13 april 2012 so many germs; so little · 2017-05-19 · so many germs; so little time healthcare...

Nanosonics Limited DN

Equities Research – Nanosonics Limited 1 Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

13 April 2012

So Many Germs; So Little Time

Healthcare & Biotechnology

$0.52

BUY

Shane Storey PhD MBA 07 3212 1351 [email protected]

Nanosonics is the developer of the Trophon EPR device, for the high level disinfection of ultrasound transducers. GE Healthcare is commercialising the device in North American markets. Nanosonics sells to rest-of-world via a network of distributors.

Security/Capital Details ASX Code NAN Market Cap $120 M Issued Shares 230.9 M Avg Mth T’over 4.29 M 12 Mth High – Low $0.94 - $0.48

Important Disclosure

Wilson HTM Corporate Finance Ltd acted as Lead Manager and underwriter for the December 2009 placement and advisor in relation to the share purchase plan by Nanosonics Limited and earned fees for acting in this capacity.

Nanosonics Limited Resuming coverage – BUY. DN

Year to June

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2011a -11.2 -4.8 -15.8 -15.7 -19.6 -14.5 0.0 0.0 02012e -6.0 -2.6 46.0 -21.5 -21.4 -22.7 0.0 0.0 02013e 0.3 0.1 104.2 509.1 -200.0 158.1 0.0 0.0 02014e 12.9 5.6 4,990.9 10.0 10.5 8.5 0.0 0.0 0

Equities Research – Nanosonics Limited 2 Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

13 April 2012 Recommendation

We resume coverage of Nanosonics with a price target of $1.00 per share, and a BUY rating. The ultrasound/radiology sector seems set for inevitable change as regulators and professional bodies abandon toxic, bulk chemical disinfection and seek safe, effective and traceable solutions. The growth equation for Nanosonics must factor in rising procedure volumes in the major markets, a slowing in new antibacterial drug development and payors refusing to pay for the consequences of healthcare-associated/acquired infections. Nanosonics’ technology is a near perfect means of providing high level disinfection: fast, effective, non-toxic and it leaves no environmental residues/waste. BUY rating re-instated.

$0.52

BUY

Shane Storey PhD MBA 07 3212 1351 [email protected] Key Points

Nanosonics is a medical device company developing sterilisation and disinfection products for hospitals, radiology clinics, medical centres and other point-of-care healthcare settings. Its lead product, Trophon EPR is a device used for disinfecting ultrasound transducers (probes). GE Healthcare (GEHC) is the exclusive distributor of Trophon EPR in USA and Canada. The device is also sold in Europe and Asia-Pacific via non-exclusive third party distributors.

Trophon EPR is the first exemplification of Nanosonics’ technology – the use of concentrated, aerosolised biocides (hydrogen peroxide) to disinfect delicate medical devices/instruments that cannot be exposed to extremes of temperature/pressure (eg steam).

Current disinfection practice employs hazardous chemical solutions or sporicidal wipes. Guidelines in Australia support the Trophon EPR alternative. We expect to see the global industry move away from bulk liquids disinfection for two reasons. Toxicity and poor compliance are widely admitted shortcomings of current methods. Regulators and payors are likely to continue to seek ways of preventing hospital- or other healthcare setting-acquired cross-infections, in our view.

WHTM Resumes Coverage – Target $1.00; BUY rating.

We take a DCF approach to setting a Nanosonics price target at $1.00 per share. Our choice of 14% discount rate is in line with other early-stage medical device companies we cover.

We develop an idea that the Nanosonics share price has been correcting over the last year, following share price surge in response to first revenues. We think the stock can re-rate significantly over the next 12 months, as more evidence of sales traction comes to hand, particularly from GEHC’s US/Canadian sales.

Risks – in the medium tern, that of ‘keeping up’ with GEHC, should they push more aggressively into the US market, placing pressure on manufacturing, product support and working capital. In the longer term, understanding what the ‘mature market’ annual volumes for Trophon EPR will look like, globally. We present some conservative arguments for a ‘replenishment market’ of over 10,000 Trophon units, annually. But it could just as easily be double that.

We forecast that Nanosonics could produce its first HY profit result in 2HFY13 and generate positive free cash flows from FY14, inclusive. We factor in no future capital raisings for Nanosonics. If we were to do so, it would be small (no more than $10M), entirely justified (given the scope of the international opportunity) and irrelevant to the investment view (perhaps a 10% dilutive impact).

We resume coverage with a BUY rating.

Price Performance

Apr 12Dec 11Aug 11Apr 11

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Security/Capital Details ASX Code NAN Market Cap $120 M Issued Shares 230.9 M Avg Mth T’over 4.29 M 12 Mth High – Low $0.94 - $0.48

Key Data/Ratios – FY 2012

Cash $5.6 M Burn $5.5 M EV $114 M Interest Cover 15.6 x ROE -52.5% EPS Growth 46.0% PEG Ratio x NTA / Share $ 0.04 DCF $ 0.89 12 Mth Price Target $ 1.00

13 April 2012

Equities Research – Nanosonics Limited 3

TABLE OF CONTENTS

Recommendation ............................................................................................................................................ 2 INVESTMENT THESIS ..................................................................................................................................... 4 Nanosonics Valuation .................................................................................................................................... 5

DCF-BASED PRICE TARGET - $1.00 PER SHARE. ................................................................................................... 5 TARGET PRICE AND RECOMMENDATION ............................................................................................................... 6

FINANCIAL FORECASTS................................................................................................................................ 7 APPENDIX A – TROPHON EPR ...................................................................................................................... 8 APPENDIX B – MARKET ACCESS ............................................................................................................... 10 APPENDIX C – NANOSONICS VALUATION SUMMARY ............................................................................ 14 APPENDIX D – MARKET FEEDBACK ......................................................................................................... 18 APPENDIX E – INTELLECTUAL PROPERTY ............................................................................................. 20 APPENDIX F – BOARD AND MANAGEMENT ............................................................................................. 21

BOARD ........................................................................................................................................................................ 21 MANAGEMENT ........................................................................................................................................................... 21

Figure 1: Relative NAN share price performance since its IPO in 2007. Comparators: ASX200 (XJO) and ASX200 Healthcare Index (XHJ).

Source: WHTM Research

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13 April 2012


INVESTMENT THESIS

Resuming Coverage; $1.00 price target; BUY rating

We resume coverage of Nanosonics with a price target of $1.00 per share, and a BUY rating. This company has reached a position where the market should begin to take notice of quarterly sales traction, driven by GE Healthcare’s US and Canadian launches of the Trophon EPR product for ultrasound probe disinfection. That marketplace seems set for inevitable change as regulators and professional bodies abandon toxic, bulk chemical disinfection and seek safe, effective and traceable methods. The growth equation must factor in rising procedure volumes, a slowing in new antibacterial drug development and payors refusing to pay for the consequences of healthcare-associated/acquired infections. Nanosonics’ technology is a near perfect means of providing high level disinfection: rapid, effective at the point of care, non-toxic and it leaves no environmental residues/waste. BUY rating re-instated.

Introducing Nanosonics (NAN:AU) Nanosonics is a medical device company developing sterilisation and disinfection products for hospitals, radiology clinics, medical centres and other point-of-care healthcare settings. Its lead product, Trophon EPR is a device used for disinfecting ultrasound probes. While the device is approved and validated for a wide series of probes, we see initial marketing targeting obstetrics and gynaecology (OB/GYN). GE Healthcare is the exclusive distributor of Trophon EPR in USA and Canada. The device is also sold in Europe and Asia-Pacific via non-exclusive third parties.

