Orthopedics Probe's Deep Roots

Regulatory Pressure

Recently, it was Reicin's own downgrade -- triggered by the new government probe -- that pressured the stock instead.

Reicin cut his rating on Zimmer from overweight to equal weight because the company relies on hip and knee replacements for so much of its business. However, he also expressed serious concern about the industry as a whole.

He says the Justice Department may now scrutinize companies for offering perks -- such as gifts, junkets and fees -- to physicians who participate in clinical trials. But he seems more worried about the government's focus on consulting agreements.

Over the years, device makers have inked consulting deals with big orthopedic groups that rely on the companies' implants -- and even their sales staff -- in the hospital operating room. Technically, the device makers should be paying the physicians for legitimate services. But some believe the companies have been improperly buying market share instead.

Thus, some now wonder whether such tight relationships -- and the explosive growth they fueled -- could eventually come to an end.

"We think that the close relationship between the sales rep and the physician is the primary source of the positive pricing environment for the industry," Reicin wrote on Thursday. "Perhaps the biggest risk to industry fundamentals relates to the potential of some sort of external shock to the industry if regulatory or legal bodies chose to redefine this relationship. We think that Wednesday's actions by the DOJ may be a start."

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