PRO MEDICUS LIMITED — Capital/Financing Update 2009

Jan 27, 2009

Attention ASX Company Announcements Platform Lodgement of Open Briefing[®]

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Pro Medicus Limited 450 Swan Street Richmond, Victoria 3121

Date of lodgement: 28-Jan-2009

Title: Open Briefing[®] . Pro Medicus. CEO on Visage Acquisition

Record of interview:

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Pro Medicus Limited today announced it had signed an agreement to acquire US digital imaging and 3D visualisation company Visage Imaging for an undisclosed cash amount. What’s the strategic rationale for this acquisition?

CEO David Chambers

We’ve been very open about wanting to acquire assets, particularly in North America, to help give us a leg-up in that market. Visage is a fantastic acquisition for us, given its product set is extremely complementary to ours and takes us to the leading edge of diagnostic imaging.

Visage isn’t just a 3D visualisation company; it has four main product areas. The first is its picture archive communication system (PACS) which is the software our own radiology information system (RIS) product links into. Visage’s PACS is well regarded and the acquisition gives us the opportunity to have our own PACS product, which we haven’t before. The Visage PACS is a web-based system, so it will fit very well within our product portfolio.

Second is the 3D visualisation product, which allows CT and MRI images to be reconstructed in 3D and which we see as the next wave in radiology technology. The huge advantage of the Visage product in this space is its use of thin-client distribution technology, which means 3D images can be accessed on virtually any PC without requiring the enormous amounts of computer and network

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memory that most current systems require. Visage is one of only two companies that currently have this technology commercialised.

Thirdly Visage has an OEM division which makes “white label” 3D and PACS products and components for major companies, including one of the world’s largest modality vendors. And lastly there is Visage’s amira® research arm, which licenses its applied visualisation technology to universities and other teaching institutions, and works collaboratively with them.

We believe that post merger we’ll have the largest product footprint in the marketplace; we’ll be able to provide a solution from scheduling and billing to PACS and its distribution through to advanced 3D visualisation. We think that will be an unbeatable combination. Visage also has bases in North America and Europe so our geographic footprint will increase enormously. Importantly, advanced 3D visualisation is a product that sells well into the large hospital space in the US, whereas currently our sales are focussed on the private radiology centre market.

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Given Visage has been loss-making, what metrics did you look at in your valuation of the business?

CEO David Chambers

Firstly we looked at the technology itself, which is leading edge particularly in thin-client 3D visualisation, and obviously has a very high replacement cost. Secondly we looked at how complementary the products would be with ours and we’re confident we can bolt onto and add value to each other’s product sets.

The third thing we looked at was why Visage was loss-making and what we could do to turn it around. Over the last two years Visage has had a massive amount of R&D, particularly to bring to market its latest 3D visualisation product, which in December 2008 received US Food and Drug Administration (FDA) approval. So we believe there’s upside in terms of that product’s release. Also on the plus side, we’re looking to apply some of the business principles we’ve used successfully here at Pro Medicus to help establish an appropriate cost base for the business.

It’s also worth mentioning that over the last 12 months there’s been a sharp decline in the selling prices of businesses of this type, to the extent that the replacement cost of the technology would be a multiple of the sale price of the business. So we think the timing of this acquisition has been very opportune for us as well.

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You’ve indicated you’ll use existing cash resources to acquire Visage. Are there expected to be additional costs relating to the integration of the business?

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CEO David Chambers

The fact that we’re able to buy this business for a cash amount that’s very modest vindicates our board’s decision over the past 12 to 18 months to retain a significant cash reserve.

We’ll have to invest some more into the Visage business, although we believe the investment can be funded out of ongoing cash flow, so yes, there will be some additional cost. But post-acquisition, we’ll still have net cash on our balance sheet.

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You expect the acquisition to be earnings neutral within one year. Given Visage’s performance history, what assumptions do you base these earnings expectations on?

CEO David Chambers

Visage has a track record in terms of sales of its products and we believe we’re being very conservative in our forecasts given the current financial environment.

As part of the acquisition agreement, Visage will put in place a number of significant cost saving initiatives that will make it a leaner company than it has been under its previous owners. In addition, we think we’ll be able to benefit over time from a number of synergy opportunities the merger of the two companies will create in terms of product development and new opportunities.

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You’ve indicated you see advanced 3D visualisation technology to be the “future” of diagnostic imaging. What’s the current market for advanced visualisation and what are the factors that are expected to drive its penetration of the diagnostic imaging market?

CEO David Chambers

The market for advanced 3D visualisation technology is growing; Frost and Sullivan expects it to reach over US$1.4 billion by 2013 in the US alone. That compares with its forecast for the US PACS market of US$1.8 billion by 2012.

