Cochlear bucks uncertainty, meets expectations

Cochlear shares gained $A3.90 (+10.1 per cent) to close at $A42.50 on February 18 after half-yearly reports for the six months ended 31 December 2001 showed that the company would meet its long-term growth target of 20 per cent a year.

"After warnings in December 2001 of a soft half year ahead, they delivered on-line with expectations" said Andrew Goodsall, healthcare analyst at Burdett Buckeridge Young. Cochlear's European and Asian markets proved particularly strong, and the US held solid despite the events of September 11 and delayed approval of new products.

Cochlear's net profit rose eight per cent to $17.2 million, and system sales climbed 17 per cent to $120 million. Sales revenue for Europe and Asia was up 23 per cent of the previous corresponding period, but the US was up just 10 per cent and systems sales grew 13 per cent compared to last year's first half.

"Patients in the US are holding back waiting for the new model, and the competitors also have a behind-the-ear processor they are aggressively promoting," Goodsall said.

Cochlear's major US competitor, Advanced Bionics LA, has around 50 per cent of the US market. "After Cochlear launches its new ESPrit 3G in the US, they will take back some of the share to become the number one market player," Goodsall said.

The ESPrit 3G speech processor was recently launched in Europe and Asia, has just received approval in Canada. It is still awaiting approval from the US Food and Drug Administration, but Cochlear's managing director, Jack O'Mahoney, said he expected the processor to enter the US market by the end of this quarter. In Australia, the Therapeutic Goods Administration still has not approved the ESPrit 3G.

Cochlear's R&D spending has increased 48 per cent over the same six-month period year ago. The company's $5.1 million acquisition of Implex, a German company, which is developing a fully implanted bionic ear, proves the company's commitment to R&D and new product development, Goodsall said.

"It's encouraging that 80 per cent of the market value is based on future earnings," he said. "It's a sense of certainty that they will be technical innovators competing in the market."

Increasing Cochlear's bottom line was a reduction in Federal government tax on R&D, Goodsall said. "Without this tax offset, their profit was 31 per cent for the half year. By reinvesting funds in R&D, the profit was not abnormally inflated".

Cochlear plans to invest another $18 million in the group's R&D division for each of the next three six-month periods.

After a three-month slide since the stock hit a high of $52 in early November, it has started to climb. "We have no reason to doubt 20 per cent plus growth forecasts, but the market may trade Cochlear significantly lower for some time," Goodsall said. "The market is currently unwilling to take risks."