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Is Capitol Health Ltd a buy on China deal?

This morning, diagnostic imaging business Capitol Health Ltd (ASX: CAJ) announced that it has entered into a five-year Collaboration Agreement with Enlitic Inc. The deal means that Capitol will take a share of revenue from the sale of Enlitic Deep Learning Services in the field of radiology in China.

Capitol will receive a percentage of Enlitic sales that it initiates in China and a smaller cut of all other sales from the region. Capitol will also provide training and other support services.

Enlitic’s technology applies a form of artificial intelligence called deep learning to medicine. In particular, the technology can potentially be used in radiology to improve diagnostic accuracy and expedite disease detection.

Capitol’s partnership with Enlitic began in October 2015 when Capitol announced that it would invest US$10 million in the start-up and receive Australian and Asian marketing rights in return. Today’s announcement does not really contain much significant new information and it seems that Capitol is yet to make any actual sales of Enlitic’s solution.

A debt fuelled acquisition spree combined with a fall in industry sales volumes has meant that Capitol shares are down 85% from their high in April 2015. Meanwhile, shares in listed peers Integral Diagnostics Ltd (ASX: IDX), Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) have not suffered such large drops.

Although all these companies had to deal with the same adverse market conditions, a simple share price comparison is not strictly fair. Integral only listed in October 2015 and the other two are much larger businesses and offer various services in addition to diagnostic imaging. Furthermore, none of these companies were as richly priced as Capitol to begin with.

Enlitic’s technology is exciting as is Capitol’s involvement, but I can’t help wondering if Capitol would be better served focusing on its core business of providing diagnostic scans to Australians. On the other hand if Capitol makes a couple of large Enlitic sales then I will be tempted to buy in.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. You can follow Matt on Twitter @MatthewBrazier1.

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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