Nanosonics Ltd

ASX:NAN — Company Profile

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$2.63

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Added 6 months ago

Nanosonics manufactures and sells a high level disinfection unit for ultrasound probes, the Trophon EPR, which is increasingly becoming the gold standard for disinfection procedures.

Sales have tripled in recent years as increasing regulatory standards have accelerated the adoption of more rigorous disinfection models. Importantly, there remains a huge global market opportunity, with the company estimating a potential installed base of 120,000 units.

At the end of FY2017, nanosonics had an installed base of 12,400 units, predominantly in the USA (where the market opportunity is estimated to be for around 40,000 units).

The business has a ‘razor and blade’ model, providing it with very ‘sticky’, high margin, recurring revenue thanks to the sale of consumables. As the installed base grows, and as usage increases, the potential here is significant.

The business is has no net debt, plenty of cash, strong sales momentum, a good industry tailwind, market leading positioning and capable & aligned management.

Growth is expected to remain strong as the company consolidates its lead in major markets, moves into new geographies, and expands its technology to service a wider array of disinfection needs.

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Added 6 months ago

The business plans to introduce new products based on its disinfection technology.

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Added 6 months ago

Following a lean manufacturing program, capacity looks to have increased 4-fold in 2017.

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Added 6 months ago

A new agreement with GE was announced August 2017 (see link). Comes into effect on July 1, 2019 Prior to this, GE was the main sales channel, accounting for a strong majority of sales (over 65% in FY2017) Nanosonics will gain a material increase in sales and margin on consumables in North America

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Added 6 months ago

The revenue profile for each unit sold looks like this, with consumables and service charges accounting for roughly 70% of sales

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Added 6 months ago

Sales Channels In 2017 they established ‘capital reseller agreements’ with the majority of ultrasound OEMs. After the sale, Nanosonics is responsible for training, maintenance and supply of consumables Established a direct sales operation for Canada in 2017 Has its own direct sales operation in North America Sales partnership with Japanese distributor: http://www.asx.com.au/asxpdf/20170616/pdf/43jzb0qhsp0w8s.pdf

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Added 6 months ago

Profit Drivers

  • Expand further into existing markets, especially the US and UK
  • Moving into new geographies, such as Europe and Japan
  • Increasing units per site
  • Increasing throughput of units (more consumables)
  • New products

Strawman
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Added 6 months ago

Managed Equipment Service (MES) Sales Model

Nanosonics focuses on a MES model in the UK.

Clients pay an “all-inclusive” fee for consumables and get the machine and maintenance included as part of that for a fixed contract period. Nanosonics retains ownership of the Trophon unit.

The advantage is that it helps some clients overcome a capital constraint, which is a major consideration in the UK market.

130 unit placed in UK during FY17

Nanosonics expect the majority of hospitals in the UK to adopt this model

The MES model reduces revenues in the short term even though the long term implication for revenues is that the company is no worse off. Basically, sales are just spread over a longer period.

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Added 6 months ago

Unit Economics

As per a 2013 presentation (see link), Nanosonics sells each Trophon unit for around US$10k.

Each unit uses around US$3k worth of consumables each year

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Added 6 months ago

A big driver of uptake are increasing regulatory pressures. From 2017 annual report:

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Added 6 months ago

Market Penetration

As of June 2017, had 14,100 Trophon units in operation.

In North America, there is an installed base of 12,400 units across 3,500 facilities (giving an average of 3.5 units per facility).

Ultrasound probes are sterilised by a Trophon unit 40,000 times per day in North America (so each machine is, on average, used 3.2 times per day).

Nanosonics estimates that there is a potential for an installed base of 40,000 units in North America. That is, market could expand by over 3 times

There are 36 NHS trusts in the UK using Trophon 

Nanosonicshas a market penetration of 70% in Australia (2017 Results presentation has details -- see link)

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Added 6 months ago

  • Loss of distribution partner -- GE accounted for 66% of sales in 2017 (see pg 23 of 2017 annual report)
  • Single product risk (though new products being developed)
  • Regulatory risk -- new guidelines may not suit the Trophon solution
  • FX risk -- majority of earnings come from offshore
  • Product liability -- a failure could result in serious reputation damage and potentially legal action

Strawman
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Added 6 months ago

Nanosonics has experienced very strong growth in recent years -- as depicted in 2017 annual report

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Added 6 months ago

As of FY2017 they had a 75% gross margin. That was the same as FY2016, and is a big improvement on previous years (2013 was 57%, 2014 was 65%, 2015 was 69%) -- presumably due to increase consumable sales as a proportion of the total.

Nanosonics just broke even in 2016, with 2017 the first meaningful profit.

Has generated FCF in 2016 & 2017

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Added 6 months ago

Balance Sheet

Company has $1.35m in debt, which was borrowed in 2015 to facilitate leasehold improvements at its manufacturing plant in Lane Cove. It is being repaid in fixed monthly installments at 4.92% interest and will be repaid in full by 2020.

Nanosonics has $62m in cash as of the end of FY2017 So a very strong net cash position.

With the business cash flow positive, it is very unlikely to need additional capital anytime soon

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Added 6 months ago

CEO Michael Kavanagh

STI are up to 50% of fixed salary and are paid in cash and shares STI’s measured against sales and PBT (60%) as well as individual performance goals (40%)

LTI are up to 60% of fixed salary and paid in shares LTI’s Revenue and/or EPS as well as TSR against comparator group

His fixed remuneration is $540k

He holds 1.3 million shares, As well as 240k performance rights and 211k options subject to vesting conditions

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Added 6 months ago

Growth in US installed base (from 2017 AGM presentation -- see link)

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Added 6 months ago

Establishes a direct sales model in North America in 2015 (formerly relied on GE as a non-exclusive distributor)

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Added 6 months ago

How the Trophon unit works:

Strawman
Strawman
Added 4 weeks ago

Trophon 2 has been granted regulatory approval sooner that expected.

Major differences:

  • Works for future probe designs
  • Paperless traceability (helps with compliance audits)
  • Online firmware updates

Product will be released during Q1 of FY19. May have some sales and inventory impact short term.

This is certainly good news. Keeps the product set at the forefront of the industry, will continue the expansion of the installed base, makes the offering more compelling from a regulatory compiance standpoint, and shows the company's R&D efforts are yielding (at least some) tangible results.

Announcement here

Strawman
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Added 6 months ago

A low temperature, nano-nebulant based ultrasound probe disinfection unit Uses a proprietary hydrogen peroxide disinfectant that is sonically activated to create an ultrafine mist and free radicals. These potent free radicals have a superoxidative effect that destroys pathogens No harmful by products -- water and oxygen are by-products Compatible with over 1,000 types of ultrasound probes One button operation. Disinfectant cycle takes 7 minutes (Image from Pg 17 of FY2017 Annual Report)