningful. You've seen a proliferation of educational programs, not just from industry, but also from the societies that support the surgeons in these categories. I think most importantly, in terms of the growth rates that you see here, what's really driving that is an advent of next-generation implants, new technologies that have really allowed surgeons to treat patients very differently, improve outcomes, and in some cases, actually increase the number of the procedures that they're doing. Certainly on the foot and ankle side, over the last 5 to 10 years, companies have delivered implants that are made specifically for the needs of foot and ankle surgeons, as opposed to retrofitting existing implants to those surgeons to use the way they are.
You've also seen on the shoulder arthroplasty side a real revolution in terms of convertible systems that can go both from a reverse or an anatomic perspective. You've seen a great deal of innovation around the glenoid side. A number of things that have led to these great growth rates that we see and our perspective going forward is that the growth in these segments will continue. We certainly also see the shift, notably in the foot and ankle side, but also on the shoulder side in terms of the site of care, which is also allowing surgeons to really think about and increase the number of procedures that they do.
Let me kind of dissect these two categories in the extremity space and give you a little flavor for how we look at the market, but more importantly, how we have performed in the recent past and how we look to continue to drive the kind of growth that we've seen going forward. I think you all know this is a highly segmented space. You have the large strategics that are very invested in this space, but you also have a number, a very large number of smaller, and I'll hesitate to use the term ankle biter companies that are also very focused in this space. Some of them single technology, but very aggressive in really chasing some of those 100-some odd procedures that I talked about earlier.
Stryker, over the last 6 to 7 years, has foot and ankle of focus. We have developed, as is our DNA, dedicated and focused sales reps that wake up every day and service the needs of the foot and ankle customers. That focus that we've created on the commercial side has been the biggest driver of our success. When added to the portfolio that we've developed both organically and externally through three strategic acquisitions. We have now hit the point in time in 2017 where we can say quite clearly that we are the U.S. market leader in the foot and ankle space. It's really been a great story and a story that we work very hard every day to continue going forward, so that that arrow that you see that represents the last 5 years continues in that direction.
The shoulder side is certainly a different story for Stryker from a past performance perspective, but a very similar story to us in terms of how we see amazing opportunity in this space. This pie chart obviously looks a little bit different. Our slice of that pie is a little bit smaller, but our dedication and commitment to win in this space is no smaller. We have now established a foundational portfolio that allows us to compete with anybody in this space. We've also launched a significant effort in the U.S. market around our commercial activity, the competence, and raising the competence level of our sales organization to sell shoulder, how we brand, how we position ourselves, and how we work with the shoulder society to stamp our arrival in the shoulder space.
I'm going to spend the rest of my presentation really focused on the shoulder market and give you a little flavor for, again, how we see what's happening demographically, but most importantly, where we're taking our portfolio going forward to be a winner and a leader in this space. You probably have a hard time seeing the colors here, but this slide is really meant to reflect recent past and how we see the market moving forward in terms of the procedural segmentation in this space. I think the takeaway here for everybody is the revolution that's taking place in terms of the increased penetration of reverse shoulders in the U.S. market.
Has been that way in Europe for quite some time, but in the U.S. market, we've seen a revolution, and it's really based on, again, the advent of convertible systems, better instrumentation, just better implants, and also data that really is starting to show that for elderly patients who fracture their proximal humerus, that the best course of action is, in fact, to give them a reverse shoulder. I show you this slide because it gets right to the heart of what is the core of our portfolio and the strength that we have developed in our reverse shoulder. We have launched our shoulder in 2014, our reverse shoulder, and we're getting great response to it and seeing tremendous uptick in the penetration of reverse that happens to coincide with this trend in the marketplace, which obviously is of benefit to us.
A word about where we're going from a portfolio perspective. The strategy for Stryker in shoulder is the things that I talked about before, which really raises the game for us. We're adding talent, we're adding competency, we're creating an organization that understands shoulder and can convey that to the marketplace. We're building our internal capabilities. We're focused short term on commercial execution, which we've always brought to the table in every segment that we compete in. We're really upping the ante in terms of our presence with societies, the education we do, the competence level of our reps.
Most importantly, we're filling out the portfolio to take that foundational portfolio that we've created, the excellence that we have with our reverse shoulder, the excellence that we have with our fracture stem, which was just launched last year, and looking forward to a point in time when we can apply the great proprietary technologies that Stryker brings to bear in the areas of additive manufacturing and, most importantly, robotics to shoulder arthroplasty. What I would leave you with here, short term, continue to fill out the portfolio to meet the needs of the shoulder surgeon. Long term, excuse me, change the game by bringing Mako technology to shoulder arthroplasty. When you talk to shoulder surgeons and you look at and dissect the results that they see with their patients, the biggest challenges that they have are on the glenoid side.
Simply gaining appropriate exposure to the joints can be very challenging, also fixation of the implant in the glenoid presents additional challenges, particularly with patients that have bone defects and other challenges in the glenoid. What the robot will do for us is allow our surgeons to operate within a small window, not be as concerned about the exposure that they have to get, while providing absolute precision in terms of the preparation of the bone and ultimate precision in terms of the placement of the implant. We have a big belief in Mako technology. We have a big belief in what that brings to shoulder arthroplasty, we have initiated a project to get after that and really change the face of shoulder arthroplasty going forward. That's it for my prepared remarks. I think we have a few moments for questions.
Yep. Kristen? If you could just wait for the mic.
Yeah.
Hi, it's Kristen Stewart from Barclays. Can you just comment a little bit about, I know you said that you initiated a project with, I assume that's with Mako. Just how should we think about timelines for bringing Mako into the shoulder?
Great question. With Mako, the project has recently been initiated. This is a comprehensive project, so it will be multi-year in length in terms of the actual development. Working with our regulatory partners, we believe that this will be a project that will require data. This is a lengthy project, a multi-year project, but we have really kicked it off in earnest.
Thanks. Steve Lichtman from Oppenheimer. Gordon, first question, you talked about improving commercial execution. Can you talk a little bit more about what that means? Are you also adding reps on the extremity side? Maybe you can flesh that out a little bit.
Yeah. From a shoulder perspective, it is exactly that. Working with our sales teams to, first of all, increase that baseline competency in shoulder. It is a very different procedure. It's a very different conversation to have with a shoulder surgeon. We've initiated our own sales training program. We're kind of beefing that up. We will selectively add specialists into the marketplace to address specific needs of each market. It is a gradual evolution from our existing sales force, getting them more conversant and competent in the space, but ultimately adding specialists into our sales organization.
Thanks. Just secondly on the pipeline, can you talk a little bit about ReUnion S, which you had on the slide for 2019? A little bit more about that implant and then similar to Kristen's question on 3D printing, when should we think about that potential rolling out in extremities? Thanks.
The first question, the ReUnion S. In the marketplace, one of the changes that has really kind of become very prevalent is the shorter stem or stemless phenomenon. We estimate that probably up to 50% of cases right now in the U.S. are either a shorter stem or a stemless device. We will be launching not a short stem in 2019, but an optimized length stem based on a great deal of science and research that we put into the optimal geometry and the optimal length of the stem. We're very excited to be launching that next year. In terms of additive manufacturing, it's an ongoing process. We are looking at the capabilities that we have, that we've developed at Stryker across the full platform of extremities products, from the glenoid side all the way to the total ankle side.
There are numerous opportunities in different stages of development at this point. We certainly see in the extremities piece of our portfolio, really fantastic opportunities there.
Thanks. It's Matt Miksic from Credit Suisse. Question on the robot and the shoulder. You mentioned that data will be likely required. Maybe you can put it in perspective how you compare the data that you expect to be required to the data that was required, say, for the total knee and how similar or different.
