We maintain our $48 fair value estimate for narrow-moat Pro Medicus PME. Our constant-currency earnings estimates are unchanged. We expect further contract wins to underpin our forecast five-year earnings per share compound annual growth rate of 21%. The firm announced a contract win with LucidHealth, a US private provider of radiology services, for a total committed minimum value of AUD 40 million over seven years. Planning for the rollout is commencing immediately based on Pro Medicus’ established cloud-based implementation and we assume a nine-month earnings contribution in fiscal 2026. Our broadly unchanged fiscal 2026 EBIT forecast of AUD 222 million implies 44% growth on fiscal 2025.

Pro Medicus is materially overvalued with a lot of good news baked in. Shares currently trade at over 170 times our forecast fiscal 2026 EPS. While some smaller radiology groups are willing to pay a premium for Visage 7, we still anticipate wider uptake to be slow. Visage 7 resonates most with US academic hospitals and large healthcare systems that have greater interest in advanced visualisations. However, management believes that even some top hospitals don’t require the best technology in the market, even in terms of speed and quality of images. We expect downward pressure on the average size of future contracts as the more lucrative academic hospitals market inches closer to saturation.

We also suspect the market is likely underestimating competitive pressures. There are low barriers to entry in the industry, and competing products such as Philips’ HealthSuite platform, are catching up by utilizing or exploring similar technology such as server-side rendering, cloud-native architecture, and artificial intelligence. We expect further margin upside to be limited given the research and development spending required to stay competitive in the long term. We forecast a five-year revenue CAGR of 19% and EBIT margin to expand to 80% by fiscal 2034 from an estimated 77% in fiscal 2025.

Pro Medicus' business model is sound, but shares screen as expensive

Pro Medicus’ strategy revolves around renewing existing contracts and winning new clients for its main product, Visage 7, while increasing its price point. The company won six out of six major public tenders it competed for in fiscal 2021, which often involved on-site pilot tests. While this likely highlights Visage 7’s current superior speed, scalability, and resilience, continued investment in research and development is imperative for the firm to remain at the forefront of innovation and consistently win contracts. Most of the firm’s expenses are allocated to over 40 software engineers with the main R&D center located in Berlin. The company also recently extended its R&D capability in New York in collaboration with NYU Langone Health in 2021. Its R&D efforts mostly revolve around software enhancements, program extensions, and research in artificial intelligence to assist in diagnoses.

Many of Pro Medicus’ competitors already utilize server-side rendering and cloud-native architecture. Legacy systems are also mostly owned by larger competitors such as GE Healthcare, Fujifilm, and Philips that will be incentivized by the high returns in the industry. In Australia, Sectra won a AUD 85 million 13-year deal over Pro Medicus with NSW Health for both its Radiology Information System and Picture Archiving Communications System in 2020.

Visage 7 has found most success with US academic hospitals and in fiscal 2022 was in nine out of the top 20 ranked US hospitals, more than double its nearest competitor. While Pro Medicus has secured a few contracts with midmarket US hospitals such as Allegheny and Wellspan, wider uptake has been slow with Visage 7’s features likely superfluous for their normal operations. However, Pro Medicus is still targeting smaller radiology groups that seek to consolidate IT infrastructure and become more efficient.

Currently, Visage 7 is limited to radiology departments, but Pro Medicus is aiming to extend the product set to other specialty departments including cardiology and ophthalmology. In addition, when winning contracts, the firm has other product offerings such as Open Archive or Visage RIS that it can cross-sell to clients.

Pro Medicus bulls say

  • Pro Medicus is well positioned to benefit from industry tailwinds such as cloud adoption, larger datasets, and remote access.
  • Earnings are extremely defensive due to contracted revenue being largely guaranteed over five to eight years from customers.
  • The long-term growth opportunity is significant as most of the US market still uses legacy systems and other geographies are largely untapped.

Pro Medicus bears say

  • Product differentiation is unlikely to be durable, with low barriers to entry and larger competitors already utilizing server-side rendering and cloud-native architecture.
  • Wide adoption outside of academic hospitals is unproved, and superior speed and visualizations are likely superfluous features for the average hospital.
  • Future contract wins are likely to be smaller as Pro Medicus already dominates the larger US academic hospital market.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.