Oct 21, 2009
Executives
Steve MacMillan – President and CEO Katherine Owen – VP, Strategy and IR Curt Hartman – VP and CFO
Analysts
David Lewis – Morgan Stanley Rick Wise – Leerink Swann Bob Hopkins – Banc of America Mike Weinstein – JPMorgan Matt Miksic – Piper Jaffray Matthew Dodds – Citigroup Seth Damergy – Deutsche Bank Bruce Nudell – UBS Kristen Stewart – Credit Suisse Adam Feinstein – Barclays Capital Derrick Sung – Sanford Bernstein Doug Schenkel – Cowen and Company Michael Matson – Wells Fargo David Roman – Goldman Sachs Jeff Johnson – Robert W. Baird Joanne Wuensch – BMO Capital Markets William Plovanic – Canaccord Adams
Operator
Good day, ladies and gentlemen, and welcome to the third quarter 2009 Stryker earnings conference call. My name is Louisa, and I will be your operator for today.
At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.
(Operator instructions) Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations and will be subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements.
In addition to factors that may be discussed in this call, such factors include but are not limited to further weakening of economic conditions that could adversely affect the level of demand for the company's product; pricing pressures generally, including cost-containment measures that could adversely affect the price of or demand for the company's products; changes in foreign exchange markets, legislative and regulatory actions; unanticipated issues arising in connections with clinical studies and otherwise that affect United States Food and Drug Administration’s approval of new products; changes in reimbursement levels from third party payers; a significant increase in product liability claims; unfavorable resolution of tax audits; changes in financial markets and changes in the competitive environment. Additional information concerning these and other factors are contained in the company's filings with the United States Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.
Today's conference call will also include a discussion of constant currency sales performance and adjusted diluted net earnings per share for the third quarter and nine months period ending September 30, 2009 and for the year ended December 31st, 2008. Further discussion of this non-GAAP financial measures, including GAAP reconciliation, appears in the company's Form 8-K filed today with the United States Securities and Exchange Commission, which may be accessed from the full investors' page on the company's website at www.stryker.com.
I would now like to turn the call over to Mr. Steve MacMillan, President and CEO.
Please proceed.
Steve MacMillan
Thank you, Louisa. Good afternoon everybody, and welcome to Stryker’s third quarter 2009 earnings report.
With me today are Curt Hartman, our Vice President and Chief Financial Officer and Katherine Owen, Vice President of Strategy and Investor Relations. With three quarters of the year now under our belt, it is clear that 2009 has been one of the most challenging periods our company and many others have faced.
However, we are pleased that we have delivered on our quarterly commitments outlined in April, and that we are well positioned to achieve our targeted top and bottom-line goals for the full year. Although there continues to be a great deal of uncertainty both as it relates to the world economy as well as the underlying growth rates for some of our businesses, we believe the actions we proactively undertook to control our cost structure have us well positioned going forward.
Furthermore, the combination of the economic slowdown as well as our own learnings stemming from a quality journey have prompted us to also take a deeper look at our cost structure going forward resulting in some restructuring charges in the quarter. Turning to the third quarter, we delivered solid results in a challenging period with sales up 1% on a constant currency basis to $1.7 billion, while also up modestly on a sequential basis.
And it’s worth noting that in a phase of a difficult economic environment, which resulted in significant weakness in our MedSurg businesses, we were still able to post both year-over-year and sequential revenue growth. Against that backdrop, a few highlights from this quarter include all of our implant businesses, including both hips and knees delivered accelerated revenue growth even though Q3 is seasonally the weakest quarter of the year, which we believe underscores both our strong competitive position as well as the underlying strength of our target markets, and spine continued its track record of delivering double-digit constant currency revenue growth.
Overall, our US orthopedic implant businesses continued to post solid growth up 8% collectively in the quarter. Despite restricted hospital capital budgets, both our endoscopy and medical franchises reported a sequential dollar increase in sales.
Our ongoing focus on leveraging our infrastructure to drive greater operating efficiencies fueled an 80-basis point increase in Q3 operating income, which is particularly noteworthy given the relatively modest top line increase. And finally, we continued to deliver strong cash flow generation with cash and equivalents totaling $2.9 billion which provides us with considerable flexibility to pursue potential acquisitions, share buybacks and dividends.
As you all know, we’ve also been intently focused on a major transformation and implementation of corporate-wide quality systems. As we’ve stated throughout this year, we feel we are making a significant progress, yet we still have a great deal of work ahead of us.
At this point, we are pleased to record that the biotech warning letter which we received in April of 2008 posed an FDA inspection in 2007 has been resolved, following a productive re-inspection of our biotech facilities earlier this year. We view this as an important first step in our goal of resolving all of the outstanding warning letters and look forward to providing you with further updates as we receive tangible results from additional FDA activity.
Our compliance initiative involves the collective efforts of our entire organization, and the magnitude of these actions can’t be overstated. Against this back drop, the resolution of a warning letter is a key milestone for us as we continue on our journey toward achieving a world-class compliant system.
But again, much work remains. The results of the quarter confirmed that we are able to deliver on our commitments like focusing on our customers while at the same time making the necessary investments in our business and compliant systems to be able to deliver top tier results over the long-term.
With that, I will turn the call over to Katherine.
Katherine Owen
Thanks, Steve. My comments today will focus on hospital capital budgets, pricing and OP-1.
Starting with hospital capital budgets, the environment remains difficult, although we continue to believe our results as well as the insights we are able to glean from our key customers reinforces the view that the capital spending cycle is bottoming and it’s unlikely to deteriorate meaningfully from current levels. During the third quarter, we saw a slight decrease in a percentage of our hospital customers with the capital freeze in place with a corresponding modest uptick in the percentage now recording a more fluid approach to capital purchases.
We view this is encouraging, but we would underscore that the shifts have been minor and the real key lies with the timing and magnitude of the actual recovery in capital spending. On that score, there remains a great deal of uncertainty.
However, we will continue to focus on controlling our cost structure to drive ongoing operating leverage. With respect to pricing, the trend remains essentially unchanged from Q2 with our global total company pricing flat year-over-year.
We also saw a stability as it relates to our orthopedic implant pricing which was down in the low-single digit consistent with the trends we have seen throughout 2009 and continue to see low-single digit declines in pricing for our hip and knee implant, partly offset by a more favorable pricing environment for some of our other implant businesses. Shifting to the status of OP-1 in our R&D effort, not surprisingly, we’ve received numerous inquiries regarding the plant to this program going forward, following the disappointing FDA’s panel outcome earlier in the year.
Given the extent of development what we have done today and potential applications for OP-1 in other indication such as soft tissue, we are undergoing an intense review on our various strategic options. As many of you are aware, we have an existing customer base that’s an important consideration, and we have a major state-of-the-art manufacturing facility located in Lebanon, New Hampshire that is also a factor in our analysis.
We expect to complete our strategic review in the coming months and look to report back to the investment community in early 2010 regarding our plans going forward. With that, I will now turn the call over to Curt.
