The presentation may contain information that includes or is based on forward looking statements within the meaning of the federal securities laws that are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to, weakening of economic conditions that could adversely affect the level of demand for our products pricing pressures generally, including cost contaminant measures that could adversely affect the price of or demand for our products changes in foreign exchange markets legislative and regulatory actions, unanticipated issues arising in connection with clinical studies and otherwise that affect U. S. Food and Drug Administrative approval of new products, changes in reimbursement levels from third party payers, a significant increase in product liability claims, the ultimate total loss the ultimate total cost with respect to REJUVINATE and ABG2 matter, the impact of investigative and legal proceedings and compliance risk, resolution of tax audits the impact of the federal legislation to reform the United States Health Care System changes in financial markets, changes in the competitive environment, our ability to integrate acquisitions and our ability to realize anticipated cost savings.
Additional information concerning these and other factors is contained in our filings with the U. S. Securities and Exchange Commission, including our annual report on Form 10 ks and quarterly reports on Form 10 Q.
This is a customary statement. I'll give you a moment to read that. Okay. Let's move forward to the agenda. We have an action packed few hours together.
I'm going
to start off with an overview of Stryker's overall outlook, our key strategies.
We then have 2 very topical panels, very exciting topics, the Mako Total Knee as well as Stryker Performance Solutions. We then have Lonnie Carpenter talk about our cost transformation for growth program, a financial update and outlook into the future from our CFO. We will then have investor Q and A during our main session, which is also being broadcast. Following the broadcast, we will then move across the street for a product fair. Stryker leadership, including division presidents as well as other general managers will all be also available across the way for your further questions.
So I'd like to
start the presentation off with our mission and values. These are the unifying forces within all of Stryker, consistent across all our divisions and across all our geographies.
This is a makeup of our sales. If you look at the end of
last year, we finished just short of $10,000,000,000 You'll see in the pinwheel there that no one business represents more than 15% of our sales. This year, we will cross not only the $10,000,000,000 mark, we will also cross the $11,000,000,000 mark before the end of the year. With the acquisition of Sage and Physio, obviously, the blue section is going to grow a little bit more when you see the final numbers for the end of this year. If you
think about over the past
5, 6 years, we've really diversified our business. So if you think about capital equipment, both large and small capital equipment represents less than 15% of our sales. And when I say small capital, I'm talking about power tools and cameras, which really aren't very volatile. They tend to be very, very steady performers regardless of the environmental circumstances. This chart here shows our culture of growth.
We have a history
of being a growth oriented company. Since we went public in 1979, every single year we've grown our top line through recessions, through whatever circumstances we've managed to grow.
And then of course, we'll update that at the
end of this year and we'll continue the streak at the end of 2016. So this chart here just shows sort of the evolution from 20 10. Just some examples to let you know that this strong organic sales growth that you've seen over the past 4 years is absolutely sustainable. I'll just pick 2 examples here. Look at the neurotechnology area.
Back in 2010, we were kind of a niche player in neurotech. Now we're a market leader in total stroke care, empowered instruments and CMF. We've really bolstered our neurotechnology franchise. Another example is trauma and extremities, where if you look back in 2010, there was one clear market leader and then a number of other companies that lagged the market leader. But we've clearly burst away from the pack and are the clear number 2 in that segment with a broad and very fast growing portfolio, including being a market leader in foot and ankle.
And as you see the other items on the list, you can see we've made a lot of changes over the past 5, 6 years, which position us extremely well to continue to deliver strong organic sales growth at the high end of medtech.
In addition to
the strong growth profile, we've also
developed very strong capabilities to drive operating leverage. We've developed very significant standardized programs, efforts to streamline our processes and standardize them across the organization, as well as driving collaboration. So in the past, Stryker was very siloed. We now have tremendous collaboration occurring across our divisions and across our regions, and we show up that way in front of our customers. We have 4 key and core strategies, which you see here on the slide, and I'm going to go through each one of them.
1st and foremost, business unit specialization. This is part of the secret sauce of Stryker. It's been one of our hallmarks where we have dedicated sales, marketing, R and D and business development by division, extremely close to the customers. That helps us to drive innovation. That helps us to spot targets for acquisition and of course to drive very strong growth.
And you see on the last bullet, our R and D spending has actually accelerated over the past 4, 5 years to be north of 6% of our overall sales. Next, M and A, you see we've been a very, very active acquirer. Since 2010, we've acquired over 40 companies. And you can see this year, we've been very busy with a number of acquisitions, both large and small, including Sage and Physio Control. This continues to be the number one priority for cash.
International growth continues to be a huge opportunity for Stryker. I'm very excited and encouraged by the changes to our operating model, starting with Europe, where Europe was actually accretive to Stryker's growth in 2015 and will once again be accretive to our overall growth in 2016. So growing significantly faster than the market and actually adding to our overall growth profile. And then Canada joined our transatlantic operating model at the beginning of this year. And after 2 quarters of consistent performance for the past few years,
the Q3 was spectacular, terrific growth
in Canada, and we do expect Canada to also be accretive to the overall Stryker growth. Turning to emerging markets. We've had a lot of challenges over the past couple of years, not unique to Stryker, but we've certainly had our challenges. But the long opportunity remains very, very compelling. And we're committed to growing in the emerging markets.
You saw in the Q3 earnings results that our overall emerging markets growth was positive in the mid single digit range and that included still negative results from China. We expect China to turn positive in Q4 we remain committed to continuing to grow not only in the premium segment, but also in the mid tier segment. So when I say mid tier segment, think about TROSEN for spine and trauma and a number of products in our MedSurg segment, which are addressing the mid tier market. We've just started to launch them this year and we'll be launching continued products in the years ahead. Cost transformation for growth.
You're going to get a significant update today from Lonnie Carpenter, so I'm not going to go into this in detail. But we've spent the last couple of years getting ready to have a multiyear improvement in driving down costs and contributing to consistent operating leverage, which you'll hear from both Lonnie and our CFO, Glenn Boehnlein. So in summary, we continue to drive strong organic sales growth at the high end of medtech, and you should continue to expect that from Stryker. In addition, we remain absolutely focused on driving innovation and acquisitions so that we can be category leaders in every segment where we play. We're going to continue to drive globalization.
We're going to be consistent deliverers of leveraged earnings, and we will effectively deploy capital to enhance our shareholders' returns. So with that, I'll turn it over to David Floyd. Thank you.
All right. Good afternoon, ladies and gentlemen. I'm delighted to be here, and we will begin the session focused on Orthopaedics. I want to start off before we get to our panel discussion to talk about our overall strategy in the Orthopaedics Group for our Orthopaedics and Spine businesses. Consistent with Stryker's category leadership strategy, the Orthopedics Group aim is to pursue global market leading positions across our core franchises of joint replacement, trauma, extremities and spine.
And our strategy is focused on the 5 dimensions that you see here. Differentiation in our business models. We will focus on innovative and differentiated technologies and commercial models to uniquely meet the needs of emerging customer segments. The next hour or so will really be spent on examples of this differentiated approach in our joint replacement business. Global growth.
We will take the strong sales culture and commercial execution that we have enjoyed for so long in the United States to develop in emerging markets around the world by driving greater alignment between our franchises and the markets. We've experienced great success with this approach in Western Europe over the past 2 years. Acquisitions. Although we have a strong innovation engine in Orthopedics and Spine, consistent with Stryker's overall strategy, we will continue to seek to strengthen our businesses with acquisitions in our core and adjacent markets. Again, over the next hour, you will hear about several of the acquisitions that we have completed and how we are leveraging them in our largest business.
Cost transformation, we will take out unnecessary costs so we can reinvest in growth initiatives. And our workplace, grounded in our mission and our core values and building on our high engagement culture, we will evolve to meet the needs of our changing and increasingly diverse workforce. Today, we want to highlight differentiation because we have developed what we believe is a uniquely different approach to the joint replacement market that gives us a strong competitive advantage. I will briefly touch on 2 examples of our differentiated business models, and then you'll hear more from some of our leaders and customers
on these two capabilities.
We believe
that we will demonstrate that Stryker is uniquely positioned to embrace the changes that are occurring in healthcare broadly and orthopedics specifically. We have enhanced our strong core joint replacement business by integrating a unique high value technology platform, robotics, along with health care consulting services that meet pressing customer needs. Mako is a robotics technology that was first conceived in 2004 and acquired by Stryker in 2013. On that foundation of experience and the historic success of the Mako partial knee replacement, we are very excited about the total knee application, which is in, as you know, early market release. Approximately 10% of the hospitals in the U.
S. Performing orthopedic surgery already own 1 or more Mako systems. The forthcoming full commercial launch of the total knee application has driven an even higher level of interest because surgeons believe that the value proposition in total knee replacement is especially powerful. You will hear directly from 2 of them in just a few minutes. Stryker's Performance Solutions is a healthcare consulting service organization, which can trace its roots back to 2,002 and was built by us with a series of acquisitions.
With a decade and half of experience and a large installed base of clients, our proven ability to help customers with performance analytics and care redesign is a significant advantage for Stryker. This is especially true in the joint replacement service line, where the advent of bundled payments and other changes to the economics of reimbursement lead us to believe that capabilities in this area are essential to market leadership in this space. At Stryker, we have significant experience and deep capabilities to help customers navigate the transition to value based healthcare. Today, you will hear about our offerings from 2 of our customers. And now we will turn to a detailed presentation on our Mako Total Knee.
And for that, I will introduce the President of our Joint Replacement
Business, Bill Hovneagle. Bill? Good afternoon.
So we're excited to be here today to get you up to speed on the progress of where we are with the total knee application. The way this session is going to run over the next hour is before I bring up our panel, I want to share with you what we'll do is we will start with about 4 or 5 questions for the panel to discuss some of their early clinical experiences about using the Mako application. Then what we've got ready for you is 4 very short video vignettes of the procedure itself. And we've highlighted a couple of the key points in the procedure that we'll also have the surgeons speak to. After that is when we're going to broadly open it up for all Q and A that happens in this audience, and we're hoping that the time should be evenly split between our little presentation and your Q and A.
So to get started, let me
introduce some of the panel.
We've got first with us today is, if we could, Doctor. Kirby Hitt, who is here, our Director of Division of Joint Replacement Surgery from Baylor Scott and White.
Okay. How
are you? So Doctor. Hitt has been a long time user of the Triathlon Knee System. He is credited with being a member of the original design team for Stryker on the triathlon program. He has implanted as many as 5 1,000 triathlons during his career.
Doctor. Hitt does not have previous Mako experience in either the partial knee or the total hip. Also with us today is Doctor. Seth Dravet. Seth is an Assistant Professor of Orthopedic Surgery at the Hospital For Special Surgery.
Come on up, sir. Doctor. Jurabeck has been about a 4 year user and believer in Mako. He's performed probably about 150 Mako partial needs and just over 8 50, robot assisted arm procedures in the total hip. Doctor.
Jurabeck has recently started using the Triathlon Knee System. Also joining us up on the panel today is our own Robert Cohen. He's the VP and General Manager of our Global R and D House here at the division. Thanks for joining us, Robert. Robert is a 30 year veteran in the orthopedic industry.
Robert came to us by way of the acquisition. His previous role was the General Manager of the Mako Group prior to our acquisition. So a little bit about these gentlemen. They are representative of 2 categories of surgeons and engaged in an early study on the Mako Robotic arm assisted application. Stryker is conducting an empathic study consisting of 1 cohort of surgeons with Mako experience, but without traditionally using triathlon in their practice.
The 2nd cohort consists of triathlon users who have no previous experience using the Mako robotic arm. Our goal is to define the appropriate educational pathway and user experience for surgeons who will move to this application during 2017. The other thing I want to comment, this is a clinical study. We've got 12 surgeons, 6 and 6 in each one of the cohorts. We've also started with a limited market release.
So we have about 15 sites across country that are currently now using the application. We hope to have an additional 20 to 25 surgeons before the end of the year. The purpose there is obviously to get some extra exposure and input on the application. Our other goal in that is when we go broadly next spring, we would like to have created some educational observation sites that are geographically placed around the country for teaching. A real opportunity for surgeons is to visit those sites for their observation sites.
We'd like those sites to have had under their belt 50 to 100 cases before they start seeing the 1st surgeon who's looking for education. And that brings up a really important point for Stryker and the division. So the 15 to 40 sites that we'll have this fall, many of them are not brand new Mako sales. They are us adding the application and some needed hardware to upgrade those robots. Our goal next year is to successfully launch the application.
You saw that we had some recent successes and some strong sales of units of robots. I expect that that will continue, but understand bringing current Mako users up to speed with the application, getting additional surgeons to use the applications is part of our goal when it comes to successfully launching Total Me on the Mako robots. So we will balance that throughout next year, and we're excited. And a lot of like I said, we're here to meet our customers' needs of who have already purchased the Mako robot. So let's get started with a few questions to get this rolling.
I'm going to start with Doctor. Hitt. So maybe you can explain to the audience what is your role in the empathic study? And maybe to start, how many procedures in that study have you done so far?
Bill, I appreciate the opportunity to be
here. That's on, I think.
I appreciate the opportunity to be here and privileged to share some thoughts with you today. Bill talked about robotic experience, non robotic experience. I would suggest that maybe it was young versus old. I'll let you figure out who the old guy is. But Seth is a lot older than his stated age.
So but the role I've done 25 cases with the robot so far. The empathic study, many months ago, we were presented with this technology. I was in a lab, we looked at this technology, it was ready to go 3 months ago and I was very encouraged by it. And what I was impressed upon is desire to improve the OR experience, not only the patient experience, the operating nurses experience, the scrub tech experience and the surgeon experience. So what I was impressed upon is Stryker's responsible approach to say, this technology is ready.
We have, but we want to maximize that experience. So we're going to set up a study, the empathic study. All empathic study is an observational study. We have people sitting in the rooms watching us do surgery to try to help us understand best practices in setup and how to place a raise, which you'll see later, how to set up pins, registration, how to balance these needs and how to make that experience a positive one as we go through and we shorten that learning curve.
And that's what was done.
On a weekly basis, a daily basis, we have meetings. I had a conversation this morning with 1 of the surgeons doing a robotic case today, there in Indiana. And we're sharing of ideas. We have convergence meetings, converging onto this technology. It's very exciting.
We have 9 surgeons, obviously, 9 sites, 12 surgeons, and we have a daily to weekly conversation. And it's exciting times. We're actually this is funneling over to positive patient outcomes.
Doctor. Avik, what about your role?
Yes. So I came in more on the robotic side of things. So I was using Mako before it was even acquired by Stryker. So I'm kind of a techie guy and this seemed like a very natural marriage to bring a robotic me to the technology. So I've been excited for it.
And for me, I've been a high volume robotics user, but haven't necessarily used the triathlon knee as much. And for me, my learning curve has been how best to plan and how best to implant the implants to maximize its design rationale. And that's been fun. And the robotics part has been a breeze. It makes sense.
It does what it's supposed to do as I expected from the partial knee and the hip. But now I'm learning some of the nuance with planning and execution. So that's been the fun part.
So does everybody on the convergence meeting get along and believe that are you aligned from the get go?
There's different philosophies in doing these. So there's guys who do this thing called measured resection and other people with gap balancers and it gets really contentious sometimes. People are like, oh, this is how I do it, this is how I do it. And what we're starting to find out the more and more we talk and the more we sit down, we're all kind of talking about the same thing and now we have a platform that kind of unifies both of them. And now I plan in a measured resection way, which is one way.
But then when I'm in surgery, I actually start doing gap balancing, which is the other way to confirm my plan. And it's really a beautiful merger of the 2 techniques that basically different surgeons have been doing. Doctor.
Hitt, can I ask you, if you would share with the audience your perception of Mako and the robotic technology prior to being involved in this study? So excuse me, go back 6 months and what were your thoughts then and how they evolved to today?
I guess it starts from I've been practicing for since 1990.
So I've been around
a while.
And you get I don't care how old you are. When you're a surgeon and you have successes, you begin to get set in your way. It's hard to change, very hard
to change.
So when
I was approached about robotic technology, the first thing is I really don't need that. I don't need that. I'm a pretty good surgeon. I'm getting good results. Is it something for me and my patients?
And that's something you really you're always looking for things to make things better. But
for me,
I am passionate about the Triathlon Knee. That's where I come to this empathic study. I understand the Triathlon Knee. I helped design it. My patients have shown seen the benefits from it.
