By late 2024 former market darling Nanosonics (NAN) had fallen a fair way from its days of stardom. At one point, the company traded at more than ten times forward revenue and a market cap of almost $2 billion. By 2024 it had more than halved. Investors had grown increasingly frustrated by repeated delays to FDA approval for the company’s new product, Coris, which had been flagged as a future growth driver but delivered no revenue and little visibility. With few near-term catalysts and a miss to consensus expectations in 1H24, the company found itself firmly in the sin bin.
This had always been a high-quality business but too expensive for us to own. After giving the dust some time to settle, we decided to take another look. After meeting with the company in October last year it was clear many had given up on the business - exactly the sort of thing that gets us asking questions.
Since then the company has delivered a series of positive milestones in short succession, and the share price has rallied more than 50% from recent lows. In this wire, we explain what we saw in Nanosonics, how the recent result confirmed our thesis, and why we still believe there’s more to come for this Australian success story.
What Does The Company Do?
Nanosonics makes high level disinfection equipment for hospitals. Its main product, Trophon, is used to disinfect ultrasound probes. This isn’t a glamorous business, but it plays a critical role in stopping the spread of infection in clinical settings. Trophon is the standard in US hospitals and offers a fully automated, validated alternative to the old wipe-down methods that were prone to higher rates of infection.
More than 35,000 Trophon units are installed around the world, with 87% of those in the US. Market share in that region has surpassed 50%, a remarkable feat for an Australian company operating out of leafy Macquarie Park in Sydney.
What makes Nanasonics such a high quality business is the strength of its recurring revenue base. Once a machine is sold, hospitals must keep purchasing a proprietary hydrogen peroxide cartridge to perform each disinfection. As procedure volumes grow and more machines are installed, consumable sales grow. The company also attaches recurring services contracts to half of the trophon units it sells.
Underappreciated Value
When we initially entered into our position, we thought there were two key elements the market was underappreciating.
Firstly, the profitability of the core business had long been obscured by the losses coming from the company’s investment in Coris. From our perspective the core Trophon business was trading at a very reasonable valuation. Stripping out the company’s $130 million in net cash, and putting aside the value of the $100 million already invested in Coris, we were left with a profitable, growing business trading on what looked like 14 times after tax profits within a few years. Very attractive for a product with 80% gross margins, dominant market share, and strong recurring revenues.
Secondly, Nanosonics was quietly building a second high margin earnings stream with services contracts. When the business moved to direct sales in the US in 2019, it took back control of servicing newly-sold Trophon machines from GE Healthcare. Nanosonics typically attaches a multi-year services contract to around half of new unit sales. These deals are typically paid upfront but recognised over time, creating a growing recurring revenue base.
Replacing older units with the new version opens up even more opportunities to attach services contracts. About ten thousand Trophon 1 units are now more than seven years old. These older models are increasingly being replaced by the Trophon 2, which offers better workflow, traceability, and compatibility with modern probes.
While not overtaking capital or consumables, services revenue should grow faster than the other revenue streams and represents more high-quality, annuity-like revenue.
Coris: More Consumables, More Complex
Coris is a high-level disinfection system for endoscopes. Manual cleaning of endoscopes presents significant challenges due to their intricate design, featuring long, narrow channels and complex internal structures. These areas are difficult to access and clean thoroughly, often requiring meticulous brushing and flushing. Despite rigorous efforts, studies have shown that manual cleaning alone may be insufficient to remove all contaminants, leading to the potential for biofilm formation and subsequent infection risks. An automated solution like Coris is both safer and more appealing.
The product has now achieved FDA's De Novo clearance of its Coris system. Nanosonics anticipates commencing a targeted rollout in select hospitals in the first half of the 2026 financial year, followed by a broader commercial launch in the second half. What sets Coris apart is its potential to generate even more consumables revenue than the Trophon system. With an estimated 60 million endoscopic procedures performed annually worldwide, the addressable market for Coris is substantial.
Coris is more complex than Trophon and requires plumbing, which means longer sales cycles and more hospital involvement. But it should also offer more revenue per unit once installed.
The FDA approval not only validates Coris as an innovative approach to infection prevention but also positions Nanosonics to significantly expand its market presence and recurring revenue base in the coming years.
Valuation Still Stacks Up
Our initial views were confirmed in the most recent result, with the company upgrading guidance for the full year. Capital sales continue at a steady pace while consumables and services revenue surprised on the upside growing 17% and 25% respectively.
While the stock has recovered since the low point, we think our thesis continues to play out. The installed base continues to grow, albeit at a slower pace than in the past. Consumables will continue to tick up with new unit growth and procedure volumes. Services revenue will further bolster. More details will come out about the Coris commercialisation strategy in time, giving investors plenty to get excited about.
Nanosonics wouldn’t have screened cheap in the traditional sense. But we think it's a great example of the small and micro-cap opportunities we love at Forager - the unloved and underappreciated.