COH - Cochlear Limited

[McCoy Pauley]

The infringement lawsuit was filed in 2007 and there's minimal ongoing impact as the infringed patents are either expired or about to expire. The only impact is the $131m damage award which is about $2 per share (and the market priced that in perfectly today).

The bigger problem will be the earning release and their market share performance over the last 6 months.

COH is the top shorted stock on the ASX... it will be revealed soon whether the bears have got it right.

I knew I should have sold down my holdings when the share price popped yesterday. Shocking interim report released this morning. Every excuse under the sun used to justify why the first half NPAT crashed to $21 million. Only three-four months after the AGM, where COH guided for $130-$135 million NPAT for the year, it's down to $90-$100 million.

By my back of the envelope calculations, the dividends COH has paid out over the last 12 months are almost double the NPAT COH earned since 1 January 2013 - so now COH is eating into their retained earnings to pay dividends to shareholders. It seems to me that management are desperately trying to stem the share price decline by increasing the dividend payout, but even now the dividends being paid are completely unfranked, so there's little tax benefit for shareholders.

Management talks a big game in the outlook statement, but they've been proved wrong twice already this year, so what's the bet on a third mis-step?

 

[skc]

A big miss by COH. Revenue down, NPAT down, cashflow down, debt up. It was the most shorted stock on the ASX and the bears got this one right.

Company is citing delays in regulatory approvals in new products and reckons that H2 will be an improvement. Yet based on the annoucnement wording it really feels like they are quite a way behind and have to get approval in a piecemeal fashion.

And they continue to borrow to pay dividend. EPS for H1 ~65c when excluding the patent dispute provision, yet they decided to pay $1.27. May be they should be a bit more conservative with their balance sheet. What's the point of paying out so much? As a show of confidence to holders? Please don't destroy a great Australian story!

BTW the damages awarded for the patent infringement was $131m, but they have only provisioned for $20. So if they were to lose the appeal there's plenty more to provision.

 

[McLovin]

Meanwhile...

Cochlear implants segment: strong system sales

The cochlear implants segment achieved sales of CHF 82.0 million in the first half of 2013/14,
which represents a growth rate of 15.0% in Swiss francs and 16.2% in local currencies. This was
a remarkable achievement given the effects of deferred customer demand in the US where
patients were waiting for the highly anticipated new speech processor Naída CI Q70. Shipments
started in August 2013, two months later than the launch in most other larger markets. This
negatively affected mainly sales of speech processor upgrades and led to deferred revenues, as
under the pre-launch program for implant systems, the portion of sales related to the Naída CI
Q70 speech processor was not yet recognized. With system sales in both the developed and
emerging markets clearly exceeding revenue growth, Advanced Bionics maintained the strong
momentum and clearly expanded its market position on the back of the recent product launches.

 

[McCoy Pauley]

Plus:

CAMBRIDGE, Mass. ”” Cochlear implants ”” medical devices that electrically stimulate the auditory nerve ”” have granted at least limited hearing to hundreds of thousands of people worldwide who otherwise would be totally deaf. Existing versions of the device, however, require that a disk-shaped transmitter about an inch in diameter be affixed to the skull, with a wire snaking down to a joint microphone and power source that looks like an oversized hearing aid around the patient’s ear.

Researchers at MIT’s Microsystems Technology Laboratory (MTL), together with physicians from Harvard Medical School and the Massachusetts Eye and Ear Infirmary (MEEI), have developed a new, low-power signal-processing chip that could lead to a cochlear implant that requires no external hardware. The implant would be wirelessly recharged and would run for about eight hours on each charge

http://web.mit.edu/press/2014/cochlear-implants-with-no-exterior-hardware-0209.html

 

[McCoy Pauley]

As previously mentioned, the fundamentals are very disappointing. I'm not a technical trader, but it looks like there was a symmetrical triangle forming over the past few months, and today's fall (if sustained for the remainder of trade) is a break-out to the downside. I'm sure there are plenty more experienced technical analysts/traders who can correct my hypothesis, but this does look extremely bearish to me.

 

[McCoy Pauley]

One thing that appears to have been overlooked is that COH did win a tender to supply 1800 units for the second half of this financial year, which is 1800 units more than COH supplied in the first half.

 

[skc]

One thing that appears to have been overlooked is that COH did win a tender to supply 1800 units for the second half of this financial year, which is 1800 units more than COH supplied in the first half.

If they have won the tender they would have built that into the H2 guidance already. Unless there are further tenders on the horizon this is not real new news.

