Will this be HearUSA's year?

From: Palm Beach Post, FL - Dec 7, 2003

By Phil Galewitz, Palm Beach Post Staff Writer

WEST PALM BEACH -- Founded in 1986, this local company has never made money. The firm's debts outweigh its assets by $7 million. And the company lost nearly $400,000 in the July-through-September period.

Would you believe this company -- HearUSA Inc. -- has the best-performing stock of any Palm Beach County or Treasure Coast company in 2003?

Believe it.

A year ago, shares of the West Palm Beach-based hearing aid services company were trading for 21 cents on the American Stock Exchange.

Today, the stock (AMEX: EAR) is at $1.80. That's a whopping 750 percent increase.

HearUSA has 157 company-owned stores -- about half under the HEARx name -- that sell and service hearing aids in the United States and Canada.

It also contracts with 1,400 audiologists in 49 states to provide hearing services.

"A confluence of favorable factors have benefited the company to help it finally turn the corner," said Russell Hoss, an analyst with Roth Capital Partners in Newport Beach, Calif. That Hoss is even tracking HearUSA is a sign of how far the company has come. He's one of the first Wall Street securities analysts to cover HearUSA in years.

The factors that are getting investors to listen closely to HearUSA are:

• The company is poised this year to have its first annual profit. Although it's had profitable quarters periodically over the years, it has never finished a year in the black. HearUSA was profitable for two of the first three quarters of 2003, and expectations are high for the fourth quarter.

• HearUSA is attracting attention from institutional investors that buy large blocks of shares. Wellington Management Co., a large investment firm in Boston, bought 900,000 shares this fall, making it HearUSA's fourth-largest shareholder.

• HearUSA has reduced its operating expenses and expanded its national reach, two benefits of last year's purchase of Toronto-based Helix Hearing Care of America Corp.

• The stigma of wearing a hearing aid has lessened, as evidenced by the average age of first-time wearers dropping from 78 to 68 in the past decade.

The new Medicare drug benefit bill that President Bush is scheduled to sign into law today is expected to further stimulate HearUSA's sales. That's because the bill gives Medicare HMOs billions of dollars, which the plans will use to improve benefits to attract seniors.

One of those benefits is likely to be hearing aid coverage, which is not offered under traditional Medicare. When health plans want to offer hearing aid services, they are likely to turn to HearUSA to manage it for them, analysts say.

"We've already had several calls from health plans to increase their hearing aid benefit or implement one," Dr. Paul Brown, chairman and founder of HearUSA, said recently.

Brown, 66, a pathologist who made his fortune with his own laboratory services company that he sold in the early 1980s, said insurance coverage of hearing aids is key to increasing sales.

The average HearUSA hearing aid costs about $1,300. The high cost is one reason why half of all customers usually only buy one even though they need two hearing aids.

Medicare HMOs had just begun to add hearing aid benefits in the mid-1990s when their government funding was curtailed. That led the health plans to cut benefits, including hearing services.

That move sent sales and profits at HearUSA (then known as HEARx) plummeting as the company struggled. But with HMO profits up and the Medicare drug bill giving them more funding, Brown is even more optimistic than usual about his company's future.

"I still see $10 a share in our future," he said last week during an interview in his office in the NorthPoint Parkway Office Park off 45th Street.

Brown, who has no plans to retire or sell the company, says there's still plenty of room for his stores to add customers.

Brown, who lives in Palm Beach, owns 7 percent of the company's stock, or 2 million shares. That makes him the company's largest shareholder.

This year, HearUSA expects to sell about 60,000 hearing aids, making it the third-largest seller behind Miracle Ear and Beltone.

Those two companies sell mainly through franchises, unlike HearUSA, which owns all of its stores. Brown said that gives him an advantage because he can better control the quality of service.

While the three companies sell about 250,000 hearing aids a year, most of the market is fragmented among 9,000 hearing aid providers.

To boost sales, HearUSA has begun buying independent hearing aid providers that operate near its stores. Brown wants to test the strategy in a few markets to see if it works.

There's little question the market for hearing aids remains largely untapped.

About 28 million Americans need hearing assistance, according to the Hearing Industries Association. But only about 7 million Americans have hearing aids.

To reach more customers, HearUSA has signed deals over the past few years with large insurers, including Kaiser Permanente and Humana Inc.

Last year's acquisition of Helix plus a partnership with Kaiser helped HearUSA nearly double its number of stores. Brown said that will help the company get more national contracts with health insurers.

"People thought combining two money-losing companies was a bad idea, but we needed to be bigger,'' he said of buying Helix. "Our performance validates our decision."

One sign of that validation: HearUSA sales are expected to increase 25 percent this year.

About 90 percent of the hearing aids the company sells are made by Siemens, a German company that is the largest worldwide maker of hearing aids.

Siemens has loaned HearUSA more than $25 million over the past two years, though some of the debt does not need to be repaid if the company buys at least 80 percent of its hearing aids from Siemens.

Brown said Siemens is the company's main supplier because it has the most reliable aids and enough supply to keep up with HearUSA's needs.

Despite its soaring stock price and healthy sales increase, HearUSA still faces numerous challenges. Still, it gets little coverage on Wall Street, its future sales are tied to deals with typically stingy HMOs and it has millions in debt.

And it must fight the perception that it has never made money before, even though for years Brown vowed that profitability was just around the corner.

But no one can question that Brown's drive to build a successful company remains as strong as ever.

"All the people who gave up on us are gone," he said.

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