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Pro Medicus Has The X-Ray Factor

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The Pro Medicus Visage system allows doctors to instantly upload and manipulate radiology images (including onto iPads and iPhones) to give instant diagnoses.

Melbourne-based medical IT (or eHealth) company Pro Medicus Limited (PME) is on quite a roll. The stock has doubled over the course of 2014, from 70 cents to $1.40, as it makes inroads into the US market and grows its customer base.

Over five years, Pro Medicus, has generated an OK total return (capital growth plus dividends), of 10.2% a year. But it has really got cracking in the recent past, powering up to 56.9% a year over the last three years and 77.5% over the past 12 months, to reach its current market capitalisation of $110 million.

What has changed this year is profitability. In the recent financial year, Pro Medicus lifted revenue by 27%, to $14.4 million, and made a profit from underlying operations of $1.6 million, compared to a loss of $650,000 in the previous year. Most notable, though, was the 2-cent fully franked dividend Pro Medicus paid for the year.

The result reflects the huge strides Pro Medicus has made over 2013 and 2014 with its image-storage and distribution technology called Visage. The Visage system allows doctors to instantly upload and manipulate radiology images (including onto iPads and iPhones) to give instant diagnoses. Some of these files are 4 gigabytes in size (the size of a movie), so they cannot be uploaded to mobile devices using standard technology. The Visage technology crunches very large files into 3D images that can be streamed remotely.

These strides have been made in North America. In May 2013. Pro Medicus announced a five-year agreement with Virtual Radiologic (vRad), one the world’s largest radiology groups, to use the Visage 7 Enterprise Imaging Platform. vRad, whose more than 400 radiologists read 7 million radiology studies annually, has implemented Visage 7 as a central component of its technology platform, which is focused on delivering a real-time, ‘read anywhere, read anytime’ environment.

This allows vRad to control when and by whom studies are read from anywhere within its owned partner radiology groups (both in-hospital and offsite), as well as their vast tele-radiology network. vRad uses Visage 7 to rapidly stream even the largest radiology cases to the most appropriate radiologist for interpretation, while also providing the most comprehensive clinical tools available.

The vRad deal was followed in October 2013 by the signing of another US contract, this time with VISN23, a large regional veterans affairs network servicing more than 400,000 US military veterans. The five-year, US$4 million contract will see VISN23 use Visage 7 for both diagnostic and clinical (referrer) distribution in all the radiology facilities covered by the network.

The vRad contract contributed only a little revenue in the first half, but more in the second half. Pro Medicus also got its first tranche of revenue from the VISN23 contract in the second half. North American revenue rose 85%, $5.31 million. US earnings did not match that rate of growth, because the intellectual property (IP) for all of Pro Medicus’ products is owned by the Australian entity, so the company’s cost of doing business in the US includes royalties paid back to Australia. Going forward, PME expects earnings in the US business to increase as revenues grow, and the operating cost base decreases as a proportion of revenue.

Then, in April 2014, Pro Medicus signed the biggest deal in its history, a $20 million contract with a large US health network that will utilise Pro Medicus’ Visage 7 technology for diagnosis and distribution of medical images, over a six-year period commencing in FY2015. Pro Medicus won this contract against big competition, including global heavyweights Siemens, GE and Phillips. Revenue from the contract will start in the current half and will build as the company rolls out the product to more sites around the network. Given the contract is transaction based, PME will not see the full impact of revenue from transactions until the roll-out is complete, which is scheduled for the first half of FY2016.

Pro Medicus co-founder and chief executive officer Sam Hupert says the US is the company’s most buoyant market in terms of the number and size of opportunities with which it is actively engaged. The US is not just one market, it is multiple markets, from large enterprise health players and health systems, to the private imaging centre market and the corporate remote reading or tele-radiology groups like vRad. Hupert says there are are opportunities for Pro Medicus in all of those markets, because its product is well suited to their various needs: he says PME “really can address the whole spectrum of radiology businesses,” and not just a part of it, as is the case with its competitors.

One of the major drivers of potential growth is the fact that data sizes in radiology are exploding, with the advent of new processes such as Digital Breast Tomosynthesis (DBT. It common for a single DBT examination to produce up to 8 Gigabytes of data: Visage can handle that.

The other major driver is that large medical network customers are increasingly looking for the best products in their class for various parts of their enterprise systems, rather than buying the entire system from a single vendor. This “deconstructed” market helps Pro Medicus.

As well as Visage, Pro Medicus offers a range of products designed for use by radiologists, physicians and surgeons, GPs and health professionals, including radiology information systems (RISs) and picture archiving communication systems (PACS), plus a suite of services centred on the company's product offerings to provide a seamless, scaleable, fully integrated IT environment for health care professionals, to enhance workflow and increase business efficiency.

Pro Medicus listed in 2000, but the technology was mainly used for business management, and the scheduling of X-rays. The company realised radiology was moving from film to digital, so it teamed up with Agfa in 2002, combining its informatics side with Agfa’s clinical side.

The company’s big break came in 2009, after the global financial crisis, when it saw the opportunity to pick up the Visage three-dimensional imaging technology cheaply, from a US company that needed to raise cash in a hurry.

In FY14 the Australian business produced a 12% rise in revenue, to $6.15 million, and came back to profitability at an EBIT (earnings before interest and tax) level, reporting EBIT of $1.18 million versus a loss of $740,000 in FY13, while European revenue was unchanged at $2.81 million, producing EBIT of $730,000 for the year, up from $340,000 the year before. However, operating cash flow for Europe was negative $2.87 million, a deterioration from negative $1.57 million in the previous year. Europe is the R&D base for Visage, so the cash flow of the European business reflects the company’s R&D spending on Visage.

Pro Medicus is a stock in which it would take awhile to build up a meaningful holding, given that average daily trading is worth less than $5,000. But as it makes further inroads into the market – particularly in the United States – this company is likely to pick up a lot more interest. Providing software applications and IT solutions and services to the private healthcare industry is the exactly the kind of market space that is poised to grow, given the ageing populations in developed countries (even China) and the associated locked-in increases in health spending going forward – there is pressure on every part of the healthcare system to be more efficient. Pro Medicus enables exactly that.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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