Business Strategy & Outlook

Pro Medicus’ strategy revolves around renewing existing contracts and winning new clients for its main product, Visage 7, while increasing its price point. The company won six out of six major public tenders it competed for in fiscal 2021, which often involved on-site pilot tests. While this likely highlights Visage 7’s current superior speed, scalability, and resilience, continued investment in R&D is imperative for the firm to remain at the forefront of innovation and consistently win contracts. Most of the firm’s expenses are allocated to over 40 software engineers with the main R&D center located in Berlin. The company also recently extended its R&D capability in New York in collaboration with NYU Langone Health in 2021. Its R&D efforts mostly revolve around software enhancements, program extensions, and research in artificial intelligence to assist in diagnosis. Many of Pro Medicus’ competitors already utilize server-side rendering and cloud-native architecture. Legacy systems are also mostly owned by larger competitors such as GE Healthcare, Fujifilm, and Phillips that will be incentivised by the high returns in the industry. In Australia, Sectra won a AUD 85 million 13-year deal over Pro Medicus with NSW Health for both its Radiology Information System, or RIS, and Picture Archiving Communications System, or PACS, in 2020. 

Visage 7 has found most success with U.S. academic hospitals and in fiscal 2022 was in nine out of the top 20 ranked U.S. hospitals, more than double its nearest competitor. While Pro Medicus has secured a few contracts with mid market U.S. hospitals such as Alleghany and Wellspan, wider uptake has been slow with Visage 7’s features likely superfluous for their normal operations. However, Pro Medicus is still targeting smaller radiology groups that seek to consolidate IT infrastructure and become more efficient. Currently, Visage 7 is limited to radiology departments, but Pro Medicus is aiming to extend the product set to other specialty departments including cardiology and ophthalmology. In addition, when winning contracts, the firm has other product offerings such as Open Archive or Visage RIS that it can cross-sell to clients.

Financial Strengths

Pro Medicus is in a strong financial position. As of June 2022, Pro Medicus had AUD 91 million in net cash, and the company is forecasted to continue holding net cash over the explicit 10-year forecast period. Despite having low capital intensity, net cash provides the firm with additional flexibility to pursue organic or acquisitive growth opportunities. Pro Medicus’ free cash flow generation is strong, with free cash flow prior to acquisitions and dividends averaging 93% of net income over the last five years. Free cash flow conversion is anticipated to remain relatively constant at 93% on average over the next 10 years. On this basis the company is expected to comfortably maintain a 50% dividend payout ratio, which is broadly consistent with the historical average.

Bulls Say

• Pro Medicus is well positioned to benefit from industry tailwinds such as cloud adoption, larger datasets, and remote access. 
• Earnings are extremely defensive due to contracted revenue being largely guaranteed over five to eight years from customers. 
• The long-term growth opportunity is significant as most of the U.S. market still uses legacy systems and other geographies are largely untapped.

Company Description

Pro Medicus is a healthcare IT company specializing in radiology imaging software. Its main product, Visage 7, is a clinical desktop application that radiologists use to view, enhance, and manipulate images from any device and make a diagnosis. Its main customers are U.S. private academic hospitals. In fiscal 2022, Pro Medicus earned 79% of revenue in North America, 16% from Australia, and the remaining 6% in Europe.

(Source: Morningstar)

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