Headquartered in Sydney, Cochlear Limited (ASX: COH) has grown into one of the global market leaders in hearing implants. Despite the fact it now has a market cap of over $11.5 billion and is rated as one of the top blue-chip health stocks trading on the ASX today – alongside the likes of CSL Limited (ASX: CSL) and ResMed Inc. (CHESS) (ASX: RMD) – Cochlear is still posting strong growth numbers.
In FY18, Cochlear brought in close to $1.4 billion in sales, which was a 9% increase on the prior year. But bottom line growth was even higher: net profit was up 10% to almost $246 million for the year, demonstrating how even as a mature company Cochlear is continuing to expand its margins and realise ever increasing economies of scale. And the future outlook is rosy: profit guidance for FY19 is in the range of $265 million to $275 million, 8% to 12% higher than FY18.
So how does Cochlear continue to post these numbers – and what makes the company so sure it can continue to grow in future?
The first and most obvious answer is expertise. Cochlear has a long history, and even at its current size continues to invest 12% of its sales revenues back into research and development. When there is a company operating in the industry that can afford to spend close to $170 million on R&D in a year and still post profits of $246 million, newer entrants barely stand a chance.
This level of spending means Cochlear can continually improve its product offering and defend its market-leading position from any challengers. But the real reason it can continue to expand and grow its revenues so consistently year on year is the size of its addressable market.
Cochlear claims that globally, 360 million people suffer from some form of disabling hearing loss, including 1 in 3 people over the age of 65. And yet market penetration for hearing implants is less than 5%. If these numbers are to be believed, then Cochlear has barely even begun to expand.
A market with many similar characteristics is that for the treatment of age-related macular degeneration (AMD). In an April 2018 report, data and analytics company GlobalData forecast that the combined value of the world’s 7 major AMD markets (US, France, Germany, Italy, Spain, UK and Japan) would hit US$11.5 billion by 2026.
An Australian company named Opthea Ltd (ASX: OPT) is attempting to tap into this market with its drug named OPT-302. Opthea’s treatments are specifically targeting “wet AMD”, which is caused by leakage from vessels at the back of the eye, and diabetic macular edema (DME), a form of blindness caused by damage to blood vessels in the retina as a result of elevated glucose levels in diabetics.
The OPT-302 drug works by blocking the activities of two of the factors that can contribute to the excess formation of blood vessels in the eye and can cause wet AMD. The company believes the market for its treatment could exceed $10 billion worldwide.
So far, Opthea’s treatment is still in the clinical trial phase, although recent results news of the company’s progress has been positive. This month, a safety board monitoring the company’s ongoing wet AMD clinical trials in the US, Europe, and Israel voted unanimously that the trial continue without modification.
A couple of weeks later, Opthea announced that it had dosed the first patients to participate in its Australian DME clinical trials.
Opthea only has a market cap of about $120 million and is still only in the early stages of commercialising its wet AMD and DME treatments, so at the moment it is still a high-risk investment. However, with a global market worth upwards of $10 billion, this could be another Australian potential medical success story in the making.
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Motley Fool contributor Rhys Brock owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.