Registry data has proven out that part of the piece of the puzzle that that implant can satisfy our patient needs. But I want if we're going to have a tool, they'll put that in, I wanted to make sure that that tool was going to be able to assist me in putting it in better. So I was resistant. I was a little hesitant. And I think we'll kind of talk about my experience as we come through this way.
But I've learned a lot. And I can tell you today after 25 cases that I am convinced that it has made me a better surgeon, case number 25. And with that, I'm happy. And I tell my crew every day, it's fun. It's fun again.
And if that's 3 letter word says, I'll sum it up, it's fun. I enjoy what we're doing and I'm passionate about what we're what the development's moving forward. And as we said, we don't all agree. We have disagreements all the time and that's driving this technology to be better and better every day.
Thank you. Doctor. Drabic, in your experience with the total knee application, how would you describe your learning curve? How many cases did it take for you to progress through that curve? And maybe in your experience, how many cases do you think it may take for a surgeon to be confident
with this application? I think there are a couple of different learning curves and it depends on who's picking it up. But for me, I already have the robotics part down pretty well. So my learning curve was planning for the implant and the design rationale, which Kirby helped set up. And so every implant has a little bit different design rationale.
And the triathlon needs to fight and fit in, it's a fantastic knee. But again, when you plan,
now I
have to plan for a knee and know all of its geometries and the nuances. So I think that's been part of it. The other part is actually the surgical execution. It is a little bit different than the other applications. But it's much like if you're a Mac user, PC user and you
get a new application, you got to know where the
buttons are and then you get to pass out with it. And that's kind of how this is, is that when we're in surgery, we're trying to we're figuring out exactly the best workflow for each case. So in general, for me, I'd say it was probably somewhere between 510 where I really started feeling comfortable with the technology. And if you look at the empathic surgeons and you start looking at our data, it looks like it's between 7 15 for most of us.
So we're all
kind of trending along the same time course.
So,
it's not a lot, but there is some learning curve.
Doctor. Hitt, you had no experience. You had not used Mako before starting in this study. I think we're very interested to see what you think of the learning curve and what is learning curve to you?
It's a good question for us. I had no experience in coming into this. I had to learn the whole gamut of it, not only the setup, but how to deal with patients and setting it, tell them what we're doing and the whole balancing and the whole thing. For me, it's only about time. The most important thing that I learned is from the start, the final result was where I wanted it to be.
So we were not compromising anything from the start of the study. It's always good. So for me, right now, learning curve took about 10 to 12 cases. I think that's borne out. Almost everybody went through it probably these guys went through that same learning curve when they initially started it, that 10 to 12 cases.
But those first 10 cases, I would say, we never were compromising results. It was all about me understanding what the robot was doing and how for me to get better at utilizing that tool to improve that outcome. So right now, we're about 12 to 15 minutes longer. I suspect every 4 or 5 cases, I'm getting more efficient and more efficient. So I suggest maybe in 3 to 4 months, I may be down to that 7 minutes to assess that right
now. Doctor. Jarevick, your experience, what is the time difference you're actually seeing between your Mako total knee and your manual case?
Yes. So for partly it actually is to be honest depends on my OR staff because they're still learning too with the setup. So I think as a surgeon I'm pretty much time neutral at this point when I have my A team. But the but when I have, some study who hasn't done one and the system set up stuff for the NILE. And then so it's probably about 10 minutes right now.
It's not a but it's there's a learning curve for both the surgeon and your OR staff. But we get through it pretty quick because I do a lot of robotics and you guys have obviously starting to go through it. Did you use a robot at all or anybody in the hospital?
No. No experience whatsoever.
So we've talked about time in our past, Doctor. Hitt. So if it's 10 minutes or 12 minutes, how comfortable are you with that? And how do you justify it?
Well, I guess, when I said into this, I said I'd like for it to be time neutral and I've changed that philosophy. It doesn't have to be time neutral because if the end result is better than what I was getting with the manual instruments, then I can live with that. Now if it's 30 minutes or an hour, maybe we have a discussion, but we're talking about 12 to 15 minutes. I'm willing to give that 12 to 15 minutes if I think it's going to help my patient. And I think most surgeons would say the same thing.
We're willing to do anything that will allow that improvement of results. And just a little delay in what time we get home, evening is probably less important.
I know it's not about speed, but where do you think you'll be in 2 to 3 months?
There's no question. They tell me I'm getting faster. I'm a slow learner too. So we're 12 to 15 minutes. And my first one, I'm sure I was probably 45 minutes over my normal.
That was me understanding and stopping and I'm still asking questions. We have Mako product specialists there. We're learning off of each other and trying to maximize the technology to benefit. And so we're continuing to learn it. When we stop having to do that, then probably we're probably looking at maybe close to time neutral.
But if it is,
it doesn't have to be for me.
So we're not really trying to speed people. We're trying to look around time neutral with where they're at, right?
I think about when I started to adopt the hip software and the hip application, I've done a lot of hips. And there is something about using it repetitively. And at this point, I'm probably one of the more efficient surgeons in my hospital. Part of it is use and then part of it is now I'm actually faster with it because now I'm so good at planning, it takes away a lot of intraoperative decision making. So I put in a couple of minutes before this case, I know exactly what to expect.
And I'm hopeful I'm going to get there pretty soon with the knee and I think we will.
Okay. So let's take the time to explain a couple of key moments during a total knee application using the Mako assisted arm. So I'm going to have Doctor. Hitt, since this was all new to you, talk to us a little bit about what's the setup like, what was it like going through it, and then we'll also talk with Doctor. Hitt about registration.
I'll start out with setup. First of all, the first thing is a lot of setup is done before we ever entered the operating room. And what we see is that our scrub techs are new
to this technology too. They said
the setup is really very, very minimal. It really doesn't affect their flow too much. Here you're seeing that there's 2, the pin placements are on the tibia and the femur.
You say,
well, gosh, we're putting pins in the tibia and femur. Well, what I avoid is having to put holes in the femur with our older manual instrument technology in order to accomplish what we're doing here. And these little 3 millimeter pins, which patients don't even really comment on, don't really have any issues with. Then the arrays are placed and here's the arrays to allow our setup and registration will come next. This is the registration and
this is the part
that took me a little longer because Seth and others have had experience with this. They know exactly where this you can what's interesting is look at the virtual, imaging of that. That's the real femur. That is a patient's femur with all the osteophytes and bone spurs, the actual anatomy. And all we're doing there is just registering and getting the flow of how to register that.
Now from start to finish to put the pins in, the arrays and register, it takes me 6 minutes and 20 seconds on average. And it used to take me upwards of 15 minutes. You see just that step has gotten quicker and I'm sure it'll even get quicker as time goes on. But this is kind of fun actually. This is the fun part of it.
We're doing things we've never done before. We have more information than we've ever had to place the knee in a better position and balance this knee. So this part is I don't think we're ever slowing going to
be able to get this too much faster.
There's some other things, other technology we may in the future maybe to consider. But right now, this works and very effective and I trust it. And any comments you have about you learned a lot about registration.
Yes. So I don't know how much everybody here knows about the kind of how the robotics works, but we get a CAT scan of the patient ahead of time. So this is kind of the CAT scan of the patient and then we take points off the bone during while we have the patient's knee open. And in that way, the robot knows exactly where each bone is, the femur and the tibia, and then you can adjust your plan to it. So that's the point
of the registration. So when you're going through it, for
me, each, raise. So it's usually about 3 minutes realistically. To put in their raise. So it's usually about 3 minutes realistically from when we put the pins in until we're ready to start with the
next step. Doctor. Hitt, I
think he just called you out. 3 minutes, 6 minutes. Yes. So this is the next screenshot that surgeons will get to see in your opportunity after registration. So, Doctor.
Dravet, would you comment on what
this enables you to do?
Yes. So this is kind
of the exciting part and this is where I'm learning more. We've never really been able to plan that well in three dimensions. So we have the real patient's CAT scan. So this is very this is specific to the patient. And we have the freedom to move around the femoral component and the tibial component in 3 dimensions.
In any given direction, think about where you're removing bone and then you think about how exactly the level where you want your joint line, how to rotate the components so the kneecap tracks well, how to maximize the amount of flexion so there's not so there's not it's not too big or get too stiff. So these are all these little minute points that when we had mechanical jigs and we put them on and everything is set at 5 degrees and 8 millimeters of resection, now we have the ability to customize any of it. And we can even do it on the fly when we're in surgery if we want to make a fine adjustment. I can say, you know what, I wish I would have taken an additional millimeter of bone here or there or change the rotation. And you can actually do that very effortlessly where we never used to be able to do that before.
We used to
put in mechanical guides, make the cuts
and then kind of bring it out and then do some trial and error. So that's where I think we can save time. So when we get really good at planning, which I'm getting better and better at, I think that we can make all the cuts and then it's just ready to go at that point.
So I think it's important to recognize after you've done the registration, this pops up on the screen, this planning stage has been done for you that you have authorized after coming from Stryker to say, this is the starting point I want. And now you have time interoperable to say, is that exactly what I want to pay?
That's a good point. So it comes to me like this with desired sizes for that bone and that anatomy and kind of and you work with your, mygaloplasty specialist and who's in the OR with you and they kind of know your preferences. They kind of have a baseline plan and then you can make adjustments to it. But this is kind of where it is right out of the box, which is very easy for me.
And I introduced another thing. We look over on the right hand side there and you see the sizes of the implants. Now what I can do is I can have specialized instrument trays where I can essentially minimize the amount of trays
that my OR crew has
to open up for different opportunities for trialing. So now we know what those sizes are going to be before we ever get in the operating room
before we start our case.
How many trays do you open up?
I wouldn't even know. You only know, yes.
Just a few, just a couple.
Yes. Just
enough. Okay.
And we looked at this as an opportunity at our hospital. If we could open up fewer trays, which you can. So I template ahead of time. I actually contact or email, there's a list, whatever, but the mechanism which we get it, but we know exactly the sizes that I'm putting in. So we open up fewer trays, fewer trials.
And then and for each tray that I save, it's $167 per hospital. So we did a cost analysis on that. And so if I can save 5 trays per case, that's real money over the course of the year.
So a really exciting piece around the Mako application is the next stage.
So Doctor. Hick, would you
please comment on what's going on here?
Well, this is exciting because for me, this is the differentiator. If you learn nothing else today, this is what differentiates a lot of technology is before we make any resections, I can do my exposure, which is hopefully will balance that knee and get alignment accurate. If it's not accurate, this computer, this robot doesn't lie to us. It tells us exactly where we are. And that's the feedback we need as surgeons.
When you don't have this feedback, it's kind of a, yes, a good thought. I think that feels good. That's how we train sometimes. This is an excellent training. So I have a residency program and they're excited.
I have residents coming in wanting to see this technology so they can begin to feel that. Now I wanted to see what they're feeling. But now we can do dynamic balancing. I can balance this knee before I ever make a cut. I can adjust the implants or I can do releases.
I have that choice of what
I think is important before I ever make a cut. And that in itself for me is
the differentiator in my practice.
I couldn't agree more. I think that this screen is probably we could spend a lot more time on, but not a single bone cut has been made and we kind of already know our result before we even remove any bone. So in the past, we always used to kind of make the patient fit the implant. We'd make the cuts, we put the implant in and then we do all these releases to try to make it feel good. But now what we do and what I've noticed in my practice is that in its early experience, I know, but what I have enjoyed as part of this technology is I can get some feedback.
I make subtle implant changes or positions in my implants, then make the cuts, put it in, feels great, do fewer releases. To me, I have actually changed the order and the progression of how I do a knee replacement with this technology, which I think is exciting.
And I assume at this stage
is where you're happy with what you have as you go to the next step, which is actually making the cuts with the assist of the robotic arm. Correct.
So to me, the surgery is actually already done at the last page that we looked at, the balancing page. And then this becomes the milling work, which is a it's a very accurate tool that cuts the bone perfectly just as your plan is, which is great because the arm is holding that saw very rigidly. And usually we used to pin in cutting blocks and the blade to deflect to the pins and move. But here, it's very specific or it's very tight tolerances.
So it's very accurate cuts,
but it's to the plan that we already predetermined. And then and the other thing that you see is there's these safety boundaries kind
of around. So if you
look up there, you can see there's kind of that green box around where the saw blade is going. And I teach resins and fellows too.
And for me, I always
get a little nervous when they're cutting behind the knee because if they don't have the feel, you don't want them to run into something important like an artery or nerve or blood vessel or something that you don't want them to hit and you have to train surgeons. So this has been a fantastic training tool for the hip, for the partial knee and now for the total knee where there's a safety function and educational portion to it.
Doctor. Hitt?
I agree. The safety issue, there's 4 factors for me. One of them is validating the precision and accuracy. And I don't trust anything somebody tells me. So we've done we there is a tool that we can actually validate every cut that made.
We use that for the 1st 10 or 12 cases and I stopped doing it because it was always right on. The safety piece is big for me in an education setting because when you get done, the soft tissues are pristine. There is no issues with potentially unfortunately cutting things you're not intended to cut and it's fun. The last thing, it's just fun. When you're using this thought, it's something we haven't done before.
So we enjoy it. I enjoy coming. I enjoy what I do, but I enjoy it a little more
when I have that robot. I know I've got that first case in the morning, I get to do that first. So at this point in the procedure, you've got a tibia femoral cut, everything aligned. What other steps are there?
Cup of coffee.
But no, I think all joking aside, it is once the cuts are done, the implants fit in very well. And then you put the trial in, you always still trial, make sure you don't want to make any adjustments, but it's remarkable how well they feel afterwards. And I've been doing some of these training labs for limited market release, and that's the same thing all the surgeons have been saying is when we're doing these labs, like, okay, we did the plan, have a good plan, make the cuts and they're like, wow, that's kind of how I want my knee to feel or that's and without all the trial and error, because sometimes you make the cuts, you put it in and say, I need to recut and I need to redo this. And so it's a very predictable right out of the gate, which I've really come to like.
I think one comment, even if you put your trials in and you say, I still want to tweak this thing, you can recut. You go back and we the NPS can insert those into the computer, we robot can actually recut those. You don't have to do that very often because you've done those steps preamp, but we have steps in order to address any issues that may occur. But after these cuts are made, it's kind of upon everybody kind of is kind of relaxed and we're starting to put the implants in. What I use this tool also is we use cement.
On our case, we put a lot of cement on the end of the femur. We take it out, we run it through a post. We want to make sure that cement hasn't displaced that component from where it's supposed to be. We make sure it's seated appropriately. We use that as another tool after we've already finished everything in the final implants.
So the question to our other panel member, Robert, with regards to the functionality and workflow of what we just saw in the Mako total knee application, how does that compare to our largely successful Mako partial knee application? Must tell you, I'm kind of enjoying sitting here with 2 surgeons who call our product fun and exciting. There's a lot of similarities and obviously it makes sense. The total knee application, when you compare it to the partial knee application, it's all driven by the core technology, which is the robot platform itself. And when you look at some of the technology blocks that drive our robot platform, that's consistent regardless of application, robotic arm control, virtual cutting tool boundaries, being able to take a pre plan into the OR and not have to finalize that plan until after the reassessment with that individual patient before making any other cuts.
The differences between them are obvious. The total knee has a saw. We have different planning software, but it's all still driven off that same core base robotic technology. Thank you. We're going to ask one more question to the panel and then we're going to open it up to your questions.
So for both of you, Doctor. Hitt, we'll start with you. Do you believe that the Mako total knee application is for all indications or just certain deformities.
That's interesting because as this has evolved in my mind is I pictured this as a tool to take care of minimally deformed knees. And what I've learned over the course of this is actually I think it's more beneficial for the more severe deformities because I've got a tool to give me more information to balance this knee. So it's evolved in my mind. So I believe that it's for all indications. The workflow options that we have will address all these issues.
So we may have different workflows for the minimally deformed knee or minimally arthritic knee to the more severe deformity that has a lot of malalignment and there's workflow options to address each one of those and we're adopting those and seeing what is best where the empathic study is helping us understand where to apply that procedure to this technology.
Yes. I think having precision, whether it's minimally deformed or more deformed is a benefit to the patient and also to your outcomes. I do agree that the larger the deformity, potentially the more power that you have to make the corrections and really start to pre plan. But ultimately, you want a well balanced knee that the patient likes. And I think that the more precise we are, the better.
