So far in 2016 one of the best performing shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been Cochlear Limited (ASX: COH).
The shares of the implantable hearing solutions provider have climbed higher by a massive 47% since the turn of the year to $140 currently, compared to a paltry 3.5% gain by the S&P/ASX 200 index.
Solid top and bottom line growth have been the catalyst for the strong performance. In August Cochlear reported bumper full year profits of $190 million on revenue of $1.2 billion. This was an increase of 30% and 23% respectively over the prior year.
A key driver of this growth was the performance of its Asia-Pacific segment. The segment saw revenue increase 31% to $210.5 million, with the Australian and China markets a particular highlight.
New marketing programs and the expansion of field sales led to a 10% increase in unit growth in the Australian market. Over in China, the company performed well in both private pay and tender market. According to management, the region benefited from Chinese Central Government tenders of around 3,300 units.
But could this bumper profit growth be coming under pressure? According to a report in the Australian Financial Review, it could be.
The report reveals that one of Cochlear's biggest rivals expects competitive pressures to drive down the price that the Chinese government pays for hearing implants via its public tenders.
With the average implant price for public tenders down by 25% to approximately $7,838 in the last two years, Swiss giant Sonova is expecting profitability in the space to be squeezed considerably due to the fierce price war.
Although the Americas, Europe, and the Middle East are by far Cochlear's biggest markets and contribute 82% of total sales , I'm sure many investors see the lucrative China market as a key driver of future growth.
If profits in China's public tender market are squeezed and growth in the region slows, then it may be difficult to justify the 40x full year earnings premium at a share price of around $140 today. I believe this could put its shares at risk of a spot of profit taking in the next few months, especially after such a strong rally this year.
Although I think Cochlear is a fantastic company, at the current price I would hold off on an investment. Other healthcare shares such as ResMed Inc. (CHESS) (ASX: RMD) and Sonic Healthcare Limited (ASX: SHL) could prove to be better options for investors right now in my opinion.
