Cochlear and ResMed: Why the Device Sale Is Not the Business

Medical devices are usually analysed as product businesses and the good ones are annuities. A company that implants a device in a patient at age five has a customer for seventy years, and the value of that relationship dwarfs the margin on the original surgery. Understanding this reframes how both companies should be assessed — and explains why each guards its installed base with such intensity.

How does the Cochlear model work?

The implant is placed surgically once and is intended to last the recipient’s lifetime. The external sound processor, which captures and processes sound and transmits it to the implant, is a consumer electronics device that improves with each generation and is replaced every several years — frequently funded by health systems or insurers.

That structure creates a durable relationship. A recipient implanted as a child will purchase multiple processor upgrades over decades, and because the external device must be compatible with the implant already in their head, switching to a competitor is not realistically possible. The surgical decision made once determines the supplier for life.

The company’s market position rests on that installed base and on the clinical relationships behind it. Surgeons recommend implants based on long-term outcome data, support infrastructure and confidence that the manufacturer will still exist in thirty years to supply upgrades — which strongly favours the incumbent with the longest track record.

How does ResMed differ?

The consumable cycle is shorter and the volumes are far larger. Sleep apnoea affects a very large population, most of it undiagnosed, and treatment involves a flow generator device plus a mask that must be replaced regularly because it degrades with use. Masks and accessories generate continuing revenue at attractive margins.

The strategic layer is data. ResMed built cloud-connected devices that report usage to clinicians, insurers and patients, which serves several purposes at once: it demonstrates adherence to reimbursement authorities who require evidence of compliance before funding treatment, it allows clinical intervention when usage drops, and it embeds the company in the care pathway rather than merely supplying hardware.

That data position is why ResMed is better understood as a software-enabled device company. Competitors can build a comparable flow generator; replicating the connected ecosystem, the reimbursement integration and the accumulated usage data is considerably harder, and it is what defends the installed base from price competition.

What are the risks in this model?

Reimbursement, first and most importantly. Both companies depend on health systems and insurers funding devices, upgrades and consumables, and a change in reimbursement policy in a major market affects revenue directly with no commercial response available. Neither company sets the price its ultimate payer will accept.

Recall and quality risk is the second, and it is existential rather than financial in a device business. A quality problem affecting an implanted device or a respiratory device carries patient safety consequences, regulatory action and reputational damage that can persist for years, and the industry has examples of both companies’ peers being severely damaged by recall events.

Currency is the third and most persistent for Australian investors. Both companies earn the large majority of revenue in US dollars and euros while reporting in Australian or US dollars, which means reported results swing with exchange rates independent of operational performance. Constant currency figures are the only meaningful basis for assessing underlying growth.

Why did Australia produce both?

Through public research and a small domestic market that forced global ambition. Cochlear’s technology originated in university research supported by public funding, and the company commercialised it with the assistance of an Australian manufacturer — the classic pathway from publicly funded science to a global company that Australia has managed relatively few times.

The domestic market was never sufficient. Australia has too few patients to support a device company of any scale, so both companies were export businesses from an early stage, building regulatory approvals, clinical evidence and distribution across the United States, Europe and Asia. That is expensive and slow, and it selects for companies with genuine clinical differentiation.

The pattern matches the broader Australian technology story. A small home market removes the option of domestic-only success and forces global product and distribution decisions early, which is a disadvantage in capital requirements and an advantage in strategic clarity — the same dynamic described in our analysis of the Australian startup ecosystem.

How large is the untreated market?

Very large in both cases, which is the primary growth argument for each company. Severe hearing loss affects millions of people who could benefit from implantation, and implant penetration rates among eligible adults remain low in most markets including developed ones, particularly among older patients where hearing loss is often accepted as a normal part of ageing.

Sleep apnoea is comparable. The majority of people with clinically significant obstructive sleep apnoea are undiagnosed, because diagnosis requires a sleep study and many sufferers do not present to a doctor at all. Every improvement in diagnostic accessibility – home-based testing, screening in primary care, consumer wearables flagging risk – expands the treatable population.

The constraint in both cases is the referral pathway rather than the technology. A patient must be identified, referred, assessed and treated, and each step loses candidates. This is why both companies invest heavily in clinician education and awareness campaigns that look like marketing and function as market creation.

How do these companies handle competition?

Through clinical evidence and switching costs rather than price. In implantable devices, a surgeon selecting a manufacturer is making a decision on the patient’s behalf that cannot be reversed without further surgery, so long-term outcome data and confidence in the manufacturer’s longevity outweigh price differences.

In sleep therapy the barrier is lower and the competitive dynamic more active. Devices are replaceable, masks from different manufacturers may be interchangeable in some configurations, and price competition is real. This is why the data platform, reimbursement integration and clinician relationships matter so much – they create stickiness that the hardware alone does not.

Both companies also face the risk that a competitor’s failure helps them more than their own execution does. Device markets are concentrated, and a recall or supply disruption at a major competitor redistributes market share quickly and often durably, because patients and clinicians who switch under duress rarely switch back.

A practical note on comparing the two. ResMed reports in US dollars and is dual-listed, while Cochlear reports in Australian dollars, so headline growth figures are not directly comparable and currency movements affect each differently. Both disclose constant currency growth, and that is the only basis on which underlying performance should be assessed. Investors who compare reported revenue growth across the two will draw conclusions driven substantially by the exchange rate rather than by anything either company did.

What does the manufacturing footprint look like?

More Australian than most listed technology companies, which is unusual and strategically deliberate. Both companies retain substantial research, development and manufacturing capability domestically while selling almost entirely offshore, meaning the intellectual property and the highest-value production stay in Australia.

That choice carries costs. Australian labour and energy costs are high, the domestic supply chain for precision components is limited, and shipping finished devices to global markets from Australia is more expensive than manufacturing closer to customers. Both companies have added offshore manufacturing capacity partly for those reasons.

The offsetting argument is control and quality. Medical device manufacturing requires regulatory approval of each facility, rigorous quality systems and traceability, and keeping critical production close to the engineering teams that designed it reduces the risk of the quality failures that have damaged competitors. For a product implanted in a patient or used nightly for decades, that trade-off favours control over cost.

How should investors value these businesses?

On the installed base and its recurring revenue rather than on unit sales in any given period. A quarter of weak device sales matters far less than a change in the rate at which existing patients upgrade or replace consumables, because the installed base generates revenue for decades while a single period’s sales contribute once.

The metrics that matter are therefore penetration into the untreated population, the size and age profile of the installed base, and revenue per patient over time. Companies that disclose these clearly are easier to assess than those reporting only revenue and margin, and the disclosure quality varies.

Both companies have historically traded at premium multiples reflecting the annuity characteristics, which means they carry the risk attached to any highly valued business: the growth assumption embedded in the price leaves little room for a reimbursement change, a recall, or an alternative therapy reducing the addressable population. The business quality is genuine and the valuation is not automatically a bargain.

Worth noting that Cochlear’s origins trace to publicly funded university research and to government support for early commercialisation, which makes it one of the clearest Australian examples of public science converting into a globally significant company. The pathway that produced it – research funding, a manufacturing partner, patient early capital and decades of persistence – is precisely the pathway Australian policy has struggled to reproduce since.

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