Cochlear Ear-Implant Recall Costs May Reach A$150 Million

Cochlear Ltd., maker of the world’s best-selling ear implant, said costs from a voluntary recall of one of its hearing devices may reach A$150 million ($152 million). The shares fell the most in two weeks.

Recall-related costs will be in the A$130 million-to-A$150 million range, Cochlear Chairman Rick Holliday-Smith said in speech notes prepared for today’s annual meeting in Sydney. That’s more than the A$100 million estimated by UBS AG in a report yesterday. The after-tax cash cost of the provision may be A$20 million to A$30 million, the company said.

Cochlear, formed 29 years ago to develop a so-called bionic ear invented by Melbourne researcher Graeme Clark, aims to maintain its A$1.20-a-share dividend, Holliday-Smith said. The shares have lost 26 percent of their value since Sept. 11, when Cochlear said it was recalling its Nucleus CI500 range because of an increase in failures of its CI512 units.

“Statistically the recall is still accelerating, and may increase three fold yet,” UBS health-care analysts Andrew Goodsall and Dan Hurren said yesterday. They estimated a 4 percent decline in per-share earnings in the year ending June 2012 and reiterated their “sell” rating on Cochlear shares.

Cochlear ended trading down 1.8 percent at A$53.54 on the Australian stock exchange, the biggest decline since Oct. 4. Before the recall, Cochlear had about 70 percent of the global market for hearing devices implanted in the snail shell-like part of the inner ear.

Reputation Untarnished

Of 20 cochlear-implant surgeons surveyed globally, 85 percent indicated Cochlear’s reputation was little or untarnished by the recall, Nomura Holdings Inc. wrote in a report today.

“We are more confident that Cochlear’s reputation in the market is not as damaged as we had feared,” Nomura health-care analysts David Stanton and Zara Lyons said.

Switzerland’s Sonova Holding AG is Cochlear’s second-largest competitor with about 15 percent of the market, Nomura said last month, adding that potential recipients and surgeons were more likely to use cochlear implants from other suppliers.

“So far, we’ve seen minimal impact on market share,” Cochlear Chief Executive Officer Chris Roberts said in a phone interview today. “We’ve got a strong position that we can defend.”

Rather than switch to an alternative supplier, surgeons have instead used Cochlear’s CI24RE implants, Roberts said.

The company plans to fund the cost of the recall with cash, and increased a loan facility with Westpac Banking Corp. by A$50 million in case additional funding is needed to maintain the current level of dividend, Roberts said.

February Update

More details of the cost of the recall will be announced in February, when the company reports first-half earnings, Holliday-Smith said. Items related to the recall will be accounted for in the period ending Dec. 31, he said.

Checks on the recalled products found failures were caused by a malfunction of one of four electronic components due to moisture entering the device via a breach in the hermetic seal. The malfunction causes the implant to shut down as it can no longer receive information and/or sufficient power from the unit’s sound processor, the company said.

“We regret the difficulties it has created for so many of our stakeholders, but it was the right thing to do especially when our primary consideration is always the welfare of our recipients and our long term reputation,” Holliday-Smith said.

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