Thirty years ago, inventor Doug Noiles had what he calls a "flash of insight" that would pave the way for a popular artificial knee.

Noiles, a machine designer by trade, had spent the day in San Francisco at the American Association of Orthopedic Surgeons' annual conference. He had hoped to pique doctors' interest with a model of an artificial knee he was designing. But after some surgeons rejected his plan, he retreated to his room at the Chinatown Holiday Inn.

Later, though, he awoke with what turned out to be a revolutionary idea. "Why not let it rotate?" he thought.

The result was the mobile-bearing knee, a device that promises more natural movement than the so-called fixed-bearing devices that make up the rest of the market. Right now, just one company -- Johnson & Johnson ( JNJ - Get Report) -- has permission to sell mobile-bearing knees in the U.S. The company's orthopedics division, DePuy, underlines that dominance in advertisements to consumers. Analysts believe the device accounts for a nice chunk of J&J's massive orthopedic sales every year.

But the New Jersey company could soon see its long monopoly come to an end, as rivals seek approval for similar devices in a highly competitive industry in which new offerings and their big price tags mean so much.

Right now, in fact, the big orthopedic device makers -- ranging from Stryker ( SYK - Get Report) and Zimmer Holdings ( ZMH) and Smith & Nephew ( SNN) -- need blockbusters more than ever. In the past, they could always hike prices to help boost profitability.

But they have recently found themselves trying to sell those expensive devices to hospitals that no longer make any money on the bulk of their joint-replacement surgeries. As a result, the manufacturers must constantly roll out new products -- and promise superior results -- in order to justify the premium prices that have made them so profitable in the past.

"Orthopedic device makers can sell their products in one of two ways," explains Ronald Grelsamer, a prominent New York orthopedic surgeon who wrote the book What Your Doctor May Not Tell You About Knee Pain and Surgery. "They can show that a product has a long track record of success and has stood the test of time. Or they can bring out something brand-new and promise that it is going to be significantly better" than competing devices.

For now, Johnson & Johnson can actually do both. The company offers one mobile-bearing knee that has been on the U.S. market for nearly three decades and a newer version that many believe is even better than the first. But HealthPoint Capital, a merchant bank focused exclusively on orthopedics, says its stranglehold on the market may not last.

"DePuy's knee revenues remain quite strong due to their exclusive, and hard-won, right to sell a mobile-bearing knee in the U.S. market," HealthPoint Capital wrote last year. But "we believe that the market will be swamped with competing mobile-bearing knees in the near future."

Shares of Johnson & Johnson rose 28 cents to $64.27 on Monday.

Waiting Period

Although he patented the concept for mobile-bearing knees, Noiles actually won more fame -- including a lifetime achievement award -- for a successful hip design instead.

Personally, however, Noiles always ranked the mobile-bearing knee among his finest inventions. Moreover, he fully expected mobile-bearing devices to by now dominate the artificial knee market.

Instead, HealthPoint Capital estimates, the knees account for just 10% of artificial knee sales in the U.S. and just 30% even in those markets where designs are more abundant.

"I always thought that, in my lifetime, all knees would be rotating knees," Noiles told TheStreet.com this month. "But I'm 82 now. So the matter is at question."

To be sure, the industry has tried its best to bring out new mobile-bearing knees in the market that arguably counts the most. Two years ago, the Orthopedic Surgical Manufacturers Association officially asked the FDA to pass a resolution that would make approval of mobile-bearing devices easier in the U.S. An FDA advisory panel last year voted in favor of that request, but -- in a rare detour -- the agency opted to not follow that advice and asked for additional information instead.

FDA spokeswoman Julie Zawisza said the agency "could not find a mechanism that would adequately protect patients from known risks of the device" if the measure were, in fact, approved at that time.

By now, of course DePuy has collected decades worth of data on its first mobile-bearing knee and has introduced a competing system as well.

The company has known little but success so far. HealthPoint Capital this spring attributed Johnson & Johnson's industry-leading knee growth to its mobile-bearing devices. In the past, that same firm has estimated the U.S. market for mobile-bearing knees at $320 million -- or 3.7% of Johnson & Johnson's U.S. device sales overall -- with the potential to nearly triple by 2007.