 

[McCoy Pauley]

If they have won the tender they would have built that into the H2 guidance already. Unless there are further tenders on the horizon this is not real new news.

I'd say that's spot on, but it's news in the sense that COH hadn't previously announced the tender win. I have to say that I'm not sure how much per unit COH receives from the Chinese government for the supply, as I've not seen any figures about it.

 

[McLovin]

I'd say that's spot on, but it's news in the sense that COH hadn't previously announced the tender win. I have to say that I'm not sure how much per unit COH receives from the Chinese government for the supply, as I've not seen any figures about it.

The sales to the Chinese are lower margin. The blurb from Sonova's interim report shows just who is winning the race at the moment. COH seems to be bleeding market share to AB.

 

[McCoy Pauley]

The sales to the Chinese are lower margin. The blurb from Sonova's interim report shows just who is winning the race at the moment. COH seems to be bleeding market share to AB.

Yes, in the presentation slides COH released to the ASX, they estimated their market share in the US as approximately 60% (with a question mark, which is concerning).

 

[skc]

The sales to the Chinese are lower margin. The blurb from Sonova's interim report shows just who is winning the race at the moment. COH seems to be bleeding market share to AB.

The recall probably dented their reputation but their regulatory approval process also left a lot to be desired.

This from their announcement...

The Nucleus ® 6 sound processor received regulatory approval in the key markets of Europe and
USA and was then launched. Regulatory approval in the USA did not include all features and
further approvals are being received on a progressive basis.

Are they offering free upgrades to patients who take up their device now? If there's a competitor's product on the market that is complete, you'd choose that over something that hasn't got all the features in place yet, wouldn't you?

 

[McLovin]

Yes, in the presentation slides COH released to the ASX, they estimated their market share in the US as approximately 60% (with a question mark, which is concerning).

It is and it isn't. AB's product is newer and COH has some products in the pipeline. I think the salient point is that whereas COH was the product a few years ago and customers would reflexively buy COH implants, even if they were older models, AB is now manufacturing something that is as, at the very least, seen as an alternative. That seems to have removed COH's ability to grow unit volumes right through the product life cycle.

 

[McCoy Pauley]

The recall probably dented their reputation but their regulatory approval process also left a lot to be desired.

This from their announcement...



Are they offering free upgrades to patients who take up their device now? If there's a competitor's product on the market that is complete, you'd choose that over something that hasn't got all the features in place yet, wouldn't you?

Which is why COH have found that sales of their products, particularly in 1Q14, have been very slow. The question for COH is whether they can win back market share once their products have regulatory approval.

 

[Toppy]

I made some negative posts earlier in this thread, but I couldn't have predicted this. NPAT down 73%!

Truly the darling days are long behind us. I'm interested in ASF's thoughts on future prospects. Merrill Lynch put COH's global market share at 54%. They're the most expensive implants on the market. The most recent model is many years old. Alternatives (at least in a technical sense) are available for a quarter of the cost in some places.

My feeling, as sad as it is, is that COH will need to go the way of Holden/Ford/Toyota and offshore manufacturing to bring costs down and compete on price. Short of being out-of-sight technologically superior, COH isn't going to regain its reputation or profitability. And I'm doubtful the Swiss, Austrian, American, Chinese competitors are far behind in technology; some may even be getting ahead.

 

[McLovin]

It is a risky strategy paying high multiples of earnings for future growth. You are right plenty can go wrong. On the few occasions it works out the compounding can work miracles for your returns. Paying a bit over $45.00 just over a year ago I am happy to hold and watch Cochlear for a while yet to see if they can achieve some decent growth. If the growth continues who knows what multiples people would be prepared to pay of those future earnings?

Any change if your thinking, robo? It was an interesting discussion we had at about post 190 in this thread. A year on has your opinion changed?

 

[robusta]

Any change if your thinking, robo? It was an interesting discussion we had at about post 190 in this thread. A year on has your opinion changed?

Yes my opinion on Cochlear has changed this on my portfolio thread on the 22/10/13

COH - Cochlear, current market value of $5365.44 up 18.22% on purchase price and 12.03% of the portfolio.
This is the business that is causing the most consternation at the moment. The initial entry point was lucky, almost at the low point after Cochlear's recall and even then for a normal security too much was paid. Later more were picked up for a bit over $56.00 after the price had fallen from $80.00 plus.

