Is Nanosonics the next ASX healthcare blue-chip?

The Nanosonics Limited (ASX:NAN) share price has soared in 2019, trading at all-time highs. Is it the next blue-chip healthcare share on the ASX 200?

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The Nanosonics Ltd. (ASX: NAN) share price closed Monday's trading session at an all-time high of $5.36. Nanosonics is among the top 10 gainers for the S&P/ASX 200 (INDEXASX: XJO) index, with its share price soaring more than 80% in 2019. A sticky business model, growing market, and product innovation could see Nanosonics well poised for future growth and perhaps become Australia's next healthcare blue chip.

Blue-chip potential

CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) are heralded among long term investors as two of the most rewarding companies on the ASX. Both companies have provided sustainable long-term growth and continued innovation has seen them become global leaders in their respective fields. As a supplier of sterilisation equipment to hospitals, Nanosonics shares similar characteristics to the two healthcare giants and could potentially follow in their footsteps.

Nanosonics was founded in 2000 and is a global provider of sterilisation devices to hospitals and healthcare centres. The company's flagship Trophon device sterilises ultrasound probes without the use of chemicals and sells for more than $10,000. The Nanosonics business model also generates revenue from its 'consumable' components which are patented, protecting Nanosonics from being undercut by competitors. Many investors and analysts have high hopes for Nanosonics, given the company's sticky business model, dual revenue streams, and large addressable market.

Solid results

Earlier this year, Nanosonics delivered a strong half-year report, highlighted by a 221% increase in net profit of $7.1 million and record first-half sales revenue of $40.7 million. Sales of Trophon devices increased 11% and contributed $16.4 million to revenue, while recurring consumables and services were up 59%, generating $24.3 million in revenue.

Fundamentally, Nanosonics looks in good financial health with an expected earnings growth of 48% and a 64% revenue growth, indicating that earnings are driven by high-margin products. The cash balance of Nanosonics grew to $71.3 million in the first half, indicating excellent debt management and opening the potential for further research and product development.

Global and product expansion

Like Cochlear's hearing implants, Nanosonics products are sticky in the sense that hospitals and healthcare centres are unlikely to stop using the devices once they are installed. A lucrative sales agreement with the General Electric Company (NYSE: GE) has allowed Nanosonics to gain 40% of the market share in the United States. Nanosonics aims to develop a global growth strategy as more markets develop, with the company already identifying Europe and Japan as the next regions of growth.  

In addition to further expansion, Nanosonics also intends to dominate the infection prevention sector by investing heavily in research and development. The company looks to grow its product pipeline to address infection prevention not only in hospital settings, but also in dentistry and aged care facilities. Nanosonics aims to develop products that not only kill bacteria, but also collect data that ensures traceability and compliance of infection control standards

Foolish takeaway

As a company with a $1.3 billion market capitalisation and profits less than $10 million, Nanosonics is a long way from the likes of CSL and Cochlear. However, it does share similar characteristics, which could see the company develop into something special.

With its chief executive being the former vice president of global marketing at Cochlear, Nanosonics is poised to execute its global strategy. Equipped with strong fundamentals and a business model that fuels recurring revenue, Nanosonics can take advantage of its market opportunity by continuing research and development to further enhance its product pipeline.

Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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