Australia is rightly renowned globally for its biotech research, and the significant (about 150 strong) component of life-sciences stocks on the Australian Securities Exchange (ASX) is a very intriguing sector. This week I want to look at the devices part of that world: here are three examples of some of the wonderful technology that is coming out of Australia and being taken to a global market.
The caveat, of course, is that life on the share market for these companies as they build their way toward eventual profitability can be a difficult path, and share price appreciation is rarely a linear process. But for investors who do their own research and get comfortable with the technology in question, how it is being received (and put to use) on the global market, and the size of the relevant market opportunity, periods of share price weakness can represent a cheap seat aboard a growing valuation. Here are three medical device stocks that I think are worth a look.
- Mach7 Technologies (M7T, 56.5 cents)
Market capitalisation: $136 million
12-month total performance: –25.2%
Three-year total performance: –5.1% a year
Analysts’ consensus target price: $1.27 (Stock Doctor/Thomson Reuters, two analysts), $1.34 (FN Arena, one analyst)
I looked at Mach7 Technologies (M7T) in May at 53 cents, and I also recommended it at 68 cents in August; and I’m happy to go with it again, at 56.5 cents. The company develops software platforms for the healthcare industry, specialising in image management systems and patient data management. Its products allow healthcare enterprises to identify, connect, and share diagnostic images and patient-care intelligence where and when needed. M7T develops data management solutions that create a clear and complete view of the patient to inform diagnosis, reduce care delivery delays and costs, and improve patient outcomes.
The core of these offerings is the Mach7 Enterprise Imaging Solution, which encompasses enterprise data management, enterprise diagnostic viewing and departmental workflow applications. Mach7’s Enterprise Data Management solution, consisting of a powerful vendor-neutral archive (VNA) and data administration tools, allows for the fast storage, access, retrieval and viewing of images across a healthcare network, with connectivity to the cloud. Mach7 is progressively moving to more software-as-a-service (SaaS)-style contracts, which make up more than half of contracts.
Mach7’s medical imaging software solution centralises, stores, organises and displays patient data across the healthcare enterprise – connecting hospital networks and facilitating data flow between hospital departments and clinicians everywhere. The Mach7 product suite works with or replaces a healthcare enterprise’s existing, and sometimes antiquated, medical imaging infrastructure to fill the gaps created by different departments using different imaging solutions, eliminate IT complexity and ensure clinicians have a complete and comprehensive view of their patients’ imaging history.
During the half-year, Mach7 signed major deals with Hong Kong private hospital St. Paul’s Hospital, and US national IT and radiology service provider Nuvodia: the St. Paul’s deal has a total contract value (TCV, which refers to the lifetime value of a contract) of $1.52 million, and the Nuvodia deal has a TCV of $2.5 million. But these were put in the shade in January, when Mach7 signed its biggest-ever customer contract, a ten-year deal with US outpatient radiology service provider Akumin, to deploy Mach7’s entire Enterprise Imaging platform, for a TCV of $16.7 million.
For the December 2022 half-year, M7T posted record half-yearly revenue of $16.4 million (up 14%); record growth in sales orders, which were up 17% to $25.8 million; a 22% lift in annual recurring revenue (ARR), to $16.4 million; a 13% rise in earnings before interest, tax, depreciation and amortisation (EBITDA) and net operating cashflow of –$5.8 million. In terms of guidance, Mach7 said at the half-year it was on track to exceed FY23 sales order target of $36 million, which would represent a rise of 8% on the $33.2 million of sales orders achieved in FY22. The company needs $5.5 million in additional contracts to be recognised in the second half to reach this revenue guidance.
Other FY23 targets are to grow revenue by more than 20%, and to be cashflow-positive. Broker Morgans says the 17% growth in the sales order book is a strong indication of future growth. Mach7 ended the December 2022 half-year with $20.6 million in cash (up 2% on 31 Dec 2021), and no debt. With the reasonable expectation of further contract wins, Mach7 looks to be very attractive buying at these levels.
- Singular Health Group (SHG, 9.2 cents)
Market capitalisation: $10.4 million
12-month total performance: –54.6%
Three-year total performance: n/a
Analysts’ consensus target price: n/a
Listed in February 2021 at 20 cents a share, raising $5 million through the sale of 25.8% of the share capital, Singular Health Group has not had a happy time on the share market – although it started with a rocket.
The shares hit 70 cents in their first month on the ASX, but it has been mostly downhill from there, and SHG has not traded above its issue price in a year.
So, why is SHG worth a deeper look?
