Zimmer, Peers Brace for Pricing Storm

Over the past five years, Zimmer (ZMH) has introduced dozens of new orthopedic products. But not one qualified under federal rules as a truly innovative technology.

Instead, Food and Drug Administration data show, all gained clearance through the so-called 510(k) process for being "substantially equivalent" to items already available to the public. Since 2000, in fact, the big orthopedic implant companies have combined to gain regulatory approval for just five hips and one knee that qualify as breakthrough devices.

There is one area in which the new devices clearly differ. They tend to cost far more, allowing manufacturers -- companies such as Zimmer, Stryker (SYK) and Biomet (BMET) -- to pocket fatter profits.

Now, though, some observers warn of tougher times for the device makers. These people say cash-strapped hospitals are demanding greater cost consciousness from surgeons. They say doctors have been floored by findings that the newer, costlier devices don't always make for healthier patients. As a result, implant makers could see their profits pinched as demand eases for the newer devices.

"Zimmer has mentioned that they are discounting more heavily," notes Bear Stearns analyst Milton Hsu, who rates Zimmer outperform and the sector market-weight. He adds that Zimmer has shown enough flexibility that it could actually benefit from hospital belt-tightening. Even so, he adds, "it appears that some hospitals are placing the burden on the industry to demonstrate the economic value of premium-priced technologies before allowing them to be sold."

On Monday, Zimmer, which emphasizes that it does have innovative products in the pipeline, rose 71 cents to $78.45. Stryker, which is responsible for one of the five breakthrough hips, gained $1 to $48.89. Biomet, maker of the only recent innovative knee, added 53 cents to $35.06.

Drip, Drip

To be fair, the lion's share of medical devices earn their regulatory blessings as equivalent rather than breakthrough products. Moreover, newer gear often boasts features that can set it apart from its predecessors. Indeed, Zimmer CEO Raymond Elliott points to such changes, including the use of stronger highly cross-linked polyethylene, as "real improvements" in the joint replacement field.