Nanosonics : Appendix 4D and Half Year Report

20 February 2017

Company Announcements Office Australian Securities Exchange

• First half sales of $36.1 million, up 33% on prior half ($27.2 million) and up 132% on prior corresponding period ($15.6 million).
• Operating profit before tax of $10.3 million, up 203% on prior half ($3.4 million) and compares with an operating loss of $3.2 million in prior corresponding period.
• Free cash flow for the half year of $8.2 million, up 19% on prior half ($6.9 million) and compares with negative free cash flow of $5.0 million in the prior corresponding period.
• Cash reserve of $56.9 million, maintains strong balance sheet to support growth strategy.
• All regions contributing to growth with strong sales in North America continuing.
• Managed Equipment Service (MES) model gaining traction in the United Kingdom.
• Nanosonics Canada direct operations established and direct selling commenced in second half.
• Preparations for further geographical expansion continued with distribution negotiations taking place in Japan and Middle East.
• R&D activities associated with our product portfolio expansion and multigenerational trophon program are progressing well with increased investment made in the half.

Nanosonics (ASX: NAN), a leader in infection control solutions, today announced its Appendix 4D Half Yearly Report for the half year ending 31 December 2016.

1. A detailed explanation of the income tax benefit recorded in period is provided in note 3 of the accompanying Interim Consolidated Financial Report.

   Nanosonics Limited ABN 11 095 076 896 14 Mars Road, Lane Cove NSW 2066 Australia

   Tel: +61 2 8063 1600 Fax: +61 2 8063 1600 Email:info@nanosonics.com.au w:www.nanosonics.com.au

   FY17 first half sales of $36.1 million were up 33% compared with FY16 second half sales of $27.2 million and were up 132% on prior corresponding period sales of $15.6 million. In constant currency terms i.e. current period sales calculated using the average exchange rate of the comparative periods, FY17 first half sales were up 36% compared with second half FY16 and 142% compared with first half FY16.

   The increase in sales revenue in the first half reflects:

   • Continuing strong adoption of trophon in North America, driven by the Nanosonics direct sales team together with the Company's distribution partner, GE Healthcare. The total installed base grew by over 2,000 units in the first half, taking the total North American installed base to over 10,700 units as at the end of December;

   • Increasing revenue from consumables and service associated with a global installed base that grew to over 12,300 units during the period; and

   • GE Healthcare building its inventory of trophon units from a low level at the beginning of the half to meet its safety stock requirements. It is anticipated that current safety stock levels will be maintained throughout the second half.

     Gross profit increased to $26.3 million compared with $19.5 million in the prior half and $12.6 million in the prior corresponding period. Gross margin as a percent of sales was 73% compared with 72% in the prior half.

     Operating expenses grew to $17.2 million for the half. This growth reflects an increased investment in R&D as Nanosonics continues to develop its 2ndgeneration of the trophon technology as well as new products as part of its overall portfolio expansion strategy. Increased investment was also made in sales and marketing activities, mainly to support sales growth in North America and market expansion activities in Europe and other markets. This increase was offset by increased recoveries of direct and indirect labour and overhead of $1.3 million associated with the increased production volumes in the first half.

     Operating profit before tax was $10.3 million compared with a profit of $3.4 in the prior half and an operating loss of $3.2 million in the prior corresponding period.

     Following an assessment of Nanosonics' operations it has been determined that it is probable that taxable profits will be generated against which carried forward tax losses and tax credits will be utilised. As a result, previously unrecognised deferred tax assets in relation to the Australian entities were recognised as a non-current asset. Accordingly, the Company recorded a net income tax benefit for the period of $11.7 million. Taking this into account, net profit after income tax for the half year was $22.0 million.

     Free cash flow for the half year was $8.2 million, up 19% on prior half of $6.9 million. Cash as at 31 December 2017 totalled $56.9 million providing a strong balance sheet for the Company to continue executing on its strategic growth agenda.

     REGIONAL REVIEW North America

     Strong adoption of the trophon technology continued in North America during the half where the installed base grew by over 2,000 units resulting in a total North American Installed base of over 10,700 units. Significant investment in market awareness and educational activities were made and continue through both Nanosonics' direct sales team as well as GE Healthcare. The fundamentals for adoption remain strong, despite an element of uncertainty currently surrounding healthcare policy reform. Further investments in growth across all market segments are planned in the 2ndhalf as we continue to work to establish trophon as standard of care.

     During the period, Nanosonics also established its direct operations in Canada with sales staff now in place. Whilst the product is approved and available in Canada a specific licence was required to be obtained by Nanosonics' 3rdparty logistics provider to distribute the Sonex consumable. This licence has recently been granted and direct sales operations will commence this quarter.

