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TWST: Give us an idea of what you cover in the orthopedic space.
Mr. Wittes: I cover all the large cap orthopedic names ' Biomet (BMET),
Stryker (SYK), Zimmer (ZMH), Smith & Nephew (SNN), and Wright Medical
(WMGI). TWST: What is going on in the orthopedic market at this juncture?
Mr. Wittes: I think we've seen a dramatic loss in pricing power among
the orthopedic companies in 2005. Looking at 2006, we expect pricing to
be flat to down, which is dramatically below the 4%-5% price inflation
they enjoyed the previous five years, but it's closer to the realities
of most other medical technology markets. This is a reversal of a trend
that had lasted about five years prior, when companies could pretty much
ask whatever they wanted and not run up against much of challenge from
their customers ' the hospitals. TWST: What has changed? Why this shift?
Mr. Wittes: It's all about profitability or lack thereof. Early last
year we did a survey of US hospitals (the smaller overseas market has
never had good pricing to begin with), which indicated about two-thirds
were no longer profitable with hip and knee procedures. That is a
dramatic shift in economics, as orthopedics, specifically hip and knee
procedures, used to be a major profit center. This situation really did
force some tough decisions and much greater scrutiny than ever before.
This also forced hospitals to make some tough decisions and begin
working more closely with the main gatekeeper ' the orthopedic surgeons
' to get pricing down. Once this trend became apparent to us, we
downgraded the group in early February of 2005, which, at the time, was
quite controversial, as these stocks were trading at all-time highs,
but, given the correction in valuations seen during last year, it has
been pretty much accepted by now.
Tickers included in this excerpt: BMET, SNN, SYK, WMGI, ZMH
For more information call (212) 952 7433. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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