Good morning, everyone. Thanks for being available on such short notice. As I think is normal, if you have an ad hoc information you want to share with a capital market, I think a lot to digest on the press release we have shared this morning with you. We wanted to give you a chance to hear how we voice it over, and then leave space for Q&A.
I'm intending to talk for about eight to 10 minutes, and then we have about half an hour for the Q&A. De facto, we've announced two significant points here with regard to a voluntary field corrective action on our AB business, as well as a better performance than what we have expected and guided on the hearing instrument side.
I think there's two smaller notes in there in the press release with regard to the coronavirus and current movements on the FX side. Let me first go to the Advanced Bionics side. We have informed today that AB initiates a voluntary field corrective action. This means that AB has notified the relevant regulatory bodies that it will retrieve unimplanted devices. That means we're pulling the inventory, which may be in the hands of clinics out of the market, of the initial version of the HiRes Ultra and the Ultra 3D implants, as of today.
This action was initiated in immediate response to AB's quality system recording recent increases of cases with declining hearing performance. Ultimately, this required some of the devices to be exchanged, with regard to the patients where this decline of hearing performance was measured. It is a small number.
The testing of the affected devices showed that physiological fluid ingresses at the electrode, ultimately interrupting the stimulation and leading to a decrease in hearing performance. I think first I want to express that we very much regret this event, particularly with regard to the recipients impacted. I think every case is one too much if we think about it from the patient perspective. This is our utmost concern, hence our proactive and early reaction here to what was a low number of cases. At the same time, it's very important to us to state that we have not seen this in any case being or creating any health risk or health hazard to the respective recipient.
You need to look at this as a performance related matter where the device doesn't improve the hearing as much as we had intended, but it is not a health or safety issue. We're also speaking about a very limited number of cases. To date, less than 0.5 % of the over 16,000 recipients have been explanted. Based on the AB's quality system monitoring, which we do on a regular basis with all of the devices in the market, the vast majority of the Ultra implants continue to function properly without any degradation for the patients. Nevertheless, in an abundance of caution, AB decided to voluntarily initiate this field action. I want to explain the relevance with regard to device availability.
When we talk about the initial version of the device, that was the implant which we have sold and implanted over the last three years, which we pull out of the market with regard to the inventory in the hands of the clinicians. It is currently superseded by a recently approved new version. The improvements are addressing the issues, were developed with the help of independent healthcare practitioners after analyzing the first limited number of cases.
These improvements reflect AB's efforts to continually enhance its products and are approved by major regulatory agencies. Namely, we have approval of FDA, the CE, and Health Canada at this point of time. We're in the process of rolling out these improved versions, and have started so over the last couple of weeks. During the deployment of the new version of the devices, we expect AB's business to be negatively affected.
Partially because while we're doing the changeover, you can imagine that there may be some concerns on the doctor side, but at the same time, we also are in the process of ramping up or have started to ramp out our manufacturing, but don't have all of the inventory at hand at this point of time we need in this transition period.
In addition, we flagged in the press release that we expect one-time operating costs in the range of CHF 40 million-CHF 50 million, which we expect to book in the current fiscal year, for this voluntary field corrective action. I want to move on to the update on the hearing instruments business, and obviously on a much more positive note here. I'm happy to report that Sonova's hearing instruments business is performing better than we had anticipated in the second half of the year so far.
We continue to see good market reception across the key markets for the Phonak Marvel, including the expansion of functionality and capabilities of the Marvel we did with the Marvel 2.0 in August 2019. In addition, you may remember that we flagged increased investments into the sales force and in some marketing capabilities in the wholesale business when we talked about the half-year result, we have seen that those investments are starting to pay dividends, in those markets where we have chosen to do those kind of investments.
A key highlight continues to be in this year, the U.S., where we gained market share across all major channels. I'm sure most on the call here are following the Veterans Affairs numbers, it's obviously a very strong performance, when we get above the 50% mark here from a market share perspective. You're well aware about the private label contract with a large U.S. retailer. We also see good growth and good market share winning on the independent side given the improvements to the sales process, but also the Marvel impact.
