Australia | Jul 11 2022
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After a huge step up in funding over the last three years, artificial intelligence in radiology may be approaching adoption.
-Integration of AI in radiology has made leaps and bounds amid accelerated investment
-Algorithms support efficiency and accuracy of diagnosis
-Radiologists with development partnerships stand to benefit from short-term efficiencies and longer-term market gains
By Danielle Austin
While it has taken some time for AI to secure a foothold in the radiology sector, with the technology largely underperforming initial expectations to date, analysts from Goldman Sachs have highlighted ongoing investment into the technology has accelerated progress, with revenue generation now on the horizon for the technology.
Funding for AI in radiology quadrupled in 2018-2021, compared to spending in the preceding three years, has seen the sector make huge strides forwards in recent years. There are now more than 190 AI algorithms approved by the FDA, and the industry is highly competitive with more than 200 independent software vendors vying for share in a market Goldman Sachs is estimating to be worth US$18-25bn, with growth potential offering substantial further upside.
The broker highlights to date these algorithms do not seek to replace the need for radiologists, but rather improve or support the efficiency and accuracy of the diagnosis process. Approved algorithms are focused on improving measurement and image processing, workflow management and visualisation, but the broker sees potential for further use of AI technology in retrieving patient information and relevant medical information.
The Goldman Sachs analysts also expect productivity improvements that can be achieved in the near- to mid-term will be able to help mitigate a growing shortage of radiologists and pathologists.
With Australian radiology providers likely to benefit from AI adoption, a number have established development partnerships, including Integral Diagnostics ((IDX)) with Medica, Healius ((HLS)) with Qure.ai, and Sonic Healthcare ((SHL)) with harrison.ai. Goldman Sachs notes these relationships provide the AI developers access to data and feedback to support the creation of algorithms, but also incentivises radiology providers to adopt the technology.
The broker anticipates clinical benefits for these companies will accrue over time, but given a lack of detail around the commercialisation strategies of many of these relationships notes it is difficult to predict how an eventual allocation of gains will play out.
Australian listed stocks set to benefit
The analysts from Goldman Sachs identified Pro Medicus ((PME)) as the best placed stock to benefit from the emerging trend of AI in radiology, within the broker’s coverage.
Not only is medical imaging software provider Pro Medicus now generating revenue from its breast density AI algorithm, it is working to commercialise further AI and continues to work with academic institutions and third party vendors to develop AI for radiology, which will be hosted through the company’s Visage suite. The Goldman Sachs analysts note this integration with its Visage platform makes Pro Medicus better positioned than peers to commercialise AI, and recognises the long-term growth opportunity this could present to the company.
Beyond its AI efforts, the company has maintained steady contract wins and renewed long-standing customers on favourable terms. While Goldman Sachs has long carried a Sell rating on Pro Medicus because of its higher share price, the broker has upgraded to a Neutral rating, finding the stock now presents a better risk-reward balance.
Even more positive is Wilsons, which reiterated an Overweight rating on the stock in June following the company’s announcement of contract renewals for the Visage platform with both Sutter Health and Wellspan Health, worth a combined minimum value of $47m. The analysts from Wilsons highlighted renewal pricing represented a sizeable 67% upside to initial contracts signed in 2014, but also that the long-term contract renewals, 7-years and 5-years respectively, are a positive sign for the company’s continuing US expansion campaign.
Elsewhere in the sector, Integral Diagnostics has formed a development partnership with Medica and formed the MedX! Joint venture. Goldman Sachs carries a Buy rating for Integral Diagnostics.
Analysts from Macquarie recently moved to a Neutral rating on Integral Diagnostics, from a previous Outperform, accounting for subdued near-term revenue and higher costs for the company. The broker noted recent acquisitions, including Peloton Radiology, Exact and Horizon, look to provide mid-single digit accretion in the outer years of its forecast range.
Healius partnered with start-up Qure.ai in mid-2021, initially to integrate the company’s AI solutions into Healius’ chest x-ray technology. Goldman Sachs carries a Neutral rating for Healius.
The Credit Suisse analysts are also Neutral rated on Healius, and in a wider look at the domestic healthcare system note Australia’s post-covid volume recovery lags international markets. The broker highlighted staff shortages and increased uptake in telehealth appointments as key drivers of the trend.
Sonic Healthcare is not only partnered with harrison.ai, whose medical imaging software facilitates AI models to improve efficiency and accuracy of diagnosis, but holds a 20% stake in the company and formed the franklin.ai joint venture. Goldman Sachs carries a Neutral rating for Sonic Healthcare.
Morgan Stanley, updating on Sonic Healthcare in early July, reiterated that the company remains its top pick for domestic health services, noting data from Medicare may suggest early signs of recovery across the diagnostic imaging sector. The broker feels Sonic Healthcare offers superior valuation compared to other large-cap healthcare stocks. The broker is Overweight rated on Sonic Healthcare.
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