Cochlear hard of hearing

A big contract loss in China and new competition have made life tough for Cochlear.

Cochlear's (COH) star appears to be waning among customers and investors, as highlighted by last week's devastating tender loss on a Chinese government contract.

For years a world leader, an Australian success story that has been first choice for biotech and health sector investors, Cochlear has now found itself in the uncomfortable position of playing catch up. But it is refusing to listen to shock waves sweeping through the market.

It is only now that the full ramifications of its technical glitch and the embarrassing and costly recalls on its Nucleus 5 device in September 2011 are starting to be felt.

For despite all the promise that its new Nucleus 6 device holds, along with the potential for a broader market base, the company has opened the door to competition that is likely to forever alter the dynamics of its business.

A week ago, Swiss group Sonova won a tender to supply China with 1,500 of its hearing implants, meaning the Chinese Government only needs another 1,200 units to fill its quota for the year. And that means Cochlear will not sell anywhere near the 2,800 units it sold to China last year.

As the undisputed technical innovator and market leader for years, Cochlear has long been able to resist the temptation to discount, arguing that rival products were inferior. The recall may have changed all that but the company's attitude to discounting remains firmly in place.

In the most recent results, sales drops across in most jurisdictions were compensated by last year's large tender win in China. That will not be the case this year and analysts now are busy calibrating the expected impact of the loss, with most now advising investors to sell Cochlear.

As an innovator and leader with what once seemed unlimited growth, Cochlear has traded on rather heroic multiples. Even after the recent setbacks it still commands a PE ratio of more than 20.

A Chinese company, Hangzhou Neurotron, also is rapidly gaining ground, developing a device that it plans to sell for one third of the more than $30,000 Cochlear charges for an implant.

If that kind of discounting spreads to other jurisdictions, Cochlear will need to focus on costs if wishes to remain competitive. But given the discounting that has characterised the revolution in electronic device production in recent years, Cochlear will be unable to remain impervious to the competitive forces now sweeping through its industry.

The roll-out of its Nucleus 6 device – which has the potential to expand the market into adult hearing – has been slower than expected due to regulatory hurdles in America. Its Swiss rival Sonova, meanwhile, received full approval before the launching its latest device.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles