1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector: Healthcare||52-Week Range: A$2.15 – $3.54|
|Industry: Healthcare Services||Market Cap: A$1,043.2m|
We rate NAN as a Neutral for the following reasons:
- Requirement for ultrasound disinfection. Ultrasound transducers must be disinfected between patients to prevent cross-infection. Trophon EPR is a significant improvement above traditional methods (soak, spray, wipe or other manual reprocessing/disinfection method). For instance, traditional soaking takes ~25 minutes versus trophon which takes ~7-8 minutes to disinfect ultrasound probes.
- Potential addressable installed base of ~120,000 trophon EPR units globally (~40,000 in the US, Europe and Rest of World each).
- New guidelines and regulation drives pathway to reinforce requirements for high level disinfection. For instance, new guidelines in Australia and New Zealand setting trophon as the standard in high level disinfection.
- Continued growth in North America to be driven by its direct sales team with adoption remaining strong and trophon becoming the standard of care.
- Large and credible distribution partner is retained in GE Healthcare with demand for safety inventory.
- Managed Equipment Service business model (MES) in the UK overcoming capital budget constraints by clients.
- Progress with geographic expansion.
- Strong balance sheet with A$69.4m cash position to support growth strategy.
We see the following key risks to our investment thesis:
- Competitive pressures as potential entrants enter the market.
- Non-receptive markets where NAN’s product is considered over kill compared to traditional disinfection methods such as using sterilised wipes.
- Key customer risk as one customer is NAN’s largest customer
- Product faults or incident where recalls are required.
- Adverse foreign currency movements in AUD/USD.
- Poor execution of R&D with no progress.
- Nature of business makes it prone to easily reaching a natural penetration rate, where growth becomes subdued.
Nanosonic (NAN) reported as expected FY18 results.
Key results highlights were: 1. Total sales of $60.7m were down -10% (-7.8% in constant currency). Sales of consumables and service were up 25% (28% in constant currency) to $35.2m ($36.0m in constant currency) reflecting the increasing installed base. 2. Operating profit before tax was $5.6m, compared with $13.9m in the prior year. 3. strong balance sheet with cash reserve of $69.4m, up from $63.0m at FY17. 4. global installed base (IB) grew 25% to 17,740 units with North American IB growing 26% to 15,620 units and Europe up 49% to 730 units.
NAN is no doubt a quality business with solid management team but in our view, NAN is more than fairly priced relative to our DCF valuation and is more of a 2020 story where we see earnings uplift.
- New Trophon2… according to management, “trophon2 reflects a completely new mechanical and software design that delivers… new functionality including AcuTrace™ for paperless traceability and documentation, and capabilities for it to be seamlessly integrated with hospital IT systems… [and] new features to further optimise point of care usage and clinical workflow. trophon2 was made commercially available in North America and Europe from mid-August”.
- North America… Revenue of $54.4m was down from $62.3m in FY17 as a result of “transitionary reduction in capital revenue due to earlier than anticipated regulatory approval of trophon2 and subsequent run down of trophon EPR inventory by distributors, [and some] customers deferring purchase, pending the release of the new model”. Revenue from consumables and service was up +22% to $30.3m, reflecting strong ongoing growth in installed base (IB) (which increased +26%, from 12,400 units to ~15,620). According to management, “trophon has now been adopted in all of the top 50 hospitals in the USA and in ~5,000 hospitals and clinics”.
- Capital Reseller agreement with GE Healthcare… Early in FY18, NAN entered into a new Capital Reseller agreement with GE Healthcare in North America, which comes into effect in FY20. On the analyst call, management noted that new three-year agreement provides “GE Healthcare customers with ongoing access to trophon through the GE Healthcare sales channel [and] under the terms of the new agreement, NAN will gain a material increase in both consumables sales and margin in North America from July 2019”.
- Europe/Middle East… Revenue of $3.0m ($2.9m in constant currency), was up +76.5% from $1.7m in FY17 driven by increase in revenue from consumables and service which was up to $2.2m compared with $1.1m in FY17. IB increased from 490 to 730 units mainly driven by the UK where “Managed Equipment Service (MES) program resulted in strong growth with the installed base of MES units increasing 146%” in FY18. According to management, “under the MES program, trophon capital equipment owned by NAN is placed in hospitals and the facility pays an all-inclusive price for consumables in return for the use of the fully maintained Trophon”.
- Asia Pacific… Revenue of $3.3m, was down -6% from $3.5m in FY17 due timing of the purchase of trophon units. However, sales in consumables and service increased +21.7% to $2.8m, up from $2.3m in FY17. Australia and New Zealand (ANZ) remain primary markets in the Asia Pacific region for NAN. Trophon has ~70% market penetration. IB grew by 9% to 1,390 units, reflecting the already highly penetrated market in ANZ.
- FY19 management expectations. Key points highlighted by management include: 1. in July 2019, NAN’s distribution agreement with GE Healthcare in the U.S. will change to a Capital Reseller model, “which will result in a material increase in both sales and margin from consumables in North America from 2019”. 2. Continued growth in installed base in North America with FY19 adoption like FY18. 3. Regulatory approval of trophon2 in Japan expected FY19-end. 4. MES program in UK is expected to see growth in FY19, targeting new unit growth of 75% to100% over FY18 of which 90% will be under the MES model. 5. Continued investment in growth with FY19 expenses expected to be ~$53m including ~$13m in R&D.
Figure 1: NAN Financial Summary
Source: BTIG, Company, Bloomberg
Nanosonics Ltd (NAN) is an ASX-listed company which focuses on developing and commercialising infection control devices. NAN’s first device, the trophon® EPR is a proprietary automated device for low temperature, high level disinfection of ultrasound probes. The device is approved for sale across major markets including, Australia and New Zealand, US, Europe, Japan, Hong Kong, and South Korea. The trophon® EPR is sold through distributors including GE Healthcare, Philips, Samsung, Siemens Toshiba and Miele Professional.