Curt Hartman
Thanks, Katherine. On many fronts, our third quarter results demonstrated positive gains relative to a tough market as well as against our own internal challenges.
In kicking off the third quarter review, I think it is safe to say we are encouraged by our results as evidenced by our domestic implant performance, quarterly increases in our MedSurg sales and the lifting of one of the FDA warning letters. Although we still have significant work to do, these are important achievements for our organization that underscore the fact that no one at Stryker is comfortable at parity to the broader market both now and in the future.
Jumping in the business results, I will begin with a quick review of the impact that foreign currency had in our sales. Consistent with recent quarters, currency contribution – currency contributed to reduction in top line sales by approximately $20 million, and the company’s overall sales growth was impacted by 1.2%.
This was slightly below the bottom end of our expected range of 1.5% to 2.5% anticipated in the quarter. Through the first nine months, sales have been reduced by $183 million, which has impacted growth by 3.7%.
Looking to the fourth quarter, currency will now move to positive for us. And the currency rates hold near current levels, we would expect fourth quarter sales to be impacted by approximately 3.2% to 4.2% when compared to 2008.
At these rates, the full-year currency impact would be a decrease in a range of 1.6% to 2.0% when compared to 2008. Next, I will spend a moment on the impact of price and volume mix on the top line.
In the quarter, selling prices consistent with both the first and second quarters were essentially flat on a world-wide basis. This broke down into a slight international price scheme of less than 1% which was offset by domestic price loss of 1%.
Volume and mix was generally as expected for our orthopedic implant products and consistent with the last three quarters volumes were off across the MedSurg categories. In the quarter, selling days were consistent with the prior year.
Now I will turn to the franchise segments, as evidenced by the details provided in our press release, we had encouraging results across several categories paced by our domestic implants in the quarter. On that note, orthopedic implants which represented 61% of our sales in the quarter registered a nice gain posting a 6% increase on a reported basis and 7% growth in constant currency.
Our hip franchise was up 4% as reported in dollars and up 6% operationally in the quarter. The Accolade, Trident, X3 and Restoration products paced our growth on a global basis.
In the US hip sales were up 7% continuing the favorable trends from the second quarter. Trident, Accolade and X3 all delivered sold gains, and we are encouraged by the uptick in our tritanium cup offerings.
Internationally, hip sales were up 5% operationally in the quarter. All international markets posted positive gains with the strongest results coming from Canada, Japan, Pacific and Latin American markets.
Top brands included Trident, Accolade and X3. Our global knee franchise recorded 5% sales growth in dollars and a 7% increase on a constant currency basis during the quarter.
The US knee business had another strong quarter reporting a growth of 10% against the stiff prior year gain of 18%. Growth was driven by the continued strength in the Triathlon line with strong primary growth being supported by high market acceptance in the revision line.
Internationally, knees were up 1% on an operational basis. Strength in our Japan, Pacific, and Canadian businesses was offset by small decline in Europe.
Triathlon again recorded nice gains in global market acceptance. The global trauma business recorded a 5% increase in dollars and a 6% increase operationally.
These results are below our average and our analysis would indicate that the trauma market softness is partially a reflection of a decline in driven miles as well as a decline heavy construction starts, both of which drive a portion of traumatic injury admissions. Our US trauma franchise recorded 6% growth slowing from first half rates.
Sales of the foot and ankle, hip fracture and upper extremities products paced our trauma growth. International trauma sales were up 6% operationally in the quarter with sizable gains again recorded in Canada and Latin America.
This was offset by softer performance in Japan owning to a reduction in hip, fracture device sales and pressure associated with the first half reimbursement reductions. On a product line basis, international trauma sales were paced by growth in hip fracture and extremity products.
Our global spine business recorded its best quarter of the year, posting 14% growth in dollars and 14% on an operational basis, despite facing the most challenging year-over-year comparison. US spine sales grew 13% consistent with first half results.
Domestic spine growth was again paced by our inner body and thoracolumbar offerings. Internationally, spine sales posted operational growth of 16%, our best results since Q1 2007.
Inner body and thoracolumbar devices paced our growth with our Europe and Pacific markets delivering strong gains in the quarter. Now, I will turn to the MedSurg group, which represented 39% of our sales in the quarter.
As a reminder, MedSurg is comprised of three businesses that historically generate about 60% of sales from capital equipment. Clearly reduced hospital capital spending continues to impact the MedSurg business results.
Though as Steve mentioned, our medical and endoscopy businesses did record the highest absolute sales volumes of the year in the third quarter, while instruments returned to the positive growth. Total MedSurg sales declined 8% as recorded and were up 7% on a constant currency basis representing a slight improvement from the 8% constant currency decline in Q2.
Looking at the franchise segments, sales per instruments would historically generate 40% of sales from capital equipment, grew 2% in the quarter and 3% operationally. In the US franchise, instruments reversed the prior quarter’s decline reporting growth of 3%.
While continued general softness in the capital equipments slowed result, sales of single used consumables as well as increased sales in the products to serve markets outside of orthopedics helped to offset this decline. Internationally, instrument sales increased 5% in constant currency with gains in Japan and Latin America partially offset by small decline in other international markets.
Our endoscopy segment recorded third quarter sales that were down 5% and up 4% in constant currency. As a reminder, approximately 60% of sales are from capital equipment in this franchise.
US endoscopy sales were down 10%. Encouragingly the consumable portion of our mainline endoscopy business showed solid double-digit growth in the quarter.
However, we continued to experience weakness with our larger ticket capital items such as the operating room integration products resulting from the slowed hospital construction market. Given us the backlog for some of these capital purchases is typically several quarters, we would expect the softness in this area to continue for some period going forward.
Internationally, our endoscopy sales remain positive recording a 16% operational gain. Growth was paced by Pacific, Latin America and Canada.
Finally, our medical products which generate approximately 90% of sales from capital equipment saw a global sales decline 28% in the quarter as reported and 27% in constant currency. US medical sales declined 23% while international market sales were down 43% in constant currency.
Keep in mind, the international dollar basis is limited, so our quarterly variations will feel broader swings. As we stated in the Q2 earnings call, medical’s third quarter comparable of 31% was the toughest quarter this franchise will face in 2009.
Clearly, this remains the most challenge of our capital equipment business segment and the one we feel has the longest road to a normalized recovery. Having said this, we do believe that our product lineup and value proposition continues to resonate with customers, given its emphasis on the patient and hospital staff satisfaction.
In short, we remain bullish on this business for the long-term. That wraps up the franchise segment, so I will turn the remainder of the income statement beginning with gross margins.
Third quarter gross margins increased 20 basis points compared to 2008. Gross margins in the quarter were impacted by a favorable mix of product sales partially offset by continued investment in our compliance initiatives.
Research and development spending represented 5.1% of sales in the quarter while being down 10% versus prior year. Two or three quarters spend in the R&D remains within our desired range of 5% to 6% of sales.
