Rumblings of Change in the Hearing Markets: Sonova Buys Advanced Bionics

Full article reprinted from Start Up - November/December 2009  

The hearing markets have followed a different evolutionary branch than the rest of the medical world, with a complicated infrastructure, and a schism between its two main product categories; the hearing aids sold through the audiology channel, and cochlear implants, surgical devices marketed to ENTs. This fragmentation has long kept the hearing markets from realizing their potential. The recent merger of Advanced Bionics with Sonova is a major step toward bridging the chasm in the hearing impairment industry, and perhaps in beginning to change its dynamics.

Rumblings of Change in the Hearing Markets: Sonova Buys Advanced Bionics

Full article reprinted from Start Up - November/December 2009

In theory, the markets for hearing technologies ought to resemble those of ophthalmology. Both industries are driven, in large part, by the demographics of aging, and both markets are split between consumer, self-pay products (eyeglasses, hearing aids), and surgical products (intraocular lenses, cochlear implants). Ophthalmology companies strive to fill in product gaps along a continuum that treats patients from childhood through old age. Such a model would seem applicable to companies in the hearing markets as well, where patients suffer from mild to severe losses from various causes. But the hearing markets have followed a different evolutionary branch than the rest of the medical world, with a complicated infrastructure, and a schism between its two main product categories. This fragmentation has long kept the markets from realizing their potential. According to Holger Schimanke, director of investor relations for Sonova Holding AG, approximately 16% of the world population has a hearing loss that would benefit from a hearing aid and can afford one; in this group product penetration is only about 20%.

In the largest product category, there are the four major hearing aid companies. The leader in the market is Sonova (the former Phonak AG, which changed into a holding company with a different name in 2007 when it began to acquire other, well-known brands), which holds 23% of the hearing aid market. William Demant Holding AG, the owner of Oticon AS, has a 23% market share, and in third place is Siemens AG, the audiology division of which holds 18% of the hearing aid market. GN ReSound Corp. has 12%, and Sonic Innovations Inc. and Starkey Laboratories Inc. each hold less than 10%. These companies sell to audiologists, operating in a fragmented infrastructure of Mom & Pop shops and some retail chains that don't bring in more than single-digit shares of revenues.

On the other side of the divide are companies addressing the medical, reimburseable ENT market--specifically, the otology sub-specialty--for cochlear implants, a potential market of 200,000 patients each year, drawn from deaf newborns and children, and adults with hearing loss due to accidents, illnesses or toxicity. In this underpenetrated market, only 25,000 cochlear implants were sold in 2008, on a worldwide basis. Three players dominate the cochlear implant market, including Australia's Cochlear Ltd., which holds 67% of the market, Advanced Bionics Corp., which is number 2 in the market with an 18% share, and MED-EL Corp., following closely behind with a 14% market share. To date, these companies have scratched only the surface of the potential $750 to $800 million global market for cochlear implants.

The recent merger of Advanced Bionics with Sonova is a major step toward bridging the chasm in the hearing impairment industry, and perhaps in beginning to change its dynamics.  In November, Sonova offered to pay $489 million for Advanced Bionics, which had 2008 sales of $117 million and sales for the 12 months previous to the acquisition of $123 million. Shareholders of Advanced Bionics enjoyed a nice return, having paid Boston Scientific Corp. $150 million to take back the company's auditory and drug pump businesses in 2007. ( See "Boston Scientific Shuffles and Sells in Bid to Right Ship," IN VIVO, December 2007.) Sonova noted that it paid a fair price, at four times sales, comparing it to the leading company in the space, Cochlear, which trades at 4.9 times trailing 12 month sales.

Sonova management says the deal was the next logical step to strengthen Sonova's position as the leading provider of hearing health care solutions, a uniquely broad definition for a company in the hearing space. Specifically, the acquisition gets Sonova into a new market with 10 to 15% growth rates, and one where it plans to enhance value by its core R&D capabilities.

Sonova's Holger Schimanke explains that while much of the industry is characterized by isolated companies performing R&D from scratch on a product-by-product basis, Sonova put into place a platform R&D strategy in 2000, the year it embarked on a series of acquisitions beginning with Unitron Industries Ltd. Schimanke says its goal is to leverage, over a broad product line, its know-how on, for example, chip sets, algorithms, features, and forms. It's apparently working. Schimanke says, "We have the highest innovation rates. Every six months we are introducing new products to the market addressing the major causes of low penetration rates: the need for better performance. With high performance, acceptance will rise." In a presentation in October 2009 announcing its half-year results, Sonova noted that 86% of its sales have been generated from products that had been launched within the past two years.

- Mary Stuart

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Companies mentioned in this article:

Abbott Laboratories Inc.

Abbott Medical Optics Inc.

Advanced Bionics Corp.

Boston Scientific Corp.

Cochlear Ltd.

Otix Global Inc.

Siemens AG

Sonova Holding AG

Phonak AG

GN ReSound Corp.

Starkey Laboratories Inc.

William Demant Holding AS

Oticon AS

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