Cochlear (ASX: COH) is one of the world’s leading heath technology firms with global dominance in the internal and external hearing aid space.
The stock has reacted sharply to tariff concerns and its impact on the company along with cost overruns and disappointing growth in some operating segments.
However, we believe the company presents excellent long-term growth prospects and structural tailwinds.
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About Cochlear
Cochlear Limited (ASX: COH) stands as the global leader in implantable hearing solutions with a pioneering legacy spanning over 40 years. The company operates through three primary business segments: Cochlear implants (62% of revenue), Services (sound processor upgrades and accessories), and Acoustics (bone conduction solutions).
Headquartered on the campus of Macquarie University in Sydney, Cochlear operates with regional offices across Asia Pacific, Europe, and the Americas, employing over 5,000 people globally and selling its products in more than 180 countries. The company’s manufacturing is spread across Australia and China.
The company listed on the Australian Securities Exchange is a top 30 ASX-listed company with a market capitalization of nearly $18 billion at time of writing.
Source – Cochlear HY25 Investor Presentation
Market Dominance And Brand Value Are Major Strengths
Cochlear’s (ASX: COH) dominant market leadership position in implantable hearing solutions represents its most formidable strength, developed and maintained through decades of innovation and clinical expertise.
Source – Cochlear HY25 Investor Presentation
The company’s unwavering commitment to research and development is evidenced by its consistent allocation of approximately 12% of annual sales revenue to R&D initiatives, amounting to over $3 billion invested since its listing.
This substantial investment has yielded an impressive intellectual property portfolio comprising more than 2,300 patents and patent applications worldwide.
The company’s robust manufacturing capabilities are built on rigorous quality control processes, with cochlear implant production involving over 181 process steps, 12 tests, and 41 inspections, creating significant barriers to entry for potential competitors.
Financially, Cochlear demonstrates remarkable consistency with gross margins maintained at approximately 75%, supported by their adoption of Lean manufacturing methodologies for over 15 years.
Their global manufacturing network provides strategic flexibility, allowing them to scale capacity to meet demand while managing supply chain risks effectively through long-standing relationships with 565 suppliers across the world, many of which have been maintained for over 20 years.
Cochlear’s strong balance sheet features a net cash position of $383 million (as of December 2024), providing substantial financial flexibility for continued investment in growth initiatives and potential strategic acquisitions.
The diversified revenue stream across three complementary business segments-cochlear implants, services, and acoustics-provides resilience against fluctuations in any single market segment, with recent financial results showing particularly strong growth in Cochlear implants (13% in constant currency) and Acoustics (22% in constant currency) for HY25.
At the same time, Cochlear’s long standing market dominance and product excellence has resulted in deep and long-lasting relations with medical professionals such as doctors and surgeons who would hesitate to recommend untested or new competition easily to their patients.
Lastly, Cochlear’s vast data and experience has allowed the company to improve customer satisfaction and outcomes. For example, the company’s Remote Check and Remote Assist telehealth platform lowered clinic visit expenses by 62% compared to in-person evaluations while reducing visits by 30%. These capabilities will only improve with AI, improved connectivity and data creating a powerful moat for the company in a cost sensitive industry like healthcare.
Regulator/Insurer Exposure And Lethargic Upgrade Cycles Are Weaknesses
Regulatory uncertainty of the complex global healthcare funding environment, where Cochlear’s (ASX: COH) success is heavily dependent on reimbursement policies that vary significantly across markets.
Macroeconomic uncertainties, including inflation, currency fluctuations, and potential economic downturns, could affect both healthcare spending and consumer ability to afford premium medical devices like cochlear implants, particularly in emerging markets where private pay remains a significant funding source.
This is particularly acute for major developing economies such as China and India which have been strong growth engines for the company but are facing tariff pressures from the West.
The company’s reliance on reimbursement and healthcare funding presents an ongoing vulnerability, as changes in healthcare policy or reimbursement criteria could materially impact market access.
Furthermore, the Services revenue decline suggests challenges in effectively identifying and connecting with recipients who could benefit from the latest sound processing technology, indicating persisting challenges in customer relationship management despite investments in digital platforms and services.
Overall, the company is facing difficulty in convincing both medicare/insurance providers and out of pocket paying customers of the benefits of newer versions of their products, in part because gains are increasingly marginal for customers.
Under Penetration Serves Major Opportunity
The most compelling opportunity for Cochlear (ASX: COH) lies in the vastly undertreated market for implantable hearing solutions, with the World Health Organization estimating that over 60 million people worldwide experience severe or higher hearing loss, yet fewer than 5% of eligible candidates have received an implantable solution.
Source – Cochlear HY25 Investor Presentation
This substantial untapped market provides a clear pathway for sustained long-term growth. Demographic trends strongly favor Cochlear’s expansion, particularly the rapidly aging global population with one in four seniors suffering from moderate or higher hearing loss.
This demographic shift is especially pronounced in the United States, where 10,000 new 65-year-olds join the senior population daily, creating an expanding pool of potential candidates.
Emerging clinical evidence strengthening the link between hearing loss and cognitive decline represents a potentially transformative opportunity, exemplified by the ACHIEVE study results showing hearing intervention slowed cognitive decline by 48% over three years in older adults.
This growing body of research could fundamentally change how hearing loss is perceived and treated among healthcare providers and patients alike.
