Company Interview / CORIS to build on Trophon's base

Michael Kavanagh, CEO of Nanosonics (ASX:NAN) addresses the company's annual profit drop of 35% to $13M despite a 2% rise in revenue to $170M. Michael points out that the initial half saw decreased capital unit sales due to budget restrictions in hospitals, but there was notable growth in the second half.

Michael explains that the market’s fundamentals remain consistent, with increased demand for infection prevention technology. Nanosonics is expanding geographically, targeting markets in Europe, Asia Pacific, and North America. It is are also working to establish high-level disinfection requirements for ultrasound transducers in Japan.

Michael discusses the potential of their endoscopy-performing technology, Chorus, which could revolutionise contamination control. He says the robust performance of Nanosonics' trophon® business, forecasting continued growth and strong operating margins of around 25% in the medtech device industry.

Full unedited transcript:

0:11

Nanasonic's posted a drop of 35% in its profit to $13 million for the full year. Revenue, though was up 2% to $170 million, saying that impacts of inflation, you know, we're we're hitting the the budgets of hospitals. However, it says that a significant turnaround was seen in the second half. So let's get the details. We've got Nanasonic CEO Michael Kavanagh joining me now. Michael welcome to always. Thank you so much for joining us. So you talk to us about the dynamics of the result and why we saw a better second half to the year.

0:47

Very good morning. And thanks uh, to get together here, the um yes, it was a really a year of two halves where the, um, first half the sales of our capital units, which is a disinfection device specialized in the area of ultrasound. Uh, transducer decontamination was impacted by the, um, availability of capital budgets in the in the hospital sector, but that very much turned around in the second half where we saw a significant increase in our capital unit volume sales. That was up over 24% over the first half, and our capital revenue was up over 20%, uh, over the first half as well. So overall revenue, um, that we, we experienced in the second half, uh, was very strong revenue growth over the first up, 14%. What I should say is, uh, that really the dynamic out in the marketplace, there was nothing

1:46

fundamentally changed with respect to the requirements, uh, within the hospital systems for infection prevention or indeed that nothing really changed with respect to the underlying demand that we saw for our technology. How it manifested itself in, particularly in the first half, however, was the time to actually close the deals that were in our pipeline. They lengthened in the first half, but we were very fortunate that they managed to contract a bit. Then in the second half, which saw a very good result for for the business in the second half. Is it fair to say, though, that, as you know, the market continues to be penetrated and as your penetration in the market, you know, continues to grow, particularly when it comes to the troughing product, that that the growth will inevitably slow top line growth.

2:39

Um,

2:40

I guess conventional wisdom would have you think that way, except there's a very, very big market out there, and we're now expanding our business geographically, um, in Europe, in Asia Pacific. But even in North America, where, um, you know, it is our largest market. And there's still a significant opportunity for for ongoing growth in North America. Um, we're about 50% penetrated to the the Tam for the Trufant technology. And, uh, we're very confident that there's still significant growth opportunity there with the remaining 30,000 Tam, about 20,000 of that is within the hospital sector and about 10,000 in the private physician sector, where we partner with specialists in the private physician or for for the private physician sector, but our own direct operation, where they're spending a lot at a time now, are actually in existing hospitals that already have

3:40

our trough on technology, maybe in 1 or 2 departments. However, ultrasound is used in numerous departments, uh, within the hospital setting. So we're internally we call it our, you know, go deep strategy, ensuring that the technology gets adopted across all the different departments. And about 60% of our sales actually are into this segment. So we've got ongoing growth that we see happening in North America. But our expectation over the coming years is that we'll see that our European markets and our Asia Pacific market, and particularly Japan, where we're investing quite a bit, um, we'll start contributing a lot more over and above what they do today. Yeah. Okay. So talk to us a little bit because I understand that you've got new distribution partnerships, you know, across some of the regions that you're looking to grow the business into. So how are they going. You know, is there any update that we can expect coming through in the coming, you know, in this current half? Um, probably not in this current half. But, um,

4:40

you know, part of our, our geographical expansion strategy is in some of the major markets, we want to be direct. So we've invested, for example, in our, our own direct operations, uh, in the UK, in Ireland and Germany, we've got partners, um Ecolab, for example, we recently signed in France and Turkey and some of the countries in the Middle East, um, in Asia Pacific. Um, today, the majority of our sales in Asia Pacific are really related to the ANZ, Australia and New Zealand market. Um, but we put in quite a big emphasis on Japan now. We've got an infrastructure ourselves in Japan, but counterintuitively, and some people may be quite shocked about this, is that ultrasound transducers in Japan, even those that are used into cavity wise, um, are not required to be high level disinfectant. So part of the work that we are doing in these

5:39

markets, we call it about strengthening the fundamentals for adoption and that strengthening the means to try and establish through the various societies new requirements and mandates that high level disinfection actually takes place. So part of our investments are doing local clinical studies. And indeed we've done clinical studies in Japan that demonstrates over 90% of transducers used in an OBGYN setting are contaminated, and 50% contamination is actually actually pathogenic. In other words, can cause disease. Um, similar sort of results in a recent study we did in emergency care with transfusions used in emergency care, about 75% contaminated. Um, so it's all about generating that awareness and that awareness that data is to generate the requisite guidelines. And then once those guidelines

6:35

to, uh, place, then we start seeing adoption of the, the technology. Interesting. So there's a bit of an education piece there as well. Um, let's talk because we're running out of time. Um. Chorus. Are you still certain that you're going to be gaining approval? FDA approval for this product? Is the timeline still sort of early next year.

6:57

Oh, look, the word certainty is a very strong word, but we're very confident. I would say, um, we believe we've got a another transformational technology that we've invested heavily in R&D and continue to do so, but we do so because it's a technology that is really addressing a key unmet need. And that's in the area of endoscopy and the issues that exist with cross-contamination with endoscopy. Now, by and large, endoscopy is it's a critical procedure. Um, and, you know, over the top five markets around the world, there's on average about 60 million, um, endoscopy procedures cost a different endoscopy types take place on an annual basis. And what our goal is to do is in that cleaning phase of endoscopy that, uh, we automate that to end, but not just bring automation to it. Um, that the we address what is a significant issue and that's contamination in the complex

7:57

internal channels within these endoscopes. And we've recently had peer reviewed publications on the chorus technology actually demonstrate the absolute superiority of that technology and its ability to address that problem. So we're very excited. We just have to go through the normal regulatory processes. And uh, once approved, we, uh, we look forward to commercializing and bring it around the world. Well, um, look, thank you for joining us today. Just one final question. Like, what is the next catalyst in your view, for, you know, the share price to to push higher?

8:35

Well, I think everybody is looking very closely at the opportunity for chorus, but I really do, um, you know, on our website and in our investor presentation, I do encourage people, um, to, to look at the trough on business alone because the overall fundamentals that you see there that's on a consolidated view. And with that consolidated view, it includes all the investments that we're making for the future. But we have put in a proforma PNL just for the trough on business alone, where we strip out all of those future. Uh, like the chorus related expenses. And it's a very profitable, strong, growing, um, business. You know, where where you're looking at operating margins of nearly 25% and which is a very, very strong operating margin in the medtech device industry. And we're expecting continued leverage there. So I think the real catalyst people need to see I think the market reacted very positively to,

9:35

um, you know, the guidance that we've given out with that 8 to 12% growth, which is all just trough on and and but good controls on the opex line and, uh, good gross margins. So I really encourage people to look at the trough on only and then, you know, consider the the key opportunity that that exists there for the chorus business.