Biomet, Zimmer Clash on Pricing Picture

Biomet failed to return a telephone call from TheStreet.com on Monday seeking input for this story. But after peaking near $50 late last year, the stock has lost 30% of its value and now hovers within 50 cents of a 52-week low. The question that confronts Biomet investors is whether to listen to still-bullish Miller -- or to the growing ranks of orthopedic industry skeptics.

Clear Signal

Clearly, many experts have been tuning in to the comments of Zimmer's Elliott, the leader of the largest orthopedic device maker in the world.

In mid-September, for example, Lehman Brothers analyst Bob Hopkins suddenly predicted that orthopedic device makers would see their product prices drop. He specifically cited Elliott's "clear change of tone on pricing" when making that negative call.

Two weeks later, as orthopedic stocks continued to slide, JMP Securities analyst Robert Faulkner started coverage of Zimmer with an underperform rating. To be fair, Faulkner said the stock could bounce on solid near-term results. However, he predicted serious challenges down the road.

Faulkner offered history as a guide. During the last industry downturn roughly a decade ago, he noted, similar pressures dragged implant prices lower and orthopedic stocks along with them. Thus, he said, the stocks could suffer -- perhaps for years -- before rebounding once again.

Indeed, he suggested, orthopedic-device makers have only just begun to feel the pinch from their biggest customers.

"Hospitals are notoriously bad at watching their P&L [profit and loss], so orthopedic manufacturers have historically been able to raise prices beyond the point where orthopedic reconstructive procedures become unprofitable to the hospital," Faulkner wrote. "Only once the hospital as a whole comes under price pressure do we see hospitals begin to push back against orthopedic pricing. This is where hips and knees are currently."

Out of Tune?

Yet Biomet seems to be elsewhere.

During a quarterly update in late September, Miller told analysts to keep looking for the same 4% to 5% price increases that the company has enjoyed in the past. At one point that day, Biomet's stock actually jumped more than 4% as investors savored the CEO's confidence.