Goldman Sachs upgrades Pro Medicus on back of AI algorithm upside

Pro Medicus (ASX: PME) shares were up around 5% at the close following an improved upgrade on the S&P/ASX 100 health imaging technology company to Neutral from Sell by Goldman Sachs, with the price target up 9% to $42.60.

Having assessed the relative merits of Artificial Intelligence (AI) in radiology, the broker believes Pro Medicus is the clearest beneficiary, both through commercialisation of its own AI algorithms but also by integrating others through its picture archiving and communication systems (PACS) viewer/AI accelerator.

“In our conversations with radiologists/AI providers, existing monetisation strategies for AI are typically based on either pay-per-use or recurring subscription packages,” the broker noted.

“We also add a +15% premium to our peer/sector multiples versus history to reflect the longer-dated AI opportunity which is not factored into our estimates until FY24.”

Value & differentiation

Goldman’s regards the integration with its Visage PACS viewer as a key source of Pro Medicus’s value/differentiation.

Beyond its efforts in AI, the broker also believes the company has also maintained a steady cadence of contract wins in challenging times, while also renewing/extending long-standing customers on favourable terms.

With the company well positioned for long-dated commercialisation opportunities, the broker believes the risk-reward is fairly balanced.

“Based on our current assumptions, AI could be 3-9%-plus accretive to our revenue forecasts in FY24-26,” the broker notes.

Improved clinical outcomes

To the uninitiated, there’s a growing body of evidence that AI leads to improved clinical outcomes and productivity/efficiency for radiology providers.

Best estimates suggest the FDA has now cleared 190-plus AI algorithms that target neuroradiology, chest, cardiac, women’s’ imaging, abdominal, musculoskeletal and dental.

Applications of AI in medical imaging include focused on measurement, image processing, workflow management and visualisation.

“The industry is now progressing into revenue-generation and becoming increasingly competitive,” Goldman’s notes.

“Based on efficiency improvements cited in the clinical studies we examined, and our conversations with industry practitioners, we see the potential for AI to disrupt 30%-40% of the 41% of time spent on image interpretation by radiologists.”

The broker estimates that 200-plus credible software vendors are currently vying for what could be a US$18-25bn total addressable market (TAM) today.

Productivity improvements across the sector

Pro Medicus is only one of many listed radiology providers to benefit from AI adoption, including Sonic Health Care (ASX: SHL), Healuis (ASX: HLS), Integral Diagnostics (ASX: IDX) and Australian Clinical Labs (ASX: ACL) – with the broker having Buy ratings on the latter two.

The broker expects clinical benefits to steadily accrue over time, but also sees scope for near/mid-term productivity improvements to help offset the growing shortage in radiologists/pathologists.

Goldman’s believes increased adoption of AI will benefit the radiology players across its coverage through accuracy/efficiency improvements to enhance clinical outcomes, productivity gains to benefit radiologists and potentially offset undersupply.

Then there’s a continued shift towards preventative healthcare to increase longer-term demand for radiology/diagnosis.

Pro Medicus share price over one year.