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Cochlear share price falls on ‘loss making’ Oticon Medical acquisition

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The Cochlear Limited (ASX: COH) share price is trading lower on Thursday morning.

At the time of writing, the hearing solutions company’s shares are down 1% to $228.92.

Why is the Cochlear share price falling?

Investors have been selling down the Cochlear share price on Thursday following the release of an acquisition announcement after the market close yesterday.

According to the release, Cochlear has agreed to pay A$170 million to acquire cochlear implants and bone conduction hearing solutions provider Oticon Medical from Denmark-based hearing health care company Demant. This follows Demant’s decision to exit its hearing implants business activities.

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

Though, the deal still has a few closing conditions to satisfy before it completes. These include customary closing conditions and the receipt of competition approvals in jurisdictions where the transaction meets relevant notification thresholds.

If all goes to plan, the acquisition will be funded from its existing cash balances and is expected to close in the second half of 2022.

What’s has been the reaction?

According to a note out of Goldman Sachs, its analysts appear to believe the deal could be a good one. And while it won’t make much of a difference to its market share, the broker highlights that it provides greater scale and supports industry pricing.

Goldman commented: “[G]reater scale would allow COH to further re-invest into product development (as it has traditionally done) which would further entrench the company’s market position. The acquisition of Oticon would likely also be supportive of industry pricing, given that Oticon was previously considered to be one of the market challengers with below industry average pricing.”

Management commentary

The market doesn’t appear as convinced based on the Cochlear share price performance. Particularly given that the acquired business is currently operating at a loss.

Nevertheless, Cochlear’s CEO and President, Dig Howitt, is very positive on the deal. He said:

“The acquisition of Oticon Medical will provide us with greater scale and will enable us to increase our investments in R&D and market growth activities. While Cochlear is a market leader in implantable hearing, we are a small player in the hearing loss segment where hearing aids remain the primary treatment option.

Our goal is to improve the penetration of implantable hearing solutions, building customer awareness and confidence, and offering more patients hearing solutions best suited to their individual needs.”

Mr Howitt also addressed the lack of profits from Oticon Medical. He added:

“Oticon Medical is expected to add AUD75‐80 million to annual revenue. The business is currently loss making. Our priority post‐closing of the transaction will be to determine and implement a plan that returns the business to profitability as quickly as possible. Integration costs, which include the development of compatible next generation sound processors, are yet to be determined and could range from $30‐60 million. We continue to target a long‐term net profit margin of 18%.”

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