Iron Is Hot at Stryker

Investors in the big orthopedic device makers are keeping an eye on a pricing standoff with a big customer.

Last year, HCA (HCA) promised Zimmer (ZMH), Stryker (SYK) and the DePuy unit of Johnson & Johnson (JNJ) the bulk of its business in return for price cuts on their artificial hips and knees. The hospital operator is struggling to bring skyrocketing implant prices under control.

HCA has been fighting an uphill battle to win over notoriously brand-loyal orthopedic surgeons and make the arrangement work. But salespeople for competing device makers such as Biomet (BMET) and Smith & Nephew (SNN), which were left out of the company's deal, indicate the big hospital chain may be making some progress.

"We used to have 70% to 80% of the market share at HCA's hospitals in Houston," says a Smith & Nephew representative in the area. "Now it's basically zero."

Clearly, some HCA surgeons who once used Smith & Nephew implants have begun using so-called compliant devices -- ones that are covered under the HCA pact -- instead. Other surgeons -- including some especially busy ones -- have simply taken their business elsewhere. HCA has paid a price as a result.

But investors are increasingly concerned that the device makers could suffer from the deal as well. They'll get an update on that notion when Stryker posts fourth-quarter numbers after the close Thursday.

After all, three of them have already given HCA big price breaks in order to win the company's business. With other device makers left out, those chosen vendors fully expected higher volumes in return. But HCA -- as the largest hospital chain in America -- could spark an unwelcome trend if it actually managed to pull this deal off: It could make other hospital operators start demanding big price cuts of their own.

Stryker CEO Stephen MacMillan acknowledged this very threat during an investor presentation early last month. But he dismissed the possibility just after that -- and some Wall Street experts have since followed suit.