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December 1, 2003

Ears to the ground predict growth in implants

From: Melbourne Herald Sun, Australia - Dec 1, 2003

By Richard Gluyas

THREE times a year, bionic ear developer Cochlear chaperones 15 to 20 ear, nose and throat surgeons from around the world through its Sydney facility and the Melbourne-based co-operative research centre, the Bionic Ear Institute.

With 9328 Cochlear implant systems sold globally in 2003, and at $55,000 a pop for lifetime care, the product hardly qualifies as a fast-moving consumer good.

The company, for all its triumphs since listing in 1995, still faces the fundamental challenge of creating broad awareness in the medical and wider communities that its product exists, let alone its attractions.

That is the nature of the task confronting new chief executive Chris Roberts, who will take over from Jack O'Mahony next February.

Cochlear's growth trajectory is well known.

It took 20 years for the company to achieve its 30,000th system sale, but only two years to register its 50,000th sale in Japan earlier this year.

Over the past five years, Cochlear's return on equity has averaged 51 per cent as sales revenue has climbed from $127 million to $289 million, with earnings before interest and tax surging from $23 million to $80 million.

The obvious question is: can it all continue?

The equally obvious answer is, yes, it can. That is, with the usual risks attached to a competitive, hi-tech business environment.

In Cochlear's favour, though, the markets are there to be exploited, the technology is proven and supported with strong reinvestment in research and development, and there is growing brand awareness consistent with a 65-70 per cent share of the global implant market.

The main business risks at this stage are long term.

Screening of newly born children for deafness in the US and in some European countries means the growth rate for implants could start to track the birth rate in 10 years or so.

That becomes a problem if the take-up for deaf people over 65, who now account for only 15 per cent of the market, remains slow.

Earlier this year, the Bionic Ear Institute defined the market opportunity for Cochlear. With implants only helping people with profound or severe deafness, Cochlear's key Western markets, as well as Japan, were estimated to total 3 million candidates for the device.

Emerging markets such as China, where 35,000 children capable of benefiting from an implant are born each year, would increase that number significantly.

A large deduction of about 40 per cent is necessary to take account of those unable to receive an implant for health or other reasons.

But even so, Cochlear and its two main competitors are thought to have achieved a market penetration of less than 4 per cent.

O'Mahony, in his three-year term, has spoken of the technology challenges, as well as building market acceptance.

As it used to be with hip replacement, there is concern among implant candidates about the surgery.

Once that subsides, Cochlear's customary 20 per cent-plus growth rate in system sales could accelerate.

Some people close to the company predict that in four years or so Cochlear could boast $1 billion in annual sales, more than trebling the 2003 revenue of $289 million.

There is a finite budget, of course. But it would not be surprising if Roberts continued the growth trend.

© Herald and Weekly Times