Why Cochlear Limited just invested $24 million in a sleep apnea treatment business

One of Australia’s best healthcare businesses in hearing aid maker Cochlear Limited (ASX: COH) trades on a very expensive valuation due to its best-in-class reputation as a manufacturer and retailer of hearing aids.

Even after recent share price falls it still trades on close to 40x trailing earnings per share of $4.21 in financial year 2018. This is because it has a strong competitive position, pricing power – as patients demand the best hearing aids – and a large global addressable market.

It also has a solid track record of long-term growth to prove its qualities as the kind of company investing legend Warren Buffett might even like at the right price.

It does however, have a few weaknesses including the risk of cut-price competition and the fact that it can be described as a one-trick pony in that it largely sells only slightly differing versions of hearing-aid devices or chips.

However, today it announced an investment that helps branch its operational interests out into another fast-growing area of medical devices.

It is to invest EUR13 million (A$23.8m) into a European medical device named Nyxoah S.A. that’s “focused on the development and commercialisation of a best-in-class hypogloassal nerve-stimulation (HGNS) therapy for the treatment of obstructive sleep apnea”.

In reality this is a small investment in a start-up type business and therefore not especially material to a $10 billion business like Cochlear, but it’s possible over the long-term it may turn into a good deal for investors.

It’s also notable that Nyxhoah’s in-development-therapy for the treatment of sleep apnea is described as “minimally invasive” and an “attractive alternative” for patients who struggle to comply in using traditional masks for the treatment of obstructive sleep apnea via continuous open airway therapy.

The market leader in this sector is ASX-listed ResMed Inc. (CHESS) (ASX: RMD) and the potential for innovative new therapies to challenge its existing medical devices is a risk for investors to watch. Today ResMed shares are down 3.3% to $14.31, which is not much worse than the wider S&P / ASX200 (ASX: XJO).

Cochlear’s share price is down 3.1% to $169.90 on the kind of day when shares paying BIG dividends become more attractive..

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. 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.

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