Cochlear Ltd.

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Cochlear Ltd.

14 Mars Road
Lane Cove, New South Wales 2066
Australia
Telephone: (+61) 2 9428 6555
Toll Free: (800) 620 929
Fax: (+61) 2 9428 6353
Web site: http://www.cochlear.com.au

Public Company
Incorporated: 1982
Employees: 700
Sales: AUD 344.9 million (2004)
Stock Exchanges: Australian
Ticker Symbol: COH
NAIC: 339113 Surgical Appliance and Supplies Manufacturing

Cochlear Ltd. develops implantable hearing devices that help the hearing impaired hear. The devices use a combination receiver and stimulator implanted in the ear that works in concert with a microphone and a speech processor to give deaf patients the ability to perceive most environmental sounds and speech. Cochlear Ltd. dominates the market for implantable hearing devices, controlling an estimated 70 percent of the global market. More than 60,000 patients have had the implant surgery successfully performed. The company's implants, which are branded under the "Nucleus" name, are sold throughout the world through a network of Cochlear Ltd. subsidiaries and offices. Cochlear Ltd. also develops implants for individuals who are deaf in one ear, marketing the implants, which are anchored to the patient's bone, under the "Baha" name.

ORIGINS

Graeme Clark devoted his life's work to discovering a way to help the profoundly deaf hear, a mission that owed its inspiration to his deaf father. Clark, born and raised in Australia, witnessed firsthand the difficulties endured by those who lived in silence, an empathy that drove him to pursue an academic career aimed at finding a solution to the affliction. In 1967, while working as a research professor at the University of Melbourne, Clark came across a scientific paper detailing the use of electrical stimulation to help a deaf person receive hearing sensations. The idea was purely theoretical, one that drew its fair share of critics who believed the concept was too dangerous or too complicated, or both. Undaunted by consensus, Clark, who would become regarded as the father of the "Bionic Ear," pressed ahead with his research, devoting years to exploring the practicality of an implantable hearing aid.

Clark's research centered on the cochlea, the spiral-shaped cavity of the inner ear that resembled a snail shell. The cochlea, or inner ear, contained tens of thousands of fragile hair cells essential for hearing, nerve endings that Clark hoped to stimulate electronically with an implantable device. Although his belief in developing a cochlear implant put him on the fringe of the scientific and medical community, Clark was nonetheless highly regarded, winning an appointment to chair the Department of Otolaryngology at the University of Melbourne in 1970. (Otolaryngology is the branch of medicine that deals with the diagnosis and treatment of diseases of the ear, nose, and throat.)

Funding for his research work on cochlear implants was hard to come by, however. He and his staff were forced to seek donations from the public and solicit financial help from organizations such as the Lions Club and Rotary Club. He labored for a decade with meager resources, at last receiving a research grant in 1977 for "The Development of a Hearing Prosthesis."

With the money from the grant, Clark neared completion of his scientific work, determined to find a way to place an electrode securely within the inner ear. A trip to Minnamurra Beach in New South Wales provided the inspiration for solving the difficult problem. Clark found a small Turban-shell on the beach and began experimenting with a blade of grass. The following year, Clark was ready to unveil his creation, a debut that made medical history.

In 1978, the first prototype prosthesis was implanted by Clark and colleagues at The Royal Victorian Eye and Ear Hospital. Rod Saunders, a 71-year-old who had lost his hearing at age 46, was the first recipient of the multi-channel cochlear implant, the first medical device to restore brain function prosthetically. Several weeks after the procedure, the implant was successfully "switched on," when all ten electrodes began working. Saunders recognized the tune "Waltzing Matilda," and when Australia's national anthem was played at the demonstration, he delighted the crowd by standing at attention. During a May 27, 2004 interview aired on the Australian Broadcasting Corporation, Clark recalled his reaction to Saunders regaining his hearing. "When he heard speech, I knew that all our hard work had been successful," Clark recounted. "It was one of the most wonderful experiences of my life. I was so overcome, I went into the next-door laboratory and did what's not very Australian—I burst into tears of joy."

