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By Team Ace Investors

Company Overview

Nanosonics (ASX: NAN) is an Australian infection prevention company that has successfully developed and commercialized a unique automated disinfection solution – trophon technology, representing the first major innovation in high-level disinfection for ultrasound probes in more than 20 years. Nanosonics’ trophon technology is fast becoming the global standard of care for ultrasound probe disinfection. Ultrasound probe disinfection is the process of cleaning and disinfecting ultrasound probes to prevent the spread of infection and protect patients. Since 2009, the trophon device has redefined the standard of care in ultrasound probe reprocessing providing ultrasound probe HLD to protect patients from cross-contamination. In addition to HLD, the trophon device portfolio offers several consumable and accessory product solutions to allow users to prepare, disinfect, track and trace, and store ultrasound probes therefore offering a complete reprocessing solution. The company will continue to drive trophon adoption through its ability to transform the way infection prevention practices are understood and conducted in existing markets and through continued geographical expansion.

Investment Rationale

Achieved a 7% YoY growth in total installed base to 34,790 trophon units

For the financial year that ended on 30 June 2024, the company achieved a 7% YoY growth in the total installed base to 34,790 trophon units, driven by growth across all key markets. However, the newly installed base declined 10%YoY due to a range of market conditions including hospital capital budget constraints.

In North America, the company recorded a 7% YoY growth in installed base to 30,390 units which represents approximately 50% of the estimated total addressable market, with new installed base increased 6%YoY in H2 FY24. The opportunity for ongoing growth in trophon installed base remains significant with over 270,000 ultrasound units in operation in North America and an estimated TAM of 60,000 trophon units.
In Europe, the company recorded a 10.95% YoY growth in the total installed base to 2230 units in FY24 and a strong 16%YoY growth in the new installed base to 220 units. The Company continues to invest in its growth plans for the EMEA region. In France, Nanosonics has recently established a partnership with Ecolab as its distributor for that market. This new collaboration has led to trophon being successfully listed as an independent disinfection device category on the UGAP public hospital tender. This distinction underscores the trophon technology’s unique value and broadens its accessibility to French public hospitals.
In Asia Pacific, the total installed base increased by 6% to 2,170, with 120 units installed. The majority of this growth was in the ANZ market which is highly penetrated (>75%), with trophon continuing to be the market leader. The Company continues to invest in its expansion plans in the Asia Pacific region with a primary focus on Japan.

Research and development continues to be a cornerstone of future growth

During FY24, the Company invested $32.8 million in R&D, up 11% compared with the prior period. In addition to its Endoscope Reprocessing program with CORIS, the R&D organization also progressed on several important projects in its ultrasound reprocessing and connectivity product roadmaps to advance its future offerings and leadership. The company achieved a critical milestone with the FDA de novo regulatory submission of its next transformational product, CORIS® in April 2024. The FDA submission represents a significant step toward addressing one of the most critical unmet clinical needs in instrument reprocessing: the cleaning of flexible endoscopes. The Company has recently received questions from the FDA and is working to address the questions raised as expeditiously as possible. While the regulatory approval process for CORIS is underway, the CORIS scientific program continues with clinical trials, publication of studies, and presentations at international infection prevention and clinical conferences. Endoscope cleaning represents a significant opportunity. There are over 60 million flexible endoscope procedures conducted per annum across major Western markets including the United States, Canada, Australia, and key European markets.

Nanosonics experienced a significant turnaround in 2H24, with considerable growth in unit sales

For the financial year ended on 30 June 2024, the financial performance of the company was impacted by constraints in capital budgets experienced by hospitals. Despite ongoing capital budget challenges faced by hospitals, Nanosonics experienced a significant turnaround in the second half (2H24), with a considerable 20% growth in capital revenue in 2H24 $26.3 million vs $21.9 million in 1H24, together with strong growth in consumables and service. This not only reversed the negative revenue growth experienced in 1H24 but steered the Company back to a trajectory of revenue growth for FY24, creating a solid platform for future growth and expansion.

