Sonic Healthcare’s Successful Roll-Up Business Model and AI Investments Boost Growth.

About Sonic Healthcare Limited

Sonic Healthcare Limited (Sonic, the Group, ASX: SHL) is one of the world’s largest medical diagnostics companies that provides laboratory services (85 percent of revenue) and radiology services (10 percent) to doctors, hospitals, and their patients. Last year the Group serviced an estimated 125 million patients. Sonic was listed on the ASX in 1987 and today employs 42,000 people, including 1,600 pathologists and radiologists, and 15,500 medical scientists, radiographers, technicians and nurses, making it one of the world’s leading healthcare providers.

Proven business model

Sonic’s operations are structured as a Federation, with individual medical practices and geographies working autonomously within a synergistic network. This means that clinicians employed by the Group consider themselves as working within specialist medical practices rather than as businesses. The outcome is a unique employee culture that makes Sonic the preferred acquirer when laboratory or radiology owners and founders seek to realise the value of their practices. Importantly, this structure also preserves the value of acquired Goodwill.

The individual medical practices work in a collaborative way within the Federation structure, by relying on centralised executive support, group purchasing, IT support, quality system sharing and centralisation of testing, as well as widespread communication, including detailed benchmarking within the Group, leading to best practice and high margin outcomes.

Favourable international growth prospects

Sonic operates in attractive and growing global healthcare markets chosen on factors like political, legal, and financial stability, cultural understanding, and reliable and stable healthcare funding systems. The Group is also attracted to fragmented markets, where it has a successful track record in consolidating fragmented markets in Australia, Europe and the USA using this strategy. By building concentrated postions in targeted geographic laboratory markets, Sonic is able to build scale and infrastructure to facilitate synergies that drive margin improvements, earnings growth and improved returns on capital invested.

Sonic also seeks out markets with increasing demand for diagnostic services, arising from growing and ageing populations, new tests and preventative medicine. Against this favourable backdrop, Sonic is confident in growing revenue, earnings and returns on investment organically or through synergistic acquisitions or joint ventures. Organic growth in Sonic’s markets has averaged about 5 percent per annum over the long term and Sonic sees this continuing.

Sonic operates in seven countries and is the world’s third-largest pathology services provider. Future acquistions are most likely to occur in the USA and Germany given the size and fragmentation in those markets. Opportunities will also be targeted in Switzerland and Belgium.

Sonic is not actively seeking laboratory acquistions in Australia due to the potential action by the Australian Competition and Consumer Commission on the grounds of lessening competition. Acquistions are unlikely in the UK as the market is dominated by the National Health Service (NHS) and Sonic is the largest private participant. However, substantial growth opportunities exist from potential NHS and private hospital outsourcing contracts.

AI to drive step changes in efficiency

Sonic anticipated the application of Artificioal Intelligence (AI) in pathology and radiology to deliver step changes in efficiency, quality, and capacity in coming years. Sonic is investing substantial amounts in digital pathology and associated IT infrastructure to unlock these efficiency gains.

Sonic holds an 18 percent strategic stake in Harrison.ai and has established a joint venture with them called Franklin.ai, to develop best-in-class AI diagnostic tools for pathology. Sonic owns 49 percent of Franklin.ai directly plus 9 percent indirectly through its stake in Harrison.ai. With the backing of Sonic, Franklin.ai has completed its first product (“Prostrate Digital”) with deployment for clinical evaluation in Sonic’s Sydney laboratory to commence in the second quarter of FY2025. Franklin’s products are planned to be marketed globally, in addition to being used within Sonic’s laboratory operations.

Sonic also owns a technology business with a unique end-to-end digital pathology platform and incorporating a laboratory information system, digital pathology viewer, image storage and AI algorithms.  Called PathologyWatch, the platform will accelerate Sonic’s transition to digital pathology and related use of AI globally. The platform is currently being rolled out in Sonic’s US Dermatopathology division.

Sonic’s global strategy of ‘rolling up’ pathology services in carefully chosen markets within its Federation structure should continue to generate superior shareholder returns in the decade ahead.