WHTM View – Nanosonics’ Opportunities

Commercial validation: NAN has secured a commercialisation partner for Trophon EPR in the US and Canadian markets. GE Healthcare (GEHC) is a global leader in the provision of both ultrasound equipment and infection control devices to hospitals, medical centres and other healthcare settings. The GEHC transaction was the first independent commercial validation of Nanosonics’ value. GEHC is the exclusive distributor for Nanosonics’ Trophon EPR ultrasound probe disinfectors and related consumables in the US and Canada. The agreement also provides GEHC non-exclusive original equipment manufacturer (OEM) co-sale rights for the Trophon EPR with GEHC ultrasound consoles.

Platform technology offers multiple opportunities: Nanosonics’ ‘NanoNebulant’ technology is applicable to other endoscopes (colonoscopes, transesophageal endoscopes). The technology is also amenable to disinfecting large volume areas /objects (operating theatres, hospital beds).

Large markets: Nanosonics describes a c.US$300M annual revenue opportunity from the sale of Trophon EPR and its consumables in the obstetrics/gynaecology (OB/GYN) ultrasound market1. The opportunity is not limited to use with GEHC equipment. GEHC sells Trophon EPR without branding (vendor-neutral) to encourage its use with ultrasound probes from other OEMs such as Siemens, Philips and Sonosite. The device is validated across a spectrum of probe types outside OB/GYN such as vascular, neonatal, musculoskeletal, cardiac and prostate.

Inexorable pressure to curb hospital acquired infections (HAIs): payors resist or even refuse to reimburse hospitals for the costs of treating hospital-acquired infections. The risk of HAI incidence is rising with increased procedure volumes (ageing population) and the emergence of multi-drug resistant bacteria and other infectious agents. In our view, hospitals and other settings will adopt new infection control technologies – particularly if they can be bundled with (or even, in the future, built-in to) ultrasound consoles.

More deals in the offing: at last year’s AGM, Nanosonics highlighted further technology partnerships under discussion, including other uses of ‘nanonebulant’ and its patent rights in prionicidal2 technologies. In particular, we see the development of a Trophon-like solution for transesophageal probes as particularly attractive.

1 See 2011 AGM Presentation 2 Prions are infectious agents composed of misfolded or otherwise incorrectly constituted protein molecules. Prions formed the basis of Creutzfeld-Jacob disease in humans, which was a transmissible spongiform encephalopathy (BSE) similar to ‘mad cow’ disease. Steam sterilisation may not be sufficient to sterilise for prions. World Health Organisation recommendations for prion sterilisation include sodium hydroxide, hypochoritesor even sodium thiocyanate in combination with steam or dry heat up to 1000 degrees.

Nanosonics owns a technology that provides rapid, non-toxic, zero residue disinfection for medical devices and instruments

GE Healthcare is the exclusive distributor of Nanosonics’ Trophon EPR system in North America. GEHC also has non-exclusive rights to sell into their user base outside USA

The investment thesis is that hospitals and other healthcare settings face inexorable pressure to prevent acquired infections. Adopting new disinfection technologies should play a key role in that global movement.

13 April 2012


Excellent clinical/regulatory offering: Nanosonics’ guidance of Trophon EPR through CE Marking in Europe and FDA approval in USA has been an efficient use of funds, in our view.

WHTM View – Nanosonics’ Risks

Visibility of earnings: the largest market for Trophon EPR is under the exclusive stewardship of GEHC, offering investors limited visibility on sales, outside Nanosonics’ quarterly cash flow reports. We understand that GEHC is nurturing Trophon EPR demand from within its largest (and possibly, slowest) customers first.

Valuation and volumes: the obvious valuation risk is that of understanding what the ‘steady state’ mature market for Trophon EPR could look like, in terms of annual volumes. We model an annual ‘replenishment market’ of more than 10,000 devices; but it easily could be double that, possibly more.

Competitive risks: a number of new players have entered the infection control space with new technologies including ultraviolet light, ultrasound and even alternative hydrogen peroxide based technologies. We expect more competitors to attempt to enter this market, if Trophon EPR is successful.

Reliability, recalls, warranties – Nanosonics provides Trophon EPR on a 12 month warranty and recommends a service every 5,000 cycles. All device companies face the risk of quality and/or performance problems leading to recalls at some stage. The company has hired a depth of management expertise to mitigate this risk.

Keeping up with Waukesha, Wisconsin: as a small company, Nanosonics faces the risk of being able to keep up with GEHC, should US demand suddenly accelerate. Some components have reasonably long lead times (c.6 months) so purchasing quantities may have to be increased to accommodate demand, placing pressure on working capital requirements. Scale-up would also be required, although we note that Nanosonics has very experienced management in this regard.

Nanosonics Valuation DCF-based price target price - $1.00 per share. We value Nanosonics using a DCF framework, consisting of explicit earnings forecasts to 2022. Our calculation basis was to include only the Trophon EPR and its consumables and omit future product lines/opportunities at this time.

We assume that Nanosonics receives an average selling price (ASP) of A$5,200 for each device shipped to GE and other distributors/partners. Nanosonics sells Sonex-HL consumable cartridges for c.A$48 and each unit provides for c.35 cleaning cycles. We assume a flat, fixed revenue of A$1.00/cycle.

Free cash flow forecasts are given a more detailed treatment on page 16. We estimate the Nanosonics’ equity value at $207M. The discount rate we have chosen is 14%, which is consistent with the other early-stage medical device companies we cover (IPD, SOM, UBI, AVH).

Table 1: DCF valuation summary for Nanosonics

FY13 FY14 FY15 FY16 FY17 FY22FCFF -$1.6 $11.2 $30.3 $27.2 $33.3 $36Cumulative WACC 1.14 1.30 1.48 1.69 1.93 3.25

PV of FCFF -$1.4 $8.6 $20.4 $16.1 $17.3 $290Terminal Value

NAN Valuation InputsPV of FCFF = 118$ Beta 1.333

PV of Terminal Value = 89$ Risk-free 6.00%

Value of Operating Assets of the f irm = 207$ Risk premium 6.00%

Less net debt -$ WACC 14.00%

Value of Equity = 207$ Tg 2.50%

Value of Equity per share = 0.90$

12MPT 1.02$ Source: WHTM Research

The key near term risk we identify is that of ‘keeping up’ with GEHC, should they decide to push aggressively into the US market. Longer term valuation risk is that of understanding ‘mature market’ annual Trophon volumes

The value proposition is a near-perfect technology offering in high level disinfection. We value Nanosonics at $207M EV – posting a $1.00 price target. Re-instate BUY rating.

13 April 2012


Target price and recommendation

Nanosonics is likely to be re-rated on the basis of revenue growth, in our view. Two relevant examples which illustrate typical market reactions to early life science revenues include the early stage developers Cellestis (CST3) and Sirtex Medical (SRX4). Figure 2 shows how the share price of CST and SRX tracked as a function of revenue traction (expressed as a quarterly moving annual total or QMAT5). Both examples show an early share price reaction to emerging revenue streams, followed by a correction (share price naturally overshoots), followed by a second rerating in response to increase in QMAT growth.

Figure 2: CST (A) and SRX(B) relative stock performance as a function of revenue development. Revenue growth in the end, was responsible for more reliable valuation gains.


Our sense is that the NAN share price likely did get ahead of itself on early revenues and has been in ‘correction’ mode for the last year. Figure 3 shows the expected revenue momentum out to 2013 – which could catalyse Nanosonics’ ‘second wind’ in share price.

Figure 3: Accelerated growth from GEHC’s launch could support sustainable stock gains. Hollow QMAT data points represent WHTMe.


3 Cellestis was a tuberculosis diagnostics company, which was acquired in 2011 by Qiagen for c.A$341M. 4 Sirtex manufacturers and sells Sir-Spheres, for the treatment of secondary liver cancers. 5 QMAT is a trailing, four quarter aggregate revenue number.

