has suffered a sprain.
After regaining its footing in a late-summer rally, the giant orthopedic company tumbled last week on fresh concerns about prices for its artificial joints. Merrill Lynch analyst Katherine Martinelli blamed the fall on pricing pressures outside the U.S. and called the market's reaction overblown. But some industry bears expect to see evidence soon of price cuts here at home. Meanwhile, they are wondering just how much Hurricane Katrina will chip away at this year's sales.
Still, the industry itself continues to promise healthy results. Indeed, Zimmer and several other players --
-- were offering reassurance during an investment conference sponsored by Thomas Weisel Partners just last week.
The firm's analyst, Lynn Pieper, said the "upbeat" company presentations confirmed expectations for solid growth in the joint reconstruction business. Pieper then went on to blame Zimmer's decline on investor confusion.
"While management affirmed our previously discussed belief that the U.S. pricing environment is seeing increased pressure, we do not believe that expectations for 0-2% pricing contribution are a surprise," wrote Pieper, who has an outperform rating on Zimmer's stock. "We continue to model flat price contribution for 2006 and believe that, overall,
presentations from all three orthopedic competitors were very positive, indicating solid trends in the reconstructive market."
For years, companies such as Zimmer have relied on steady price increases to help fuel their explosive growth. Increasingly, however, hospitals have found themselves struggling to pay for expensive implants on many joint-replacement surgeries. As a result, some of those hospitals have fought off price increases and managed to secure discounts instead. Thus, industry bears have pointed to a possible a power shift away from those who make orthopedic implants to those who actually buy them.
All of the major orthopedic device makers have taken a major spill over the past week. Zimmer fell the hardest, spiraling from a high of $83.89 on Tuesday to $78.32 Monday morning.
Martinelli blames Japan.
Specifically, she says that Japan may seek price cuts of up to 8% -- instead of the routine 2% to 4% -- on orthopedic implants this year. Still, she believes those cuts will cost Zimmer no more than a penny's worth of earnings and has therefore kept her bullish view of the stock intact.
Indeed, Martinelli expects Zimmer to beat its own targets outside the U.S. Still, she does foresee possible pressures at home.
"We see no reason to change our sales estimate," she explains, "given the expected temporary disruption to elective procedures in the U.S. tied to Hurricane Katrina offsetting the potential upside overseas."
Some investors fear more lasting problems, however. They know, for example, that Zimmer has already offered discounts to
-- the nation's largest for-profit hospital chain -- and wonder if the extra business the company receives in return will actually prove worthwhile.
Zimmer itself has already indicated that the company could be taking a risk on deals such as that one.
"We take a look at the model and decide whether we can make a lot more money, assuming they hit compliance or something close to it, and then we invest the reduction in price up front," CEO Ray Elliott said during the company's second-quarter conference call. But "we are not going to get any checks back from them or anything like that" if the plan fails.
Elliott portrayed such compliance agreements as tough. Still, he expressed little concern that Zimmer might suffer as a result.
"If it works, I think it's great; it's a great opportunity," he said. "If it doesn't work, we are back to a different situation.
But I'm not concerned about it either way from Zimmer's perspective."
Still, the entire sector can expect less business from some hospitals owned by HCA and
Both companies run hospitals in the Gulf Coast region devastated by Katrina. Tenet owns five New Orleans hospitals, four of which have been shut down completely, and one in hard-hit Biloxi, Miss. The company said on Friday that two of the shuttered hospitals remain surrounded by water and that the other two have been taken over by local government officials who need the facilities to house emergency workers.
Tenet says the future of the first two hospitals, at least, remains uncertain. The company does, however, hope to quickly reopen the others.
All told, Tenet relies on its six Gulf Coast hospitals for roughly 6% of its revenue. However, one company critic says, Tenet depends on those facilities for cash flow even more.
Jeff Villwock, a Caymus Partners analyst who conducts research on behalf of the Tenet Shareholder Committee, estimates that the Gulf Coast hospitals normally generate up to 15% of the company's cash flow. Now, however, he expects those hospitals to burn through cash instead.
In the end, Villwock believes that Tenet will suffer a $100 million hit to cash flow from operations -- excluding rebuilding expenses -- in one of its most important markets.
"This is real money," he says. "This is significant to this company."
Tenet's stock, once a $50 stock market darling, slipped 12 cents to $11.90 on Monday.