Selling, general and administrative costs were flat versus prior year and as a percentage of sales dropped 10 basis points below last year levels and are a 120 basis points 2008 levels on the year-to-date basis. While SG&A in both dollars and as a percentage of sales was at the high end versus the previous three quarters, we are comfortable that fluctuations in these categories were selective investments are appropriate.
Also as noted in the quarter, we reported $67 million of restructuring charges related to decisions to terminate certain third-party general agent agreements with our European division to simplify the organization structure in our biotech, Europe, Japan, and Canadian divisions and to discontinue selling certain products within both the orthopedic implants and MedSurg business segments. These moves represent our ongoing commitment to evaluate our operating mile to ensure we continue to drive focus and efficiency.
On this note, our third quarter adjusted operating margin increased to 22.9% percent of sales leading to a 4% increase in adjusted operating income in the quarter. Next, I will provide a breakdown of other income for the quarter.
This was made up of $9 million of investment income offset by interest expense of $5 million in foreign currency transaction losses of $400,000. The company’s effective income tax rate was 27.2% for the third quarter of 2009 equaled with third quarter of last year and down 20 basis points from the 2008 full-year rate.
We continued to expect our full-year 2009 effective tax rate to be substantially inline with our reported full-year 2008 tax rate. As we look at our balance sheet, we are obviously pleased to report another strong quarter with cash and marketable securities increasing by approximately $500 million.
Our goal as has been noted on several occasions is to find the right ways to deploy this resource to assist in our long-term growth strategies while ensuring we return maximum value to our shareholders. Accounts receivable days ended the quarter at 61, which represents an increase of one day compared to the prior year.
For the quarter, accounts receivable days averaged 58. We continue to maintain a diligent focus on this important asset.
Days in inventory finished the quarter at a 164, which was down three days sequentially and flat against the prior year. Although, we realized a modest improvement, our inventory levels are still an open area of opportunity.
Finally, I will provide some quick commentary on cash flow. We continue to perform well with year-to-date cash flow from operations up 22% to $921 million and free cash flow up 28% from $648 million to $833 million.
Turning to our outlook for the reminder of 2009, we are tightening our top line range with full-year constant currency sales growth, now estimated of 1% to 2% versus the prior range of 1% to 3%. We are also tightening our full-year EPS targeted range to $2.90 to $3 of 2% to 6% which compares to our prior range of $2.90 to $3.10, up 2% to 10%.
Our 2009 targets continue to assume that Q4 results benefit from several factors, including the easier year-over-year comparisons and the elimination of the FX drag based on current exchange rates. As we have stated previous, we do not assume a meaningful recovery in hospital capital spending in 2009, rather we expect the current environments remain relatively stable with ongoing modest upticks.
As it relates to our expectations for 2010, we will provide details regarding our outlook and related topics on the January fourth quarter earnings call. With that, I will turn the call back over to Steve.
Steve MacMillan
Thanks, Curt. Before we open up the call to Q&A, I would like to offer some closing comments.
Looking ahead, there is obviously a lot of uncertainty right now as we attempt to gauge the timing and magnitude of the economic recovery, as well as the ramifications in healthcare reform. Having said that, we think we have made a lot of progress in three key areas this year, which should put us on solid pudding as we exit 2009 and enter 2010.
Specifically we have made progress on our quality and compliance journey with our whole organization having more clearly defined and embrace the actions required and we are on the road to implementing these changes, though again much work still lies ahead. Second, we have taken actions to better control our cost structure, and third, we have stayed very focused on our customers and delivered through the year a testimony to our resilient teams around the world.
While the challenges ahead are sure to be significant, we think our team and our company are emerging stronger and better preparing. In closing, as we look back on the third quarter, although our financial results are below our historic levels, we believe it’s noteworthy that despite facing considerable external and internal challenges, we still delivered sales growth both year-over-year and on a sequential basis.
We achieved these results despite the ongoing economic upheaval that has played considerable pressure on our MedSurg businesses, and while still making major investments in quality and compliance which speaks to the underlying strength of our organization. We are pleased by the ongoing solid results from our orthopedic implants business as well as our ability to generate tremendous cash flow and drive ongoing operating leverage.
Combined these efforts will continue to allow us to meet our near-term commitments, while also ensuring we are able to make the investments necessary to achieve strong results over the long-term. With that, we will now open it up for Q&A.
Operator
(Operator instructions) And your first question comes from the line of David Lewis with Morgan Stanley. Please proceed.
David Lewis – Morgan Stanley
Good morning. Good afternoon, sorry long day.
Steve MacMillan
Good afternoon, David.
David Lewis – Morgan Stanley
Maybe Curt, let me just start with you, just quickly on margins here. Can you give us some more specifics around what drove – you talked about kind of a 50 bp depression GMs, it was a little heavier than that, you mentioned some compliance programs, so maybe some clarity around that, as well as specifically on the SG&A spending and what we should expect for the reminder of the year?
Curt Hartman
Couple of questions there, David. I think first of gross margins – as we look at the third quarter, we had a favorable product mix as evidenced by the growth in the orthopedic – the broad orthopedic implants to include our spine franchise and certainly those are going to carry a higher gross margin.
Countering that obviously is our continued commitment to the compliance initiatives and the investment that’s going to flow through the P&L at our various manufacturing plants as we continue this three-year initiative. Relative to SG&A, we had another good quarter.
As I noted in my comments, it was our absolute lowest dollar level of the year, nor did we generate quite as much leverage versus prior year as we have in the previous quarters. However, I think there was some decision-making that went on about where we are placing strategic investments either in sales force expansion or other categories that we think long-term will benefit the organization.
As we look at the fourth quarter, I think you should expect somewhat of the same offense that we are going to keep things pretty tight. We do believe that as we look at our business, we are not going to limit ourselves and we are going to make the right strategic investments.
So as you think about the fourth quarter and perhaps look at our prior year, you will notice how those trends flow.
David Lewis – Morgan Stanley
Okay very helpful. And Steve, just two quick ones.
First of all on medical, there has been some improvement obviously in broader MedSurg businesses, but specifically in medical that remains sort of the underperformer. Do you have enough visibility now to at least believe that next year that business can be at least flat?
Steve MacMillan
Probably. Enough visibility – probably the true answer there David is no.
I think we have a gut feel that says that business could at least be flat, yes.
David Lewis – Morgan Stanley
Okay, very helpful.
Steve MacMillan
That’s right.
David Lewis – Morgan Stanley
Sorry Stephen, just lastly, if we think about the orthopedics, obviously it encouraging sequential proven in that business. I guess two kind of questions here, one, do we see that as sort of a at least a movement that you think is maintainable and you talked about last quarter some OUS restructuring and management changes, it’s down, but that was still a drag, so to the extent to alleviate some of those international issues, could we expect a further improvement from these third quarter levels?
Steve MacMillan
Yes, but I’d be cautious. I think with all of the orthopedic implant it’s going to be modest changes.
Our goal is always to get a little bit better and I guess probably that’s the path we are on.
David Lewis – Morgan Stanley
Okay. I will let someone else jump in.
Steve MacMillan
Thank you. Thanks.