Singular Health’s core technology, the Volumetric Rendering Platform (VRP), enables two-dimensional medical imaging data to be quickly converted into fully interactive three-dimensional (3D) models of patient’s anatomy, which can be viewed in 3D and/or virtual reality (VR) for surgical planning, patient education, and surgical implant design.
The original software that came out of this platform, MedVR, is a software application that converts CT, MRI and PET scans into 3D and VR, and then enables the user to put on a headset and “walk inside” the human body and look at the immersive elements and the adjoining elements of the body that are affected by that particular pathology.
MedVR has been built into the company’s software, the 3Dicom Viewer, which is available in four tiers: Patient, R&D, MD and Surgical. (DICOM, which stands for digital imaging and communications in medicine, is a standard protocol for the management and transmission of medical images and related data and is used in many healthcare facilities). The 3Dicom Viewer is used by surgeons, dentists and other medical practitioners who are providing patients with pre-and-post-operative 3D scans. 3Dicom Patient software – which has been downloaded in more than 40 countries – allows patients to share their scans (with their consent) with their medical practitioners, family, and friends (this version has no measurement or diagnosis capability.)
3Dicom’s value proposition is based on the fact that because patients perceive the world using 3D, they can better understand 3D anatomical models than traditional 2D medical images. Enhanced 3D visualisation gives better spatial context, showing various anatomical sites (and pathologies) relative to each other.
In June 2021, Singular launched the Medical File Transfer Protocol (MFTP), an innovative method for compressing, anonymising and transferring medical images, reports and even design files between 3Dicom users with QR codes and/or unique tokens via email. In August 2021, Singular Health launched a mobile application that enables patients to receive their own DICOM scans from practitioners using a QR code, store it on their mobile device and visualise in 2D/3D, with annotations from their doctor and/or radiologist.
The company has also added to its intellectual property its cranial AI model for accelerated design of cranial implants, using a publicly available dataset of craniotomy CT scans, and developed with the CSIRO. It works in this area with fellow ASX-listed company, the Singapore-based Osteopore, a global supplier and manufacturer of natural-tissue-enhanced regenerative implants, with Singular Health providing design software and an integrated means for surgeons and designers to collaborate.
The first of the product tiers to be cleared for sale in the US, 3Dicom MD, aimed at collaborative diagnostic review, received 510(k) clearance (that is, for medical devices) from the US Food and Drug Administration (FDA) in October 2022. The company is targeting approval from Health Canada, the Therapeutic Goods Administration (TGA) in Australia), and the Health Sciences Authority (HAS) in Singapore in the first half of calendar-year 2023.
Next on the approval pathway is 3DICOM Surgical, the medical design application that allows for virtual surgical planning, with pre-operative placement of screws, implants and other devices. Singular is targeting FDA clearance for the US market in in the second half of calendar-year 2023, and is targeting Health Canada, TGA and HSA approval in the first quarter of calendar-year 2024.
The logical extension of Singular’s work was into 3D printing, and it has taken that step, buying a 25% stake in Melbourne-based manufacturing company, Australian Additive Engineering (AAE), and commissioning a 3D printing facility in Melbourne in March 2022, which is fully operational, and is operating at high capacity, making patient- specific implants, surgical guides and anatomical models. In January 2023 did a deal with Perth-based 3D printing company Global3D, taking over the majority of Global3D’s existing medical-focused 3D printing business. This deal brought Singular a second printing plant, giving the company a unique national footprint in the design and 3D printing of patient-specific medical implants and prosthetics, using polymer and titanium.
Singular Health has an ambitious model called “Scan to Surgery,” in which medical practitioners visualise radiological images using its 3Dicom viewers, deploy its AI models to segment relevant anatomy, use the integrated Virtual Surgical Planning software to manipulate this anatomy, and design patient-specific medical implants and cutting guides, which Singular will print at its facility and deliver for surgical use. The key to the Scan to Surgery initiative is the deployment of a single software solution, to create an end-to-end personalised surgical planning platform. The near-term goal is to demonstrate this for the spinal and maxilla-facial surgical sectors.
It’s a very ambitious plan, and there will be investors that balk at the fact that Singular Health – although it describes its cash position as “strong” in its December 2022 quarterly report – has just under $1.2 million in cash in the bank, although it is achieving revenue. Singular is spending money to put in place the conditions to grow that revenue significantly, but there will be investors who will struggle to get comfortable with the “cash burn” situation. That is why Singular Health must be considered a very speculative punt, in a highly speculative sector; but the growth opportunity may swing the purchase for some. Market research firm Frost & Sullivan recently valued the global medical software and 3D-printing market at $US4.48 billion ($6.6 billion). Investors have to ask themselves whether the opportunity to back a company with all the tools to grab a meaningful slice of this market is worth 9.2 cents a share.
