Medicalgorithmics S.A. (MDG) Earnings Call Transcript

So hello, everyone, and a warm welcome to the Poland ON AIR Conference. So this session is dedicated to the Medicalgorithmics S.A., and we're truly delighted to welcome Dr. Kris Siemionow and he's the CEO of the company as well as CFO, Michal Zapora. He will support him during the Q&A session. But before we go to the Q&A session, we are happy to see the presentation and the insights. Kris will, yes, explain to us now. So Kris, the stage is yours.

Thank you so much. Good afternoon to you. It's good morning for me. I am Miami based for quite some time now, and I'll give you a little bit of my history because it is relevant to the company. Okay. I wanted to start off with a high-level slide because the company, Medicalgorithmics was actually founded in 2005. It went public on the Warsaw Stock Exchange sometime around 2014. My group, which is called BioFund Capital Management, a U.S.-based private equity fund focusing on life sciences, acquired the company essentially from near bankruptcy at the end of 2022. So this is a turnaround. And the reason I say that at the start is because many people will look at their iPhone or whatever stock tracker and see that the company has been through ups and downs, and it certainly has. But we -- when we came to the company over 2.5 years ago, we essentially revamped the business model. The company was in the ECG or EKG, as you would say, in Europe, monitoring space. They were making devices. We switched the strategy to make the company essentially a software company, and this is at a high level what we do. We offer AI-powered software for noninvasive cardiac diagnostics. So that's the core business model of the company. And we focus on 2 areas of diseases in the cardiology space. One is on arrhythmia so EKG and the other one is on coronary artery disease. And the company focuses on diagnostics in a noninvasive manner. So that's why it says here, we do CT scan diagnostics, and I'll show you the product in a second. All of our solutions are certified for the country. On the arrhythmia side, we have FDA certification as well as the CE mark. On the coronary artery disease, we have CE mark certification, which we just received earlier this year. So the products are available essentially globally. And like what is it that our software does? Like why would anyone wants to buy it? So our software allows our customers and our customers are generally diagnostic centers all over the world. Our software allows those diagnostic centers to analyze data from their patients and generate an end-of-study report. That's what EOS stands for. An end of study report allows our customers to get money from insurance companies. So that's how they get paid. That's how they get refunded for the service they do. They submit the end of study report to the insurance company. We provide them the technology that allows them to do that. So the company, like I said, has been around for quite some time, and that is very relevant to why we were able to do what we did in terms of our business strategy. So about 12,000 physicians use the company. We have a target of treating or diagnosing, sorry, about 0.5 million patients this year, and that number is growing very rapidly. When we came into the company 2 years ago, it was about 100,000 patients annually were being diagnosed by the company's hardware. Now once again, we're a software company. So that number has grown significantly, and we are forecasting a significant number of patients in 2026. We employ about 150 people, the majority of whom are software engineers. We're active in 25 countries. Like I said, we have FDA certification. So we have customers in the United States, in Canada, but also in Australia, for example, and then, of course, throughout Europe as well. So this is me. So I'm actually a physician by training. I used to be a spine surgeon about 10-plus years ago. I switched sides, as you would elegantly say, and went into business where we were developing medical technology companies with a heavy emphasis on software. Three of those companies have been since acquired by large U.S.-based strategics. But like I said, we have a whole team. We have Michal here, who's our CFO with prior work experience, for example, at EY and [ Przemek ] and [ Jarek ], who are the CTO and Chief Operating Officer, respectively. So it's a full organization that has the ability to do business all over the world. So these are our 2 products. So finally, some nice color pictures. On the left side of the screen is a picture of our arrhythmia diagnostics products. On the right side is our coronary artery disease diagnostics. Once again, this is software products that we manufacture that are compatible with hardware devices provided by other companies. If I just start on the left side of the screen, the arrhythmia diagnostics, we essentially allow our customers to analyze EKG signals that are obtained from patients via remote patient monitoring. So that's what you see on the bottom of the screen. You see this pocket EKG, you see Kardiobeat, you see the Bittium Faros. Those are manufactured devices that the patient wears for a period of some days, 3 days, 7 days, 14 days or 30 days, then the data is sent to our cloud and our artificial intelligence-based system analyzes this data and then spits out the report. And that's what you see on the computer screen. This software allows our customer to analyze the report and generate a report for the physician. On the right side of the screen, we are doing coronary artery diagnostics. What does this mean? We are essentially trying to assess the risk that the patient has of having a heart attack noninvasively. So right now, in order to assess your risk of a heart attack, the physician has to take you to