I think it's probably a little early to have that conversation at this point. We have a little bit of work to do to fully understand that. I think we'll defer an answer to that one until we have a more precise understanding. We certainly believe that based on everything we know, predicate devices, what's in the market right now, that the FDA will require data, and I'll leave it at that.
Just to follow up, if I could, on total ankle arthroplasty. Clearly foot and ankle, you've put the numbers up as you described in your position in the market. Total ankle maybe a bit of work to do, and I'm wondering to what degree we should expect a kind of similar jumpstart strategy of using robotics or some of your other technologies to try to push that business forward in the next year or the year after.
You're certainly astute enough to understand that robotics could potentially play a great role in total ankle arthroplasty. I think I would answer that question and say that we've done some initial homework in that space and probably leave it at that.
Regarding the total ankle space, we are working on some custom specific cutting guides as well.
Kristen again. Over to Glenn.
Hi, Glenn Novarro with RBC. This is for both the shoulder and foot and ankle, do you have any plans to bring to the market pre-planning software? As a follow-up on the foot and ankle side, do you have any plans to develop any biologics? Thanks.
Relative to preoperative planning software, we have a system, we refer to it as TruRize. It is currently available in the U.S. market for reverse shoulders only, and we look to get approval for anatomic shoulders in the next year. We are in that space currently. From a total ankle perspective, again, I'll answer this to say that there's a number of things that are under consideration at this point in time.
Thanks. Chris Pasquale, Guggenheim. I'm wondering, can you comment on the timing of ReUnion stemless, when you think that'll be available?
Yes, we're not prepared to talk about specifics at this point, other than to say we have an active project. We're very excited about it. We look to bring concepts that we've developed organically to that space. I think as you probably know, the regulatory climate in that segment has shifted a little bit, and I think we're still gauging what the necessary elements will be to bring to market. I will just leave it at to say that it is an important part of our pipeline, and we're aggressively working on it, and we'll probably answer that more specifically at another time.
Okay. Then on the ankle side, you mentioned patients doing specific cutting guides, some other stuff you're working on. From an implant perspective, are you happy with your product line there? Are there any product line extensions within the STAR family we should expect in the next year or two?
Yes. We have an active work underway in the STAR family. Our custom cutting guides, as Avi mentioned. We're also actively looking at, in addition to our talar component, some work that we're doing in that space. STAR is a very important product line for us. It is certainly one that we believe in and a number of activities underway to continue to evolve the technology, make the procedure simpler for our surgeon customers, and really build on the clinical history of STAR, which is really the most studied and positively studied total ankle in the marketplace.
Robbie Marcus, JPMorgan. Extremity stands out to me as one of the most interesting markets in that it's high growth, highly fragmented, and pricing remains pretty good. If you think a few years out and look into your crystal ball, how do you think the market looks in terms of number of competitors? Do you think pricing can hold up like it has to date?
Yes. Certainly something we think about and talk about quite a bit. I think to my earlier point, we do not see anything to slow these markets down going forward, and if I kind of take a look at them one at a time. Foot and ankle, again, there's over 100 commonly done procedures. There are many of those procedures where there's still great opportunity for innovation. We believe that there will continue to be a lot of aggressive R&D in the space, a lot of aggressive activity, very few barriers to entry. We look forward to seeing a lot of activity. From a pricing standpoint, again, it has been a little bit off the radar screen, relative to some other segments in orthopedics. Certainly, the pressures that I think everybody sees are starting to creep in a little bit to the extremity space.
The shoulder side, again, these are procedures that there's opportunity to improve patient outcomes. There are a number of companies, certainly us, that are focused in really getting after that. Again, we see continued growth. We see continued opportunity to innovate, again, pricing pressure, probably not as significant as we've seen some other spaces.
Melinda, maybe grab Rich, one last one.
Hi, thanks. Rich Newitter, Leerink Partners. I was just wondering if you'd talk a little bit, I think one of the points you had on a slide there was the increasing shift to outpatient and ambulatory surgery center surgery. How is your portfolio positioned there? Also, if you could talk to the last question around pricing, how do you think this is going to impact or change the way you go to market in the business as you try to tailor your selling process to that setting? Thanks.
Yeah, thank you. In the foot and ankle space, that movement into the outpatient setting has been really underway for quite some time, we have really adapted a portfolio that can really play very nicely in that space. We've developed a number of surgery-ready kits that kind of get to ease of use and efficiency for the surgeon in the procedure. We have really geared a lot of effort in our development cycle around the issues of efficiency, again, ease of use and making the procedure just easier for the surgeon. We believe very strongly that the portfolio that we've developed on the foot and ankle side fits perfectly into the desire of the surgeon to kind of move that into the outpatient space. We're quite comfortable. Obviously, the pricing can be very different perspective in the ASCs in particular.
We've developed strategies and again, have a portfolio that we think aligns very nicely to the needs of the surgeon in that site of care.
You have to introduce something now. You have to introduce something.
I think we're done. Sorry. I was just settling in and getting comfortable there. It's my pleasure now to introduce Mr. Andy Pierce, our Group President for MedSurg.
Thank you. Well done, guys. Thank you. Gordon, if you'd like to give my talk, you can on endoscopy. Good afternoon. Over the next 30 minutes, we're going to talk about our endoscopy business. I'll do a brief introduction to the business. We'll be followed up by a true luminary in the industry, a physician that is a pioneer in the use of fluorescence imaging, Dr. Martin Newman, and from there, Dr. Newman and I will take some Q&A. Good?
The endoscopy story really resonates over time with three key themes. The first theme is innovation. Based in the heart of Silicon Valley, the Endoscopy division has led the advancement of minimally invasive surgery for the last 30 years. Industry firsts have come out of the division, such as the first soakable three-chip video camera for MIS surgery, the first integrated operating room, and more recently, the first post-free distraction table for hip arthroscopy. That's just to name a few. The division is rich in history with its firsts. Second, the division is known for its commercial excellence. If you talk to physicians such as Dr. Newman or the gentleman that were on the stage earlier, you'll find that they revere their Stryker sales representatives. In the Endoscopy division, that is alive and well.
We have four of our former Stryker sales representatives represented here today in our executive ranks. Mr. Matt Moreau, who you'll be able to meet later, who's the Vice President and General Manager for our sports medicine business. Mr. Brent Ladd, who's the President of our Endoscopy division, who you'll also be able to speak with later. Spencer Stiles, who sits up here, proud alumnus of the Endoscopy sales force, who is the Group President for our NIF group, and Mr. Tim Scannell, who, as you know, is our President and COO. Third, our market-leading growth. The Endoscopy division sets the bar high, and the Endoscopy division goes out and gets it. This is a beautiful graph that stretches back into 1999. The division was started actually in 1989. If you look at the compounded annual growth rate from those days, it would be astronomical.
There would be tiny little bars at the end. The division over the last five years has produced a compounded annual growth rate of just over 8%, and in the U.S. alone, about 10% growth. A rich history of fast growth out of the Endoscopy division. All right, the division is comprised of three separate selling businesses. These businesses are full commercial businesses with general management, sales forces, R&D, marketing, et cetera. You know that we believe in focus and specialization, and that's alive and well in the Endoscopy division. Starting on the left, our largest business unit, the Endoscopy business unit. This business unit is the pioneer in white light imaging.
This is where we had the first soakable video camera that I talked about earlier, and now is the leader in fluorescence imaging, which you're going to learn about in a little bit from Dr. Newman. In the center, you see our communications business. This business is actually based in Dallas, Texas. The communication business created the integrated operating room space where we took the equipment in the operating room off the floor, hung it on equipment booms, made for a safer environment for the staff and a more efficient environment for surgery. That's our communications business, and this business is a leader in its spaces. Finally, our sports medicine business. The sports medicine business competes in the largest market for the Endoscopy division, and the sports medicine business based in Denver, Colorado, is what we might call an emerging leader in its spaces.
