Nanosonics: Watch operating leverage build

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
24 February 2023, 6:30 AM
Sectors Covered:
Healthcare, Life Sciences

  • Nanosonics (ASX:NAN) posted a solid 1H23 result which was in line with forecasts and FY23 guidance was reconfirmed.
  • The transition to a direct sales model is complete; operating leverage evident; and the new product launch on track for late CY23.
  • Modest upgrades result in our target price increasing to (login to view). Add.

Event: 1H23 result

Sales were up 35% to A$81.6m in line with pre-released guidance. They were represented by capital revenue of A$25.9m (up 36% on pcp, 28% in cc and up 39% on 2H22) and consumables of A$55.7m (up 34% on pcp, 27% cc and up 36% on 2H22), which was driven largely by increased installed base (IB) and growth in ultrasound procedures returning to pre-COVID levels.

The global IB was 31,120 units (up 4% or 1,270 units (US +4%, Europe +4%, and ROW +4%)). The upgrade cycle continues with 800 units replaced in 1H23, which saw momentum improve in the 2Q, which we expect to continue in 2H. We estimate ~9,000 units in the US need to be upgraded to Trophon2 (ie over 7 years old).

Gross margin improved to 78.9% (pcp: 76.6%) due to favourable pricing on both capital and consumables, and the impact of the transition to a direct sales model from the strong USD offsetting higher freight costs. GM will come down in 2H, with a mix shift towards capital sales.

Operating expenses were up 31% to A$51.6m with R&D of A$13.6m. NAN continues to gain operating leverage in the US Trophon business, with revenue growth outpacing costs (management estimates 55-60% operating margins). EBITDA was A$12.8m with an EBITDA margin of 15.7%.

NAN reaffirmed FY23 guidance as per its update on 19 January: 1) total revenue growth of 36-41% (previously 20-25%), 2) gross profit margin between 77-79% (previously 75-76%), and 3) operating expenses to grow between 22-27% (previously 15-18%).


Management provided some more colour around the regulatory requirements of the new flexible endoscope CORIS® product as well as first images of the product, see overleaf. Both the US and ROW will require an in-use clinical study to show the cleaning efficacy over current mechanisms (manual cleaning) and will not require patient related clinical endpoints.

To date it has received promising data, and remains confident in its timeline of commercial launch in limited jurisdictions (Australia/ Europe) likely by the end of CY23. NAN continues to work with the FDA through the STeP program as it gathers evidence for De Novo pathway (expect submission within the next 6-12 months).

The transition to a direct sales model in North America is complete, all direct accounts have now been set up and new pricing agreements are in place. This has resulted in an uplift in pricing (~7%), as well as direct access into IB to drive the upgrade cycle.

An additional 4-5 people were added to the customer service team (in addition to expectations) to support the increased demand. Operational leverage will drive future earnings growth.

Forecast and valuation update

We have made minimal changes to FY23 forecasts. FY24/25 sees an EBITDA upgrade of 19%/8% respectively reflecting pricing upgrades, resuming IB growth of 4%, additional contribution from service revenue, offset by lower forecasts from Europe.

As a result of the forecast changes our DCF based valuation has increased to (login to view). We have set the target price at the same level.

Investment view

We maintain our Add recommendation.

Price catalysts

  • Update on CORIS® program, particularly in relation to the regulatory progress.


  • Delays in commercial launch of CORIS®, the flexible endoscope cleaning device. 
  • Lower installed base due to budget restraints within the hospitals.

Find out more

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