Morningstar | Court Case a Minor Speed Bump for Cochlear
Cochlear has been ordered by the U.S. District Court to pay USD 268 million in damages to the Alfred E. Mann Foundation for Scientific Research and Advanced Bionics due to patent infringement. Cochlear will appeal the judgment with an outcome expected in about two years. Importantly, the damages relate to an expired patent and the ruling should not impact Cochlear’s future business. Cochlear disagrees with the reasons for the damages and will take the case to the U.S. Court of Appeals. Pending the outcome of the proceedings, Cochlear will lodge a USD 335 million insurance bond with the Court.The potential damages are not sufficiently material to warrant a change and we reiterate our AUD 180 per share fair value estimate. If Cochlear is required to pay the full amount it would equate to just a 3% impact to our fair value estimate. However, the case has been the subject to several hearings and an appeal. Our view is Cochlear will need to pay a significantly smaller amount, which is likely immaterial to our fair value estimate. Cochlear intends to assess the current AUD 21.3 million provision for this case and provide an update to the market. We expect the provision to increase but remain modest.
The primary impact to Cochlear is the payment of the USD 355 million bond. The company’s balance sheet will weaken somewhat with the outflow; however, it will still be robust. Net debt at the end of June 2018 was AUD 86 million. This grows to approximately AUD 560 million by the end of fiscal 2019 due to the bond, but debt metrics remain comfortable. Net debt/EBITDA is forecast to peak at 1.3 in fiscal 2019, declining to 0.6 by end fiscal 2021 when the damages settle. EBIT/net interest expense troughs at 11 in fiscal 2019, still comfortable, particularly for a business of Cochlear’s quality. Shares remain close to fairly valued.
Cochlear is a for-profit entity and operates in the implantable hearing device industry. Co.'s implant systems comprise an implant which is inserted during surgery and an external sound processor. As of June 30 2016, Co. sold in over 100 countries and had a direct presence in approximately 20 countries and used distributors and agents in other areas. Manufacturing for the cochlear implant product range is based in Australia. The bone conduction implant product range is manufactured in Sweden. Co.'s supply chain operates with product being distributed from its manufacturing sites in Australia and Sweden to its regional distribution centres in the U.S., the U.K. and Panama.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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