Operator
As a reminder, ladies and gentlemen, please limit your questions to one and one follow-up. And your next question comes from the line of Rick Wise from Leerink Swann.
Please proceed.
Rick Wise – Leerink Swann
Good afternoon, everybody. I guess I will start with the mixed signals that we are seeing from different med tech companies so far.
The cryo folks there seems like we are seeing more pricing pressure, some procedures slow down, more pressure on contracts as contracts are renegotiated. It sounds like the ortho industry is not seeing that.
Is that – am I – I am just saying that correctly?
Curt Hartman
I can’t really comment on them Rick, as much as you probably can. But I can tell you, we feel a lot of pressure this year, but we continue to manage through it.
I think the combination of the products we are bringing, the services we are providing, it’s not without its pressure, but I think we continue to feel pretty good about working through them.
Rick Wise – Leerink Swann
So you are just not seeing any incremental pressures again on price or procedures or volumes versus the first half of the year.
Katherine Owen
Rick, maybe if I can jump in with a couple of comments. I think on the pricing side, things have been very stable relative to what we saw throughout ’09 and that we are seeing some pressure, but the magnitude of it from a quarter-to-quarter basis hasn’t changed.
I think on the volume side, we are still seeing some pocket where there has been the economic impact on elective surgery, but that has not changed meaningfully throughout the year certainly in the third quarter recognizing we do the normal seasonal effect that you see in Q3. I think the other thing to keep in mind is and I am not telling or anything you don’t already know, but our footprint here – and we are diverse in terms of the range of med tech products that we offer, so there is going to be different parts of our business with different challenges and also the geographic footprint, so – in some way they’ll probably differentiate a little bit just from some of our peers and it doesn’t mean that we don’t have challenges.
It just means that when you add about at the end of the quarter, I think what you are seeing is our ability to offset some of the weakness in certain businesses with greater underlying strengths in other businesses and that will change in another quarter.
Rick Wise – Leerink Swann
Okay. Just a follow-up, congrats on the warning letter resolution, that’s excellent.
What – can you help us understand what’s next for biotech and for the other warning letters, any incremental color there? And is there any cost savings, cost go away by resolving the biotech portion that we can feel a little more positive about on COGS or SG&A?
Thank you.
Curt Hartman
Sure Rick. Don’t assume any cost savings going away.
We iterated we are on three-year probably $200-ish million journey and we will continue to make those investments in our facilities around the world. Can’t predict what’s next, but I think after the direction we have going over the last couple of years which is publicly certainly been incrementally worse, we are encouraged.
But we know we have got still work to do with. We are very, very pleased that certainly the journey we are on and the investments we have been making, we think this should be a validation that the work we are doing is going in the right direction.
Rick Wise – Leerink Swann
Thank you, and congrats again.
Steve MacMillan
Thanks Rick.
Operator
The next question comes from the line of Bob Hopkins with Banc of America. Please proceed.
Bob Hopkins – Banc of America
Hi, thanks. Can you hear me okay?
Steve MacMillan
Yes Bob.
Bob Hopkins – Banc of America
All right, great. So I just wanted to follow-up on Rick’s question about the warning letter.
And I don’t think the biotech warning letter was the first one you received and yet it’s the first one you are getting resolution on. Is there anything, any sort of structural reason why that was the case, anything to be read into with the other processes that are going on?
Curt Hartman
Nothing to be read into that Bob. Just the way things work I think.
Bob Hopkins – Banc of America
Okay. And then, just, could you just remind me of the kind of how the process works to be – did you formally get a letter that they said that you are free and cleared or did you just get an incremental approval or something, was there a formal notification, is that how this works?
Steve MacMillan
We in this particular case did receive a formal notification.
Bob Hopkins – Banc of America
Okay.
Steve MacMillan
Very careful to say anything like that without a very clear understanding given that the journey we have been on.
Bob Hopkins – Banc of America
Yes, I know. I am just trying to understand the process and that did involve a plant inspection as well a re-inspection.
Steve MacMillan
Absolutely. Very detailed.
Bob Hopkins – Banc of America
And still no –
Katherine Owen
Bob.
Bob Hopkins – Banc of America
Yes.
Katherine Owen
There is just one detail on – although the biotech warning letter was the last one of that group that first three received. If you go back to the timing of the actual inspections, it was actually fairly close to when the MAWA inspection occurred.
Bob Hopkins – Banc of America
Okay. That’s helpful.
Thank you. And so, yes, I’m just trying to see what we can read into that.
And so, just one other quick –
Steve MacMillan
Bob let me try to help you here just a little bit. As I know, I have gotten many questions from you and most of you on the call here over the last couple of years on where are we – where – how do you know your program and your spending are working.
As we said, we have been very engaged with the FDA on this journey in close communications and working very closely. But I know for the last year, all the external signals you have been seeing have largely been going in one direction and that’s not been a direction that we’ve considered particularly favorable nor have you.
I think the way you should think about this is, okay, they have embarked on a program, this is a step in showing that that program is probably working. We still have more steps and we really look forward to – we still got three outstanding warning letters, let me remind you.
We have got work to be done and we certainly look forward to hoping to same thing for the other sites down the road here.
Bob Hopkins – Banc of America
Okay. Just one more on the spending subject, Steve, in your opinion, should we be looking at these as really four completely separate issues or can we look at the approval here on the biotech side as something that is certainly an incremental positive as it relates to the other three situations?
I have to mention that to some degree, yet you wouldn’t have progress in one, if the other three weren’t re-setted in the right direction.
Steve MacMillan
I just want to be really careful from over commenting here. I mean they are four separate individual things.
Having said that, what’s very clear is the FDA had a lot of issues that transcended sites. So a huge part of our program here has been not just responding to the issues in one warning letter at that site.
We have been taking actions for every observation at all the sites and then addressing that across all 21 sites not just the four that were inspected. So that’s the magnitude of the effort.
And I think hopefully we should be able to see a little bit of progress from this.
Bob Hopkins – Banc of America
Okay. Thanks.
I appreciate it. I will get back in line.
Thank you very much.
Steve MacMillan
Great. Thanks Bob.
Operator
As a reminder, please limit your questions to one and one follow-up. And your next question comes from the line of Mike Weinstein with JPMorgan.
Please proceed.
Mike Weinstein – JPMorgan
Thank you. Evening everybody.
Let me ask you this as we think about the fourth quarter, do you have any thoughts on specific countries in Europe and how their budgets are looking going into the end of the year. What I am specifically asking is, how do you feel about various countries are going to look given the economy of state of their healthcare budgets, we have a weak December, because they can no longer fund, hit the new replacements?
Steve MacMillan
Yes I think it really varies country to country just when their own fiscal years are. If you look at the UK, it’s really an April 1st and March 31st fiscal.
And then even have different provinces within different countries. I don’t think we see a – we are not modeling a dramatic change within Europe in terms of a much in the fourth quarter.
I mean I think a modest – modestly down probably but nothing significant.
Mike Weinstein – JPMorgan
That really focuses on trends and mix and recon. Can you talk for a minute of pricing and mix in trauma and spine?
