Feb 2020 Australian Financial Review

Hearing device maker Cochlear is confident its sales will return to normal in China once the coronavirus is controlled, despite the outbreak causing a significant hit to its full-year profit expectations.

Dig HowittCochlear chief executive Dig Howitt. The company has slashed its guidance as the coronavirus dents demand

The company announced it was downgrading its full-year underlying net profit guidance by 5 per cent, from the mid-point of its range, as hospitals across greater China (including Hong Kong and Taiwan) have been deferring surgeries to limit the spread of the coronavirus. Cochlear cut its net profit forecast from $290 million to $300 million down to $270 million to $290 million, triggering a 3.39 per cent share price drop. Its shares closed at $236.47.

Cochlear's downgrade was modelled on the impact Cochlear felt in 2002-03 from the outbreak of SARS. At the peak of the SARS epidemic in February 2003, Cochlear was priced at $33. Chief executive Dig Howitt said China was a top five market for the medical device business, and that while it was a sure bet that implant surgeries would normalise once the virus was contained, it was uncertain how long this could take. "Once things cleared up, it ramped up reasonably quickly, but going back 17 years our volumes were much smaller," he said. "We certainly do expect a rebound and a catch-up, but it's hard to know over what period that will take. [Now] quite a lot of excess surgeries will be delayed, so it won't just be catching up for cochlear implant procedures when things return to normal."

ChinaExpanding its business in China has been a priority for Cochlear. It is in the process of building a new factory in China and increased its capital expenditure to $180 million in 2020 to account for the costs. Mr Howitt said he had no intention of reducing spending in the region at this point.

"We will not make any changes to our cost base in China. We've invested heavily to build out our market presence and we're leaving that cost base in place," he said. "We don't see any disruption [to the construction of the factory]."

While the company has taken a whack from surgeries being deferred, Mr Howitt was confident there would not be any material disruption to its supply chain, despite some sound-processing parts and accessories being sourced from China. "We have at least three months inventory of most components and at this stage do not expect any disruption to our ability to supply products to our customers," Mr Howitt said.

The unexpected slowdown in China comes on the back of a tough year for implant sales in 2019, with its competitors momentarily getting a one-up on the long-term market leader. Unit sales of its popular implants declined in 2019, thanks to its competitors beating Cochlear to release an MRI-compatible implant. However, this did not stop its net profit from jumping 13 per cent.

Based on Cochlear's latest guidance, the hearing device maker is now targeting a jump in net profit of between 2 per cent and 9 per cent  for the 2020 financial year

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