Patent litigation, COVID-19 send Cochlear into the red with $238m loss

Hearing implant maker Cochlear (ASX: COH) has reported its first ever loss since listing on the ASX almost 25 years ago, as a US court battle and suspended surgeries due to COVID-19 weighed heavily on its results in FY20.

The Sydney-based group has today announced a $238.3 million loss, down 186 per cent from a profit of $276.7 million in FY19.

The bulk of this sharp drop can be explained by a US patent infringement case brought by two research institutes that compete with Cochlear, which led a District Court to order US$268 million (AUD$371 million) in damages.

After losing an appeal on the decision in March, Cochlear is now taking its legal activities up a notch through an appeal to the US Supreme Court.

A US$75 million (AUD$104 million) settlement was also reached for prejudgment interest and attorneys' fees with the Alfred E. Mann Foundation for Scientific Research (AMF) and Advanced Bionics, but the money is in escrow pending the outcome of Cochlear's appeal.

In a letter to shareholders released today, CEO Dig Howitt and chairman Rick Holliday-Smith claimed the amount of damages awarded was "out of proportion".

"If Cochlear's Supreme Court appeal is successful, there may be a new trial to redetermine the quantum of damages," Howitt and Holliday-Smith said.

"As the patent at issue in the litigation has expired, the judgment will not disrupt Cochlear's business or customers in the US."

The rest of the negative shift in performance is due to the impacts of COVID-19, with implant sales going from a 13 per cent rise in the first half to a decline of 60 per cent in April.

"The impact of COVID-19 on profitability was significant with underlying net profit declining by 42 per cent to $153.8 million," the Cochlear leaders said.

Sales revenue for FY20 fell 6 per cent to $1.4 billion, although in constant currency terms it fell by 11 per cent. In the second half revenue was down by more than a fifth.

But the trading trend has improved since May with surgeries restarting across most markets, and in June-July cochlear implant revenue was only down 15 per cent year-on-year.

"For the developed markets, unit volumes were in line with last year for the June/July trading period, reflecting both a return to surgery and marketshare gains," Howitt and Holliday-Smith said.

"While the resumption of surgeries in the US, Germany, Japan and northern Europe has been quite rapid, there are still a number of markets with lower levels of surgery activity including the UK, Italy and Spain.

In contrast, volumes were down 50 per cent year-on-year for Cochlear's emerging markets, although circumstances vary greatly from country to country.

"Surgeries in China are growing quickly, and we remain committed to continuing to invest in further growth," the pair said.

"In other markets, including India and Latin America, surgeries have remained very low as COVID-19 cases continue to grow."

The group added it expected $23.6 million in coronavirus-related government assistance from a number of countries.

It has now been just over six months since Cochlear - like most ASX-listed companies - started to factor COVID-19 into its guidance.

On February 11 the company reduced its earnings forecast by around $15 million due to expected impacts from the virus in greater China, but if that result materialised it would have still been a 2-9 per cent increase year-on-year. In mid-March Cochlear bit the bullet like so many and withdrew its guidance.

This was swiftly followed by a $1.1 billion capital raising that was well received, and the company has continud on its course of reinvestment with $185 million spent on R&D in FY20. In July the company also received US FDA approvals for four new products.

COH shares were up 6.15 per cent to $210.50 each at 10:35am AEST. 

Updated at 10:35am AEST on 18 August 2020.