Steve MacMillan
Sure. The – Curt, do you want to take?
Curt Hartman
Yes. Pricing and mix in trauma and spine I think is a little bit analogist to our earlier comments where we kind of lump in the entire orthopedic reconstructive segment.
I think we still feel very good about the pricing trend that we see in our trauma franchises. That is not to say or to imply that there isn’t pressure there.
But I think overall, we feel very good. And I think we have a bit of the same thing going down there in spine franchise.
At the end of the day, where innovation is apparent, customers are adopting that innovation and willing to pay that price, where the product is a little bit long in the tooth, there is far more price pressure. And when there is competitive pressures around those items because people have similar offering, you are going to see that now.
That’s kind of the hearing now. Certainly over the long-term, there is a great potential for pricing trends to be down, depending on where everything shakes up, but that’s a touch speculative for me to get into.
So as we stand here today, we feel pretty good overall with where our reconstructed pricing falls.
Mike Weinstein – JPMorgan
Without non-recon prices.
Curt Hartman
Say that again.
Mike Weinstein – JPMorgan
You meant your trauma and spine pricing rates.
Curt Hartman
I mean trauma and spine, as we turn the –
Mike Weinstein – JPMorgan
So if we think about how businesses have held up through the course of the recession. The – it looked like trauma and spine, it might come out of recession with the ability to still capture positive mix and price in aggregate which would differentiating with recon at this point?
Curt Hartman
In aggregate, yes. No, I think we’re still hoping and even the recon market with the right innovations we can collectively mix and pricing can still be a little bit positive.
Mike Weinstein – JPMorgan
Okay, let me switch back if I can just to the warning letters, how I see the picture. Still we haven’t heard anything on the (inaudible) from the demand action, should we assume anything at this point relative to the company getting warning letters and not getting warning letters in those (inaudible)?
Curt Hartman
Probably the best I can tell you that you should assume Mike is we are clearly working very hard at those sites as we have on all of our other sites and communicating that program very closely to FDA on a fairly regular basis in terms of our updates and it’s part of the comprehensive program that we are on.
Mike Weinstein – JPMorgan
Can I read into that that at this point you think you are not going to get warning letters or you don’t know?
Katherine Owen
I think Mike you have to look at it as the more time that goes by without receiving additional warning letters is obviously good news. There is always a live period when you are interacting with the FDA’s following inspection.
We are going to continue to give you guys updates as we get news that’s definitive like the receipt of the – the lifting of the biotech warning letter. Obviously given an organization as large as ours, we are going to continually have inspections going on.
And I think right now, we are focused on the fact that the investments we are making seem to be paying dividends in terms of making solid progress, but we still have work to do. It doesn’t make sense speculate to say whether or not one could or could not lead to a warning letter.
The whole effort –
Mike Weinstein – JPMorgan
Last question, I will let others jump in here. Steve, $7 in share in cash, are they – can you envision a transaction where you would spend more than $7 a share in cash and would actually put you in a net debt position?
Steve MacMillan
Not in the short term or medium term probably. No, we are not going to do anything stupid with net debt.
Mike Weinstein – JPMorgan
All right. Thank you, guys.
Steve MacMillan
Great. Thanks Mike.
Operator
As a reminder, please limit your questions to one and one follow-up. And your next question comes from the line of Matt Miksic with Piper Jaffray.
Please proceed.
Matt Miksic – Piper Jaffray
Hi good evening. Thanks for taking our questions.
Steve MacMillan
Sure Matt.
Matt Miksic – Piper Jaffray
So one follow-up on that use of cash question there. Not expecting you to do anything stupid with your cash.
But I would love to know sort of where you’re leaning, how you’re looking at potential strategic opportunities or are we getting into the point where you have got enough cash here and just have to say it’s time to return to the shareholders.
Steve MacMillan
We are looking at all three. We are looking at – as Curt mentioned, both acquisitions, buybacks and dividend.
Matt Miksic – Piper Jaffray
Okay.
Steve MacMillan
And we're just not going to get much more detailed than that at this point.
Curt Hartman
And I think Matt that’s consistent with what we’ve tried to say all year with M&A as our preferred use, but we retain the right to pursue those other options.
Matt Miksic – Piper Jaffray
Just to push you a little bit on that. I know you have been saying that all year given the process you are going through with the FDA, given healthcare reforms and maybe the uncertainty in some of these markets heading into 2010, is it I don’t know how to put this question, so that you can answer it.
But it seems like you have had a hard time maybe getting to the right opportunity or getting to the right opportunity with the right visibility. I guess when do you think we will have a decision which way you are going to break on that?
Steve MacMillan
To give you a couple of things here, Matt. First off, the – overall, we think the market – there’s going to continue to be good buying opportunity out there.
I would say you touched on something there which is the FDA. We clearly have been very focused internally this year and have had a lot of work to do internally before we can automatically just take on something big and complex or even something of some big scale.
And candidly I think there has hold us a little bit more on the sidelines during this year while we’ve frankly been watching the global economic meltdown, it’s clearly had an impact on our MedSurg businesses, while we have been making tremendous investments and getting a lot healthier. And I think as we have been putting that investment in order to being healthier, it will put us in a better position going forward than – and I would say six or nine months ago, candidly we had the cash, but it would have been all a much bigger distraction.
It will still be a bit of a distraction, but we are further down the road.
Matt Miksic – Piper Jaffray
Okay that is helpful. So maybe 2010, you will feel a little more free to focus externally.
Steve MacMillan
Yes, the other reminder – the big reminder I will give you is we don’t feel the nerve. There is no timetable in our plans and these are cash.
If there is a great opportunity we can move and we’d love having the strong cash position, but we don’t feel an urgency to do anything other than good opportunities. So we are not going to be pinned down to any specific timing.
Matt Miksic – Piper Jaffray
Fair enough.
Katherine Owen
I guess I would just offer the one comment, and not to assume that the lack of an announcement of us doing a major acquisition or a deal and somehow indicative of lack of activity on the BD side. We’ve tried to impress upon everybody that we are sticking to a very discipline as it relates to due diligence.
A lot of that has gotten even stricter as we have learned more about FDA compliance related type of issues, given what we have got to do as an organization. We are sticking to our discipline on value and not going to overpay, and as a result, we pass on the lot.
So there is a great deal of activity going on here. A lot of it’s not obviously evident to you guys externally, but I would just impress upon you that we will continue to view dividend, stock repurchases and M&A as a use of cash, but our level of intensity or activity on the M&A side hasn’t changed.
Matt Miksic – Piper Jaffray
Thanks. I wouldn’t assume that.
But that’s helpful. One follow-up and I hate to do this.
Seems like nobody can get off this call without asking a question about these warning letters. But I did want to understand, I think you touched on it there Curt that there is a number of – there is sort of broad process going on across all your facilities having to do with kappa and standardization of your procedures there.
I guess, what's different about the biotech business was – just to help us understand – look at it as either an indicator of progress, but I don’t want to run with it as sort of a strong indicator that these letters are going to start to go sort of one after another. Was there something different about biotech that enables you to sort of put that one to bet, maybe is a less device oriented?