In summary, we saw better than expected growth despite the more challenging comparison base after the anniversary of the successful Marvel launch, and therefore we're ahead of what we had expected at this point of time on the HI business on the top line. Trying to bring this now all into, let's say, a number perspective and what does it mean for the outlook for the current fiscal year. In light of the higher growth in the hearing instruments business, and despite the temporary headwind from the voluntary field action at AB, we're raising our outlook for the full year.
We've shared that we raised the growth expectation from 8%-10% to 9%-11%, as well as adjusted EBITDA growth to 14%-17% from the 12%-15% we had guided for. This is in local currencies. As before, the guidance for adjusted EBITDA growth excludes restructuring cost. In addition, it does not consider the one-time cost related to the voluntary field corrective action I mentioned before.
Allow me a quick comment here on the currency side. We've observed already, quote unquote, "negative currency headwinds" in the first half. The Swiss franc has strengthened further since when we met in November. We have therefore decided to provide an indication of the estimated headwind for the year here based on the current exchange rates.
At this time, we expect the sales to be reduced by around 3 % points and the adjusted EBITDA by around 6 % points in Swiss franc. Using our new guidance ranges would apply an increase in sales of six to 8 % and a growth on the adjusted EBITDA of eight to 11 % in Swiss franc. Of course, the exact impact will depend on the currency development for the remainder of the year. With that, I hope this gave a good summary of what we have shared in the press release. I would open it now for questions. By the way, I didn't say that Hartwig is next to me, so I may punt some of the questions to Hartwig.
Hi, guys.
The first question comes from the line of Michael Yeung, Morgan Stanley. Please go ahead.
Thank you, good morning to all. I have three questions. Firstly, these are all related to the AB please. The first one is on patients. Can you comment on whether these patients suffered pain or other side effects when they had the electrode explanted? I'm not talking about the procedure itself, did they experience pain or something when the implant was faulty inside their skull? Question number two is, on the cochlear implant business, should we expect sales growth in the second half of your current fiscal year to be negative growth?
Thirdly, when it comes to the cochlear provision of CHF 40 million to CHF 50 million for this recall, can you provide some insights into how you got to this number? The math behind the number of patients you think will be impacted, as well as costs and damages that you think will be attracted to the recall. Thank you.
Michael, thank you. Thanks for the question. On the patient side, very good question. No, there has been no reports in any shape or form that people had pain or side effects. What in reality happens, the signal you get to the hearing nerve gets weaker, so people really recognize that the improvement they had in the hearing performance isn't there, but there is no indications that there would be any pain, nor would we understand that from the error we have analyzed.
I think on the CI sales growth side, I think we have factored in the, let's say, lower growth, post the field corrective action into our guidance overall. you may think about HI doing even better than what the number would tell you, because on the CI side, obviously post the field corrective action, we're a couple of weeks in that transition.
We have chosen to not share that number. We factored it in, so I think the overall is what the sum of the two is. With regard to the CHF 40 million and CHF 50 million, what we have gone through on the best available information is what do we have to think in terms of write-off of inventory at hand? What are the product returns we expect which we can't fulfill because we don't have enough inventory yet.
Then a cautious reserve for product liability claims, and that's what's making up the CHF 40 million-CHF 50 million. We are not in a position to share any prediction go forward. We've used our best cautious assumptions here. We do have certain experiences, but I think we are taking the CHF 40 million-CHF 50 million as a good midpoint of our expectation.
Okay. Can I just confirm, is the total number of implanted patients, is it around 16,000?
Yeah.
For the product-
Yeah. It's the Ultra product line, which is the majority of our product. That's 16,000. We started with the first version three years ago. That's the total number of recipients who have received the implant.
Right. the 16,000 is the base number of which further faults could occur if this issue was to escalate. Is that correct?
Yeah, I think that's a fair way to think about it.
Great. Thank you.
Next question comes from the line of Veronika Dubajova, Goldman Sachs. Please go ahead.
