Pro Medicus’ sustainable long-term competitive advantages
Pro Medicus Limited (PME) is a Melbourne-based medical imaging IT provider. The company’s Visage platform is market leading and used by hospitals (leading academic, private and public) and radiology clinics globally. Given the nature of the industry and priority of patient care and safety, the industry tends to be thoughtful and cautious when implementing new technology or services. Therefore, the uptake of the Visage platform by many of the leading hospitals around the world is a validation of the product and their competitive advantage in this space. Furthermore, since the technology is delivered as a software as a service (SaaS) to customers, the company benefits by having recurring revenues, and customers also benefit from ease-of-use, flexibility, minimal upfront costs and clinical efficiencies. Unlike many other SaaS businesses, Pro Medicus also benefits from having its revenues tied to transactions with minimum commitments. This means that Pro Medicus generates greater revenues as radiologists use the technology more. Unlike other industries where volumes can be cyclical and volatile, radiology volumes grow in most years. This means that there is inherent revenue growth in the business from existing customers. According to UBS, Pro Medicus’ total addressable market is the ~US$560m Enterprise Imaging segment and is forecast to grow at 17% CAGR from CY18-22E. The company reported revenues of $56.8m in fiscal year 2020, suggesting that it still has significant market share and growth potential.
One of the steps in our Investment Framework is to identify companies that have sustainable long-term competitive advantages, and we believe Pro Medicus has multiple advantages – one of those advantages we have written about in the past is ‘high switching costs’. If a company is able to embed itself into the workflow of its customers’ it is unlikely to be replaced even by a slightly cheaper or superior competitor due to the operational risks and costs associated with switching. We think that this is especially true in the healthcare industry. Despite the advantages to incumbents, customers are switching to Pro Medicus’ solution which highlights the superiority of its offering. We think it is unlikely that customers will find a superior product and switch again from Pro Medicus.
We have written in the past about platforms and aggregators and the strengths and nuances of those businesses. Like Xero, the cloud accounting platform which also offers other software solutions such as payroll, invoices and lending to subscribers, Pro Medicus has developed other features such as a workflow solution for its users. Given its insight and existing relationships with customers, we think the company is well-placed to become a single technology vendor to their customers. Furthermore, given the fixed-cost base, we think that the incremental revenue has the potential to be highly profitable.
Pro Medicus has created offerings for cardiology and ophthalmology, and the offering is close to commercialisation with the company entering tenders in this space. They are also on their way to monetising their Artificial Intelligence capabilities, having submitted for FDA approval their breast density algorithm in collaboration with Yale. These initiatives are examples of the company commercialising their innovation, and growing their total addressable market and revenue potential. Management have a track record of successfully launching new products into a highly specialised market, and we think that they will continue to successfully do so into the future.
In summary, we think that the company has multiple growth opportunities:
Continue to grow within existing customer base
Onboard new hospitals and clinics
Offer new features including workflow solutions to existing customers
Offer solutions to different departments, initially cardiology and ophthalmology
Monetise Artificial Intelligence capabilities
These are long-dated opportunities, which the market may not appreciate immediately, but as long-term investors we are happy to be invested in the company.
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