The Pro Medicus Limited (ASX: PME) share price has been surging higher in recent weeks. It closed 5.7% higher at $51.17 on Thursday and is now up 32% in a month.
This year has been a volatile one for the ASX healthcare share. It climbed above $66 earlier in the year before falling below $38 in mid-June. But it has been going upwards since then.
The company may have partly gone up as part of a broader recovery along with many other ASX growth shares. For example, the Xero Limited (ASX: XRO) share price has risen 18% over the past month and the REA Group Limited (ASX: REA) share price has soared by around 23%. The S&P/ASX 200 Index (ASX: XJO) is up by more than 4% over the same timeframe.
But, the rise that Pro Medicus has experienced only recovers some of the lost ground — the current price represents a fall of around 19% this year to date.
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Contract wins
Pro Medicus announced in mid-June that its Visage Imaging business had signed two contract renewals with a combined minimum value of $47 million. These two were Sutter Health, which renewed for seven years, and Wellspan Health, which renewed for five.
The contract renewals are transaction-based with committed minimums with potential upside.
For me, and perhaps investors, a key element from the update was that the renewals were negotiated at an increased fee per transaction compared to the original contracts.
Pro Medicus CEO Dr Sam Hupert explained why this update was so positive:
The industry norm for renewals is for short extensions to the original contract at the same or lower price. The fact that our clients have renewed for a full or longer contract term at an increased price supports our belief that the Visage solution delivers unparalleled value both in terms of financial and clinical ROI (return on investment).
Whilst it is still early days, our renewal success rate sends a positive message to the market and helps build on the network effect that we have been experiencing.
Extremely profitably
Pro Medicus has one of the highest earnings before interest and tax (EBIT) margins on the ASX. In the FY22 half-year result, the EBIT margin was 65%. This helped net profit after tax (NPAT) grow by 52.7% to $20.7 million, which then funded a 42.9% rise of the interim dividend to 10 cents per share.
Any new revenue that the company generates is being turned into profit at a high rate. Therefore, contract wins and contract renewals (with a higher fee per transaction) can help Pro Medicus' profit. Rising profit can be an important factor for pushing the Pro Medicus share price higher.
Pro Medicus share snapshot
Despite its recent gains, the Pro Medicus share price remains 12% over the past 12 months.
At the current share price, the company has a market capitalisation of $5 billion, according to the ASX.
