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Cochlear Slumps Most in 7 Years After Recall Threatens Sales

Cochlear Shares Drop in Sydney After Recall, Analyst Downgra
Cochlear Ltd. technicians work at the company's production facility in Sydney. Photographer: Jack Atley/Bloomberg

Cochlear Ltd. plunged the most in more than seven years in Australian trading after a recall of its hearing devices threatened to tarnish the company’s reputation and erode its share of the global ear-implant market.

Cochlear is voluntarily recalling its Nucleus CI500 range because of an increase in failures of its CI512 units, the Sydney-based company said in a statement today. The shares lost a fifth of their value after UBS AG cut its rating to “sell” from “neutral” and said the recall may hurt Cochlear’s sales, reputation and valuation.

The financial impact of the recall is “difficult to predict at this stage,” Cochlear said in the statement. The company, formed 29 years ago to develop a so-called bionic ear invented by Melbourne researcher Professor Graeme Clark, has about 70 percent of the global market for hearing devices implanted in the snail shell-like part of the inner ear.

“This recall is potentially a big deal,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “The CI500 range is Cochlear’s primary implant device, and a recall may impact short-term earnings, as well as possibly damaging its reputation. Cochlear has recalled the device on its own initiative, so we’ll be interested to see if they’re able to rectify matters in a short time.”

Cochlear dropped 20 percent to A$57.50 at the 4:10 p.m. close of trading in Sydney, the most since Dec. 16, 2003. The decline wiped A$835 million from the company’s market value, making it the worst performer today on the nation’s benchmark S&P/ASX 200 Index, which fell 3.7 percent.

Global Market

The devices are sold in about 100 countries. The recall is only for units on shelves and doesn’t relate to those already in use, the company said. If failure occurs, the implant safely shuts down without injuring the recipient, and the malfunctioning device may be replaced with an implant from its previous range called the Nucleus Freedom, it said.

“We don’t know how many are out on the shelves,” Neville Mitchell, Cochlear’s chief financial officer, said in a phone interview. “I have no idea how many we will have to recall.”

Production of the CI500 range stopped today and the company is now manufacturing the Freedom, Credit Suisse AG wrote in a report. Additional supplies could be provided next month, analysts Saul Hadassin and William Dunlop wrote. One month of lost sales would equate to a A$20 million, or 10 percent, reduction in net income, they wrote.

Profit Risk

In the event that there is a systemic problem affecting more than just recent manufacturing batches and the cochlear implant inventory is written off, net income may be reduced by a further 33 percent, the Credit Suisse analysts wrote.

Fewer than 1 percent of the CI512 implants have failed since they were first sold in 2009, Cochlear said. The recall was prompted after a “recent increase in the number of Nucleus CI512 implant failures,” it said.

“This has the potential to lead to prolonged market share gain for its competitors,” most likely closely held Med-El Corp., Nomura Holdings Inc. wrote in a report today, in which it reiterated a “buy” recommendation.

Switzerland’s Sonova Holding AG is Cochlear’s second-largest competitor with about 15 percent of the market, Nomura’s Sydney-based health-care analysts David Stanton and Zara Lyons wrote. Potential recipients and surgeons are likely to use alternative cochlear implants to those of Cochlear, they said.

About 20,000 units from the Nucleus 5 series have been implanted, accounting for about 70 percent of the company’s sales of inner-ear implants, Nomura said. The brokerage estimated 27,800 cochlear implants would be sold in the year ending June 2012, accounting for more than two-thirds of revenue.

“The commercial impact of this recall is very hard to predict at this stage,” said Jamie Spiteri, head dealer at Shaw Stockbroking Ltd. in Sydney. “However, uncertainty is always a concern.”

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