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13 April 2012


Upcoming milestones/catalysts We have re-instated the BUY rating on Nanosonics in view of our valuation of the Trophon asset and our observation of what how the share price might respond as revenue growth becomes manifest. We see the following events as the most likely to assist Nanosonics’ share price over the next 12 months:

Sales growth under GEHC arrangements: we understand that Nanosonics is currently negotiating purchase quantities for the next 12 months with GEHC. The stock’s performance will likely be dominated by the quarterly cash flow statements and management commentary;

Reinvigoration of Europe: we expect news flow to increase from Europe, as the upgraded N20 Trophon is rolled out and as Nanosonics builds in more product support behind its distributor network;

New geographies and distribution: we understand that Trophon has recently been approved in India and we expect to see more approvals over the next 12-24 months, encompassing South America, Asia, Africa.

Product Collaborations: transesophageal echocardiology (TEE) probes are a likely area for the collaborative development of a new specialised Trophon-like device. At the 2011 AGM, Nanosonics flagged several trade alliances under discussion which we would expect centres around the TEE opportunity and their prionicidal technologies.

FINANCIAL FORECASTS Nanosonics’ revenue model is linked to the sale of Trophon EPR medical devices and its associated consumable, the Sonex HL hydrogen peroxide cartridge. We provide detailed revenue forecasting assumptions later in this report, but Table 2 presents a brief summary FY12-15E. Note the company’s medium term cash position does rely on the success of GEHC’s marketing efforts. Nanosonics had $10.8M in cash as at the end of 2011, but had moderated its net cash burn to c.$1M/quarter. We have made no provision for additional capital raisings in our forecasts or valuation.

Table 2: Forecast financials for Nanosonics FY12-15E. P&L FY12 FY13 FY14 FY15Trophon Device Revenue $M 12.0 21.2 37.0 56.8 Trophon Consumable Revenue $M 0.6 3.5 9.6 20.6 Sale of Goods $M 12.7 24.7 46.6 77.4 COGS $M 4.9 9.2 16.7 26.8 Gross profit $M 7.8 15.5 29.9 50.6

gross margin 61% 63% 64% 65%SG&A 10.5 11.3 12.9 13.8 Development expenses 2.8 3.4 3.5 3.7 EBITDA (5.5) 0.8 13.4 33.1

EBITDA margin 3% 29% 43%EBIT $M (6.4) 0.1 12.6 32.3 PBT $M (6.0) 0.3 12.9 33.2 Tax $M - - - - NPAT $M (6.0) 0.3 12.9 33.2

Balance Sheet FY12 FY13 FY14 FY15Cash $M 5.6 4.2 15.7 33.7 Net Assets $M 8.5 8.8 21.7 41.7 Retained Profits/Losses $M (51.0) (50.8) (37.8) (17.8) Total Equity $M 8.5 8.8 21.7 41.7


13 April 2012


APPENDIX A – Trophon EPR Given that this document is a resumption of coverage and that the technology background is well described in previous WHTM research, we provide only a basic summary here. Simply, Nanosonics has a technology for the high level disinfection of medical devices that does not rely on extremes of temperature, pressure or the use of toxic chemicals. This is particularly useful for reprocessing instruments whose materials of construction (plastics) do not withstand harsh methods of sterilisation. Figure 4: NanoNebulant technology

Source: Nanosonics

The technology uses high-frequency ultrasonic energy to nebulise (break up a liquid into a very fine spray or aerosol) a stable solution of hydrogen peroxide, which is a biocide. The device concentrates the droplets further before passing them to a closed chamber containing the ultrasound probe. Hydrogen peroxide kills bacteria and inactivates viruses by causing massive damage to cell walls, internal proteins and genetic material6. The probe is exposed to this ‘NanoNebulant’ for 7 minutes. A catalytic destructor is employed to break down residual hydrogen peroxide into oxygen and water.

6 Finnegan, M. et al. (2010) Mode of action of hydrogen peroxide and other oxidizing agents: differences between liquid and gas forms J. Antimicrob. Chemother. doi:10.1093/jac/dkq308.

13 April 2012


Table 3: A compare and contrast table to highlight the competitive advantages of Nanosonics’ ‘nanonebulant’ technology.

Source: Nanosonics, WHTM Research

13 April 2012


APPENDIX B – Market Access ANZ Market

GEHC does have non-exclusive rights to distribute Trophon in Australia to their installed customer base. The predominant form this has taken is to include Trophons as part of a bundled offering, when tendering to sites, particularly as part of the relatively new ‘LOGIQ7’ multimodal systems and their ‘Volusun8’ range of OB/GYN ultrasound machines.

Figure 5: Multmodal ultrasound machines such as GEHC’s LOGIQ series (left) are general purpose, accommodating both surface and intracavitary transducers. GEHC also manufactures dedicated OB/GYN ultrasound equipment (right) with specialised features such as foetal cardiac assessment and to perform assisted reproduction procedures.

Source: GEHC

Outside GEHC, Trophon is distributed in Australia by Regional Health Care Group9. In New Zealand, the principal non-exclusive distributor is Biodecon10.

Nanosonics indicates that nearly 600 Trophon EPR units have been installed in ANZ since sales began in March 2009. We estimate that the ultimate installed base in ANZ could reach 1,300 machines – which is about 14% of the estimated installed base of 9,500 ultrasound units.

USA and Canadian Markets

GEHC is the exclusive distributor of Trophon EPR in USA and Canada, having launched the product mid-2011. We estimate that 2,000 devices were ordered in year one. GEHC has introduced incentive programs to encourage their sales force to sell Trophons; particularly as a bundled offering, ‘hard attached’ to LOGIQ multimodal machines. There are explicit commissions attached to Trophon sales and these are communicated clearly to sales reps in the field.

The initial phases of GEHC’s US launch seems to have targeted the installed OB/GYN ultrasound user base first, concentrating on some prestigious reference sites such as Stanford IVF, Brigham and Women’s Hospital, Massachusetts General Hospital, Walter Reed Army Medical Centre and Beth Israel Hospital. More broadly, Trophon orders have been placed at more than 100 ‘reference sites’ in the USA. Additionally, Trophon has also been adopted in US Veterans’ Affairs (VA) and Department of Defence (DoD) Hospitals, both of which are updating their disinfection protocols11. There are 147 VA Medical Centres, 292 Vet Centres and 642 Community Based Outpatient Clinics across 21 Veterans Integrated Service Networks (VISNs) in the USA.

7 http://www.gehealthcare.com/euen/ultrasound/products/general-imaging/index.html 8 http://www.gehealthcare.com/euen/ultrasound/products/ob-gyn/index.html 9 Note that Regional Health Care Group www.rhcg.com.au is a related party in that the group’s CEO, Maurie Stang, is also Non-executive Chair of Nanosonics. 10 Biodecon – www.biodecon.co.nz 11 See March 2012 Military Medical CBRN Technology - http://issuu.com/kmi_media_group/docs/mmt_16-2_final. In 2009 three VA Hospitals were targeted for inadequate sterilization of endoscopy equipment (Murfreesboro TN, Miami FL and Augusta GO). Patients tested positive for Hepatitis cross-contamination.

13 April 2012


Group purchasing organisations12 (GPOs) are also significant GEHC customers. Healthtrust Purchasing Group (HPG) has become the first GPO to approve Trophon EPR purchasing. HPG members include Hospital Corporation of America, Triad, HMA, Community Health Systems and Lifepoint, as well over 3,000 ambulatory surgery centres, physician offices and other medical centres.

