Pro Medicus, A Global Software Super Star

This story features PRO MEDICUS LIMITED, and other companies. For more info SHARE ANALYSIS: PME

Pro Medicus’ growth story is far from over. How should investors deal with the valuation challenge of one of Australia’s premium growth companies?

-The Pro Medicus services offering
-Future growth prospects
-What makes the Pro Medicus moat so strong?
-Analysts’ thoughts on Pro Medicus

By Danielle Ecuyer

The Pro Medicus conundrum for investors

Pro Medicus ((PME)) may be one of Australia’s top export stories and a winner for investors with the share price up 170% over the last year, but it’s the valuation that seemingly remains an eternal challenge.

Arguably, the latter comment looks laughable when observing FNArena’s consensus FY25 price-to-earnings multiple of 250x. Even looking out to FY26, as the current fiscal year is halfway through, the price-to-earnings ratio only shrinks to 170x.

If you’re left scratching your head in disbelief, you are not Robinson Crusoe, as even the die-hard momentum followers are probably choking on their espressos.

So, what gives? What makes Pro Medicus so different to other healthcare services providers?

Arguably, this is the nub of the issue: is Pro Medicus a technology, growth or healthcare company?

Morgan Stanley has taken the challenge head-on, initiating coverage with a new approach on how investors could consider assessing the company, with Goldman Sachs not far behind.

Both brokers proclaim Pro Medicus is a long-term technology growth story with network effects and structural tailwinds. Investors better not compare it to Healius, Pacific Smiles, Ramsay Health Care or Genetic Signatures and the like.

What does Pro Medicus do?

Founded in 1983, the company has evolved into an industry leader in the US radiology imaging software industry with its Visage product and service offering.

Visage offers radiologists streaming technology, permitting immediate access to images with easy viewing and the ability to manipulate the images without waiting for a heavy file to load.

Advanced visualisation of images is referred to as Picture, Archive, and Communication System or PACS, otherwise known as digital imaging software. A PACS system facilitates the transport of private patient medical imaging information, obviating the need for manual file storage and transportation.

Simply put, patient images can be stored, accessed, assessed, and manipulated for immediate use by radiologists and healthcare professionals.

The PACS systems can be on-premise within a healthcare facility via hardware, including servers and workstations, or run remotely via cloud computing services. Pro Medicus offers both.

Pro Medicus’ Visage product comes in three sub-products, as explained by Morgan Stanley:

-Visage 7 is a single integrated desktop system that can achieve functions formerly requiring multiple independent systems across 3D and 4D visual functionality.

-Visage 7 Open Archive is a flexible, powerful, and scalable system for storing and managing medical images. It is designed to work well with various other systems and technologies and can be employed on different brands and types of equipment.

-Visage 7 Workflow simplifies the process of organising and managing imaging tasks, helping users work more efficiently within the same platform.

Looking to the future

Morgan Stanley estimates the total addressable cloud-based PACS market for radiology at around US$1.6bn and cloud-based PACS for cardiology at US$0.4bn, with a high probability for the US$2.2bn on-premise PACS market to be disrupted over time.

The total addressable market is currently worth US$4.2bn today, and projected to grow at an 8% compound average growth rate to 2030 to an estimated value of US$6.5bn. 

Including cardiology, which Pro Medicus is now offering, the scope for cloud-based PACS to grow lifts to around 10-12% on a compound annual basis.

The implications for Pro Medicus are broad reaching, with multiple growth drivers. 

Recent major contract wins, such as Trinity Health and Langone Health, suggest the company’s technology offers a leading competitive edge.

In the latter case, Citi highlighted recently the contract upgrade included an extension and a willingness to take on Visage’s two sub-products, Archive and Worklist. The broker explains most recent contract wins have included all three products or a “full-stack” for Visage.

Trinity Healthcare is referred to as an IDN or integrated delivery network, jargon for an organisation that owns and operates a network of healthcare facilities such as hospitals, physician groups, clinics, ambulatory surgery centres, and imaging centres. The goal of an IDN is to provide coordinated and comprehensive care to patients by integrating various healthcare services under one umbrella.

Pro Medicus’ recent US$330m Trinity Health contract set a new record for the company. Trinity is a top 5 US IDN, which has the potential to underpin network effects across other IDNs, representing over 40% of the total addressable market for Pro Medicus, according to Goldman Sachs.

This broker believes Visage has over 8% market share of US radiology volumes, and out of the top 25 IDNs, only four are using Visage.

