Pro Medicus is bigger than Coles and twice the size of Qantas

From a gritty corner in Melbourne, this low-profile player has turned its founders into billionaires as they took $500m paydays this week while delivering staggering returns to investors.

Pro Medicus CEO and co-founder Sam Hupert. Picture: Stuart McEvoy

In a gritty corner of Richmond, on the edge of Melbourne’s CBD, is a low rise, grey and otherwise unremarkable building. There’s a pub across the street that does a good chicken parma as well as an honest burger.

If you were looking for anything else positive to say, it would be that this office is close to a train station. And that’s about it.

Thousands of people pass the Pro Medicus headquarterson Swan Street every day, without registering what it is or does. In fact, it’s the biggest company you’ve never heard of. And it remains a remarkable export story.

Valued at nearly $27bn, Pro Medicus is larger than Coles and twice the size of Qantas. This top 20 Australian company has flown under the radar while make its name in medical imaging software. You sure you haven’t heard of it? Don’t worry, no one has.

More extraordinary is Pro Medicus’ employee numbers. Even with a growth spurt of late, headcount is just 121.

And these staff are all deeply loyal to the company, with more than third considered long termers. Turnover last year was a little above 2 per cent, where most companies would dream about figures in the low double-digits.

Like Commonwealth Bank, Pro Medicus’ shares, have defied gravity over the past year, surging 30 per cent in November alone and more than 185 per cent over the past 12 months. In 2015, its shares were changing hands at around $3 each. On Wednesday they closed at $261.

Pro Medicus has plenty of tailwinds behind its business model.

The share surge saw the two founders of Pro Medicus get a combined $500m windfall this week after they offloaded a million shares each.

Even after the sell-down, chief executive Sam Hupert and technology director Anthony Hall have $6.2bn each - that’s right each - sitting in Pro Medicus shares. This puts them easily in the top 15 of Australia’s richest people.

Big league

Stewart Oldfield of Field Research has been a long-time watcher of Pro Medicus and had been telling clients in recent weeks to set their watches on the likely founder sell down. Why? Because habits are hard to break, and the pair have conducted similar sell-downs in recent years of similar sizes to free up some liquid and without any impact on the momentum of the stock.

Indeed, shares Wednesday jumped nearly 2 per cent as investors scrambled for more.

“We like Pro Medicus because they’re playing in such a big pond, and they’re winning in their niche,” Oldfield says. “It’s just one of those rare examples of an Australian company playing in the big league of the world’s largest healthcare system”.

To be specific that game is the US private hospital system, where Pro Medicus’ radiology software dramatically speeds up turnaround time for radiologists.

Pro Medicus got its break from a smart acquisition of US software play Visage more than a decade ago and this is the product it now sells mostly with a single focus in the US. It offers 3-D and even 4-D medical images, fast access and high quality remote viewing.

Pro Medicus ruthlessly focuses on selling its technology to the leading health networks in the US. And every long term contract it enters into pushes its shares ever higher.

Pro Medicus now counts eleven of the top 20 ranked hostial networks in the US as customers, a calling card that opens the door to even more.

More recently it has been branching out into cardiology scanning, another specialist high growth area. AI and data storage represent other opportunities.

Structurally, it has plenty of tailwinds. A chronic shortage of radiologists mean that hospitals want to find ways to improve productivity without the cost. And the Visage technology is a proven way to do so.

Pro Medicus’ low cost base – right down to avoiding swanky corporate offices – mean its profit margins of nearly 70 per cent are more than three times its nearest competitor. This allows it to direct more as a proportion of revenue back into R&D to keep ahead of the field.

“It’s a two-horse race, and the other horse is nowhere to be seen,” Oldfield says.

Pro Medicus shares its suburb with AFL team Richmond. Picture: Getty Images

Despite its mammoth market size, Pro Medicus is still a small company.

Profit last year was a record at nearly $83m, although this was up a sharp 36 per cent on the year. Revenue increased by 30 per cent to $161.5m it has nearly $630m of contracted revenue locked in for the next five years.

“Clearly, maintaining growth rates of 30 per cent-plus year-on-year gets harder as the base gets bigger, but we believe we can maintain our trajectory of strong, profitable growth,” Hupert tells investors.

There are other markets in Asia and Europe on offer, but Hupert says they are not as evolved as the US. “We don’t want to take our eye off the prize,” he says.

Should I buy Pro Medicus (ASX: PME) shares then?

With so much blue sky baked into the share price, there are plenty of risks. Pro Medicus is trading at a forward price-to-earnings ratio of more than 230-times. The ASX is closer to 20-times.

That’s a lot of earnings growth needed to support the shares. Its rivals Vuno or Invicro could get their act together or play in a discounting game. And like WiseTech and to a lesser extent Mineral Resources, there is the very real transition risk when it’s time for the two founders to step aside. However, accounting software firm Xero, which this week hit a record high, is one that has demonstrated it can be done seamlessly.

Pro Medicus says the share sale by Hupert and Hall was designed to add liquidity to the shares and no further sales are planned for the foreseeable future. Both “are actively engaged in the company as executives and board members and are committed to its future,” it said in statement. Like the scrappy football team it shares a suburb with, Pro Medicus shows big things can grow from Richmond.

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Google it

Artificial intelligence has the potential to turn the online search business model upside down. And this could disrupt the global gorilla in search, Alphabet’s Google. Just not yet.

That’s the conclusion from the Australian Competition and Consumer Commission’s latest deep dive into online search that has found Google still monopolises Australia and AI has yet to dent its dominance.

The ACCC review represents a three-year update of search as part of its long-standing digital platform inquiry. Over that time Google has maintained its 94 per cent share of search although Microsoft’s big, which is now powered by AI, powered by OpenAI’s model has gained ground slightly to 4.7 per cent from 3.9 per cent previously. However, that was mostly at the expense of rival search players.

Google continues to dominate internet search in Australia. Picture: AFP

The Albanese government is currently consulting on whether to give the ACCC the powers to designate certain platform services under the digital competition regime. Google and Apple’s respective app stores and ad technology will likely be the first two services to be investigated for designation.

Much of Google’s strength is its position as a default search engine – not only for its own widely used Chrome browser, but for others like Safari used on Apple’s iPhone, or alternate browsers like Firefox. Google has a lucrative revenue sharing deal for these arrangements, while the protecting its position as the most widely-used search engine.

It was this point that pushed the US Department of Justice to apply to a US court to force the break-up of Google by spinning off its Chrome browser. That followed a court ruling in August where a judge had found Google was using its market power to monopolise the search.

It remains to be seen how far this case will go in Donald Trump’s America.

Still, it could be AI, not legal efforts that represent the biggest threat to Google. It is still in its infancy but AI-powered ChatGPT is making inroads into search, although from a low base. The ACCC points out Open AI does not have its own web index and therefore lacks a key component of a search engine, and this edge has maintained Google’s success in general search.

The arrival of AI is also changing the nature of search, with users are demanding more summaries and visuals. Users are changing the way that search questions are asked, and this challenges Google’s traditional ranking systems.

So too is the rise of zero-click searches that are less lucrative for Google. These are answers to a question without the user clicking through to the website. The ACCC found that among Australia’s most popular searches from over a near year-long period, 43 per cent of these were now in zero-click searches.

Google may still hold the upper hand yet. Its ability to access and massive amounts of data to train its own generative AI systems could give it the edge for the medium term, But like Microsoft’s dominance in the early days of the internet, being number one in tech only lasts as long as the next big breakthrough.

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Originally published as Pro Medicus is bigger than Coles and twice the size of Qantas