Zimmer Holdings falls following downgrade

NEW YORK - Shares of Zimmer Holdings Inc. declined Tuesday after a Morgan Stanley analyst downgraded the stock, saying orthopedic implant companies need to make changes to recover from the economic downturn.

David Roman cut his revenue growth estimate and downgraded Zimmer shares to "Underweight" from "Equal Weight." The change reflects Roman's view that procedure volumes won't rebound very much as the economic slump ends. The companies need to find new areas to innovate because their implant products aren't very different, he said.

Roman said potential fields of focus are surgical robots and precision surgery in the near future, and cartilage preservation and tissue regeneration in the years after that. In his view, orthopedic implant design may have peaked, and patients are increasingly turning to less-intrusive treatment options.

Zimmer and Smith & Nephew PLC don't have much financial flexibility in Roman's view. He said about 70 percent of Zimmer's revenue comes from sales of knee and hip implants, and the company is losing market share. Roman believes that lack of flexibility makes it harder for the company to invest in new technologies, so he suggested the company focus on returning cash to shareholders and improving its position in the market.

He maintained an "Equal Weight" rating on Stryker Corp. shares, saying that company has more room to maneuver, and downgraded Smith & Nephew to "Underweight."

In the past, he said, the implant makers had been able to use close relationships with surgeons and vendors to their advantage. But their consulting activities are constrained as a result of government scrutiny, he wrote.

A group of five implant makers, including Zimmer and Smith & Nephew PLC, agreed to pay a combined $310 million in 2007 to resolve allegations that they gave money and trips to surgeons who used their products.

Shares of Warsaw, Ind.-based Zimmer fell 91 cents, or 2.4 percent, to $37.78 in afternoon trading. Smith & Nephew stock rose 38 cents to $37.75, and Stryker shares slipped $1.50, or 3.9 percent, to $37.34.

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