PRO MEDICUS LIMITED — Management Reports 2008

Aug 25, 2008

Attention ASX Company Announcements Platform Lodgement of Open Briefing®

Pro Medicus Limited 450 Swan Street Richmond, Victoria 3121

Date of lodgement: 26-Aug-2008

Title: Open Briefing® . Pro Medicus. CEO on FY 09 Outlook

Record of interview:

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Pro Medicus Limited today reported net profit of $7.95 million for the year ended June 2008, up 12.5 percent from the previous year. Sales revenue was $15.4 million, up 17.2 percent. The growth was driven by the strong performance of your Australian business, reflecting an increase in radiology practices using your digital product to 125 as at the end of June, up from 40 a year ago. What has prompted the rapid take-up at this time?

CEO David Chambers

We were very pleased with this year's result which was another record profit for the company, our fourth in a row. Digital imaging was the key driver. We've always said we'd reach a "tipping point" for digital when imaging centres came to understand that the automation our digital product provides can deliver significant productivity gains. As we signalled in the first half, we believed we'd reached that tipping point and our second half numbers confirm this. Radiology practices have now seen the tangible benefits that can be realised and better understand the resulting improvements in efficiency and how that can help them manage and grow their practices.

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Whilst revenue rose, so did costs, with expenses up 22.2 percent to $4.04 million. What were the drivers of the cost increases and will this trend continue?

CEO David Chambers

As heralded in the first half, we've continued to invest in building a platform for our future growth, adding to our skill base – including my own appointment – our infrastructure, and our R&D. All of that has meant an increase in our costs but we see this investment as vital to our growth aspirations for the company. Having said that, whilst our margins have undergone some minor erosion, they're still at the upper level for our industry.

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The Australian business booked pre-tax profit of $9.6 million in 2008, up 32 percent, on revenue of $12.5 million, also up 32 percent. Second half pre-tax profit was $5.6 million, up 40 percent. Is the momentum sustainable in the current year ending June 2009?

CEO David Chambers

We don't feel we've exhausted the potential in the Australian market. In fact, we're currently working on several interesting opportunities. You also shouldn't overlook that we'll continue to get service annuity streams coming out of our products, including the digital imaging products, as they come on line.

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Given the limited size of the Australian radiology market, what scope is there for longer-term growth in the digital product?

CEO David Chambers

There are still opportunities for us here as the market is undergoing some major changes with an increasing number of new radiology groups forming. However we realise the Australian market is only so big, so as our penetration of the market increases, momentum will need to shift to other products, other segments and other markets. And of course, we're already well down the track with this in terms of the major initiatives we've undertaken in North America and the UK.

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Within the Australian business, you've indicated that the number of transactions on your e-health network promedicus.net was up 10 percent to 3.5 million in 2008, yet revenue increased only 1 percent, implying a drop in margin. What has driven the growth in transactions, is it sustainable and what's behind the decline in margin?

CEO David Chambers

The growth in transaction numbers came from an increase in the number of doctors using the network from 25,300 to 27,776. This is in line with our view that in healthcare there's a growing desire for electronic transfer of results and other information and we expect that trend to continue. This has now spread well beyond GPs to include specialists, hence the steady rise in the number of doctors registered to use our system. We don't expect demand to level off any time soon so we need to position ourselves to take advantage of this. Having so many doctors using the network is a good start, and we're also looking at other fields in healthcare where we think the e-health network has applicability.

There were two reasons for the slight drop in margins. First, there are some new competitors in the market and some of the products on offer are at low or zero cost because they're heavily subsidised by government. Second, we've bundled in volume-based e-health discounts for some of our largest clients as part of an overall package that includes our digital imaging offering. This makes sense as they see these two products going hand in hand – the electronic delivery of a report and the ability to electronically deliver the images. Nevertheless, we believe we're still enjoying margins that are well above industry standard for this type of product.

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The North American business booked pre-tax profit of $1.7 million, down from $2.5 million, reflecting the translation impact of the stronger Australian dollar and the absence of licensing fees under the AltaPACS contract in Canada. Excluding the AltaPACS contract, what was the trend in earnings in constant dollars?

CEO David Chambers

In constant dollars, earnings were slightly down, which reflected a short hiatus when we were renegotiating our agreement with Agfa-Gevaert in North America. It also reflected the fact that Agfa was faced with its own, unrelated, issues during the period.

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How might this loss of momentum impact your sales in the North American market nearer term?

