ANALYSIS-Ortho stocks may be vulnerable as job losses mount

By Debra Sherman

CHICAGO (Reuters) - Knee replacement surgery can cost an arm and a leg -- and can seem even more daunting during hard economic times.

Sales of knee and hip implants in the lucrative U.S. market slowed in the first quarter amid an overall decline in elective surgery. Some analysts say the trend may continue as job losses mount, insurance policies disappear and post-employment health coverage expires.

And shares of orthopedic device makers, historically a safe haven during an economic downturn, may be vulnerable. Demand for such devices is expected to remain strong over the long term as baby boomers age, but signs of a short-term hiccup have emerged.

"Historically, these procedures haven't been affected by the economy. What has changed since the last big recession is that people's co-payments weren't as high as they are now. And I don't think there were as many uninsured," said Wachovia analyst Michael Matson.

"Given that the nature of this recession is different in that it's consumer-led rather than business-led, and given that insurance is disappearing, I'm concerned (orthopedic device makers) could have more economic exposure than people realize," he added

Without insurance, a new knee can be expensive. The average cost of a total knee replacement, excluding doctors' fees, was $31,000 in 2003, the latest year for which data are available, according to the U.S. Agency for Healthcare Research and Quality.

Dr. Mary O'Connor, an orthopedic surgeon at Mayo Clinic in Jacksonville, Florida, said her patients are more aware of out-of-pocket expenses and try to time elective procedures to minimize costs.

"If they're not miserable and they can delay surgery for three or six months, then they would do that," she said.

Elective surgery tends to trend up heading into recession because people realize their jobs are at risk; they rush to get medical attention paid for by insurance, said BMO Capital Markets analyst Joanne Wuensch.

Indeed, the 2007 fourth quarter produced an uptick in hip and knee replacements.

"If the economy continues to sputter, and unemployment rises, elective procedures will go down," Wuensch said. "That says nothing of the tough fourth-quarter comparisons the ortho companies now face."

Orthopedic device maker Zimmer Holdings Inc (ZMH.N) last week posted weaker-than-expected first-quarter sales of hip and knee implants.

"I don't think we're seeing fundamental impact," Zimmer Chief Executive David Dvorak told a conference call. "I suppose if there was a long-term and sustained economic downturn, that could have an impact, but we aren't seeing those signs in the core business."

Quarterly results from Zimmer rivals Stryker Corp (SYK.N), Smith & Nephew (SN.L) and Johnson & Johnson's (JNJ.N) DePuy unit also reflected slower growth in the reconstructive implant market. But a big slowdown in Stryker's hip sales was due mostly to the company's hip product recall.

"TOO EARLY TO TELL"