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Why the Pro Medicus Limited share price is going nuts this morning

The Pro Medicus Limited (ASX: PME) share price is up 8% to $4.68 in early trade after the provider of digital medical imaging and patient management systems announced a big new deal with Australian healthcare leader Primary Health Care Limited (ASX: PRY).

Pro Medicus shares are up 1,565% over the past five years thanks to the blockbuster success of the company’s Visage 7 operating system that large healthcare providers subscribe to in order to manage patients’ medical imaging records from booking appointments to screening, diagnosis, and electronic record keeping.

The smarter and more functional an online system the more it helps healthcare providers save time and ultimately money by improving the management of the vast amount of electronic medical records now accumulated across healthcare systems.

The company said today’s deal with Primary will deliver an 11% uplift to FY 2016’s total revenues every year for the next five years. In FY 2016 total revenues were $27.58 million, which suggests the deal is worth around $2.86 million per year to Pro Medicus over five years, or around $14.5 million in total.

For the six-month period ending December 31 2017 the company posted a profit of $4.8 million, with future contracted revenue (excluding today’s deal) of $115 million over the next five years. So while today’s news is good, it’s not a game changer for a company that has a volatile share price reflecting its fast-moving nature.

Pro Medicus has an exciting outlook but the question for investors is how much is that already reflected in a market valuation around $450 million with the stock selling for $4.68?

Another promising medical imaging business in the breast screening space is Volpara Health Technologies Ltd (ASX: VHT). It’s still at the loss-making startup stage with a market value of $43 million and a long road ahead to prove itself as the real deal.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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