The drivers of the market for 3D visualisation have been specialist areas – cardiology for example, where with a 256-slide CT scanner, 3D visualisation can show a very detailed view of the coronary arteries. Previously, you’d have had to have an angiogram for this, but CT is now used worldwide as a screening technology so that only those that have known pathology or diagnostic symptoms progress to angiography. Increasingly there are other areas where the technology is being applied, including virtual colonoscopy, neuro-radiological planning, and in the oncology area. 3D is becoming more and more prevalent, and we believe that’s a trend that will only continue.

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What are your integration plans for Visage and what level of synergy benefits do you expect to realise from the acquisition? What’s the expected integration time line?

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CEO David Chambers

We’ve obviously looked at this very closely as part of the acquisition process. We expect the integration process to run over the next 12 months. One element of the integration will be around our US sales team, which will merge with the Visage sales team. The other will be a technical integration where our current products, which provide the ability to move from scheduling through to 3D processing, will integrate with the Visage PACS and advanced visualisation products.

It’s worth saying that cost saving synergies are not the main driver of this acquisition – it’s about extending and deepening our product base into areas that we believe will position us outstandingly well for the future. We don’t have huge overheads in the US and so it’s not like there are major costs that can be eliminated.

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What is the level of R&D spending within the Visage business and how does it compare with that of Pro Medicus? To what extent does the business depend on ongoing R&D and product renewal?

CEO David Chambers

There’s been a significant amount of R&D spend in Visage over the past few years, simply because it was starting in the advanced visualisation market from scratch and building not only the technology for 3D visualisation, but also the specialised applications such as the cardiac suite I mentioned before, and the neuro-radiology suite.

Like in our own business, there’ll be a need for continued R&D to make sure the Visage products stay competitive and remain best of breed. The R&D required to give them a strategic edge in terms of combining them with our work flow products will only take a few months and we expect to able to get our first iteration of our combined product set out fairly quickly. We believe this and the continued R&D will all be manageable within the budget we’ve set.

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You’ve indicated Visage has on-going OEM contracts with major companies in radiology and other healthcare related fields. What’s your strategy with regard to this part of the business?

CEO David Chambers

OEM was originally the key focus of Visage’s strategy, and that business is a good business in its own right, so we intend to keep it. Our intention is to add to that the direct sales model we employ as part of our own business model so that we can more accurately address the needs of the end user. So, effectively we’ll be opening up new markets but maintaining the traditional ones Visage has been working in.

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What are your plans for Visage’s amira® product, which is used widely at universities and research institutes, a market outside Pro Medicus’s traditional area of expertise?

CEO David Chambers

The people who founded the amira® product and have supervised it, will be staying on as part of the acquisition. The fact that they’re people who work closely with a lot of the large universities and that there is a cross-pollination of ideas is a positive thing, feeding back into our R&D pipeline. At the same time, amira® is a viable business in its own right, so we’re looking to keep it for those two reasons.

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Can you comment on the culture of Visage and how it compares with that of Pro Medicus?

CEO David Chambers

Even though Visage was a life sciences division of a larger group, its culture seems to be surprisingly similar to what we have here. A lot of the development methodologies it uses are the same as what we use, and the way they think about the technology and its application is very similar to the way we do. That’s something we’ve been incredibly pleased to have found during our due diligence.

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To what extent does Visage’s business depend on its current senior management and how have you sought to lock them in over the short to medium term?

CEO David Chambers

We’ve identified the key people as many of those in the R&D team and some of the senior sales team. Those people have signed on for a new term with us, so we think the transition should run relatively smoothly.

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What are the longer-term growth opportunities for the merged business?

CEO David Chambers

The Visage products, particularly its digital imaging and advanced imaging based on a thin-client system, fit into our longer-term strategy for radiology and other allied areas such as cardiology and orthopaedics. We also believe the two companies’ products are not only complementary, but also mutually enhancing, so we see that the whole will be greater than the sum of the parts.

We now have a platform that catapults us into different markets: in the US it’s a broader based market that now includes the large teaching hospitals; in Europe, which is a significant market for Visage, there are potential channels for our own products.

We’ll have a product range that goes from the moment a patient rings for a radiology appointment all the way through to a complete 3D reconstruction and

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distribution of those images, which we don’t believe anyone else at this stage has the capacity to do as one company. That will give us a huge competitive advantage as we position for the longer term.

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Thank you David.

For more information about Pro Medicus, visit www.promedicus.com.au or call David Chambers on (+61 3) 9429 8800.

For previous Open Briefings by Pro Medicus, or to receive future Open Briefings by e-mail, visit www.corporatefile.com.au

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