Notes following a closer look at NAN's 1HFY25 results.

Discl: Held IRL

OVERALL

The 1HFY2025 was a very good robust result YoY, but the HoH view, particularly the fall in the number of installed units from 2HFY24, tempered that enthusiasm back a bit. A re-rating was to be expected with this good result, but the huge ~37% rise of the share price was surprising, but most welcomed. 

Thesis of (1) moat around Trophon being the standard of ultrasound disinfecting (2) capital sales driving strong recurring consumable revenue, is now back on track., after a challenging period of GE transition, then stagnant capital sales. 

FINANCIALS

1,730 Trophon units installed in 1HFY25 - 1,050 New, 680 upgrade - some 10,000 Release 1 units still in operations today - upgrades drive new service contracts and service revenue

The YoY improvement was significant:

• Gross Profit up 15.8% , Expenses increasing by only 9.7%, NPAT increased by 58.2%
• This was driven by both Capital Revenue up 11.3% and Consumables/Services Revenue up 19.8%, from a 4.5% decrease in new Trophon units of 1,050 and a 9.7% increase in upgrade units of 680

The HoH view was very good, but less so:

• Gross Profit up 6.4%, Expenses up 3.0%, 43.4% increase in NPAT
• Capital revenue fell 7.3%, offset by Consumables/Services Revenue increasing 8.0%, from a HoH 15.3% fall in New Trophon units and a 23.6% fall in Upgrade units
• The 8.0% increase in Consumables/Services revenue was very encouraging 
• The blip however, was in the reduced volume of New (down 190 units to 1,050) and Upgrade (down 210 units to 680) units which resulted in Capital Revenue falling 7.3% - would have liked to have seen both numbers sustain from FY24 to have full confidence that the capital sales recovery is not only under way, but also sustainable

Return to gross profit margin to 78.5% (76.3% in 2HFY24) was pleasing, reflecting a successful inventory management program, return to normal production volumes in H1, and the product sales mix

Operating expenses remain well under disciplined control - a 9.7% increase from 1HFY24, but only a 3.0% increase from 2HFY24 - this was impressive as it includes investment in the new ERP system which commenced in FY24 and further investment into Coris R&D and pre-commercialisation costs

Very healthy cash position:

• Cash flow of $13.8m for the period
• Cash and cash equivalent grew to $144.5m at 31 Dec 2024, with zero debt

REGIONAL PERFORMANCE

Continues to be heavily skewed towards North America

OPERATIONS

New manufacturing site for both Trophon and CORIS consumables being established in existing Indianapolis facility - completion and registration expected in 2H

Range of benefits expected to be delivered (1) margin improvements over time (2) sustainability benefits from reduced transportation (3) reduced exposure to the introduction of any potential tariffs on goods imported into the US

CORIS

Proceeding through the FDA’s de-novo review process with answers to the FDA questions received to date having been submitted

Continued preparations for supply chain and manufacturing readiness - targeting the commencement of the first stage of commercialisation in Q1 FY26, subject to the requisite regulatory approvals

Assuming a successful FDA de novo clearance of the CORIS system, marketing of the device will commence in the US. In parallel, it is expected that the first 510K for expanded scope indications will be submitted shortly thereafter

Outside of the US, the first commercial launch will likely take place in Europe in Q1 FY26 which is not contingent on the FDA de novo clearance

REVISED FY25 OUTLOOK

Will absolutely take this!

Headlines looked good at first glance, but capital sales/revenue feels flattish H on H if there was only a 11% increase in capital revenue vs 1HFY24, which was not a good half at all. Was wanting to see more follow-through capital sales momentum this half and suspect I might be a tad disappointed.

Market appears to have expected, and is OK with this, given the ~30% rerating since the mid-Dec 2024 low of $2.88 and the rather muted price movement today. I'll take that!

Discl: Held IRL

• Revenue growth driven by 20% growth pcp in consumables and service annuity revenue streams
• Total number of Trophon units sold in 1HFY25 was broadly in line with internal forecasts and was similar to the total number in the pcp, with overall capital revenue up 11% compared to pcp
• PBT result includes $1.3m unrealised forex gain
• Expects to achieve revenue, gross margin and operating expenses in FY25 at the top end of previous FY25 guidance

As part of reviewing the position with NAN, I learnt more about the US FDA De Novo submission, which is the submission category NAN has done for Coris. Thought it might be helpful, not only for NAN, but for other medical device companies.

An FDA De Novo submission is an application submitted to the FDA for creating a new device product classification, of which Coris is.

