Should you buy, hold or sell Pro Medicus shares?

Pro Medicus Limited (ASX:PME) is an Australian incorporated and domiciled company, listed on the ASX with subsidiaries in Europe and North America. It develops and supplies healthcare imaging software and services to hospitals and diagnostic imaging groups in Australia, the United States, and Europe.

Pro Medicus was founded in Australia in 1983, and targeted the US market seven or eight years ago, in a move that has been very successful.

With the development of its new software ten years ago, Pro Medicus quickly became a market leader and dominated market share and is well placed to continue to expand its services into hospitals and medical groups.

The company is led by the original co-founders. Sam Hupert has been the chief executive officer and managing director at Pro Medicus Limited since October 2010 and has a 25% ownership stake in the business.

His co-founder Anthony Hall is technology director & executive director and also has a 25% ownership stake in the business.

This large ownership stake means the key executives' interests are well aligned with that of shareholders.

What it does

PME is a leading imaging IT provider, delivering services and solutions to hospitals, imaging centres and healthcare groups worldwide. It has developed software that repackages imaging for radiology, delivering it in a fast and efficient way.

Its Visage 7 software solves many of the problems with the legacy systems that dominate the market. Most of these were largely built in the early 2000s and don't have the capability to handle the continuously increasing size of the files. Today larger file size imaging modalities (CT, MRI, Breast Tomosynthesis) are becoming increasingly common. For example, the file size of higher density CT, breast tomosynthesis (x ray to scan for early signs of breast cancer) is increasing from 300-500 megabytes to 6-10 gigabytes.

This "data explosion" is driving a need for scalable storage solutions - and healthcare providers are transitioning to Enterprise Imaging. Visage 7 has a lot of advantages in this environment.

It is a healthcare imaging software that provides radiologists and clinicians with advanced visualisation capability for rapidly viewing 2D, 3D and 4D medical images, Picture Archive and Communication System (PACS)/Digital Imaging software that is sold directly and to original equipment manufacturers (OEM), training, installation and professional services and support products. It offers:

• Speed: Time saved for simple scans like an x-ray is immaterial, but for complex studies like MRI or PET/CT can see tens of minutes saved. If a radiologist is scrolling through different slices of an MRI scan, delays can slow them down and impact the quality of their analysis.
• Functionality: Works with various types of images - 2D, 3D, 4D and doesn't require a third-party application to view multi-dimensional images
• Scalability: Single viewing platform that can be integrated into third party PACS and most widely developed electronic health records. Works irrespective of user location. You can be at home, in the hospital, at a café etc. 

We are in a medical environment where radiologists are expensive and are going to be in short supply over the next ten years. The lag time loading traditional files results in lost time for radiologists, which can be frustrating and impact analysis. In addition, radiologists are expensive - salaries in the US average US$424,000 - and over the next ten years we're going to have a significant shortage of radiologists.  As this trend continues, PME's offering becomes more attractive.

Strategy

In the old days you had to take physical radiology images from one place to another. These days it is all computerised, but there is so much data in imaging that is time consuming to send. Ten years ago, PME created new technology that streams the data. Instead of saving it as a file, it uploads everything into cloud. With this technology the radiologist can undertake a scan, open it in real time, and assess the disease in real time.

This technology was so good that the company was able to grow market share very quickly. But there is still ample opportunity to increase market share. We anticipate its market share will go from less than 5% today to 20% in ten years' time given its new technology solves a lot of problems.

PME has been winning business against traditional players in the market and taking share from the likes of Phillips and GE. To date, 100% of contracts that have come up for renewal have been renewed.

It has an innovative revenue model, where it takes a percentage of every image, and it is also growing in other areas, such as artificial intelligence (AI).

Returns

PME's share price has gone up more than nine-fold in the past five years. We expect it to double in the next three years, with an average compounded growth rate of more than 30% per annum.

Recommendation

We rate Pro Medicus as a buy. It is one of the highest quality companies in our market.

Its earnings are quite predictable as the volume of demand for imaging is very predictable from one year to another. It has seen a good growth trajectory over past few decades and this should continue into the future.

The growth is underpinned by the entrenched nature of its software once it is adopted by medical facilities, as well as the opportunities that exist to leverage its AI capabilities in the future.

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