Pro Medicus (ASX: PME) – A Secular SaaS Growth Story

Pro Medicus (ASX: PME) is a health tech software company providing imaging tools and services to clients such as hospitals, diagnostic chains, and independent practices. The company’s growth was significantly boosted by the logistical disruptions of the COVID-19 pandemic and a growing shortage of radiology professionals. 

A key secular tailwind is the global scarcity of radiologists and the increasing complexity of testing data, which can reach several gigabytes from a single test. Pro Medicus’s technology facilitates the sharing of these large datasets, enhancing the scalability of radiology diagnostics.

The stock enjoys almost unanimous buy ratings from the analyst community.

About Pro Medicus

Pro Medicus (ASX: PME) is a software-as-a-service company offering a suite of solutions that help healthcare testing providers archive, analyze, manage, and scale their operations. The company has two major products: Visage RIS and Visage 7. 

RIS (Radiology Intelligence System) allows service providers to manage imaging and administrative actions such as workflow management, patient registration, and billing. 

Visage 7 is a cutting-edge analysis tool that allows doctors and radiologists to view multiple complex tests and imaging outputs effectively by enabling easy sharing for remote diagnosis along with many other functionalities.

At the time of writing, Pro Medicus currently trades at a market capitalization of A$24.2 billion.

Strong Product With Scalability And Pricing Power

Pro Medicus’s (ASX: PME) biggest strength is its product-market fit, benefitting from a secular tailwind in an essential non-cyclical sector. 

Source – 1H25 Earnings Presentation

The key USP of Pro Medicus is the market-leading technology behind its Visage system, which allows the sharing of multi-gigabyte test imaging from the cloud between testing providers and radiologists/doctors using a very thin client, making very complex datasets available on a smartphone for diagnosis. 

The company is a big beneficiary of the acute worldwide imaging professional shortage, which has further been exacerbated by fears of automation. The shortage of radiology professionals has led to a slowdown in incremental radiology capacity investment, which in turn has manifested in rapidly increasing wait times for radiological tests.

Instead of streaming thousands of 2D high-resolution images from intricate scans such as PET, MRI, or CT, the company’s software merges the photos into a 3D image using a proprietary method and only streams pixels to the doctor’s or s/radiologist’s smartphone or office. 

In contrast, standard software provided by machine manufacturers such as Siemens or GE sends gigabyte-size files via the traditional upload and download method, which is intensely time-consuming, taking several minutes for a single patient.

Pro Medicus is currently the only player providing this technology due to their unique efforts to blend multiple technologies into their offering. The company’s market fit is best evidenced by the fact that it services 11 out of the 20 best hospitals, several of the largest private healthcare chains, and independent practices in the US.

Over the past couple of years, the company has shown remarkable growth not just in clients but also value per contract as all renegotiations have happened at higher prices, most new contracts are full stack instead of just independent products, and renewal rates are nearly 100%.

The company operates on a pay-per-click/transaction model with minimums/baselines in place, the former giving clients a pay-as-you-go structure above a certain fixed cost. 

Transactions form the lion’s share of the company’s revenue, followed by baseline/fixed revenue, on-site hardware, and professional training services. This gives the company the benefit of an annuity-style revenue stream instead of lumpy large deal wins.

The company has a secular tailwind from ever-rising healthcare costs in the US. This is manifesting in an increasingly large number of providers wanting to cut costs by moving to the cloud and embracing digitization-aided productivity gains. 

Pro Medicus has huge room to grow as it currently serves just 9% of the market but believes 85% of the TAM is serviceable by its business model. Scaling will be even faster as most new contracts are cloud only as compared to on premises.

Most healthcare providers in the US are now shunning expensive on-premises solutions in favor of the cloud, which is more scalable for Pro Medicus in terms of onboarding and general demand. 

For example, despite sensitive security considerations, the company recently received US Federal Ramp clearance for their hypersecure cloud, opening opportunities with the Department of Defence and Veterans Services.

The company continues to scale record contract wins with a recent mega deal with US healthcare major Trinity Health, with which it signed a mega $330 million deal over 10 years, among others.

Source – 1H25 Earnings Presentation

Just the company’s existing client base represents revenues of $894 million over the next 5 years if renewed, locking in average annual revenues 10% higher than FY24, assuming no new deal wins.

Overall, Pro Medicus also has a very scalable asset-light business model with no major capital expenditure other than ongoing R&D. The proprietary nature of its product benefits from significant network effects along with tremendous pricing power, more than 100% over competitors in many cases.

Macro Uncertainty And Complete Dependence On The Imaging Demand Are Weaknesses

Pro Medicus’s (ASX: PME) weakness is slow growth in radiological test access due to punitive costs of setting up machinery, which has been worsened by a radiology professional shortage. 

On top of that, analysts expect the global healthcare sector to reach 2019 levels of capex/investment only by 2025, which could hamper growth for the company.

Secondly, Pro Medicus has outsized exposure to the US, which accounts for nearly 60% of global healthcare spending. The company recently admitted to regulatory and other challenges that prevent growth in other high-growth markets such as Japan and China. Should there be a slowdown in the US given the current macro environment, it will drastically impact the company’s prospects.

The second weakness is that the company’s product is entirely dependent on imaging being the dominant form of health diagnosis for a variety of health issues. 