the operating room or operating suite. You have to have a catheter inserted into your heart, contrast has to be administered. And that is a significant effort both for the patient and for the health care system. We are able to provide this information noninvasively from a CT scan. So this is a little bit of a deeper dive into the AI-based software called DRAI, so DeepRhythmAI. And I believe this presentation will be available for you. The reason we put this up is so that you can use this as a reference. So for example, if you're doing due diligence on the company, we have FDA certification with that name. And this is something that's very relevant and very important, and this is something that happened this year. So when we took the company over just 2.5 years ago, we made a significant financial but also time investment into generating new software. This new software was built using a database of over 8 billion, [ whether it ] be heartbeats that we have in our data library. These heartbeats were manually marked by experienced clinicians. So not only we have the data sets, but we also knew what's in the data set. So it's a labeled data set, which is a very unique thing to have. We developed our analytics software based on that data. We certified this software, as I mentioned, with the FDA, we certified it in the European Union with CE. And we then ran a very big study that took place in Western Europe and North America, Canada and the U.S. with 52 cardiologists, as you can see, 167 technicians. And we compared the cardiologists and the technicians how they analyze the data to how our software analyze the data. And the bottom line is that for every mistake an experienced cardiologist makes, we make 14 mistakes less, so 1 to 14. So the system is extremely efficient and very reliable from a diagnostics perspective and it's 14x better than a human. This was published in Nature, which is the best medical journal in the world, and we're very proud of that. This is the largest study of artificial intelligence in cardiology in the world right now. So it's 14,000 patients, 140,000 days of EKG signal. This has significantly enabled us to grow our business because not only is this good research, but this is something that our sales teams, of course, utilize when they're approaching customers. And this has also allowed us to actually have inbound traffic from potential customers. So we're very proud of this study. And then the platform component so this is the algorithm that actually just runs the data and spits out a result. Once you have that result, you have to be able to visualize it. So like human eyes have to be able to see what is being generated by the algorithm, and that's the platform. So we also sell this as a separate product. Sometimes we bundle it for certain customers. Certain customers just want this algorithm. Certain customers want the algorithm and our platform that allows them to visualize it. And we, of course, do everything tailor-made for those diagnostic centers in terms of language, layout of the report, et cetera. But this is something that allows us to be very competitive in the marketplace because not only do we have what I consider the best and artificial intelligence-based system that's done with the latest software. So there's not significant technology debt, which allows our customers to run this very efficiently, lets our company run the algorithms very efficiently. As you are probably very well aware, any time you're selling cloud-based software, the cost of computation is a significant component of your costs and the older your technology stack, the worse that profile looks like. So we're very proud of the fact we have the latest technologies that allow us to be very efficient, allow our customers to generate these reports very efficiently for themselves. So that's what this platform essentially enables. So we have, like I said, a global presence. These are some of the customer names that we have signed agreements with. We signed approximately 18 agreements just this year with partners all over the world. That's on the heels of signing about 15 agreements last year. We are in the process, of course, of continuously acquiring new customers. And hopefully, we'll be able to share some nice news of new customers being brought on to the platform soon. I think it's very important for any investor to understand that the cycle is long. So it takes -- it's not that you buy an app in an app store and you can download and you're ready to go. So there's a customer acquisition time, of course. Once we acquire the customers, our team has to meet with the customers' IT department to integrate the software and sometimes the customers require certain features that we, of course, build for them, and that's a very good thing for us because it's somewhat of a unique proposition in the market. And so we do that, and that takes time. And sometimes the customer takes off-the-shelf solution. And of course, we like that as well. So it just depends on the customer and their needs, but we're very flexible in what we offer. And I do believe that, that's a big part of our success. So the -- when we acquired the company in 2022, we brought in a technology that is called VCAST. VCAST actually stands for Virtual Coronary Artery Stress Test. That's the acronym that we came up with. So VCAST, that's the reason behind the name. And this is a noninvasive diagnostic test that allows cardiologists to make decisions. So after the test is performed on the patient, the cardiologist essentially can recommend 1 of 3 things, either we don't do anything, either we give the patient medication or in certain instances, perhaps the patient needs a cardiology intervention like a stent placed. And once again, all this happens noninvasively. You can see the