This business is focused on soft tissue fixation and soft tissue resection, primarily in the shoulder, the hip, and the knee. We believe in being the best first and eventually leading our markets to be determined down the road. This business has been a fast grower for Stryker. It moved from a distant, not even on the page in terms of its market share a handful of years ago, to now a strong number 3 position in the U.S. and growing fast. To continue that growth trend that I showed earlier, we have four key growth drivers that we'll talk about briefly as you think about the Endoscopy division. First, we are focused on maintaining our leadership in MIS visualization in general. Then, of course, as you know, fluorescence imaging through the acquisition of the Novadaq business, we are now the hands-down leader in fluorescence imaging.
We believe that that will be the future of imaging for MIS surgery and also for open surgery, as you'll hear about from Dr. Newman. Additionally, for us, the acquisition of Novadaq allowed us to expand into some new categories, and you'll hear about one of those as we talk about breast reconstruction surgery with Dr. Newman. Next, facility new build, remodeling, expansion, driving operating room upgrades. By facilities, we primarily mean hospitals, but also the trend towards building more outpatient surgery centers. These are wonderful opportunities as our hospital customers and ASC customers modernize their operating rooms for us to put the most current equipment in integrated operating rooms in those facilities. That's the capital equipment, the hospital infrastructure equipment, as well as our visualization equipment to fill those operating rooms.
Next, as noted, we have an emerging leader in our sports medicine business competing in our largest global market, about $4.5 billion. As noted, about a number 3 share here in the U.S. This business has been getting a disproportionate amount of our investment in R&D, our investment in expanding our commercial sales force, as well as we invested in business development in this business with the acquisition of Pivot, which really made us the technology leader in hip arthroscopy. Most recently, the acquisition of Ivy Sports Medicine, which gave us a strong leadership position in meniscal repair. Finally, focus on geographic expansion. You well know, Stryker has been undergoing what we call our trans-Atlantic operating model over the last several years.
We have taken a stronger position in Europe and Canada and other markets around the world, we know that those markets for us are lower share than we traditionally had in the U.S., they have provided tremendous growth opportunities as we ramp that share quickly over time. That's just a brief introduction to the Endoscopy division. With that, I'm going to introduce our very special guest speaker. As noted, Dr. Martin Newman is on staff at the Cleveland Clinic in Florida. That is the warm Cleveland Clinic, not the cold one. He's in the Department of Plastic and Reconstructive Surgery. He is the program director and the head of the clinical research for the residency program. You'll look down below on the publications, he is a prolific publisher as well as an in-demand podium speaker.
Also, as noted prior, Dr. Newman is really the pioneer in using fluorescence in surgery. Please join me in welcoming up Dr. Martin Newman.
Thank you very much. I'm a luminary. I like that.
You are a luminary.
Well, to my neurosurgical colleagues, that was really great. To my industry colleagues, I've really been impressed with what I've seen today. I'm going to try and come up to that standard. For those people who are not in healthcare, this is going to be a quick crash course in surgery, Wiki Medical School. I'll start by saying that successful surgery depends on being able to remove a diseased tumor, tissue, or an organ while preserving healthy structures. That kind of makes common sense. That following removal, the remaining structures will only survive if they have a viable blood supply. The blood supply has to be adequate. Therefore, one of the jobs of a surgeon is to look at the tissue that they leave behind and to make a judgment and say, "This has an adequate blood supply.
This should live," or "This isn't going to make it, and we have to do something about it." Now that you're all in healthcare, now that you're all medical students, I can be honest with you, I can tell you that with all our training, surgeons are less than 100% accurate in identifying poor blood supply, ischemia, as we say, with our naked eyes. We're good, but there's still room for improvement. Now, to give you an example of how this might affect the surgical outcome, we'll take, for example, breast reconstruction. As you know, breast cancer is a very common thing. One in eight women in the U.S. will have breast cancer. I would argue that everybody in this room knows someone who has had a breast cancer. It's very common, one in eight women.
When it comes to surgery, it begins, like I said, by removing the diseased tumor or tissue. The surgeon must assess what's left behind to determine whether or not it has adequate perfusion. Is it going to live? If so, leave it. If not, you got to take it. If it doesn't come out right, you get a result like this, or this, or this. As bad as this is, it gets worse because it's a domino effect. Once the skin dies, the patient is going to lose the breast for the second time. It's going to be significant pain and suffering. That's from the humanistic point of view, that's from my point of view. I have to watch the tears and deal with this.
From an economic point of view, and I know it's predominantly a financial meeting, from an economic point of view, the costs are ridiculous. You're going to have an extra operation. You're going to have unplanned hospitalizations. You're going to lose your dermis, so you're going to lose your implant, your costs are going to double, triple, and even higher than that. How much so? Well, we looked at this, if you look at professional fees and hospital charges for a woman who has mastectomy flap necrosis following breast reconstruction, the numbers can be as high as $100,000. That's in the first year. This thing drags on and goes up to $130,000, $150,000. It's not a good situation. How often does mastectomy flap necrosis occur? Mild, moderate, severe, about 25% of the time.
If you multiply that by the number of people who are having breast reconstruction, you can just imagine the drain on hospital and healthcare resources. What do we do? We give them a dye, a medicine on the table, ICG. We watch it course through the vasculature, takes about 30 seconds, then we image it with a camera, like a SPY. What we can immediately determine using this technology is what's well perfused and what isn't, what's going to live and what's going to die. If it's going to die, we take it now, we debride the tissue rather than wait for the problem to occur in the postoperative phase. You put out the fire before it happens. Here's an example, I'm not sure how it's going to project, let's take a look over here. What you're visualizing here is a mastectomy flap.
That's the wound. You're beginning to see the blood flow come in, then at some point you see it kind of stall out around here. I can tell you now, this is the first time you're seeing this, you don't know, I can tell you now that this tissue inside the line is going to die. This is kind of marginal. We ran a couple of these before we knew what it meant, we let him out of the operating room, something like this translates to something like this about 100% of the time. This has a 100% correlation. Again, if you can see this on the table and correct the problem before letting the people out of the OR, you could virtually eliminate that 25% rate of flap necrosis.
The technology is what you've been hearing about, the SPY, and it is the current market leader. They came to me about 10 years ago and said, "This used to be like a cardiac machine, whatever, they said, "We want to do something for plastics, for you guys to assess tissue. We want you to help us come up with an idea." I said, "Well, all this is good, but when you guys can dumb it down to be something about the size of my iPhone, that's when I'm sold." Indeed, that's what they have now. This is the portable SPY-PHI. This is the next generation. This is going to put this technology in the hands of every surgeon so it can be used on every patient.
When you guys do scalps, you can take this thing out just to see if the scalp flap is going to rip, rather than get that necrosis that sometimes you get around the wounds. This is, I think, really what's going to, I hate to use the term, but be a game changer. Because if we can get this in everybody's hands, you're going to probably be able to virtually eliminate flap necrosis, which is the biggest complication of plastic surgery. Okay. With that, Dr. Newman's going to join me, and we'll take any questions.
Yeah, Bruce. Kristen, can you go to Bruce, please?
That seems very powerful. Just beyond mastectomy or rather breast reconstruction, what other types of procedures in the U.S. could benefit from perfusion assessment? Could you just kind of put a case number on it, and roughly what's the as a capital piece of equipment, is there a disposable attached to it? If you could just kind of from the medical point of view, the applicability generally, and the economic potential generally.