Clark's hard work represented one of the most significant medical breakthroughs of the century. His system consisted of three principal parts: a receiver/stimulator, a microphone, and a speech processor. The microphone picked up speech and other sounds, which the speech processor coded into electrical signals. Unlike a conventional hearing aid, which just made sounds louder, Clark's speech processor selected certain important information in the speech signal and produced a pattern of electrical pulses that were sent to the receiver/stimulator implanted in the cochlea. The receiver/stimulator contained tiny electrodes—a pair of electrodes represented a "channel"—that conveyed the information to the brain via auditory nerves in the inner ear, enabling the recipient to perceive most environmental sounds and speech.

The ten-channel implant that allowed Rod Saunders to hear silenced Clark's skeptics and opened the doors to funding that supported further development of the cochlear implant. In 1979, a group of medical equipment manufacturers operating under the name Nucleus expressed its interest in commercially developing Clark's inner ear implant, interest that was also expressed by the Australian government, which awarded a public interest grant to fund the commercial development of Clark's Bionic Ear. Once criticized to the point of ridicule for his belief that a cochlear implant was possible, Clark no longer had to rely on donations from outside the medical community, as the remarkable success of his work attracted the attention and the support of those willing to invest in making the cochlear implant available worldwide. Cochlear Ltd., formed in 1982, became the corporate entity through which the collaborative effort of Clark, Nucleus, and the Australian government sought to bring the cochlear implant to market.

COMPANY PERSPECTIVES

With Cochlear, you can count on three things: technical product innovation, world-class design, and lifelong commitment. Our 60,000 Nucleus recipients and thousands of hearing and educational professionals make up the largest cochlear implant community in the world. Our community is continually supported by our guiding principles.

EXPANSION IN THE 1980S

Cochlear Ltd. led a high-profile existence during its first decade in business, as word of the company's namesake product spread beyond Australia's borders and captured the attention of the worldwide medical community. After George Watson became the second recipient of Clark's implant in 1980, the work of turning the prototype into a commercially available device began in earnest. In 1982, the year Cochlear Ltd. was formed, the first device for clinical trial worldwide was implanted at the Royal Victorian Eye and Ear Hospital, the Nucleus CI22, a 22-channel implant. The international trial proved to be successful, completing an important step before approval from the U.S. Food and Drug Administration (FDA) was obtained. In preparation for the implant's approval by the U.S. regulatory body, Cochlear Ltd. established a physical presence in the United States. In 1984, a small team of Cochlear Ltd. officials opened a subsidiary named Cochlear Corp. in Englewood, Colorado, just outside of Denver. The year also marked the first time the cochlear implant surgery was performed in Europe.

Nearly 20 years after Clark's research began, a major milestone was reached. In 1985, the FDA approved the Nucleus multi-channel cochlear implant for profoundly hearing impaired adults. (Profoundly hearing impaired, or PHI, was classified as hearing loss of more than 90 decibels, which meant a PHI classified individual had no useful hearing. Severely hearing impaired, SHI, reflected a hearing loss of between 70 decibels and 90 decibels, leaving the individual with some residual hearing.)

Obtaining FDA clearance, the first of its kind, represented a major step toward Clark's goal of distributing his implants worldwide, essentially assuring that regulatory bodies in other countries also would approve the use of the implants. Officials at Cochlear Ltd. did not celebrate the occasion for long, however. The year also included the first use of the implants on children. At the Royal Victorian Eye and Ear Hospital, the proving ground for Clark's work, the first two research pediatric cochlear implant procedures took place, setting in motion clinical trials for children in the United States by the following year.

Acceptance of Clark's work was broadening with each passing month during the 1980s, and Cochlear Ltd. fleshed out its physical presence to keep pace with the growing demand for the revolutionary device. In 1987, the year the Australian Postal Service issued a "Bionic Ear Stamp," the company established its European headquarters in Basel, Switzerland, giving it offices to serve what would be one of its most important financial markets. In 1989, an Asian headquarters was established in Tokyo, four years after the first Nucleus cochlear implant surgery was performed in Japan.

Cochlear Ltd. began the 1990s with another achievement to celebrate, an event that confirmed the company as the preeminent concern serving the deaf worldwide. In 1990, the FDA approved the Nucleus Cochlear Implant System for children aged two to 17 years, the first cochlear implant to be approved for pediatric use by any regulatory body. Clearance by the FDA, as it had five years earlier, conferred market supremacy to Cochlear Ltd., giving the company an enormously significant stamp of approval that helped it maintain its lead over rival companies who had developed their own versions of Clark's cochlear implant. As the regulatory bodies in other countries gave their nod to Cochlear Ltd.'s implants, the number of recipients mushroomed, increasing at a fantastic rate. By 1992, the 5,000th Nucleus implant surgery had been performed. In 1994, the number of Nucleus recipients reached 10,000. The following year, after more than demonstrating itself to be a commercially viable company, Cochlear Ltd. completed its initial public offering of stock, debuting on the Australian Stock Exchange.