And this is the most precise tool I've seen thus
far. All right. So we spent the last 25 minutes, 30 minutes sharing with you a little bit about our progress and where we're at. So let's start right here. We're going to I think we've got microphones that we're going to pass around.
Do we have that? Can I get one upfront over here? I got 1, 2, 3. I got 1, 2, 3. We'll get there.
Over here on the left. I'll have.
Bruce Nadell from SunTrust. How often do you find that the intraoperative simulation after the pre planning, you could track congruence as well as tightness and looseness through the range of motion. How often do you have to make subtle adjustments to really get the optimal balance of the soft tissue? And sometimes you achieve it through small adjustments of the positioning?
That's a great question. You're probably in our preoperative plan meeting. Were you there, Nayan? That was a perfect question for what we tried to accomplish. Having known this implant and putting over 5,000 leads in, we know what the resection we're after in order to accomplish.
We know how much we have to take off for the implant to be put back. And we've applied those preoperative parameters to our preoperative planning. Once we've done that, I find that we very seldom have to manipulate that plan. And what we found is very, very predictable. And I can tell you there's only been 4 cases that I've had to do any type of manipulation of the implant or do releases in order to satisfy the result that I think in validating it with this tool is dynamic balancing.
So great question, but we've come to that. That's what the emphatic study has helped us to understand where we need to be preoperatively, so we don't have to make a lot of adjustments in
intraoperative. And I
don't know if Seth does that as well, but I've not seen that as many necessary changes.
Agree. The pre plan is really critical. So as long as the surgeon and the MPS spend time on it, I think that you're going to be pretty close. In some cases, I think that sometimes maybe you don't 100 percent anticipate how stiff a ligament or something is and then you may recut.
So I've done it a couple of times where I say, oh, I wish
I had an extra millimeter and I do it or an extra degree of barris or whatever angle you're changing. And then but it's done very easily. So that's the nice thing. You're not trying to repin it and cut through a wobbly block. You just kind of come in and change your plan if you need to.
But it's usually within a millimeter or so if there was any subtle change that I need to make.
Andrew, could
you just comment on the utility in hips because I know knees tend to be more variable and hips, you said you use it for THR?
Thank you.
Yes. So I use it in the beginning, when I first started with the hip, I was only using it for probably 5% of my hips. So it was the ones who were post traumatic or were born with a birth defect where the hip wasn't normal and you start doing and I wanted some advanced technology. But then the software kept getting better and better and probably I ended up getting better with it. And so I gradually went to using it more and more and now I use it on 100% of my hips.
And so the leg length offset, the patients care about leg length. And I'm this is a very accurate tool for that. And I say, why don't I use it for every case because then I won't have that outlier every now and then where I might have made them too short or too long or what have you.
Great. Right here, Frank.
Hi. Rick Wise from Stifel. Two questions. First, I'd be curious to hear the physician's thoughts on disseminating this technology to the rest of your peers. What kind of data is needed?
What kind of experience? Is this in fact a technology that's ready for all now? Or is it something there's some other evolution in either software handling or ease of learning that needs to happen before it's ready for the rest of your peers So
let me add to that just
that how many physicians so far have you educated on this technology, let's say, in the last staff, especially you in the last 6 weeks?
Yes. Probably,
I don't know. It'd be hard to give me exact number, but maybe about 30 or so, something like that.
So I wanted to sure you understand you
had experience in doing that. So please.
So yes, I think that in general, I think this has been the most controlled rollout of the technology that I've seen or I don't want to call it cautious, but well thought out. So the study groups like us, which are part of the empathic study and then the limited market release,
which are
a lot of my colleagues that have been doing a lot of robotic joints. I agree, I think that you think about, okay, this is a new technology, but the implant we're putting in is a tried and true implant.
It's been
around for a long time with excellent track record. So in order for me to do it, I say, okay, I've been doing partial knees for a long time. I put pins in the femur, pins in the tibia, and now I just have a more accurate and precise way to make my cuts. To me, it's a win win. And I'm putting in an implant that has a great track record.
So I don't see a lot of risk, but I think that a lot of surgeons view it that way. There might be a learning curve with regard to how fast patients do it or how fast the surgeons do it or pick up on some of the nuances of robotic planning. But I don't know what you're kind of new at
I'd make
a comment.
Our whole goal is when it's all said and done, everything we do is for the benefit of the patient. And so what this technology does for me is equalizes the playing field. Unfortunately, I have a lot of years of experience. And when you put this technology in my hands, a lot of those low volume, mid volume surgeons become almost as good as me and I'm good with that. I'm good with that.
And maybe just create competition someplace else. But for my family, when they have a total knee, right now, I think this technology is what I'm going to ask. And I don't care if it's the full volume or mid volume surgeon because this is as long as they follow the parameters and the guidelines that we're setting up with the hepatic study, help them understand this technology, I think it levels the playing field as far as the surgeons are concerned.
And just to follow-up, if I could. There is competing technology out there, perhaps you've all seen it. And when I talk to doctors, sometimes they'll get pushback that will suggest this the Mako system is more expensive. The Mako system is larger. The Mako system is closed versus open to all implants.
How are you all thinking about that and making your choices? I mean, I don't want to put you in an awkward position right now, but how do we think about this competitive dynamic? Thank you. Yes. Why don't we talk
about first the competing technology? We can look at the different technologies. In this world of robots, all robots are not the same, right? There's very much different robots. And this whole class of robots is getting confusing.
There are claims for what's a robot now, what defines a robot. I can tell you we have a robot. There's also other things. And you go down aspects and look at other technologies that go after total knee arthroplasty, whether it's going to be customs, PSI blocks and the like. The capability that we see to especially go after the larger percentage of total knee patients, short term dissatisfaction is where do you put the knee and do you accurately put the knee in where the surgeon wants to put the plan.
So we've been able three dimensionally to do plans like we never were able to do before, take that plan in the OR without a prior commitment to instruments that were already delivered, without a prior commitment to a custom that was made flat on a CT without assessing someone's actual motion, where we're taking in a plant without any of those fixed set of instruments, we're able to individualize the final plan to that specific patient as you bring their knee into a total range of motion. Right now, without committing to do that right before that cut, this is really the only technology that we see in the space that's capable of doing that to the extent of executing that type of plan. And
we could get into more depth
in the after hours here this evening. But when you talk about an open or a closed platform, when you get to this level of technology, it's important that the system is well aware of the design history files and details about that implant that are intricate in this. I can't believe that my competitors are going to open up those files for me so that we can put
it on a robot.
There are some regulatory challenges or just
being a medical device.
And I think we're following those platforms. I think we're doing the appropriate thing. Right here, Bren. Pettis.
Thanks so much. Matt Megsley from UBS. So I wanted to follow-up with you, Doctor. Hidd, on something you said earlier about knee 25 has made me a better surgeon.
This is one of the
big questions, I think, about the space. Guys who are like yourself pretty good at putting in these knees, get pretty good results. What is it about the system that you feel really makes you a better surgeon than Wafala?
Yes. That's a question we I asked myself at the start of this. And what I arrived at for me is 3 things. You can talk about precision and accuracy. And again, we've taken after we get through these cases, we analyze these more than I analyze any of my old cases.
I want to make sure that technology is providing and it's been spot dead on every single time. And so we talk about computer assisted surgery has outlier they decreased the outliers from a manual instrument. I'm going to suggest to you that maybe as we learn more and more about this, we may eliminate the outliers. That's for me. So that's the first thing.
Safety is just unparalleled. Seth talked about it. I get nervous. Anytime we're trying to change surgeons and you have to let them do part of the case, we're there right there, but they're having
part of the case.
I get nervous. Even when I have the saw,
I get nervous. When I have the slide, I get nervous. Robots never let me down. The most important thing for me is the feedback it gives me with balancing this knee. Our biggest fear and I bet you his biggest fear, he's younger, I worry about things.
My biggest fear is can I balance this knee and do right by the patient? Can I walk out of this knowing I balanced that knee? Because that's going to determine whether they have success or failure, how well I've done in that surgery. And I hold that very personal. This gives me that information.
And I
can't lie. It can't let me lie.
I'm sitting there doing a dynamic balance and
it tells me whether I'm balanced or not. And so if it's not balanced, I can make adjustments. So for me, that's why I think I'm a better surgeon because the feedback it gives me and I know exactly where I am when I finish that product.
You had
a follow-up question?
Got it. So I just want to comment a little bit on it too. Doctor. Hitz has a lot more experience than I do. But I still remember when I was coming out of my practice, I was fortunate to train at some great places and with a lot of the giants in the field.
But still when I was coming into practice, I started at Hospital For Special Surgery, I was number 100 of 100 surgeons there and I'd be like, okay, what am I going to do? I know I have to start a practice. I know that I can't have any complications early on. I need to do perfect surgery every time. And that was some of my mindset for using advanced technology to say, hey, I have an experienced eyes looking over my shoulder every case, a guy like Doctor.
Hitt saying, hey, this is how we plan and how to execute. I've been finding now that I have a higher volume, I say, okay, yes, this isn't great and that's more precise than what my eye is. But now I'm training my residents and fellows and they say, Steph, this is a no brainer. When I'm going to practice, I know I get the right resection. I know I get the right alignment.
And so when you see the next generation of surgeons, it's interesting to see how they gravitate towards these technologies that will help minimize their outbuyers because that's the last thing we want. We want to put in everybody's knee or hip or whatever it is just right and that's our job as surgeons.
I do have a follow-up. On some of the doctors that are coming through your training, you're demonstrating the total knee system. Can you give us a sense of obviously folks who are using Mako already for partial knee are going to be pretty jazzed up about the robot and maybe excited to start doing total knees. But beyond those folks, what other types of people are you seeing are docs getting sent here by their hospitals a year because they're interested in taking this up and why? Just maybe some color would be helpful.
So I might direct that one to Doctor. Hitt, maybe some of your colleagues of your same genre. That was plight.
Well, I know they've been involved in the educational piece because I'm still learning, they're already experienced. So we changed the flip path, so he's experienced robotic guy. But we have my partners who it's interesting, they're looking in the window. This technology fascinates them, okay. They want another tool to make them better and that's what these surgeons are striving for is that edge.
How is it going to decrease their increase their comfort level going to surgery? But that's experience I've had. I know Seth has been training surgeons on this technology based on his vast experience and I'd like to see his comment. What are you seeing? Who's coming to the meetings?
What are they after? And are they
Yes. Even just in the
OR, it's right. I'm fortunate to work with a lot of world class knee surgeons. And I started using this technology early on, and I noticed that I was getting a lot of fog in nose marks on my window because everybody's kind of looking in and they want to see what it's about and see if it really works. And so that's within my own institution, I get a lot people who come in and kind of looking. And then the other on the other side of it though is that I've had surgeons come from Australia, China, India, Israel just recently where they come in from all over the place and even within the U.
S. Just to see the robotic platform and see it in action, see it work efficiently and how they can bring that potentially to their own institution. Another question.
Let's trade to the back of the room a little bit to be fair. Right back there in the middle. Yes?
Thank you. Raj Denhoy from Jefferies. I'm curious you alluded to it a little bit about the cost. And I'm curious if you guys could
comment on what the marginal cost is,
additional cost of doing
a Mako procedure versus a standard procedure when you think about the additional time as well as
the cost of the robot?
But good news, I'll get to that question. I don't really care what hospital costs. I mean that, if I go into the operating room and I've been working in that hospital 27 years, they've been very profitable. They're doing well. Their doors are still open.
But to get that, I think it's important that that cost is something that you have to show that value. The value for the hospitals at this point is, some of their volumes are increasing. So we're getting ready to attract a new joint surgeon to our group. The first question he asked, do you have a robot? Do you have a robot?
That's his question. Not what he's going to get paid. How many ORs he's going to get? Do you have a robot? So that's for us, it's going to be a to be competitive, we're probably going to have to be in that marketplace.
So we have different ways of offsetting that first initial outlay of expenditure for us. For us, philanthropic dollars, Memorial Hospital, we can do it that way. There's other options for us. But and we just bought our 3rd da Vinci robot, didn't blink an eye, and I think that's going to be similar. So if you try to do a prostate surgery without a robot today, you're going to lose business.
And I suspect in 5 or 10 years from now, it'd be the same thing with this application. If you don't have that robot, you're probably going to lose business. And so I think the hospital sees that as a potential, something they have to work through. But I think that's a valid question that we have to work through. But right now, it doesn't seem to be an issue.
There's a lot of hospitals buying into this technology, understanding the importance of what it can provide for
our patients.
Doctor. Jarek, you want to add to that?
Yes. I think that there is some cost, but if you look at it different ways, if you're having better outcomes then that adds value. As far as for us, we're an academic institution and there are a lot out there and part of it is kind of teaching the way of the future. And that's kind of I think how we justify that. We say, hey, there's an educational role to our institution and there's some cost here, but there's value in making better surgeons or more skilled surgeons or with more diverse skill sets.
The other place where you can save potentially money is some of this advanced templating. Like I said, we looked at our cost with internally and if I can save 5 trays, which I usually can now because I don't have to bring every tray in because I know the sizes and I just need the specific trial that saves me $167 per tray. That makes up for some of the costs incurred by the advanced technology.
Just one quick follow-up on that. When you talk about the improved outcomes for patients. What are the key metrics you think you would point us to? Is it more acute events, time in
the hospital, recovery time? Is it longer term in terms of revisions? What are
the key metrics in your mind in terms of judging the outcomes here?
Yes. I think
all the above. But if you look at we don't we're not going to have long term data. So survivorship data, we're not going to have tomorrow. Is it going to be different on a robotically placed knee versus manual instruments? Early complication rates, return to work.
That's a big one. When people go out for 6 weeks, it's a lot better if they go out for 2 or 3 weeks than if they're out for 6 weeks. And if we can start to show these things, which I think there's a lot of potential, we've showed some of those with partial knee that there are going to be, I think, an advantage to the patient but also to society.
I'll make a comment that what I've noticed is and it's getting too early for me to tell whether those readmission rates or early return to work or those things are going to play itself out. What I have noticed and I think it's real is the placebo effect of having a robot and I'm educating those patients. I'm going to do your case with the robot and it's going to be less invasive. This is the tools that I have available for you.
It's also a placebo effect
for me. I expect them to do better and they expect to do better. Maybe that's all setting those expectations before surgery, but so far it's been a real positive. Patients expect to do better and so far, they are doing better.
I don't know if we can differentiate that
from the placebo versus real until we get a little farther out.
I had a question over here.
David Lewis, Morgan Stanley. So I know there
were some questions around cost, but I
think it was answered more from a robotic cost perspective. But I'm just trying to understand what's the appropriate patient population for this particular type of implant? Do you not care about the patient's insurance kind of whatsoever? And you've all been successful taking down implant prices the last 5 years. This implant has got to be 50% more expensive than your average implant.
So does that not matter at all to the administration in light of some
of the outcomes you talked about?
So is it good for every patient
or just a slight few?
It's all commerce for me. I would say that the end of the day, we have a robot in our hospital. It's used, I'm going to use it on every patient I possibly can. There's some consumables involved with this, but I'll give you an example. We use injectable cocktail in our knees, which costs more than the consumables do for the robot.
So I can use some alternative. That's just one area where I can cut cost or justify cost that way. For me, it's all commerce because at the end of the day, if I feel like I can get a better result doing this technology,
I really have
a hard time sleeping at night if I didn't if I begin to differentiate those patients.
Other questions? Over here. Rich Newitter from Linnan Partners.
I just wanted to follow-up on the outcomes question. It sounds like you don't quite have the follow-up yet with those key metrics, the admissions and whatnot. And I think you mentioned that there those exist for the partial knee. And the only reason I'm asking you, have you actually have studies or any preliminary data for the total knee case that you've done? The partial knee is a minimally or a less invasive procedure to begin with.
So I would expect it to be quicker to return to work. Is that in fact what you will get from doing the total knee through the robot? Yes. That's my hope.
We don't have data on that, but I'm approaching how I do a total knee now much more like how I do a partial knee because it builds on kind of the same bones that are the same foundation that Robert was telling you about is that for me now I'm doing a lot less soft tissue stripping, a lot less dissection. So even though I make maybe the same size incision, what I'm doing deep down is less, just like a partial knee. I'm not over releasing the MCL. I'm not dislocating or what we call sublux in the knee forward, which causes soft tissue trauma. So I'm minimizing the soft tissue trauma and almost kind of building a ship in the bottle, so to speak.