Good morning. It's Veronika here. I have two questions, please, one on the hearing business and one on CI. Arnd, can you help me understand, I'm just looking at the upgrade to the guidance this morning, and I appreciate there's a lot of moving parts, but if I sort of look at how well you've done in the VA since the November contract, I sort of get to excluding the VA, the business in wholesale is maybe growing 6%-7%, which really, I mean, in the context of the market growth at 5%-6% isn't particularly impressive. Am I doing something wrong with the math there, or had you assumed already some pickup from the VA when you gave us the guidance? Or is that really right and you're excluding the VA, maybe excluding Costco, really not seeing a huge amount of traction with Marvel?
That's my first question. My second question, just looking at this voluntary field action, I guess you're a couple weeks in. I'd be curious to understand what feedback you've had from surgeons so far, and how you're kind of trying to assess the reputational damage. Obviously, it's a fairly substantial change to product design, and it's not an insignificant fault, so I'm just curious if you can share any experience from the field on whether this has knock over impact onto your competitive position in the medium term. Thank you.
Yeah, Veronika, thank you for the questions. I think on the HI side, I'm not quick enough to do the math you did here, but I think if I look at the growth rates in the different channels, we do see good growth in the independent standalone, which for us is the most relevant litmus test after the VA performance with regard to the performance of the Marvel.
I think I need to go back to the number and run the numbers the way you did, but in general, we're looking at a good momentum in the Marvel and clearly one where we're seeing good market share development, particularly in the U.S. No concern on our side. I think we had expected that the VA, it's always a couple of months response curve until you have a new product. We did expect still some uplift there.
We also knew about that there's a pricing change coming at some point of time, so I think we were not surprised by that. The 50 is high, but we did expect some positives there. I think on the CI side, the revised version of the implant is not a very dramatic change of the implant. It really has taken factors in which allow us to be convinced, and we've seen that in the internal testing that it's significantly more robust. I think the doctors with whom we have worked closely on that improvement are very convinced about it.
As you can imagine, these are the largest institutions, and these are the ones who are also the most sensitive with regard to product quality. We feel good about the feedback of the doctors on the way we've taken, keeping them in the loop and active in the process. They're also important because they tend to be key messengers to the rest of the market. We know that they have onboarded the new version of the product as one they are actively implanting. I think we're at a good place there.
Arnd, can I just ask as a point of reference, on your prior implants, what's the explant rate that you would have seen a couple of years in? Just to help us understand how significant the 0.5% is that you're referencing today.
I think you're talking about a similar number over time. It is unfortunate, but it does happen that implants get explanted. I think with the 0.5 still clearly below our thresholds from a quality management system perspective, which you would expect sets the level at something which is normal. The 0.5 is really an early initiation of the voluntary field action here.
Understood. Thank you very much.
Next question comes from the line of Sebastian Walker, UBS. Please go ahead.
Hi there. Thanks for taking the questions. Two, if I could please. One on the CHF 40 million-CHF 50 million. Does that include any write-downs on the old implant from an R&D perspective? Anything that's been capitalized there? The second question, just more broadly, given the commentary around the investments in H1 paying dividends now in terms of growth rates for the hearing instruments business, could you maybe just give us an update on how we should think about OpEx development in the second half versus H1? Whether you're going to accelerate any investments or whether we should expect more of a flat development. Thanks.
Hi, Sebastian. Thank you. On the CI side, there is no need, and therefore we haven't factored it in of any write-off on R&D investments. As I said, the revised version is a continued improvement type of approach. The vast majority of the technology is the same. With regard to the investment side here, I think as we have said during the first half year, we have initiated investments.
There are still some increases, if you think about your OpEx run rate, because we were in the process of scaling up the sales force. In general, the OpEx side is in a good place, as you can also see from the improved fall-through, which our guidance would indicate relative to the first half of the year. I think we're seeing an even better leverage than we have seen the first half year from the growth here.
Great. Thanks. That's very clear.