KEY DATES

1967:: Graeme Clark begins exploring the possibility of using electrical stimulation to improve hearing loss.
1978:: The first cochlear implant restores hearing to Rod Saunders.
1982:: Cochlear Ltd. is formed to commercialize Clark's cochlear implant.
1984:: The company establishes its North American headquarters in Colorado.
1985:: The U.S. Food and Drug Administration (FDA) approves the company's implant for profoundly hearing impaired adults.
1987:: A subsidiary is established in Basel, Switzerland, to serve the European market.
1990:: The FDA approves the company's implant for pediatric use.
1995:: Cochlear Ltd. completes its initial public offering of stock.
2000:: The Nucleus 24 Multichannel Auditory Brainstem Implant is approved by the FDA for hearing loss resulting from neurofibromatosis Type II, a neurological disease.
2005:: Entific Medical Systems is acquired.

Cochlear Ltd.'s activities, from the moment of its creation, were directed toward building a worldwide infrastructure and making improvements in the design of the company's implant system. The exponential increase in the number of Nucleus recipients testified to the company's worldwide reach, while progress on the engineering front occurred on a consistent basis, yielding smaller, more effective implant systems. One improvement of note was achieved in 1998, a year in which the 20,000th person received a Nucleus cochlear implant. Cochlear Ltd. unveiled the ESPrit in 1998, the first multi-channel speech processor worn entirely behind the ear, an innovation that eliminated the long cables required by previous speech processors that were attached to the recipient's belt. Other advances in design and technology followed, but the company's most significant progress at the dawn of the 21st century was achieved in bringing different types of implants to market. The diversification strengthened Cochlear Ltd.'s already stalwart market position, making for a successful completion to the company's pioneering first 25 years in business.

ACQUISITIONS IN THE 21ST CENTURY

The new century began with a nod of approval from the FDA, giving Cochlear Ltd. a new type of implant to offer to the hearing impaired. In 2000, the Nucleus 24 Multichannel Auditory Brainstem Implant (ABI) was approved for use in teenagers and adults with neurofi-bromatosis Type II, a neurological disease that causes tumor growth along nerves in the spine and neck. The removal of the tumors often required part of the auditory nerve to be removed as well, causing total loss of hearing. Cochlear Ltd.'s ABI restored some of the hearing lost by placing a receiver deep in the brain. The company's efforts to develop devices complementary to its cochlear implant also led to a partnership with Switzerland-based Phonak Group, a leading maker of hearing devices, to create an implantable hearing aid for those with less severe hearing loss, but Cochlear Ltd.'s greatest achievement in this direction occurred via an acquisition in early 2005. In March, the company acquired Sweden-based Entific Medical Systems for AUD 195 million. Entific developed a bone-anchored hearing implant system for individuals with malformed ear canals who were deaf in one ear. The company's implant system, marketed under the name "Baha," offered a hearing solution to an estimated 250,000 people worldwide.

As Cochlear Ltd. looked to the future, the company maintained a formidable lead over competitors. The company controlled an estimated 70 percent of the worldwide market for hearing device implants, holding sway over rivals Advanced Bionics Corp., based in California, and Austria-based Med-El Corp. In the years ahead, the company was expecting to achieve earnings growth of more than 20 percent annually, as it applied its technological expertise to next-generation implants and pursued Clark's mission of enabling the deaf to hear.

PRINCIPAL SUBSIDIARIES

Cochlear Corporation; Cochlear AG (Switzerland); Cochlear Europe Limited (U.K.); Cochlear GmbH (Germany); Cochlear France S.A.S.; Cochlear Benelux N.V. (Belgium); Cochlear Italia S.R.L. (Italy); Cochlear Sweden Holdings; Nihon Cochlear Co. Limited (Japan); Cochlear (HK) Limited (Hong Kong); Cochlear (HK) Limited (China).