Sure.
I'll talk about it from the business perspective.
From the medical point of view, if you use a Bovie and a knife, a scalpel, and some sutures, I think that this has a role. It's already been adopted into almost every surgical specialty. Colorectal is a big user of it. GYN is a big user of it. There are applications that are not "approved" yet. It's just exploding. It's being rapidly adopted by most of the surgical specialties because perfusion is everything in surgery.
Just to build off what Dr. Newman said, the use cases are almost endless, and I don't want to over-dramatize that, but what's happening now is we're learning, particularly with SPY-PHI, as it's more portable, that in the hands of our surgeons, oftentimes using it off-label, not with our encouragement, they're finding new applications routinely. Standard applications that we see in the industry today, of course, are like Dr. Newman referenced with breast surgery, breast reconstruction. We see gallbladder surgery is very common in MIS, where you need to see the biliary tree and not cut critical anatomy, so it lights up green with a fluorescence dye, the ICG dye.
In colorectal surgery, very common use case where we're seeing in colorectal, where you have an anastomosis of the colon, which is a resection, where you're taking cancer out, and you need to reattach those two endpoints, and you need good blood flow without leakage. Prior to fluorescence imaging, the surgeon would essentially guess or use his or her best judgment on blood flow, put those two ends back together, and oftentimes they would have what's called an anastomotic leak, which is really an awful circumstance for the patient. Now that we are able to see that clean blood flow, they can put those two ends together with confidence that the patient's going to heal. A number of different use cases. We're seeing it used in patients that may be potential amputees, where ER surgeons are saving limbs. There's a number of different use cases that are possible.
Disposables?
With the SPY-PHI and the SPY Elite that you see on the screen here, we also have an MIS camera that is not shown here that also has fluorescence imaging. We do sell the ICG agent, the actual drug itself. We distribute that product. With these products, there are sterile sheets that go over the cameras. Drapes.
Thank you.
Thank you. Rick Wise, Stifel. Just from my past with Novadaq, SPY-PHI, if I think back a couple of years ago, had depth limitations. Is it now able to do the same kind of imaging job that the larger unit can do? Or is it in fact more appropriate for blood flow closer to the surface only?
I think it should be the same. It's the same technology.
Great.
There's one element, this is perfusion quantification, which is only used in specific types of procedures that we're building the software for the SPY-PHI device to have, but functionally, it's essentially the same.
Are there other indications for this technology? I mean, sentinel node identification, I know was an exciting thing in the past. Maybe just I'll finish and say, I know that there was the potential for other imaging agents. Are these all futures that you're focused on? Thank you.
Am I allowed to?
Yeah. Please, Dr. Newman.
I wrote a paper, published about six months ago, that showed a correlation between the ICG's ability to identify a sentinel lymph node in melanoma patients. It showed about 100% concordance with technetium-99. Technetium-99 being the nuclear medicine scan that people get in lymphoscintigram. I argue that if we could obviate the need to have to send patients to the nuclear medicine suite, and that's, again, from a humanistic point of view, it's painful. It drags out their day. It's just not a pleasant experience. From an economic point of view, sentinel lymph node mapping lymphoscintigraphy is very expensive. If we could obviate the need for doing that and just SPY them on the table for a known lymph node basin, I mean, it's just, again, a game changer.
From a visualization point of view, when you're doing a sentinel lymph node and you've injected some methylene blue or something, and you're looking at it and going, "Eh, that could be it. I don't know. Let me see." There's none of that. I mean, it just lights up like a Christmas tree. It's an amazing technology.
I'll take the second part of the question, of course, building on the sentinel lymph node work, there are a number of physicians that are studying sentinel lymph node, and I would anticipate in the near future we'll have clearance for that use. Specifically to other molecules, this is a really exciting time in the imaging space, particularly for us being the leader in fluorescence imaging as a number of different molecules are being invented, designed, created today that simply will change the game in a number of different care settings. For example, of course, the holy grail is molecules that will attach to certain types of cancer cells. You attach a fluorophore to that molecule, and you can see clean margins when you excite it with the laser. You get the fluorescence image, and you see clean margins of that tumor.
We do see this use case outside of the U.S. where the on-label, off-label issue isn't such a challenging matter, where you have lung cancer. You do have a number of use cases around lymphatics and in liver cancer already. Some really exciting things happening in this space. I would also say visualizing the ureters and potentially down the road, visualizing nerves.
Additional questions? Yeah, David.
David Lewis, Morgan Stanley. Andy, just two for you. The first is, Novadaq's issue was not the technology, it was distribution. Can you talk just about how the integration process has worked this year when you think about the placement opportunity for this particular technology and the integration to future endoscopy cameras for Stryker? What is that placement opportunity, and where are you in the integration curve this year? I had a quick follow-up.
David, the placement opportunity of the number of units, for example?
Yeah. What is the opportunity for the number of SPYs you can place? Some of that's going to get interated into 6088, I think it's complicated.
Yeah.
I am just trying to get some sense of where we are and where we could go.
Well, we are not going to give specific details on our sales numbers, but I will say that, and you can speak with Brent later about this as well if you would like, the model that we built prior to the acquisition for Novadaq, we are doing extremely well relative to that model. That, of course, a big component of that is our placement of the devices, primarily now focused on placing SPY-PHI. Would say that it is very early days still in terms of penetration, and that we have a large opportunity relative to the market. We have today in the endoscopy division about 20,000 endoscopy towers in the U.S. alone that are Stryker endoscopy towers. Of course, all of those towers do not yet have a SPY-PHI attached to them. We hope that one day they each do. Then relative to the technology integration, we are moving in waves.
We will be probably two generations away from full integration of all of the Novadaq technology into a single platform for Stryker, but we fully anticipate that.
Okay. Just the second question is, you are not a surgical tools provider, you are really a surgical imaging provider. Some of the surgical robotic companies in general surgery are moving to sort of fully integrated solutions where they are offering their own imaging. How concerned should people be that you take this out five, six, seven years where Medtronic and J&J have integrated surgical imaging robots, and you are still just trying to be the surgical company? How do you deal with that risk?
Well, the first thing I would say is I'm not so sure that down the road we will still just be trying to be the surgical imaging company. Of course, we have a large robotics program in our corporation today with hard tissue robotics, and robotics in general, as you heard from others, is a very interesting space for us overall. It's not to say that we won't one day be there as well. I'm not saying we will, but it's not to say that we won't. That being said, we love the position that we're in with the technology leadership that we have in fluorescent imaging. The IP portfolio is robust. One of the real benefits of the acquisition of Novadaq was their strong patent portfolio. That will certainly make it a real challenge for those robotics players that are entering the space.
Of course, as you know, we provide the imaging for the Intuitive da Vinci robot today. That being said, whether it's future partnerships down the road that we may have with other robotics providers, or one day being our own provider in soft tissue robotics, we believe that we have a place. The other part I would say to that is, it's still very early days in feeling out the right procedures for robotics. As you know, there's a lot of controversy around what procedures today relative to da Vinci are appropriate relative to cost, benefit, what's not. We believe that over time, that will shake out, but we have many years of strong growth as that shakes out. The other part of that, of course, is the players in the industry developing those robots are likely some time away from being very effective.
Thanks, Andy.
We have time for one more. Yeah, Bob?
Sorry, Bob Hopkins from BofA. Just one quickly, Andy, if Katherine's okay with this. I'm just wondering if we could look backwards. You've had a fantastic year in your division. Can you just give us a sense within the three core businesses that you're in, what the growth spread is among those various businesses this year?