Anything you could tell us that that might give us some color as to how it relates to the rest of the process as you’re going through?
Katherine Owen
I would just – if I can just jump in, I would just I mean the warning letters are publicly available, you can see the issue that has been outlined and there are some very consistent issues raised across the warning letters and there is also some ones very specific to biotech. And as a result, it does impact the timing and the amount of resources required to resolve the warning letters.
I think overall, biotech is evidence of the commitment and the investments we're making in a total program. It’s an important milestone.
And I think it says we are on the right path, but we are not done.
Steve MacMillan
And Matt just to try be a simple comment here, I would encourage the group to not to over think this. This is Stryker in a very broad approach to its network of 21 plants and a quality system.
But we are working hand in hand with the FDA on these, and it’s the combination of those two things coming together. And as Katherine said, there are consistent themes across our plants that the FDA took exception to.
There are some themes that are very unique to the plants and it will go at the pace that both Stryker and the FDA allow it to move forward at.
Operator
Your next question comes from the line of Matthew Dodds with Citigroup. Please proceed.
Matthew Dodds – Citigroup
Thank you. Couple of questions.
Steve, for you first. Off all the implant markets, it seems the spine market has held up pretty well on volume this year versus last year.
I assume some of that would be elective. So just wanted your comments on why you think the spin market is holding up so well on a volume basis?
And then Katherine for you on the OP-1 review, you mentioned the manufacturing plant which I broadly take that to assume just looking at the value of that potentially as a sale or as an asset?
Steve MacMillan
The – on the spine market, I think we just continue to see a lot of people in a lot of pain. And there is a still a fairly young population of people who want to get back into the game either frankly back to work everything else, and it just feels like from everything we can continue to tell around the world, the spine market is probably going to hold up pretty well.
Curt Hartman
And Matt, this is Curt. I think on the question relative to OP-1 and the intent here on our comments, the intent is to convey to the audience.
This is very complicated serious of decisions that the organization is going through. We have been on a very long journey related to a product for spine applications.
We believe the product has some very broad applications that we have not historically discussed. We also have a very large investment in the manufacturing site that Katherine referenced.
So when you put all that on the table, there is a lot of things for this organization to consider and a lot of parties that need to be part of those discussions. And again we are not going to jump to a quick decision here and it’s just a matter of sorting through all that with all relative parties around the table.
Matthew Dodds – Citigroup
Okay, thanks, Steve. Thanks Curt.
Steve MacMillan
Thanks.
Operator
The next question comes from the line of Tao Levy with Deutsche Bank. Please proceed.
Seth Damergy – Deutsche Bank
Good afternoon. This is Seth for Tao.
First, I just had a question, just stick with pricing. I wanted to see if you could give us a specific price impact in the US on the hip and knee businesses.
And also you also mentioned that you discontinued some products in the restructure and wanted to see if they were a material in just in the orthopedic growth.
Curt Hartman
I will start with the second question first, the discontinuation of products. I think you should assume are not material for the long-term or the short term and I think you should probably perhaps consider relating some of that to our quality initiatives where we simply felt it was better for us to exit that market versus continued forward with remediation efforts that may not really bear much future fruit.
On pricing, we historically have not gotten down to the – to the segment detail on pricing. I think what Katherine was trying to convey early is what we talked about in our quarter call where we did give in some specificity on the hip and knee lines that those trends are fairly consistent quarter-over-quarter as we’ve gone through 2009.
Seth Damergy – Deutsche Bank
Okay, that’s fair enough. And just one follow-up, I am assuming there – there are calendar year hospitals are coming or they're within the budgeting process, so your reps are probably at least getting a first glimpse at what next year has to offer.
I mean can you just speak broadly on any just any color for the calendar year hospitals, their capital budgets and what you are seeing?
Steve MacMillan
It’s an interesting question and I would probably frame it this way. Certainly hospitals are looking at their needs.
Certainly hospitals are probably lining up their priorities, and in some cases, they are probably talking to the folks at Stryker about their capital equipment requirements. Talking about and submitting proposals for budgetary requirements is very different than the hospital CFO, the hospital CEO actually agreeing to spend the money and I don’t think the hospital environment is any different than any other company environment today.
We have the same discussions within Stryker that they’re probably having within hospitals. We think we need to do these projects, but where do we really want to spend our money given the economic situation.
So is the normal dialog going on around budgetary planning? Yes.
We had pockets of that reported. Is it meaningfully different than year-over-year?
I don’t think I would go there. And I also think you have to understand the fundamental environment has changed and having a budgetary discussion is very different than predicting the future spend.
Operator
As a reminder, please limit your questions to one and one follow-up. And your next question comes from the line of Bruce Nudell with UBS.
Please proceed.
Bruce Nudell – UBS
Good afternoon. Thanks for taking the call.
Just holding up the results posted by the three companies and major joints that have reported so far and kind of looking across at least the first two quarters in contrasting of what we have seen so far. It kind of looks like a – the US market for hips and knees is in their 4% to 5% range and the ex-US market on a constant currency basis is in a low single digits.
Is that kind of fitting with your view of things and is it safe to assume that most of that or if not all of that is basically volume?
Steve MacMillan
It was pretty good assumptions, Bruce.
Bruce Nudell – UBS
Okay. And then just thinking about major joints going forward, in the developed markets, what sort of unit assumptions, unit growth assumptions assuming conservatively that prices offset by mix and basically flat ASP environment, I know you are hoping to do a little better, but what sort of unit growth do you think is possible, sustainably in the developed markets for major joints?
I am sorry.
Steve MacMillan
Call it low-to-mid single digit. We certainly don’t want to get too far ahead of ourselves on that.
Bruce Nudell – UBS
Okay. And just, Steve, is it fair to assume that even if MedSurg isn’t what it used to be, it can still be a pretty good business in the high single digits once we get pass this economic turmoil.
Steve MacMillan
Yes, the fundamentals of our MedSurg businesses will continue to be very good. There a lot of great stuff and great opportunity ahead of us.
I think the – just to call back, it’s going to be a little slower there. But we continue to feel great about all of the businesses that we are in.
There is not one business we are in today that we look at and say, let’s get out of it, because we don’t think it’s got a good future.
Operator
Your next question comes from the line of Kristen Stewart with Credit Suisse. Please proceed.
Kristen Stewart – Credit Suisse
Hi, thanks for taking my question. I was just wondering if you can provide a little bit more specifics and there is a little bit of it earlier on the restructuring charge, just seems to be a significant number.
I am just wondering to what degree we are likely to see kind of an earnings benefit either this year or next year, what’s kind of the return that you are assuming on that restructuring and how much of it is cash?
Curt Hartman
The charge in the quarter was $67 million, and it was broken into a couple of buckets. Now the first one I would think about would be some sales distribution changes in our European business and if you are familiar with the way those countries operate, there is typically a couple of levels within that process between the company such as Stryker and the end customer.
