After years of pleasing spoiled investors, Zimmer ( ZMH) now finds itself battling just to relieve its followers instead.

Suddenly, just beating profit expectations is no longer enough. After all, Zimmer did just that late Wednesday and still saw its shares slip Thursday, continuing a slide that began in early September. That's around the time when Zimmer CEO Ray Elliott started spooking investors with candid discussions about price cuts for orthopedic implants. Since then, Wall Street has focused on very little else.

True, some investors rushed to celebrate Zimmer's latest profit growth -- which came in 4.5% higher than Wall Street expectations -- by purchasing the stock on an upswing during after-hours trading on Wednesday. But the stock's gains proved to be short-lived. The stock fell 2.6% to $62.10 by the time the market closed on Thursday, when investors had better digested Zimmer's quarterly results and found little to comfort them in the company's follow-up conference call.

They spotted clear trouble instead. Even the profit upside started to look shaky. Of the 3-cent cushion, some noted, 2 cents came from a sharp cutback in selling, general and administrative expenses that could prove unsustainable. And the final penny came from a lower tax rate.

Still, investors didn't need to hunt between the lines for issues. They could see, quite clearly, that Zimmer's quarterly revenue growth had just slipped into single-digit territory for the first time in recent memory. Even worse, sales growth for the company's main products -- artificial hips and knees -- had plummeted sharply even with help from price increases that, by next year, are expected to go away.

Anticipating future price cuts, Zimmer went ahead and scaled back expectations for revenue and profit growth next year. The company now hopes to grow revenue by 8% to 9% and profits by about twice that much in 2006.

Some experts actually had been bracing for as much.

"We would characterize ZMH's 3Q results and 2006 guidance as no worse than what were already low expectations," wrote Lehman Brothers analyst Bob Hopkins, who has an equal-weight rating on the stock. "The issue, however, is not the current quarter or even the next quarter, but rather where pricing will end up in 2006, 2007 and beyond, and what impact that will have on the top and bottom line growth outlook for all the ortho companies."

By now, of course, the orthopedic stocks have taken a hit in anticipation of a slowdown. Even so, bearish investors still foresee additional pain ahead.

The Good Old Days

Granted, some experts disagree. Take SIG Susquehanna analyst Mark Landy, for example. Landy believes that Zimmer actually offered up a "worst-case scenario" with plenty of room for positive surprises.

Still, others aren't so sure. For example, one analyst noted during Thursday's call that Zimmer's lowered fourth-quarter expectations imply revenue growth of just 6% -- and questioned how the company expected to achieve higher growth in 2006, given the headwinds coming its way.

Elliott, at least, sounded confident. He pointed to a combination of factors, especially the rollout of new products, as positive forces.

"I'm not concerned about the directional guidance at all," he concluded. "I think it's solid."

But Elliott has wound up wrong before. After all, Hopkins pointed out during Thursday's call, Elliott was still forecasting 2006 profit growth of 25% just one quarter ago.

What, Hopkins wondered, had caused such a dramatic change?

To explain, Elliott described implant pricing back in "the older times -- a few months ago." Then, he said, Zimmer was still anticipating price increases of between 1% and 3% in the U.S. Now, he said, the company expects price cuts of 1% in the U.S. and must also grapple with unexpectedly harsh price cuts of up to 8% in the big Japanese market as well.

Without those changes, he said, Zimmer would be looking to generate around 40 cents more in profits and approach its original 25% growth target for next year.

Still, was already warning about pricing pressures in the U.S. market during the so-called "older times" four months ago. Back then, reported, at least one hospital system had managed to negotiate price cuts of 45% on artificial hips and secure similar discounts on artificial knees as well. A few bearish analysts had started focusing on implant pricing, too, and many others have steadily followed suit.

But in the end, it seems, the market waited for signals from Elliott himself. It was only after he grew noticeably cautious, after all, that ortho stocks really began to sell off.

For his part, Elliott seemed to challenge the idea that some had offered earlier warnings and question their "bizarre rush" to claim that they had.

"They weren't even saying that a month ago," he said. "We say, 'Check the record.'"

'Fact vs. Fiction'

Ultimately, Elliott labeled the whole notion one of five "myths" swirling around the orthopedic industry today. But he chose another as his favorite myth of all. He cast doubt on the widespread belief that most hospitals lose money on joint replacements for Medicare patients. For that to happen, he said, the hospitals must be "really poorly run" and operate in an academic setting. They must be securing only the base $10,000 reimbursement from Medicare. And they must be using only expensive higher-end implants.

Yet Bernstein analyst Bruce Nudell still cannot see how hospitals really make money on those cases. He estimates that hospitals collect just $11,000 for each Medicare joint-replacement surgery and wind up spending more than half of that -- about $6,000 -- for the implants themselves. After that, he notes, they have only $5,000 left to cover the costs of a major surgery and an estimated four-day hospital stay.

Lee Memorial Health System, one of the busiest hip-replacement centers in the country, has already told that it cannot make money under that scenario.

"We actually lose money on what is a massive growth business for us," Lee Memorial CEO Jim Nathan said back in early April . "It's a significant issue."

But Elliott claimed on Thursday that hospital consultants simply make such arguments because they "want to make a point" when negotiating prices with the industry.

"It's pretty easy to take apart," he insisted. "I'll stand by what I said."

Elliott attempted to shoot down three other "myths" as well. Despite what some may say, he said, the current situation is no replay of the sharp downturn that hurt the industry more than a decade ago. Nor, he said, is the "magic of diversity" -- away from joint reconstruction -- a favorable option. And ultimately, he declared, ortho stocks are not "a bad place to be."

"That's fact vs. fiction," he said when explaining one myth. "That's Zimmer reality."

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