Pro Medicus Projects Strong Outlook

This story features PRO MEDICUS LIMITED. For more info SHARE ANALYSIS: PME

-Unique high speed technology
-Long-term recurring revenue
-Strong US market potential
 

By Eva Brocklehurst

Pro Medicus ((PME)) is at the forefront of new medical technology, harnessed to provide detailed scans at high speed to the medical fraternity in hospitals and radiology clinics.

Over $60m in minimum contracted revenue is currently envisaged by Moelis over the next five years. The broker's base case assumes volumes will be 20% higher than the minimum contracted. A 1.5c dividend is expected in the second half, taking the total to 3.0c for FY16. Dividends are currently unfranked but full franking is considered likely within the next 18 months as more Australian tax is paid.

Moelis takes up coverage with a Buy rating and $3.61 target, assuming more contracts will be won with hospital and radiology practices over the medium term and volumes from existing customers will remain over and above contracted minimums.

The company is a medical software developer, providing imaging and practice management software in North America, Australia and Europe. The medical imaging segment is 80% of sale and enables up to 4D, including x-ray, CT, MRI, PET scans that can be digitally streamed to desktop or mobile devices for diagnosis. Practice management software caters to radiology groups in Australia and Canada.

The unique technology delivers speedier images to the customer. There is a large problem for hospitals and clinicians in that IT networks struggle to manage the data loads. Pro Medicus technology enables the digital streaming without sacrificing image quality and takes seconds as opposed to competitor offerings which take minutes.

The company has long-term recurring revenue streams with upside potential through 5-7 year contract terms. The relatively high fixed cost base and scalable software platform means each new contract allows for incremental margin expansion. Moelis notes this is in evidence through earnings margins almost doubling to 30% in FY16. The broker expects earnings margins to grow to almost 40% by end FY18.

Meanwhile, the US imaging market is valued at US$2bn a year and growing at a 10% compound rate. The company's software is leveraged to the features that underpin this market, such as regulatory requirements for hospitals to have electronic medical records, including digital images, or face lower government and/or insurer reimbursements.

Demographics such as an ageing population and growth in remote diagnoses also underpin the business. Electronic medical records will be mandatory in the US by 2018. Another highlight, noted by Moelis, is that digital imaging is a less invasive method of diagnosis and can reduce medical risks – in turn providing a digital record for legal risk mitigation.

The company was listed on ASX in 2000 and expanded imaging software in 2009 when it acquired US-based Visage Imaging. At this stage the company has less than 1.0% market share in the US. There are no direct listed competitors but a number of listed conglomerates focus on imaging equipment in the hardware market while there are some private and niche operators primarily in North America.

Risks? Moelis notes increased competition is one. Major investment in software development by competitors may affect the company’s future earnings profile. The major hardware competitors are large well-funded firms such as Siemens, Fuji and Philips, which presently focus on capital equipment given its higher value and larger market size relative to software.

The other risk is that some of the customers receive funding from government and changes to regulation may impact on the business. For example the Australian government recently made changes to limit bulk billing for digital imaging which impacts radiology clinics. Although Pro Medicus has fixed contracts with radiology clinics in Australia it may face future re-tendering for practice software.

A significant portion of the revenue is also derived in the US so exchange rates may affect the reported Australian dollar value, while a portion of R&D costs are also in Europe. The company has a number of registered and pending patents and has taken measure to secure its rights in terms of intellectual property.
 

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