May 2018 

Financial Times

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Cochlear chief executive Dig Howitt says the company's China strategy is 'more about market presence, building understanding and working with government than low-cost manufacturing' 

Cochlear has teamed up with Apple to create technology that streams sound direct from iPhones to enhance users’ hearing capabilities. “I can hear clearer than some of my friends in loud clubs by dampening the background noise through my mobile,” said Kate Obermayer, a Cochlear employee and one of the first users of its Nucleus 7 iPhone-compatible processor. “It has also got me hooked on podcasts, which I can stream to my sound processor.”  The processor is the latest innovation by Cochlear in the US$1.2bn a year global cochlear implant market, which it has dominated since performing the first commercial implant in 1982.

The tie-up with Apple and the start of construction on Cochlear’s first manufacturing plant in China — the fastest growing implant market, accounting for around a tenth of global demand — have helped drive a 40 per cent surge in its share price to almost A$200 over the past year. Investors have also warmed to Cochlear’s push into the seniors’ market, betting that an ageing population will fuel growth in implant recipients, now about 600,000 people worldwide. Most implants are targeted at the paediatric market. 

But competition is intensifying from new entrants, particularly in China where Nurotron — a Hangzhou-based company founded in 2006 that licenses technology from the University of California, Irvine — is gaining market share. This is causing some analysts to question Cochlear’s A$11.2bn valuation, translating to a 50 times price-to-earnings ratio.  “We think the market is underestimating the threat of new entrants encroaching on the emerging China opportunity where government tenders have provided newcomers an entry point based on price,” said Chris Kallos, analyst at Morningstar.  Mr Kallos predicts the oligopoly enjoyed by Cochlear, Swiss-based Sonova and Austria’s Med-el in emerging markets until now is under threat from Nurotron, which slashed prices by up to 25 per cent in the past two years. He forecasts Cochlear’s market share will decline from 60 to 56 per cent by 2022.  Last year Nurotron won 38 per cent of government tenders for implants in China, compared with 19 per cent by Cochlear. In previous years the Australian company typically won between a third to a half of each tender. In 2017 Nurotron also expanded into Europe and Latin America. 

Cochlear is responding by investing more in China. It began work on a A$50m plant in February, which will boost its implant production by 50 per cent. It is also partnering with the Sichuan provincial government to establish a hearing research centre.  “The overseas companies that have been successful in China are the ones that invested in the country,” said Dig Howitt, Cochlear’s chief executive. “Our investment is more about market presence, building understanding and working with government than low-cost manufacturing. This is a regulated industry where government funding is important.” 

Sales of Cochlear implants rely heavily on public health systems for funding, and on local doctors and surgeons for product recommendations to patients. Cochlear hopes that by investing in China it will gain more access to local health providers and boost its brand recognition.  Public tenders in China awarded contracts for 7,500 cochlear implants in 2017 but the private market could be roughly half that, say analysts. “This is a huge potential future market and we want to be an important player,” said Mr Howitt.  Mr Howitt said superior technology such as the iPhone-compatible Nucleus 7 will enable Cochlear to outperform its competitors. But he said the big opportunity was in extending the market to the over-65s, where implant penetration levels are just 3 per cent. 

“Cochlear implants have been established as the standard of care for newborns in many developed markets but an ageing society creates a big market,” said Mr Howitt. “Boosting awareness of our products is the biggest issue we face, as well as developing an understanding of how important hearing loss is to overall health.”  The World Health Organization estimated in 2015 that half a billion people, almost 7 per cent of the population, experienced disabling hearing loss. There is growing research that treating hearing loss would help to forestall social isolation and aid job prospects, and might help prevent cognitive decline, depression and dementia. “Many people see hearing loss as just a normal part of ageing,” said Mr Howitt, “but you don’t have to put up with it.”

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