Market over-reacting to cochlear fears: analysts

A warning on meningitis risk by US cochlear implant manufacturer Advanced Bionics and the Food and Drug Administration last week took its toll on market leader Cochlear.

Shares in Cochlear plummeted to a 20-month low of $27 on Friday, before gaining ground to close 11.3 per cent, or $3.80, lower at $29.80.

Even after Cochlear moved to quell fears by reassuring investors of the safety of its product, the stock opened the week lower still. At the time of writing, the device manufacturer had slid a further 4 per cent to trade at $28.60 - significantly below its record high of $52 achieved in August last year.

But analysts agreed that the market had over-reacted.

In a note to clients on Monday, Deutsche Bank biotech analysts David Lowe and Alex McGee said they expected Cochlear to rally this week in response to further clarification of the technological issues behind the FDA's investigation.

"We believe the severity of the price decline following this news was an over-reaction but an understandable one given current market nervousness and given [Cochlear] remains a premium stock with less margin for delivery error," they wrote.

They said there were no significant issues related to the company's current product lines, with the only impact likely to be short-term sales as parents of potential child recipients delay their consent for the operation.

"We believe that the design issues facing Advanced Bionics could prove a long-term positive for [Cochlear]," the analysts said.

"[Advanced Bionics'] products have already been withdrawn from certain European markets. An adverse FDA finding on the link between claimed design flaws in [Advanced Bionics'] implants and meningitis would benefit Cochlear."

Another analyst, who declined to be named, said that with the obligation now on Advanced Bionics to clarify its situation to the FDA, pressure should ease on Cochlear - although it was difficult to say how much longer the local stock would be punished.

The analyst also said that some of the decline in Cochlear's share price may have been attributable to hedge funds, which would now start to withdraw in light of founder Graeme Clark's reassurances.

The US Food and Drug Administration issued a public health notification on Wednesday noting that 25 adults and children with cochlear implants had been diagnosed with meningitis worldwide and it was aware of nine deaths in these cases.

Surveys of cochlear implant centres currently under way suggested that there were additional, unreported cases of meningitis among cochlear implant patients, the FDA said.

Independent review

Jim Miller, president of Cochlear Americas, the company's US division, said he was not aware of any meningitis-related deaths linked to the company's products in that entire period.

In a statement to the Australian Stock Exchange last Friday, Cochlear said that the overall incidence of meningitis in its worldwide Nucleus recipient community was similar to the incidence of meningitis in the general population. The company said that in light of the Advanced Bionics warning, it had contacted leading medical experts at New York University and the University of Melbourne to conduct an independent review of all reported cases of meningitis in Cochlear's nearly 40,000 Nucleus implant recipients worldwide over the past 20 years.

"Cochlear's Nucleus Contour electrode was developed following extensive laboratory testing," the statement said. "It is round and in one piece and this means that the cochleostomy seals with fibrous tissues after the operation, reducing the risk of infection."

Miller noted meningitis was a complication of any inner ear surgery, and some deaf patients were at even greater risk due to malformations of the inner ear. But he said his company's research showed the incidence of meningitis in implant patients was not greater than that of the general public.

Still, Miller lauded the FDA's effort to raise awareness about the risks of meningitis, and said his company routinely recommended prophylactic antibiotic treatment in the period immediately before and after implantation surgery.

Additional reporting by Reuters and Iain Scott