US sales boost Cochlear year profit 45pc

From: Stuff.co.nz, New Zealand - Aug 20, 2003

MELBOURNE: Cochlear Ltd, the world's largest maker of hearing implants, reported a 45 per cent rise in annual profit built on solid US sales that more than offset slower Asian growth during the Sars crisis yesterday.

The Sydney-based bionic ear maker said it still expected to achieve 20 per cent annual sales growth over the long-term and profit growth in the year ahead of around 20 per cent, in line with analysts' forecasts.

But Cochlear warned that hearing implant surgeries in Asia continued to be lower than normal in the new fiscal year as people were still staying away from hospitals.

Net profit rose to $A58.2 million in the year to June 30, compared with $A40.1 million before one-offs a year earlier and in line with Cochlear's forecasts. Analysts had expected a net profit of $A57.2 million, according to a Reuters survey of eight major brokers.

"Clearly the result's been driven by margin expansion during the period, and that's a positive," said Merrill Lynch analyst Michael Carmody.

Cochlear shares jumped as much as 3.3 per cent after the result, then fell to close down 0.1 per cent at $A35.01 in a flat broader market.

"Maybe some speculators bought it up on the earnings per share growth bottom line. And when they realised there were not going to be any upgrades for '04, you've seen the stock drift," said Portfolio Partners analyst Andrew Hamilton.

Cochlear's shares are considered expensive, trading at 37 times earnings for the year to June 2002, compared with multiples of 20 or less for other Australian health-care stocks, even after falling 10 per cent in the year to date against a five per cent rise in the broader market.

Pointing to an estimated 1.4 million deaf people in the United States compared with the 5,500 a year who receive implants, Chief Executive Jack O'Mahony said the key issue for the company was to make more people aware implants could help.

"We've got to expand the market. And when you see the numbers I just quoted, there's plenty of room for expansion," he told reporters.

STRONG PROFITABILITY

Cochlear's earnings-to-sales margins expanded to nearly 28 per cent from 20 per cent, mostly due to cost controls, and were expected to remain around that level, Chief Financial Officer Neville Mitchell said.

Implant sales grew 19 per cent to 9,328 units, in line with Cochlear's forecast of 20 per cent long-term trend annual growth.

In Asia, which represents 20 per cent of sales, Cochlear estimated it had lost about 250 sales in the second half due to the Severe Acute Respiratory Syndrome virus, which put people off going into hospitals to have hearing implant surgery in China, Hong Kong, Taiwan and Singapore.

"Surgeries have begun again, but the first quarter results in Asia have again been adversely impacted, but to a much lesser degree," the company said.

The group's overall growth in fiscal 2003 was propelled in the first half when it grabbed and held on to market share in the United States from its main rival, privately owned Advanced Bionics Corp, which battled a brief meningitis scare.

Unlike some other Australian exporters, Cochlear was largely unscathed by the 18 per cent rise in the Australian dollar against the US dollar, since it hedged its offshore revenue well.

Cochlear expected to step up research and development spending this year by 10 to 15 per cent from $A37 million last year, focusing on improving its speech processors and the capacity of its software to measure brain responses and self-regulate the implants.

©Fairfax New Zealand Limited 2003.