Cochlear amplified by record revenue despite ongoing pandemic fallout

Hearing implant producer Cochlear (ASX: COH) achieved record sales revenue of $1.64 billion during FY22, propelled by demand for acoustic implants and sound processor upgrades, with all regions and product segments tracking above pre-COVID levels.

The Sydney-based global leader in implantable hearing solutions increased its net profit after tax by 18 per cent to $277 million. However, statutory net profit dropped 11 per cent to $289.1 million, which included a one-off gain of $12 million primarily related to the reevaluation of its asset Epiminder.

Cochlear implants continued to experience variability in performance, especially across countries most impacted by COVID, with the UK and Australia still performing below pre-COVID levels.

Although sales revenue of implants increased by 5 per cent to 38,182 units overall, emerging markets outperformed developed markets in terms of growth, helped by a strong recovery in China and the Middle East.

In the US, where volumes are 20 per cent above pre-COVID levels, Cochlear’s partners report strong patient pipelines and growing waiting lists, although access to operating theatres remains constrained due to staff shortages.

Cochlear implants still account for most of the sales revenue, with sound processor upgrades and accessories making up 31 per cent of sales and acoustics contributing 12 per cent.

Administration expenses increased by more than a fifth to $137.4 million, driven primarily by increases in IT expenses and growth in insurance and costs associated with the purchase of Oticon Medical – which Cochlear acquired in April for $170 million.

The decision to acquire its Danish competitor followed Demant’s decision to exit its hearing implants business activities, and although currently loss-making is expected to add $75-80 million to annual revenue.

As part of the transaction, Cochlear has committed to providing ongoing support for Oticon Medical’s base of approximately 75,000 hearing implant recipients, which includes cochlear and acoustic implants.

Cochlear’s operating expenses increased by 15 per cent, reflecting growing investment in R&D and market growth activities with a material increase in cloud computing-related investment.

A change in accounting practices in 2021 limits the ability to capitalise on customisation and configuration costs related to cloud computing products.

As a result, investment in cloud computing has been reclassified from capital expenditure to operating expenses, with Cochlear spending $21.6 million on cloud investment in FY22, up from $3.9 million in FY21.

This change has led to Cochlear committing to invest $100-150 million in cloud-based technology solutions over four to five years.

Cochlear was founded in 1981 by Australian ear surgeon Professor Graeme Clark, whose father struggled with hearing difficulties.

Partnering with Australian entrepreneur Paul Trainor – and his Nucleus Group – and the University of Melbourne, and with funding from the Australian government, they developed the Cochlear Nucleus 22 Implant, the first multi-channel cochlear implant.

Its global headquarters are on the campus of Macquarie University in Sydney, with regional offices in the Asia Pacific, Europe and the Americas. Its products are sold in more than 180 countries, with a direct presence in over 30 countries and a global workforce of close to 4,500 employees.

During the year, Cochlear achieved FDA approval for the treatment of unilateral hearing loss and single-sided deafness with a Cochlear Nucleus implant in the US, while its remote assist app also received approval - enabling live video appointments for both cochlear implant and baha implant recipients.

The business also formed a partnership with Malala Fund aimed at removing hearing loss as a barrier to education in emerging markets.

Cochlear expects growth of between 5 per cent and 10 per cent in FY23, equating to an underlying net profit of between $290-305 million, weighted to the second half of the year.

“We remain confident of the opportunity to grow our markets. There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long-term sustainable growth of the business,” Cochlear said.

“Our clear growth opportunity and strategy, combined with a strong balance sheet, mean we are well placed to create value for our stakeholders now and over the long term.”