numbers 01, 02, 03 on the left side of the screen. Those are the steps that are required. So the big advantage of this type of technology is that it's CT scan based. CT scans are ubiquitous, meaning they're essentially in every hospital, even hospitals that do not have a cardiologist. So the advantage is you do not need to go to a specialized center to get information. Of course, this is all done in the cloud. So the results can be sent anywhere, but the patient's access point can be in the community. So even a small town can provide the diagnostic. So the patient does not have to travel to a specialized center. And once again, this is all noninvasive. So after the CT scan is completed, the data that is generated by the scan is uploaded to the cloud. And I think it's very important to note that CT scans, even though they're ubiquitous, they're also very quick. So it takes 30 seconds to a minute to do a CT scan for the patient. And it's very cost effective for the health care system as well. So that is what's important. I see some questions popping up and maybe [ Adrian ], I'll answer the question that you're asking me after I go through the presentation because I suspect that your answer will come in the presentation. And the third thing that happens is our analysis. So once the analysis comes, this takes about 3 hours or so or 4. This is very intense on the compute side. So that's why it takes that amount of time. But that time is very competitive for the market, meaning about 2.5 weeks ago, a company called Heartflow went public on the NASDAQ. They have been a pioneer in this field and their analysis times of generating this report are significantly longer than ours. Essentially, they guarantee 24-hour turnaround time, while we are going to market with about a 3-hour turnaround time. So I do believe this is something that will be a significant advantage for us as we start getting the customers. So what's the competitive landscape look like? So there essentially are 3 main companies that are offering a cloud-based system that allows the user and the user being either a cardiologist or a radiologist to upload the CT scan. And it's Heartflow clearly and ourselves, and you can see some of the metrics here. This is a very exciting field from a clinician perspective. Now over the last 12 months, the American College of Cardiology just made recommendations that this should be one of the first lines of diagnostic, meaning a CT scan of the heart should be something the patient gets first. That's a new recommendation. Before that, the first-line diagnostic treatment was an invasive catheterization. So this is good for software companies that are developing this in this space. Reimbursement on the U.S. side is very strong. So these are data from the Center of Medicaid and Medicare Services. However, in Europe, as we're expanding in Europe now, we also are seeing a very healthy price points. For example, in the United Kingdom, it's around GBP 900 per test. So why is reimbursement so high for this type of a test versus for, let's say, Holter monitoring, which is significantly lower. And the reason is that the payers are very interested in getting the diagnostics out of the operating room, which costs significantly more into this noninvasive approach as done by the CT scan and companies like ourselves. So customers for VCAST, this is a game of big numbers. So there are approximately 10 million or so CT scans of the heart performed in the United States annually. People living with coronary artery disease, the numbers are also very significant. As you may be very well aware, heart attacks are a top killer in the world. So we are targeting Europe first because this is where we now have certification. And then as we grow and get more data from our European partners, we will take that data and be working on getting our FDA certification starting next year. So this is our pipeline. This is just high-level numbers. We, as I mentioned, have signed significant amount of customers. These customers are globally, we have about 8 customers signed in the U.S. Just as a reminder, the company had 0 customers and 0 revenue and 0 business in the U.S. So we have, as I said, we're targeting about 500,000 sessions this year. In 2024, it was 270,000 and 143,000 in 2023. So we're doubling. And the reason that we're talking about sessions is because my first slide that I showed you, said we get paid per end of study report. So the more sessions we do, the more revenue we get because that's how we get paid. I guess you can say it, we get paid per click. I briefly mentioned, and I think there was a question from [ Adrian ] that came something about customer churn. The reason I told you about integration, us customizing the features for each customer, it's a very big effort for the customer to switch. Once they have a provider like ourselves, their entire business on the analytics side relies on us. So for example, in February of this year, 2025, we signed a contract with one of the largest diagnostic testing facilities in the United States. Between February and, let's say, July-ish, our team -- technical team was working with their technical team to ensure that the features that they receive from us are custom-made for them based on their specifications. This required coding literally on our side and coding and programming on their side. Once that process is complete, that company transitions all the software analytics onto us, onto our cloud, and that takes also some time because they have to train their personnel. They have, let's say, 100 technicians. All these technicians have to be trained on our system while supporting the ongoing business needs for that company. So they can't take like a week off or something like that. And the reason I'm describing all of this