The FY18 forecast of $96m requires AZV to achieve greater than...

The FY18 forecast of $96m requires AZV to achieve greater than 50% US market share and would need to displace the largest four vendors in this space (Rauland Borg, Ascom, Hill-Rom and SimplexGrinnell) to achieve this objective.

US based Nurse Call Systems are substantially more sophisticated than their international peer group (This is true of any comparison with non-US Nurse Call vendors and not specific to AZV).

This is a result of the US spending 16.9% of GDP in healthcare, versus the OECD average of 9.3% - simply put: US healthcare invests substantially greater amounts in hospital technologies than the rest of the world, so all healthcare technologies tend to be considerably more advanced (there are exceptions in pockets of technologies, but nursecall is not one of these exceptions).

Please find enclosed my comments for your consideration:

REVENUE

1. The US Nurse Call market (“Markets & Markets” 2013 Report) is worth $USD112.5m in 2011, moving to $USD175m by 2015 (Approx. $USD160m in 2014).

2. There are approx. 3m Hospital & LTC beds in the US and the average upgrade time for the nurse call buttons is around 15 years – so around 200,000 beds annually (this works out to around $800 per bed, in line with industry averages).

3. The same report states that the Global Nurse Call market is growing at 11.7% CARG (until 2015).

4. The largest Nurse Call competitor in the United States is Rauland Borg, who generated an estimated $USD187m of revenues last year with 48% being attributed towards nurse call ($USD89m). Rauland Borg is the global “gold” standard in Nurse Call.

5. Rauland Borg claim between 48% and 60% of the North American market share (which places the market size at between $USD148m and $USD185m, which concurs with "Market & Markets" report. Please reference (http://www.arcomsys.com/nursecallProductSolutions.php).

6. The second largest player is (was) Telligence (previously Dukane), with revenues of $USD20m (Teligence was acquired by Ascom for $USD22m). Depending on how the market is measured, one could argue that Hill-Rom or SimplexGrinnell should be in second place (Depending on installed base of current sales).

7. There are at least 70 manufacturers of nurse call systems globally, major US players include: Rauland Borg, Ascom, Hill-Rom, SimplexGrinnell, Critical Alert Systems, West-Com, Jeron and TekTone. AZV is one of the manufacturers grappling for market share of a $USD160m market.

GROSS PROFIT

1. I note that AZV stated that they had listed with the FDA earlier this year.

2. I would consider the potential impact of the 2.3% Medical Devices (Introduced in the Patient Care & Protection Act) and consider this in the context of the impact to Gross Profit.

3. I would consider the ongoing cost of implementing and maintaining the QSR 820 quality system (manufacturing, insurances, increased staff overheads), as required by the FDA for the regulation of medical devices.

4. I would consider the impact (both potential upside and potential downside) of the AUD/USD Fx.

5. I would consider the impact of the level of Product Development required for an Australian Nurse Call vendor to compete within the United States and to maintain a competitive product.

CAPITALIZATION OF R&D

1. The capitalization of intangible assets is governed by the Australian Accounting Standards (AASB 138).

2. In order for R&D Assets to be capitalized under AASB 138 they must meet certain specific criteria (for example; they must have value over multiple financial years).

3. There are different definitions for R&D, depending upon the context. Management may have one definition of R&D (for example; A company may need to conduct a lot of R&D for a specific project, so whilst this may be defined as Research & Development, it would not meet the AASB 138 requirements to capitalize the expense).

4. AZV Annual Report indicated the company invested $AUD2.6m into Product Research & Development.

5. Ascom Wireless Solutions state 19% of their revenues are derived from Nurse Call (which results in around $USD60m), coupled with their investment into clinical middleware and wireless telephony, Ascom are the single largest player in this space.

6. Ascom invests 8.7% of revenues into R&D (around $AUD31m annually - Ascom spends as much on R&D as AZV has in revenues). I would consider the relative weight of investments into R&D of the nursecall peer group to determine which product has the higher likelihood of technologically being superior and meeting customer requirements.

I trust the above assists you in your analysis.

Based upon the Ascom acquisition of Telligence, Marketing Capitization of Ascom and associated transactions this places a value of 16c-18c.