Recapturing Market Share The Key For Cochlear

This story features COCHLEAR LIMITED. For more info SHARE ANALYSIS: COH

-Small positive step
-Second half still challenging
 

By Eva Brocklehurst

Cochlear ((COH)) has received approval from the US Food & Drug Administration for the Nucleus Hybrid L24 implant. While welcoming this development, brokers believe it is only a small positive and unlikely to significantly improve the outlook.

The implant is for adults with severe or profound high-frequency hearing loss in both ears and is the first such device approved by the FDA. The device combines a cochlear implant with the sound amplification of a hearing aid. The implant is expected to offer benefits for hearing loss where a hearing aid has proven inadequate, but this is a specific need which is expected to limit market penetration. Brokers think there are a number of constraints. There is a risk of permanent damage to the residual low-frequency hearing and added cost and risk of subsequent surgery.

CIMB believes the product will offer benefits where traditional aids have proven inadequate and has potential for earlier intervention in the key adult patient segment. The broker observes some modest success for hybrid products that are currently available from Cochlear and Med-El in the European Union over the last two years. CIMB maintains the stock is not trading at levels which reflect the more challenging operating environment. Moreover, guidance given at the first half result for the second half of FY14 still looks optimistic. A Reduce rating is retained.

It's a sizeable market opportunity but the potential for loss of low-frequency hearing may limit the market penetration, in Credit Suisse's opinion. The FDA was concerned about this issue but considered the overall benefits outweighed the risk for those who do not benefit from hearing aids. Hence, Credit Suisse thinks clinicians will be very cautious, given in some cases there's the potential need for repeat surgery.

In BA-Merrill Lynch's view the company is yet to spearhead a technological or efficacy advantage that can be recognised by the industry as enough to regain market share. Nevertheless, the approval of the hybrid is an important step in pursuing a sub-set of patients. The broker does highlight the fact that Cochlear is the only provider of this product system which signals the potential for a new area of sales. The next area of product development is expected to be implants that reduce trauma upon implanting, with the aim of preserving residual hearing.

Merrills contends that, while small, the FDA approval of this hybrid does reduce the downside risk for the stock, and warrants a raising of the price target to $56.30 from $55.35. This target represents the top of the range on the FNArena database. Merrills considers the stock's premium to peers is also warranted given the products are more necessity-based and there are high barriers to entry.

Cochlear has no Buy rating on the database. There are four Hold and three Sell recommendations. The price targets range from $47.29 (CIMB) to $56.30 (Merrills). The consensus target is $51.67, signalling 10% downside to the last share price.
 

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