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August 9, 2005

Cochlear: ‘Ere, ‘Ere

From: Australasian Investment Review - Sydney,Australia - Aug 9, 2005

News flow surrounding bionic ear manufacturer Cochlear (COH) has been mixed of late. In the US, the Centers for Medicare and Medicaid Services have proposed a 14% decrease in the cochlear implant reimbursement rate, which is a bit of a blow considering Medicare/Medicaid funds 40% of all US cochlear implant procedures.

GSJB Were suggests the rate decline is likely to be short term negative for Cochlear in terms of market sentiment, but it won't impact actual earnings in the short to medium term.

Meanwhile, the operating environment for Cochlear will remain very positive for at least the next six months, says Weres, due to competitors facing regulatory issues, as well as Nucleus Freedom continuing to pick up market share, and the new Entific product due to be released next year.

Continuing in a positive vein, SB Citigroup has detected a distinct industry shift toward bilateral implants (one in each ear). This is not new, says Citigroup, but the analysts are "astonished" by a change of attitude from leading clinics globally. Bilateral implants more closely simulate a normal hearing experience, Citigroup informs us. Studies show patients consistently score better on comprehension scales, allowing children to realise their full potential.

The industry has previously acted to conserve precious reimbursement dollars by limiting patients to one device, Citigroup says, but with private insurers in particular now willing to fund two devices clinics are beginning to recommend two.

A new wave of bilateral clinical trials in the US will add further support. Citigroup believes the issue is a fait accompli – bilateral implants will become the "standard" for profoundly deaf infants. With the pace picking up the analysts speculate that 50% of infants implanted in the developed world will receive two implants by 2008.

They currently forecast 13% unit sales growth in FY08, but bilateral growth alone could represent 14%. Citigroup has upgraded its rating on Cochlear from Hold to Buy (medium risk). GSJB Were cannot go higher than Outperform,L/T Buy.

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