US market size … could grow to an installed base of 25,000 units or more

Frost & Sullivan data indicates a global installed base of approximately 500,000 ultrasound machines. We estimate that the USA market has 150,000 ultrasound machines13 of which perhaps 85,000 to 100,000 are high-end multimodal platforms. GEHC had 27% overall market share in the USA in 200914. Alternatively, we estimate that GEHC’s installed base of multi-modal ultrasound machines is 20,000-25,000 machines. Large multimodal ultrasound systems cost US$100,000 to US$150,000 and are turned over, on average, every 6-7 years. Therefore, we estimate that GEHC sells 3,750 large systems per year. In addition to that, we estimate that GEHC sells approximately 6,500 smaller, dedicated ultrasound units into other specialist settings, 20% of which (1,300) are OB/GYN equipment (women’s specialist sonography, gynaecologist rooms, fertility clinics)15.

Other original equipment manufacturers (OEMs) like Philips, Siemens, SonoSite make up the non-GEHC 73% of ultrasound system sales. GEHC has the rights to sell Trophon into these OEMs as well, so the ultimate annual market for ultrasound machines in the USA (multimodal and specialised units), collectively, is probably more than 20,000 per annum across all OEMs.

We model a scenario where Trophons accompany a majority (80%) of specialist OB/GYN sales by GEHC, up to 60% of GEHC’s multi-modal ultrasound placements and 10% of sales into other specialities/applications. Outside the GEHC user base (other OEMs), we model lower rates of penetration. The results are set out in the Table below, which gives a sense of what annual ‘turnover’ volume of Trophons might be sustainable in the US market. The future installed base is difficult to gauge. In our modelling, we have Trophon placements ramping to an installed base of approximately 25,000 units by the end of FY18. If that proves to be the case, then by that time, 1 in 4 ultrasound machines in the US will have a Trophon unit attached to them.

Table 4: We estimate that the US ultrasound market could support a sustainable annual ‘replenishment’ volume of anywhere between 6,000 and 7,000 units. Our assumptions are set out below and anticipate that up to 44% of Trophon placements could go to OEMs other than GEHC.

GEHC units penetration Trophon unitsMultimodal ultrasound 1,300 80% 1,040 Specialist OB/GYN 3,750 60% 2,250 Other 5,200 10% 520 GEHC subtotal 3,810

Other OEMsMultimodal ultrasound 1,950 50% 975 Specialist OB/GYN 10,100 20% 2,020 Other 14,059 0% - OEM subtotal 2,995

Grand total 6,805 Source: WHTM Research

12 GPOs are entities that facilitate bulk purchasing on behalf of their members (or owners) who are typically hospitals and other healthcare providers – examples include MedAssets, Veira Medical Group, Amerinet, HealthTrust, GroupSource, MediGroup, Provista, Novation, HPS, HPSI, GNYHA Services, and Care Purchasing Services. 13 In 2006 Frost & Sullivan published Market insights into the global ultrasound market. 14 Millennium Research Group 15 See http://files.gecompany.com/gecom/investors/events/ge_healthcare_analyst_meeting_oct_20.pdf investor presentation, which estimated GEHC’s 2008 global ultrasound sales at US$1.9Bn. Over the period 2000-2008, GEHC’s product mix expanded from 7 products to 26. Average price fell from US$90K to US$57K as GEHC introduced more compact, lower priced ultrasound products.

13 April 2012


EU and other markets

Nanosonics accesses the European markets through GEHC (on a non-exclusive basis) and other 3rd party distributors. The 5EU countries (Germany, UK, Spain, Italy, France) represent approximately 20% of the world ultrasound by installed base. We model those markets simply by splitting them up on the basis of population. We model equivalent product economics to those under the GEHC/USA agreement.

Table 5: Current list of European partners and associated websites.

Country Partner Website Germany Kroner w w w .kroener-medical.deUK ManaTech w w w .mana-tech.comFrance E.D.M. w w w .edm-imaging.comItaly Med.Italia w w w .meditalia.netScandinavia Mermaid Medical w w w .mermaidmedical.dkPoland Trimed w w w .trimed.com.plRussia AVA MedicalSw itzerland Promedics w w w .promedics.chRomania Sanorama w w w .sanorama.roAustria Climed w w w .climed.atNorthern Ireland MDI Medical w w w .mdimedical.ie


Nanosonics to invest in European product support …

Sales in Europe have been relatively uneven since Trophon’s mid-2009 launch, in that progress has come in the form of one-off contract wins or similar. This is not unusual for a product of this type, which is itself, changing as Nanosonics gathers product feedback from its users and partners. For example, there was demand for an upgraded International 220V version; released last November in Europe (N20).

The company does recognise a need for additional product support in Europe, particularly around servicing, which often cannot be done adequately by third party distributors. This has been flagged as an area for future investment. Nanosonics has a small office presence office in Germany currently (Hamburg).

OEM relationships in Europe – future competitive tension …

GEHC is not the dominant ultrasound manufacturer in all European countries, where exclusive distribution rights remain available. Nor is there any apparent cohesion between the US and European GEHC branches, with respect to Trophon EPR. There are systems within GE that could foster better global co-ordination (GE’s Healtymagination programs) in the future.

Until that time, and while GEHC’s rights in Europe remain non-exclusive, it is in Nanosonics’ interests to promote Trophon aggressively to other OEMs in Europe both directly and via their partners. We do not expect to see any single OEM take a pan-European position. But it is quite possible that OEMs in large countries like Germany or UK could contemplate an exclusive arrangement.

13 April 2012


Rest of world (ROW) opportunities

Nanosonics’ most recent regulatory win was in India, a market with an installed base of c.42,000 ultrasound machines. No distributor has yet been appointed. Countries for which regulatory submissions are planned are listed below. The default commercialisation strategy would likely be via distributors. Although in special circumstances Nanosonics may contemplate building a direct presence. Chinese and Japanese submissions are planned for 2H 2012, but these countries can take 12-24 months to approve.

Table 6: Market access schedule for Trophon EPR.

In Market Tier 2 Tier 3Australia Argentina ChinaNew Zealand Brazil JapanUSA IndiaCanada Sub-Saharan AfricaEurope KoreaTurkey SingaporeIsrael / Middle East Taiw anHong Kong MexicoIndia Thailand

Vietnam Source: Nanosonics, WHTM Research

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APPENDIX C – Nanosonics Valuation Summary Our valuation of Nanosonics, at this stage, is based entirely on expected earnings from the global commercialisation of the Trophon EPR and its consumable Sonex-HL cartridges. We will add further products to the valuation as they obtain major market regulatory clearances and distribution arrangements. Trophon EPR – opportunity in ultrasound probe reprocessing Nanosonics illustrates the earnings potential by pointing to the following data points.

Global installed base of c.500,000 ultrasound machines; Approximately 20% of procedures are intra-cavity OB/GYN related; Ultrasound machines are a capital item, typically replaced every 4-5 years; Assuming an average of 5 cycles per day - >600M cycles, of which 20% probably

relate to OB/GYN. Table 7: Nanosonics estimates an c.A$300M revenue potential from the OB/GYN-related market for Trophon EPR.

