Aug 2018 Sydney Morning Herald

Hearing implant maker Cochlear has hit a business milestone, selling more than 550,000 implants to people across the world, which helped lift full-year net profit 10 per cent to $245.8 million.

The Sydney-headquartered company reported its decision to ramp up marketing to consumers has helped, with sales revenue up 9 per cent (in constant currency) to $1.35 billion. Net profit guidance for the 2019 financial year is between $265 million and $275 million, an expected 8 to 12 per cent increase on FY2018. There was a 14 per cent increase in the final dividend to $1.60 a share, with full-year dividends up 11 per cent. Despite the higher profit results, the company's share price lowered 5.33 per cent to $188.18 as its FY2019 guidance fell short of market expectations.

Dig Howitt

Cochlear chief executive Dig Howitt: "We reached a major milestone early in FY18."

Macquarie Wealth Management analysts said in a research note that while the company has an attractive product offering, "current valuations appear to be factoring in market share and/or industry growth rates ahead of our base case forecasts”.  It has an underperform rating on the stock at $198.78, which is below the $200 share price mark that Cochlear reached last month.

Cochlear implant units sales rose 8 per cent to 35,260 units sold, which was up 11 per cent excluding Chinese Central Government tender units.

“We reached a major milestone early in FY18," Cochlear’s chief executive and president Dig Howitt said. "We have now provided more than 550,000 of our cochlear implants, bone conduction implants and acoustic implants, helping a growing number of people hear with one – or two – of our implantable devices.” He said growth was expected to continue across the business in fiscal 2019, underpinned by the significant investments made in product development and market growth initiatives over the previous few years. The company had launched new products for customers and would continue to invest operating cash flows in activities aimed at building awareness and market access, he said. “Over the next few years, we have a number of large long-term investment projects, including the development of our China manufacturing facility, with the construction phase expected to be complete by the end of FY20, and investments in IT platforms to strengthen our connected health, digital and cyber security capabilities," he said. "These projects are expected to increase capital expenditure levels to $80 million-$100 million per annum over the next few years."

Mr Howitt said the 500,000 milestone was also a reminder of the opportunity for Cochlear.  He said fewer than 5 per cent of people worldwide who could benefit from an implantable hearing solution were currently being treated. "Cochlear has prioritised three market segments – adults and seniors in developed markets; children in developed markets; and children in emerging markets – with strategies to improve awareness and access tailored by segment," he said. “The adults and seniors in the developed markets provide the biggest opportunity for Cochlear given the large, and growing, market size as the population ages.” But this segment was challenging to penetrate as most candidates suffered from progressive hearing loss and did not know about Cochlear and bone conduction implants. Penetration rates were currently very low, at around 3 per cent, but the seniors segment was the fastest growing for Cochlear over the past few years, he said.

"We have been increasing our investment in health economics, our market access capability and the collaborative partnerships we have with the medical research community to build on the clinical evidence that demonstrates the effectiveness of our products, particularly for seniors," he said.

Over the past year, Cochlear has pledged funds to the Johns Hopkins Bloomberg School of Public Health to establish the Cochlear Centre for Hearing and Public Health.  The centre will be the first of its kind at any academic institution focused on addressing hearing loss.

It has also established the co-funded Cochlear Chair in Hearing and Healthy Ageing at Macquarie University, for research into hearing in Australia. “We will continue to invest in driving referrals via our successful direct-to-consumer marketing activities as well as through the hearing aid channel," Mr Howitt said. The company was performing well in developed markets including the United States and United Kingdom and much of Western Europe, Australia and Japan. Sales in these markets grew 9 per cent. Emerging market units grew more than 15 per cent (adjusted for the impact of lower Chinese government tender units), with strong growth in the Middle East and the China private pay market.

“The Nucleus 7 Sound Processor, the world’s first made-for-iPhone cochlear implant sound processor, was launched during the second quarter across key markets including the US, Western Europe and Australia, performing well in its first nine months," Mr Howitt said. In June, the Nucleus Smart App for Android smartphone users was released, allowing recipients with a compatible Android device to control their hearing with the Nucleus Smart App. And the Baha SoundArc was launched, providing a non-surgical bone conduction solution that works with all of Cochlear’s Baha 5 sound processors. “The services business performed strongly, delivering constant currency revenue growth of 15 per cent driven by the release of the Nucleus 7 Sound Processor and the first full year of revenue," he said. Sound processor upgrade revenue increased 12 per cent in constant currency and Cochlear Family membership exceeded 100,000 members.

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