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Competition Strengthening, Cochlear’s Innovation Lagging

Written by on June 1, 2013

Competitor Advanced Bionics, owned by Sonova , reported a 47% increase in sales for fiscal 2013. Sonova has a 31 March year-end.It is difficult to estimate market share effects because the comparison period was heavily impacted by Advanced Bionics’ product recall in late 2010. In commentary on the 2013 interim results, Cochlear COH said that it had not suffered ‘material’ market share loss. Cochlear has ceded a total of around 5% market share to Advanced Bionics and smaller Austrian competitor Med-El following the Australian company’s 2010 recall.

Cochlear’s reputation for technological innovation and reliability in a highly specialised medical science niche and strong intellectual property position, represent strong competitive advantages that provide a narrow moat that should sustain high returns on capital. Hearing loss has a large negative impact on both individuals and societies worldwide, causing significant social and economic costs. The market remains immature and we expect solid growth rates to repeat over the next decade.

A second recall would be much more damaging to Cochlear’s reputation for reliability and quality than the first. In April 2013 Med-El launched RONDO, the world’s first single-unit processor for cochlear implants. The processor has the advantage of an audio processor that can be worn completely off the ear, making it especially appealing to people who wear glasses. In May 2013 AB released the Naida CI Q70 sound processor in Europe, Canada and several other countries.

The new product incorporates a host of new features, including noise filtering and wireless connectivity to a wide range of consumer electronics such as mobile phones and televisions. With the recall of the CI500 implant in 2011, Cochlear lags in terms of new product introduction, but we understand launch of the Nucleus 6 is imminent. The system is ‘wireless ready’, but not yet wireless enabled, requiring a software upgrade still under development.

A sustained softer Australian dollar will provide something of a tailwind over the medium to long term as existing currency hedges unwind.

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