Markets: Hard for hearing

Hearing implant maker Cochlear is maintaining market dominance but faces another challenging year as offshore rivals up the competition, especially in emerging markets.

Although Cochlear Limited (COH) has announced profit results in line with their estimates for the year, they are amid an increasingly competitive industry which will put pressure on future earnings.

Competition is coming from Switzerland-based Sonova Holding AG, a company with core businesses of hearing instruments and hearing implants. Then there is China’s Hangzhou Nurotron Biotechnology who recently received approval to compete with Cochlear for Chinese government contracts, sending Cochlear’s share price down 18 per cent in one day in June.

Citibank notes Cochlear’s growth in the US and Europe, major markets for the company, are slowing down compared with historical averages. This is a reflection of slowing industry growth rates and/or loss of market share to Sonova.

Sharing a similar view is Morgan Stanley, citing Cochlear’s dominant market share as vulnerable.

The emergence of Nurotron is set to disrupt Cochlear’s focus on emerging markets China and India, with this sector accounting for 34 per cent of Cochlear’s sales in the 2012 financial year. Of Sonova’s offerings, only 11 per cent of sales are generated in the Asia region. 

Reports indicate Nurotron can sell a hearing device for half the price of Cochlear, putting the Chinese firm in a good position to be the preferred device supplier with cash conscious buyers in the communist state.

Another advantage to Nurotron is their close ties with the government, which can be more than helpful when doing business in China.

Nurotron have specifically focused on China, however their CS-10A hearing device is sold globally. Sonova has new products on the horizon, potentially chopping more of Cochlear’s market share.

The long-term implications from Nurotron’s entrance offering a low cost alternative could result in a shift in the price of cochlear implants, which has been dominated by Cochlear from the beginning. Even though the number of cochlear implants have grown over the years, the price has remained unchanged as Cochlear have had around 70 per cent of the market share and have been able to control the price.

In the absence of profound competition, Cochlear’s earnings per share grew at a compounded annual growth rate of 11 per cent from financial year 2008 through to 2011 inclusive.

This year, however, marks the second difficult financial year running for Cochlear, with a voluntary recall of implants disrupting the share price during the 2012 financial year and threats of increased competition claiming this financial year.

If Cochlear wants to compete with lower prices, as their business stands today it will most likely lead to lower profit margins and falling earnings per share, unless they can increase volumes sold.