– On 23rd Jan 2020, Hg Capital announced it had agreed to acquire a majority stake in imaging IT software vendor Intelerad Medical Systems from previous majority stake owners Novacap.
– The founders, management and employee shareholders at Intelerad will be reinvested, with Novacap remaining as a minority shareholder.
– The company has undergone significant growth in the last four years, announcing a USD75m R&D program in 2019 and acquiring imaging IT workflow specialist Clario Medical at the end of 2018.
– Total investment from the Hg deal is expected to be in the region of CAD 650-700m (USD $490-530M)
– The investment will be focused on driving growth for the company, both in its main market of North America and to fuel international organic expansion. The funding is also expected to support future acquisition targets to drive inorganic growth.
After a relatively short search, Intelerad has found a new majority stakeholder, Hg Capital. The London, UK based investment firm already has invested over $1B in the healthcare and life sciences sector, including firms such as Rhapsody + Corepoint (healthcare data interoperability), Allocate Software (healthcare workforce management) Evaluate (Pharmaceutical commercial information and advisory) and Medifox (ambulatory care services). The deal is expected to close by the end of 1Q 2020, providing Intelerad with a substantial new investor and war chest. So, what will Intelerad do with the new funds and what challenges lie ahead?
The Signify View
Short Term: Foundation laid, time to grow
Intelerad has been one of the success stories of the imaging informatics market in recent years. While still relatively small, the Montreal-headquartered firm has been steadily gaining market share, a product of the relatively early evolution of its portfolio towards a platform-based solution to support enterprise radiology IT. This has brought success in the outpatient imaging and private radiology reading group segment in the US, Australia, and New Zealand, while also supporting a disruptive entry into the US and UK acute hospital market.
In the short-term, the focus will remain along similar lines, especially given the changing shape of imaging services in the US, the largest single market for imaging IT globally. The provision of imaging services in the US is in a period of transition; increasing scan volumes, limited reading resources and declining reimbursement on account of changing care models is causing many large health systems to revaluate their imaging services.
We see three major trends that Intelerad will be looking to leverage:
1. Greater scrutiny on operational efficiency and workflow for imaging and diagnostic radiology services by large health systems and acute hospitals
Consolidation of the approximately 14,000 private radiologist reading groups into much larger regional and national entities, many of which have acquired or are acquiring outpatient imaging centers
Growth in the use of teleradiology services
The firm is well-positioned in the near-term to capitalize on these trends; the late 2018 acquisition of Clario has added capabilities supporting organizations measuring and tracking the operational performance of imaging service lines, which will only start to be realized this year following a period of integration. This will be a useful asset for one of the key battlegrounds for the market this year – radiologist productivity. Given the fierce competition for deals and growing tendency for competitors to “race to the bottom” on the price to win customer share, being able to prove clear return-on-investment (ROI) over the contract term helps differentiate the offering.
The platform-based portfolio and relatively early move offering SaaS contracting will also play well with the outpatient and small community hospital market, ensuring a degree of budget predictability. Intelerad already has reference customers established at some of the largest regional and national radiology reading groups.
Opportunities in the acute segment will be harder to come by; while there is a growing focus on outsourcing imaging services (both in terms of image acquisition and diagnostic reading), few acute hospitals have taken the plunge yet. Moreover, contracts in this segment are more complex and influenced by a broader criterion, including capability in advanced visualization, artificial intelligence, modality fleet management, and professional services.
Here Intelerad is up against some of the giants in Healthtech, including GE Healthcare, Philips, Siemens Healthineers, Canon Medical Systems, and Fujifilm Medical. Further intensifying competition, incumbents such as Agfa Healthcare, Change Healthcare, and IBM Merge also have a significant customer base in the hospital segment.
However, as one of the earlier movers to an enterprise radiology focused portfolio, Intelerad does have the opportunity to disrupt; the penetration of Sectra into a number of US acute hospital deals and Visage Imaging into the academic hospital segment in the last three years has shown the market-leading incumbents do not have the market locked-down.
Artificial intelligence is also a growing differentiator in purchasing decisions; while most customers don’t expect vendors to be offering a full portfolio of AI-based image analysis tools yet, there is growing expectation to see a clear pipeline and strategy for integration or orchestration of AI into imaging IT products. Intelerad has already taken a first step with the launch of Odyssey, an “AI-Augmented workflow” triage tool that selectively and adaptively routes images to a range of clinical AI algorithms (utilizing Zebra’s AI1 algorithm bundle). Boldly, the firm has also offered the new tool on a one year subsidized “try before you buy” option.
Combined, we think the progress made in portfolio development fits well with current and near term customer trends; therefore, we expect to see Intelerad continue to gain momentum and market share in the near term.
International Expansion for Select Markets
Intelerad has outlined its growth plan to also include focus on international expansion and like almost every imaging informatics vendor, to increasingly leverage artificial intelligence to improve its products.
