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Is Cochlear Limited’s new hybrid device a turning point?

Cochlear Limited (ASX: COH), the maker of hearing aids, has received approval in the US for the launch of its hybrid hearing device, opening up a new market for the company.

Previously, Cochlear’s devices were intended for those people who were profoundly deaf. Users who have hearing loss in the high frequencies, but can still hear low-frequency sounds can now get a cochlear implant to help, especially in noisy environments like restaurants. Called sensorineural hearing loss, partial loss of hearing is the most common form of hearing loss.

It opens up a totally new market for Cochlear, and the company has beaten its rivals to the punch, suggesting that it may be able to build up a strong market share, before its competitors can get a decent foothold.

What is a concern though is that while it has some big advantages, 68% of users in a trial of 50 people experiences one or more adverse events, such as low-frequency hearing loss. Six users even underwent surgery to replace the hybrid system with a standard cochlear implant. The US FDA still decided to approve the hybrid device because most users showed a significant improvement in hearing.

Cochlear could also get another boost, as it is still awaiting approval for the full set of features in its Nucleus 6 processor. The company still has a dominant market share in cochlear hearing devices globally, but concedes it lost around 10% of market share to 60% in the US over the past 1-2 years. That came after the company was forced to recall its top of the line device, tarnishing its track record of reliability.

But approval of the hybrid device and the expected approval of the fully featured Nucleus 6 processor could see Cochlear put its recent worries behind it.

As CEO Chris Roberts noted in February 2014, “One of our strategies is to continually invest. We’ve spent over $500 million on research and development in the last five years. Most of that benefit hasn’t come back yet.”

Foolish takeaway

Cochlear was the most-shorted individual stock on the ASX as at 14 March 2014, followed by News Corp (ASX: NWS), UGL Limited (ASX: UGL) and Monadelphous Group (ASX: MND). With Cochlear shares up 2.5% at lunchtime today, many of those shorters may well be forced to cover their positions in the days, weeks and months ahead. I certainly wouldn’t want to be standing in front of the Cochlear train at this point in time.

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Motley Fool writer/analyst Mike King owns shares in Cochlear. You can follow Mike on Twitter @TMFKinga

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