Pro Medicus Hits New Heights with Record Contracts and AI-Driven Innovation

About Pro Medicus Limited

Pro Medicus Limited (Pro Medicus, ASX: PME, or the Group) was founded in 1983 and is a global provider of medical imaging and software services to hospitals, imaging centres and health care groups. Its main product, the Visage 7 imaging platform, is a clinical desktop application used by radiologists to view images from any device to make a clinical diagnosis.

Long-dated contracts boost recurring revenue

Pro Medicus continues to be awarded new long-dated, record amount contracts from leading US healthcare providers.

The Group’s previous record contract amount win in September 2023 (Baylor Scott & White for A$140 million over 10 years), has been exceeded by a $330 million contract win with Trinity Health, the fifth largest hospital system in the US. Announced on 28 November, the contract is for 10 years and covers an extensive network of 93 hospitals and numerous other healthcare facilities employing 9,300 clinicians in 26 states. The contract is all cloud-based and the rollout will commence immediately, with go-live expected early in the first quarter of FY26.

Other recent contracts awarded include a $30 million, 7-year contract with Duly Health and Care on 22 December, the largest independent, multi-specialty physician-directed medical group in the Midwest USA and on 26 November a $24 million upgrade with NYU Langone Health, one of the most respected healthcare institutions in North America. The original contract signed in September 2020 has been extended to 2029, as part of the deal.

In October this year Pro Medicus signed a $98 million, 8-year contract renewal with St Louis-based Mercy Health. Meanwhile in Australia, a $32 million 5-year contract extension was signed on 15 October with an un-named large Australian Radiology Network.

Premium product and demand growth commands premium price-earnings multiple

Healthcare earnings attract a premium price-earnings multiple because of the inherent growth in demand for healthcare products, devices and services driven by an ageing population and rising global living standards. However, in the case of Pro Medicus, several other factors are at play which are driving and sustaining the Group’s price-earnings multiples to unprecedented levels.

Firstly, Pro Medicus’ current market penetration is just 7 percent of the US radiology market, which performs an estimated 650 million scans a year and is growing at 3.5 percent annually. The long-term growth prospects for the Group’s leading-edge imaging solutions appear linear given the current run of contract wins, the large addressable runway and the transaction-based model of the Group’s core imaging product.

Secondly, the Group’s cloud-based software enables hospitals and radiology clinics to stream medical images remotely, including to mobile devices, using cloud-based services.

This means radiologists can make diagnostic decisions without their patients next to them.

Thirdly, being cloud-based, rather than computer network based, images and files don’t require scanning, compressing and sending down a network to be downloaded at the other end. This method is slow and cumbersome, whereas the cloud-based software imaging technology is quick and enables near real time diagnosis. This technology is proprietary to Pro Medicus and explains why Pro Medicus earns up to 50 percent more than rivals Siemens and Philips for its cloud-based imaging software.

Fourthly, apart from enhancing productivity, contracts for the Pro Medicus imaging platform are long dated (average 7 to 10 years) and switching costs are considerable because hospitals must invest heavily in training staff.

Finally, Artificial Intelligence (AI) has the potential to boost clinician productivity and diagnosis accuracy to another level. Currently, radiology diagnosis requires thousands of images to be examined by trained clinicians searching for abnormalities. This process is time-consuming and prone to human error. AI has the potential to enable Pro Medicus’s software to assess risks, prioritise scans for radiologists, and possibly identify anomalies. AI can already outperform doctors in detecting specific cancers.

Passive index fund buying continues to support the share price

In FY24 Pro Medicus earned an Underlying Profit Before Tax margin of 72 percent on 29 percent higher Revenue from ordinary activities of $161.5 million. The Group is debt-free and has approximately $155 million in cash and other financial assets and in FY24 paid a fully franked dividend of 40 cents per share.

Radiologist’s reliance on imaging will continue growing, as reflected in the nine fresh contracts awarded in FY24 with a minimum future contract value of $245 million. The unrivalled speed and accuracy of the Pro Medicus imaging software solution should support this growing radiology market specialist over the long-term. These quality attributes and PME’s $26 billion market capitalisation are attracting ETF and health index fund buying globally that is likely to continue to support the share price.

Shareholders can expect this buying support and emerging radiology market dominance to deliver stable and dependable superior risk-adjusted returns in the decade ahead.