Sales, A$M OB/GYN OtherTrophon EPR Device 133 531 Sonex-HL 148 741 Chemical Indicators 20 99 Carts, Mounts 5 20 Total 306 1,391


Nanosonics concludes that the OB/GYN segment of the ultrasound market represents c.$300M potential revenue stream. It also implies a maximum peak volume of c.25,000 device sales per year, globally. Basis for WHTM forecasts We do think it is reasonable to limit our short term focus to the OB/GYN market segment, where we note that GEHC has at least 40% market share in the USA. OB/GYN ultrasound is a mature market but is growing at 6-8% due to increased demand for early foetal imaging using transvaginal sonography. The average number of ultrasounds per pregnancy increased from 1.5 in the 1990s to 2.7 in 2006. More recent acceleration has come from an increase in assisted-fertility pregnancies, where transvaginal scans are required for follicle assessment, early detection of abnormalities; and as sophisticated ‘4D’ facial imaging technology has become available. The majority of GEHC’s OB/GYN ultrasound business is from high-end multimodal ultrasound consoles that provide for both external ‘surface ultrasound’ and transvaginal imaging. See http://www.gehealthcare.com/euen/ultrasound/products/ob-gyn/index.html for information regarding GEHC’s OB/GYN range. We estimate that GEHC sells c.10,250 ultrasound units (at varying levels of complexity and price points) per year into the US market. We estimate a saturation point of c.25,000 Trophons in the US, which would mean a Trophon is attached to approximately 1 in 4 ultrasound machines across that country. In an earlier section we calculated that the annual replenishment market could reach 6,000-7,000 Trophons in the USA; but we model at c.5000-5500 units per year given that we are still some years away from that level of business maturity. Globally, we model the Trophon installed base reaching c.50,000 units with an average replenishment market of c.10,000 devices – but it could be double that once more obscure markets (China, India, South America) are considered explicitly in the modelling. In the shorter term, Nanosonics’ manufacturing capacity is 6,000 units per annum. So our FY12 and FY13 projections are constrained with that in mind – FY12 production represents c.38% of capacity, rising to 68% capacity in FY13. We assume that extra capacity comes on line to support 7,100 device sales in FY14 and more than 10,000 in FY15.

13 April 2012


Figure 6: Anticipated geographic Trophon demand (annual) FY16E shows a Trophon replenishment market of over 10,000 units, annually. US is dominant – 67%.

6,200

150

150

1,350

1,500

700

US Aus, NZ Canada Japan Europe RoW


Table 8: Forecast Trophon EPR revenue to Nanosonics by HY FY12-15E.

1HFY12 2HFY12 1HFY13 2HFY13 1HFY14 2HFY14 1HFY15 2HFY15Trophon unit demand

US 450 600 800 1,000 1,250 1,500 2,500 3,000 Aus, NZ 250 250 250 250 75 75 75 75 Canada - 50 125 150 175 200 225 250 Japan - - - - 500 750 1,000 1,250 Russia 50 75 100 150 175 200 225 250 France 25 50 75 100 150 175 200 225 Germany 75 100 150 375 450 525 215 215 UK 30 80 100 200 240 320 360 400 RoW 78 150 100 151 200 152 300 153 Total 958 1,355 1,700 2,376 3,215 3,897 5,100 5,818

Consumable demandInstalled Trophon EPR base, units 889 2,045 3,573 5,611 8,406 11,962 16,461 21,920 Cycles/day/device 1.0 2.0 2.5 3.0 3.5 3.5 4.0 4.0 Cycles, M 0.1 0.5 1.1 2.1 3.7 5.2 8.2 11.0

Device Revenue 5.0 7.0 8.8 12.4 16.7 20.3 26.5 30.3 Consumable Revenue 0.1 0.5 1.2 2.3 4.0 5.6 8.8 11.8 Sale of Goods 5.1 7.6 10.0 14.6 20.7 25.9 35.4 42.0


Consumables revenue modelling

Every installed Trophon EPR provides an annuity earnings stream from the consumable hydrogen peroxide cartridges, sold as Sonex-HL. Revenue potential is therefore a function of both the installed device base and the number of cycles run per day. Utilisation varies widely depending on the application. As an example, Sydney IVF reports volumes of up to 12 cycles per day per machine. I-MED reports varying rates of 3-7 cycles per day per machine. Utilisation is likely to be low in centres new to the device and we would expect, in the longer term to observe an average utilisation rate of 5 cycles/device/day across the installed base.

In near term years we have downplayed our utilisation estimates, starting at 1-2 cycles in FY12, increasing to 2-3 cycles in FY13. We wanted to reflect the fact that there is a time lag between a device sale and the generation of the consumables stream (shipping, distribution, installation, training).

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Gross Profits

Recent financial results record a gross profit of c.62% but that lacks any differentiation between device and consumable. Our modelling is based on a 60% gross margin for the Trophon devices. Similar to other medical device manufacturers, Nanosonics is essentially does final assembly and cycle testing of the machines at their Alexandria facility. There may be opportunities in the future to engineer more costs out of device assembly, but we model a relatively fixed gross margin at this stage.

The consumables category also includes two products: the Sonex-HL hydrogen peroxide cartridges and the chemical indicator discs that tell an operator that a disinfection run has been successful. Sonex-HL cartridges retail for c.$100, providing 30-45 cycles (we assume $48 net to Nanosonics). Chemical indicator discs are sold in boxes of 300 – Nanosonics receives approximately 15 cents per run. For both products, we model Nanosonics’ gross profit at a fixed 80%.

Expenses

Nanosonics does not have a large cost base by biotech standards. We provide a summary of their P&L expenses from the last 3.5 financial years.

Table 9: Nanosonics expense item history FY09-12A.

Category 1HFY09 2HFY09 1HFY10 2HFY10 1HFY11 2HFY11 1HFY12Staff costs 2.56 2.54 2.31 2.62 2.99 3.78 3.65 Patents 0.09 0.12 0.15 0.11 0.14 0.39 0.15 Quality and regulatory 0.08 0.08 0.13 0.08 0.10 0.16 0.07 Business development 0.27 0.36 0.33 0.19 0.27 0.24 0.30 Rent and lease 0.37 0.67 0.64 0.80 0.70 1.33 0.72 Consultants 1.06 0.83 0.75 0.88 0.85 0.88 0.65 Other 0.72 0.55 0.44 0.17 1.00 1.42 0.90 Total 5.15 5.14 4.75 4.84 6.05 8.19 6.44 pcp change -8% -6% 27% 69% 6%


Given that most of the company’s selling is accomplished by partners and distributors, we see the operational costs as relatively stable. We do expect to see additional investment in supporting European commercialisation – but this would be less than $1M per year. Nanosonics must move into a larger manufacturing site before FY14 to satisfy our forecast Trophon demand. Their Alexandria facility now provides just under 2,500m2 space. We would expect to see the new place measure 4,000 to 5,500m2. Rent costs were c.$2M in FY11. We’ve increased rents in FY14 to about $3.5M and grow it at 4% annually, thereafter.

Cash flows

Nanosonics ended calendar 2011 with $9M in cash. On our forecasts, and assuming no further financings, Nanosonics would reach a cash low point of $4.1M by the end of FY13. That year is also forecast to deliver the company’s first positive EBITDA result, but one can see from Table that capital expenditure and working capital investment are such that positive free cash flows commence ion FY14, and then grow quite rapidly thanks to the high gross margins. We have made some modest provisions for working capital requirements but these of course could be higher, if GEHC elected to push more aggressively into the US market.

Table 10: Free cash flow forecasts FY12-15E

Cash flow FY12 FY13 FY14 FY15EBITDA $M (5.5) 0.8 13.4 33.1 Chg w orking capital $M (0.6) (1.6) (1.4) (2.0) Capex $M (0.7) (0.8) (0.8) (0.8) Tax $M - - - - FCFF $M (6.8) (1.6) 11.2 30.3


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Unrecognised revenues

We have not included any explicit forecasts for new products, such as the planned Trophon-equivalent for disinfecting other probes (eg transesophageal). Additionally, there are a couple of additional Trophon-related revenue streams we’ve ignored at this stage. Nanosonics does sell capital items such as stands and wall mounts for Trophon installation. Secondly, and perhaps more significantly, Nanosonics also offers service contracts to ANZ customers, for preventative maintenance. This business may extend to Europe in future years. Service contracts are priced at an average of c.$1,200 per year. We understand that the costs of delivering those services are c.$50 for parts and c.$400 for labour implying a gross profit of 60% or more. Third, Nanosonics will also launch software (c.$500/site) and dedicated printers (c.$800/unit) as Trophon peripherals.

