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October 22, 2002

Cochlear up $3.99 on profit tip

From: Sydney Morning Herald, Australia
Oct. 22, 2002

By Jan Eakin

Cochlear shares surged more than 13 per cent yesterday as doubts vanished that the ear implant developer's future profitability would be hurt by a rival's recent links to meningitis.

The share price surged $3.99 to $33.93 after the outgoing chairman, David Penington, told shareholders that earnings would leap 40 per cent in the current financial year.

In August, the group had forecast 25 per cent earnings growth for the 2002-03 financial year with one-off gains from the temporary withdrawal from the market of US rival Advanced Bionics.

Advanced Bionics has been linked to more than 50 cases of meningitis over the past six years and is under investigation by US regulator, the Food and Drug Administration.

"Our latest projections following ABC's [Advanced] re-entering the market are that we should gain approximately 300 incremental systems this year, the bulk coming in the first half," Professor Penington said.

"We predict an increase in earnings per share of more than 40 per cent in the first half year.

"It is still early, but earnings for the full year could be of the same order," he said.

Advanced Bionics returned to the market last month after its "positioner" product, which has been linked to the meningitis cases, was abandoned.

The group's aggressive marketing campaign in the US is promoting its older, positioner-free implant, and has managed to win back some market share.

Cochlear is believed to have 55 per cent of the US market, Advanced 35 per cent and Med El 10 per cent.

However, Advanced has suffered badly in Europe and Cochlear's global market share has increased from 65 per cent to about 70 per cent.

While analysts had anticipated a boost to Cochlear's first-half figures following the removal of Advanced Bionics from the market, many expressed surprise that the second half could prove similarly strong.

"That's a huge gain for the second half," UBS Warburg analyst Kiara Bechta-Metti said. "They're obviously doing the right thing in educating doctors on why their product is safe."

Speaking after the annual meeting, Cochlear's managing director, Jack O'Mahony, defended the group's decision to stick by its traditionally conservative forecasts of 20 per cent system sales growth a year and 25 per cent earnings per share growth over the longer term.

"This is a very sensitive market," Mr O'Mahony said. "All it takes is one surgeon out of action in the US for a while and that impacts our sales.

"Look at the impact September 11 had last year. We're cautious without a doubt."

Andrew Goodsall of Salomon Smith Barney is forecasting a net profit of $55 million for the current financial year, against $40.1 million last time. However he has dropped back to the 20 per cent growth target for fiscal 2004.

"Not every year will come this easy," he said.

Professor Penington, chairman of Cochlear since its listing on the Australian Stock Exchange seven years ago, is to be replaced by the deputy chairman of WMC, Tommie Bergman.

In a statement to the stock exchange, Cochlear said Professor Penington's retirement was in line with the statutory age requirement.

Mr Bergman said he was delighted with his new role at Cochlear "at this exciting time of its development and growth".

Copyright © 2002. The Sydney Morning Herald.