MARKETS SPECTATOR: Cochlear's forecast fade

Cochlear's chief says increased competition and a disappointing profit forecast does not mean the hearing implant market has reached the peak of its market share.

Cochlear has, with much fanfare in Istanbul, released its next generation of hearing implant aids based on custom chipsets called 'Nucleus 6'. A release in South Korea is expected to take place within days followed by a North American release in Canada. All well and good.

But the company’s new product release comes with a rather big caveat: a profit forecast. Cochlear says “second financial year half sales have been weaker ahead of the much anticipated launch of Nucleus 6".

The company has experienced “slower market growth” in the US. In an ASX statement today Cochler expects net profit for the 12 months to June 30 to be $130-$135 million.

That must come as a shock to analysts following the stock. Chris Roberts, Cochlear’s chief executive, told Markets Spectator that analysts as a group had on average net profit forecasts of between $150-$155 million.

Not surprisingly Cochlear’s shares have plunged. At 1205 AEST the stock was down $7.85, or 12.16 per cent, to $56.69. The benchmark S&P/ASX200 Index had fallen 0.08 per cent to 4930.30. Cochlear’s shares have slumped 21 per cent since their 52-week high of $82.87 on February 29.

Some analysts, including Morgan Stanley’s Sean Laaman, who has an 'underweight' recommendation on the stock, already view Cochlear as riding on the crest of a wave. They don’t think the company’s market share could get any better than its estimated 70 per cent of the hearing implant market. People who are suffering from a deterioration in their hearing may not be shifting to Cochlear products. Laaman estimates that of the 150,000 patients surveyed in 2012 who became profoundly hearing impaired from severe hearing impaired, perhaps only as many as 22,500, or 15 per cent of them, received a Cochlear implant.     

Moreover, competition for Cochlear is heating up. The US company Advanced Bionics is launching new products at the same time as Cochlear. Austria’s Med-EL has launched an all-in-one speech processor. Denmark’s William Demant has bought Neurelec, a second-vertically integrated competitor t Cochlear.

So what, says Cochlear chief executive Roberts. He welcomes competition as it will educate the market to demand better and more sophisticated products.

Roberts is optimistic the Nucleus 6 will be a “game changer”. The device, inserted through surgery into the head behind the ear, can analyse the environment and change the program of the device to suit the wearer of the device. It also gives wireless connectivity to consumer electronic devices, provides data for clinical analysis and has a hearing aid built into every sound processor. As awareness grows of Nucleus 6 and its competitors then demand for such hearing implant devices will continue to grow.  

Cochlear stock was trading at a five-year price earnings ratio of 22.1 times, according to Laaman. The company’s shares were trading as high as 24.4 times. It is unlikely the stock will trade at such levels again this year as by Roberts own admission it will take a year or so to gauge the market’s reaction to Nucleus 6.

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