PuriflOH to challenge Nanosonics?

Apart from PuriflOH there is only one medical equipment disinfection stock on the ASX. That stock is $NAN/Nanosonics.

In one sense PuriflOH and Nanosonics are similar – they’re both targeting global medical sterilization markets.

But in share market terms, they’re very different.

NAN’s market cap is $1.37b. PO3’s market cap is $113m.

On Friday, $NAN closed at a record high of $4.56 in a frenzied market – there were 3850 trades. $POH closed at $3.60, in a non-frenzied market. There were zero trades.

Trophon disinfection technology is different to the FRG/Free Radical Generator tech soon to be deployed by PuriflOH.

But the technologies both involve application of fine mists. And they achieve a similar result. They destroy pathogens.

Run by ex-$COH/Cochlear VP Global Marketing, Michael Kavanagh, Sydney-based Nanosonics makes equipment to disinfect the surfaces and intra cavities of ultrasound probes.

Its key product, trophon 2, features nano-nebulant technology – probes are disinfected in a special chamber by a mist of very fine, nebulized droplets of concentrated hydrogen peroxide.

Trophon 2, sells for ~$US7000. Main distributor is GE Healthcare.

While trophon hardware is a money earner, NAN actually derives more revenue from selling trophon-related cartridges, wipes and other consumables for an annual average of ~$2500 per device.

As holders of PuriflOH, we can learn much from Nanosonics.

The group has some 200 employees, derives 90% of revenue from the US and claims 43% of the US ultrasound probe disinfection market.

It’s grossing $27m from US capital equipment sales and $45m from consumable sales. Average gross margin is ~75%. Average consumables margin is ~90%.

Earlier this month – on March 8 – broker Bell Potter posted an updated research note on NAN.

Bell Potter senior analyst John Hester: “Nanosonics is a standout Australian company which has developed and commercialized the Trophon – a device invented for the purpose of point of care infection control in the hospital or clinical setting.

“The Trophon provides high level disinfection (HLD) of sensitive medical instruments (that are not suitable for high temperature sterilization) with the first application in sonography probes targeting obstetrics and gynaecology patients.

“The Trophon is the most significant innovation in patient and operator safety (in relation to sonography) since the invention of the ultrasound.

“The efficacy of the device in killing pathogens…is unquestionable and has been proven in clinical studies and backed up by broad adoption by the most prestigious hospitals across Australia and the United States.”

Question: If NAN’s trophon can kill bugs on ultrasound probes, can PO3’s FRG kill bugs on ultrasound probes?

From FRG BlueMist efficacy information published by PuriflOH and its Detroit-based Somnio Global affiliate, the answer would have to be an emphatic Yes.

On March 8, Bell Potter raised its price target from NAN price target from $3.00 to $3.56…and reaffirmed a recommendation that clients sell the stock.

Why? “The half year update contained no new information on prospective product launches”, Bell Potter says.

“The future value of the R&D ($15m pa) remains highly contentious.

“The risk surrounding these product launches remains high and is a key driver of our Sell Recommendation.”

But here’s the thing: While Bell Potter has reservations about launch of new products - almost certainly related to medical instrument disinfection - it still places a valuation on the new products.

That value is ~$300m.

“…we attribute a value of between $270m to $337m for new product(s) representing between 22% to 27% of Enterprise Value.”, Bell Potter says.

While there’s no public evidence that Bell Potter has done research on PuriflOH, the broker’s work in the medical disinfection space may have relevance to PuriflOH.

PuriflOH expects two thirds of its revenue to come from the medical sterilization sector.

Indeed, PuriflOH is a “med-tech”. Its ability to purify air and clean water gets most publicity but medical disruption will be the key to the group attaining behemoth/unicorn status.

Given the ability of PO3’s tech to completely destroy medical bugs, there may be a case for applying Bell Potter disinfection equipment valuation protocols to PO3.

Right now, PuriflOH has 31m shares on issue.

Bell Potter’s ~$300m for NAN’s unidentified new disinfection products computes to a PO3 equivalent of about $10 a share.

As I’ve recently posted, sums done by Beer & Co analyst Pieter Bruinstroop point to a valuation of $13 a share for PO3’s room surface sterilization tech alone.

This $13 valuation makes no allowance for the FRG tech to be deployed against bugs affecting a wide range of medical instruments…including ultrasound probes.

I would suggest there’s a case for combining Bell Potter’s valuation equivalent of ~$10 a share for medical instrument sterilization with Beer & Co’s valuation equivalent of ~$13 a share for medical room sterilization.

The result? ~$23 a share.