INSIGHTS

WEEKLY COMPANY INSIGHT: COCHLEAR

Roy Davidson, 3 October 2019

COH031019 

Description

Cochlear (COH) is the leading global manufacturer of cochlear implants which are used to restore hearing for patients with severe to profound sensorineural hearing loss. The company also makes bone anchored hearing aids for patients with less severe forms of hearing loss. 70% of all implanted cochlear implants have been manufactured by COH and the company’s name is synonymous with the product category, a rare feat.

What are cochlear implants?

Cochlear implants are medical devices that are used to partially restore hearing for patients with severe to profound ‘sensorineural’ hearing loss in which the inner ear is not functioning properly. This can be either congenital or acquired later in life. For severe to profound sensorineural hearing loss, hearing aids, which simply amplify sound, are a much less effective treatment option, and a cochlear implant may be required. A cochlear implant essentially converts sound into an electric signal that is transmitted directly to the inner ear (cochlea) and, in turn interpreted by the brain as sound, bypassing the part of the ear that isn’t functioning properly.

Opportunity lies in Adults and Seniors segment

COH estimates that its addressable market is less than 5% penetrated with there being more than 15 million people globally that could benefit from a cochlear implant or a bone anchored hearing aid (Baha). With the Children segment relatively mature (60% penetrated in developed markets), COH is currently targeting the Adults and Seniors segment which it estimates is less than 3% penetrated in developed markets. COH is focusing its efforts on building awareness in this channel to increase penetration. This includes direct to consumer marketing and working with the hearing aid channel to build a clear referral pathway for adult patients. COH is also working with various groups (surgeons, audiologists) in the hopes to develop a standard of care to ensure more consistent diagnosis and treatment of severe to profound hearing loss.

Sound processor upgrades drive recurring revenues

Once a patient has been implanted with a cochlear implant, the external sound processor is typically upgraded every five years when it reaches the end of its useful life or to take advantage of features available in new processors. This sound processor upgrade cycle is attractive as it creates a stream of recurring revenue for COH at a relatively high margin. Over the past five years, Services revenue has almost doubled, growing from 24% of revenue to 30%.

A high quality company, but not cheap

COH is a very high quality company, as evidenced by its track record of growth and its sector leading return on invested capital. However, it is not cheap, though this is largely explained by the company’s high returns and growth outlook.

Risks

  1. technological advancement
  2. decreased government funding
  3. increased competition
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