CEO David Chambers

We're now in a transition period as we implement our new business model, but there are new projects in our sales funnel and we'd expect momentum to pick up from here. As with any new model it will take time to reach full momentum – exactly how long is difficult to tell but early signs are encouraging. A 12 to 18 month period wouldn't be unreasonable given a market of this size.

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Under its new agreement with Agfa, Pro Medicus is establishing its own presence in the North American market and will take full control of the sale and marketing of its products in that market. How will your growth opportunities change under the new arrangement?

CEO David Chambers

Under the new agreement, we'll be able to sell product under our own name in North America, rather than under the Agfa brand. So taking control of our North American sales effort also means we'll be getting a full mark-up on our software rather than sharing it with Agfa. We'll also receive ongoing service revenue directly.

Importantly, the new arrangement is supported by Agfa, whose sales channels and logistics support we'll continue to use. We'll continue to work with Agfa and continue to be Agfa's preferred RIS (radiology integration system) vendor, as well as having the opportunity to pick up sales of Agfa's PACS (picture archive communication systems) products in many instances.

The agreement also gives us the opportunity to look at introducing other products, like our line of e-health business solutions, and at other markets outside the imaging centre market such as orthopaedics and cardiology, where our technology is also applicable.

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How are you seeking to offset the risk of launching a standalone operation in North America?

CEO David Chambers

We think the risk is low. We've acquired a lot of knowledge about the US market over the last three years. We believe that will stand us in good stead. We're also not going in unsupported, as we'll still be working closely with Agfa, using its sales channels, some of its facilities, and various forms of infrastructure support.

Another offset is that we'll be able to sell into other markets and where appropriate work with other PACS vendors. And importantly, we're looking to use a similar model to the one we have here in Australia, so the size of the team we need is relatively small which keeps the investment risk to a minimum.

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Can you comment on the outlook for earnings from North America in the current year given the increased cost of establishing your own presence in the market?

CEO David Chambers

It's too early to be definitive, given we've just implemented the new model. There will be a material increase in costs, but as I said earlier, we're not starting from scratch, our team is small and focussed so we haven't had huge establishment costs, and some of our costs are being defrayed by Agfa. The fact that we're getting the full revenue rather than a percentage will also be a plus. Realistically, we'd expect to see a gradual climb in our earnings rather than a step-change – certainly in the beginning.

We still believe the opportunity is great; the penetration of fully integrated digital software solutions among North American imaging centres being relatively low, and with no player yet having established a dominant position.

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R&D expenses were $0.6 million in 2008, down from $0.7 million. What's been your progress in new product development and can you provide an update on your development of a next generation product platform?

CEO David Chambers

We introduced a number of new capabilities into our US product offering throughout the year, including integration of a number of third-party billing modules and integration of a leading US electronic medical record (EMR) product.

We're also involved in a major R&D effort aimed at transitioning our products to a new technology platform which is being designed to serve as the cornerstone for our future growth in both local and overseas markets. Under Australian International Financial Reporting Standards (AIFRS) costs associated with this major project need to be capitalised, hence our reported R&D spend was less than our actual spend of $1.2 million.

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Pro Medicus had cash of $12.9 million as at the end of June, up from $11.1 million a year earlier. What is the expected cost of establishing a base in North America and how will you fund it? What is the expected impact on cash at the end of June 2009?

CEO David Chambers

Because we're trying to keep our team small, like we've done here in Australia, we'll fund our North American operation out of free cash flow. We don't expect it to have a significant impact on our balance sheet. We will however, look to use some of the cash reserves for other opportunities as they arise. We have a strong, debt-free balance sheet, and we believe we have plenty of capacity to fund growth through product development initiatives as well as through other avenues of expansion.

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Pro Medicus announced a fully franked final dividend of 3.25 cents per share, down from 4.00 cents last year, which included a special dividend of 1.0 cent. The full-year dividend was 6.00 cents, down from 7.00 cents, with the previous year including special dividends of 1.50 cents. What's the outlook for dividends for the full year? Can you increase dividends and continue to invest in growth?

CEO David Chambers

Like for like, our normal dividends (excluding special dividends) have increased. The board felt that on this occasion it would be prudent not to pay a special dividend, consistent with what we said at the first half.

We feel we've been consistent in striking a balance between return to our investors and protecting the business growth aspirations of the company. There are lots of opportunities for us in North America, both in terms of penetration of existing markets and in terms of potential acquisition opportunities given asset prices have fallen. Being cashed up, we're well positioned to realise our growth ambitions.

corporatefile.com.au

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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