##{"id":58874,"date":"2011-09-21T12:29:15","date_gmt":"2011-09-21T02:29:15","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/09\/21\/cochlears-problems-sound-deep\/"},"modified":"2011-09-21T12:29:15","modified_gmt":"2011-09-21T02:29:15","slug":"cochlears-problems-sound-deep","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/09\/21\/cochlears-problems-sound-deep\/","title":{"rendered":"Cochlear&#8217;s Problems Sound Deep"},"content":{"rendered":"<p>\n\t<strong>&#8211; Analysts still unsure over impact of recall<br \/>\n\t&#8211; risks remain to the downside<br \/>\n\t&#8211; Morgan Stanley joins the <span class=\"scayt-misspell\">downgraders<\/span><\/strong><\/p>\n<p>\n\t<br \/>\n\tBy Greg Peel<\/p>\n<p>\n\tIt was over a week ago when leading global hearing implant manufacturer Cochlear ((<span class=\"scayt-misspell\">COH<\/span>)) announced it had recalled its most recent product, the Nucleus 5, due to an unexplained tendency for some devices to turn themselves off. The market&#039;s response was swift and severe on the day and then more bad news was to come. Cochlear shares have since fallen around 25%.<\/p>\n<p>\n\tIt&#039;s a bitter blow for this previous stock market darling. If you want to make a biotech executive squirm just quietly say the word &ldquo;recall&rdquo;. At least in this case the recall occurred simply because devices weren&#039;t working properly rather than any recipient&#039;s health being affected. But with the problem not yet obvious to Cochlear technicians, brokers expect it will be many months before the Nucleus 5 can be back on the market. And that leaves plenty of time for the sharks to move in for the kill.<\/p>\n<p>\n\tCochlear has long attracted a premium valuation to market based largely on the fact it has for a long time been the global leader in its field. There are other devices on the market, but Cochlear&#039;s competitors have never been able to make the dent in Cochlear&#039;s dominant market share they&#039;d like to. And they, too, have had their own problems with device recalls. The Nucleus 5 recall came at a time major competitor Advanced Bionics was still suffering from its own product recall. The return of the AB product was not expected for a couple of months.<\/p>\n<p>\n\tStock analyst response to the Nucleus 5 recall were initially somewhat mixed. Obviously it was a blow and forecasts earnings and target prices were duly chopped as a result, but just how much of a lasting blow would it prove to be? That is the problem. The voluntary recall was more of a reliability issue than a total product failure issue and Cochlear was obviously erring on the side of caution, but the previously unquestioned reputation of the market leader had been damaged.<\/p>\n<p>\n\tIrreparably? That remains to be seen. In the shorter term it&#039;s all about whether Cochlear&#039;s competitors can successfully exploit the market share opportunity granted them and in the longer term it&#039;s about whether they can do so permanently. Thus it didn&#039;t help Cochlear&#039;s cause, and market sentiment, when only days after the recall Advanced Bionics announced its own recall was now over &ndash; a couple of months ahead of expectation.<\/p>\n<p>\n\tOn the initial news of the Cochlear recall, both <span class=\"scayt-misspell\">RBS<\/span> Australia (Buy) and Credit Suisse (Neutral) questioned whether the company&#039;s competitors really had the scale and the capacity to make a significant dent in its superior market share. By contrast, BA-Merrill Lynch and UBS immediately downgraded to Sell, joining <span class=\"scayt-misspell\">Citi<\/span> which was already citing overvaluation. <span class=\"scayt-misspell\">Merrills<\/span> noted that the Nucleus 5 represented 44% of global device supply and 65% of Cochlear&#039;s earnings and as such the downside potential could be significant. UBS suggested Cochlear&#039;s reputation was now damaged.<\/p>\n<p>\n\tThe <span class=\"scayt-misspell\">Merrills<\/span> analysts did subsequently note that the early return of the AB product implied the US Federal Drug Administration was not going to <span class=\"scayt-misspell\">scrutinise<\/span> hearing devices as stringently as had been assumed. This meant Cochlear was possibly being over-cautious for no reason and could possibly get the Nucleus 5 back on the market more expediently, but nevertheless the damage had been done in <span class=\"scayt-misspell\">Merrills<\/span>&#039; view. Market share losses would likely be greater with the AB product quickly filling the vacuum.<\/p>\n<p>\n\tMorgan Stanley does not believe the Nucleus 5 will be back quickly, and indeed believes it will be off the market for an &ldquo;extended&rdquo; time. The quick return of the AB device means Cochlear&#039;s market share losses will be exacerbated, the analysts suggest.<\/p>\n<p>\n\tOn news of the recall, the analysts did some investigation and found that the last four months showed a sharp acceleration in Nucleus 5 &ldquo;failures&rdquo;. What&#039;s more, the time to failure from implantation was around 4-7 months, implying more to come. These findings, suggests Morgan Stanley, increase the likely ultimate cost of the recall to Cochlear.<\/p>\n<p>\n\tDespite Cochlear&#039;s 25% drop in share price to date, Morgan Stanley has elected to drop its target another 17% lower. Initial cuts from the <span class=\"scayt-misspell\">FNArena<\/span> database brokers took the average target to $57.95 but MS has set $45.17 and will not rule out even further cuts as developments unfold. Unsurprisingly, the broker has downgraded to <span class=\"scayt-misspell\">Underperform<\/span>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>After a 25% drop, Cochlear&#8217;s risk may still be to the downside as another broker downgrades to Sell.<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[39],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58874"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=58874"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58874\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=58874"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=58874"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=58874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}