The expanding indications and reimbursement coverage across multiple markets provide additional growth avenues, with recent examples including the U.S. Centers for Medicare & Medicaid Services broadening coverage for cochlear implants, Japan, UK, and Belgium expanding reimbursement criteria to include severe hearing loss, and the FDA approving treatment for single-sided deafness with Cochlear’s Nucleus implant.
Cochlear’s acoustics business presents another significant growth opportunity, with the Osia System demonstrating strong uptake and expansion into new markets including France, Italy, and several emerging market countries.
The Osia System, with its 3T MRI compatibility and enhanced performance characteristics, positions Cochlear to capture greater market share in bone conduction solutions, where current penetration remains below 1% of the addressable market of over 3 million people in developed markets.
Geographic expansion, particularly in emerging markets where wealth is growing and awareness of cochlear implants is increasing, provides additional growth potential, supported by Cochlear’s initiatives around market expansion, funding advocacy, professional capability development, and tiered product offerings to maximize penetration.
Tariff And Cost Overruns Are Threats
Cochlear (ASX: COH) faces a complex array of external threats that could potentially impact its financial performance and strategic positioning. The most immediate concern relates to the Trump administration’s tariff policy, which announced a minimum 10% tariff on foreign imports, including those from Australia, as part of what was dubbed the “liberation day” economic plan.
While many Australian exports face baseline tariffs of 10%, the situation for Cochlear is more nuanced. According to company statements and market analysis, Cochlear has traditionally imported its products under a chapter of the Harmonized Tariff Schedule of the United States that provides for duty-free importation of certain products, including hearing implants.
As of April 2025, the company had stated it “will continue to be able to rely on” this exemption, suggesting minimal direct impact from the tariffs. However, the broader implications of escalating trade tensions and potential retaliatory measures between trading partners introduce uncertainty into Cochlear’s global supply chain.
The cochlear implant market faces potential hidden costs and shrinking margins due to Trump’s tariffs, with particular vulnerabilities in high-precision components such as microelectronics, sound processors, and electrode arrays that are essential to Cochlear’s products which are sourced from various global suppliers from jurisdictions that are subject to US tariffs.
For example, the company’s recently completed manufacturing facility in Chengdu now faces uncertainty as a supplier to major markets such as the US and Europe.
Lastly, Cochlear’s cloud infrastructure program, initially budgeted at $150 million, now requires $250 million due to expanded scope, including ERP and manufacturing system overhauls.
While this investment aims to enhance operational agility, the 31% cost overrun raises concerns about project management efficacy and potential underperformance should the company fail to materialize operational gains from this investment.
Cochlear Financials
Cochlear (ASX: COH) demonstrated a period of strong financial performance across fiscal year 2024 and the first half of fiscal year 2025. The company posted record sales revenue of $2,258 million in FY24, marking a 15% increase on a reported basis and a 12% rise in constant currency compared to the prior year.
This growth was broadly based across the business. Profitability followed suit, with underlying net profit in FY24 climbing significantly by 27% on a reported basis, or 15% in constant currency, to $387 million.
This strong financial health allowed for increased shareholder distributions, with total dividends per share rising 24% to $4.10 in FY24.
The positive trajectory continued into the first half of FY25, achieving sales revenue of $1,170 million, representing a 6% increase in constant currency, primarily driven by performance in Cochlear implants and Acoustics, despite a dip in Services revenue.
Source – Cochlear HY25 Investor Presentation
Underlying net profit for HY25 was reported at $206 million, a 7% increase on a reported basis, or a 1% increase in constant currency. This growth was achieved alongside continued strategic investment, with operating expenses (excluding R&D) increasing, reflecting ongoing efforts in market growth initiatives, enhancing the standard of care, and advancing the product and services pipeline.
R&D expenses specifically reached $277 million in FY24 as the company invested in its pipeline. Financially, Cochlear maintained a solid balance sheet with net cash of $514 million at the end of FY24, although this figure reduced to $383 million by the close of HY25, influenced by factors including increased working capital and share buybacks. The interim dividend for HY25 also saw an 8% increase to $2.15 per share.
Looking ahead, the company anticipates its full-year FY25 underlying net profit to be towards the lower end of its initial guidance range of $410 million to $430 million, factoring in a lower contribution from Services revenue and increased cloud investment costs.
Source – Cochlear HY25 Investor Presentation
Conclusion
Cochlear (ASX: COH) maintains a compelling investment proposition based on its dominant market position in an underpenetrated market with strong demographic tailwinds.
The company’s consistent financial track record, with high gross margins and prudent capital management, provides a solid foundation for future growth.
Cochlear’s strategic focus on strengthening adult referral pathways, expanding acoustics offerings, and developing next-generation implant technologies positions it well to capitalize on the vast market opportunity.
While the recent Services revenue decline warrants monitoring, the launch of the new off-the-ear Nucleus Kanso 3 Sound Processor in mid-2025 is expected to drive renewed Services growth from FY26.
The company’s guidance for FY25 underlying net profit at the lower end of the $410-430 million range reflects short-term challenges but doesn’t diminish the long-term growth narrative.
The tariff situation, while creating some uncertainty, appears manageable based on current information regarding medical exemptions and progress on trade deal negotiations.
For investors seeking exposure to healthcare innovation with a reasonable price and long-term growth potential, Cochlear represents an attractive opportunity at current levels.