I can, Bob. Yeah, well, I did note earlier that our fastest-growing business is our sports medicine implant business. That business, Bob, is high teen, low 20s. It's a fast grower, a strong double-digit grower. It has been for years. Again, lower market share position, so a smaller business overall, but growing very fast, very innovative business. Our communications business is also a strong double-digit grower. That business has benefited, as you saw earlier, as noted on the trend towards new builds, remodels, new constructions in ASCs as well as we build out the OR infrastructure. Really nice several-year run in our communications business. We've had a great run with our 1588 camera in our core endoscopy business. As per usual in our camera cycles, we're on the back end of that cycle. It's been discussed about by Kevin and Katherine and Glenn at other points.
Our core endoscopy business is a slower grower this year. Of course, we like to innovate, and we like to innovate in cycles. That business will be back very strong and continue to be a strong contributor to Stryker Corporation for a long time.
Yeah, last one.
Hi, Ryan Zimmerman, BTIG. Just in the cycle for the integrated OR, where are we in the development of that with respect to new physical plants in the U.S. versus retrofitting existing physical plants in the U.S.? Thank you.
Sure. Well, I would say, first off, thanks for the question. The business is about 50/50 for us, about 50% new build, 50% remodel. I would also say that about 80% of operating rooms in the U.S. still today are what we would call standard operating rooms, not integrated ORs. That being said, of course, you can do the math and understand that we have a long trajectory ahead of us if we shoot for that 100%, which we won't get there. We have a long way to go for growth in that business. Good. Great. Thank you very much. Thank you, Dr. Newman.
Thank you, sir.
Thank you very much. You are a luminary.
All right. Next up, our newest member to Stryker on the Stryker leadership team, Viju Menon, who is our Global Group President for Global Quality and Operations. Viju Menon. Biju.
Thank you, sir. Good afternoon. Also, this afternoon, you heard a fantastic story about how we maintain the growth to be high-end in med tech. Along with that, we have a very robust program to deliver absolutely consistent bottom-line operating margin accretion, and we have an initiative, it is called the CTG for Cost Transformation for Growth. This will work eventually. I have white clicker, it will work. The Cost Transformation for Growth is something that is not new to this community. We are in our third year, and we are in our third year of absolutely delivering the 30 to 50 basis point accretion this year as well. My role is twofold.
One is to provide you with an update of where we are, but also convey with absolute high confidence that we are going to continue to deliver the 30 to 50 basis points of op margin expansion in the years to come. If you look at the eight dimensions of this, what you see is, draw a vertical line through the middle. The right side is really SG&A, the left side is product cost benefits.
If you look at the right side, those have been very consistent, whether through shared services from the integration of finance that Glenn's driving or the Workday implementation that Katy, I think, and the HR team's driving this year, to the global operating model that you heard from Kevin on down, the very division-centric aspect, which keeps us very close to the customer, but at the same time, leveraging the scale across all the operating divisions to deliver op margin accretion. That operating model is absolutely robust and key to success. Glenn and the team have driven fantastic improvement through the indirect procurement sourcing leverage. You will hear in a couple of minutes from me what we are going to do and what we are in the process of doing from direct sourcing as well.
When you think about global ERP, we absolutely have gone live in CMS, which is one of the smaller divisions, and on track to proliferate the SAP ERP standardization in 2019 across our larger divisions as well. That is on track so far. From an outsider perspective coming in about six, seven months ago, as I looked at direct sourcing, there is an absolute opportunity that we are pursuing to deliver transformative savings from a direct material procurement standpoint. There is a very well-established playbook that many industries follow from a direct material sourcing perspective, and that is what we are putting in play here at Stryker as well. To think about the overall supply chain optimization, all of the independent work streams, if you think about demand planning, supply planning, sourcing, manufacturing, and fulfillment, we run a pretty good supply chain.
The difference that we're making is really looking at it from a patient centricity and working backwards from the hospital bed, the surgeon, the patient, back through the value chain up to the very top of it, really integrating it such that we can deliver much better of a customer experience, but also unlock significant cash from an inventory standpoint, along with our embedded service levels. More to come, but very optimistic about the opportunity here. Last but not least is absolutely plant network optimization, both from a strategic standpoint, from a make versus buy standpoint, but also within the four walls of each of the plants.
If you think about the opportunity to unlock, whether it's equipment effectiveness, whether it is the footprint optimization, whether it's frankly the yields and the production quality output, there's a lot of specific initiatives that we're driving that'll unlock significant value from the plant network as well. As you heard throughout the afternoon, making really good strides from a product life cycle transition across the different divisions. All in all, the key takeaway is very confident in continuing to deliver the 30 to 50 basis point of op margin accretion as we have committed to. With that, my privilege to introduce Glenn, our CFO, to take us home. Glenn?
For last. Actually, Q&A is after me, so maybe that'll be better. All right. What I'd like to walk you through is just sort of wrap up all the things we've talked about, put a nice bow on it, and reiterate sort of the long-term growth model that we laid out two years ago. If you think about it, what we're really trying to drive here is really sustainable EPS growth, and there's three factors here. Starting at the top is sales growth. As you heard today, this focused market approach and dedicated sales forces, power brands, and a diversified portfolio really ensures that as we look at making sure that we're growing above what the average med tech is growing, that even in markets that might be lagging, we have other markets that are growing double digits that allow us to make up for that.
Moving to the middle of the income statement, what are we doing to drive operating leverage? You just heard Viju describe where we are with our cost transformation for growth program and the two facets that we're really focusing on, really improving our product costs and our COGS and becoming very efficient from an operational structure. Secondly, driving meaningful SG&A leverage through programs like indirect spend, through what Katy and I are doing on shared services. All that leads to balanced R&D investment. I think you'll see over the past years, we've actually increased our investment in R&D. Finally, moving down to the bottom, and it doesn't get much airplay, but we've set up very efficient tax and debt structures that really help us manage our effective tax rate as well as our interest expense. What do these three things add up to?
They all add up to EPS growth that's leveraged versus our sales. I'll show you that in a second. Speaking of growth, I know you've seen this slide before, although you haven't seen 2018 on here. If you go back as far as five and a half years, we've been outpacing the market. We've been outpacing the market more than 150 basis points, and what I'm here to tell you is that 2018 isn't any different. What I have on the slide here is year-to-date Q3, and we're already 200 basis points ahead of the market, and I fully expect that we'll finish the end at the high end of our guidance range of 7%-7.5%. All that growth would be pretty meaningless, though, if we didn't deliver earnings.
I think if you look at the history of how have we been doing at delivering leveraged earnings, we weren't always so consistent. But I will tell you that since we put these programs in place in the last three years, since 2016, we have continued to deliver leveraged earnings versus our sales growth. That will continue in 2018, too. I guess the other thing I'd really like to point out here, and something that hopefully doesn't go unnoticed, but in years where we've had particularly strong top-line growth, we have let that flow through to our earnings growth. I know we put a minimum 9% out there, but where we're seeing stronger growth, we'll deliver greater than 9%. Looking at our capital deployment strategy, this is no secret. Kevin's talked about it. Katherine's talked about it.
We reiterate this in one-on-ones and in earning calls. We are focused in three areas for capital deployment, but one of these is far bigger than any other, and that's our M&A strategy. This M&A strategy is one of the facets that really ensures that we'll continue to be a high grower at MedTech. If you look at sort of capital deployment even this year, we're on track to deploy over $2.5 billion towards M&A. Not to be sort of slighted, though, I really do think if we look at dividend growth, we've been very consistent to drive dividend growth that is in line with our earnings. If I went back and looked at sort of what's that growth been since 2010, we've driven a dividend growth CAGR of 15%.