Key Highlights

For FY24, Nanosonics achieved a 2% YoY growth in revenue to $170.0 million, with 2H24 revenue increasing by 14% in H2 over H1 (HoH).
Nanosonics experienced continued growth in total installed base globally, with the global installed base growing by 7% to 34,790 trophy units. During the year, the company has placed a new installed base of 2,340 units. After the challenging first half (1H24), the number of upgrade units sold accelerated in 2H FY24, which increased 44% HoH in H2. This growth was particularly evident in North America where upgrade units were up 71% HoH. The 820 upgrades sold in H2 in North America represented a record half for upgrade sales in that region. North America continues to represent the greatest opportunity for upgrades due to the size of the older trophon EPR installed base.
For FY24, the Company achieved a 9% YoY growth in recurring revenue to $121.8 million. During FY24, Consumables revenue benefitted from tailwinds associated with the growth in ultrasound procedures with ultrasound as a modality becoming more prevalent in healthcare settings. Service also experienced significant growth, with growth in revenue from service contracts increasing 41%YoY and was a major contributor to its free cash flow of $20.4 million.
The company achieved a gross profit margin of 77.9% in FY24 vs 78.7% in FY23, primarily driven by the decision to do a one-off slowdown in production in the second half of the year to lower working capital and return inventory to desired levels, product mix with more trophon units sold in H2 over H1. The Company plans to return to higher manufacturing volumes in FY25 with anticipated improvements in gross margin.
The Company has no debt, providing a strong foundation for continued investment in growth both organically and inorganically.

Outlook: Looking forward, the company remains confident in the ongoing growth opportunity of its trophon ultrasound reprocessing business as the pipeline for capital units continues to build. For FY25, the company expects to deliver growth in total revenue of 8-12%, with growth in capital revenue and recurring revenue aligned with growth in installed base and upgrade sales. The company is expected to have a gross margin of 77-79% with higher production volumes in FY25 after reducing inventory in FY24. The company expects Operating expenses to grow between 6-10% including ongoing investment in CORIS and other R&D, as well as one-off expenses associated with the introduction of a new ERP. For the trophon business, the company expects positive operating leverage and improvement in operating margin in FY25. In addition to the targeted growth in FY25, beyond FY25 Nanosonics is targeting continued expansion of the trophon business across all regions, including growth in installed base, upgrades, and consumables/services. Together with ongoing leadership in North America, it is expected that EMEA and Asia Pacific will become material contributors to the global trophon business. The company also expects to commercialize the CORIS endoscope reprocessing platform and will also evaluate opportunities for strategic acquisitions.

ACE’s Recommendation

Nanosonics (ASX: NAN) is an Australian infection prevention company that has successfully developed and commercialized a unique automated disinfection solution – trophon technology. During FY24, the Company invested $32.8 million in R&D, up 11% compared with the prior period. In addition to its Endoscope Reprocessing program with CORIS, the R&D organization also progressed on several important projects in its ultrasound reprocessing and connectivity product roadmaps to advance its future offerings and leadership. The company achieved a critical milestone with the FDA de novo regulatory submission of its next transformational product, CORIS® in April 2024. The FDA submission represents a significant step toward addressing one of the most critical unmet clinical needs in instrument reprocessing: the cleaning of flexible endoscopes. Endoscope cleaning represents a significant growth opportunity, with over 60 million flexible endoscope procedures conducted per annum across major Western markets. During FY24, the company also achieved a 7% YoY growth in total installed base to 34,790 trophy units despite constraints hospital capital budget, driven by growth across its all key markets. Despite ongoing capital budget challenges faced by hospitals, the company experienced a significant turnaround in 2H24, with a considerable upswing in unit sales. We believe that investments in R&D to expand its product portfolio and a growing installed base are expected to drive growth going forward. The stock closed the day at A$ 3.17/share and presents an investment case in our view. So, we would like to recommend a SPECULATIVE BUY rating on the stock.

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