Cochlear Ltd (ASX: COH) released its 2014 full-year financial results on Tuesday. The market reacted favourably to the result, largely due to the considerable increase in revenues from the first half of 2014 to the second half of 2014. However, we remain cautious about the company’s prospects for two reasons.
Our primary concern has been Cochlear’s inability to grow unit sales of cochlear implants in key markets. For example, the graph below shows units of cochlear implants sold have been relatively stable since the recall of the Nucleus CI500 in 2011.
We note that sales in the past two years have been supported by contracts in China, which are awarded at discounted rates. When a company generates flat sales in a growing market, it implies loss of market share to competitors.
Our second concern is the risk that Medicare in the United States will remove reimbursements for Bone Anchored Hearing Aids (BAHA). Medicare reimburses prosthetic procedures like the cochlear implant (where a device replaces an organ) but does not reimburse hearing aids (where a device stimulates the organ). Since 2006, Medicare has reimbursed BAHA procedures, but it has recently proposed to cease payments, which are outlined below:
Osseointegrated devices such as the BAHA are bone conduction hearing aids that mechanically stimulate the cochlea; therefore, we believe that the hearing aid exclusion applies to these devices and propose that Medicare should not cover these devices, consistent with our interpretation of section 1862(a)(7) of the Act.
BAHA sales comprise around 12 per cent of Cochlear’s global revenues, of which the United States is a meaningful share. If Medicare ceases to reimburse BAHA procedures it may have a negative impact on the addressable market.