Australia | May 23 2013
-Competition in cochlear implants heats up
-Cochlear expected to lose market share
-Stock viewed as overvalued
By Eva Brocklehurst
Cochlear ((COH)), the leader in implants for the profoundly deaf, has a battle on its hands. Sonova's Advanced Bionics is making inroads into its markets, quickly. Advanced Bionics has recently reported a 47.1% increase in sales for FY13, on a constant currency basis. The quantum of this increase is not reflective of market share gains but, in UBS' estimation, that could be as much as 10%. At any rate, it does put a good deal of pressure on the 70% market share that Cochlear enjoys.
Both Cochlear and Advanced Bionics are to launch new products at the EU conference in Istanbul, Turkey, this week. Full approval of the products is expected by the end of the northern summer, while US FDA approval could take longer, perhaps by the end of the year. MedEL is also expected to launch the new all-in-one processor/headpiece "Rondo" at the conference. Advanced Bionics is expected to close the current performance gap with Cochlear's device, if not better it. The new speech processor will deliver improved performance and has wireless connectivity enhancements. The Cochlear N6 which is to be launched has a new thin profile but is yet to incorporate the wireless technology from partner GN resound, something which surprised UBS. There is no suggestion as to when that may become available.
UBS has checked sources and found the first tranche of the 2013 Chinese contract gave 1400 of 4000 units to competitor MedEL. In 2012 Cochlear won 2800 of the 4000 units so it is still possible that Cochlear will participate in the remaining volume for 2013. The Chinese tender had been held up as an example of where Cochlear could capture volume sales, but that appears to be also under pressure.
Cochlear's market share and franchise may be well entrenched but the innovations by competitors suggest the technological leadership is now questionable. UBS offers three key determinants for brand selection. They are peer reference, reliability and technology. Advanced Bionics has matched many of the features of Cochlear's N5, which was recalled, and has also leveraged parent Sonova's expertise in sounds processing. MedEL's Rondo is worn off the ear and has been well received, particularly by those who wear glasses as traditional behind-the-ear devices can interfere.
Usually, 12 months after a launch Cochlear makes its new processor backward compatible to recipients of earlier models. UBS notes the first year of such sales for N5 captured 20% of the potential patient base. There are around 30,000 patients with N5, which was capped by the recall. So, Cochlear could launch a N6 backward compatible inside of the 12 months that could boost near term earnings, but this would disrupt the longevity of the forward earnings cycle, in UBS' opinion. Industry capacity to accommodate an upgrade cycle is also a cap on total sales in any given 12 month period.
Citi also expects the new products will lead to Advanced Bionics gaining market share. Even if Cochlear catches up with enhanced technology, there is sufficient momentum to Advanced Bionics' gains that Cochlear will lose 20% of market share over the next 18 months. Citi views the stock as expensive, as it is trading on a 12-month forward price earnings ratio of 26 times. This is particularly of concern given the risk of market share losses. The broker favours a Sell rating, as does UBS.
UBS believes the premium that the stock commands to the ASX Industrials ex Financials index as well as global peers – 55-85% – is not rational. On the FNArena database the recommendations underpin the same belief the stock is overvalued. There are seven Sell ratings and just one Hold (BA-Merrill Lynch). Cochlear has a dividend yield based on consensus earnings forecasts for FY13 of 3.5%. For FY14 it is 3.7%. The consensus target price is $62.32, suggesting 12.6% downside to the last share price.
See also, Questions Mount Over Cochlear's Top Status on February 6 2013.
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