is to answer the churn question. So if you've spent 6, 7 months as a company, as our customer with your IT department interfacing with our software, if you've trained hundreds of technicians, which also took time and resources from you, the chance of you switching to another vendor is very low. And then 2 of the most relevant reasons why we don't anticipate customers to switch. Number one, as I mentioned, is because we believe we have the best diagnostic software in the world, and we have this published in Nature. So you can review the article as our customers and the clinicians do. So right now, this is the best. So this is the gold standard from a publication perspective. Also, the second reason is efficiency. When a customer switches to our software, they can do twice as much with the same number of people. So we don't expect our customers to switch because they see that they are significantly more efficient as a result of switching on to our platform. The biggest cost for our customers are people. And as our customers grow in scale, they have to add more technicians to their company profile. So you have this kind of a profile of costs are growing and the number of people growing as the revenue grows. Once they switch to our software, their cost profile does this. It flattens out. When they switch to our software, each one of their technicians can generate more reports in 1 hour than they do with their current software. We, of course, have metrics. That's how we actually sell the software. We show our customers what they can anticipate it will take them to generate one report. And to give you an example, a very large company that offers a similar type of a service. It takes 30 minutes to generate 1 report. Once they switch to our software, it takes about 15 minutes to generate 1 report. So about 50% improvement, right? So that's why we believe that once a customer actually tests our system, integrates it, they will be a customer for a very, very long time. So that sort of, I believe -- okay, never mind, we have one more -- a couple more slides. So as far as the revenue projections and where we have -- what we have done since we took over the company, as you can see here on the left side of the screen, the company is trading at approximately, let's say, PLN 6, so that's what, about EUR 1.50 per share. And we did a lot of work, both as actually work, work, meaning people work, but also financial work to ensure that the company has turned around. So we switched the cost structures. We restructured the type of people we have in the company, but most importantly, the product. And we -- that took time, right? So the first 2 years it took time. The company had a fairly significant, I would consider loss in '23 and '24. And now we feel that the customers we have signed and the revenue that's growing is significant. So in Q1, we grew 7% year-on-year. Q2, we grew 17% year-on-year. We published preliminary data for July where we grew 30% year-over-year. And if you continue following the company and our publications, we want to be as transparent with the shareholders as possible and potential investors and just keep you updated as to what we believe is going on and how the revenue growth looks. So what else do we have? I wanted to show maybe one more slide. And this is in the appendix section. So our revenue growth is once again highly dependent on the growth of sessions, what our customers bring to our cloud to monitor, and that has been fairly significant. So like I said, we anticipate about 500,000 sessions to be done at the end of this year, and that's the graph you see on the right. As you see here, the targets are very ambitious, but this is based on our funnel, on our pipeline, on what our customers are reporting to us. What's also very important to know is that the cardiology diagnostics space itself is growing very rapidly, especially in the United States. And that's driven by several factors. One is the one you probably consider as very obvious. It's the aging U.S. baby boomer population, which is really accelerating, especially now. So that's one. But the other thing, and it's more related to what we do is traditionally, these types of services, whether it's on the arrhythmia side or the coronary artery diagnostics side have been managed by cardiologists, which makes sense. That's their specialty. They're the ones who are making this recommendation. What has really happened as a result of COVID is that not only are cardiologists prescribing these diagnostic modalities, but now also primary care physicians. So if you look at who our customers are targeting, because once again, we sell software, we don't target doctors. We target diagnostic centers that then target doctors. So these diagnostic centers used to traditionally work predominantly, let's say, 98% with cardiologists. These diagnostic centers are now working with primary care physicians. And this is specifically I'm talking about the U.S. market, which is the highest reimbursement market in the world. So that has really increased the demand for these services. So let's say, if you look at the top 5 companies in the cardiology space, whether it's Philips, iRhythm, Boston Scientific, Baxter, they are all reporting that their cardiology businesses are growing, and it's not because they're cannibalizing from each other, just because the market itself is growing, which, of course, for a company like us is helping us because we do not have any increase of significance in our cost profile when our customers grow. What does increase in the cost profile for us is our cloud-based computing costs, but we are happy with that because we more or less pass that on to our customers. So that's that. And I think this is -- this concludes the presentation. We can start with the questions.