Valuation approach - DCF

Discounted cash flow is the most appropriate tool to value Nanosonics given the company’s relatively simple product offering and clear guidance on margins. We have produced an explicit free cash flow forecast out to FY21. We treat FY22 as the terminal year and apply a 2.5% terminal growth rate, which we think captures both the perpetuity value of Trophon and future product opportunities from the NanoNebulant platform. We have selected 14% as the discount rate to apply; and this is consistent with our treatment of other medical device companies we cover, who are also at the early commercialisation phase.

Table 11: DCF summary for Nanosonics valuation. FY13 FY14 FY15 FY16 FY17 FY22

FCFF -$1.6 $11.2 $30.3 $27.2 $33.3 $36Cumulative WACC 1.14 1.30 1.48 1.69 1.93 3.25

PV of FCFF -$1.4 $8.6 $20.4 $16.1 $17.3 $290Terminal Value

NAN Valuation InputsPV of FCFF = 118$ Beta 1.333

PV of Terminal Value = 89$ Risk-free 6.00%

Value of Operating Assets of the f irm = 207$ Risk premium 6.00%

Less net debt -$ WACC 14.00%

Value of Equity = 207$ Tg 2.50%

Value of Equity per share = 0.90$

12MPT 1.02$


We value Nanosonics at an EV of $207M, which is a 64% premium to its current market capitalisation of $126M. The share price is reflecting two major concerns, in our view. Firstly, Trophon is at a very early stage in its commercial life, and the market only has a handful of data points from which to forecast sales and market size. We are comfortable with the opportunity size, based on our work, but the market will need to see 2 or three consecutive quarters of positive revenue growth to build trust in the product. Second, that the cash position is too low for a company that finds itself entering the foothills of a major US launch. A concern is that if GEHC elects to push aggressively into the US ultrasound market, does Nanosonics have the cash to keep up with GEHC? This concern around capital raising is exacerbated by the company’s current share price. If we were to factor in a capital raising to our valuation, it would be small (no more than $10M), entirely justified (given the scope of the opportunity) and largely irrelevant to the investment view (perhaps a 10% dilutive impact).

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APPENDIX D – Market Feedback We interviewed 10 sites in Australia and New Zealand, who have been using Trophon for between 1-4 years in routine clinical practice. The respondents were selected from general radiology, specialist OB/GYN radiology and reproductive medicine settings. Our conversations with users addressed the current status of industry disinfection practices, Trophon/Sonex pricing, device reliability, advantages and disadvantages.

Industry practice – Australia has both national and state based recommendations for processing specific medical device items, including ultrasound transducers16. Intracavity ultrasound transducers (probes) are categorised as Class IIb, semi-critical reusable instruments requiring high-level instrument grade disinfection.

Figure 7: Recommendations for reprocessing critical and semi-critical devices.

Source: Department of Health and Ageing.

Further to those recommendations, the Australian Sonographers Association17 (ASA) says that only chemicals registered with the Therapeutic Goods Administration (TGA) are to be used:

Glutaraldehyde (almost never used, these days); Ortho-phtalaldehyde (ie Cidex OPA (most commonly used because it gives off less

vapour; Hydrogen peroxide, used with the Trophon EPR (TGA approved 19/2/2009).

Respondents pointed out that at the moment, the majority of radiology practices in Australia are non- or poorly compliant with both ASA and Department of Health recommendations. Non-compliant practices are either using sporicidal wipes18, Milton tablets (sodium hypochlorite), Virkon (a potassium peroxymonosulphate19 solution). Cidex is widely used in Australia and New Zealand (although some public hospitals have banned it on WH&S grounds).

16 There are two national standards: AS/NZS 4187-2003 Cleaning, disinfecting and sterilizing reusable medical and surgical instruments and equipment and maintenance of associated environments in health care facilities. Secondly, see Infection control guidelines for the prevention of transmission of infectious diseases in the health care setting, Department of Health, Australia 2004, Chpt.17.pp Available at: http://www.health.gov.au/internet/main/publishing.nsf/Content/icg-guidelines-index.htm 17 See www.a-s-a.com.au 18 For example Tristel – a chlorine dioxide based wipe system marketed for cleaning invasive ultrasound probes. These wipes are expensive – up to $9/cycle. 19 Neither Milton or Virkon are TGA approved for high level disinfection.

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Pricing – at c.$12,000 per unit, this is not seen as a significant capital budgeting item. One large Australian radiology network we spoke to say their ultrasound capex budget is nearly $2M (14-16 ultrasound systems annually), to put the Trophon purchases in context. Customers report consumables pricing of between $2 and $4 per cycle. It appears Sonex-HL pricing is generally higher in Australia (compared to New Zealand). Utilisation rates are also a key factor – high throughput places report 40-45 cycles/cartridge and are not bothered by pricing. Low volume sites report higher per cycle costs and consider that too high. Top 3 Advantages of Trophon EPR: 1. Superior to alternatives on safety/regulatory grounds – glutaraldehyde based

systems are ‘hated’. Miltons was widely used (very cheap) but now that TGA has turned against that product, it is rapidly being abandoned. Some respondents thought that the Australian radiology system will be reviewed at some point and that poor compliance could and should prompt tougher regulations on high level disinfection for these ‘semi-critical’ devices.

2. Point of care convenience – although most general radiology clinics still have a centralised room for equipment reprocessing, some practitioners have opted to install Trophons next to the Ultrasound machine, in their rooms. Transvaginal ultrasound transducers cost between $30,000 and $50,000 to replace. Respondents saw value in keeping probes in the rooms and avoiding transporting delicate instruments from room to room.

3. Peace of mind – most reported poor record keeping with glutaraldehyde-based systems (operators often lose track of how long probes have been immersed). Users like the indicator discs and hard-wired data/cycle storage that confirmation successful decontamination.

Top 3 Critiques: Cycle time – the seven minute cycle time was seen by some as too long. This

comment came from a more specialised women’s health radiology clinic whose workload was dominated by consultations requiring full pelvic scans. Practitioners in general radiology clinics saw seven minutes as attractive, in the context of a standard 25 minute ultrasound appointment.

Many respondents expressed a view that they would like to see a Trophon unit that could process 2-3 probes at a time, “even if it ends up being the size of a dishwasher and was more expensive” in the words of one respondent.

Consumables pricing – some thought that Sonex-HL peroxide cartridges are too expensive, but this type of response came from bulk billing sites with low volumes. Reaction to consumable price was also a function of what the practice was doing before they installed their Trophons. Bulk fluid disinfection (Miltons, glutaraldehyde) is perceived as cheap; whereas sporicidal wipes are clearly more expensive. Our sense is that if the maintenance and equipment costs of glutaraldehyde systems were considered (fume hoods, filters, ventilation), then Trophon consumables pricing would be cost effective.

Reliability – two longer term users (3-4 years across multiple sites) did report early problems with device reliability (2009 through 2011), although they confirmed that no problems had been experienced for 6-9 months or more. None of the NZ respondents we spoke to shared this experience – all reported excellent reliability.

13 April 2012


APPENDIX E – INTELLECTUAL PROPERTY We searched USPTO20 and WIPO21 databases and found 14 patent families. We have not conducted any formal patentability, validity or freedom to operate analyses of Nanosonics’ patent portfolio. We provide a listing and summary of the patent families, along with estimated US expiry dates, assuming they proceed to grant22.

Table 12: Selected patent families from Nanosonics’ intellectual property portfolio Patent Family Patent Refs US Expiry Date* Invention

Improved Aerosol AU application 2006275317

4-Aug, 202623

An ultrafine mist to disinfect and sterilise, including the process of vapour removal and controlled humidity.

Membrane concentrator US application 11/997886

4-Aug, 2026 Use of a gas permeable membrane to concentrate nebulant vapours.

Membrane vapour concentrator US application 12/525658

31-Jan, 2028 A vapour biocide concentrator incorporating a semi-permeable membrane.

