Medicalgorithmics: A Strategic Shift Towards Growth and Innovation in the Medical Technology Sector
Aa
Share
We initiate our coverage of Medicalgorithmics with a BUY recommendation and set our FV at PLN 45.2 per share (implying 26% upside). Medicalgorithmics has significantly changed over the past year: it has acquired a new strategic shareholder Biofund, is cash rich, has a new business unit Kardiolytics, and has reinvented its strategy for the ECG business.
Kardiolytics is developing VCAST, an AI tool to analyse heart CT scans. The procedure already possesses a reimbursement code in the US and is gaining a foothold on the lucrative USD 10bn market as an alternative solution to the current more invasive tests. VCAST is entering a decisive period with important newsflow ahead, and should soon start clinical trials and registration in the EU and in the US. MDG, for the first time in a long time, seems to have an idea of how to navigate the ECG business, which had presented a series of setbacks in previous five years.
We can already see the first positive effects of moving away from PocketECG exclusivity, with each successive deal bringing MDG closer to its long-awaited presence in the US market. New strategy for the ECG business in the US. Under the new ownership, MDG has significantly changed its strategy for the ECG segment in the US. MDG sold off the structurally unprofitable Medi-Lynx to React and then took from it the market exclusivity for Pocket ECG.
The management aims to sign multiple IDTFs (Independent Diagnostic Testing Facility) in the US market to build scale and diversify revenue streams. In order to do that, Medicalgorithmics decided to separate its Pocket ECG system into hardware and software, and integrate its software (the key asset) with a number of third party devices. MDG has already signed initial integration agreements and first contracts with IDTFs other than React. We believe this process will continue; we await new larger contracts thanks to which MDG may mitigate the risk of high exposure to React, where we see risk of terminating the contract with MDG.
Kardiolytics
Kardiolytics’ VCAST utilizes AI to extract diagnostic information about narrowing of heart blood vessels (atherosclerosis) from CT imaging of the heart. Fractional Flow Reserve tests using CT serve as an alternative to the invasive traditional FFR test. Currently, VCAST is nearing the completion of its developmental phase and is set to begin the necessary clinical trials for registration. Clinical trials are scheduled to commence in late 2023, and we anticipate submission of the registration motion for CE still in 2023 and to the FDA in 2024. We believe that the company may initially obtain the CE certificate for the EU, which could pave the way for potential partnering. A commercial launch is projected for 2025. We assume 56% cumulative probability of success. Our valuation of Kardiolytics is PLN 253m, or PLN 25.5 per share.