And I can do that accurately with the technology, where before I used to have to expose more so I could see things in order to get alignment right and implant position right. So that's what I've noticed when I said I'm starting to change how I do total knees where I think some of the value to the patient is going to be in
early recovery. And to be clear, in the early study, empathic study we're doing, we're about 200 cases deep. We're about 50 percent of the way down this piece as it helps us to guide toward our teaching and education next year. There are other clinical studies that will be starting up in the near future.
I'll make a comment about outcomes and because I don't know how to perceive that yet is the 25 cases we've done, the length of stay has decreased by 0.8.
Our
average length of stay is 2.1 days. So we're into patients and the average range of motion and narcotics use has decreased. So but I still can't tell you whether that we have to play that out, whether this is that placebo effect or this is real, but it's very encouraging. We have the administrators' attention right now when we see that length of stay go down. That's the number they really are held accountable to.
The other thing is HCAP scores. We're seeing our HCAP scores go up in these patients who had robotics. Is there some correlation? We don't know. We'll figure that out.
But I'm in a CJR, which you'll hear about, I think, later today about mandated bundled payment program. This is important to me. Patient satisfaction and outcomes are very important if we want to get paid in the future.
We got time for a few more questions.
How about right here in front?
I see one back there somewhere. You're next.
Larry Biegle from Wells Fargo.
Thanks for taking the question. So we're all struggling with how much could this help you take share, how much could this help your knee business grow.
But when I look at
what I'm struggling with, I'm looking at the your hip growth and it's slow this year than Doctor. Jarabeck talked about how he really likes the hip application. So why is it what we're seeing in your hip business kind of not a good analog
for what to expect with the total knee application?
So the HIC business across the industry is a little bit slower this year. We're seeing that across the entire industry. I think the focus right now for Mako has been on the uni and the excitement around the total knee. I think as more and more surgeons are coming to us about the total knee, we're getting multiple questions about the hip and how do I extend that application. It wasn't nearly as widely used as the parcel.
But I think in our future, as we see this total knee take over, you're going to see a lot broader use of the hip application at this time. Thank you. We have one back here.
Thank you, Matt O'Brien. Piper Jaffray. Just curious about the study that you're enrolling in so far as the patients. Would you classify them as
kind of easier TKA patients that you typically see?
Or are you seeing all comers or
just kind of cherry picking as you're getting kind of used to the technology. And I just want to make sure I'm clear too. You said that pretty much every patient that you see that comes in the door that could get an EKA done, you'd be comfortable putting them on the robot.
Absolutely. And for me, Seth can probably do as many robotic cases a day because his time factor is not a difference. So what I've been doing is doing about 2 cases, 1 or 2 cases on my OR days. We're not selecting these patients out. We're actually they're random.
We actually approach them. And I've had interesting, we've every patient we've approached, not one patient has ever said, no, I'm not interested in being enrolled. I thought that was fascinating. They're all excited about it. So no, it's all comers.
And, I hope someday that, when we get through the study that I'll be able to and I get that time factor where I'm comfortable with it, that every patient of the day gets a robot. And the only thing I have to do is I'm in a teaching institution, so we cannot lose the fact that we continue to have to teach residents how to do an instrumented knee, because unless they understand that part of it, it's harder for them to grasp the robotic side of it. Remember, this is a robotic assisted surgery. So they have to understand the triathlon knee first. And all this is a tool to help us put this outstanding knee in a better way.
So your question is, I can't wait to the time, well, I don't have to I can just go with everybody. I don't if everybody gets
a robot at some point in my future.
Doctor. Jarevic, this is
Fred. Yes, I think that in general, I'm at a center, there's a lot of referrals from the outside and that's kind of what my practice is, a lot of times some of the trickier ones. And I do get some of the straightforward ones, but I haven't shied away on anybody and I've done big deformity cases and bone loss cases and things where the advanced templating helps a lot ahead of time. So I can kind of think through some of my decisions prior to even going into surgery. And I just want to reiterate if
I could. So the purpose of the study again is multi factorial, but the robot itself when you pre plan the robot itself doesn't know whether it's a difficult case or not difficult case. You're planning where the saw is going. The real purpose of the study is so we can reduce the learning curve when we go into full commercial release and get that user experience as beneficial as possible. What are the technical tips that we're learning from these folks?
It's not about the software we're challenging the robot that the robot can't put a knee in the right place. It's more about reducing the learning curve and all the variables and factors that go into that. Super. Other question, we have one on the back left here. Yes, that's you.
Don't look over your shoulder. Sorry about that in the back here.
Bob Hopkins from Bank of America.
I have a question actually on the launch. You guys have mentioned that at AAOS next year will be kind of the full coming out party for the total knee. But I'm just curious between now and then, what actually happens? Like what will you have at AAOS that you don't have right now? Or is that just the first Academy meeting since approval?
I'm just trying to understand what exactly happens at that meeting. Will you have more data? Just maybe talk about
the launch cadence a little
bit more over the course of 2017.
So let me try and describe that a little bit. We've got a tool here that is has enormous strength to it. And we got to make sure we have an opportunity to teach that in an orderly process. If I was to drop in front of you 15 trays and 500 different custom instruments and say, go have at it. That's a difficult way to launch this product to a wide variety of surgeons.
So our goal is when we're at the academy and we want to actually the word show and get people signed up for training, we want to make sure that the story is correct,
that you're going to learn
it from here to here and here's how the application works. We don't want any confusion and we want to make sure also that when they go to that learning, there's things about where is the robot placed, what's the height of the robot off the table, all of those aspects. We really don't want somebody to have to recreate the wheel. And as I said before, we do want time because of surgeons across the United States, really across the globe, really enjoy And, we have a pretty good list of surgeons who would like to do that. And we have a pretty good list of surgeons who would like to do that.
And so it's going
to take us some time. I'd like to send them to a surgeon who can't who doesn't say, well, I started last week. We'd like those surgeons who are going to be our training sites to have 2, 3 months under their belt, So they can say in my last 75 cases or in my first 100 cases, this is what we're seeing from the data, length of stay and other items. So trying to get that prepared does take time and that's what we're trying to be responsible about. So when we do have that offering come the academy, it's a full story, a full launch and really there for our customers.
And is 40 the number of centers that will you grow from there in terms of number of training centers? And what's the capacity of those 40 to train over the course of 'seventeen?
So right now, our target is to
get a number of that
magnitude by the time we get to the Academy. Based on need, we'll look at that next summer. We can grow that or keep it the same and figure out capacity is really institution by institution. Some of them have rules on what they allow or how many in a given month. How do you handle that when you have visitors?
Well, we have visitors almost on Wednesdays and they come and you mean as far as participation, we encourage it. It's an exchange of ideas. So we can open it up every Wednesday for our surgeons today.
Okay. We're going
to take one more question, but I want to be assured that we're going to be available afterwards at the product fair across the street and spend a lot of time 1 on 1 answering your questions. So there is one right there in the back. We'll answer that, and we'll end this session and get started with the next one.
Thank you. Good afternoon. Jeff Johnson from Robert W. Baird. So a question, I guess, as I'm hearing a lot of things here, I'm hearing about the benefits of the pre op planning, the registration for the cuts and then actually making the cuts themselves.
Could you just aggregate for me where the benefits where the greatest benefits of that are? I mean, as I think through some of the other systems out there with GPS and some other systems that are out there that do kind of some of the same pre op planning, some of the registration and all that. How important is it to actually have the robotic arm to then help you with the cut versus doing all the other stuff that could maybe be done without a robotic arm to make the cut?
So let's ask both surgeons of that when
we're talking about seeing it in virtual reality, it's probably one of the steps he's looking for.
I think one of the big value pieces of the for me as a surgeon is actually adjusting my plan. So I can go in with what I think is a perfect plan And then when I actually open up the knee, register it, bring it throughout a range of motion and simulate what it's going to be, sometimes I say, I'd like to change my plan slightly. I don't have some of those advantages with some of the other technologies you mentioned. So for me, that's the highest or that's my biggest benefit. And then the precision of the saw is fantastic as well because when you cut with normal jigs, even if you pin the jig on and you cut through it, there's a fair amount of variance.
The saw blade deflects and sometimes when you're doing the cuts, there's some slop in how the blade fits into the slot where you can get some error and they compound each other potentially when you're cutting multiple cuts and adds up over time. So this is a very precise way to do the plan, make adjustments and then execute the cuts just as you planned. So it makes it just more reproducible.
Doctor. Hint?
Another point, the technologies you discussed are good technologies, but they leave one variable out is that a lot of times we have to make all the cuts and then if we have a problem, what do we do? Do we have to go do releases? Or do we can we recut with an instrumented knee? It's almost very difficult to go back and recut things. So what this technology does for me is we don't get to that point.
We're finding out if we can balance the knee before we finish those cuts.
And if we do have
to recut, that robotic arm helps me to recut that, whereas an instrumented knee is very, very
difficult to do.
And some of those technologies are to the bone itself. So you look at a femur, you look
at a tibia. What we're doing is we're doing a total knee.
And that has 3 compartments and bones that articulate on one another. And before we and that has 3 compartments and bones that articulate on one another. And before we do any of the cuts itself, we're able to look at the relationship of a femur to a tibia, not just focus GPS on one bone by itself and then be able to assess that cut and even tweak if you want, still keep that relationship maintained. That's unique. So with that, I want to thank all of you for your questions and your time.
Can we give the panel a round of applause? Gentlemen, thank you. Thank you so much. Thanks. So with that, we'll end this panel.
And I'd like to introduce for our next segment on Performance Solutions, Mr. Stuart Simpson, our Vice President and General Manager of our Commercial Business. Thank you.
Thank you, Bill, and welcome, everyone, to the Performance Solutions segment. Some of you might have seen me just relax a couple of minutes ago. That's because one of our panelists has only just arrived, and I was delighted to see him get here just on time. It's my pleasure to host today's panel discussion focused on our management services organization that we call Performance Solutions. Before I introduce the panel members, I'm going to walk you through some of the background and some of the current thinking about Performance Solutions, which hopefully will explain why we want to give it some attention today.
Stryker Performance Solutions as a business was formed in 2011 to help us develop a business that enabled us to partner in a new way with our customers, think about services that complement our product portfolio and think about moving from transactional relationships to valued partner relationships with our customers. But you can see from the time line that's up here that the companies that we acquired as we build out the Performance Solutions organization, have over 14 years of experience in health care consulting, as David mentioned in his opening. In 2011, we acquired a company called Marshall Steel and Associates, which provided us with capabilities and clinical data required to implement care redesign within the hospital. So think about in the hospital, think about optimizing care pathways and surgical service lines, think about aligning all of the executives, the hospital staff, the clinical staff and the physicians around doing the best thing, the most efficient thing and being centered on patient experience. That's what the Marshall Steel program was all about.
This company was founded in 2006, and the founder, Doctor. Steele continues to work with Performance Solutions and an advisory capacity to this day. In 2012, we acquired another organization called Comprehensive Care Solutions and that organization and those people provided us with expertise and management tools to help physicians manage their practice and advise them on payment reform strategies. So it's more centered around the physician, the physician business and making the physician business model as successful as possible. We believe that the combining of these two components created quite a compelling and very interesting combined entity.
The rest of what we did as we built our Performance Solutions was through organic development. The company, Comprehensive Care Solutions, was founded in 2002, and 2 of the founding members continue to be Stryker employees as part of the Performance Solutions leadership team. Performance Solutions has approximately 60 employees and nearly half of them, 28, are either MDs, fellows or masters in healthcare related disciplines. The team is divided into 2 different core competencies. The first of them is our performance analytics team, and they manage hospital data, they manage patient data, they manage payment data and CMS data and patient reported outcomes data to find and communicate meaningful and actionable insights to our customers in the hospital setting and in the physician group setting.
The other core team is the implementation team. These people go into the hospital or into the practice, and they help those customers implement practice optimization programs or service line optimization programs based on the clinical operation and financial insights coming out of the analytics group. These people are on-site with our customers for sometimes months, a number of months during the implementation period. And when the program is up and running effectively, they continue they're no longer on-site, but they continue to have quarterly management review meetings to look for further opportunities to improve these programs. So the Performance Solutions management team will virtually meet or in person meet with the hospital executives, hospital operations teams, physician teams and clinical teams to look for opportunities to assess the performance of the program and look for opportunities to improve the program.
We have over 270 customers, and we have a database of over 700,000 care episodes, which are predominantly orthopedic patients, 700,000 procedures in that database. This allows Performance Solutions to help surgeons and hospitals improve the quality of care they're providing, reduce their episode costs and improve patient satisfaction rates. That's the 3 pillars by which we measure the Performance Solutions program. The offer is the program is enabled by proprietary software. 2 areas, particularly in our performance analytics.
We have an analytics tool, which we believe is market and industry leading and customers are always amazed at what we can do with it. And secondly, we have our patient and care provider care coordination software, which we've recently introduced to make many of the Marshall Steel programs automated. So why does this all matter? Well, FFO payment models, commonly called bundled payments, mean that the providers, either the hospital or the physician group, are at risk and are accountable financially for the total episode of care, whether it's the component that's delivered in hospital or whether it's the component of aftercare rehabilitation, often extending 90 days. During this period, the accountable the provider is accountable for all of the medical costs for that patient once they leave the hospital, not just within the hospital.
In CGR, which was mentioned earlier, it's mandated that the hospital is at risk, but it's not all about risk. Hospitals who figure this out, there's a huge upside opportunity for them. But if they don't figure it out, there's a significant downside risk to them financially. Another bundled payment models introduced before CJR often is the physician group that have elected to take that risk and access to the upside opportunity. Going forward, we believe that both of these types of bundled payments will be extended, and we've already seen communications from CMS to that effect.
Come next year, CGR is being extended to cardiac episodes. It's being extended to hip fracture episodes. We've seen communication from CMS. The voluntary bundles that existed before CMS will be CGR will be opened up again. And we expect this type of model to continue.
On top of that,
the way CMS pays positions for the work they do will change irrespective of whether they're in a bundled payment program or not. There's a piece of legislation passed in 2015 called MACRA, and that comes into effect in 2018. And it's going to reward physicians for higher quality, lower cost care. And it's going to penalize other physicians financially for not achieving those same standards.
So the
way physicians get paid, irrespective of bundle payments, is going to change. So value based purchasing is here to stay. And because most physicians and hospitals are not fully prepared, it will be quite disruptive for them. But increasingly, they recognize that if they mobilize and respond best and fast, there is an upside opportunity, not just a downside risk. This creates an opportunity for our performance solutions to help our customers adapt to this new market and this new reality.
Based on over 14 years of experience, we're very comfortable moving into valued partnership type savings generated. And we believe that, that will generate a significant or we anticipate that it could generate a significant new revenue stream for Stryker in the years ahead. We already have just over 20 contracted relationships where we are at risk on the downside and share the upside opportunity. And we've already begun that transition from a transactional vendor to a valued partner with our customers. I'm going to share with you some of the performance statistics after the panel session to show you some of the substance behind this program.
But first, I want to introduce you to the panel and give you the opportunity to ask your questions of them. We've got 2 different customer types here. First of all, we have an orthopedic surgeon who also has financial interest in health care facility, and we have a hospital executive. So first of all, I'd like to introduce Doctor. Jack Sherman.
I don't know it says John, I don't know, but he goes by the name Jack. He's an orthopedic surgeon from Via Christi Hospital in Wichita. That's in a CGR market, so he has first hand experience. He also is an investor in the Kansas Surgery and Recovery Center, which has a voluntary bundle for total joint replacement. And in full disclosure, he's our consultant for Stryker Orthopaedics.
Thank you,
Next, I would like
to introduce Mr. Jody White, who is President of Lowell General Hospital. That hospital convenes the bundle for total joint replacement. His facility has earned the designation of a destination center by working with Performance Solutions. And Jody and his leadership team asked the Performance Solutions group to help them negotiate and manage the co management agreement that exists between the hospital and the physician group.
So welcome, Vincent. Thank you. And last of all, but by no means least, Mr. Brian McCrone is the Vice President in charge of our Performance Solutions organization. He's been with us for 13 years.
