ASX midcaps: Why medical imager Pro Medicus has captured our attention

ASX midcaps offer exposure to fast-growing industries such as medical technology. Here Pendal equities analyst OLIVER RENTON outlines one example, Pro Medicus

• Midcap portfolios offer exposure to medical technology
• Medical imager Pro-Medicus a good example
• Find out about Pendal Midcaps Fund

SAM HUPERT started as a GP in 1980 and within a couple of years realised that the then-nascent world of computing would have a massive impact on medicine.

Within three years he’d started Pro Medicus, an imaging software provider working with hospitals, imaging centres and health care groups.

Today the ASX-listed group – held in Pendal Midcaps Fund – is worth more than $6 billion.

Pendal MidCap Fund invests in the 100 biggest companies outside the ASX50, where market caps typically range from around $1 billion to $10 billion.

The global diagnostic imaging market is worth some $US28 billion globally – and growing at 4.9%, according to Grand View Research.

Growth drivers include an increasing prevalence of lifestyle-related diseases, rising demand for early detection tools, speedier diagnosis, government investment and expansion into developing nations, Grand View reports.

“Simplistically, Pro Medicus makes the software that radiologists use to view images and diagnose cases,” says Pendal equities analyst Oliver Renton.

But it’s technology could be used in cardiology, ophthalmology and pathology as well as all areas of reflected light, says Renton.

“Largely Pro Medicus is in radiology, but its IP can extend to other ‘ologies’.”

“It operates in a large addressable market, which we think is larger than what the market ascribes because the technology is applicable more broadly than radiology as well as the core market being larger due to Pro Medicus premium monetisation.”

The narrower radiology addressable market is between 600 million and 650 million scans in North America per annum.

Revenue is based on the number of scans undertaken using Pro Medicus equipment, and Renton estimates the group makes about A$3 per scan.

“Down the track, cardiology could add 20 per cent to the addressable market,” says Renton.

“If you look across the whole spectrum there is probably a 50 per cent increase in the addressable market.”

A two-layered market

Pro Medicus operates in a two-layered market.

The first is the older legacy hardware manufacturers which have owned a large chunk of the market for decades, who initially gave software away for free to ensure radiologist bought their equipment.

The second are the software providers like Pro Medicus, who offer value added services to the sector.

Within the newer IT solutions, Pro Medicus unlike its competitors, streams images whereas older competitors largely compress files before sending.

“The legacy providers are struggling as data sizes get larger, and data sizes are on an inexorable rise,” Renton says.

“There is now a structural advantage embedded in terms of streaming, versus compressing. And that will only widen as providers shift to the cloud, and increasingly use artificial intelligence.”

Pro Medicus currently has about 5 to 6 per cent of market share in the US, Renton says, and is growing.

Previously, dominant legacy hardware players like GE, held up to 30 per cent market share at its peak.

The group transformed in 2009 when it bought German based Visage Imaging (see video above).

Many of the team of imaging experts that came with the purchase remain at Pro Medicus, providing great stability. The core R&D for the company remains in Germany.

Like any piece of software, Renton says the key risk for Pro Medicus is that someone “builds a better mousetrap”.

“However, we think that as the business model transitions and becomes less about the core software, and more about networks especially as artificial intelligence is introduced, then Pro Medicus will benefit and that key risk diminishes,” Renton says.

“There is a risk that someone comes out with a technology that competes, but we think this is less of a risk as AI becomes more real and network effects start to kick in.”

Like all technology businesses, there’s also risk around key staff, Renton says, particularly given it’s a lean model.

“But if you’re working on the best product in the industry with the best clients, it’s unlikely that you will leave especially when you are at the cutting edge of healthcare and its interaction with artificial intelligence, cloud computing and data.”

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About Oliver Renton

Oliver is an analyst and co-portfolio manager with Pendal’s Australian equities team. He has more than 15 years of industry experience.

About Pendal MidCap Fund

Pendal MidCap Fund features 40-60 Australian midcap shares. Led by portfolio manager Brenton Saunders, the fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies.

Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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