Cochlear Limited (ASX:COH) is the global leader in the design and production of hearing implants. The company had an amazing record of product innovation and safety up until the recall of its Nucleus 5 implant in 2011. As a consequence, the share price and earnings have taken a hit. However, swift and decisive action by management has limited the reputational damage to the Cochlear brand.
Despite the recent decline in earnings, Cochlear is in a strong position to rebound and thrive over the long-term. Cochlear's reputation for reliability, innovation and the ownership of valuable intellectual property gives the company a strong competitive advantage. The company has strong relationships with surgeons and governments over the world, including the United States, Europe and China.
The company has huge scope for growth over the next decade. Cochlear estimates that its products are currently utilised by a very small percentage (perhaps as low as 1%) of the potential market for hearing devices. It will see increased demand for its products as governments around the world increase healthcare spend and as a result of its products being highly leveraged to a growing Asian economy. A strong cash position and low debt provides a solid foundation to fund future growth.
The 2014 year is an important year for the company as new products are scheduled for regulatory approval and commercial launch. On a positive note, the company recently received regulatory approval for its Nucleus 6 sound processor in the key markets of the United States and Europe.
Cochlear does face some risks to its long-term success. Another product recall such as that experienced in 2011 would significantly damage the brand and consequently surgeons and governments may decide to abandon Cochlear's implants. There is also a risk that a competitor could develop a superior product with a strong reputation for reliability.
Foolish takeaway
At the current price of $57, investors have the opportunity to purchase a quality company that is set for years of future growth. Despite a decline in earnings over the last two years as a consequence of the product recall in 2011, Cochlear should see a strong recovery in earnings from 2015 as the company releases new products to the market.
Investors looking for further exposure to the healthcare sector should look at ResMed Inc. (ASX:RMD) and CSL Limited (ASX:CSL) who are also set to benefit from increased market penetration and are highly leveraged to growing wealth within Asia.