He has a finance background. He was the 2nd ever employee of Stryker Performance Solutions. I think that meant he swept the floors and did everything back in the day as we started to build this out. And more and most importantly, Brian personally led the acquisition of the 2 organizations that represent the foundations of this business. So welcome, Brian.
I've got a couple of questions as Bill had to get the conversation going. And then I'll throw it open and we'll take all your questions. So Brian,
a lot
of people have asked us this over the years. What exactly does Performance Solutions do? Thank you, Stuart.
So I think the easiest way for me to describe our business is to explain an actual customer engagement. So when you think about how we start an engagement with the customer, everything is based on data. So we'll pull data from inside the hospital, clinical, operational, financial, patient satisfaction, OR data. We'll pull it into our proprietary database that we've been building for the past decade, which, as Stuart said earlier, has over 700,000 episodes in it. And then what we do is we try to take the emotion out of the conversation.
So we'll bring this information back.
We'll show the hospital or a physician group where they are across our database,
where there are
opportunities to improve for quality outcomes, where their financial opportunities are to improve and really take a data driven approach and give them the ability to see what best in class in each of these categories could potentially look like for them. And by doing this, then we're able to lay out really a customized plan for them for how we can take them through a long term engagement.
And the
implementation specialists that Stuart had talked about earlier are really experts who have long deep history in healthcare who we can bring to the hospital, they live with the hospital through an implementation period of whatever services we agree to work on with them. Once that period is up, we have a longer term relationship where on a quarterly basis, we'll still continue to pull data from the hospital to track how well they're performing and look for opportunities to continue to improve on patient outcomes, continue to improve on financial metrics over a longer period of time. So it's a constant program. It's a constant data driven approach for how we can help our customers get better.
Thanks, Brian. Jody, do you want to just say a few words about your relationship with Performance Solutions before we get to the question?
Sure, Stuart. And it really isn't fair for the hospital exactly to get up there and not have a cool video.
It's been
a little bit off balance here. But Performance Solutions for us has been a great opportunity.
Think about it just for
a few minutes. Orthopedics at a community hospital, Lowell General as an example, we're a large community hospital. We do about $500,000,000 in business. We're in a large community in the Commonwealth of Massachusetts. Orthopedics for us is $35,000,000 with about an 11% contribution margin.
So it's a big piece of any community hospitals business. And what's been happening over the years, as you would all, I think, would expect, hospitals do hospital work. Surgeons come and do their work with us. Patients get great care and they go home at the end of the day. But healthcare has changed.
Healthcare is evolving to a point where we've got to stop doing business the same old way. Fee for service is gone. And the days of us just getting paid to do things to people, independent of our physicians and letting us just kind of coexist, it's all gone. So we're taking this opportunity at Lowell General to take a look at how do we take a look at Medicare's number 1 DRG, the total hip, the total knee and what can we do together to go after those 4 or 5 things or maybe 4 things that are most important to us all. Healthcare is too expensive.
We have to drop the cost of care in everything that we do, as an industry, are too expensive. Patients deserve better, and we need to do better from patient experience from a quality standpoint, and our surgeons need to be well compensated, happy and enjoying their work with us. That doesn't happen if you're just doing business as usual. So we've taken up this idea of an orthopedic destination center. We grabbed that with the Marshall Steele idea of taking our doctors with our clinical team, our nursing team, our dedicated orthopedics unit and have said, we are going to transform how we do this business so that we drop our costs, reduce variability, improve the patient experience, improve quality and overall have our doctors engaged in new and meaningful ways they love to come to work and work with us.
So, our work began there with Striker Performance Solutions as we look to take our journey, use a Marshall Steel template to help us evaluate our program and we've moved on from there into bundled payments and a co management agreement that I'm happy to talk about.
Thank you. And Jack, do you want to just talk a little bit about your relationship and then I'll get to the question. How did you first come to be a partner with Performance Solutions?
Well, I've actually been part of
our total joint improvement team for probably 5 years before we met the strike the program. And we were able to make some
pretty good changes in our program. I'm the best orthopedic surgeon in Wichita. I do the best operation the best way. Unfortunately, there's 10 other guys who think the same thing and
we can't all roll the boat in the same direction.
And as you know, if you're going to try and do that,
it's really by hurting cats. So this program helped us do that.
So we were able to build on our previous experience. We're able to show people data.
Certians are
scientists. I mean, they look at data.
They can argue about who's best, but they'll look at data. And if you've got data,
you can talk them into rowing the boat
in the same direction.
And that's what SPS helped us with.
Okay.
So what are you
seeing with respect to changes in say rehab? We all know that the post acute cost care for joint replacement is the biggest area of opportunity. What are you seeing with rehab utilization rates now? And how does Performance Solutions help you with that?
I think that the episode of care has changed. It's now 90 days. It used to be the hospital stay. And now that the hospital generally is accountable for that, they're looking downstream. And SPS helped us tremendously with our component that 3 day part of 90 days.
But SPS is going to help us with knowing more about the other end. And that's really, as you said, that's where
you have to
concentrate. We send our patients out. I'm in a community that my draw here is probably 200 miles, so not all my patients live down the street. And it makes it very difficult. And that will be our challenge to get people get the same outcomes and do that in a meaningful and economic way.
Thank you, Ivan, when do you think the utilization of rehab will be optimized? When will we have realized the full opportunity in the post acute phase, do you think?
Well, the whole
thing is changing. I think we are looking we are really looking at getting people ready for surgery much more than we used to. We have people
getting some of their weight off.
We have them getting their family members in from out of
town to take care of
them, all the things like that.
And then sometimes where they go from the hospital is really a disposition problem, not a health issue. And that's a big problem. So all those things are going to have to be figured out because, as you mentioned, the hospital is going to be accountable for that episode. Okay.
Jerry, do you have any comments on that?
Yes. I think, again, as I said before, the times there are changing with respect to our crazy business of running a hospital. And the quicker that we can figure out that we need our physicians to be partners with us and we need Stryker not to be a vendor to us, but to be a partner with us, the quicker we're going to get to business and we're going to win. Stryker has been a great partner for us. Our physicians love the equipment.
They we
haven't got the cool robot yet, but they're talking about it. We're working really hard with our docs to be sure that they are fully equipped and ready to go. But what we haven't had before is a partnership. And when you have a company like Strecker with awesome equipment and having them come to the doctors and say, Mr. White, will you buy this joint for us?
Let's go in this direction. That compensation has always been agnostic to cost and the overall plan for the patient. So with this program, as we've got into a co management agreement, I'm sure you've heard of co management agreements, our doctors form a holding company that I contract with and we take risks together. We take the bundle payment together. This year, our 1st year in the bundle, there's another $1,000,000 on the table for our docs just based on performance inside the bundle.
And that's been transformative. When you take 8 orthopedists and you put them in the room for the first time and you put all their data up on the slide, time of case, blood utilization, return to the OR, infection rates, etcetera, there wasn't a peep for a couple of minutes and then everybody finally got on board and the word variability became very, very important. When you reduce variability in care, you improve quality, you improve the patient experience, you improve predictability and you improve profitability because healthcare is now paying for outcomes, not paying for us to do things to people. And this has been transformative for us as we went together into the bundle. And we couldn't do a bundle without a partner like Stryker.
The analytics is superb. It is a transformation for Stryker as they move away from being a vendor to me to being a partner for us as we move forward to do great things with our patients.
Thank you. So I'll open up to questions from the floor now.
Lender Varro with RBC. One of the things investors are worried about in any bundle or any
CJR program
is the impact that the programs will have on implant prices. So can you talk about what you're doing with Stryker or the other vendors that you're working with in terms of implant pricing? That's number 1. And then one of
the things that we've found in
our research is that for those who are in CDR in the bundle, the real cost savings we found, at least in our research, is coming more on the rehab side. So can you comment on that as well? Thanks.
Yes. I'll take a crack at that first. If you think about the total cost from time of knee pain right through the operative course through rehab and to home, The actual cost of the joint really becomes immaterial, but it's not the biggest part that you're looking at. And in fact, what has happened with me, I used to be the one that had the parade of orthopedists come to my office and say, Mr. White, we want this one and it's another $400 per case, but this is what I was trained on, this is what I want.
Now it's the 2 lead orthopedists that do most of our total joints sitting down with the vendors and saying, this is the price point that knee is coming in at and I'm not even in the room anymore, which is a very nice thing to see.
So we have some
common alignment there. You're precisely correct. The low hanging fruit in any orthopedic bundle is the post acute phase. It's where the biggest money is being spent. We've taken our post acute discharges off to SNF from 78%, which was it was 2 years ago, down under 30% now.
We're going to get down to a much smaller number than that. Patient's length of stay is coming down dramatically. Patients going straight home is going down. You're going to see patients going home now without rehab anymore. It's all going to be on videos, and they'll be doing it with health coaches and other things just to drop the cost of care because I think as I said before, health care is too expensive.
We've got to find creative ways to drop our costs and Stryker needs to move away from being a transaction company and being a company that solution for me so that in my marketplace we win more orthopedics because we're the highest value orthopedic provider around.
Dan, do you have any comments?
Yes. In my experience, Via Christi is a big city hospital. Our own private hospital a totally different environment. And as an investor surgeon, the bottom line is important to me, not that not important otherwise, but this program really helps understand that. It's amazing to me how most doctors really don't know what they're spending.
They really don't know. And how much you can do simply with demand matching implants
using devices that are high-tech for a
high-tech user and less high-tech for people that won't use that. So simple things can help quite a bit. We send 80% of our patients home,
Home.
And that's with a robust teaching program, a pre op preparation, a class, all the things that you have in the Marshall Steel program, it's made a tremendous difference and I'm sure it's improved the bottom line.
Stuart, just to add one piece to that. So the low hanging fruit really is in the post acute portion of the episode. But unless you're really thinking about because everyone's going to recognize that and unless you're really thinking about the entire episode of care and trying to think about how you're going to address the entire from before they get to the hospital to the 90 days and look at the entire picture, by the time you progress over the next couple of years, especially when thinking about CJR, when by year 3 year 4, your target price is being compared against an entire region, you're going to fall behind. So by year 4, you could have a hospital in Buffalo competing with a hospital in New York and Pennsylvania, so with all the same target price. So hospitals just focusing on the one aspect of it, really need to start thinking about the entire episode.
Well, hands been up. We'll try and get through get to most of you, if not all of you.
Thanks. Matt Mings at QVM. So one question for your panelists and then follow-up maybe for you, Stuart, if I could.
It sounds like both
of you have been working in the voluntary program for some time. And of course, then there is the CJR, which is kind of rolled in more recently in mandatory program. So maybe first, given what's happened in the last 24 hours, if there were to be some change in the progression to push forward on bundled payments as an initiative as the policy agenda unfolds the new administration over the next 6 to 12 months, how much would that change what you're doing on the ground in your voluntary initiatives that you've put in place to improve care, take cost out and all those things? And as I mentioned, a follow-up for Stuart.
Let me take it from the executive position. I think that the reason why we adopted the bundled payment before it was required is because it's the right thing to do if you're a hospital that's going to try to reduce costs, improve quality, reduce variability. Hospitals need to play our game differently. Hospitals that
are just going to kind
of move along and do the same old, same old, we're going to be acquired or going to be going out of business. I want our hospital to survive and win in the marketplace, and we're going to do more of these service lines. I was telling Stuart, Stryker is blessed by having the 1st bundle being orthopedic bundle. It's one of their sweet spots, and it's a great way to move a market by helping us to be much, much more successful. Cardiology is next, bariatric and general surgery, others are going to come along.
It's terribly important that hospitals embrace these things emphatically because it's the only way, the only way the hospital is going to reduce its overall cost by engaging the surgeon and aligning incentives. Bubbled payments dramatically align incentives. When you align incentives, profitability goes up, variability goes down, the patient experience goes up and the surgeons are a lot happier and the hospital is profitable. So it's a go forward situation regardless of what transpired last night.
Yes. I would agree. It's still about
patient. Since we started the program, our patients are happier. They have a better outcome because they know where they're going before they leave. They know when they are where they should be. And they
can tell you when they're supposed to be
getting out of bed because they've been educated.
This is all part
of the program. And so creating an expectation, creating a single story when you go through a process like this, the patients told anyone of a number of things. And this has allowed us to give them a single story. Everybody's on the same page and tremendously facilitates all the things that you're interested in.
Dan? To my perspective, I don't know what's going to happen in the future. All I do know is that we have to bend the cost curve on health care in this country, and that will only happen by delivering higher quality, lower cost and identifying and eliminating waste in the health care system. So I think the competencies we've talked about, the experience we've talked about are relevant, whatever may come.
I'm sorry, just one
follow-up for you, Stuart, if I could. On the other assuming everything stays the same, CGR is rolling forward, there's nonvoluntary centers that are now participating that are maybe, call it, earlier in the curve, earlier in the cycle. Can you talk about your expectations for how that might change the landscape of some of these newer centers, smaller centers over time compared to folks who are further along and have the process down to a greater degree?
There's no question. One of the intended outcomes of these programs is to make sure that the work is done by the most capable, highest quality, lowest cost providers. And some will be successful and some will not be successful. So I think there'll be some consolidation.
But I do also think that there will be a
move towards the successful organizations getting closer to the community. So I think you'll see large organizations extending closer to the patients that they serve, but implementing all of the programs that they've developed in the core center. Can we go a bit further back in the room like Bill, as I find myself in tied down at the front? We will come back, Ryan.
Thank you. Raj Denhoy from Jefferies.
Just a question, I think Doctor. Sherman, you alluded
to this, but one of
the things you also hear about hospitals that have implemented CGR programs given that they are so tied to the outpatient or the rehab costs that they are starting to sort of cherry pick or lemon drop certain patients, right, that if a patient is obese or
you don't think they're going to
have a good outcome or consume a lot of rehab, maybe you don't want to do that patient. And I'm curious if that's happening, how pervasive it is, you think it's going to get bigger?
I think there have been a lot of patients who were not optimized before their surgery. And as a consequence, they got in trouble. And that's not good patient care. So one way or another, this has kind of brought us to the idea that creating an optimal patient before they come in. If you want to call that cherry picking, fine, but maybe I can make a cherry out of something else that walks in my office.
In the end, they do better
and that's what it's all about. It's about the patient.
Are you turning away patients? No. No. Are you aware of any? I'm just you hear anecdotal reports of this.
I'm just curious whether it is actually happening out there.
In our community, that's not been something I've heard of or seen.
That's what Jack just said.
I think that it's certainly a more detailed and more stringent review of our patients to be sure that we've got the right patient, the right time, the right phase, but patients are being turned away. Patients are getting great care.
Mike Hoenn at JPMorgan. Jody, since we have in here, I think we
would all be interested in
your reaction to the election last night in terms of
what it might mean for your business and how the outcome and the uncertainty around what it means for ACA as well as your overall environment, how that might influence your capital plans for 2017?
Yes. Interesting turn of events last night. The Affordable Care Act is broad, wide sweeping. The biggest effect it's had for us, independent of folks having coverage and still coming to us with higher deductibles and unable to afford them, We end up with an awful lot of cost cuts as part of the AAC that come into hospitals, especially coming into the 5th year. Independent of these variables, the point I'll make back is that healthcare as an industry, whether ACA stays or goes away, it's just too expensive.
And what we're going to have to do with hospitals is take some responsibility for that and be sure that the things that we do together with our doctors that we take responsibility for dropping the cost, improving the quality and make sure patients are getting great care. So at this point, we're not making a plan to change course. We're focusing on the base blocking and tackling of what our business is trying to do. And most importantly, we're looking for a partner in Stryker to help us to transform how we do our business with our doctors. I'll just give you a quick example.
Prior to our Performance Institute helping us get into our shared services agreement, our co management agreement, We had 9 orthopedists doing total joints, each had a different post operative course. So the patient would hit our 30 bed all private orthopedic unit with orthopedic surgeons on cards saying this is Doctor. So and so's knee, this is Doctor. So and so's knee, and they're all different, antibiotics are different, up and down is different, passive motion machine is different, cost is different. That's just a ton of variability that's just too doggone expensive and too risky for our patients.
But hospitals, they're going to be in the business of trying to keep care locally, which is what is an important thing for us, keeping people out of from us going to Boston for care, we can do a total hip for half of what it takes to get a hip done down at Mass General or at the specialty hospital in Boston. And it's good for us. It's great surgery. It's great patient outcomes. We've got extraordinary people.