On the international front, Intelerad has been most successful so far in the private imaging market in Australia and New Zealand, where it has established a dominant position. Its traction in the hospital market here has been slower, though it has secured a share of the much-coveted AUS47.2m (USD31.8m) Western Australia Health Authority deal, a contract covering 80 hospitals it will implement with Canon Medical (lead partner) and specialists Kestral and DesAcc. Given large regional deals make up the bulk of revenue for Imaging IT in Australia, successful delivery of this project should act as a further reference for other businesses in the country. That said, while large in scale, these deals are infrequent and fiercely competitive, so Intelerad will also need to broaden its international horizons to continue to push further top and bottom-line growth in the mid-term.
The UK market is the most obvious candidate, especially given the firm has just established its first major acute care trust implementation with the NHS in England. However, the dynamics and complexities of NHS procurement for imaging IT limits assured growth in the UK. Each cluster of hospitals has tended to push its own framework for radiology IT in the UK, making it easier for incumbent contract extensions. Furthermore, the governance structure of the NHS for IT is a moving target, adding some further risk to its growth prospects. That said, the market is warming to a more enterprise radiology approach, with operational workflow management and teleradiology a key priority in a system over-stretched for radiologist reading resources.
Intelerad should be looking for markets that have traditionally been sluggish in enterprise imaging adoption, have been relatively fragmented in competitive terms and have a significant amount of private radiology business. France is a more obvious opportunity in Europe, especially given the changing hands of the incumbent Agfa imaging IT business to Dedalus; Switzerland too could offer some opportunity. Germany is perhaps the other large European market that could suit, though the strong preference for local regional vendors and the bureaucratic procurement process may limit growth without significant investment in sales operations. The Middle East, South Africa, North Africa, and South East Asia could also offer medium to long-term expansion opportunities. However, we would advise a more focused and targeted approach to the UK and France in the medium-term.
Market polarity will leave less opportunity for the mid-tier vendors
The long-term outlook for Intelerad is perhaps the most uncertain. We see definite potential based on current market trends and the historical performance of the firm to support continued growth in the near and medium-term. This would put the firm into the $100m-250m revenue range in the coming years. However, the outlook for imaging IT software vendors in this “mid-tier” is unclear, especially given the impact of long-term market trends we are already observing. These include:
– Increased consolidation of health networks into larger systems and focus on simplifying IT system supply chains
– Growing focus on “enterprise imaging”, especially for combining IT systems and imaging content from multiple different clinical departments (including cardiology, pathology, surgery, emergency medicine, endoscopy, etc.)
– Increasing market competitiveness due to longer and larger deal sizes; transforms large imaging IT software deals from software transactions to longer service-based partnerships
– Bundling of products (imaging hardware, clinical devices, monitoring systems, IT platforms and professional services) into long-term managed services deals
– The race for artificial intelligence integration and orchestration for image analysis, with strong competition for asset acquisition of leading independent AI software vendors.
Some of these challenges can be addressed with strong strategic partnerships and selective acquisitions of specific assets to meet enterprise imaging and artificial intelligence trends. However, with larger and longer-term deals in several mature markets, there will be fierce competition and focus on layering on professional services and operational support to ensure customer retention.
We see this driving greater polarity in the competitive market, with large multinational healthcare technology and large imaging IT vendors more able to take near-term profit margin cuts to secure long-term deals, especially in the acute hospital sector. Moreover, increased bundling of hardware, software and professional services will also exclude pure-play imaging IT vendors from some deals.
As a mid-tier vendor, this will be a challenge for Intelerad. It will unlikely have secured the financial firepower to compete with the largest healthcare technology vendors in large acute hospital sector deals in the US, thereby limiting its continued growth. Instead, it will be more reliant on existing customers, strategic partnerships and the outpatient and ambulatory sectors. While the directional shift suggests that imaging services are also gradually moving from the acute sector towards the outpatient and private sector, how pronounced this trend will be will have a bearing on the long-term success of the firm.
It is at this point if it has established a broader international customer base, that it will become increasingly attractive as an acquisition target itself. For its new investors, while an exit is far from front-of-mind at this stage, in comparison with an ongoing and expensive battle to maintain and grow to the next level of competition versus some of the leading healthcare technology vendors on the planet, a pay-day in five to ten years’ time could be the most likely long-term outcome.
About Steve Holloway
Steve Holloway is the Director at Signify Research, an independent supplier of market intelligence and consultancy to the global healthcare technology industry. Steve has 9 years of experience in healthcare technology market intelligence, having served as Senior Analyst at InMedica (part of IMS Research) and Associate Director for IHS Inc.’s Healthcare Technology practice. Steve’s areas of expertise include healthcare IT and medical Imaging.