Biomet's Option Puzzle

Against all odds, Biomet (BMET Quote) has joined the list of companies coming under the microscope for possible stock-option abuses.

Unlike some other major healthcare players like Caremark (CMX Quote) and UnitedHealth Group (UNH Quote), which have already attracted government scrutiny for their lucrative equity-based awards, Biomet has regularly won applause for its frugal treatment of top company leaders. Indeed, Biomet has long maintained a policy that prevents the company from giving any stock options to its chairman or CEO at all.

Nevertheless, Biomet and rival Stryker (SYK Quote) recently wound up on a short list of medical-device companies that could soon face the stock-option music. A recent Deutsche Bank statistical analysis ranks big companies for the apparent likelihood that they timed option grants to make them more profitable for holders. Stryker ranks 48th out of roughly 500 companies studied and Biomet 67th.

"While we cannot determine if options were backdated, we have provided some analysis on the stock performance around the implied option-grant dates for companies under coverage," Deutsche Bank medical-device analyst Tao Levy wrote last week. "Based on our analysis, Stryker and Biomet appear most vulnerable to questioning on options."

Stryker looks like the more vulnerable of the two, going by the Deutsche Bank report. Compared to Biomet, Stryker posted larger positive stock swings during the month that followed its option grants. The company also granted a higher percentage of options before run-ups of 25% or more in the shares. In addition, it granted options with strike prices closer to the stock's 52-week lows.

Regulators and prosecutors have been looking at stock-option practices at various companies with an eye to whether accounting and disclosure rules were broken, according to media reports. Several companies have said they would undertake earnings restatements to fix misbooked compensation expense.

"Overall," Levy concludes, "this analysis would indicate that Stryker and Biomet grant performance show similar characteristics to other companies that have announced stock-option-backdating investigations" so far.

Biomet didn't respond to requests from TheStreet.com seeking comment on Levy's report. Stryker said its finance chief is traveling till Friday.

Both companies face troubling investigations already. They, along with Zimmer (ZMH Quote) and Johnson & Johnson's (JNJ Quote) DePuy, recently fielded subpoenas in a Justice Department criminal probe of the industry.

Their shares, hammered also by pricing concerns, have suffered dearly as a result. Stryker, while up 17 cents to $43.49 on Wednesday, is trading within a few dollars of a multiyear low. Biomet, down 7 cents to $31.67, has found itself in a similar trough as well.

Stryker Price

Of course, Stryker may have raised some eyebrows by now for repricing stock options in the mid-1990s and issuing some low-priced options since that time.

Way back in 1996 -- two years before the period that Levy studied -- Stryker went to the trouble of lowering the strike price on stock options it had issued to senior executives just a couple of months earlier. Specifically, it dropped the strike price on the options to $22 from the previous $22.94 to $25.44 a share.

"In authorizing such action," Stryker explained in the company's 1996 proxy statement, the compensation committee "took into account its belief that the decline in the market price of the company's common stock since the original date of grant reflected external market factors rather than factors concerning the company and its operations, and that the re-pricing of the options was appropriate in order to maximize the incentives provided to option recipients."

The stock, poised for an extended rally, would have soon made those original options worth plenty of money regardless. After that, Stryker seemed to simply exercise better timing with its annual stock-option grants the first time around. Between 1998 and 2002, Levy notes, Stryker reportedly issued options on dates that -- due to the stock's performance around those time periods -- now look "suspicious."