But now we're going to do it in a way with Stryker that helps us bring our game up through our performance with our doctors, teammates together, aligned incentives for great patient outcomes and above all, improving quality and drop in cost.
Bruce Nadell from SunTrust. The fear of that the CJR pertain to the broad waiver given to gain sharing for internal cost savings. We actually called Medicare And one of the things that they told us that was a surprise is that, gainshare savings or savings needs to be rebased every year. So if
you go generic year 1
and you reduce the implant cost by $1,000 you can't carry that $1,000 savings forward in time. So it really seems without having a sustainable gain sharing amount associated with a generic hip and knee, It really doesn't pose that much of a threat. I was just wondering what you guys thought about it based on your varied experiences.
Honestly, I don't know. Honestly, I don't know. I haven't thought of the gains during part of CGR as a retirement plan to tell you this year. So I think it's all about the patient
and the benefits they'll see.
Yes. In the bundled payment plan, certainly, there's a piece of gainsharing to it. It is a race at the bottom. You're not going to be able to rebase and take the same savings. At the same time, it's really all about quality.
It's all about efficiency. And there is there's an awful lot of room there to go and to grow. And as payments, morph away from doing things to people, it's also going to help us to understand that payments are going to change as the performance criteria change. And I believe that getting together into a co management agreement with our physicians that takes a look every day at offering a better product for our patients and for our community is something that is well beyond a game sharing place. It's much more about a sustainable way to offer a superb product to keep our hospital healthy and strong and have our patients with great outcomes and overall great performance by the surgeons.
And I'll just comment that the implant component of the episode of care is well under 20% of the total cost of an episode of total joint replacement. And after the rehab costs have been optimized, the next biggest driver of cost is the quality of the surgery, the complication rate, the readmission rate and all of those downstream costs. And that's where the quality of the work becomes critical to the overall cost of the care.
Rick Wise, Stifel. Mr. White, you said several interesting things to you. You said healthcare is too expensive. We have to reduce variability.
And I guess I'm just curious just in the context of this afternoon, how are you thinking about adopting new technology? How does innovation fit into that this brave new world of cost focus? And maybe more specifically,
how does the Mako robot
potentially fit into your challenging world? You expressed interest in it, I think, in passing. Do you have to before you adopt something like Mako, have to get all of your surgeons on board before you can do it? Just help us think through how you're thinking about it.
Yes. I think it's a perfect question because when you're thinking about adopting technology as the surgeons said, technology offers an extraordinary clinical platform, but there is a cost to And in the old days, the Stryker would go to the 2 orthopedists, would convince them that the robot is the right thing to do and they'd be up in my office with a rep looking to get a PO signed, and I'd be saying, well, it's not in the capital budget, and we go through this cantankerous back and forth, simply because we are trying to run our business the old way. Running our business the new way, where the surgeons are aligned with me to make a have a successful outcome for their patients. We put all these things on the table and now we'll make a great decision together. We've not gone through the exercise of the robot discussion with our doctors yet.
They're looking at it. They're interested in it, but it will not be a contentious I need capital play.
It will be what's good for
our patients, what's good for the bundle. And if it means that the cost of doing business,
then it's a cost
of doing business if it's the right thing for the patient. But I want to just reinforce this. When you bring Stryker in as a strategic partner, they help us with the framework to make our doctors, incented to align with us and to work with us closely. Physicians, especially physician surgeons that come to us, if they're just coming in as itinerant operators, coming in and operating and going home again, and I just treat them like somebody is bringing me a case and getting paid fee for service, it's going to all come tumbling down very, very quickly because we're still way too expensive. Now with the robot, if you bring the robot in and it's offering great clinical outcomes, people are going to be paying for quality.
Right now, they're not or a very small piece of it. As quality goes up, variability goes down, that's going to bring payment into the future and that's where some of this technology is going to be paid for. But you've got to look at it from a smart position. If you do this as a hospital executive trying to make a decision without having your doctors aligned to work with you, into very difficult conversation counterproductive conversation and hospitals can't do this alone. Stryker performance is going to help us to make great decisions because our doctors trust the company and we're now redefining our relationship away from transacting business to making me clinically and financially successful.
Okay. We've got time for one more question, and then we need to move on to the next segment.
It's Kristen Stewart from Deutsche Bank. Doctor. Sherman, I think you had mentioned the concept of demand matching earlier. And so I was just wondering how far along you think that is today? Because I know that was something that came up in the 1990s as a way of controlling costs.
So is that something that's very prevalent now or something that you could see? And then, I guess maybe for Brian, how dispersed do you see implant costs? Because I guess over the last several years, you saw the increased transparency, a lot of price compression has occurred. And so is that something that could put further pricing on the implants themselves in the next several years?
Demand matching, there's a huge variance in what you spend based on polyethylene technology, metal technology, ceramics, things like that. And that's not a new concept. But when the doctor has no knowledge of what he's doing and has no consequence to what he does, then he does what he does. And so I think that demand matching is really a pretty easy thing to do. It doesn't change patient outcomes at all because in general, the lower cost devices are still very, very good.
And so that's a simple way to start and that's with information.
Yes. So and when you look at the price of the total episode being anywhere from $17,000 upwards of $40,000 there's a ton of opportunity to reduce the entire cost structure through care redesign and reducing post acute costs. So there's a lot of variability, and we'll start to see that go down. I think our national average, a total episode costs about $25,000 which we've already seen that start to decline over the past year, even just since the CJR program came into effect.
Okay. With that, I'd like
to thank our panelists and we're I said at the beginning of the session that at the end, I'd share some of our Performance Solutions performance statistics. Those 270 something customers that we have in this program, on average, are growing their surgical volume double digits. On average, are discharging 78% of patients direct to home versus a Medicare national average of 51. On average, the complication rate is 1.6% versus a Medicare national average of 3.6%. Their average readmission rate is 2.4 versus 4.8, so 50% reduction.
They are typically staying patients are staying one day less in hospital. And in total, in 2015, we calculated that the Performance Solutions program had saved those customers over $110,000,000 So that speaks to the impact of program. So we believe that we're very capable of helping our customers to adapt and grow their orthopedic service line. And we believe that with our implant lineup, with our technology platform in Mako and with our Performance Solutions organization, we're well positioned and we're embracing the future of Orthopaedics and Healthcare at Stryker.
And with that,
I would now like to turn to a presentation on our cost transformation for growth. And I will introduce Lonnie Carpenter, Group President for Global Quality and Operations and ask him to come to the stage.
Thanks, Stuart. Good afternoon, everyone. As always, it's great to be with you here today, and I appreciate the opportunity to talk with you about the next item on our agenda, cost transformation for growth. We call it CTG. But before I jump into the program, I thought it would be appropriate to take a minute and walk through our change that we've gone through over the past several years
because it is relevant.
If you think about the history of our company, for those of you who know our company well, we've been fiercely decentralized. And then in 2010, I stood in front of this group. As you think about the left hand side, we talked about kind of changing a little bit, setting our baseline and getting a little bit organized. In 2010, as I mentioned, I stood in front of this group, we had some quality challenges. And it was really the first time the organization decided we're going to have our center led kind of centralized function.
And so for the next really 2 intense years, we focused on our quality first journey, getting rid of some of the warning letters, improving our quality systems, making sure that they were consistent, effective and compliant across the company. And we're thrilled with the progress that we've made over the past several years and feel really good about where we are from a quality standpoint. 2010 to 2012. 2012, we built upon that. We decided to centralize our manufacturing plants and our direct sourcing function.
We focused on that for the last several years. 2013, another change. We decided to focus on distribution and logistics and our network. We built out an Indianapolis Central Distribution Center in the U. S.
We built out one in Europe, in Venlo, in the Netherlands. 2015, yet another change. Our commercial operating model changed. We launched our regional headquarters in Europe. We changed our commercial structure to have sales, marketing and R and D both in the U.
S. And Europe reported into one transatlantic structure into each one of the division business presence. So a lot of change that we went through in the last several years. At the same time, in the middle section, we continue to invest in the business. You heard Kevin talk about our investment of R and D actually going up.
A lot of the great new products you're going to see
over at the product fair
will certainly give us a chance to demonstrate that. And at the same time, we are very aggressive, as you know, in acquisitions, integrating 45 different acquisitions over the course of the last 5 years, some small technologies that we brought to market and certainly some bigger acquisitions like we've done recently with mature businesses
like Physio and Sage. And of course, we've gone through
a number of hot headwinds as our competitors have in this marketplace. And I really thought it was important to kind of give you that background or that context because as we get ready to go on to 20 7 sorry, move from 2016 to 2017, we feel we're pretty well positioned to after cost transformation for growth because of the change we've incurred over the last several years. So let's talk about cost transformation for growth and what I'd like to answer are a
couple of questions that I'm sure
that are on your mind. What is CTG? What are the savings we're going to generate? And the second question is, how are we approaching it? And how are we organized to go after it?
When I'm finished, I will turn it over to Glenn Bayline, our CFO, and Glenn will talk about how CTG fits into the strategic long term sustainable growth model for the company.
Okay. So let's talk about
what is CTG. And I first want to talk about what it's not. It's not a short term, cost flashing, cost cutting, big restructuring program. It's important that we put the word growth in there. It's really focused on enabling the long term growth leveraged growth of the company.
And it's really built upon the principles and the guiding principles you see up here. First, we want to go after our structural costs that have tended to build up over time as we've grown, drive those structural costs out because we know if we can do that, they won't creep back in over time. Looking at costs that are really non value added to our customers, we don't mean a whole lot to them and certainly aren't driving growth. Significantly slow the growth of those costs, then that cost curve. So as sales continue to grow, we're actually driving leverage.
And we feel that the focus on both of those things are going to drive cost savings and also cost avoidance.
So next few bullet points on here
really talk about what is the CTG impact and what are we trying to achieve. So first, we believe that the cost savings going to allow us to continue to reinvest in the growth of the business, reinvest in sales, marketing, focus and specialization, reinvest in R and D, reinvest in M and A, things that are, again, are going to continue to allow us to grow the top end of medtech. At the same time, take those savings to drive sustainable, consistent operating margin expansion over time. And we believe that the CTG program will allow us to deliver over the next 5 years, each year, 30 to 50 basis points of operating margin expansion with a cumulative 5 year impact of 190 to 250 basis points. The key takeaway I'd ask you to think about on the right hand side of the slide is we want both.
We want top line growth. We want sustained operating leverage over time. We don't want to cut costs or do we'll do anything to impact the growth trajectory that we're on. We think by focusing on both, delivering top line and consistent operating margin expansion, that will allow us to deliver on that 3rd guiding principle in generating shareholder value.
That's a little bit about the what
and what we're trying to achieve with CTG and what we're going to deliver.
Now let's talk about how,
how we organize to go after that. And you can see we really have 8 programs that we're focused on around the company. The programs are at various stages of maturity. Some, as I've mentioned, we've started a few years back. Some we're just getting started on.
Some we'll take a little more investment. But we're really confident in saying that all of these programs over the course of the next 5 years will contribute to that operating margin expansion that I outlined on the previous slide. Also, these 8 programs are focused on driving savings and cost avoidance, both in cost of goods sold and in SG and A. I'd like to take a few minutes and walk you through a high level of each one of these 8 initiatives and what we're trying to achieve.
So first on the cost of goods sold side,
product life cycle management, it is probably the biggest opportunity that we have across the company. It is the biggest source of complexity and cost that we have in our organization. You may have heard Kevin talk about in the past, companies try and operate in an eightytwenty rule. 20% of your products account for 80% of your sales. We are far off of that number.
It's because over years years of generating multiple generations of products, we've continued to retain those products, have legacy products and certainly opportunity for us to reduce the number of products we have, put our best products, our power brands in our hands of our customers around the world that will generate a better value proposition
for them. So a big opportunity for us
to drive cost and complexity out of our business. I mentioned the plant network. We're at a pretty good stage now in terms of what we've focused on over the last several years. But as our plant network is organized today, we think we're better positioned to leverage opportunities to reduce cost, be a lot more efficient and share automation and lean across our network like we haven't done in the past. What I'll also tell you with our plant network, the way that we are organized today, it really allows us to take a benefit of sharing our core competency technologies that we have.
A good example is 3 d Additive Manufacturing. So in the past, when that was developed by the Recon business, it would have only stayed in the Recon business.
But as you know, we've shared
that with the Spine business. We've launched a great new product out of Spine using 3 d additive manufacturing. We plan on continuing to proliferate that technology across all of our businesses. And that's why in the Q1 of 2017, we will open the doors in a brand new fully automated 3 d additive manufacturing facility in Ireland. We're excited to expand this technology again across all of our businesses to launch some great new innovative new products, at the same time use that technology to take cost out of our existing products.
Shifting over to our supplier base.
We did a nice job of kind of leverage our company wide spend for our direct sourced product. And really start to consolidate our supplier base to some key contract manufacturers that we know that are best in the industry are driving great quality innovation, improving service levels and delivery, at the same time reducing costs and continue to drive more business their way.
And then last is to
build out and really leverage
the central distribution centers that I mentioned that we've developed in the U. S. And Europe to be more efficient at moving products throughout the network to drive the cost of servicing our customers and the cost of logistics down. I would tell you, as we've built up each one of these areas over the past several years, we've developed better systems and processes. We also had the opportunity to integrate, as I mentioned earlier, a number of different acquisitions.
So we've kind of been refueling in flight as we've gone through that. But I would tell you today, we feel we have the right systems and processes and a pretty good playbook of how to integrate businesses, small and large, into our company.
Switching over to SG and
A, certainly opportunities for us to drive savings and leverage. First, on shared services. We opened our European shared service. We've learned a lot by putting that in play. And certainly, there's opportunities for us to take the lessons learned there and to build more of that out throughout our company, particularly in our HR and finance organizations.
There's transactional things we can get a lot more streamlined and drive cost out. Our operating model and org design. You heard Kevin talk about the fact that we have expanded our operating model to include Canada this year, some great lessons learned in helping to drive and grow that business. We think there's pieces of the operating model as we look at other geographies around the world that we can put in place to really
have the best of
both worlds where we have the strong country structure we can capitalize on, at the same time bring the specialization of focus to bear in those businesses. And certainly spans and layers is an opportunity across the company, not only in each one of the departments, the functions, but each one of the businesses. We'll be looking at our ratios and to drive the best in class ratios over time. Indirect spend, a target rich opportunity for our company. It's a great example of the non value added costs I mentioned earlier that really are not important for our customers.
It's a $2,000,000,000 spend that we have for the company. We've taken the lessons learned around direct spend. We're applying it as indirect spend to be a lot more professional and governance around how we spend and leverage the savings across the company. Good example is our freight spend. We would have had multiple carriers in the past with all the businesses used.
We've now narrowed it down to a select few and certainly are driving some nice cost savings as a result of that. And last but certainly not least, again, you would have heard Kevin or Catherine mention, we're in the process of rolling out 1 global ERP across the company. The first implementation will be in the second half of twenty seventeen. And then over the course of the next 3 years, we will implement ERP at each one of our various sites around the network. We're taking a very methodical and controlled way of rolling that out to make sure we're not disrupting the business.
We're doing anything to slow down the growth or to impact the leverage we plan on delivering.
And again, just like on the cost
of goods side, the investments we're making in SG and A are allowing us to put systems and processes in place that are scalable, that we can leverage and certainly have now the opportunity to plug an acquisition into that system that we didn't have before.
So that is the what
and the how. In summary, I want to mention again and reiterate the fact that we feel really good about how we're positioned going into our cost transformation for growth program. We're confident in our ability to deliver that targeted 30 to 50 basis points of op leverage every year and a cumulative impact of 190 250 over the course of the next 5 years. Glenn will talk to you next about how CTG again fits into the overall growth and strategy plan for the company.
Thank you.
Thanks, Lonnie. CTG is certainly foundational for our ability to drive operational leverage in the future. Lonnie did a great job and an overview of CTG. One thing I kind of want to focus everybody back on is the entire sustainable growth model. First and foremost, at the very top of the model is sales growth.
We have thousands of employees waking up every day thinking nothing about thinking everything about sales growth and how to beat the competition. Growth is ingrained in our culture, and we're committed to be a leader in the key markets that we serve. Next on the model, as Lonnie went over, is operational leverage. We'll take this growth, and we'll drive operational leverage off it, both on a product cost basis and on an operational cost basis. We'll make targeted investments that will drive innovation, strengthen our sales model and drive our operational effectiveness, most notably through CTG.
