Cochlear's deaf-defying feat

From: The Australian - Sydney,Australia - Mar 10, 2007

The biggest challenge the hearing-device maker faces is not finding growth but managing it, says CEO Chris Roberts reports Robert Gottliebsen

March 10, 2007

THE market values Cochlear at just under a whopping 30 times the annual earnings per share rate achieved in the latest half year, because analysts believe the company will grow at a 20 per cent-plus rate for at least the next five years.

It's an ambitious target for any company, but Cochlear chief executive Chris Roberts believes the analysts "fade" or cut back high growth rates too early.
To back his judgment, he used the current disclosure window to buy some $7 million worth of stock. He already has close to 400,000 shares worth more than $200 million.

He explains his decision this way: "I actually believe in this business. It's not about whether a company is going to grow or 18 per cent or 20 per cent or 25 per cent. It's about how many years you'll grow at that rate.

"When I reverse-engineer the growth that's implied in the share price, it's pretty miserable in terms of how people fade it. It's very hard for people to actually believe in longer-term growth.

"We've got 25 years' history. Don't fade the growth in a few years' time. There's 25 years down the track. If anything, we're getting stronger."

How does Roberts see more than another decade of high growth, given that the company has grown at an annual rate of about 22 per cent for the last 10 years and doubled in about four years?

Roberts says the company has 70 per cent global market share and the current Cochlear implants only cover 10 per cent of the available market.

Those who already have implants can benefit from the new technology and the company is developing new devices to improve the hearing of people who find the Cochlear implant unsuitable. These new markets are substantially greater than the conventional Cochlear business.

"There is a huge unmet clinical need out there and it's up to us to organise ourselves and just go out and capture it. It's there for the taking. We can help so many people and it's a tragedy that we're not (doing it)," Roberts says.

Cochlear's current turnover is about $550 million and Roberts expects to repeat the previous doubling.

"We're putting a lot of time designing what this business looks like for the next doubling," he says.

"We've challenged everyone in the organisation. When we're doing a billion dollars of revenue, what will you in the finance department look like? What will the supply chain look like? We're not designing a supply chain for a business today, we're designing a supply chain for a billion-dollar revenue," he says.

The traditional Cochlear implant system involves inserting an implant that lasts 70 to 80 years. The technology that transmits to that implant can be easily changed and so many of those who received implants in the 1980s have had four or five upgrades.

Roberts says that the new Cochlear system, called Nucleus Freedom, is a vast improvement on the previous generation. There are about 90,000 Cochlear implants in operation (usually in one ear only) and of those about 10 or 15 per cent already have the new system, so there are about 75,000 available for an upgrade.

Cochlear is planning to roll out Nucleus speech processors to about half that replacement market. In addition, it has been found that hearing is further improved if an implant is placed in both ears, particularly at an early age, further boosting the potential of the base market.

Roberts says the improved hearing systems are widening the market. Three years ago Cochlear distributed about 65 per cent of its product through agents. Now direct distribution covers more than 70 per cent of sales and the company has substantially increased its direct selling power in the US and Europe. Roberts hopes this better distribution and consumer contact will boost sales.

The two largest untapped geographic markets are China and India. A philanthropist has donated 15,000 Cochlear implants to the Chinese over six years. This will greatly increase the knowledge of the product in the world's largest untapped market for implants.

Roberts believes three new global hearing markets have enormous potential.

The first is called "bone anchored solutions" - the company acquired the Swedish based Entific so it could be the leading global player in this area.

A second market is the development of an acoustic ear simulator, but the most exciting new market is people with partial hearing who are reluctant to have that hearing replaced by a Cochlear implant.

Cochlear's new "hybrid" technology enables such a person to keep their existing hearing but vastly improve their speech recognition.

Roberts says this market is much larger than the traditional Cochlear market. The "hybrid" product is currently undergoing clinical trials. The recent rise in the Cochlear share price partly reflects the potential of this breakthrough.

In the US, Cochlear's biggest rival is the Boston Scientific-owned Advanced Bionics, which has about 25 per cent of the American market. In Europe, the Mendel group has a similar percentage.

Because Cochlear's 70 per cent market share is global and it invests about 12 per cent of its revenue in research, the group has a big advantage over its localised rivals. Boston Scientific is planning to use the hearing implant technology in a series of other medical applications.

Roberts and Cochlear do not plan to follow the US company, as they intend to go after the large untapped potential of the hearing market.

Interestingly, Professor Graeme Clark, who made the initial research breakthrough which led to the Cochlear success story, is now also researching wider applications of the base technology.

Looking at what can go wrong, Roberts says the company's greatest challenge is managing the looming Cochlear growth.

"The business is surprisingly complex for its size. But it's not too big. There's a lot of opportunity for companies of this size through the next doubling and the doubling beyond that. It's still small. But you have a critical mass, so if a key salesman breaks his leg the numbers aren't going to fall over."

© The Australian