And a big part of our change here is that it runs through restructuring was the elimination of a couple of those layers in some of the markets. That’s a part of it.
Another segment was what we refer to as a simplification within a couple of our businesses, biotech, Canada, Japan, and what we’re really talking about is looking at the processes and the people around those and in some cases making some changes of operating structure. And then the final component is this product line obsolescence and taking charges related to that.
The goal here is to really simplify and provide focus and I think your final question on that was which component was cash. I think it was about $9 million in total and it’s – we don’t break it up separately, but it’s a minimal charge, and I think $4 million in the quarter and $5 million all.
$9 million in Q3, I am sorry.
Kristen Stewart – Credit Suisse
Okay. And what sort of run rate I guess in terms of savings would you anticipate by these actions on a go-forward basis?
Curt Hartman
Certainly, we would hope that there is some benefit to the P&L. I think you should probably expect a minimal this year as we continue to sort through and get the new pudding underneath us.
And I think we probably hold off on quantifying that as we ahead into 2010 at this point in time. A lot of it was quality and compliance focused, if you really think about Kristen, eliminating some of the middle people in the European distribution chain, close to our customers and more clearly in control of things like that and then getting rid of some of the product line, so they won’t be much of a pickup there.
Operator
Your next question comes from the line of Adam Feinstein with Barclays Capital. Please proceed.
Adam Feinstein – Barclays Capital
Okay, great, thank you, everyone. Just, I guess just a quick question here.
If you can just talk and even just if you can give us any specific numbers just in terms on trend, so implied within the revenue numbers for Q4, maybe just talk about what you are anticipating relative to the third quarter for both MedSurg and ortho, so do you think the year-over-year growth rate should be similar, better, just want to get a sense in terms of how we should think about the different segments for Q4?
Curt Hartman
We don’t really give guidance by segment, Adam.
Adam Feinstein – Barclays Capital
Okay. I understood.
Just figured I would try to get that in. So let me ask another one then.
I guess just then how were you thinking about obviously within ortho, you guys had some growth there. So how were you thinking about the overall market growth and do you believe you are taking market share within hips and knees in both the US and outside the US?
Katherine Owen
I think –
Steve MacMillan
The overall – or go ahead Katherine.
Katherine Owen
I think we probably have to wait for the reporting period to finish, because we have got a couple of fairly significant players still out there to report numbers. I think as you know this is the market where market share shifts tend to be fairly glacial.
You don't seem (inaudible) switches in any given quarter. So overall, we feel very good about where we have been at with knees and since the momentum their continues and hips has been slowing improving not where we wanted to be, have been certainly moving in the right direction.
I will be surprised if Q3 is very different than other quarters where you don’t see major market share shifts in any given quarter.
Operator
Your next question comes from the line of Derrick Sung with Sanford Bernstein. Please proceed.
Derrick Sung – Sanford Bernstein
Hi, thanks for taking my question. There has been some talk about COBRA coverage running out amongst the ranks of unemployed near the end of this year.
And I was just wondering if you had a sense for how that or we’re concerned about how that might impact orthopedic recon procedures if either you are seeing procedures being pulled out forward so that patients can get them while they are under a COBRA coverage or if you are concerned at all that that might lead to another step down in the US markets.
Katherine Owen
I think it’s probably just another one of those variable that would see in any given quarter or whether it’s people hurrying up to get procedures done, while they still have coverage in place or while they have got a COBRA in place. We don’t expect it to have a demonstrable impact one way or the other, it’s probably what’s going to continue to put some pressure on elective procedures overall.
Derrick Sung – Sanford Bernstein
Okay. And then just going back to what you are seeing in Europe and I think you mentioned that you were still seeing a small decline in needs at least in Europe.
How much of that is procedure volume versus pricing pressure? It sounds like both are generated from sort of the national health budget.
Are you seeing procedures being pulled back on or is it more hostiles and governments getting focused on pricing and mix?
Curt Hartman
Derrick, I think at this time, we still see it as mostly a procedure volume slowdown under the knee side.
Derrick Sung – Sanford Bernstein
Okay. And on the hip side, would it be the same as well?
Curt Hartman
Yes, I think both trends are slower. I think knee is certainly are going to feel it more similar to what they did in the US, where those procedures tend to be if you can say it a little more elective in nature.
Operator
Your next question comes from the line of Doug Schenkel with Cowen and Company. Please proceed.
Doug Schenkel – Cowen and Company
Hi, good afternoon. Your US hip and knee growth was a better than certainly what I think the Street had been modeling.
I think as Bruce mentioned a couple of questions ago, it seems like volumes are continuing to improve a bit across the US market along the lines what we saw last quarter. Is there any sense you have as to whether or not this year may even be more back loaded than what we have seen in the last couple of years when it comes to hip and knee volumes?
And do you have any sense as to whether or not there has been any notable differences in how outpatient versus maybe inpatient volumes and some of the other areas are trending?
Katherine Owen
I don’t think at this point we expect to see any significant change in fourth quarter volumes recognizing Q3 as traditionally the seasonally weak quarter, so you have the normal sequential benefit there, but no sense if there is a backlog waiting there. And the vast majority of these patient procedures are still done on a patient basis and I don’t think we have got any real noteworthy comment in terms of differences between the two groups if any exist.
Doug Schenkel – Cowen and Company
Okay. And then clearly you guys have faced a lot of challenges over the last several quarters and can you talk about this a little bit?
But seemingly you have had be a bit more on the defensive than usual and I would say that to some extent true both may operationally as well as what you mentioned earlier on the context of discussing M&A. Are you at the point where you now feel like you can be a little less defensive and if not, how far away are you from getting to the point where you want to be in terms of being aggressive both operationally and on the M&A front?
Steve MacMillan
Yes, we are – I think we are moving well along the road and it varies in overall piece. But we love playing offence.
The economy and all the compliance journey clearly did push us into defense let’s from an economic – from the economy standpoint, we are probably a little bit closer to being able to play offense, and I think we have made a lot of progress, but we still have work to do on the other frame. But I don’t think there is anything now holding us back from playing offense.
Operator
Your next question comes from the line of Michael Matson with Wells Fargo. Please proceed.
Michael Matson – Wells Fargo
Hi, just quick question. Not to keep harping on all the quality issues.
But just wanted to hear a little bit more about the appointment of Lonny Carpenter to the Group President of Quality and Operations. That move came just 10 months after he was made President of Instruments and Medical.
Just wondering why that wasn’t done earlier in this process and if we could read anything into that that move.
Steve MacMillan
Yes, I would say with the global economic meltdown the way it was and combined with wanting to continue on the journey towards our quality issues. I probably just moved a little quicker on this move.
And frankly if I were to turn the clock back, might have done things a little bit differently. When we appointed, I think we certainly didn’t anticipate the way the MedSurg is going to meltdown and everything else.
And frankly as we look at our overall approach to quality, compliance, operations, there are so much, so many efficiencies that we can bring out this organization for many years ahead and Lonny is uniquely capable and frankly have a bigger impact on the corporation in that role than he was running a couple of divisions.
