PRO MEDICUS LIMITED — Earnings Release 2004

Aug 25, 2004

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: 26-Aug-2004

Title: Open Briefing. Pro Medicus. CEO on Outlook

Record of interview:

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Pro Medicus Limited today reported net profit of $3.6 million for the year ended June 2004, down from $4.5 million in the previous year. However, net profit for the second half was $2.5 million, up 20 percent from $2.1 million. What were the key drivers of the second-half growth and is the momentum sustainable going forward?

CEO Sam Hupert

We believe it is. There was a clear contribution from digital imaging sales, two of which were made late in the first half, with the revenue recognised in the second half. We've now sold our digital imaging technology to a range of different radiology practices and these 10 sites form an excellent base for the next round of sales. It's proved that the technology works and the productivity and efficiency gains have been as good, if not better than, anticipated. We think the growth in digital imaging products is sustainable going forward given we're just beginning to penetrate the industry.

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What's the outlook for earnings in the current year ending June 2005?

CEO Sam Hupert

We normally don't provide forecasts other than to say we see continued growth in our mainstream products, particularly digital imaging. Promedicus.net is growing over 20 percent per year. We've now reported that over 16,000 doctors are connected, so we see that growth continuing. We're also looking at other

opportunities, like the GP desktop market and overseas opportunities for our technology, which hopefully will start to contribute in the current year.

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Pro Medicus' Core Business, which includes practice management applications and services, reported pre-tax profit of $2.8 million, down 39 percent, on revenue of $4.7 million, down 30 percent. To what extent did the result reflect the impact of the reversal of revenue accrued under the Mayne Health Diagnostic Imaging contract and what's the outlook for the business in the current year?

CEO Sam Hupert

All of the Mayne reversal, $1.2 million, was within the Core Business. As we announced when Mayne deferred the contract, we fully reversed the transaction with the view that as parts of it are resumed, they'd be recognised as new revenue. However, we see the Core Business as mature in the Australian market although it still contributes well especially in terms of ongoing service revenue, which provides us with solid annuity streams. Where we see upside is in offshore markets, where we can offer a full suite of products – the Core products combined with digital imaging - that's world class.

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The Core Business has about 75 percent of the radiology market, but there's a perception that your market share's under threat given the recent trialling of the Health Communication Network (HCN) iRIS radiology practice software by radiology group I-Med, which is about to merge with MIA Group to become Australia's largest radiology operator. How do you view this threat and how do you intend to protect your market position?

CEO Sam Hupert

We view the competition as healthy. HCN has been working on iRIS for four years and yes, I-Med has been trialling the product. Currently we supply roughly 100 percent of MIA's sites, including the UK sites, and 40 percent of I-Med's sites. Much of the iRIS trialling's been around replacing "home grown" systems acquired in the I-Med roll-up. While our competition's trying to catch up in providing basic management software, we've developed the industry's best digital integration products and were the first to release a product compatible with HIC-Online 3.0, the latest version of the Health Insurance Commission's online claims processing system. Our strategy is to keep ahead of the pack.

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What's your strategy to grow the Core Business in offshore markets?

CEO Sam Hupert

We've already developed versions of our Practice Management and Appointments systems for the UK market, where they're being used by MIA Lodestone, one of UK's largest private radiology groups. That gives us confidence we can adapt the Core Business for other markets.

The UK market's traditionally been serviced by the National Health Service (NHS) and is just beginning to privatise. With the government looking to offset more medical services to the private sector, private radiology in the UK will be a growing area.

North America has even more potential given the private radiology system there has many similarities to ours and is growing more than 12 percent a year. With our digital imaging offering we have a world class product to address this market, which we'd most likely do with a strong international partner.

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In the promedicus net business, profit before tax was $1.6 million, up 12 percent, on revenue of $2.1 million, up 19 percent. Pre-tax profit margin was 78.1 percent, down from 83.0 percent. What were the main drivers of the revenue growth and what was behind the reduction in margins?

CEO Sam Hupert

Since promedicus net began, there's been a strong and steady progression in the number of doctors connected. That's a function of two things. One is the growth in the number of radiology groups using the system to deliver their results and two is that more doctors are becoming electronic. More recently we've started bringing other providers, such as medical specialists, into the mix, and that's adding to the growth.

In terms of margins, when we listed in October 2000 the average transaction fee was 85 cents and forecast to go down to around 70 cents within a year of listing. The average fee has declined, but far less than our original forecast. We've been able to maintain it at just under 80 cents.

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In light of already having a large percentage of Australian GPs connected to promedicus.net, what do you see as sustainable levels of revenue growth and margin going forward?

CEO Sam Hupert

The majority of doctors connected in the first few years were GPs, under a government incentive program for this sort of connectivity. But, we're now seeing a second wave of doctors, the specialists, becoming electronic. The market's not fully saturated, even though we have 16,000 out of Australia's 20,000 to 22,000 GPs. There are approximately 40,000 medical practitioners in Australia. And to date, the majority of our transactions have been radiology, but specialists write a letter for every patient they see, so even if we get only a small percentage of those, it could have a significant impact on our transaction volumes.

Remember also that promedicus, net could well become an international product. It's very scalable and could be used in privatised markets anywhere.