Next question comes from the line of Maja Pataki, Kepler Cheuvreux. Please go ahead.
Yes, apologies for the noise. We're on a train. Just one question from my side, please. You've mentioned that in the CHF 40 million-EUR 50 million you also include some product liability claims. According to that, could you share with us what your assumption is based on that? What kind of patient population do you think could come through from an expectation point of view, and how shall we think about that going forward? Thank you.
Hi, Maja. Thanks for the question. I think in general, when we look at the case I was describing here, you're looking at "a lower end" of an impact to the respective patient. As we said, there's no safety issue, there's no pain, there's no side effects we're aware about or we would, at this point of time, expect. You're talking about a significantly lower exposure per patient. That's one factor here from, as I said, all we know at this point of time. I think we wouldn't like to share the exact number of what we have predicted here with regards to the number of claims. You know we have a good experience, sadly, from all of our vendor B discussions, so we used our model there.
We used the assumptions behind it with regards to how many people would come forward, and what is the likelihood of them having a valid claim, and what would you pay for that? That got us to the assumptions we have in here. It is not the majority of the CHF 40 million-CHF 50 million. In that regard, we look at the case as being very different than anyone we have more experience with, just given the, let's say, smaller impact to the individual.
Understood. Thank you. Just to follow up quickly, can you tell us how long you have been monitoring that and for how long you have been aware of it, just to kind of take an assumption on or get a feeling for the momentum that is building up?
I think we are aware about singular cases of this situation somewhere in the range of about a year. Keep in mind, we set the implants about three years out in the market, so you have an S-curve behind there. At the beginning, this technology wasn't available for all use cases. That's I think the timeline there. The progression isn't. I don't want to say too much about it, but we're not alarmed by the progression. If not, we would have done different things here with regard to the one-time cost. We had very early, let's say, singular cases some nine to 12 months ago and started to work on an improvement.
Thank you.
The next question comes from the line of Daniel Buchta from Dober. Please go ahead.
Yes. Thank you very much. I hope you can hear me. I'm on the train as well. Maybe just a bit on the strategic point of view of what this product recall means. If I look back at the history of your cochlear implants business, it was having difficulties, but in the past one and a half years, you did a quite job in showing above-market growth and bringing the profitability to the level of a mid-teens level, at least moving in that direction. Now we have a setback again in this business. Is on the strategic point of view, something changing here?
You still have a goodwill of, I think, a bit more than CHF 300 million on the balance sheet related to the acquisition back in the days while earnings. If I net everything you have earned in the past couple of years and deduct CHF 40 million-CHF 50 million from it, you probably didn't make much money at all over time. How is all that to be seen? Strategically, how committed are you still to that business? Thank you very much.
Daniel, thanks for the question. I think the first statement, we are strategically committed to the business because we see the benefit of having this as part of our portfolio for people with a hearing loss. We also think, and we can see this also from competitors in the market, at least one, that you can operate this business in a very attractive way from a growth and profitability side.
Yes.
Now, if you look at our last 18 - 24 months, outside of what we announced today, we were on a good pathway to improve the profitability, which was always the Achilles heel in the discussions we had together. I think we had a good 400 basis points EBITDA improvement over that period of time every 12 months. We know enough levers to continue that journey.
I think for us, this is unfortunate. We will need to get through the period we have ahead of ourselves. I think the fundamentals are there to continue that journey after that interim period here. I also believe, given that we're reacting early here, we're very proactive with the doctors. We had some of them involved on the analysis as well as on the improvements. I think we can keep, quote unquote, the reputational damage to more of a transition phase rather than a long-term phase.
Okay.
All in all, I think you'll see us having to go through this period now, and then you'll get us back to, we have good technology, we will grow the profitability, and the case in general stays intact.
Okay. Thank you very much. That's very helpful.
That was the last question.
If there's no more questions, thanks so much for jumping on the call on such short notice and working with us through all the ins and outs here. We know we didn't make it too easy this morning, but I hope it was helpful to listen in, and I wish everyone a good day. Thank you.