Gordon Van Ummersen, vice president of marketing for DePuy Orthopaedics, says that both knees enjoy a "fantastic track record of success" -- and that, if anything, the newer knee seems to be performing a bit better than the original. Even some industry participants outside the company point to that second device, which incorporates Noiles' 30-year-old rotation principles, as the best artificial knee around. Thus, they believe that DePuy will just keep gaining U.S. market share in the future.

But others, including the FDA itself, have stirred some doubts about whether mobile-bearing knees are superior at all.

"It is not yet proven that these devices are better -- or even completely equivalent -- to a well-functioning fixed-bearing knee," the FDA wrote last year. "In some ... reports, the survival rate(s) of mobile-bearing knees are slightly lower than fixed-bearing knees, the patients are not more active and the revision rate slightly higher. ... That having been said, the sponsor does provide multiple retrospective and non-randomized studies which report good to excellent clinical results for the majority of study patients."

Golden Oldies

Still, Bernstein analyst Bruce Nudell says that many traditional fixed-bearing knees enjoy high success rates as well.

Nudell has specifically compared Johnson & Johnson's original mobile-bearing knee to a conventional knee created decades ago by competitor Biomet Based on data from the Swedish Knee Register, he says, both of those knees boast the same 95% 11-year survival rate.

Yet, Nudell notes, the prices for mobile-bearing knees and fixed-bearing knees -- even inside a single company -- can differ sharply. Based on its list prices, he calculates, Johnson & Johnson can make as much as 35% more by selling a mobile-bearing rather than a fixed-bearing device.

Going forward, however, Nudell questions whether companies can keep charging more for premium devices without concrete evidence that they actually work better. After all, he points out, the companies are marketing the implants to hospitals that no longer make any money on joint-replacement surgeries for Medicare patients.

"All told," he says, "the lack of proof statements for knee 'mix shift' makes the group vulnerable to cost-control efforts on the part of motivated providers who are at break-even for the government-funded portion (2/3) of their case mix."

Nevertheless, companies like Stryker and Zimmer still hope to sell their own mobile-bearing knees here at home. They have, in fact, already begun moving through the lengthy FDA approval process that the industry has so far tried -- but failed -- to avoid.

In its latest annual report, Stryker disclosed that it has been selling a mobile-bearing knee overseas since 2001 and is right now in the midst of a clinical trial that could finally open doors in the U.S. as well. Similarly, Zimmer said in its most recent quarterly report that it has already secured an investigational device exemption (or IDE) and, with permission from the FDA, expects to introduce its own mobile-bearing knee to the U.S. market in 2007.

HealthPoint Capital sees plenty of opportunities ahead -- especially if the FDA finally agrees to "down-classify" the devices and make their approval easier in the future.

"Although DePuy has been able to monopolize the mobile-bearing knee market for approximately 25 years, we anticipate that several players could be in the market in the next year or two," the firm has written. And "we continue to believe that the mobile-bearing knee will gain significant market share in the next five years and could become the prosthesis of choice for the younger, more active Baby Boomer patient population."

Loyal Fans

In the end, however, newcomers to the U.S. market could find themselves struggling to win business away from those who by now have long been loyal to DePuy. That crowd would likely include physicians like Grelsamer. Grelsamer has, in fact, stuck with DePuy's original mobile-bearing knee even though some view the company's newer offering as superior.

Quite simply, Grelsamer prefers to use devices with proven track records over the newer -- and often more costly -- experiments that regularly enter the market. He points to DePuy's original mobile-bearing knee as one of a few artificial joints that have actually stood the crucial test of time. Meanwhile, he says, the orthopedic highway remains littered with plenty of failures that seemed like good ideas in the past.

Thus, Grelsamer plans to keep using DePuy's original mobile-bearing system even as more choices become available.

"As these companies come up with their new products, they're going to try to be different than DePuy," he explains. "They're going to change something and, hopefully, make it better. But they can actually make it worse instead."

In the end, he says, only time will tell.

"It's not so much that newer devices aren't better," he concludes. "It's that you have no way of knowing for many years to come."