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The Radiology Information System/Picture Archive and Communication Systems (RIS/PACS) business booked profit before tax of $0.5 million in 2004, up from $0.3 million. Revenue increased to $1.1 million from $0.6 million. What's the

current level of interest in these products and what's the outlook for the current year?

CEO Sam Hupert

These are our digital imaging products and the level of interest is extremely high. There's a recognition within the radiology industry that it will go digital, and whilst there are numerous competitors, we believe the technology we've developed with Agfa gives us the only fully integrated offering that's out there working and providing proven benefits. We're well positioned because the technology layers on top of our existing technology, which has significant penetration within the radiology market. It's an add-on rather than a replacement, which should help us in terms of sales going forward.

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You first announced the launch of your digital imaging products in July 2002. Why has it taken so long for sales to emerge?

CEO Sam Hupert

There were two key issues. Firstly, when the market first looked at digital as a possibility, the key driver was the lower expected cost, on the back of film replacement, which is the case, but not to the extent expected. There's now far greater recognition that the key benefit is in the productivity of your three costliest assets – the radiologist, the radiography technicians and the equipment. There's also more awareness of the upstream benefits – you're able to deliver the images to referrers wherever they are, it's better customer service and as more referring doctors are electronic, they'd expect electronic delivery.

Secondly, the radiology industry had gone through a large and rapid consolidation and the major players went through sweeping senior management changes, all of which impacted their ability to acquire new technology. We're over those issues now and the fact that we've had 10 sites take our technology in the last six months shows that penetration has started to accelerate.

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What are the factors that will drive the market penetration of the RIS/PACS products?

CEO Sam Hupert

There are three. One is the financial impact of re-engineering a practice. Digital technology's the first re-engineering of the radiology process since X-ray was invented; it's a fundamental change that will have significant effects. Second is the clinical benefit. You can manipulate the image on-screen – zooming, stacking, lightening or darkening – which you can't do with film. The third thing is that with new technology, particularly multi-slice CT technology, and the volume of images between 16 and 32 times greater than it used to be, it's becoming totally impractical to manage it all on film.

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During the 2004 year, Pro Medicus acquired the clinical records software now called ProMed Clinical. What was the rationale behind your entry into this area?

CEO Sam Hupert

We'd been looking at the area for some time. We felt there was a need for a product that was more robust, faster and more scalable than some of the other offerings. We also felt we had a huge asset we could leverage off, the 16,000 doctors connected to promedicus, net, who know us and trust us. That gives us the means of electronically communicating and, once the product's installed, updating, which of course is a huge cost saving once you get a significant number of users. The fact that we also had a billing module meant we could have a very competitive clinical product in the market.

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As a late-comer into a market dominated by HCN's Medical Director product, how will you position ProMed Clinical in the market and when do you expect the product to reach break-even point?

CEO Sam Hupert

We're positioning ProMed Clinical as a direct competitor, but with some additional features in terms of connectivity that we think doctors are looking for. We believe ProMed Clinical's faster and a lot more robust and scalable, and we have the technology to migrate the doctors' existing data onto our product, so there's effectively no disruption in any changeover, which is very important.

The market's a difficult one because there are a large number of doctors and it takes time to generate market share, even though we have a significant presence. We're not looking to break even on ProMed Clinical for 18 months to two years. but once we've got a solid base of doctors using our product, we'll have an excellent referral network that will drive growth.

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In 2004, net cash flow from operations before interest and tax was $5.3 million, down from $6.3 million. To what extent did this reflect cash outgoings related to the Mayne contract and to what extent did it reflect other factors? What's the outlook for operating cash flow in the current year?

CEO Sam Hupert

There was some impact from the Mayne contract, but it also had to do with the timing of receivables. We've always had a strong positive operating cash flow. As you can see, our cash balance was up almost $1 million over the year and we'd expect a strong operating cash flow in the current year.

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As at June 2004, Pro Medicus had eash on hand of $10.5 million. Given the solid cash in-flow from your existing operations, and their minimal ongoing investment requirements, why retain this level of cash?

CEO Sam Hupert

It's partly because of the conservative nature of the company. We've always ensured we're cash funded, and that we have virtually no debt. Fundamentally, we're an R&D company in the IT space. We've been able to successfully fund all R&D from operating cash flow, and of course all R&D is expensed. We feel it's important to have significant cash reserves for those activities.

Also, we believe there are opportunities for us in offshore markets and we want to make sure that if we go into those markets we're fully funded by our own cash reserves rather than having to resort to any form of debt. And we're always on the look-out for potential acquisitions where we could add value.

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Pro Medicus announced a fully franked final dividend of 2.25 cents per share, up from 2 cents previously. This brought the full-year payment to 3.5 cents fully franked, up from 3.25 cents. Given your expectation of an improved performance, what's the outlook for dividends in the current year?

CEO Sam Hupert

Over the last year and a half, given our retained earnings have accumulated, we've lifted our dividend payout policy to the 60 to 70 percent range from 50 percent, which has allowed us to distribute profits to shareholders whilst still retaining a solid cash balance. All things being equal, we're looking at maintaining the 60 to 70 percent payout ratio.

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Thank you Sam.

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