Owners of orthopedic-device stocks are starting to relax. Over the course of the past week, they have learned that a criminal probe of the industry could prove far narrower than they had previously feared. Zimmer ( ZMH) and, more recently, Biomet ( BMET) have now reported that a government inquiry into possible antitrust violations centers on actions by an unnamed competitor involving a single hospital. Both companies say they didn't engage in any questionable practices themselves. (On Monday, Smith & Nephew ( SNN) identified one of its independent sales representatives as the likely culprit. Smith & Nephew said that it has severed ties with the individual and believes that the company itself did nothing wrong.) Shares in the group have risen in relief. Zimmer, which hit a 52-week low of $52.20 earlier this month, climbed 3% Friday to $62.39. Similarly, Biomet has bounced 10% off a recent low of $30.22. It rose 2.2% Friday to $33.31. Some analysts have started feeling better about industry giant Zimmer in particular, as a result of the updates. "Considering Zimmer's belief that negotiations with only one hospital are the subject of the investigation, the dramatically narrowed scope likely limits the potential penalties," Thomas Weisel Partners analyst David Lebowitz wrote on Thursday. "This will reduce the overall pressure this investigation has placed on orthopedic company shares. In addition, specifically with respect to Zimmer, it seems that the company is not likely the primary focus of the investigation." Lebowitz went on to note that Zimmer reported that it had reached an agreement with the hospital in question -- without participating in any pricing schemes -- in early 2006. He acknowledged that the company had finalized a deal with a major customer, HCA ( HCA), during that same time frame. But he doubts that the HCA pact caused the antitrust probe, since only one hospital is apparently involved. Lebowitz has an outperform rating on Zimmer's stock, which he values at between $68 and $75 a share. His firm hopes to secure investment-banking business from the company over the next three months.
In any case, Zimmer has seen the government probe threaten its bottom line. Notably, the company last week lowered its second-half earnings guidance by 2 cents because of legal expenses. The company did, however, keep its aggressive revenue forecasts intact. In order to hit its targets, the company needs to more than double its recent sales growth rate -- to at least 10% -- in the final two quarters of the year.