Slow Recovery More Likely For Cochlear

Australia | Mar 17 2020

Cochlear has withdrawn FY20 guidance and expects the subsequent recovery in implant surgery will be slow.

-Coronavirus cases expected to sideline adult implant surgery
-China recovering and surgeries in South Korea remain strong
-Balance-sheet remains in the company's favour


By Eva Brocklehurst

While recovery is undoubtedly on the (distant?) horizon after severe turmoil in markets, the issue for many brokers centres on corporate quality and balance sheet strength. In the case of Cochlear ((COH)), management suspects recovery will be measured.

The company has withdrawn FY20 guidance, as the number of coronavirus cases is expected to have a substantial negative impact on cochlear implant surgery, particularly in the US and Western Europe. Cochlear is expecting a sharp slump in implant candidates and a soft recovery. This stems from the prospect that adult candidates could have their surgery on a reduced priority listing once the epidemic is over.

Credit Suisse concurs that surgery for adult implants is unlikely to be a high priority, even when the threat of coronavirus is reduced, and the company could lose potential recipients. The broker does not forecast implant unit sales recovering to pre-virus levels until the second half of FY21 and FY22.

Funding caps may also limit the speed of recovery in FY21. Funding for cochlear implants is capped in most of Europe, excluding Germany. It is unlikely caps will be reached in 2020, Citi points out, but what is unclear is whether unused funds will be carried to 2021, given extreme demands on the health care systems.

As these funding caps affect adult patients, a source of growth for the company, this will reduce the speed of the recovery in FY21. Citi estimates that 60-70% of cochlear implants are sold in the adult market.

Credit Suisse expects limited surgery will be performed for cochlear implants up until September 2020. The broker also suggests, as countries lock down, only a limited number of paediatric surgeries may occur. In a bear case scenario, where no cochlear implant surgeries are performed for the remainder of FY20, the broker forecasts unit sales will be down -55% in the second half.

UBS assumes cochlear implant unit sales will return to historical levels from the first half of FY22 but suspects this could be ambitious. The broker still ascertains Cochlear will maintain its dominant market share in the US. Earnings downgrades, meanwhile, are large and the broker finds it difficult to forecast unit sales and processor upgrades over the next six months.

China Recovering

One encouraging sign is that China has experienced a growing number of surgeries over the past week or so. In February, Cochlear lowered guidance by -5% because of delays in surgery in greater China.

Credit Suisse also points out the run rate of surgeries in South Korea has remained strong, so the impact across countries varies. In Japan and South Korea paediatric patients account for 50% of surgeries.

Citi takes the view that while there is a short-term shutdown of many economies and it is impossible to predict near-term earnings, the focus, therefore, must be on gearing. In this case the Cochlear balance sheet is assessed to be fine, as all non-essential expenditure is reduced for the balance of FY20.

Management has signalled it does not plan to reduce its workforce, given the likelihood the disruption is only temporary. Moreover, Chinese suppliers have resumed production of components. Cochlear is also rolling out its new bone conduction hearing implant, the Ostia 2 system.

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