Our most recent acquisitions clearly demonstrate that we have the abilities to make investments that become accretive immediately. Sage and Physio are both accretive to Stryker currently. We also have great examples from our past. Neurovascular has become a real growth engine for Stryker and it's been a terrific investment. And lastly, we'll maximize the financial efficiency.
And this isn't some fancy financial reengineering where we're going to leverage our debt to reduce our EPS. This is really sound, efficient and effective management of our debt and tax positions so that we can utilize those in our ability to manage the growth model but also provide opportunities to invest in the future. As you've heard Kevin say often today and others say often today, we're committed to growing at the high end of medtech. Now I know as you look at this chart, it's not complete, and I don't have all the data for all my peers for Q3. But I'm fairly certain that my 6.3% year to date growth, organic growth, will be at the high end of medtech once I populate this.
How do we accomplish this? First of all, we have a focused sales force model. We have individual sales folks that are focused on these key markets and are waking up every day addressing the competition and selling their products. Secondly, we also have product diversification and market diversification, and this diversification allows us to focus on the markets where we can gain the most growth. And then lastly, we actively invest in innovation.
Whether through M and A or internal funding, we are focused on investing in innovation. We not only sell into orthopedics, we provide care to patients in the ICU. We're in the general surgery suite with state of the art visualization. We're with EMS teams as they transport patients to the ER. And lastly, we're saving lives every single day with our neurovascular coil and AIS products.
The last thing I would point out is our divisional structure ensures that we have a separate focus on innovation investments and M and A. Each division has a separate team specifically focused on their key market and how they're going to continue to drive growth. Next, if I look at leverage, leverage is something that we're committed to improving over time. As I look at this chart, this is our reported EPS growth. There's lots of puts and takes here.
2013 was the 1st year of Med Device. 2014, we were severely impacted by FX. But as Lonnie outlined, and Lonnie vividly described the programs that we're putting in place, we're committed to driving operational leverage on sustainable basis in our business. CTG will strengthen our organization. It's a multiyear program that's foundational, and most importantly, it cuts across our business lines and establishes these efficiencies at an organizational level.
That ensures that they're sustainable, they're repeatable, and that we'll continue to drive leverage off of them. I can already point to some of our early successes around indirect spend, and I'm confident that with the right investment and focus over the next 5 years, that we'll continue to see operating expense efficiency. Another pillar of our leverage growth model is really capital deployment. Capital deployment has been a key element in our growth strategy. As Kevin discussed, our prioritization of capital is pretty straightforward.
Number 1, we're focused on M and A. Number 2, we're focused on dividends. And lastly, on share repurchases. We deploy our capital on deals to strengthen our market position, provide innovation platforms, and ultimately provide great returns for our shareholders. You could see how this was balanced in the past, and 20 16 was really a standout year for M and A activity and deployment of our capital into accretive assets.
So what does this look like for 2016? I really think as you look at 2016, you can see all the elements of this strategy really coming together. We'll deliver growth at the high end of medtech from 6% to 6.5% for the full year. Year to date, we're delivering 60 basis points of leverage in our op margin. And lastly, we'll deliver robust adjusted EPS growth of over 12% at the $5.75 to $5.80 per share range that we have guided everybody on.
2016 really demonstrates a year driven by sales growth, leverage gains and deal accretion. So what does this mean when you push it all together for our long term sustainable growth? As we look beyond 2016 and over sort of our 5 year strategic planning horizon, what are the targets that we use for our businesses to set the agenda for their growth? First of all, over the next 5 years, our sales growth will be continued to be at the high end of med device. If history is a predictor, this has been over 5% routinely, but it will be subject to market forces.
Lonnie went over in detail what our CTG program will provide in terms of operating margin expansion. We'll deliver 30 to 50 basis points annually of op margin expansion each year for the next 5 years. And then lastly, all of these strategies combined to allow us to target EPS growth over the 5 year horizon of at least 9%. These are the targets that we use to guide our businesses. Keep in mind, this isn't guidance for 2017.
As we normally do, we'll provide our 2017 guidance in January. So to wrap it up, I want to say we'll deliver above market top line growth. We'll drive sustainable leverage on that growth with our CTG programs, and all of this gives us the confidence that we will continue to deliver great returns for our investors. And at this point, I'd like to invite the leadership team up for Q
and A.
Okay, great. So the way we're going
to do this is I'm going to be the moderator.
You can see we have a number of our leaders up here. We have some additional members of my leadership team sitting in the front.
So if you have
any questions for our General Counsel, he's sitting up front, our Head of HR, etcetera. But we have our Group President, CFO and Catherine Owen. So we'll start over here Rick.
Thank you. Thank you, Kevin, Rick Wise, Stifel. It's come up in several ways today. Part for the first question not to be about the election. Sorry, and I realize we don't have a lot of clarity yet, but in a world where ACA
could go away
at least in its present form, that could be concerning for your hospital customers. Kevin, how are you thinking about the potential impact of the Trump administration on Stryker and the outlook? And maybe more specifically, the impact on the MedSurg business? And should we be more concerned going forward in this uncertain environment ahead? Thank you.
Thanks, Rick.
Certainly, it was a big night last night, and it's going to take time for us to really understand what does this mean.
I would tell you for
us, we wake up in the morning, it's business as usual. We live in a world where we have single payer systems in France and Canada. We have 2 tier systems in the UK. So regardless of the administration, if we deliver products that add value, we win. And we've seen in Europe over the past 2 years, and you can imagine the types of healthcare systems there are in Europe, where we're growing faster than Stryker's average growth rate.
And that includes our capital equipment business as well as our disposable business. So for us, I'm not going to say it's a non event. The reality is we have to adjust to whatever we see happening, but it's really not a concern at the moment. When the ACA was put into place, we didn't see an enormous spike in capital. We didn't see an enormous spike in our implant business.
And so as it adjusts, we don't expect to see some kind of major deceleration either. I said in my opening remarks that our capital equipment business is below 15%, and that includes small capital, which we've seen even through recessions are very resilient. Our camera business, our power tool business, frankly most of our capital is in that smaller capital category and they really aren't as affected by big changes. We do have beds. We do have OR communication equipments, which are a little bit more expensive, but not a major concern.
Maybe I'll ask Tim if he wants to add anything to that.
The only thing I'd add is that
really since 2,009, we've dealt with some degree of uncertainty. So first coming off the recession and then ACA was coming, what's it going to look like and then what's going to happen with implementation. So we've really been through, in my view, a 5 to 7 year period of some significant uncertainty through which we've learned to adjust. The other thing I would note, our division with our biggest exposure to capital, of course, medical, we did diversify our portfolio this past year with the Sage and Physio acquisitions, creating a situation where they are far less dependent on capital. And the last thing I'd note is that the leaders that run these businesses have learned the importance of innovation, value creation, quality outcomes and different things like that.
So we know we're not going to sell a bed today the same way we sold a bed 10 years ago.
We're going to
have to look at outcomes, fall prevention, low beds, different innovations in that portfolio, which we've brought to market through innovation. So we don't want to dismiss the concern. However, we do want to express our confidence to compete in this market.
Okay, great. Right here in the front.
Thanks. Chris Pasquale, Guyana. Kevin, by my math, you guys have averaged around 11% constant currency earnings growth over the last 5 or 6 years. That's been largely during a period where you've been making a
lot of investments that you're
now set up to leverage to drive more operating margin expansion.
So why is 9% the right target for Stryker going forward?
Is that a high enough bar
given where you are on
the top line? A lot
of your peers are targeting double digit earnings
growth even without some of that top line strength.
I think the way Glenn explained it, it's a floor. So we're not setting a range, we're not setting a high end, we're setting a floor. So we're saying at least 9%. And then every January, we'll give you the specific numbers for the year based on what's going on in the marketplace, how we see our innovation, what's happening competitively. So we just had a floor.
We didn't set any kind of precise number. It's a floor, and that's how I think about it. I don't know, Glenn, if you want to add anything. Yes.
I mean, the only thing I would add is we're looking at a 5 year horizon. So we thought it best to set a floor. We're certainly not afraid to deliver more of that. I think you see that in 2016. And so we set the minimum bar is what we did.
And what we don't want to do is forsake the opportunity for high growth. So you set the floor too high, then and you have a tremendous opportunity. Let's say the total knee starts to catch fire and we have this opportunity to really accelerate that. If you set the floor too high, then you suddenly can choke opportunities for growth. And that's why each year is a reset here.
So as we set each year's goal, we can then determine whether it's something that we want to lower a little bit because we can see tremendous growth opportunities or raise a little bit if we see that we can drive even more leverage. As CTG
sort of evolves,
we're going to have the potential to potentially add even more leverage than we had before. So setting floors, I think, is a smart business practice, especially when you're growing because the last thing we want to do is choke our growth. You've seen unbelievable consistency in our growth if you go back quarter after quarter after quarter, year after year after year over the past 4 years. We've been consistently growing.
So we don't want to choke
the growth, and that's why we prefer to set a floor rather than set some kind of artificial range and not set the floor too high in case we have opportunities in front of us that are just too delicious to pass up on. Or in the case of a macroeconomic turmoil, that if we set the floor again too high, then we end up doing short term decisions, choking important investments. We've seen over the past 5 years, our R and D as a percent of sales has actually gone up. It's actually increased to over 6% as we've delivered the earnings you just mentioned. And so we are very committed to R and D.
You didn't see R and D on the chart as it related to cost transformation growth. So you should expect to continue to see that number being a little bit north of 6%. And so we don't intend to choke R and D either. So those are the different reasons why we prefer to just set a floor. Again, you may not think that's aspirational enough.
Every January, we'll set our target, and we're not afraid to go higher than that.
That's helpful. Thanks.
Thanks. I think Mike and then David after Mike.
Thanks, Kevin. Mike Weinstein, JPMorgan. So two questions. First one is the 190 basis points to 250 basis points.
How did you come up
with that?
Why is that the right range?
Go ahead, Glenn.
Come on, Lonnie. You can't fund on that, Lonnie.
All right. We'll start with Lonnie and then Glenn will add. Yes.
So great question. And I was surprised you asked because you asked the same one question every year. But we really looked at, as I mentioned, we really have 2 objectives. 1 is the growth objective and certainly the other one is sustained operating leverage. We didn't want to do anything
to really influence or drive
the growth down. As I mentioned, we have 8 programs. We have a pretty good sense for where they are in the maturity, but we need to invest in those programs while delivering the operating leverage. Because for instance, ERP, we're just starting to launch that. So there's going to be some investments we're going to have to put into that.
PLCM, as we look at rationalizing our product offering, will be taking products out of the field and replacing those. So we balance all those factors to figure out where we're going to invest. Other ones like indirect spend, we're already getting leverage on, plant network, we're getting leverage on. We balance all those. We felt that the $190,000,000 to $250,000,000 was the appropriate number for us
to put out there.
Okay. And then if we look
at 2016, Glenn, the 60 to 70 basis points of margin expansion comes in a year in which the device tax was lifted and so that was a 90 basis point benefit to you guys.
In the midst of it
as well, there have been acquisitions which have been dilutive to margins and so forth and FX. So there's been a lot of moving parts there. But with 2016 as the backdrop, what confidence should we have going into 2017 that we'll certainly see that organic margin expansion play in?
Well, I think and you're speaking to operating margin, right?
Yes. Okay.
I think some of the things, first of all, the 2 acquisitions will annualize after 3 months. We'll be a year through our integration. So we'll see some expansion relative to that. I also think that we'll start to see the early phases of some of our CTG programs take off. I mentioned indirect spend.
That one is currently having a good impact on our margin. We will be making some CTG investments, as Lonnie alluded to. And as I look at the expansion for next year, and I look at that 30 to 50 basis points range, I think as we make the investments, we're going to be on the lower side of that. And then as we get out over the horizon, you'll see that accelerate to the higher side of 50 basis points a year.
And the important reason why we focus on operating margin is we're not talking about doing buybacks or other sort of financial engineering to get to the EPS number.
We want to show you
the 3 pieces, right? The top line, the operating margin line, where if you look back over the past 4, 5 years, we haven't driven that as consistently as we've driven the top line. We're now telling you we're going to give it to you every single year and then, of course, driving EPS on top of that. So this plan with the EPS floor does not assume any kind of significant buybacks.
David Lewis, Anderson Stanley. So maybe Kevin, just a quick follow-up on that. I mean you've talked about the upper end of medical device growth rates for several years and sort of there are 3 companies who are in that 6% growth club.
The other 2 of them, specifically I'll
just name them, Boston and Bard are giving you more of that double digit earnings growth every year and you're committing to 9%. So you have this very significant capital flexible business where you easily could drive more than 9% in any given year. So philosophically, are you sort of saying 9% is the operating income target? That is sort of the floor. There's got to be cap deployment?
Are you sort of saying that we're going to have to reinvest cap deployment to offset other investment initiatives we have inside the business?
No, it's a floor. A floor is a floor. It's a floor. It's nothing more than a floor. And so clearly, as we drive better performance, you can expect a number to go higher than that.
We just wanted to set a minimum level. We're not going to be below that number. We're certainly not afraid to go higher than that number, but we just don't want to get locked in. Now other companies may have other reasons for providing more specificity. I think this is the first time we've actually laid out a multiyear off margin expansion.
We feel pretty comfortable about that because we've done the preparation, we've done our homework related to cost transformation and growth. And as you move across the hall for the product fair, you can certainly talk to any of our division presidents about they're involved. They are all we're all in on this. We spent a year preparing for the transatlantic operating model. And what do we see?
We saw Europe grow faster than Stryker's average in 2015 and it's doing it again in 2016. So we
like to take our time.
We like to really do our homework. And then when we're ready to execute, we execute. We take our numbers very seriously, and we're committed to driving. You can hold us accountable to that performance. So that's why we're setting just a floor.
And it's just a floor. I wouldn't overthink it.
So it's a floor. I think we're
clear there.
So, Mike, just real quick for you, the pricing assumption embedded in the 3
to 30 50 bps in the
next 5 years. And then for Kevin, Mako, I mean, the one focus I took away from this presentation today is, look, it's all about driving knee, it's all about driving triathlon and you have great capital equipment business. We're seeing companies like Medtronic get very aggressive on how they think about capital and disposables or capital consumables. Why not have a totally different go to market strategy on Mako? And why not be offering 5 year committed purchase contracts to hospitals to drive higher NPV, which is frankly more triathlon.
And don't be so focused upfront on selling $1,000,000 boxes. So why not go a different direction?
So I'm not going to get into all the different sort of commercial ways that we have robots installed. I can tell you we do have a lot of flexible approaches. We don't have just a rigid one price only model. We have our Flex Financial unit, which provides different types of options for financing. I don't know, David, if you want to elaborate on that.
Yes. I think the thing to keep
in mind is we are focused on driving the value of the total knee application. Bill articulated it very well. We've got customers to take care of to expand. So the goal isn't necessarily to maximize the number of robots we can sell. It's to maximize the volume of the total of the application.
There's lots of ways to do that. We've got a lot of flexibility in how we finance robots today. It has not been an obstacle in selling robots.
So I think there
are lots of opportunities to do that differently over time. Right now, we're focused on getting it launched, seeing what our customers' appetite is once we sort of get past that first wave, and then we are confident we come up with the flexibility that we need to meet our customers' needs.
But we do provide a menu of options. What we've seen thus far is the even though we provide a menu of different ways to acquire the robot, the vast majority end up getting purchased. That's today. Now that might evolve over time, but we don't have a one sort of one price, one only model, and that shouldn't be the takeaway. But we're not going to get into exactly how do we price our robots and not going to do that today.
And there's sorry. Yes, we're assuming a similar pricing environment that has existed in 2016 over the 5 year horizon. Kristen?
Kristen, it's here from Deutsche Bank. Kevin, what kind of floor
is this? There's a floor. Is it a
ceramic floor?
Okay. That's your question. Next question.
Just taking a big step back. I was just wondering, just thinking about the environment over the next 3 to 5 years, do you just think about the evolution of Stryker overall just from a portfolio perspective? Do you think that given what may or may not be likely, I guess, as the environment changes just with the election or just the overall cost containment efforts that are likely to take hold, that Stryker is going to be more likely to evolve into different white spaces? Or do you think that additional acquisitions that you've done will be more adjacencies like we've seen with VIZIO and Sage as you're just kind of filling out portfolio expansion?
