J&J's aggressive moves in orthopedics has industry executives nervous, most recently about its purchases of artificial disk maker Waldemar Link and biomaterials expert Orquest. The Link valuation (J&J is paying $325 million upfront, plus earn-outs) isn't quite as high as some earlier orthopedics deals, but it is still comparatively substantial. With Link and Orquest under its roof, J&J is poised to assume market leadership in the traditional orthopedics markets and also in spine.

The once consolidating orthopedic implant business is, if anything, going in the opposite direction, given the decisions this week by parents of two of the leading companies to create stand-alone companies of their orthopedic businesses. Bristol-Myers confirmed what had been rumored for months: that it will spin off its Zimmer orthopedics business into a public company rather than sell the company to some other player. Earlier, Sulzer announced that it plans to spin off its medical device business, Sulzer Medica, in response to pressure from a large investor who was concerned about the industrial giant's declining stock performance. But these individual deals also represent a surprising industry turnaround--the consolidation of two years ago has largely stabilized pricing, allowing independent companies to thrive once again.

Orthobiologics are now on the horizon, driving suppliers to increase R&D spending. The goal is to develop high-margin products that will actively promote bone formation. Has the slow progress to commercialization of the first two products--bone morphogenic proteins developed by the collaborations of Stryker Corp/Creative Biomolecules and Genetics Institute/Sofamor Danek--helped prime the market to accept a new technology? Or has the perception of delay dampened enthusiasm and scared off some of the big orthopedics players?

Are small-cap stocks stuck in a temporary down cycle? Or are they being hurt by structural changes in the investment community? True, investment funds have increased in size to such a degree that it has become financially impossible for most of them to invest in small cap companies. But small companies have things that large companies don't--innovative and differentiable products that are so crucial to the growth of large companies. {IN VIVO} talks with top-ranked health care analyst Dan LeMaitre of Cowen & Co. about the pressures on large and small device companies.