The emergence of Pro Medicus: How did the company grow sans external funding

Summary

• Pro Medicus stock has gained over 4,6000%, from once trading at 50 cents per share to ~$24 per share, at present.
• PME’s Radiology platform Visage 7 has been the catalyst for the success of the Company, which allows medical images to be accessed anywhere with low data.
• The Company’s revenue from operations stood at $29.3 million for the first half of FY20 ended 31 December 2019, up by 15.7% on pcp with cash reserves of $38.8 million, up 20.2%.
• Last month, PME inked a 5-year agreement worth $22 million with NHMC (Northwestern Memorial HealthCare) for the Company’s technology Visage 7 implementation at NHMC, beginning Q1 FY21 period.

Pro Medicus Limited (ASX:PME) is engaged in the development and supply of radiology software, as well as IT solutions to the public and private health sectors. The stock has been growing at a robust rate over the last few years due to rising demand for its offering from several leading healthcare institutions.

However, the shares of Pro Medicus have given a negative return of 8.8% between $26.46 on 30 June to $24.12 on 30 July.

Given the stock market volatility induced by coronavirus, discovering high-quality stocks is more important than ever, which implies investing in stable and successful companies with solid balance sheets. Such entities can survive external pressures and deliver incredible income year after year. Pro Medicus can fall under the category of such robust stocks.

There was a time when PME was one of the small-cap companies, trading at 50 cents per share. In the present time, it has closed the trading session, on 31 July at $23.92 per share, depicting an increase of over 4,600%.

This raises a question on how the Company managed to grow in a sector where others fail or are bought before they achieve their full potential. The impetus behind it was the popularity of its radiology app, Visage 7 that provides exposure to medical photos everywhere, and with low data requirements. The success of PME is exclusive because it has grown without raising any capital.

Pro Medicus’s journey since 1983

Dr Hupert and Anthony Hall founded Pro Medicus in 1983, investing all the money and equity in the initial years. Pro Medicus concentrated in the beginning on encouraging medical practices do business more effortlessly, by aiding them maintain clinical records and handle building along with scheduling. It also evolved to allow patients to obtain their radiology diagnostic results faster.

PME was listed on ASX in 2000 and witnessed a slow and steady journey, with early wins in Australia. The Company entered the North American market in 2004 through a licensing deal with digital imaging conglomerate Agfa, but PME parted ways with Agfa by 2007. Eventually, PME bought a company named Visage Imaging from Mercury systems.

Pro Medicus started to take off in 2013 as it secured numerous high-profile clients in the US and announced a 6-year deal worth $20 million, with an extensive US health network.

The US market makes up for most of the revenues, although PME also has business in Australia. The Company and the market have more capacity to grow with more deals in the US and to expand in Europe. However, Artificial intelligence (AI) is on the edge of destroying the market as it will become mainstream, especially in radiology.

Highlights of interim results

In February, PME released HY2020 report for the six months ended 31 December 2019. Pro Medicus has been able to grow due to its brilliant financials, which involves the following:

• Revenue from operations stood at $29.3 million, rising up by 15.7%.
• Underlying profit before tax stood at $14.8 million, surging up by 45.3% on pcp.
• Tax expense for the first half stood at $2.75 million, reflecting a tax rate of 18.6%.
• Cash reserves increased by $6.529 million to $38.844 million at the end of December 2019, in spite of a growth of $1.052 million in dividend payout, $1.393 rise increase in tax payments, and more significant investment in R&D for 6 months.

Source: ASX

The Company kept on making sturdy inroads into the North American market winning significant contracts with Ohio State University ($9 million 5-year deal), a large multi-disciplinary academic medical centre in Columbus, Ohio; and Nines ($6 million 5-year contracts), a Palo Alto-based teleradiology business.

It plans to build further on its presence in the North American market. The half year period was also noteworthy for the successful accomplishment of Phase 1 of the Partners Health rollout, which included Boston’s 2 largest hospital systems in Mass Gen and BWH.

Strong pipeline of PME

CEO of Pro Medicus, Sam Hupert stated that all numbers moved in the right direction. The revenue in 2018 was outstripped by over 15% even after considering $3 million one-off capital sale from the previous period.

Excluding the capital sale in HY19, the underlying revenue growth figure stood at 39.1% due to significant step-up in our transaction revenue, which grew by 30% compared to the previous 6-month period. He also added that PME’s pipeline remains strong and persistent in growth.

As per a trading update dated 1 June, PME announced that its 100% owned US subsidiary, Visage Imaging, Inc., inked a five-year contract worth $22 million with Northwestern Memorial HealthCare in Chicago. The contract, which is based on a transaction-based licensing model, would see the Company’s Visage 7 technology implemented at NMHC, which would begin in Q1 FY21.

PME received positive feedback on both its new Visage 7 Worklist and AI Accelerator platform. Pro Medicus has a robust channel in terms of quantity and quality of opportunities, which was also strengthened by Radiological Society of North America (RSNA) annual conference held in Chicago in December 2019, joined by 60k delegates.