Space disinfection US application 11/997878

4-Aug, 2026 Method of volume and surface disinfection which concentrates the nebulant droplets by applying energy.

Prion disinfection24 US Application

10/467591

14-Apr, 2030 Provides combinations of enzymes capable of disinfecting surfaces contaminated with prions, achieving 4-log reductions in less than 60 minutes, at fewer than 60 degrees Celsius.

Membrane Sterilisation US application 11/997850

4-Aug, 2006 Enclosing an article in a chamber featuring a semi-permeable membrane and introducing a biocide for sufficient time such to sterilise or disinfect the article.

Sub-cycle based aerosol disinfection system

US application 13/000496

30-Jun, 2029 Sterilisation of objects within a chamber using a mist of hydrogen peroxide.

Quaternary ammonium compounds (QACs)

US application 11/631904

5-Jul, 2025 High level disinfection of a surface using at leas 1% (w/w) solutions of QACs.

Aerosol Sensor US application 13/002003

30-Jun, 2029 Method and apparatus for the measurement of aerosol for the purposes of certifying sterilisation

Improved Disinfection AU Granted patent 741580

22-Jun 2019 Aerosol disinfection using liquid disinfectant combined with surfactant

Safe Chemical Delivery System US application 13/001762

Jun-30 2029 Method and apparatus for safe handling of chemical consumables.

Nebuliser Manifold US application 13/059050

15-Aug, 2028 A manifold for improving aerosol properties and flow in a chamber.

Decontamination Aerosol US application 13/321796

22-May 2009 priority date

Self-neutralising aerosols

Liquid Level Sensor Provisional application 2011902486

24-June 2011 priority date

Sensor for detecting liquid peroxy chemicals

Source : WHTM Research

20 US Patent and Trademark Office 21 World Intellectual Property Organisation 22 WHTM estimates. US patent term is generally 20 years from US application filing date. Patent term extensions of up to 5 years can be obtained under 35 U.S.C. 154(b). 23 US 6,310,072 has no patent term extension under 35 U.S.C. 154(b) 24 Nanosonics has a royalty-free licence to this patent application.

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APPENDIX F – BOARD AND MANAGEMENT

BOARD Maurie Stang, Non-executive Chairman: Mr Stang was Executive Director and Chairman of Nanosonics Limited from 14 November 2000 to March 2007. He has been Non-Executive Director and Chairman since March 2007. Mr Stang co-founded and is a director of a number of leading healthcare distribution and biotechnology companies. His business activities and experience span the successful commercialisation of intellectual property across global markets. He has a track record of launching and commercialising a broad range of medical and dental devices worldwide. Ron Weinberger, Executive Director and CEO: Dr Weinberger has executive responsibility for all of Nanosonics' discovery and development programs, including the portfolio of intellectual property. Dr Weinberger joined Nanosonics in August 2004 and has over 20 years' experience in the medical research and biotechnology arena. He has proven experience in negotiating, developing, designing and managing large scale R&D programs with a strong commercial perspective. Dr Weinberger is co-inventor of several of the key technology patents that underpin the proprietary Nanosonics process as well as platform technology patents in the diagnosis of bacterial infections. Dr Weinberger is qualified with a BSc (Hons) degree in pharmacology and a PhD degree in medical biochemistry and he has authored over 50 peer-reviewed and invited manuscripts. Richard England, Non-executive Director: Mr England is a Chartered Accountant and professional non-executive director. He has over 30 years experience in accounting and financial services. He is currently Chairman of Ruralco Holdings Limited (ASX:RHL) and Chandler Macleod Group Limited (ASX:CMG). David Fisher, Non-executive Director: Dr Fisher has over 25 years' experience, including substantial operating experience in the biotechnology and healthcare industry in Australia and overseas. He held senior positions with Pharmacia AB in Sweden and was CEO in Australia of Peptech Limited. He is Managing Director of Brandon Capital Management Pty Ltd, a venture capital provider and investor in Nanosonics. He is also a director of Australian Biomedical Fund No 1 Ltd, Australian Biomedical Fund No 2 Ltd, and Australian Biotechnology and Healthcare Fund No 3 Ltd.

MANAGEMENT McGregor Grant, CFO: Mr Grant joined Nanosonics in April 2011 and is responsible for the overall financial management of the Company and, together with Dr Weinberger, has joint responsibility for investor relations. Mr Grant has over 15 years of business experience in a number of senior roles in the medical device and healthcare industries located in Australia and the United States. Previously Mr Grant worked for Coopers & Lybrand in Australia and Europe. Michael Potas, Head of Research: Mr Potas joined Nanosonics in August 2006 and has more than 16 years’ experience in the development and commercialisation of new products and technologies. Mr Potas has been instrumental in the research, design & development of the Trophon EPR & associated core intellectual property. Gerard Putt, Head of Manufacturing: Mr Putt joined Nanosonics full time in April 2011 after 18 months on the Nanosonics advisory board. Mr Putt has over 12 years’ experience in the Medical Device industry as a leader of development, engineering and production teams at ResMed. As Head of Manufacturing at ResMed, Mr Putt acquired particular experience in the implementation of new products into manufacturing and rapid scaling of production to international market needs. Mr Putt has a strong background in medical device GMP, project management, engineering and entrepreneurial roles in medical, retail and building. Ruth Cremin, Head of Regulatory Affairs: Ms Cremin joined Nanosonics in June 2011 and has extensive regulatory affairs experience, having worked at Cochlear for over 4 years as a Senior Regulatory Affairs Specialist for the ANZ and Asia Pacific Regions. Prior to this role, Ms Cremin worked at Pfizer Australia as a QA & Regulatory Officer for 4 years and was also a Regulatory Affairs Associate with Bio-Medical Research Ltd in Galway, Ireland. Lisa Springer, Head of Business Operations: Dr Springer joined Nanosonics in 2010 and is responsible for managing all aspects of Nanosonics’ expansion globally. Dr Springer was most recently the Principal and founder of Maia Partners, a corporate consultancy firm and previously held senior positions with ALZA Corporation, PricewaterhouseCoopers and Wilson HTM Investment Group. Dr. Springer holds several board seats and is a member of the Commonwealth Government Tax Concession Committee.

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Nanosonics LTD (NAN : $0.52) INVESTMENT FUNDAMENTALS Yr Ending June 2010A 2011A 2012E 2013E 2014EEPS Reported (c) -4.2 -4.8 -2.6 0.1 5.6EPS Normalised (c) -4.2 -4.8 -2.6 0.1 5.6EPS Growth (%) N/A -15.8% 46.0% 104.2% 4,990.9PER Normalised (x) -13.2 -15.7 -19.9 472.7 9.3DPS (c) 0.0 0.0 0.0 0.0 0.0Payout (%) 0.0% 0.0% 0.0% 0.0% 0.0%Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%Franking (%) 0% 0% 0%

VALUATION DATA Yr Ending June 2010A 2011A 2012E 2013E 2014EEV / EBITA (x) -10.8 -13.3 -17.9 1,288.3 8.3EV / EBITDA (x) -11.6 -14.5 -21.0 146.4 7.8CFPS (c) -3.5 -3.9 -2.6 -0.3 5.4Price / CF -15.6 -19.6 -19.8 -185.7 9.7Book Value / Share ($) 0.1 0.1 0.0 0.0 0.1Price / Book (x) 5.3 12.0 14.1 13.6 5.5

