Orthopedic device makers, including respected leaders like
( BMET) and
could see investors starting to doubt their words.
The reason? In a surprise announcement on Wednesday,
told investors that it had met the requirements set forth under a contract that lowers the prices it pays for orthopedic implants.
HCA last year promised to buy most of its orthopedic implants from three vendors -- Zimmer,
Johnson & Johnson's
DePuy -- in exchange for big markdowns on their products. The hospital chain has since worked hard to make sure that orthopedic surgeons, who are notoriously brand-loyal, use devices that comply with that deal.
has tracked HCA's recent efforts, which have hinted at clear signs of progress.
All along, however, the device makers themselves have portrayed the HCA deal as a failure that would lead to more normalized pricing in the end. They did so in early December -- during an upbeat analyst conference that fueled a rally in their shares -- and never backed away during recent quarterly updates that led up to HCA's own.
Stryker CEO Stephen MacMillan even went so far as to congratulate his rival, Biomet CEO Dane Miller, for boycotting the HCA deal and risking a lot of business in the process.
"I think Dane outsmarted us all in this, if you think about it," MacMillan said back in December. "They've held firm on their pricing. And I think we have been surprised that HCA -- an outfit as strong as HCA -- has not been able to get the compliance."
To be fair, HCA admitted on Wednesday that it had fallen just short of its compliance numbers by the year-end deadline. However, the company quickly added that it had hit its targets -- and could expect ongoing discounts -- just one month later.
Now, some believe, investors could start questioning even bigger promises from the orthopedic device makers. Specifically, they say, investors could find themselves wondering whether the companies can really meet their growth targets for the year.
Indeed, at least two of those companies -- Stryker and Zimmer -- have already found themselves justifying their 2006 guidance. Both companies are counting on strong second halves to ultimately pull them through.
"This is not a huge hockey stick," MacMillan insisted during Stryker's recent conference call, referring to Wall Street's term for a growth forecast that is nearly horizontal for coming quarters before turning nearly vertical further along. "We think we are leaving the year with a little bit of momentum here in '05, and we think there is runway ahead of us."
Zimmer CEO Ray Elliott used strikingly similar language when defending his own company's guidance at length.
"It does look a little like a hockey stick -- and I know that can make people sensitive -- but it is not really quite what it looks like," Elliott said. "We are very comfortable with that second-half/first-half situation."
Zimmer is looking for new products to help boost earnings by 21% to 23% in the second half of the year. That would be a huge ramp up from the company's projected profit growth -- estimated at 13% to 16% -- for the first two quarters.
Analysts clearly noticed. They found themselves peppering Elliott with pointed questions about the company's guidance, even as HCA prepared for a quarterly update that would prove the CEO's earlier assumptions wrong.
Orthopedic device stocks lost some ground after HCA's report.
Stryker -- which rallied hard last week on its upbeat outlook -- posted the biggest loss of all, falling 2.4% to $48.72 Wednesday afternoon. Biomet and
Smith & Nephew
, two companies left out of the HCA contract altogether, dropped more than 1% each. Zimmer, which actually opened with a gain before HCA's announcement, slipped less than 1% to $68.74.
Zimmer, in particular, has tried to reassure investors.
Earlier this week, the company's CEO listed a number of drivers for second-half growth. Most notably, Elliott said, the company will be introducing several high-end products -- which can sell for a premium -- as the year moves on. Indeed, Elliott said, the company has never boasted "a more complete pipeline and a more interesting pipeline" than it does right now.
But Bear Stearns analyst Milton Hsu has questioned whether that pipeline will pay off as much as the company hopes.
"Given that it takes an ortho (product) seven to 10 years before you have some type of superiority data -- and given the evidence-based environment that we are in now -- how do you convince (buyers) to pay 15%, 20% more for a product?" Hsu asked on Wednesday.
Elliott responded with confidence.
"You can convince people without data," he said. "But I think the world we're heading into is less likely to be supportive of that, more likely supportive of data. ... (So) you have got to have the right story."
Zimmer is counting on its own stories to work, driving customers to use its higher-priced products in the end. Indeed, the company is relying entirely on volumes and so-called "product mix" -- instead of routine price increases -- to hit its 2006 targets.
And it has stressed, again and again, that it fully expects to meet even its high second-half goals.
"We are looking forward to an extremely strong year, even though admittedly -- superficially on the numbers -- it does not necessarily look like that when you compare halves," Elliott said on Wednesday. But "you would find that the hockey stick, as it looks a little bit like, is very doable."
Zimmer is looking for top-line growth -- a crucial industry metric -- to come in at 5% to 6% in the first two quarters of 2006 and then essentially double in the latter half of the year.
Yet at least one industry expert seems to be bracing for much worse. Robin Young, publisher of the trade journal
Orthopedics This Week
, feels that fourth-quarter results -- particularly those published by DePuy -- looked pretty bleak. Indeed, he notes, sales growth across the board has fallen by roughly half from just one year ago.
He cites pricing pressures as the reason.
"Actual (not list) price increases have become almost non-existent for all major large joint reconstruction manufacturers," Young wrote in a recent issue of his journal. "It should be no surprise to any knowledgeable observer that every major hospital chain is determinedly pushing back. (And) they will, if possible, negotiate for price rollbacks and even steeper discounts" going forward.
Young then went on to offer a far darker prognosis than the device makers themselves.
"What's the outlook for 2006? Low single-digit growth," he declared.