So maybe I'll do this one. [ Adrian ], you asked what exactly are MDG revenue sources. So 99% of our revenue comes right now from the arrhythmia business. We just launched the coronary artery diagnostics business about a month ago with our first customers in Scandinavia, and we don't anticipate any significant revenue from that source in the coming months. That's like -- we are targeting midpoint of 2026, where we'll start that coronary artery disease revenue, which is the VCAST product start coming up. But all the revenue comes from the arrhythmia business. As I mentioned, the company is a turnaround. We do have some legacy business that we support, and that's on the Holter, an old software site. For example, Canada is a very big customer of ours. We are transitioning all the legacy customers onto our new business model. They are very happy about that because once again, everybody wants the Nature publication type of diagnostics, as you can imagine, and all the customers also want the savings that come along with the efficient software. So we are very excited about that. But it's -- 99% right now of the revenue is from the arrhythmia stuff. What -- [ Judith ], let me just see [ Judith's ]. [ Judith ] asked, what is the value of your cost? And what is their structure. So we have -- the best way to think about this, and I'll let Michal explain in a second, but we, of course, have a very fixed cost and those are people. So I told you we have predominantly software engineers. We do not need to dramatically increase the number of software engineers as we're ramping our business. So we have a very, relatively speaking, flat cost structure, whether we have one customer or 100 customers, we need the same amount of software engineers to support them. So there is, of course, a breakeven point that the company is approaching right now as we're growing our revenue. The cost structure that's variable is the cloud-based computing, which will become a more and more significant part of our costs. But as I say, that's built into the price. As I told you, we charge our customers per session or per report. I would say those are very analogous terms. So the more our customers do, the more they pay us, the more of a cloud they use. However, the fees that they pay us include the cloud component. So we, of course, know what that is. We calculate that, and we believe we have a very healthy margin. Michal, do you want to add anything to that, the cost structure question?

Yes. Thank you, Kris. I think you covered it very well. I mean, yes, most of our costs relates to employee benefits, about half of our cost structure are employees, but these are mainly fixed. So we do not expect them to grow significantly. Yes, we have also cloud costs. They are more correlated to our revenues. But again, we are working on keeping that efficient, right? And our clients will cover this cost, yes. So I think that's it.

Yes. So I think if you're following the company from quarter-to-quarter, the thing that you'll notice is that we will have growth in costs on the cloud side. And just keep in mind that we are happy about that. What is the VCAST? So [ Judith ] is asking another question, what is the difference between VCAST and the competitive solutions mentioned in the presentation? So there are several differences. One is on the technology side, one is on the business model side. On the technology side, we believe that the way the product is developed on the architecture side so like on the technology side, on the borrowing side, we are able to provide the result to the customer quicker than the competition. If you look at the playing field, Heartflow, clearly, ourselves, of course, this is now becoming a very exciting area for development. So there are a lot of groups that are working on developing solutions. They're not as far along as the ones I mentioned, including us, but this is an exciting space. If you assume everybody gives you a good result, meaning the result is valid. I mean what you deliver to a doctor says, this is a problem or this is not a problem. If we just assume that everybody is able to give you a very good result, it becomes a time to report gain. Who can give me the report the fastest because there's a patient waiting and I need to make a clinical decision. The quicker you are able to generate the report, the more business opportunity you have. For example, if you have a patient in the emergency department, you will currently not use Heartflow to get an answer because it takes, like I said, 24 hours. You need to know within 15 or 20 minutes if that patient needs to have a stent placed or if they can be released home with medication. So that's why time to report is so important. Because Heartflow, as I told you, is a leader and a pioneer in this space, they have a very significant disadvantage in terms of their technology stack, number one; and number two, what they had approved with the FDA. We have the benefit of having been developing this since about 2018 that our technology stack is significantly newer, which allows us to incorporate different technologies that generate the report significantly faster. So that's one. And then I said the other issue is the business model. So Heartflow operates as a diagnostic testing facility, meaning you send them the report, they analyze it, they send it back to you, but they are the ones who bill insurance companies. So they have an agreement with an insurance company to do that. I told you the fee is about $1,000, but they have to hire technicians. I mean they're running a diagnostic testing facility with this wrapper of technology around it. We sell to diagnostic testing facilities. We sell to distributors, we sell to cardiology practices, meaning they're the ones who get the reimbursement and we get a piece of it, right? It's a different type of sale. It's a different type of cost structure for our company. We don't need to hire a lot of technicians. We don't need to hire a dedicated sales force, right? So there's those advantages that we see. And that's why we chose the model, but we believe it's the one that allows us to scale the fastest, goes to market the fastest while keeping costs fixed. So that's the other advantage on the VCAST side. Let me see what other. Break -- what are we saying, Michal, about -- so what's the plan to breakeven? And what would be the revenue and EBITDA margin level in '27 based on your assumptions? So we've been -- why don't you answer what we're communicating publicly because obviously, we can tell you what we can tell you.

Yes. Yes. So as Kris mentioned, we plan to grow significantly, and we can expect that our EBITDA and our net profit will increase in upcoming quarters and years. So -- but yes, we are not -- I don't think we are in a position to give exact data now. But yes, giving -- taking the pipeline of clients, the backlog of clients that we are -- that our sales team generates another clients, I think that we are in a good position to be breakeven operationally in -- to have cash flow operations positive in the first half of 2026 and then have a positive EBITDA in the end of 2026.