Saving Lives as the World’s Pioneer in Digital Pathology: Nordic Global Leader in Medical Imaging Software | H.E.R.O. Issue 13, 7 December 2020

Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose

Saving Lives as the World’s Pioneer in Digital Pathology: Nordic Global Leader in Medical Imaging Software | H.E.R.O. Issue 13, 7 December 2020

December 6, 2020 Uncategorized 0

"Our company runs one of the largest image sharing networks in the world. In the UK alone, where virtually all hospitals are connected to our solutions, more than 35 million medical images are shared every week. One of our growth initiatives in Imaging IT Solutions is digital pathology. At an early stage, our company was asked whether we could handle microscopic images in the same way as radiology images. Due to this introductory project, Sweden is now a world leader in digital pathology. No other country has such a high proportion of digital pathology departments. Of these digital departments, our company holds a dominant share of the market, providing a robust base for international growth. We are the only supplier that can combine digital pathology and radiology in the same system, which creates better and safer care for patients, while significantly reducing costs for healthcare providers who can use one system instead of two." - CEO Dr. K

Can one single company make a critical positive difference and impact to its country and to the world's health systems to become more effective and thus take care of more patients and save more lives? Because of this quiet innovator, Sweden is a world leader in digital pathology; no other country has a higher proportion of digital pathology departments. This company commands a dominant domestic share of the digital medical imaging software systems, with a particular focus on cancer diagnostics, and has successfully expanded globally, serving over 2,000 healthcare providers around the world, including U.K. where virtually all hospitals are connected to its solutions, with more than 35 million medical images shared every week. And this speed and accuracy in diagnosis is a matter of life and death.

This enables easier collaboration between, for example, radiologists and pathologists, who play a key role in efficient cancer care. When the radiologist’s results indicate the presence of cancerous tumor in a patient, a biopsy is taken to allow the pathologist to definitively determine the type and stage of cancer. This information is critical to ensuring the right treatment is administered. This quiet innovator can provide pathologists with a fully digital review environment and thereby replace microscope reviews. With digital images of tissue samples instead of physical glass slides, using digital tools means that the images are easily accessible at the primary hospital as well as for any experts who may be consulted at other hospitals—or even in other countries. The use of medical images in areas such as pathology is growing, partly as a result of more customers implementing systems for consolidated image management. The company's IT solutions facilitate integrated diagnostics by allowing images and information from various diagnostic specialties to be archived and viewed in a single system.

This week, we highlight one of our portfolio companies, Nordic Global Leader in Medical Imaging Software, which we have held since our portfolio inception on 28 Aug 2020 and accumulated more subsequently, and is up +3.7% during the week (30 Nov to 4 Dec 2020). It had earlier reported on Nov 2020 a healthy set of 2QFY2020/04 (Aug-Oct 2020) results, in which sales climbed 13.7% yoy, order bookings +76.7% yoy to break another record high, operating profit rose 109.8% yoy, with operating margin improving from 11.8% to 21.7%, and ROE (= EBIT/Equity) of over 47.5%, on continued strong demand for its scalable solutions in diagnostic medical imaging. This rising dividend-yielding profitable and cashflow generative innovator has also compounded +475% in capital gains in the recent 5 years vs MSCI ACWI World index +61.8%. The company has a 40-year history of growth and profitability. More than 50% of the company’s sales comprise recurring revenue from long-term customer contracts. The company has a very strong corporate culture based on employees’ expertise and attitudes and their drive to solve customer problems.

Importantly, the company has expanded into the management and archiving of all types of medical images, including non-radiology images, with a comprehensive enterprise imaging solution for imaging-intensive departments (radiology, pathology, cardiology, orthopaedics). Customers can easily adapt and expand a departmental solution to create a multimedia vendor neutral archive (VNA) that supports all image management. Integration with the electronic medical record (EMR) and other relevant healthcare IT systems is an essential factor in the company’s success. As more existing customers have taken the opportunity to expand their systems to include other areas beyond radiology, the company has strengthened its position as an enterprise imaging IT provider.

The company has customers in more than 60 countries worldwide. The company believes that it is better to be big in a few countries than to be small in many. The company’s ambition is to be the largest or second largest supplier in the countries where sales are conducted through the company’s own 19 offices. Notably, the company has gone from being a relatively unknown supplier in the US to one of the most popular. For seven consecutive years, the company has won the industry’s most prestigious award, “Best in KLAS”, for its outstanding customer satisfaction in this product segment among major US healthcare providers. For the first time, the company was also ranked in 2020 as number one in Canada and awarded ‘Best in KLAS’ Global PACS (Canada). On 2 Nov 2020, the first sites of Australia's largest public health systems are live with enterprise-wide radiology imaging solution from the company. On 5 Nov 2020, the Royal College of Pathologists of Australasia (RCPA) has reached a milestone in its exam process with trainees now using the digital pathology solution from the company.

