Three weeks after posting its biggest ever December half, following unprecedented contract wins, Pro Medicus (ASX: PME) provided further evidence today that Visage 7 - the industry's first cloud-engineered solution - is increasingly being adopted by academic medical centres, integrated delivery networks (IDNs), and outpatient clinics in the U.S.
At 9%, the company’s market share in the U.S. is up from 7% in August due to the largest ever contract win of $330 million over ten years with Trinity Health, and the signing in FY25 of seven new contracts worth $57 million in annual revenue.
According to Bell Potter, productivity improvements delivered by the company’s Visage platform are driving transaction growth from existing clients at around two-to-three times the industry average.
Co-founder and CEO Dr Sam Hupert recently told investors that Visage 7 represents a distinct competitive advantage for Pro Medicus over rivals whose solutions are not fully cloud-based.
This may help to explain why the stock’s share price is up around 153% in one year.
What these advantages allow the company to do is command a significant price premium over the rest of the market. Based on Morgan Stanley’s estimates, the cloud-based picture archiving and communication system (PACS) market is growing at 15% annually, outperforming growth for on-premise alternatives by 6%.
New $40 million contract
The health imaging company’s share price was trading 5% higher this afternoon following revelations it has signed a $40 million, seven-year contract with large Ohio-based radiology services provider LucidHealth.
Based on a transactional licensing model, the contract will see LucidHealth adopt Pro Medicus’ Visage 7 Enterprise Imaging Platform, replacing its existing legacy PACS system across 140 care sites staffed by more than 300 radiologists.
Pro Medicus will begin planning for the rollout immediately, with a phased go-live scheduled to commence in late Q3/Q4 of 2025.
Following a transaction-based licensing model, the contract allows for potential revenue growth based on usage.
Commenting on today’s announcement, Hupert claimed that LucidHealth’s combination of on-site and remote reading/teleradiology capabilities makes Visage 7 an ideal fit, reinforcing the platform’s position in both private practice and broader healthcare networks.
"LucidHealth joins our rapidly growing list of private practice clients,” said Hupert.
“Their needs, which include subspecialised onsite and remote reading/teleradiology capabilities, are uniquely catered for by our proprietary server-side streaming technology reinforcing our view that Visage 7 is ideally positioned to address this market and the other key market segments we service, which include academic medical centers, IDNs and outpatient clinics."
Future upside
Today’s announcement follows on the heels of the company’s underlying profit for the half, which while beating the consensus expectation by 1%, missed revenue expectations by 2% due to timing of contract implementations.
Revenue from ordinary activities rose by 31.1% to $97.2m, aided by a 34.6% increase in North American revenue to $86.4 million.
While the company continues to win new business in the traditional client base of Academic Medical Centres and Independent Delivery Networks, Bell Potter regarded the $30 million seven-year contract win at Duly Health in the Private radiology segment last December an important inflection point.
The broker believes the consolidation of low-margin private radiology segment creates organisations of sufficient scale for Pro Medicus to now bid on requests for proposals, increasing the company’s total addressable market (TAM).
As a result, management now believes around 85% of the U.S. TAM is addressable by Pro Medicus and growing.
Revenue to outpace expenses
Based on the expectation that revenue growth will progressively outpace growth in operating expenses, Citi expects the company’s earnings margins to continue expanding.
What the broker finds particularly encouraging is the company’s ability to accelerate the pace of large contract wins, without much incremental investment.
Then there’s the company’s first cardiology implementation - which goes live in April after management signed its inaugural contract for the full Cardiac-Echo package - which is expected to generate around twice the margin of radiology.
While cardiology’s TAM is only around 20% of the radiology opportunity, the broker believes the first customer bodes well for more activity.
Despite the premium valuation for Pro Medicus, Wilsons prices the stock as a takeover target, while Citi believes the current valuation suggest greater growth than the broker’s forecast FY24-30 EPS compound annual growth rate (CAGR) of 31%.