Cochlear released the following update on the recent recall of its core product, the Nucleus 5 implant, yesterday:
The results of our investigation to date point to a loss of hermeticity from unexpected variations in the brazing process during manufacturing. Brazing is the process that joins the feedthrough to the titanium chassis. Variations in the brazing process have resulted in a limited number of implants being more susceptible to developing microcracks in the braze joint during subsequent manufacturing steps. These microcracks allow water molecules to enter the implant resulting in the malfunction of specific electronic components (typically one of four diodes).
This understanding of the root cause now forms the basis of the plan for the return of the Nucleus CI500 series implant to market.
The overall proportion of CI500 series devices that has failed is approximately 1.9% of registered implants globally with similar percentages in all three regions (The Americas, Europe Middle East & Africa (EMEA) and Asia Pacific). There were fewer reported failures in November 2011 than in October 2011.
As we have stated previously, the Nucleus CI24RE and Nucleus CI422 series implants are not affected by this failure mechanism. The manufacturing process, including brazing, is different between the Nucleus CI500 series and Nucleus CI24RE and CI422 series. There are over 62,000 registered Nucleus CI24RE devices globally and this failure mechanism has never been reported.
Their share price has subsequently jumped 15% and sits at $64 last time I checked. I covered the initial recall here on MB.
At the time of the recall I said it was a setback, but given their track record and the fact it was a voluntary recall, the setback should be temporary as I thought the market had over reacted by pricing in a 40-50% drop in net profits. I also said anyone who purchased COH with a 4 in front of the share price got themselves a bargain, even on dividend yield alone (at the time approaching 8% fully franked).
However, it looks like COH is vindicating my opinion on all fronts at the moment. It’s a manufacturing issue that has only occured on the new models – meaning a fix should be a relatively simple affair. Failures have stayed low at 1.9% and have decreased in the last two months. At the risk of speaking too soon, this is a text-book case of the market providing buying opportunities after the release of bad, yet temporary news.
In fact the speed and clarity in which Cochlear has explained its reasons for the recall and the subsequent investigation highlights the quality behind the company, usually the opposite effect to most big businesses later, rather than never admissions of fault.
Disclosure: The author is a Director of a private investment company (Empire Investing Pty Ltd) and currently has a personal interest in the business mentioned in this article. The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.