By David H. Kirkwood
NEW YORK—A number of financial research firms in the United States and abroad follow the hearing industry on behalf of their clients. These include individual investors as well as institutional investors such as pension and hedge fund managers. The latest company to turn its sights on hearing aids is Sanford C. Bernstein. Founded in 1967, Bernstein is a leading sell-side Wall Street research firm.
In its first report on hearing aids, (“Global Hearing Aids and Implants”), dated March 2013, Bernstein Research said it was “neutral on the sector overall.” It projected long-term growth of 3%-6% in the wholesale market, which it called “the main market” of the hearing aid industry. That growth rate placed hearing aids “in the middle of the pack” for medical technology.
Hearing Aids: $5.4 Billion World Market
According to Bernstein, 10.8 million hearing aids were sold in 2012, for a total wholesale value of $5.4 billion. Forty-five percent of the hearing aids were sold in Europe, 29% in North America, and 26% in the rest of the world.
Bernstein cited “pockets of attractive growth,” including the $1 billion cochlear implant market, where it is looking for 10%-15% growth. It also sees promise for bone-anchored hearing aids and new hearing technologies “such as GN Store Nord’s 2.4-GHz platform.”
BULLISH ON COCHLEAR AND GN
Looking at short-term prospects for the major publicly held hearing aid companies, Bernstein was bullish on only one in its initial report in March. That was Cochlear, the dominant manufacturer of cochlear implants, which Bernstein expects to outperform the market. However, in mid-June, the company updated its advice on GN Store Nord. it now anticipates that the Danish parent company of GN ReSound and other hearing care divisions will outperform the market over the next 12 months. Previously it predicted that GN would perform evenly with the market.
Bernstein projects that Amplifon, whose annual sale of 800,000-900,000 hearing aids a year makes it the world’s largest retailer, to perform in line with the overall hearing aid market.
The report expects the two largest hearing aid manufacturers—Sonova and William Demant—to underperform the market, citing the difficulty of increasing the profitability of the large number of retail outlets they own.
Since hearing aids represent only 1.3% of Siemens’s overall sales, that division’s performance has virtually no effect on its German parent company’s stock price. Bernstein’s report offered no advice to investors with respect to Siemens, though it said that Siemens Hearing had lost more market share in recent years than any other hearing aid manufacturer.
The report had no recommendations for investors regarding Starkey and Widex, since they are privately owned.
OTHER COMPANIES’ PROJECTIONS
Financial predictions are notoriously subjective and difficult to make with accuracy, so it’s not surprising that other analysts see the hearing aid market somewhat differently from Bernstein. For example, Handelsbanken, a major Swedish-based bank, was more positive in its report in April about William Demant. The report said, “We believe the stock is attractively valued and see modest downside risk and attractive upside,” and therefore recommended that investors accumulate holdings in Demant, a Danish company that owns Oticon among other hearing care companies.
Similarly, Handelsbanken recommended accumulating stock in GN Store Nord, the Copenhagen-based owner of GN ReSound, where it anticipates “a moderate upside” in its stock price.
Overall, Handelsbanken predicts that the global hearing aid market will remain “mostly stable” in 2013 with 4%-5% unit growth in sales.
Another market research company, IBISWorld, released a preview of its latest analysis of the retail end of the hearing aid business in the U.S. on June 17. Over the past five years, IBIS reported that revenues in America’s $2 billion a year “hearing aid clinics industry” declined by 0.2% a year.
The decline, it said, resulted in part from high unemployment and lower consumer incomes during that period. “More recently,” IBISWorld said, “the industry has fared relatively well, bolstered by an aging population and healthcare reform. As a result, it estimates that industry revenue will grow 3.2% in 2013, as many states begin to expand their Medicaid coverage in preparation of full implementation of the Patient Protection and Affordable Care Act.”
Founded in 1971 in Melbourne, Australia, IBISWorld specializes in long-range forecasting of industries and the business environment at large.
OVERVIEWS OF INDIVIDUAL COMPANIES
Along with predictions and projections, the Bernstein report contained detailed information, which is rarely made public, about the current state of the major hearing aid companies today. Included in the report were overviews of the five largest publicly owned companies that are primarily in the hearing aid business. Siemens was omitted, because hearing aids represent only a tiny part of its business, and Starkey and Widex were omitted because they are privately owned.
As has been generally assumed in the industry, the Swiss Sonova is the largest of the publicly owned hearing aid companies, with 2012 revenues of $1.84 billion and a 24% share of the total hearing aid market in terms of unit sales. According to Bernstein, a third of the Phonak parent company’s total revenues last year were derived from the approximately 2000 retail outlets that it owns worldwide and 57% from its sales to non-proprietary retailers. The remaining 10% of the company’s income came from the sale of cochlear implants and other personal communication devices.
The report said that William Demant had a 23% share in the worldwide hearing aid market last year and revenues of $1.48 billion. It reported that Demant’s 1200 stores accounted for 21% of its revenues, while hearing aid sales to other retailers made up 64% of sales. Other Demant revenues come mostly from the sale of diagnostic equipment, where it is the world leader.
Bernstein reported that the Danish GN Store Nord, owner of GN ReSound, had $1.08 billion in revenues in 2012. About 55% of its sales were derived from hearing aids—11% from company-controlled outlets (mostly Beltone) and 44% from its wholesale business.
Bernstein reported that Amplifon, an Italian-based company, had sales of about 1.09 billion in 2012, all of it from its 3237 hearing aid retail outlets, which accounted for 9% of retail sales worldwide. The Australian company Cochlear, which holds a two-thirds share in the cochlear implant field, had sales of $804, according to the report.
Big Six Hearing Aid Makers Account for 98% of the Market
According to the data collected by Bernstein, the so-called “big six” hearing aid manufacturers richly deserve the term, since among them they accounted for 98% of the world market last year.
For 2012, the research firm estimated the following market shares in terms of unit sales:
1) Sonova (owner of Phonak et al.): 24%
2) William Demant (owner of Oticon et al.): 23%
3) Siemens/Sivantos (owner of Signia, Rexton): 17%
4) GN Store Nord (owner of GN ReSound, et al.): 16%
5) Starkey Technologies: 9%
6) Widex: 9%
Over the past eight years, Bernstein reports, Sonova has gained the greatest market share, increasing from 17% in 2005 to 24% in 2012. Demant did nearly as well, growing from 18% to 24%, while the Siemens share declined from 23% to 17%. According to Bernstein, ReSound’s share grew from 14% to 16%, Starkey’s dropped from 11% to 9%, and Widex’s remained unchanged at 9%.
Manufacturers increase retail holdings
Another section of Sanford Bernstein’s report discussed the rapid growth of manufacturer-owned retail stores.
It said that Sonova now owns more than 2000 retail outlets, about four times as many as in 2003. William Demant has a little over 1200, triple its number in 2003. GN ReSound’s holdings of somewhat over 1500 stores are up about 35% from a decade ago, while Siemens, which was late to the retail arena, lags far behind.
The report gave no figures for Starkey, which owns many retail outlets in the U.S., or for Widex, which has generally stayed out of retailing.