Yes, there are a number of bio stocks that look very toppy -...

Yes, there are a number of bio stocks that look very toppy - e.g. medical devices companies such as COH and RMD, which makes me wonder if it's just people fleeing the carnage in the resources sector and looking for a place to park some of their money.

However, while NAN has to grow a lot to justify its share price - I think the defensive qualities of its product as a printer and consumables model provides more protection than other medical devices companies whose business model can be more easily devastated by competition.

Once NAN gets a trophon unit into a healthcare site - I can't see the circumstances in which healthcare sites would not want to replace the trophon at the end of its five year replacement cycle. Once people see how easy it is to use, and most critically - the time they save - why would they want to go back to the inconvenient time consuming process of washing and disposing of hazardous chemicals?

NAN gets a stable income from existing installed units through consumables which significantly derisks the stock and for the moment, when the time comes to replacing the trophon, there does not seem to be anyone else that is even on the same playing field as an alternative to compete with NAN which makes a huge difference in terms of risk. The only alternative is going back to the dark age method of hazardous chemicals.

This is unlike other medical devices companies such as RMD and COH which are continually exposed to the threat of competition as consumers need to replace or update their devices, and to which there are alternatives.

Yes, competition may arrive at some point, but I'm not aware of anyone else even playing in this space... for now.

Also, you have probably already seen this, but for those that haven't I found this example from an investor presentation from nanosonics very useful:



The gross margins on this are huge.

Extract from RBS Morgans report on Nanosonics dated 31 July 2013:

"Trophon is marketed to customers with an attractive upfront cost which is
augmented by a recurring high-margin consumable revenue stream (the
hydrogen peroxide cleaning agent) necessary for end use. As such on-going
revenues are expected to be very predictable once the installed user base
matures. The installed base is forecast to be 3,000 units by June 3013." (I believe they meant June 2013).

"The company also derives revenues from the sales of accessories; stands,
printers and software; and also from an annual maintenance revenue stream.
Figure 4 sets out the life-cycle of the revenue with the initial Year 1 revenue
estimated at A$16.1m and over a four life total revenue of A$30.1m with an
average gross margin of 81%. So by some simple maths the current installed
based has and will generate revenue of A$90.3m over four years. On the
annuity stream from this installed base, A$14.1m is estimated to be earned in
FY 14 and FY15, which underpins the current consensus forecasts."