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April 28, 2004

Cochlear melody sours

From: Melbourne Herald Sun, Australia - Apr 28, 2004

Mathew Charles

SHARES in bionic ear maker Cochlear were crunched to four-year lows yesterday after a downgrading of full-year profits for the third time in six months.

Investors knocked Cochlear's share price down as low as $18.20 before it recovered to close off 2.7 per cent, off 52c at $18.90.

The sell-off was triggered after chief executive Dr Chris Roberts warned the market to expect net profits to fall to $35 million to $39 million from last year's $58.2 million.

Cochlear told the Australian Stock Exchange in February it expected to earn marginally below last year's profit.

In December, investors slashed almost a quarter from Cochlear's market value after it surprised with a profit downgrade, which followed warnings at the company's annual meeting for lower profits.

Yesterday, Dr Roberts told the market that sales in the second-half would "not support double-digit growth" compared with the year before.

He also warned the company's much vaunted long-term sales growth target of 20 per cent might be relegated to the company's past.

"I am still reviewing that long-term growth figure," he said.

He said it was "unclear" whether long-term growth would fall below 20 per cent but noted a growing belief among analysts it would do so.

To add to the pain, a raft of write-offs will be made in a move that had analysts hoping it was simply a bid to clear the company's balance sheet.

Before tax is counted the one-offs will total $17 million and fall to $12 million after tax. They comprise $11 million from writing off inventories associated with a raft of halted research as part of a bid to expand business beyond the bionic ear.

The company will now abandon "all other activities in peripheral areas" and get back to basics: improve its bionic hearing implant.

The exception will be research into bladder control.

Cochlear will also slash 40 jobs, mostly in Australia, in a move to save about $3 million to $4 million a year.

Shareholders who hang on will be rewarded, not with a bigger dividend, but the same 44 payment they received last year.

Legal costs will consume the bulk of the write-offs following a probe by the US Department of Justice into whether Cochlear broke US laws regarding paying doctors incentives.

Regardless of the bad news, he said Cochlear remained "robust", a word he conceded was ambiguous.

He said the company's top priority was to understand what went wrong in the December half, when Cochlear's revenues fell 7 per cent -- the first time sales in the company's history went backwards.

Nevertheless, he said Cochlear remained a "great business". "The fundamentals are so solid. There is no question about the product."

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