Apparently the demand for implants for baby boomer’s aging knees and hips are bigger drivers in the orthopedic implant markets than recent negatives.

Those negatives aren’t small. They include accusations of kickbacks amounting to fraud, new investigations surrounding potential violations of foreign corrupt trade practices and legislation pending that could affect device prices, according to Bear Stearns & Co.

But Raj Denhoy, med-tech analyst with Bears Stearns, recently has issued relatively positive reports on large cap orthopedic companies Stryker (Kalamazoo, Michigan), Smith & Nephew (S&N; London) and Zimmer Holdings (Warsaw, Indiana). And Denhoy is predicting the market for orthopedic implants will continue to grow at an average of 8%-10% per year, indefinitely.

“It’s a sustainable growth pattern,” Denhoy told Medical Device Daily. “Unless something happens to change things, we’re not expecting any paradigm shifts in the near term.

“Obviously there are some macro concerns out there on cost containment, like the rest of healthcare,” he said, “but for the most part we don’t expect these to have any large impacts on growth for this sector.”

Denhoy’s rosy outlook follows a string of bad news for implant makers:

In September, five medical device implant manufacturers settled with the U.S. Department of Justice to resolve fraud allegations, with four of those companies agreeing to pay about $311 million and consenting to federal monitoring and other reforms.

The agreements settled a government probe into improper consulting contracts with surgeons. Translation: company payments to the surgeons for using its products. The companies involved included Biomet (Warsaw, Indiana); DePuy Orthopaedics (Raynham Massachusetts), a unit of Johnson & Johnson (New Brunswick, New Jersey); S&N; and Zimmer. Stryker paid no civil settlement, but it is part of the pact and has agreed to the reforms, including 18 months of federal monitoring (Medical Device Daily, Sept. 28, 2007).

In mid-October, the U.S. Securities and Exchange Commission initiated an investigation into potential violations of the Foreign Corrupt Practices Act regarding the sale of devices in a number of foreign countries. Letters announcing the investigation were sent to several companies, including Stryker, S&N and Zimmer.

Later in October, Sen. Chuck Grassley (R-Iowa) and Sen. Arlen Specter (R-Pennsylvania) introduced the Transparency in Medical Device Pricing Act of 2007, legislation intended to prevent the taxpayers from being overcharged for implants paid for through Medicare, Medicaid, and the Children’s Health Insurance Program.

If it becomes law, the legislation would require manufacturers to submit to the Secretary of Health and Human Services on a quarterly basis data concerning average and median sales prices for all implantable medical devices used in inpatient and outpatient procedures.

One could easily assume that these events would do serious harm to this sector.

But Denhoy said demographics and advances in new technology are such strong market drivers that implant performance won’t stumble.

Of the three major players, Stryker seems best-positioned to deliver consistent earnings growth, he said.

“Stryker is our favorite. The company generated 18% top-line revenue growth in the third quarter. The company takes the upside and plows it back into the business, and that’s part of the reason the company has been so successful over the last several years.”

S&N was upgraded from peer perform to outperform by Bear Stearns. “We’re going to see earnings growth accelerating to 21% in 2008. This is going to be a very attractive story,” said Denhoy.

Zimmer’s 2008 earnings, however, are at risk, he said. Among other reasons, the high costs of compliance with the DoJ settlement ($169.5 million) could drive 2008 earnings lower than anticipated.

“Uncertainty on the earnings will keep us on the sidelines for now,” said Denhoy. “With new management they have decided now it’s time to reinvest back into the business. It’s not a great time to own the stock.”

Despite Zimmer’s current status and other recent rumblings affecting the sector, it will take a lot more to slow the robust growth Bear, Stearns predicts for orthopedic implant makers in the next few years.

Bear Stearns’ predictions are focused only on the hip and knee implants market, which make up about 44% of the worldwide $23 billion orthopedics market.

Denhoy said his company focuses on these segments because they are considered “bellwethers” for the entire industry.