Dr Boreham’s Crucible: Is Cochlear’s journey a blueprint for Nuheara’s success?
Health & Biotech
Tim Boreham is one of Australia’s best-known small cap analysts and business journalists.
At its recent half-year results, home-grown global hearing implant Cochlear (ASX: COH) offered some broader market observations that should be music to the ears of smaller players in the hearing-loss game, notably the ASX-listed minnow Nuheara (ASX: NUH).
Globally, says Cochlear, 460 million people suffer hearing loss and one in three people aged over 65 have impaired hearing to a disabling degree.
Millions more folk are in the intermediate category where their hearing isn’t as good as it used to be, but the problem isn’t acute enough for them to wear a hearing aid.
Or, they’re too vain to do so.
To date, Cochlear’s implants have tackled the profoundly deaf category – and with great effect. Since 1981, half a million people globally have been fitted with the implants and like Eskys or Hoovers, the Cochlear name has become synonymous with the broader product.
But Cochlear’s sales in developed countries have been a tad soft and the company is now targeting the broader hearing loss market. Generally speaking, that means people who are using (or should be using) hearing aids.
So while Cochlear is going down the hearing severity curve, Nuheara is rising up it as it shifts focus from smart ear buds (“hearables”) to professionally fitted devices that augment fading hearing.
With apologies to the industry super funds, let’s compare the pair.
Co-founded by Silicon Valley entrepreneurs Justin Miller and David Cannington, Nuheara backdoor listed on the ASX in 2016, having raised $3.5m at 2.5c apiece.
Nuheara’s initial product was the wirelessly-connected IQbud and was pitched more at enhancing the user’s music-listening experience than anything else.
While the $400-a-pair buds sold well enough, competitive pressure in wireless earbuds is mounting so Nuheara has replaced the IQbuds with IQbuds BOOST, which are aimed squarely at providing an alternative to hearing aids.
With a list price of $649 a pair, the BOOSTs still compare favourably to the cost of a hearing aid, of anywhere between $6000 and $12,000.
One of Nuheara’s selling points was that the BOOSTs could be fitted without the costly services of an audiologist. But in the emerging tech world, corporate strategies must be fluid and Nuheara is now only providing its BOOSTs only to retailers that can provide a “value add sales process”.
These outlets include hearing clinics and – more intriguingly – the UK based Specsavers optical chain, which entered the hearing market way back in 2002.
We guess tuning up one’s eyes and ears at the same time makes ‘sense’.
In line with its more upmarket approach, Nuheara has postponed plans to launch a cheaper, $200-a-pair variant to IQbuds called LiveIQ.
Nuheara’s half-year results show the IQbuds BOOSTs accounted for 73 per cent of unit sales, with an average selling price of $400 per unit.
This resulted in Nuheara’s average per-unit sales price rising to $337 in the half, from $181 in the 2017-18 year.
But while Nuheara is reaping more per unit, the high price point means that revenue for the half fell 28 per cent, to $1.42m. The company also recorded a $4.04m deficit.
In the 2017-18 year, Nuheara turned over $5.25m (up 80 per cent) and lost $7.41m. As of December 31 Nuheara had $8.08m in the bank, courtesy of a $5m placement earlier that month.
Cochlear’s reported interim net profit – a 16 per cent increase to $128.6m – looked pretty swish. Management also reaffirmed full year earnings guidance of $265-275m, an increase of 8-12 per cent and also none too shabby.
Services revenue – which encompasses sound processor upgrades and spare parts – surged 28 per cent to $207m. This segment – which management has targeted in recent years – accounted for 29 per cent of overall revenue of $712m.
However investors can’t forgive the sub-par performance of implants, which remain Cochlear’s core market accounting for 58 per cent of revenue (the acoustic and bone implant range, known as Baha, accounts for a further 13 per cent of turnover).
CEO Dig Howitt attributes the sales malaise in developed countries to a new product from arch-rival Advanced Bionics, which means users don’t have to remove the batter when they undergo an MRI scan.
Mr Howitt notes that as Cochlear launched its latest product iteration, Nucleus 7 in the prior comparative half, it was ‘cycling’ tough comparative numbers this time around.
But he maintained Cochlear was continuing to see a strong demand for Nucleus 7, the company’s latest product iteration that is now compatible with both Android phones and iPhones.
Among the emerging countries, Mr Howitt calls out Argentina and Turkey as significant opportunities, despite currency devaluation and generally dodgy economies.
Back in the First World, Cochlear saw only 3 per cent growth in the US market.
“We do expect developed market growth over the medium to long run,” Mr Howitt said, adding that the uptake is difficult to predict.
Cochlear is hardly ignoring the advances in “hearables” technology, having entered a collaboration with Danish-based “intelligent audio solutions” house GN Hearing Solutions.
Dubbed the Smart Hearing Alliance, the tie up aims to develop the latest connectivity and wireless technology.
The alliance is relevant to “bimodal” patients; that is, those with a Nucleus 7 sounds processor in one ear and a GN’s Resound hearing aid in another (the devices are paired with an iPhone or iPod to control functionality).
Despite the headwinds, Cochlear’s results showed sound cash generation which enabled investors to be awarded with an 11 per cent dividend increase to $1.55 a share, fully franked.
This is also despite $80-100m being earmarked for long-term projects including a new manufacturing facility in China.
In truth, it’s fallacious to compare a $10 billion market cap giant with a $70m tiddler, but it’s heartening to see both companies tackling the capacious market with a focus on innovation.
We won’t call out Nuheara as the next Cochlear, but we’re hearing good things.
Despite Nuheara’s progress the company’s share price has been a tad indifferent, having peaked at 13.5c in March last year.
With cash of $92m and net debt of only $72m, Cochlear is in a sound position to pursue further acquisitions into areas that expand its repertoire.
In May 2017 Cochlear paid $US78m for Sycle LLC, the world’s dominant supplier of audiology practice management software.
Cochlear is firmly out of investor favour – its shares fell 8 per cent after the results – but we expect the company to regain its mojo in the long term.
A version of this column appeared in Biotech Daily.
Disclosure: Dr Boreham is not a qualified medical practitioner and does not possess a doctorate of any sort. He does not head a global biotech company but
when it comes to career advancement is all-ears to the possibilities.
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