What a Change of CEO Could Mean for Cochlear

Aussie medical tech company Cochlear Limited [ASX:COH] is getting a new CEO.

Yesterday morning, Cochlear chairman Rick Holliday-Smith announced that Chris Smith will replace Dr Chris Roberts as CEO in August.

He said that ‘Dr Roberts leaves Cochlear with the Board’s best wishes and thanks. He has done a remarkable job in [his] more than 11 years as CEO; trebling cochlear implant unit sales and revenues, and quadrupling net profit and the share price’.

That he has done. Cochlear has outperformed most other hearing aid developers and manufacturers around the world.  That includes William Demant [CPH:WDH], who make the advanced programmable Ponto systems through their subsidiary Oticon Medical.

hearing aid companies
Source: Google Finance
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So Smith has big shoes to fill.

What the Cochlear board says

According to Holliday-Smith, the board of Cochlear ‘had been discussing succession planning for some time and believed Mr Smith would bring a deep understanding of the company, its customers and hearing healthcare professionals’.

Chris Smith has been with the company for nearly as long as Dr Roberts. He’s spent a fair chunk of his 20-plus years in the medical device industry at Cochlear. He’s currently the President of Cochlear North America and the Senior Vice President of Global Support Operations.

But perhaps most importantly, he’s served successfully as the Senior Vice President of Cochlear Bone Anchored Solutions.

The future of implant tech

Baha 4 and Baha Attract are bone conduction systems. ‘Baha’ stands for ‘bone anchored hearing aid’. They work differently to cochlear implants. Bone conduction systems turn sound into vibrations, which go through the bone to the inner ear. The hair cells in the inner ear pick them up, and the user hears the sound naturally. It’s like making a shortcut to the inner ear, when the outer and middle ear is damaged.

baha vs cochlear
Top: Baha, Bottom: Cochlear
Source: cochlear.com
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With cochlear implants the audio processor turns sound into digital information, which goes through the internal implant, then an electrode which goes straight to the auditory nerve. That’s why it’s sometimes called a ‘bionic ear’. The processor also sends low frequency sounds to the normal hearing pathway. This is because people with hearing loss can often still hear low frequency sounds with their remaining working hair cells.

Bone implants are suitable for people with less serious hearing problems. That means people with conductive hearing loss, or deafness in one ear only. Cochlear implants are for people with severe to profound hearing loss. That means people who have ‘sensorineural’ hearing loss – i.e. their hair cells aren’t transmitting sound to their nerves any more.

Many analysts are positive about the future of the market for bone anchored hearing aids/implants. Analysis from Bernstein has described it as promising. Berenberg Equity Research said ‘We expect the market for BAHAs to continue to grow at a 10-15% … over the medium term, driven by increased penetration, wider reimbursement and industry acceptance of the procedure by surgeons. Much like the cochlear implant market, this segment is heavily dominated by two players, Cochlear and William Demant, who have [approximately] 95% share between them.’ In the ‘Global Hearing Aid Market Report: 2014 Edition’, Koncept Analytics said ‘bone-anchored hearing systems have emerged as [one of the] bright spots within the hearing aid market’.

According to Cochlear’s last report, sales of their bone anchored implants are up. The report said ‘Bone Anchored Solutions were up 25% and up 22% in constant currency again reflecting the impact of the Baha 4 and Baha Attract systems.’ In contrast, cochlear implant sales were only up 16% — 914% with currency adjustment). A similar trend was noted in their full-year report.

So bone anchored implants are a growth area for Cochlear.

Perhaps that trend is why Cochlear highlighted bone implants in their full-year report outlook. They said that ‘Baha 4 and Baha Attract have … been launched in major markets and will continue to roll out to other markets as approvals are received’. That includes approvals like the European CE and US FDA approval of the Attract, which was the first approved magnetic unit. In both those cases, being the first approved allowed Cochlear to get a head start on market share for ‘invisible’ implants.

Cochlear is optimistic about the growth of their bone anchored solutions. They believe there are lots of people with partial hearing loss — not severe enough for a cochlear implant, but too bad for a normal hearing aid — who could benefit from Baha. In their annual report, they said ‘There continue to be more people in the world diagnosed with hearing loss who could benefit from Cochlear’s products than are treated each year. There remains a significant, unmet and addressable clinical need which will continue to underpin long-term sustainable growth’.

That means there might be more potential Baha candidates than cochlear candidates left to reach.

Also, governments only started covering Baha implants relatively recently. Late last year, the US’s Medicare reaffirmed that it would continue to cover them. In the UK, the NHS has only covered Baha implants in all areas since 2013. In France, Baha implants have been covered through compulsory social health insurance since 2009. The benefit limit is set to be revised in 2017, and may then cover Cochlear’s more advanced Baha models.

Similarly, in Australia, we’re not 100% covered through Medicare, but private health insurance laws mean insurers have to cover them as an implant. And the surgical procedure to have it put in has been covered under Medicare since 2006.

In comparison, most of these countries’ public medical systems have covered cochlear implants for several years. For example, in the UK the NHS has been funding cochlear implants since the early ‘90s.

That means there could be many more people in line to get a Baha implant through the public system.

Either way, having a CEO who’s extra familiar with bone anchored technology will be important for Cochlear’s growth plans.

What has the news done to the share price?

ASX COH 20150526
Source: Google Finance
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It seems the market approved of the Cochlear Board’s choice. Cochlear stocks gained 1.37% yesterday, closing at $88.66.

Investors and spectators will just have to wait for Smith’s first report as CEO to see where he takes the company.

Eva Mellors
Contributor, Money Morning

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