However, there is a huge amount of R&D going on across the world to develop new blood testing and other diagnostic techniques that are cheaper and more accurate at diagnosis.

AI And New Diagnosis Methods Are Opportunities

Pro Medicus (ASX: PME) has two major opportunities ahead: AI and increasing product support for other test types, such as cardiology.

Pro Medicus was quick to latch onto this trend and has built AI interfacing capability into the Visage platform that combines with the cloud archive and allows clients to incorporate proprietary algorithms based on their data via APIs.

Source – 1H25 Earnings Presentation

Given the data-dense nature of radiological tests, the need to be able to share massive datasets seamlessly and incorporate AI at the top of them will be a clear requirement for the industry, thus giving the company a massive edge, as these requirements are its core competence. 

The company has a very strong R&D team in place and partnerships with marquee educational institutions, such as Yale/NYU, and clients such as the University of Florida/Memorial Sloan Kettering through its AI accelerator program. 

The company received in-principle approval from the FDA for trials of its breast density detection algorithm, which management said they are on the cusp of commercializing and are in the process of pricing.

Source – 1H25 Earnings Presentation

At a recent earnings call, management hinted at the scope of the AI accelerator program as most AI algorithms are proprietarily developed by care providers and/or university researchers but have a very tough time taking them out of the lab. 

Pro Medicus’ reach and capabilities offer a great platform for researchers and care providers to validate their algorithms’ capabilities out of the lab in the real world with direct comparability to physician opinions.

The second opportunity is expanding the company’s offerings to include other high-volume testing arenas such as cardiology, which the company said it will deploy in the next few months. 

The company’s offerings include a novel method to use Photoplethysmography (PPG) data (a rather inexpensive and non-invasive test) to ascertain ejection fraction, which could be profound if it performs with suitable accuracy in the field as ejection fraction is a very important cardiological metric which is currently only derived from expensive EEG tests. 

Pro Medicus recently announced customer trials of its Visage 7 Cardiology platform, which offers functionality such as Ejection Fraction, Doppler Curve, and Doppler Velocity via support for ECG and Cardiac Catheterization data.

Building on expanding Visage from Radiology to Cardiology, the company also recently unveiled its AI-powered RadPath Hub, which can extract patient pathology data and correlate it with the same patient’s radiology data, further improving efficiency and quality of diagnosis. 

Impact of Serious Competition On Margins And Valuation Will Be Grave

There is only one major threat facing Pro Medicus (ASX: PME), an unraveling of its market dominance, on which its growth and valuation are entirely contingent. 

The company’s thin-client approach doesn’t have any direct competition as yet and allows very steep pricing power. However, patenting software technologies is a tough task with approvals tough to get.

At the same time, slowing growth for radiology hardware manufacturers such as GE/Siemens may push to look for every avenue for growth, such as a bundled version of the type of software Pro Medicus offers. 

This risk is particularly pronounced as deglobalization and tariffs have taken center stage of late.

Material Growth In Financials Continues

Pro Medicus (ASX: PME) has 5 revenue streams: Exam/Transaction, Baseline/Fixed, Capital/Hardware, Professional Services, and Archive Migration. Exam/Transaction revenue is the biggest revenue driver for the company. 

Pro Medicus Ltd experienced a strong financial performance in both FY24 and the first half of FY25.

In FY24, the company achieved record results, with revenue increasing by 29.3% to $161.5 million and net profit after tax increasing by 36.5% to $82.8 million. 

The company remained cash flow positive, with retained cash and liquid investments growing to $155.4 million. 

Notably, the dividend payments were increased by 33% to 40 cents per share, fully franked. The Board anticipated FY25 to be another strong year, with results to date ahead of budget.

This positive trajectory continued into the first half of FY25, where the company reported another record first half. Revenue was up 31.1% to $97.2 million, and profit after tax increased by an impressive 42.7% to $69.9 million. 

Underlying EBIT also saw a significant rise of 42.9%, resulting in a strong EBIT margin of 71.9%, and the interim dividend was increased by 38.9% to $0.25. 

The first half of FY25 also saw record new contract wins, renewals, and upgrades, setting a strong base for continued growth. The company has no debt, a very strong balance sheet, and a cash reserve of A$182.3 million.

Pro Medicus Valuation

As we mentioned above, Pro Medicus (ASX: PME) is a leader in a very niche space with no direct competition, hence, there are no direct comparisons other than the majors such as GE Health and Siemens.

Pro Medicus (ASX: PME) is head and shoulders above non-health SaaS companies such as Xero and WiseTech due to superior product-market fit, demand, and pricing power.

However, it must be noted that it is trading at a high valuation, which is only justified by high margins, growth, and strong ROE.

As Good As They Come As Far As High-Growth SaaS Is Concerned

In conclusion, Pro Medicus (ASX: PME) stands out in the healthcare IT sector due to its innovative imaging solutions and robust market presence. 

Despite facing challenges such as dependence on imaging demand and regulatory hurdles in certain markets, the company continues to grow, driven by its scalable business model and strong pricing power. 

With ongoing advancements in AI integration and expansion into new diagnostic areas like cardiology, Pro Medicus is well-positioned to capitalize on emerging trends in healthcare technology.

Overall, the growth story is as good as it comes, with very strong unit economics. While the price is lofty, material growth is due to come in from continued contract wins over the next year, along with solid margins. Therefore, the scope to grow into and above the current multiple is massive.