Biomet, Zimmer Clash on Pricing Picture

But the stock has drifted lower since. Indeed, some investors heard plenty to worry about. Notably, they pointed out, Biomet seemed befuddled by a drop in the gross margin number that investors watch so much. Gross margin, a particularly strong metric in the orthopedic space, tracks revenue minus the cost of goods sold.

"I don't think any of us has any explanation at this point as to why gross margins are down a little bit," Miller confessed when questioned about the decline. But "we're looking into it."

Miller did suggest that higher-priced supplies could be cutting into those margins. However, some investors have noted that lower-priced implants could be hurting that metric as well.

Whatever the case, Faulkner felt cautious enough to recommend avoiding Biomet -- along with Zimmer -- after the company's call. As a result of pricing pressures, he predicted, Biomet's reconstructive sales growth could slow from 19% in 2005 to just 5% three years down the road. By now, he noted, Biomet has already seen its hip sales slide even earlier than most. Nevertheless, he added, that downturn could very well continue.

"There is nothing inherently inferior in Biomet's long-term hip business, we believe, but unit volume is tracking at zero in the United States, and the company's high growth is entirely comprised of price and mix," Faulkner wrote. "These are the components of industry growth that are at risk, in our view."

Faulkner went on to predict a hit to Biomet's booming knee business as well. Looking ahead, in fact, he suggested that the entire industry faces a "prolonged deceleration" in reconstructive sales.

Thus, he suggested that investors steer clear of the group for the time being.

"We observe that orthopedic stocks are great long-term stocks that should be owned eight out of 10 years," he said. "We are perhaps halfway through the two-year period not to own them. ... All of the signs we can identify seem to be pointing in the same direction: These stocks have more room to come down."

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