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Bose's entry into hearing aids foreshadows new regulations, entrants

Bose Corp., known for its loudspeakers and headphones, is making noise in another market with its newly approved hearing aid.

The U.S. Food and Drug Administration's Oct. 5 approval for the consumer electronics company's first-of-its-kind "self-fitting" device is the FDA's first step toward introducing over-the-counter, or OTC, hearing aids that are potentially more accessible and less costly.

The stocks of the current hearing-aid market leaders including GN Store Nord A/S and William Demant Holding A/S dropped as investors worried that Bose's entry to the market will bring with it pricing pressures and a new set of regulations.

The FDA has been committed to drafting proposed regulations for a new category of OTC hearing aids as required by its user fee bill since 2017. The bill, also known as the FDA Reauthorization Act of 2017, included a bipartisan measure that permitted the sale of OTC hearing aids.

The law requires the U.S. watchdog to establish an OTC hearing aid category and permit the sale of such devices by August 2020. Hearing aids that require professional expertise for custom fitting or implantation were excluded from this process.

Some Wall Street analysts said investors had overreacted. The approval of an OTC product was well within expectations of the given OTC timeline, Kit Lee, a Jefferies analyst, said in an Oct. 9 note. Until the FDA officially establishes an OTC category, Bose must comply with existing federal and state regulations on the sale of hearing aids, which will limit sales.

Lisa Clive, an analyst at Bernstein, said in an Oct. 8 note to clients that there is considerable complexity in choosing hearing aids and elderly patients usually prefer to have professional help. The average age of hearing aid purchasers is 74, she said.

Market potential

Other companies like Bose may be attracted to the size of the prospective market, Clive said, noting that Samsung Electronics Co. Ltd. has previously expressed interest in the hearing aid market.

"One of the key questions for how the category may impact the current market is whether it would open the door for consumer electronics players," Clive said in her Oct. 8 note. "How big of a threat the OTC channel will be to traditional hearing aid companies in part depends on the entrance of consumer electronics players, with their strong brands and significant marketing muscle."

About 466 million, or 5%, of the global population, suffers from disabling hearing loss, which includes 34 million children, according to the World Health Organization. Moreover, it is estimated that over 900 million people will suffer from disabling hearing loss by 2050. Unaddressed hearing loss poses an annual global cost of $750 billion, according to the WHO's March 15 report on deafness and hearing loss.

While as many as 30 million Americans have age-related hearing loss, less than 15% of them use technology that could help them process sound, Cowen analyst Eric Assaraf wrote in an Oct. 9 note.

Part of the reason is cost: Hearing aids are not covered by Medicare, the U.S. health insurance program for the elderly and disabled, and most out-of-pocket costs average about $2,400 for a single hearing aid, according to Assaraf.

Some hearing-aid companies have recently gained greater market share through consolidation. In May, EQT Partners AB-backed Sivantos Pte. Ltd. agreed to merge with hearing aids manufacturer Widex A/S. The merged entity, which has an enterprise value of greater than ‎€7 billion, has become a significant player in the hearing aid market.

GN Store Nord A/S and Starkey Hearing Technologies, Inc. are also competing for a top spot on the ladder. Other big players in the industry include Amplifon SpA and Sonova Holding AG.

"We see robust sector fundamentals over the long term supported by innovation and demographics. We believe GN [GN Store Nord] and AMP [Amplifon] are best positioned in the current cycle to deliver sustainable and superior growth, driving further upside from current levels, while we still see unfavorable risk asymmetry in WDH [William Demant]," Lee said in a Sept. 20 note to clients.

Limited access in short term

Access to OTC hearing aids may be limited in the short term, since the FDA has yet to establish an OTC category for hearing aids. Therefore, a distribution bottleneck could result due to the need to comply with existing federal and state laws and guidelines — and many states require hearing aids to be sold through a licensed dispenser, according to Jefferies' Lee.

"While Bose's entry into OTC is now confirmed, this does not fundamentally change our view on the OTC risk/opportunity, which we expect to have a modest impact overall on the HA [hearing aid] market," Lee added.

Jonathan Block, an analyst at Stifel, said in an Oct. 8 note to clients that he expects the FDA's draft OTC regulations in the coming quarters, with final regulations landing in mid-2019. Another beneficiary of those rules may be IntriCon Corp., a medical device company that is developing hearing aids at prices that are up to 80% less than current products offered through traditional channels, Block said.

"Multiple players are likely to emerge, but we believe lower cost solutions will help increase penetration rates, which have been stuck at about 20% for years," Block wrote.