Music to Cochlear's ears: Demant trades Oticon hearing implant business for $120M

Oticon Medical’s ears must be burning after parent company Demant struck a deal to divest the implant business in a sale to fellow hearing technology developer Cochlear.

Copenhagen-based Demant will sell off Oticon to the Australian buyer for 850 million Danish kroner, or about $120 million. Cochlear will shell out 700 million Danish kroner in upfront cash once the deal is finalized, then the remaining 150 million kroner within 18 months of its closing.

As part of the deal, Cochlear has promised to continue supporting the more than 75,000 people who have already received Oticon’s hearing implants. Moving forward, it will also take the newly acquired products into consideration for compatibility purposes as it develops future technologies.

If the acquisition is approved by the relevant authorities, it’s expected to be closed in the second half of this year.

Demant decided to separate Oticon from the rest of its hearing technologies business after more than a decade. Since its founding in 2009, Oticon has produced a successful range of cochlear implants and bone conduction implant systems to treat hearing loss.

However, as its parent company explained in a press release (PDF), “Demant has concluded that the prospect of becoming a global leader in hearing implants is not achievable within a reasonable timeframe without disproportionate levels of investments.”

That conclusion—plus a subsequent review of all possible strategic options for the business—led Demant to fully exit the hearing implant market. Without Oticon, it’ll focus solely on its portfolio of hearing aids, hearing care products and hearing loss diagnostic testing equipment.

“Overcoming the challenges of hearing loss—and living with implant technology to alleviate this—is a lifelong journey, and we believe it is best for our patients to continue this journey with Cochlear,” said CEO Søren Nielsen. “We will do everything in our power to ensure minimal implications of the intended divestment for customers and patients as well as the employees of Oticon Medical, who have delivered beyond expectations and are some of the brightest minds in the industry.”

In 2021, Demant reported revenues of 512 million Danish kroner, or about $72 million, for its hearing implant business. That’s less than 3% of the company’s entire revenue for the year, which totaled 18.4 billion kroner, or about $2.6 billion. Oticon also posted a negative profit for the year, with earnings before interest and tax clocking in at a loss of 117 million kroner ($16.5 million).

Divesting the hearing implant subsidiary will boost Demant’s 2022 earnings by about 150 million kroner, it said in the release. Meanwhile, Cochlear is expecting the purchase to have an ultimately positive impact on its own bottom line.

“Oticon Medical is expected to add AUD75‐80 million [$53.3 million to $56.8 million] to annual revenue,” Cochlear CEO Dig Howitt said in a statement (PDF). “The business is currently loss-making. Our priority post‐closing of the transaction will be to determine and implement a plan that returns the business to profitability as quickly as possible.”

Until that point, Howitt said integration costs—which will include developing new Cochlear technology to work with Oticon’s devices—could rank in the tens of millions of dollars. Once those are out of the way, however, he estimated that adding the implants to Cochlear’s portfolio will result in a long-term net profit margin of 18%.