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January 31, 2005

Fraud inquiry hinders Cochlear's China sales

From: Sydney Morning Herald - Sydney,New South Wales,Australia - Jan 31, 2005

By Michael Evans
January 31, 2005

A Chinese Government tax fraud investigation led to imports from hearing implant maker Cochlear being blocked for three months late last year.

While Cochlear was not implicated in the investigation, the Australian company and its competitors were unable to ship stock into the Chinese market - estimated at about 600 units a year - from October until mid-January.

Cochlear has made no statement to the market concerning any problems with the Chinese market.

Citigroup Smith Barney analyst Andrew Goodsall, who unearthed details of the investigation, said: "We understand that in October 2004, the Chinese Government launched an investigation into a state-endorsed Research Centre for Deaf Children for tax fraud.

"Whilst two of Cochlear's four distributors remain under investigation, Cochlear is not implicated and from mid-January 2004 was able to recommence sales into China."

Cochlear chief executive Chris Roberts said yesterday the claims were "not hugely off the mark".

He would not comment on whether any sales had been lost in the period ahead of February's quarterly trading update.

"There's always ups and downs," Dr Roberts said. "There's nothing in there that's not manageable. The world hasn't fallen apart."

Dr Roberts said the matter "was not something that we felt was necessary to put a statement to the market about", and he would comment further at the coming earnings briefing.

Any lost Chinese sales may be partially offset by an expected boost in US sales in the December quarter after Cochlear's major US competitor, Advanced Bionics, recalled faulty devices globally late last year.

"We suspect that the effect of competitor Advanced Bionics' global recall largely offset the impact of a stalled Chinese market," Mr Goodsall said. Cochlear appeared to have maintained gains in US market share during Advanced Bionics' seven-week enforced market absence, he said.

Mr Goodsall cut his forecast for the number of Cochlear unit sales to China in the first half of 2004-05 by 50 units, adding them to the second half given Cochlear's competitors were also off the market for the duration of the Chinese investigation.

Cochlear closed at $26.30 on Friday, down 36c.

Copyright © 2005. The Sydney Morning Herald.