Key competitive advantages

Morgan Stanley’s discussions with industry sources suggest Visage is around 60-70% faster than legacy PACS, allowing for greater efficiency and volumes growing two to three times faster than the system. Over the last three years, sales of full-stack PACS solutions like Visage have increased, alongside a 30-40% price increase. Contract renewals have averaged 6-8% higher prices.

Goldman Sachs highlights speed and cloud capabilities as two clear advantages for Visage, which influence customer PACS selection relative to competitors.

The cost benefits for healthcare organisations are a key strategic advantage, as radiologists are among the top ten paid professionals in the US, while using cloud storage for radiology reduces storage overload.

The Pro Medicus sales model is based on exam volumes with a minimum five-year contract. There is a per-user’ rate charge underwritten by minimum volumes in the contract, support fees including installation, upgrades, training, and a 5% fee for customer data migration onto the Pro Medicus platform as a one-off.

Citi estimates Pro Medicus can grow market share to over 20% by the end of the decade from 7% in FY24, generating a compound annual EPS growth rate of 24% per annum.

Macquarie estimates 15% market share by FY30, advancing to 30% by FY34, while Goldman Sachs projects market share exceeding 30% in the longer term.

Morgan Stanley highlights FY24 total revenue of US$115m, equating to around 3% of the US$4bn total addressable market, and estimates FY30 revenue of US$430m, or around 7% of the US$6.5bn total addressable market by FY30.

The latter broker forecasts 14% market share by FY30 and annual contract price uplifts of 8% per annum. The bull case assumes 17% market share and 10% annual pricing increases.

As part of the company’s strategic focus, Pro Medicus spends around 25% of R&D on adjacent products, including AI and cardiology. The company is positioning for longer-term opportunities in AI application solutions, including screening for breast cancer detection, bone mineral density, aortic calcification, and body composition, developed with academic clients.

Valuing Pro Medicus, software or healthcare?

Growth levers for Pro Medicus are multi-faceted, including contract renewals, upgrades to full-stack Visage with a 30-40% price uplift, including transition from on-prem to cloud, market share gains,  and larger organisational wins like Trinity Health. Adjacent products in cardiology and AI offerings are additional growth levers.

Pro Medicus has very low churn rates and is highly profitable, with earnings margins of 75%. Morgan Stanley expects customer revenue volumes to grow at 7% per annum against the industry’s 2-3% annually.

Looking through the lens of a software technology company, Morgan Stanley explains both Pro Medicus and WiseTech Global ((WTC)) had Lifetime Value to Customer Acquisition Cost ratios of over 300x-plus at the end of FY24. Compared to the global software average of around 5x, this is extremely elevated and shows for every dollar spent on acquiring a customer there is a $300 return. 

Goldmans Sachs points to the “best in class margins”, stressing Pro Medicus generates over 70% for the Rule of 40, translated as the combined total of the revenue growth rate and profit margin is significantly higher than the benchmark of 40% for software companies.

Among those brokers monitored daily by FNArena, Morgan Stanley’s initiation of coverage stands out with a Buy-equivalent rating and a $300 target price.

The key argument is Pro Medicus shares characteristics with WiseTech, including a sticky software-as-a-service model, strong competitive advantages, and scalability, with customer volumes growing 4-7x faster than the system.

Although Pro Medicus’ end markets are healthcare-related, Morgan Stanley argues the service offering should be assessed through a software lens.

Considering both a discounted cash flow model and a sum-of-the-parts model, Morgan Stanley estimates a valuation between $250-$360 per share, using the bull case assumptions, and adopts the midpoint $300 as its maiden target price.

Goldman Sachs believes MedTech companies like Pro Medicus are increasingly a safe haven amid an uncertain regulatory outlook in the US healthcare sector. This broker’s target price is set at $278, with a Stay Buy rating.

Wilsons is also Buy-equivalent rated with a $275 target price. This broker believes the Trinity Health contract will serve as a luminary reference site, showcasing Pro Medicus as a leader in radiology and able to displace legacy PACS systems.

Given the average FNArena target price is $200.92 for daily monitored brokers, it is hardly surprising ratings include three Holds and two Sells with considerably lower target prices as not everyone is on par with Morgan Stanley’s methodology, including Citi at $100 and Ord Minnett at $140.

Morgans agrees Pro Medicus is one of the highest-quality businesses on the ASX but, like Citi and Ord Minnett and others, the analyst cannot shake off the valuation hurdle. That challenge may not disappear anytime soon.

The author’s SMSF owns Pro Medicus shares.

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