If 1946 saw the start of the post-World War II baby boom, then 2011 was a significant year as the first boomers reached retirement age – and began to need such health products as hearing aids. Australia-based Cochlear Ltd. (COH.AX) is the global leader in the production of implantable hearing devices. Let’s listen to the latest word on its outlook.
The “Global Hearing Aid Market Report: 2013” by Research and Marketing says that the number of people suffering from a hearing impairment has been rising in the last few years. Technology such as wireless connectivity, Bluetooth and FM are now essential components of hearing aid research and development.
Cochlear operates in three areas: cochlear and hybrid implants, bone conduction implants and acoustic implants. During Alpha Deal Group’s initial due diligence call, CEO Chris Roberts said the company operates directly in 20 countries and sells its products on more than 100 markets around the world, employing 2,700 people. Cochlear is focused on patients with severe to profound hearing impairment, consistently investing in SGA and research and development. For 2014, it will invest more than $60 million in R&D alone.
Nucleus 6 and Baha speak up
The latest additions to the company’s commercial portfolio were three devices and systems which it started commercializing in the second quarter of fiscal 2014, ending in December 2013.
These included the Nucleus 6 cochlear implant system, the Baha 4 Sound Processor and the Baha Attract system. Nucleus 6 is a hybrid implant that boasts the smallest sound processor currently available on the hearing aid market, wireless connectivity, a scene classifier that allows the device to switch between different technologies to help the wearer adapt to different sound environments, and an intelligent, fully automated sound management system. It has the option of logging data and is water resistant. The Nucleus 6 was approved for commercialization in Europe and the U.S.
Cochlear also received regulatory approval for its Baha 4 Sound Processor and Baha Attract system and started marketing them in Europe and the U.S. They are both part of the bone conduction and acoustic range, featuring advanced technology. The Baha 4 Sound Processor includes a set of wireless accessories, including a mini microphone, a phone clip, a remote control and a wireless TV streamer that help their users talk on the phone and watch TV.Baha Attract supports the work of the sound processors and the implants from the Baha series by providing a magnetic connection between the two. After the launch of Baha Attractin the second quarter of 2014, more than 200 surgeries implanted the devices.
Cochlear also received a preliminary approval from an FDA Advisory Panel for a new hybrid cochlear implant dubbed PMA, which combines electrical stimulation for higher frequencies with acoustic amplification for lower frequencies. This would expand cochlear implant indications and allow patients in the U.S. to make the best of any residual hearing. Final approval by the FDA is expected soon. In Europe, Cochlear got the CE mark for three new devices, Codacs, Carina and MET.
Faint start but louder signals later
Cochlear started its financial year sluggishly, with sales slowing down before the launch of its new products, but the company said it expects that the second half of the year will improve. A contributing factor for the slow first half was the loss of some market share in the area of cochlear implants, mostly in the U.S. In addition, the company was hit by a A$22.5 million provision related to a patent dispute.
Total revenues for the six months stood at A$271.1 million, a 5% drop on the year from $291.7 million. Sales revenues, however, marked an improvement of 2%, mostly thanks to a 19% increase in sales of bone conduction and acoustic devices to A$45.9 million, from $38.5 million. Sales of cochlear implants remained almost flat on the year at A$331.1 million, compared with A$329.7 million a year earlier. Unlike in the first half of 2013, when it booked FX contracts gains of A$23.5 million, in the respective period of financial 2014 it reported a loss of A$5.9 million, a 125% annual decrease.
Cochlear share price
Source: Eikon/StarMine
Hear the earnings news
Earnings before interest and tax stood at A$26.9 million, including the A$22.5 million patent dispute charge, down 75% from the $108.3 million booked in EBIT a year earlier. Net profit after tax was A$21 million, down73% from A$77.7 million for the first half of 2013. Earnings per share stood at A$0.37, down from A$1.37 in H1 2013, or another 73% drop. Dividend payout was set at A$1.27 apiece, a 2% increase from last year’s A$1.25.
In constant currency, Cochlear’s sales revenue was down by 8% on the year but in line with the figure for the second half of financial 2013. The company also booked deferred revenues of A$6.8 million related to the Future Technology Exchange Program in the U.S. The first quarter of financial 2014 was the lowest point for the company – in the second quarter, sales were more than 30% better than those in the first quarter.
Cochlear financial strength
Source: Eikon/StarMine
Mixed signals
The biggest global players include Sonova, William Demant, Siemens, and GN ReSound. However, they all have a much wider scope of operations, including diagnostic audiology equipment and personal communication devices, not to mention Siemens’ numerous areas of business. Cochlear specializes only in the implantable technology niche, which could give it a good competitive edge, especially since it is focused mostly on the severe to profound hearing impairment market. On the other hand this narrow scope could make it vulnerable to potential weakening in demand. The company seems aware that it should continue innovating and offering the market improved products in order to keep this edge.
Loud and clear
Planning to continue investing heavily in research and development, Cochlear expects a net profit after tax of A$70-80 million for the second half of financial 2014 and an improved operating margin (which dropped to 7.1% in the first half of 2014 from 29.4% in the previous year).
The company will also benefit from the global drivers of the hearing aid and implantable devices market. In light of our initial due diligence, we would clearly say that this is an ideal entry point for long-only value market players.
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