The link below provides a 13 or so minute video and written explanation of what a De Novo submission is and how long it takes to get one. This is from a company which helps companies submit FDA approvals, Medical Device Academy.

De Novo Submission Timeline

The stats below was interesting in terms of number of De Novo approvals granted per calendar year and the average submission duration in calendar days. The "150 day %" refers to "FDA days" which is calendar days minus the days the submission was placed on hold - that is the FDA's KPI for funding request to Congress.

In summary, based on actual history, my expectations for Coris FDA approval is a minimum 12-18M away, closer to 18M, at the absolute fastest, so Coris earnings will realistically only kick in deep into FY26, possibly FY27 if there are delays.

Discl: Held IRL, not in SM

Finally got round to taking stock of my NAN position.

The TLDR view is (1) softness to continue (2) stay invested (3) stuck in trading range with no clear immediate catalyst to re-rate (4) too early to top up!

SUMMARY OF P&L

KEY TAKEAWAYS

• Capital sales and Trophon 2 upgrades have slowed and are taking longer to convert - tight budgets are seeing hospitals stretch out use of Trophon 1 devices vs upgrading
• 1HFY24 revenue has fallen 2% vs PCP and 2HFY23 - sharp drop in capital revenue of 15% on PCP, partially offset by increase in consumable sales, up 4% from PCP
• 1HFY24 gross margins was 79.7%, up about 1% from FY23, driven by revenue mix and positive forex impact
• Expenses have increased $5m in 2HFY23 from 1HFY23, increased by a further ~$1.2m in 1HFY24 vs 2HFY23 (up 12% on PCP, up 2% HoH), includes Coris expenses
• 1HFY24 PBT halved from 2HFY23 $10.2m down to $4.9m
• Global installed base up 1,100 units to 33,550, up 3% last 6M, up 8% last 12M
• Trophon 2 upgrades of 620 units, down 23% from PCP with customers extending use of their existing Trophon 1 devices due to budgetary constraints
• Coris De Novo submission to the FDA occurred in Q3FY24, slightly delayed

Positives

• Margins have been sustained
• Some 9,000+ Tophon 1 units are >7 years old, and are ripe for an upgrade - immediate focus, ~26% of current installed base
• FCF 1HFY24 was $7.9m, Cash & Cash equivalents at 31 Dec 2023 of $118.3m, no debt - no funding or cash generation concerns
• TAM to chase for both Trophon and Coris is still very large - Trophon installed base ~140,000 units vs 33,550 installed, only 24% market penetration thus far
• Coris will be the next growth driver
• Significant medical benefits of reprocessing technology and first mover advantage in Coris enables NAN to define the clinical standard in the endoscope reprocessing space which creates and strengthens the overall moat
• Coris FDA Approval is a De Novo submission - to create a device product classification

Main Short-Medium Term Concerns

• Soft market conditions in 1HFY24 are expected to continue in 2HFY24, leading to a very soft FY24 result
• Coris is still at least 12-18M away to compensate for this softness, investment in Coris commercialisation and R&D will increase operating expenses in the interim
• Favourable forex gains are baked into revised expectations eg. reduced growth in FY24 expenses

What Will Drive Prices Upwards

• Continued progress and positive news on Coris FDA submission - medium to long term
• Signs of increased momentum in the growth of Trophon 2 upgrades in the US and the overall Trophon installed base - at least 6-12M
• Actual implementation of country guidelines requiring high-level disinfection
• Growth in capital sales in EMEA and APAC - this has been patchy
• Stronger growth momentum in consumables revenue to compensate for slower capital sales - at least 6-12M

Action To Take

• Will continue to stay invested as (1) the technology benefit is a strong moat (2) the TAM is still a big one (3) the outlook will brighten in 12-18M time once current Trophon upgrade hurdles are overcome and Coris gets close to FDA approval
• No immediate clear catalyst for re-rating as 2HFY24 and FY24 is being guided to be soft
• Chart shows NAN stuck between a $2.44 - $2.74 long term support zone but with a strong resistance zone between $3.22 to $3.48 and the 200 SMA, limiting immediate term upside - this broadly aligns with the fundamental position of the business ahead of the FY24 results
• Will need a stellar FY24 result above guidance to create upward price momentum - no clear evidence to suggest this will occur
• Current 1.72% allocation is appropriate for the immediate to medium term outlook and does not warrant adding until at least the release of the FY24 results

Discl: Held IRL, not in SM

Finally, some positive movement. Time to revisit NAN and have a closer look again ..

Discl: Held IRL

Pre-results confession, not a pretty sight unfortunately ...