Lastly, we will continue to do share repurchases, but our strategy there is really only to do share repurchases to the extent we offset dilution in any given year. This amounts to roughly about $300 million in any one year. What does this look like, sort of wrapping it all together? This is what we showed you back in 2016. This is the model that we're sticking to. Sales at the high end of MedTech, delivering 30 to 50 basis points of annual operating margin improvement over five years. One of the things I think we should point out there is we've delivered 30 to 50 basis points, and we'll do it this year, even though we have very dilutive acquisitions that are hitting us. We're still hitting that target.
Lastly, all of this coming down to a minimum EPS growth of 9% annually. With that, I'm going to invite the panel back up to stage for Q&A. It'll be Kevin, Katherine, Viju, Tim, Andy, Spencer.
Okay. Thank you, everybody. The way we're going to run this is I'll feed the question, I'll just sort of point the question. I'll either answer the question myself or I'll feed it to one of my colleagues for them to answer. Who wants to start?
Hi, thanks. Isaac Ro from Goldman. Kevin, you guys have been very successful with M&A over the years. If I look around the rest of the industry, your other competitors seem to be getting a little bit more focused on M&A as well, in some cases, in similar areas where you guys have already expressed an interest. How do you build a sustainable competitive advantage on the M&A front? How do you make sure that you get the best assets at the right price on a systematic basis?
I think we actually have built a sustainable competitive advantage. Just the fact that people want to get active, it's not something you just do overnight. We've built a competence, a really strong competence over a number of years. We know how to pick the right targets, we know how to pay the right prices, we know how to integrate. Each year, we show our board of directors a dashboard of our M&A performance, it's littered with green colors in terms of being on track, being on model. Having more people involved in M&A always, well, that could potentially lead to price wars for assets. We have discipline. We're not afraid to walk away from a deal. The beauty of our decentralized model is we know all the companies that are out there. We actually acquire things very quickly. Pivot's a great example.
We took that company out when it was very small, it's clearly the best solution for hip arthroscopy. Sometimes we'll still snag things very early given how decentralized our model is. I like our chances in M&A and the fact that other people are looking into it. The problem is, as you've seen with other companies, is they'll do a deal, potentially a larger deal for them relative to their size, and they'll fail pretty miserably. You only get good at deals if you do them often. Katherine, her team also animates a very active best practice sharing process on how to integrate deals. The more you do, the better you get at things. The fact that we've been this active is great. Also, our division presidents, if we pass on a deal because of price, because you have to be disciplined.
Once the price goes above the value that will be value creating for the company, we'll pause and we'll let it go. Our divisions know if they come back with another deal, they can still do a deal, that they don't miss their turn, so to speak, which does happen in other companies. If a division misses their chance, they have to then wait maybe five or six years. That isn't going to be the case at Stryker. I don't know, Katherine, if you want to add anything to that.
No.
Okay. Thank you. Here. David?
David Lewis, Morgan Stanley. Two for you, Kevin. See if I can pass this off to anybody. The first question is, I wonder if you could just talk about the transformation of the Stryker growth profile these last five years since you've been here. It used to be sort of 5%-6% and undefined at the bottom. Then it moved-Undefined on the top to 9% floor, the infamous 9% floor. Earlier this year in AOS, you talked about not just 9% floor, but you definitely expressed confidence in a double-digit earnings profile and the high-end of med tech, frankly, has shifted in these last five years. What is the new Stryker profile? Are we talking about 7% and 12%, 7% and 10%, 6% and 13%? What is the profile as you see it?
I always like to anchor our being at the high end of medtech versus the market. You saw the chart Glenn showed. We've been very consistent delivering, on average, over 200 basis points faster than the market growth. It always depends on the market. We're not going to defy gravity, so I don't want to just give a number in free space. If the market's growing 5%, then you should expect us to grow at least 7%. If the market starts to slow and goes down to 3% or 4%, then we'll probably drop in a commensurate manner. I regularly and absolutely expect that we're going to be outpacing the market just based on our market position, based on our R&D pipeline, based on our BD performance. We've been incredibly reliable in being able to outpace the market year after year after year.
I don't see that changing, it is based on how the market grows. If the market suddenly grows 6%, 7%, 8%, then you should expect, add your 200-plus basis points, that's where we're going to grow, and we're going to leverage our earnings. Our earnings are going to grow faster than sales. Although we put a minimum of the 9%, as you've seen in the last three years, we've clearly been in the double-digit land. It always anchors back to the how's the market growing. If the market's growing, if it goes back to where it was in 2013 and the market's growing 2.5%, we're growing 5%, well then, maybe 9% is a more realistic EPS off of a 5% top line than the 12%, 13% we've been delivering the last few years.
That's my simple answer to you is if the top line's growing the way it has been growing, you should expect double-digit earnings. It really does depend on how the market's growing. You add our premium growth rate to that, and then expect good leverage on the bottom line.
If the market stays where it is today, we should expect kind of a 7% to 12% to 13% profile from Stryker in the future.
We'll give our specific guidance for 2019 at the end of January. This is the kind of visibility I have now, but you should expect a similar kind of If the market stays the way it is now, you should expect 2019 to look awfully similar to 2018.
Very clear. Just my follow-up question is on two companies in large capital devices grow faster than the weighted average market growth rate. It was Stryker and Baxter, and as of the third quarter, it's just Stryker. How are you able to grow
Thank you for pointing that out. I appreciate it.
Very welcome. Gail will kill me. How are you able to grow faster than the weighted average market growth rate? I think one of the concerns investors asked this year was sustainability, and they sort of think Stryker needs to go out and do a deal in a faster-growing, market-expanding market. At least one sizable new market to sustain that growth. Two-part question. How do you continue to grow faster than your markets, do you need to do that transformative growth deal?
I'll answer the last question first. We don't need to do a transformative deal to sustain the 200-plus basis points above market growth. We don't because we have an engine of growth that's really humming. If you look at the cycle of innovation, Andy talked about his camera. The distance between 1188 and 1288 was many years. 1288 to 1488 was pretty fast. 1488 to 1588 was even faster. 1688's coming in the first half of next year. That's a pretty fast cycle from 1588 to 1688. That's the same thing that's happening in instruments from System 6 to System 7 to System 8 power tools. Our cycle of innovation has definitely accelerated across the company. That's one thing. Our commercial model, it's a built-in advantage. The fact that we have these decentralized businesses with business units that are close to customers, with focused and specialized sales forces.
These deals that we're doing, right, Novadaq now rolling into organic growth, right? We just announced K2M, at least they announced this morning. That's going to close very soon. That's going to take our spine business to a higher growth profile. Mako, it's only just a little over a year since the full launch of Mako. You've seen the way that's contributing to our growth. We're still in the very early stages of the total knee with Mako, let alone future applications. I'm very bullish on our prospects to continue to grow really at the high end, and as you said, in Q3 we really stood out versus our competition. I expect this growth to continue unabated. Will we do other deals that are more transformative? We may. We absolutely have no need to do so at the current time. Frontier?
Either one.
Kevin, two for you. Larry Biegelsen from Wells Fargo. Thanks for taking the question, Kevin.
I may pass one of them on just to keep him engaged.
Two questions. One is it sounds like you expect organic growth next year to be pretty similar to this year based on your prepared remarks.
I didn't give a specific number, we expect very good growth next year.
Areas of Stryker that could be stronger in 2019 than 2018 and areas where maybe because of product cycles may be a little softer. Just secondly, how would you rate the spinal cord stimulation market in terms of attractiveness, in terms of strategic fit for Stryker? Thanks for taking the question.