PROFIT & LOSS ($m) Yr Ending June 2010A 2011A 2012E 2013E 2014ESales Revenue 0.7 2.2 12.7 24.7 46.6EBITDA -9.2 -11.3 -5.5 0.8 13.4Depreciation 0.6 1.0 1.0 0.7 0.8EBITA -9.8 -12.3 -6.4 0.1 12.6Amortisation 0.0 0.0 0.0 0.0 0.0EBIT -9.8 -12.3 -6.4 0.1 12.6Net Interest Expense -0.6 -1.1 -0.4 -0.2 -0.3Pre-tax Profit -9.2 -11.2 -6.0 0.3 12.9Tax 0.0 0.0 0.0 0.0 0.0Tax rate (%) 0.0% 0.0% 0.0% 0.0% 0.0%Minorities / pref divs 0.0 0.0 0.0 0.0 0.0Equity accounted NPAT 0.0 0.0 0.0 0.0 0.0Net Profit -9.2 -11.2 -6.0 0.3 12.9Abn’s / Extraord’s 0.0 0.0 0.0 0.0 0.0Reported Net Profit -9.2 -11.2 -6.0 0.3 12.9 Revenue Growth (%) N/A 200.4% 464.2% 94.5% 88.8%EBIT Growth (%) N/A -24.7% 47.5% 101.3% 14,573.3NPAT Growth (%) N/A -22.1% 46.4% 104.2% 4,971.8

PROFITABILITY RATIOS Yr Ending June 2010A 2011A 2012E 2013E 2014EEBIT / Sales (%) - -545.8% -50.8% 0.3% 27.1%ROA (%) N/A -294.8% -130.7% 1.2% 111.0%ROE (%) N/A -59.3% -52.5% 2.9% 84.8%ROFE (%) N/A -555.2% -258.6% 2.4% 236.8%

INTERIMS ($m) Half Yr Dec 10 Jun 11 Dec 11 Jun 12 Dec 12Yr Ending June 1H A 2H A 1H A 2H E 1H ESales Revenue 1.4 0.9 5.1 7.6 10.0EBIT -5.1 -7.1 -3.3 -3.1 -0.9Net Profit -4.5 -6.7 -3.0 -3.0 -0.8EBIT / Sales (%) -374.0% -814.8% -64.8% -41.3% -9.2%

BALANCE SHEET ($m) Yr Ending June 2010A 2011A 2012E 2013E 2014E

Cash 21.1 12.4 5.6 4.2 15.7Receivables 0.5 0.9 1.6 2.5 4.5Inventories 1.6 1.6 1.8 3.0 5.4Other 0.2 0.2 0.3 2.0 2.1Current Assets 23.4 15.1 9.3 11.8 27.7Net PPE 1.3 1.5 1.3 1.4 1.4Investments 0.0 0.0 0.0 0.0 0.0Intangibles 0.2 0.1 0.0 0.0 0.0Other 0.1 0.1 0.2 0.2 0.2Non-current Assets 1.6 1.8 1.6 1.6 1.6Total Assets 24.9 16.9 10.9 13.4 29.3 Current Payables 1.0 1.8 1.6 3.8 6.8Current Debt 0.0 0.0 0.0 0.0 0.0Non-Current Debt 0.0 0.0 0.0 0.0 0.0Provisions 0.4 0.8 0.7 0.7 0.7Other 0.0 0.0 0.0 0.0 0.0Total Liabilities 1.4 2.5 2.4 4.6 7.6 Equity 56.6 58.1 58.2 58.2 58.2Reserves 0.9 1.2 1.4 1.4 1.4Retained Profits -33.9 -45.0 -51.0 -50.8 -37.8Minorities 0.0 0.0 0.0 0.0 0.0Total Equity 23.6 14.3 8.5 8.8 21.7 Total Funds Employed 2.4 2.0 3.0 4.6 6.0 LIQUIDITY & LEVERAGE RATIOS Yr Ending June 2010A 2011A 2012E 2013E 2014ENet Debt (Cash) ($m) -21.1 -12.4 -5.6 -4.1 -15.7Net Debt / Equity (%) -89.6% -86.2% -65.2% -47.1% -72.3%Interest Cover (x) 15.6 11.7 15.6 -0.5 -40.2Debt / CashFlow (x) 0.0 0.0 0.0 0.0 0.0 CASHFLOW ($m) Yr Ending June 2010A 2011A 2012E 2013E 2014EEBIT -9.8 -12.3 -6.4 0.1 12.6Dep’n and Amort’n 0.6 1.0 1.0 0.7 0.8Net Int Rec’d (Paid) 0.6 1.1 0.5 0.2 0.3Tax Paid 0.0 0.0 0.0 0.0 0.0Dec / (Inc) W’kg Cap 0.0 -0.5 -2.3 -1.6 -1.4Other 0.8 1.7 1.2 0.0 0.0Operating Cash Flow -7.8 -9.0 -6.0 -0.7 12.3 Capital Expenditure -0.2 -1.2 -0.7 -0.8 -0.8Asset Sales 0.0 0.0 0.0 0.0 0.0Investments 0.2 0.0 0.0 0.0 0.0Other Inv. Flows 0.0 0.0 0.0 0.0 0.0Investing Cash Flow 0.0 -1.2 -0.7 -0.8 -0.8 Equity Raised 15.2 1.4 0.0 0.0 0.0Inc / (Dec) in Loans 0.0 0.0 0.0 0.0 0.0

Dividends Paid 0.0 0.0 0.0 0.0 0.0

Other Fin. Flows -0.6 0.0 0.0 0.0 0.0Financing Cash Flow 14.6 1.4 0.1 0.0 0.0 Net Cash Flow 6.8 -8.8 -6.7 -1.4 11.6

13 April 2012


Recommendation Structure BUY: Total return +10% or more over a 12 month period HOLD: Total return expected to be between +10% to -10% over a 12-month period SELL: Total return expected to be -10% or more over a 12 month period TOTAL RETURN OR TSR = capital growth in share price + expected dividend yield in that period Other definitions CS Coverage Suspended. Wilson HTM Ltd has suspended coverage of this company. NR Not Rated. The recommendation has been suspended temporarily. Such suspension is in line with Wilson HTM Investment Group Ltd policies in circumstances where Wilson HTM Corporate Finance Ltd is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations. Disclaimer Whilst Wilson HTM Ltd believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. To the extent permitted by law Wilson HTM Ltd disclaims all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information. Any projections contained in this communication are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Wilson HTM Ltd and therefore may not be realised in the future. The advice contained in this document is general advice. It has been prepared without taking account of any person’s objectives, financial situation or needs and because of that, any person should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs. Those acting upon such information without first consulting one of Wilson HTM Ltd investment advisors do so entirely at their own risk. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. If the advice relates to the acquisition, or possible acquisition, of a particular financial product – the client should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product. This communication is not to be disclosed in whole or part or used by any other party without Wilson HTM Ltd's prior written consent. Disclosure of Interest. Nanosonics Limited The Directors of Wilson HTM Ltd advise that at the date of this report they and their associates have relevant interests in Nanosonics Limited. They also advise that Wilson HTM Ltd and Wilson HTM Corporate Finance Ltd A.B.N. 65 057 547 323 and their associates have received and may receive commissions or fees from Nanosonics Limited in relation to advice or dealings in securities. Some or all of Wilson HTM Ltd authorised representatives may be remunerated wholly or partly by way of commission. In producing research reports, members of Wilson HTM Ltd Research may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Wilson HTM Ltd considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. Wilson HTM Investment Group Ltd is a substantial securities holder of Nanosonics Limited (NAN). Regulatory Disclosures Wilson HTM Corporate Finance Ltd acted as Lead Manager and underwriter for the December 2009 placement and advisor in relation to the share purchase plan by Nanosonics Limited and earned fees for acting in this capacity. Wilson HTM Investment Group Ltd and its related bodies corporate trades or may trade as principal in the securities that are subject of the research report. Wilson HTM Corporate Finance Ltd has received compensation for corporate advisory services from this company, its subsidiaries or affiliates during the previous 12 months.

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13 april 2012 so many germs; so little · 2017-05-19 · so many germs; so little time healthcare...

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