Michael Matson – Wells Fargo
Okay. And then just looking at the medical business, it looks like by our math Stryker probably has lost a little bit of share there.
And I understand that compared to some of your competitors you are a little more capital oriented and not really rental oriented. But even accounting for that it does look like you've begun to lose some share there.
Just wondering if you expect that to continue and if you can – if there is anything you can point to there as (inaudible) now that they have spun out of home brand or something like that?
Steve MacMillan
I think we always think of them as a good competitor. Here is a simple way to think about it.
Probably we were winning a lot of big deals and a lot of the hospital capital expansions that we are going on. We were winning a disproportionate amount of probably the big deals and we think that continues to bode really well for the long-term.
As a lot of hospitals with a very heavily installed base may want them to supplement their fleet with five or ten or 15 beds, they may not be as willing to change vendors in that situation. I think I would encourage you to just keep watching over time.
Operator
The next question comes from the line of David Roman with Goldman Sachs. Please proceed.
David Roman – Goldman Sachs
Thank you. Good afternoon, and thank you for taking the question.
Just two quick questions, first on the gross margin side, this is the first quarter in some time that you have shown some positive gross margin leverage albeit somewhat modest I think cost of goods grew out 60 bps slower than sales. Maybe you can give us some sense on a go-forward basis, how we should think about that both in terms of the – whether it’s increased spending or is it a quality-controlled spending or a currency for 2009 and then 2010.
And then just a quick follow-up on ortho, Steve at the beginning of your comments you mentioned the stability in the end-user markets and the attractiveness of the key areas where you compete with, is there something that you are seeing specifically, is that related to long-term growth or is that more a short-term comment?
Steve MacMillan
David, I will take the first part here. You are correct on the gross margins year-over-year.
We feel a little better about where things shook out. I think we still have a very high commitment to our spend relative to FDA remediation and we will not waiver from that focus and we will spend where we need to spend as we need to spend and part of Lonny’s chart is to drive that program in its entirety through every one of our operating facilities.
I think as I tried to stay at the onset, our third quarter benefited a little bit from the product mix, it did run through the P&L. I think as we look forward, we are not going to get into comments here relative to 2010.
I think it’s too early to declare victory that we are going to see this quarterly sequential uptick quarter-over-quarter. We are not ready to do that.
We are still very early in this long-term process. And we are as good as we said before as our last inspection.
So I think it’s a little too early to make long-term proclamations here in gross margin. I think what you should see is that we are very focused on it and we are going to do our best to keep them in a range that allows us to continue to grow our EPS and help out as we go through the P&L.
David Roman – Goldman Sachs
And then can you just quickly remind us how currency works through the P&L?
Curt Hartman
The preference here quickly remind us is probably not appropriate, because it’s not a quick discussion. It’s a long conversation.
I think what we have always historically said we have some natural hedges in place, given our diverse manufacturing footprint geography, I think what has transpired this year is obviously the rate of change within currency has been dramatically different than anything we have ever experienced which has let us into a deeper dive of exactly how these parts are flowing through our P&L and it gives into things such as products made in one currency sitting in another market, another currency and what are those inventory turns. Clearly as various categories of SG&A spend in half and in foreign denominated markets, those are going to have an adverse or positive impact from the P&L.
And we’ve never really tried to break that out specifically one quarter over the next. I think what we’ve always tried to do is just registered on the top line and leave at that, because of the complexity here.
Operator
And due to time restrictions, we have time for a couple more questions. Your next question comes from the line of Jeff Johnson with Robert W.
Baird. Please proceed.
Jeff Johnson – Robert W. Baird
Thank you, good afternoon. Deep into the call here, so let me just give a couple of clarifying questions, housekeeping questions in.
One, from a secular standpoint Steve, I think the previous caller was trying to get at this. But do you see MedSurg as being 200, 300, 400 basis points higher growth potential over the next three to five years and maybe core recon, or how are you thinking those two businesses from a long-term standpoint?
Steve MacMillan
Jim, I’d probably give you a different way to think about MedSurg right now. Let’s think about the 90 slush, in terms of – everybody is talking about we have a W, and V and L recoveries.
I think what we see is we saw a shutdown and we are going to see the way that slush is going to starts to come back, and it’s come back and it’s going to come back over the long run. But it may take us a little bit of time before completely back at that level and the growth rate is probably going to be slower than what it was, but still be a healthy business for us.
Jeff Johnson – Robert W. Baird
Yes, fair enough. And Curt, maybe a couple of things here, and maybe my math is up, but it looks like the interest income was down something like 40% sequentially, and I understand year-over-year change in returns and what have you on cash that’s just sitting there and basically nothing.
But am I right on that sequential and what may be drove that? And then, last quarter you had quantified kind of the expected ’09 impact from foreign currency it’ll be about $0.11 to $0.16 drag.
Can you update that number at all on what you think that full-year drag might be?
Curt Hartman
Yes, I don’t have some of those details in front of me, Jeff. But I think way you should think about with interest income is that the yields have continued to be depressed even from what we saw in the first quarter and part of this gets into the amount of the cash we have sitting on the balance sheet, where those yields are versus what they were a year ago.
And just for a reference they are well under half of what they were a year ago. And as some of those investments come to the maturities and they are renewed at much lower interest rates, that’s certainly going to have an impact on our interest income.
Operator
The next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.
Joanne Wuensch – BMO Capital Markets
Thank you very much for taking my question. I apologize if you have answered this.
Could you just give your nickel or thought or dime if you want on healthcare reform and what do you think it may mean for Stryker?
Steve MacMillan
Sure. We obviously have some concerns.
I am encouraged in some sense that I do think some of the key members of the senate finance committee they have acknowledged that the device tax needs to be revisited. Do I think it goes away completely?
Probably not. But I am hopeful that we will get to a much more sensible number.
And I think what we got to do is, is hopefully get that awareness that obviously medical devices are a lot smaller will probably less likely to benefit from the expansion of lives into coverage and then we will probably not going to get a windfall, and therefore that the tax that’s been proposed probably needs some work to really be narrowed down. So we are continuing to work with our friends in Washington to get that message through, and in the meantime, planning internally for how we approach these things.
Joanne Wuensch – BMO Capital Markets
Can you share with us what types of things you can do to plan for that internally?
Steve MacMillan
Well, obviously, ultimately what it would mean is, higher “tax”. So we are looking at our cost structures and other things to be able to figure out ways to offset some of that.
But I think overall they could be certainly some downward pressure.
Operator
Your last question comes from the line of William Plovanic with Canaccord Adams. Please proceed.
William Plovanic – Canaccord Adams
Thank you. But you may have answered all our questions.
Steve MacMillan
Great, thanks. Okay.
Well, with that, we want to thank everybody for hanging in there. This one went a little longer than probably planned.
But I think we do feel good about where we are headed, and we will be reporting our fourth quarter on January 26th of 2010. So thank you everybody.
Operator
Thank you for your participation in today’s conference. This now concludes the presentation.
You may now disconnect and have a great day.