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Cochlear’s New Implant Should Restore Share

Australia | Apr 17 2019

Cochlear has launched its MRI-compatible implant but brokers do not expect the new product will impact revenue and market share until FY20.

-Last of three major manufacturers to offer MRI-compatible cochlear implant
-Implant available in Germany and to be subsequently rolled out in other countries
-New implant likely to support revenue growth in FY20


By Eva Brocklehurst

Cochlear ((COH)) is making a concerted effort to recapture market share with the launch of its new implant designed to improve compatibility with magnetic resonance imaging (MRI) scans.

The company is the last of the three major cochlear implant manufacturers to bring this implant to market and MRI-compatibility will no longer be a differentiating feature The Nucleus Profile Plus cochlear implant is designed for routine 1.5 and 3 Tesla MRI scans without the need to remove the internal magnet.

UBS points out that these implants will not resolve all the issues that occur in imaging certain parts of the brain, irrespective of manufacturer, and the internal magnet may need to be surgically removed before the recipient undergoes some MRI procedures.

Cochlear's new implant is available in Germany and other countries will follow subject to timing of regulatory approvals. Morgan Stanley points out market share loss was most notable in the US and Germany in the first half, largely on the back of the other companies being first to market with this product.

Market Share

The broker observes market share often varies on the back of product cycles. Cochlear was first to launch smart phone compatible products and received a benefit from this. Now it is the turn for Advanced Bionics, which launched its MRI-compatible implant in the US in August 2018 and its success has resulted in Cochlear losing market share in the Americas.

Advanced Bionics launched its new implant in Europe in October 2018 and quickly gained significant traction, Credit Suisse points out.

The launch of the new implant addresses Ord Minnett's concerns that Cochlear risked ceding market share as implant clinics increasingly alerted potential recipients to the importance of this functionality. The broker still expects a contraction in unit sales in the June half, with growth returning by FY20.

Nevertheless, Advanced Bionics is likely to launch a new processor with enhanced wireless connectivity in the near future and the competitive challenge is expected to continue. UBS, while expecting the launch of Cochlear's new product will stem market share losses, does not expect market share to recover substantially.

The launch in Europe should support near-term sales in the region although Ord Minnett expects the contraction in US sales to become even more pronounced. This reflects the postponing of orders ahead of the US summer launch of the new implant. Morgan Stanley agrees some short-term risk of market share loss remains in place until the unit is fully rolled out.

To meet the mid point of net profit guidance of $265-275m, Morgan Stanley assesses Cochlear needs to deliver 5% growth in the second half. The broker likes the business for the long term because of an under-penetrated market and low disruption risk, as well as higher and expanding returns on equity. However, the valuation keeps Morgan Stanley on an Equal-weight footing for now.

UBS assesses that, in order to reach the current share price, implant unit sales need to grow at a compound rate of 10% over a 10-year period. This is a high target to achieve as cochlear implantation requires certain infrastructure to support the process, such as trained surgeons and audiologists.

Deutsche Bank increases expectations for revenue from FY20 onwards to reflect the launch of the new implant but continues to rate the stock a Sell because a weak FY19 result is likely, and the stock is expensive relative to the growth outlook, with a negative shareholder return implied by forecasts.

FNArena's database shows five Sell ratings, two Hold and one Buy (Citi). The consensus target is $168.30, signalling -6.3% downside to the last share price. Targets range from $151.50 (Deutsche Bank) to $198.00 (Citi).

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