Nanosonics (NAN-AU)

SP: $4.00 M/C: ~$1.5bn, EV: ~$1.38bn, ADV ~$3.7m (all aud)

Quick intro

I am short some NAN into upcoming results. I confer the days of its dumb valuation are over triggered by

• Trophon negative sales growth

• Growing OpEx to support CORIS commercialisation

• Negative EPS

• CORIS failed commercialisation.

‘We’ = me.

Summary: NAN is a single product med-tech trading at 56x EV/EBITDA. Its core TAM is ~90% saturated and a new competitor has entered the market looking to convert its customers. We think a) TAM exhaustion in core product and b) Failure to commercialise recently approved product will lead to 2-year negative sales and EPS vs expectations for strong growth. We think multiple contraction triggered by weak guidance is a way to capture downside alpha here.

Business: Nanosonics are a med-tech manufacturer/marketer. They have a single commercialised product, Trophon. The second product CORIS, has been in R&D testing for ~4 years, gaining FDA approval in 1H25. Both products are designed to clean medical devices using consumable hydrogen peroxide sterilant. Both Trophon and CORIS have a razor/razorblade revenue model. Nanosonics sell the machine outright as the razor (capital sales) and the hydrogen peroxide as the blade (consumables sales) as well as revenue for servicing the machines. The split is ~29% capital sales, 58% consumables, 29% services.

The consumables part of the business is high-quality; high gross-margins (>90%) and recurring sales. Capital sales are one-time and services sales and are lumpy and lower margin – think a technician servicing a machine and billing a client for it.

Trophon is a device designed to clean soiled ultrasound probes. The TAM consists of US hospitals with units situated in the hospital cleaning rooms. Ultrasound clinics and emergency wards sit at the periphery of the TAM.

A soiled probe is placed inside the device and is cleaned by pumping hydrogen peroxide sterilant over it. This cleaning ‘cycle’ takes ~7mins/cycle. This matters because Nanosonics tells the market emergency rooms are part of their 60,000-unit US TAM which we dispute. We estimate the core TAM in the US to be ~35,000 Trophon units, 42% lower than Nanosonics 60k estimate. NAN has 100% share of automated ultrasound probe market. The company has been converting white space from manual cleaning with wipes following a regulatory change in late 2010’s. In 4Q24 a company called Germitec received FDA approvals for a competing product, raised capital and begun building out sales & distribution in the US. We touch on the effects of this in point 1) of our short thesis.

CORIS is designed to clean endoscopes. There are several large med-techs operating in this space. Combined with the product complexity we think CORIS’ commercialisation will flop as discussed in 2).

Investment thesis:

1. A combination of i) TAM exhaustion and ii) Competitive presence will trigger Trophon sales/ EPS to decline 2025-2027

• a. Ultimately we think stagnating capital sales results in negative sales growth 2025-2027 vs. street expectations for +20% over the period. The cost base is still growing producing a situation where EPS declines 2025-2027. Given NAN’s premium valuation - ~56x Fwd EV/EBITDA, we think this causes share price decline.

• b. Addressing TAM. Nanosonics have promoted a US TAM number of 60,000 we think is fictional. Speaking to head of US Sales – he confirmed to us that NAN have already penetrated within >90% of hospitals with their current ~35k installed base of units. Incremental growth assumes further penetration within existing hospitals, growth other wards and winning white space in rural clinics – research suggests this growth is unrealistic. Management speaks of extending Trophon to emergency wards yet customer calls suggest they are unwilling adopters as the 7min cycle time is too long for the emergency setting. As we can see a reconciliation with lower capital sales growth and TAM exhaustion in recent results; capital sales have printed back-to-back negative YoY growth – we think this lower growth is structural to NAN.

• c. Upgrades fail to offset lower growth. The company has constantly missed its expectations for 2000 upgrades/year. Company formers suggested this was due to no material differentiation between Trophon 1 and 2.

• d. Germitec are launching in the US 2Q25 led by ex-NAN VP sales. Germitec have a superior, lower cost product and specifically confirmed they are targeting NAN’s existing customer base that are yet to upgrade to a new unit. Germitec’s ‘Chronos’ unit uses UV C light to kill bacteria as opposed to chemicals and has ~90 sec cycle time vs. 7/mins for Trophon.

• e. Further, NAN management confirmed they have no visibility over Trophons sold via GE Healthcare channel and were unable to quantify the number of active units GE had even placed. These customers are not captured in the CRM and are free to convert to Germitec. W/ no visibility, NAN are unable to do much about it.

2. CORIS will fail commercialisation, adding near-term incremental OpEx to the cost base widening EPS falls.

• a. There is a lot of hype and associated value in the stock associated with new product, CORIS. We think i) It will fail to gain sales traction & ii) Additional costs will widen the cost base.

• b. There are several competing products made and sold by endoscope OEMs themselves – we fail to see how Nanosonics will break these incumbent relationships particularly given the natural synergy between an Olympus endoscope and an Olympus endoscope reprocessor - just think of the first principals here. Compare this to Trophon which for years has converted white space with no competition pre-Germitec.

• c. CORIS is not a plug and play system; it requires alterations to existing hospital infrastructure, namely through plumbing reconfiguration. Infrastructure changes occur every 6-12 months in hospitals and sales teams must involve the hospital engineering department as well as endoscope departments & value-added-committees who set budgets. We think this alone is a friction that the company will fail to overcome.

• d. The fundamental need for CORIS is ambiguous at best. Conversations w/ Academics and infection-preventions heads suggest that pinpointing where hospital infections occur is impossible. Recall, NAN’s study on the impact of CORIS on cleaning endoscopes is self-funded.

• e. Conversations w/ Ambu (AMBU-DEN) infer that a sales pitch that targets infection prevention is a poor GTM strategy. AMBU failed to commercialize their single-use endoscopes using this strategy as they found infection prevention committees were offended being accused their current procedures were substandard. AMBU pivoted to a workflow based solution. Conversations with NAN CEO/CFO suggest they are pressing forward on selling CORIS on the basis that it solves infection issues.

• f. Olympus are going through scope redesigns triggered by the FDA. They’re being remade so working channels are easier to be manually cleaned effectively alleviating the need for extensive automatic cleaning i.e CORIS.

• g. The company needs ~2 years of subsequent 510(k)s to before the company has a range of CORIS products that covers the universe of endoscopes. Indications suggest this will not occur before FY’28 hence giving us conviction in our forecasts relative to the street. This impacts sales but also EBIT as the company won’t leverage the fixed R&D cost base that the street believes will fall away once CORIS receives De Novo.

3. Put together, we see a potential for 2027 sales to miss by ~20% and EBITDA by ~79% vs street numbers.

Appendices

1. Expanding OpEx base. a. The inclusion of a ‘Trophon-only PNL’ appeases some yet is misleading for a few reasons. I) There no plan to seperate out CORIS/Trophon ii) CORIS’ cost base will not reduce post FDA approval, it will sequentially grow as more subsequent 510(k)’s are required.

Disclaimer
The information contained in this post is for informational and entertainment purposes only and should not be construed as financial, investment, or other professional advice. I may hold or trade positions in the securities discussed, and such positions may change at any time without notice. All opinions expressed are solely my own, based on publicly available information, and do not constitute a recommendation to buy, sell, or hold any security.