Cochlear Limited (ASX: COH) is the global leader in implantable hearing devices. As its name suggests, an implantable hearing device is surgically implanted into a patient's ear unlike a standard hearing aid. Doctors use implantable hearing devices to treat people with severe hearing problems whereas hearing aids are sufficient for mild hearing loss.
Global market
The estimated global addressable market for hearing implants is 360 million people, but less than 5% of that number are currently recipients. Australia is one of the most developed markets with penetration of 10% compared to 5% in the US and just 0.5% in China.
Various barriers to adoption currently exist such as worries surrounding surgery and residual hearing loss as well as lack of awareness and prohibitive cost. These should erode over time as technology improves, word spreads and incomes rise in the developing world.
One in three people over the age of 65 suffer from hearing loss compared to an average of 5% for people of all ages. Therefore, Cochlear will be a major beneficiary of the aging of populations which is occurring in many parts of the world.
Business model
Cochlear invests heavily in R&D to ensure that its products are the best in the world. In 2015, the company spent $128 million on R&D up from $56.7 million in 2006 and today it boasts the thinnest and most reliable implants on the market.
Cochlear is improving its products in other ways too, for example by blocking out background noise such as wind on a blustery day. But performance is not the key consideration for all users as some prefer devices that are easy to use, whilst for others discretion is a top priority. The company recognises this and so produces different products to suit different needs.
Along with its differentiated product range, Cochlear also has a growing base of recipients to which it sells upgrades and other services. The company has shrewdly developed close ties with its user base making it easy for them to deal directly with Cochlear without having to go through a doctor.
Aside from the direct revenue opportunities this provides, it will also build up goodwill with recipients and medical professionals who are likely to refer other potential customers. It is difficult for competitors to replicate this level of service, particularly those selling lower cost alternatives.
Financials
Revenue has risen 104.6% in the 10-years to 2015 whilst earnings-per-share (EPS) are up by 74.4%. There is a good chance that Cochlear could deliver a similar performance in the next 10 years given its dominant position in an immature market.
The stock has a price-to-earnings ratio (PER) of over 40 based on the midpoint of 2016 guided profit and so it is a bit too expensive for my liking. However, it is interesting that Hyperion Asset Management Limited, which employs a buy and hold approach focusing on high quality businesses, became a substantial shareholder in May.