     Europe

     In Europe, market development activities continued during the half with a number of important achievements and advancements made which will be built on during the second half.

     United Kingdom

     In the UK, the group focussed on building its direct sales and service operation as a result of new Scottish and pending English guidelines as well as the introduction of our Managed Equipment Service (MES) model.

   • By the end of December, six of the fourteen Scottish NHS trusts had commenced adoption of trophon, following a series of educational and awareness activities undertaken by Nanosonics post the release of the new Scottish guidelines;

   • Despite the delay in the publication of the expected new English guidelines, a number of the largest NHS trusts in England have commenced the adoption of trophon due to the superior efficacy and benefits it brings over current reprocessing techniques;

   • The Managed Equipment Service business model (MES) in the UK, which is designed to help overcome NHS capital budget constraints, is gaining traction with the majority of trophon placements coming under this model in the half. Although the MES model results in capital revenue not being recognised upfront, the model is beneficial for both the customer and Nanosonics.

     In France and Germany, a major focus has been on market development to strengthen the fundamentals for adoption of the trophon technology. This included numerous awareness initiatives, publications as well as consultation with key infection prevention societies and authorities. A number of important developments progressed during the period which has positive implications in strengthening the fundamentals for adoption of trophon moving forward. These developments include:

     Germany

   • A revised agreement was put in place between the health insurance funds and the National Association of Statutory Health Insurance Physicians whereby its members must decontaminate ultrasound probes in accordance with the guidance provided by the ultrasound probe OEMs. The guidance by the Ultrasound OEM's must in turn be supported by expert report on the virucidal, bactericidal and fungicidal efficacy of the decontamination process;

   • In December 2016, the first official statement by DGKH (German Hospital Hygiene Society) on ultrasound reprocessing was made. This statement reinforced the guidelines of the commission for hospital hygiene and infection prevention at the Robert-Koch-Institute (RKI) and the Federal Institute for Drugs and Medical Devices (BfArM). The DGKH stated that Ultrasound Probe OEMs must prove efficacy of their recommended decontamination process by expert report. It also stated that if multiple procedures are available then the safest one, usually automated, should be chosen and the chosen process, including manual processes if chosen (e.g. using wipes) must be validated and documented.

     France

     • Since 2008, the High Council of Public Health (HCSP) has permitted Low Level Disinfection (LLD) as an alternative for the reprocessing of intracavity probes provided certain conditions were met, including the use of a probe cover and stringent visual inspections of the probe cover and probe for contamination after use.

     • In the first half of FY17, the Ministry of Health (MOH) issued a new statement where LLD remains an acceptable alternative, however strict compliance with the stringent visual inspection requirements of the probe after use plus more strict hygiene processes are now required and will be regularly audited. The MOH also recognised that LLD and Intermediate Level Disinfection (ILD) do not work on HPV with the Ministry of Health calling for additional studies on the risk of the presence of HPV on ultrasound probes plus the risk of cross contamination. The MOH also commissioned an audit of current intracavity ultrasound probe reprocessing practices in the medical community;

     • In addition a report from the High Council of Public Health now states that an HLD solution should be permanently available in every facility performing intracavity ultrasound examinations and that such solution should be effective against native HPV;

Market development efforts through awareness and education activities with both the clinical community and the ultrasound manufactures will continue in Germany and France in the 2ndhalf ensuring the necessary market segments are made aware of the new developments in ultrasound probe reprocessing.

Adoption of trophon continued during the half in Australia and New Zealand off an already high installed base. Australia is a good example of the ability of trophon to become standard of care when relevant guidelines are in place requiring high level disinfection. It is expected these guidelines will be further reinforced through the release of a new joint guideline between the Australian Society of Ultrasound in Medicine (ASUM) and the Australasian College for Infection Prevention and Control (ACIPC) which we anticipate will further reinforce the importance and requirement of high level disinfection across all semi-critical ultrasound device procedures.

The market commercialisation and distribution strategy for Japan progressed positively during the half. The trophon technology will be demonstrated at the forthcoming annual meeting of the Japanese Society of Infection Prevention and Control (JSIPC) in Kobe in February and at the Japanese Society of Obstetrics and Gynaecology (JSOG) in April.

In the Middle East, registrations are now in place in Saudi Arabia, Kuwait, Qatar and the United Arab Emirates and our distribution strategies for entry into those markets are expected to progress in the second half.

"These excellent first half results in both sales and operating profit as well as the advances in our market development activities demonstrate the ongoing commitment to the execution of our strategic growth plan, said Michael Kavanagh, Nanosonics' Chief Executive Officer and President. "The fundamentals for adoption remain strong in North America where there is still a large opportunity for further growth and importantly these fundamentals are beginning to be replicated in other markets around the world through new guidelines and directives being developed and introduced.