I'm not going to get very specific about every division. I would just say that as I sit here today, I think I have a very similar balance of headwinds and tailwinds as I had coming into 2018. Similar balance. In some cases, you have some divisions that are at the end of the cycle, some divisions that are earlier part of the cycles, but I would call it very balanced. I don't know, maybe Katherine, if you want to add a little bit on the headwinds and tailwinds.
Yeah, I would echo the comments. We're going into some strong product cycles next year, there's some other businesses that'll have more challenging comparisons, which is why we come back to that statement that when we think about our ability to grow at the high end of med tech and med tech growth being pretty similar based on everything we know next year as it is this year, we feel really comfortable with that.
As it relates to spinal cord stimulation, I've been saying for the last four years that neuromodulation is an area of interest for our company. Clearly, we have a big neural business. You can see our commitment to spine. We asserted that commitment both with the VEXIM acquisition and more recently, the pending K2M acquisition, that this is an area that's of interest, and that's a space that is of interest to our company. Unless, Spencer, you want to add anything since you're the NIS head?
If you think about our Neurotechnology businesses, it's one segment that we don't offer a product in right now. It's an attractive adjacency we continue to monitor.
That's a call point. You know our acquisitions, we tend to look for great technologies that fit in our existing call points. That's kind of the sweet spot of Stryker deals. This is within our call point, Rich?
Thanks, Kevin. We're talking about a lot of products and outlook here. Maybe talk a little bit about some of your geographic thoughts at both outlook and initiatives. Am I remembering correctly that emerging markets still are only maybe 10% of Stryker?
No, I wish they were 10%, Rich.
Okay. All right, thank you. Maybe, as we look over the next three to five years, are emerging markets a bigger priority? Is international? Just for fleshing in another aspect of the growth outlook.
Sure. I'll start, and then maybe I'll pass it to Tim to make a comment. I would say, if I look backwards, we're really excited about what's happened in Europe. The transatlantic model, and even rolling Canada into that model, has been a wild success, where we've had Europe growing north of Stryker's average growth rate each of the years since we launched that model. That's been a huge success. More recently, Japan has really turned on and become a really strong performer. Emerging markets has not been a great area for us. It's about 6% of our sales, quite a bit below 10%. The promise is still very significant. We're committed to getting better in emerging markets. We are in the process of retooling our offense. We're feeling more optimistic about China, but still have work to do in a lot of the other markets.
Maybe I'll pass it to Tim. Tim, as you know, as President and CEO, he is responsible for all of our businesses and also all of our regions.
Yeah. When Kevin was talking about our growth success over time, I was going to add international and talent being 2 other areas where we excel. On the talent side, you'll meet tonight all these fine leaders we have, and really just this history of developing strong leaders with great market knowledge that's been there a long time and learn how to partner with great clinicians like we've seen here tonight. On the international front, I would not underestimate or understate the success we've had in Europe. I think it's been fantastic, and that continues. We get stronger and stronger there. In emerging markets, I would say, admittedly, we have work to do, primarily starting in China. Our Neurovascular business is doing a terrific job there. The rest of the company has a lot of work to do.
A last thing I'd stress is we do have priority markets, which include China, but also Japan and Australia. We've had an excellent year in Japan, which I think has been very impressive for us. In Australia, we continue to be a dominant force. In general, I think it's a mixed bag where we have great performance in these developed markets. We have really great opportunity in emerging markets and some early wins for Stryker, but a whole lot more work to do.
I was going to follow up actually with a question for Tim anyway. Just as you step into this role, what are your priorities? What Kevin asked you to do, what kind of tough jobs does he ask you to tackle and to make the company even better? He likes that question, so you must have done something.
Well, he said we may not defy gravity, but we start with the premise that we need to continue to defy gravity, which means we get bigger, and we still grow faster. We're very committed to our commercial success. As I went into this role, I laid out some areas primarily surrounding collaboration across the company, but maintaining speed, simplicity, and driving synergy across the business. Ultimately, a commercial model change like this, a whole bunch does not change. We remain who we are and what we're all about. Where we add value is we do look at opportunities for synergy from a cost standpoint and from a top-line standpoint, and we've had just some early efforts to collaborate. We think it's going to be great.
When you talk about areas like surgery centers, just as a very small example, but a huge opportunity, Stryker to succeed there is going to have to bring essentially our best deals forward, our best foot forward, and that's going to mean various people in this room all stepping up and having joint deals across the company. Be very honest and say we got to a lot of to where we are through fierce decentralization. I think the next phase of our growth is going to require some fierce cooperation and collaboration. Again, we're very optimistic about the opportunities. It's early days, but our leadership team is very committed to doing that.
Okay, perfect.
Vijay Kumar from Evercore. Maybe a couple for Glenn. Glenn, when you look at your margins, 30 to 50 basis points annual, you guys are coming well above plan for the current year. When you think about 2019, I know you'll reiterate the 30 to 50 basis points, but again, you have FX, some of these larger deals coming in. How should we be thinking about some of those factors playing out at the margin levels?
I think as Kevin illuminated that 2019 feels a lot like 2018, maybe. I think some of the factors heading into 2019, we will close some pretty significant deal before year-end here, and that deal will be dilutive to our overall op margin profile. Right now, we've looked at that along with other deals, and feel very confident based on what we know we're going to obtain in op margin expansion, that we should be able to offset that and again, land within the 30 to 50 basis points of expansion.
Maybe a follow-up to that. Given M&A is the number one priority for cap deployment, if you look at free cash conversion, it's kind of lagged the last few years. When do you think you can free up more free cash so that Kevin can go back to his M&A strategies and drive 200 basis premium growth?
Believe it or not, we actually do talk about free cash flow as a team. We actually talked about it today. We really think that somewhere between 70% and 80% as a conversion rate for adjusted earnings is the right free cash flow target. We'll likely get fairly close to that this year. Through the budgeting process and through working with Viju and his team and looking at where we can make improvements on working capital, we'll work very hard to sort of get within that range in the years to come. We will also look to combine sort of incentive programs that might help drive that.
Okay. Bob, you want to?
Thanks very much. Just two questions, a very quick one for Glenn, and then one for Kevin. Glenn, on spending on ERP, I know that's been a big priority for the company. Can you just give us a sense where you are in that cycle? Will there be more spending in 2019 than there was in 2018 on ERP or is that starting to wind down?
I think, a couple of things. When we kicked off ERP almost two years ago, the company was of a certain size, a certain number of divisions, and the scope was defined within that parameter. We roll the camera forward almost three years, we've added many significant businesses to our profile. Where I would've said that we've kind of reached the hump and hopefully would start to decelerate our spending next year, I think because of scope expansion through acquisitions, we'll probably see a very similar year relative to spending on ERP next year as we did this year.
Okay. Then Kevin, one question for you. This is a topic that comes up from time to time, so figured maybe it's appropriate in this setting to give it a little visibility. It's just the question on shift to lower acuity centers and the shift to outpatient care for orthopedics. What's your latest thinking on where we are in that trend and where we're going, and what it means for your confidence in the outlook for pricing for hips and knees specifically?
Sure. I think, we have Stuart Simpson here in the front of the audience, so you can talk to him certainly at the product fair for a lot more detail. The CliffsNotes is, until Medicare provides coverage for large joint replacement in the outpatient setting, you're not going to see a big movement. It is definitely a trend for the future, but as you know it, they're only covering hospital outpatient. We have not seen a massive migration. It's still maybe in the 5% range of large joints that are in the outpatient setting. I think, certainly in 2019, we don't expect much movement. If Medicare decides that they're going to start to cover this, then you're going to start to see it move. As Tim mentioned earlier, Stryker is in the outpatient surgery center.