Great. Thanks for the question. I would say our strategy is absolutely unchanged, meaning we want to pursue category leadership in the divisions where we compete today. We have an amazing list of companies that we can acquire within our existing space. We have a lot of room to grow within our existing space, whether it's in neurotechnology, whether it's in general surgery, whether it's in ENT.
I can go on and on, right? Sports medicine, spine, all of our core businesses, extremities. There's so many opportunities within our diversified model that we don't really have this sort of prioritization. It has to be in this space or it has to be in that space. And we're certainly not excited about jumping out of our core, not with all the growth that we have within our core.
And we've seen the kind of financial returns we generate when we acquire things that are very close to what we do, usually with the same call point. That's one of our clear strengths. We deliver tremendous value when we do those kinds of acquisitions. We're not at a point where we see that sort of list of potential targets being small. We're an open opportunity acquirer.
That's what I tell my division presidents. They're all sitting here in the front row. If they can bring a deal together and bring it forward that's going to strengthen their division and be financially valuable, we're open for business. And certainly, we still have significant financial capacity even after the 2 larger acquisitions earlier this year. So it's the same strategy.
We're not moving off our strategy. I really don't anticipate anything coming out of the legislation that would cause us to want to change that strategy. Of course, we're going to watch what they say here in the United States, obviously a big market. But we participate in really, really great spaces. And our innovation and our diversified model is a formula to win, and we're going to continue on that pathway.
One follow-up on M and A and one on Mako. So one of the other topics that run around in front of the election and we may see some action on it, this idea of repatriation of overseas cash. We welcome the
repatriation of overseas cash. Just wondering
how that factors into your thinking. I mean, should we expect you to make significant moves before we get clarity on that? Is that something you're do you
need some sense of how
that affects your thinking in terms of timing or pace of acquisitions? And I have one follow-up.
No. We still have significant capacity, right? So if we if the repatriation takes a little longer, we're not averse,
as you saw early part
of this year, to take on more debt. We still have a very healthy credit rating. So if we have to take on more debt, we'll take on more debt. The day that the window opens on repatriation at a modest tax rate, which we believe and it appears that it'll be more likely now, we'll bring it back. We're not going to hesitate.
We'll be very excited to do that, but we're not going to wait for that. We have enough capacity, and we certainly, our financial strength on our balance sheet is such that we would just take on debt still very cheap. So there'll be no reason, if we found the right deal that would be value creating for the company, that we there's no financial reason to delay. We would go ahead and take on whatever debt we needed to, and we'd move forward. And then obviously, when we were able to repatriate, we'd be able to pay off that debt.
Great. And a follow-up on Mako. So you talked a fair amount about this as we head into the first half of next year and post launch, what kinds of things should we be looking for? I think you mentioned your utilization of the total knee application, adoption of the total knee application. Should we think about by the second half, you'll be able to start talking about
how
this is affecting your knee growth, the objective of your share, will you be able to talk about that at some point? Just thoughts on what we should look for in terms of metrics and timing?
Sure.
Well, certainly, you'll see the knee growth every quarter. So those are numbers you're going to see, but I'll turn it to David maybe to comment.
Yes. I mean, I think what we said is don't look for an inflection in the e market share based on this until the second half of the year, right? We've got toward the end of the first quarter of next year as we widen the rollout. Bill talked about it. People have to be trained.
If the hospital already has a robot, we've got to sell the upgrade. We've got to install it. We've got to get surgeons trained. So there's a cadence to doing this. So I think we should start to see things in the second half of the year in terms of an inflection point on that.
I think the other thing is that I think so far we've talked about how many robots have been sold, and that's been a marker for are we making progress. It's shifting a little bit for us now. It's not just how many robots do we sell, but how many total knee applications do we sell to the existing robots that are out there. So there's some different metrics I think that will show the progress of it.
But clearly, as we exit the year, we're going to have a very good idea in terms of what kind of trajectory that we're on. Are the surgeons who are using it? Are they continuing to use it? Are we putting more robots in existing facilities because they're fighting for OR time?
It'll be a lot of
it sounds anecdotal, but we'll be able to string that together pretty clearly. It's going to be a big launch. I think it's probably our biggest launch in the company's history. We're very, as you can see, very excited about the launch. The team, I think, very rightly took a disciplined approach.
You can imagine how that conversation goes when you get the approval and it's like, well, we need to go slowly now.
But it
was for the right reasons. And every day, my confidence increases that the patients that we've shown and the discipline that we've shown now will pay off for us. So we're feeling very good about it right now.
Kevin, hips and knees are only 30% of the business.
And I think They're actually lower than that.
Right. And Stryker spent a
lot of time talking about Mako
today. And it's kind of multidimensional. So like there's share gains in competitive accounts. There's probably because it's such an intimate relationship with replanning, probably some price stability element to it. And there's also probably churn at the margin in terms of share normally and this will help because it's a closed system will help stabilize some of that churn that would otherwise happen.
But just from your point of view, why is it getting so much airtime? How important is the robotic capability to the strategic kind of thrust of the company?
Well, I think the you're right. Relative to the size of the business and after the Sage and Physio acquisition, when you see the full year pie chart, you'll see the hip and knee business probably a little bit below 25% as we've diversified today. But I think these kind of technologies come along once in a career or once in a lifetime when you can totally transform a procedure. And as you know, you've been following this industry for a long time, these market share has moved glacially over the past 20 years. So this is a game changer.
It's very disruptive. And because of that, it creates a lot of attention. And you've mentioned a lot of those advantages that we see in this business. And frankly, even before we did the acquisition of Mako, the hip and knee business always took a disproportionate amount of time
of questions.
So they used to be 30% of our sales, but they were about 60% of the questions. And spine is about 8% of our sales and takes up about another 20% of our questions. So part of it is the competitive mind share, companies you can line up against Stryker. Across the hall, you're going to see the med surgeon and neurotechnology businesses. Our med surg business is really is the secret sauce of Stryker.
It's just steady eddy, tremendous performance, grows way above the market and is a reliable performer year after year after year. And frankly, I think it's very underappreciated within our portfolio. It's the reason you see that stability at the top line, Even when you see in some quarters, the driver replacement business will go into the whole market kind of goes down for a quarter, it goes back up for a quarter and Stryker keeps on delivering the top line. It's because we have that steady business with tremendous innovation, market leading positions in those categories. And you're right, it's underappreciated.
But I think this is a tremendous opportunity, and that's why we wanted to have the panel. When we did the deal, obviously, there were a lot of questions. Not all of
you were saw
the vision of Mako the way we did when we did the deal. And we were challenged quite a bit. And we said, please hold your challenge until we launch the total knee because we believe that's going to be
the reason why this is going to
be a tremendous deal. Well, that day is now not far in front of us. But you're right, it does get a disproportionate I think it always has. At least since I've been CEO over the last 4 years,
we do tend to get
a lot more questions on that side of the business. So way in the back there, is that Bob? I can't really see.
Yes, sorry about that. Bob Hopkins, C of A in
the back.
One more question on the 9%, if you can.
Bob, it's the floor.
So the way I'd ask the question is,
it looks like the 9% is a function of
the top line you laid out and all
the hard work that Monty and the entire team have
put together. So my question is, does that 30% to percent to 6% include the synergies from deals that you've talked about?
It does not. No. That's our organic delivery.
Okay.
That's helpful.
And I assume the deal synergies that you talked about are still on track. There's no change to that guidance that you provided. Yes, no change.
And then lastly, just a question on the market. We haven't talked about market growth today. So I
was just wondering if you could give a sense from
what you're seeing out there right now on the orthopedic side, hips, knees, spine. What's your sense to going on what's going on right now with market growth? And I assume you're going
to pass on this question, but
if there's any commentary that could help us understand what went on at Zimmer in the Q3, we'd really appreciate it.
Yes. Your assumption is correct, second question. And then I'll ask David to comment on sort of the market for orthopedics and spine.
Yes. I think we feel really pretty good about it. We saw a bit of a deceleration in procedural volume. We had a after a very strong year last year and a very strong Q1, we saw some slowdown, not a huge slowdown, but some slowdown in the second and third quarter. We're encouraged by what we see so far.
But if you sort of step back and look at it over time, I think it falls within the normal variations of movements in the market, right? I don't I wouldn't read much into it at all other than it happens sometimes. This year is one of those years where knees are growing far faster than hips, and there will be another year where hips grow faster than knees. I think it's a function of variation over time. I don't think there's anything significant in what we've seen this year.
It clearly slowed down a bit. It's still pretty healthy, and we expect it to continue to be healthy. We expect procedural volumes continue to be healthy,
similar to what we've experienced recently.
Okay.
Sorry, I can't see you from here too. Okay.
Battle of
Brian Pieper, Jefferies.
Just one question.
You guys threw up the slide on the market growth rate that you've seen historically. And I'm just curious if you provide some visibility as far as what you're thinking about for the market that you guys are thinking about going forward collectively between all the different categories. Is it still kind of a 3%, 4% growth category? Can you still deliver 200 basis points above that rate or even higher?
Or will that delta narrow? And then
what are some of the real key areas outside of Mako that will allow you to
continue to deliver above market growth going forward?
Yes. No, we don't anticipate the gap narrowing, and we really believe it's because of our business structure, having these decentralized business units laser focused on their customers, spending the kind of R and D that we spend to launch innovations. But we just believe that that's and you've seen it over 4 years, that that's a formula that just continues to be able to drive the top line. And so I think your general assumption, that's what we've seen over the past 3, 4 years. That's not an unreasonable assumption going forward.
We do have every one of our businesses has innovation on the agenda. And so we could you'll see
some of those when you
go across the hall. You certainly have instruments division. They have a new power tool coming out next year. They just launched their Neptune 3 recently. Neurovascular has obviously the AIS market, which you'll see across the street, which is really a market development opportunity that's very significant.
Every one of our divisions has new innovation coming. And that's the pipeline since I've been at Stryker have never been healthier. So we have very, very healthy pipelines across our portfolio because of the vastness of our businesses. It would take the rest of the Q and A if I kind of went through every single business. But you'll get a chance when we go across all to see a number of those innovations.
And we're feeling like we're in very good shape. I don't know, maybe Tim or David want to add anything from their businesses. Bill?
Yes, I think you have it.
I mean, we there's 4 division presidents up here from our side of the house that each of them is shooting for this top growth. They have great R and D. They're driving commercial excellence, globalization, business development. And when you wrap all that together, it has created a winning formula historically. We expect that to continue.
And when we do some of these smaller deals, I just I want to emphasize just how a catalyst they can be. So we did this Memo Metal deal, which was just a very small, little, smart toe procedure deal. But that was a catalyst for foot and ankle, and you've seen the kind of growth we experienced on the backs of a very small deal. And in our Sports Medicine business, which Andy Pierce is the President of Endoscopy, we do a pivot acquisition for hip arthroscopy. And it just is a catalyst that lifts not only that product but lifts the entire sports medicine implant business.
And now we've just recently done IV sports medicine for meniscus repair.
So sometimes we do these small little deals
and it just lifts the overall business and we do get a synergistic effect of adding really interesting technologies, which we tend to take out pretty early. And that's the beauty of having decentralized business development. So you're so close to your customers, you can see these technologies very early, take them out very early and it really does have a multiplying effect on the overall growth profile of these divisions. Other questions? Yes, this one right here.
Thanks. Matt Taylor from Barclays.
I guess my question is really around
the ceiling. So if you think about outperforming
your plan, if you're at the high end of your plan, if
you hit everything in the CTG program or you're at
the high end of medtech, how do you
think about dropping earnings through versus kind of holding it back for growth? Because historically, Stryker used to gate its growth at 20% back when Adtech was growing much. I missed
those glory days. I was in chemicals back then. But maybe I'll turn the question to Glenn.
Yes. I think and Kevin kind of laid this out for you, but we're not afraid to drop more than 9%. I think that should be fairly obvious if you even look at our past. But I do believe that as we evaluate what to drop through, we're going to make hard decisions around innovation investments and other investments to make sure that we can keep the sustainability going. And so sometimes that may mean that we'll claw back a little to make sure that we can make the investment.
And we'll be very transparent
about that. Like we did with the European headquarters, right? We invested in the European headquarters, and we were very transparent about we were going to reinvest some of those savings into a structure within Europe, creating general managers, more dedicated salespeople. And you've seen the kind of growth already, frankly, ahead of my expectations that we've been driving. So if we do make decisions and where we're yielding more savings and we're choosing to make some of those reinvestments, we'll be very transparent about that.
And obviously, we give guidance each January. I don't assume that the floor is the target. It's a floor. I know I've said that a few times. I just want to really emphasize, this year, we're delivering above that number.
You should expect that's kind of an organic we're going to do that organically. We're going to organically grow, as Glenn mentioned, in that kind of 5 plus range, which we've done for the last 14 quarters. We're going to keep doing that, and we're going to drive leverage outside of anything that comes from accretion from acquisition, outside of any kind of share repurchases, outside of any kind of tax benefits that can come. It's really trying to give you an organic profile that you can count on. And then if we deliver more than that, then we'll have the luxury of being able to decide on whether we drop that or whether we do some level of reinvestment.
But again, we'll be very transparent about it.
And just to follow-up on the
CTG program and the operating margin expansion. Can you just offer some thoughts in terms of how front end or back end loaded that is in the 5 year plan? Is that something that you think is going to be relatively linear? Sure. I mean I'll understand
the question. Okay. I'll start answering the question and then Lonnie can finish. The question was really about is it linear, the CTG program? Is it front end loaded, back end loaded?
So at a high level, you've got different programs, some of like indirect procurement, which is you're going to see that pretty evenly throughout the horizon. Something like an ERP, we're actually running costs through our P and L right now, and we're not going to see the benefit until we get to the latter part of that product lifecycle management costs us more now. We'll see more of that in the back end. I think that's why Glenn was kind of signaling that it'd probably be a little bit closer to the 30 in the 1st couple of years and closer to the 50 in the later years. But maybe
if you
want to elaborate on it.
Yes. In addition to Kevin's comments about ERP, I would just add the other accelerator is going
to be our product lifecycle management.
So it's going to take a while for us to transition and get global portfolios. And as we transition out and replace those products and invest in the new ones, you'll see it accelerate in
the back half. But it happens every year. So shared services will be quicker, indirect procurement will be quicker, product life cycle management and ERP will be a little more back end loaded. So I mean having 8 initiatives gives us enough tools in the toolbox that we can deliver each year a good amount of leverage. But then you're going to see probably accelerate as we exit the 5 year mark.
Okay. Any other questions? We're just about out of time, but I think go ahead.
Great. This is Kyle from Canaccord.
A quick question. A couple of years ago, we saw
a pretty strong impact from the DTC campaign in
the knee business. Just as you think about 2017 and Mako and launching there,
I guess, two questions are,
are you contemplating a DTC campaign there?
And then how does that factor into how
you think about operating leverage and does that increase cost?
Okay, great. Tim?
Yes. We haven't announced any plans for a broad DTC campaign like the Get Around Knee. We do believe that on a local basis where you have a hospital with a robot and a program, that advertising there works effectively. What we typically found is the ROI is significant enough for the hospital. The hospital will actually do the advertising.
So we try to help them understand what the value proposition is, what some of the messaging are. We've seen our customers advertise to great effect. So it's not been something that's been a great expense for us.
And what I would tell you, we don't really want to tip all of our commercial hands, but the sort of national television advertising is pretty expensive. And so I think we will be active in marketing, but whether that probably isn't going to be the way we're going to do it in terms of a big national TV campaign. We did see with our Get Around Me campaign, it was highly effective at attracting attention. And I think with Mako, I think the idea of doing things that are a little bit more regional is probably the way we're going to go. Okay.
Any other questions before we close? Okay, great. So that concludes the formal portion. We're going to turn off the broadcast. We're now going to walk across the street.
There is an ambulance, so you'll actually get a chance to see our emergency products in the ambulance. You can mill around, you can go to the ambulance, whatever you like, and then you can move into the home or Stryker Center. We do have some of our panelists that are going to be staying, including Doctor. Juravik. We do have even though the focus is med surg and neurotechnology, given all the attention on Mako, we do have one robot, and Doctor.
Gravak will be available if you want to ask further questions on that. So thank you very much.