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Morningstar | We Don't See FDA Approval of First Direct-to-Consumer Device as a Threat to the Hearing Aid Industry

We saw share prices tumble this week for publicly traded hearing aid manufacturers Sonova, William Demant, and GN, following the announcement by the U.S. Food and Drug Administration late last week that it would allow commercialisation of hearing "aids" manufactured by Bose directly to the consumer, bypassing professional audiologists. This isn't a particularly surprising development. Ever since the U.S. Congress' passage of the Over-the-Counter Hearing Aid Act in 2017, we've been anticipating an entrant in this category; Bose being the one makes sense, given the company's premium brand positioning in headphones. Still, we reiterate our viewpoint that OTC products do not threaten the competitive positioning of the hearing aid manufacturers under our coverage, and we retain our narrow moats and valuations for all three firms. Following the sell-off, shares are trading near our fair value estimates.

The Bose device is not a hearing aid in a traditional sense but rather a sound amplifier, a less sophisticated device at a lower price range than traditional hearing aids. Given the amplifier's lack of advanced features (automatic volume regulation, noise management, feedback suppression, multiple sound memories), this type of device will likely target the "mild to moderate" hearing loss segment, which has already been a tough nut to crack for traditional HA firms, given this group’s reluctance to adopt hearing aids in general (mainly due to the stigma).

The OTC category may even be a minor positive for the hearing marketplace, as it potentially expands the addressable population to people with mild hearing loss, a massive opportunity by volume. We hesitate to incorporate this in our models, given the early stage of this development--the FDA has yet to settle all the details, including the level of professional care involved. Among the main players, GN appears best positioned due to its existing headsets business and presence in the electronics distribution channel.

We expect more details to surface soon, but our review of the Bose product page suggests a device fairly similar to a traditional in-the-ear headphone set. There are no product specifics at this stage, so the extent of "hearphones'" features for now aren't clear. A bigger unknown is how Bose will comply with each U.S. state law, given that around 45 out of 50 states require a sale through a hearing care professional.

We acknowledge that there is a potential threat to an incremental customer in the mild hearing-impaired category, but so far this has been a negligible market segment for the medical technology, or medtech, firms. In the moderate HI area, amplifiers are likely to provide a poor solution to patients’ needs and are thus unlikely to see material adoption.

If hearing aid firms opt to compete with amplifiers in the mild to moderate area, they would obviously have to do it a lower price point and leverage their presence in more sophisticated hearing aids to compete with the likes of Bose. It would be tough to call out a winner here, as HA firms will need to be careful not to overextend into this space at the risk of cannibalising their own lower-end product portfolios. Separating "true" hearing aid instruments from amplifiers from a branding standpoint could also be a challenge, as we doubt Demant, Sonova, or GN would be willing to use Phonak, Oticon, or ReSound brands in this segment, and the brand recognition of second-tier brands is much lower. Finally, unlike the audiologist-manufacturer relationship, a retailer-manufacturer relationship is much weaker and the bargaining power is tilted more toward a retailer. Finally, there is an issue of capital investments in the consumer electronics space, where barriers to entry are low and price is under competitive pressure. GN is already present in the business-to-consumer space with its Jabra brand, so we won't be surprised if the firm test the waters by launching an OTC device when the FDA introduces the category.