We have a very good understanding of it through our sports med business. He's creating a bit of an offense around surgery centers. We think we'll be able to compete very well in the surgery center. As you know, within the bundle, when we're managing a bundle of procedures, the hospital and the non-implant cost is the biggest cost component. The challenge of the surgery center isn't so much the price of the implant. As you know, many of them are owned by hospitals, so the buying is done consistent, whether it's done in the hospital or out, you pay the same price for the implant. It's really the rest of the cost of the procedure that really drive the high cost of orthopedic procedures, which is why the commercial payers are pushing these procedures to move them out of the hospital.
I would like to mention that we're acting as a convener as part of BPCI, and we actually have 90 contracts that we're going to be involved in taking risk with the hospital providers, which was just recently approved. This is going to be a fantastic chance for us to put our money where our mouth is with our customers, and if we can reduce the overall cost, we're actually going to gain a financial benefit. That's all under Stuart's responsibility, and he can share more with you during the product fair. We don't think there's much risk, really, of this exploding, certainly not in 2019. Until you see Medicare cover it's going to be a very, I would say, slow, gradual build.
Yeah, right in front. Josh.
Hi. Thanks, Josh Jennings from Cowen. Just wanted to circle back on an earlier margin question. The CTG program has obviously borne fruit, if you will, and arguably, you're performing it this year, kind of at least at the upper end of the range, if not through that, because you're absorbing the acquisitions. I was just hoping to get a sense of the path forward ex acquisition for the core business. You've gotten through some of the investment period for CTG. Should we be thinking about that core business as continuing to perform with delivering operating margin expansion behind the range or even north of that, and just absorbing acquisition that brings you down to that 30-50 basis points? Thanks a lot.
Glenn, you want to take that?
Sure. I think, yeah, if we look at sort of the CTG program that Biju outlined and where we are sort of in the cycle of getting through some of that, we're probably 50% of the way on the SG&A side, and maybe only 25% of the way if you look at sort of on the COG side. I will tell you that, in terms of what touches the core pieces of the business, the COG side probably touches it more, so we have some investing to do there. We'll continue to drive above 50 basis points expansion on the SG&A side. To your point, holding all things constant, yeah, I think next year the core business will drive in excess of 50 basis points, but that will come down because of acquisitions.
I'm really excited to have Biju here, joining Stryker. Biju's prior experience was with Intel and Verizon, so he came from outside the healthcare system, and he's looked through the opportunities through a very different lens than really our industry people. For a living, they had to reduce costs in a much more aggressive way than we've had to within the healthcare system, given our margin profile. His ideas and his thoughts about the future are very exciting. We're obviously tempering what he's allowed to communicate today in terms of his ambition. Over time, certainly, we'll be able to share a lot more of that.
I think bringing in an outside set of eyes about how to do things, how to use more automated tools and techniques, I think attacking that side of the wheel that he identified, that left side of the wheel, I think is going to be very exciting.
Thank you.
Yeah. Over here.
Thanks. Robbie Marcus, JP Morgan. Maybe one for you, one for Glenn. I'll start with Glenn. Maybe just to follow up on Josh's question, is another way to maybe think about it, we've seen now in 2018, and based on the numbers, 2019, that the underlying margin capability of the business seems to be a bit higher than the 30%-50%. Do I think about, to the extent Stryker is delivering 6%, 7% organic top-line growth, that you have the opportunity to fund some M&A transactions that are dilutive that maybe in a normal year you wouldn't be able to do? Does that give you more room to go after transactions you normally wouldn't?
I think, if you look at the history and you look at sort of where we delivered on op margin expansion in 2017, where we are with 2018, and how we view 2019, just given the known sort of landscape of M&A that will happen, I think certainly one of the things that it's allowing us to absorb that is the performance of some of these early-on CTG projects. It remains to be seen as we push forward with some of the other more complex, say, COGS and operationally-oriented projects, if those will allow as much early expansion as we've seen on the SG&A side. In general, for next year, I feel pretty confident that the core business will produce op margin expansion in excess of the 50 basis points, which will allow us to absorb several of the big acquisitions that we have planned for this year.
All right, Kevin, it's not by accident that you grow above the market each year. Somewhat of a softer question, but maybe speak to how important the culture is here at Stryker and how much that contributes to the success each year.
Yeah. Well, I think I'd love to turn that to Tim because he is driving the engine of our growth.
Well, I was going to give it to Spencer. He didn't get a chance to speak yet.
Sure
thoughts on the topic. I'm a big culture fan. I say it's actually one of the most powerful forces in an organization is culture. It's the set of behaviors and norms that show up every single day. It's how people perceive taking care of the customer, how they perceive taking care of the patient, how they think about innovating, and that's embedded in the DNA of all employees at Stryker. We start with that patient and that customer and work backwards. We're very passionate about making sure the solutions we're bringing to market are creating value, and that's something people that walk through these doors every single day think about. It's really part of our secret sauce. It's what differentiates us from other companies in our space, other companies, I think, just generally in the industry.
It's one of the reasons we have great retention at Stryker. We want to be here. We're very proud of our brand. We're very proud of the work we do, and it's extremely important to us.
As I mentioned, Spencer, Andy, Brent, and Dylan, all these recent promotions, all at least 10 years with Stryker, probably closer to 15-20 years with Stryker. Long-time Stryker people have this in our DNA, and I think the best part, I love the question, and I do talk about it a lot when I'm meeting with investors separately. In fact, I'm getting asked a lot more about culture than I used to be in the early years of my job. What I'd tell you, the best part about it's very hard to copy. Someone can try to copy the size of your catheter, the length of the catheter, but copying your culture is not easy and takes many years. That's a sustainable competitive advantage that we have.
Having Tim as our President and COO, being able to take that across all of Stryker, all divisions, all global, in an even more consistent manner, is wildly exciting for me, and that's one of the big reasons why Tim is in that role. Thanks for the question. I think we have time for two more. I'm sorry. Go ahead, Kurt.
I was just going to add, we're all frothing at the bit to talk about culture. To me, the takeaway on top of what Spencer said, it's a culture of performance and accountability. To me, that's what you see and why we see the consistent delivery is we have some 38,000 some odd associates who are committed to delivering.
Actually, we now have time for one more question. All of us will be over in the product fair, and we'd encourage you to ask any of us questions to finish. Let's go to Glenn. Sorry about the person in the back. I apologize.
Thanks, Kevin. Glenn Novarro with RBC. The topic of a soft tissue robot came up during Andy's session. If I look at what you're selling into the surgical suite with the cameras and the bedding and the lighting, why wouldn't you develop a robot, a soft tissue robot? As a follow-up, does the company have the capabilities internally to develop a soft tissue robot? Thanks.
Those are the kind of questions I love to defer to Katherine, I will defer that one to Katherine.
I would say right now, thank you, Kevin. Right now, we're really focused on hard tissue. That's where our core competency lies. That's where our experience, our software capabilities, our IP estate, and as you saw today, we have a lot of applications focused on hard tissue, whether it's continuing to optimize the total knee. We have an initiative underway in spine. We have an initiative underway in shoulder. There's a lot of opportunity in hard tissue, and I think as you think about the next three, five years, that's going to be the primary focus.
Yeah, the only other thing I'd add is general surgery is one of those logical adjacencies. We don't have people standing in the OR in general surgery cases, even though we have an endoscopy division that's in that area. That's one of many other logical adjacencies for our company. How we choose to get into general surgery in a bigger way, whether it's with robotics or without robotics, it's one of the many things that are on our landscape.
We'll see how that plays out over time. With that concludes the formal portion of the meeting and the broadcast. Thank you all for your attention. We'll head over to the product fair, and as I say, all of our presidents, and there will be a showcase of products. You can talk to some of our marketing managers as well as all of us. Thank you very much.