- ImpediMed (IPD, 5.8 cents)
Market capitalisation: $104 million
12-month total performance: –63.7%
Three-year total performance: –11.9 % a year
Analysts’ consensus target price: 16 cents (Stock Doctor/Thomson Reuters, four analysts), 18 cents (FN Arena, one analyst)
Brisbane-based ImpediMed has put some world-class technology in the clinic. ImpediMed’s bio-impedance spectroscopy (BIS) devices non-invasively measure a patient’s total body water and extracellular and intracellular fluid volumes – and tissue composition – to help doctors assess and treat chronic diseases. The BIS measurement takes less than 30 seconds.
Fluid imbalance has significant clinical implications, and detailed knowledge of fluid levels can tell doctors a lot.
ImpediMed produces a range of medical devices, which are approved for sale in the US by the Food & Drug Administration (FDA) and CE-Marked for sale in Europe. The flagship product is the SOZO digital health platform aimed at multiple indications, including heart failure, lymphoedema (limb swelling caused by a lymphatic system blockage, most commonly caused by lymph node removal or damage due to cancer treatment) and protein calorie malnutrition.
Using ImpediMed’s BIS technology, SOZO measures 256 unique data points over a wide spectrum of frequencies from 3 kHz to 1000 kHz. The SOZO fluid analysis for lymphoedema helps doctors in the early detection of lymphoedema in the arms and legs. It utilises ImpediMed’s proprietary L-Dex lymphoedema index, which is 80% sensitive and 90% specific in detecting sub-clinical lymphoedema. If detected, the progression of lymphoedema can be prevented – or even reversed, by wearing a compression sleeve. If not treated, it can become an irreversible, life-long debilitating condition that gets progressively worse. Early detection of lymphoedema using SOZO allows early treatment, which prevents progression to serious disease.
The SOZO fluid analysis for heart failure provides an objective measure of fluid overload in heart failure patients. It uses ImpediMed’s HF-Dex heart failure index which is a measure of extracellular fluid as a percent of total body water: the reading is analysed against guidelines and the appropriate fluid volume found in healthy people. HF-Dex also includes an assessment for patients with end-stage renal disease (ESRD).
SOZO – which can be assessed remotely – allows doctors to easily and accurately assess changes in a patient’s condition, get earlier diagnoses, alert them to the need for intervention, through a non-invasive test. It is a software-as-a-service (SaaS) product, which generates ongoing revenue from subscribers.
ImpediMed is initially focused on three large and growing markets: oncology, heart failure, and renal failure: it says these markets overlap significantly and represent an annual addressable market of over $2 billion.
Since September 2020, in a contract that has been extended three times, global pharma giant Astra Zeneca has been using the SOZO platform in a Phase IIb clinical trial, to track patient fluid volume in a pharmaceutical study focused on chronic kidney disease. The study began in January 2021 and was expected to run for approximately 18 months, but has been extended to 29 months, with 210 SOZO systems being used in the extension, making a total of 410 used the trial (in addition to the 940 systems in operation around the world). All up, the Astra Zeneca trial will generate more than $6.7 million in revenue for ImpediMed.
In November 2022, ImpediMed reached the milestone of 500,000 patient tests performed on SOZO. In the first half of FY23, to December, more than 97,000 tests were done, up 37% year-on-year. The SOZO database now has more than 1.6 billion individual data points, and that wealth of data has enabled ImpediMed to increase the accuracy of the test, automate key protocols, improve its current algorithms and create new ones, and provide real-world data to the FDA to help regulatory clearances.
Oncology will be the main focus over the rest of FY23, covering the areas of reimbursement, expanding the sales platform in advance of reimbursement, and completing the SOZO II hardware development and submitting it for FDA clearance. In heart failure, the company expects to complete and lodge the FDA submission (for the removal of the contraindications for implantable pacing and cardio defibrillator devices) following FDA clearance for SOZO II. In renal failure, once validation and verification testing has been completed for SOZO II, the company’s R&D team will complete the Renal data review from the observational trial, and then discuss next steps with the principal investigators.
About 82% of ImpediMed’s revenue is software-as-a-service (SaaS) revenue, at a gross margin of more than 90%. Annual recurring revenue (ARR) is up to $8.8 million.
ImpediMed is solidly funded, with $26.2 million in cash at the end of 2022. It is also well-supported by investors, with 47% of its shares in the hands of institutional investors.
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