Cochlear is in the portfolio because of their sustainable competitive advantage, recent results are starting to show that moat may be slowly starting to erode. It is difficult to ascertain if this is short term or more lasting in nature. The trouble with this type of 'slow trading' is by the time I come up with my decision the answer will probably be clear to the rest of the market. COH has been a core holding for a couple of years, there could be a lesson to be learnt here on paying for growth.

And this from the 29th of the same month.

Investment Sold

They say you shouldn't get too attached to your shareholdings but I may have become close with this one. This business was considered a core holding being the dominant market leader with a competitive advantage and good growth prospects. Now i'm not so sure COH seem to have stumbled while their competitors have moved forward.

The first parcel was picked up in late 2011

While the second a few months ago.


A total of $4538.35 invested in this company.

Over the holding period $357.33 has been received in dividends.

Today 92 shares were sold @ $58.09 for $5327.33 a total gain of a little over 25.25% the other little positive is the lions share of the $788.98 capital gain will get the 50% CGT discount.

I should have listened to you back in April last year, I can be more than a little slow.

 

[McLovin]

Yes my opinion on Cochlear has changed this on my portfolio thread on the 22/10/13



And this from the 29th of the same month.



I should have listened to you back in April last year, I can be more than a little slow.

Ahh...sorry, I missed that one in your thread!

 

[McLovin]

Looks as though COH is still ceding ground. Maybe when they finally get their new product approved they'll take some back..

Medical device maker Cochlear is losing market share, says analysis of a strong yearly result from Swiss rival Sonova.

Sonova reported over 50 per cent revenue growth in its hearing implant division, bolstered by a new product release.

Sonova division Advanced Bionics reported a 54 per cent rise in revenue in the year ended March 2014 to CHF195 ($236 million).

That was a 36 per cent rise in constant currency and was 24 per cent above consensus estimates, Deustche Bank analyst David Low said.

"This strong growth was driven by the launch of Naida, which drove a strong lift in new recipient and processor upgrade sales," Mr Low said in a note.

Naida is a small, lightweight sound processor that competes against Cochlear's Nucleus range.

Sonova said customers upgrading to the new sound processor accounted for about 20 per cent of its implant revenues in the year.

With the overall market growing at about 10 per cent a year, this suggests the company's growth came at the expense of Cochlear's share, Mr Low said.

Read more: http://www.smh.com.au/business/coch...ains-ground-20140522-38qvf.html#ixzz32QKZ5OH7

 

[McCoy Pauley]

Half-listening to my podcast of Market Day this morning and I'm sure they said something about Cochlear opening clinics in Australia to directly reach their target market. But I can't find any confirmation either from a market release by Cochlear or in the general press.

But I did find a couple of articles reporting on a US study concluding that children implanted with cochlear devices are at greater risk of memory loss, albeit the actual study's findings are a little less alarming than the headlines.

Compared to children with normal hearing, those with the cochlear implants were two to five times more likely to have delays in memory, planning, attention and conceptual learning, processes collectively known as executive functioning.

But the Indiana University research team also discovered that earlier implantation of a cochlear device reduced that risk. Children who got the implants at an average age of 18 months had fewer delays in executive functioning than those who were implanted at an average age of 28 months.

The researchers also found that many deaf children develop average or better executive functioning skills after receiving a cochlear implant, according to the study published May 22 in the Journal of the American Medical Association Otolaryngology--Head and Neck Surgery.

http://www.foxnews.com/health/2014/05/23/cochlear-implants-for-children-may-cause-cognitive-delays/

http://health.usnews.com/health-new...with-cochlear-implants-suffer-memory-problems

Further, it's not made public whether the children the subject of the study received implants manufactured by Cochlear or by other manufacturers.

 

[VSntchr]

But I did find a couple of articles reporting on a US study concluding that children implanted with cochlear devices are at greater risk of memory loss, albeit the actual study's findings are a little less alarming than the headlines.


Further, it's not made public whether the children the subject of the study received implants manufactured by Cochlear or by other manufacturers.

As always, any studies picked up by the media will have attention grabbing headlines.
That is something to keep watch on though, if I (or my child) was getting an implant - this is something I would be investigating.

Half-listening to my podcast of Market Day this morning and I'm sure they said something about Cochlear opening clinics in Australia to directly reach their target market. But I can't find any confirmation either from a market release by Cochlear or in the general press.

I can confirm I read that this is the case this morning, from Merrill Lynch: "Cochlear has revealed it is investing in direct clinic ownership in certain sites and has opened its first in Melbourne. The broker believes this strategy, indicative of the growth challenges in the industry, has the potential to provide insights into patient capture that have previously been absent."