In 1999, the company became the first in the world to offer digitized prosthesis modeling for orthopaedists. Some of the most prestigious orthopaedic clinics use its systems for planning and follow-up of orthopaedic surgery to achieve better treatment results. The company's systems also help to cut costs by reducing the amount of time spent in the operating theatre. The company is the market leader in Scandinavia in IT systems for image-based planning and follow-up of orthopaedic surgery, for example in hip, knee, spine and trauma surgery. Using 2D and 3D medical images, measurement tools and a library of more than 90.000 implant templates and click guides, orthopaedic surgeons can diagnose and plan with greater accuracy. These include follow-up service to ensure that unnecessary repeat surgeries are avoided for implant surgery patients experiencing post-operative pain, which greatly benefits both patients and society

The company also provides greater security for society’s most critical communication and IT systems which contributes to a more stable and secure society. The company is Europe’s public defense cybersecurity leader in the area of encryption and secure mobile communications, serving governments, defense organizations, EU, NATO organizations that handle classified information. The company provides encrypted products for data transfer and exchanging sensitive information, including state secrets. In 1998, the company's cybersecurity solutions Tiger was approved for the classification level secret and enabled the Swedish Defense Forces to become the first in the world with eavesdrop-protected mobile telephone communication for national secrets. The Tiger was later developed for the Tetra network used by the Swedish Bluelight emergency services.  The Tiger was also used to encrypt Netherland state secrets since 2004 and protects NATO secrets from eavesdropping since 2018. In public defense cybersecurity, no country would dare to entrust the data security of its most critical infrastructure to an unknown supplier. The company’s long-standing experience and brand in the world’s most advanced data security play an important role.

The company is also the developer of RAKEL, the unique high-tech encrypted emergency preparedness communication system that connects security organizations, rescue services, police, ambulance operations in Sweden. RAKEL covers 99.84% of Sweden's population and 95% of the country's surface, with the exception of the mountain world, and the system is built and planned to withstand severe weather conditions and power outages. The company also provides cybersecurity solutions to critical infrastructure with critical social functions (energy, drinking water and the process industry) to reduce the risk of access violations, interruptions or disruptions to critical networks and operating systems. This include a strategic partnership with a Swedish energy company in monitoring service for supervisory control and data acquisition (SCADA) systems in energy distribution.

Data security became the company’s first niche area in 1978, when a team of researchers from the Institute of Technology at Linköping University were presented with the task of creating a security solution for banks. Professor I formed the company together with his postgraduate students. Mr. B, now Chairman and second largest owner, became a postgraduate student in information theory under the supervision of Professor I and led the company to transform beyond consulting into the development and sale of products and system solutions in data security and image encoding.

CEO Dr. K has been with the company since 1985 and is the company’s single largest shareholder with 9.5% of capital. Guided by a keen interest in medical technology and a vision of digital radiology images, Dr. K came to the Institute of Technology at Linköping University as a postgraduate student in the 1980s, where he also had Professor I as his advisor. Dr. K was recruited to the company and he initiated an expansion into digital image management systems for radiology departments in 1989. In 1993, Sweden’s first film-free radiology department, using the company systems was opened in Mjölby. Dr. K is listed in the Swedish MedTech Magazine as one of the most influential figures in the field of medical technology in Sweden.

Dr. K comments: "Possibilities for working remotely with the same functionality and security as the workplace, as well as comprehensive consolidation in healthcare to promote higher productivity, are some of the factors that drive the markets for medical IT and cybersecurity. With increased order bookings and profits in the first half of the year, we have shown that our focus on customer satisfaction is paying off. This is how we grow and achieve our goals. The situation for many of our customers is far from ideal, owing to the ongoing pandemic, and we are doing what we can to help. Based on their feedback, we have done well at maintaining a high level of customer satisfaction. This feels fantastic and encourages us to continue to do our utmost to meet our customers’ needs so that they can provide their patients with the best care possible and protect critical infrastructure and communication, where society is at its most vulnerable."

"The market for medical imaging IT is a field that is undergoing changes. Increased productivity, access to new technology and scalability are more important than ever in the situation that healthcare now finds itself. Healthcare is facing large increases in volume owing to the number of examinations that need to be conducted and reviewed once the elective healthcare sector picks up again after the COVID-19 pandemic. Mergers or acquisitions of healthcare providers also lead to the need for efficient scaling of systems in pace with increases in volumes."

"Like the rest of society, we are witnessing an increasing trend toward cloud-based solutions, which will fundamentally change our industry in the field of medicine. This change has taken longer compared with other fields, owing to customer concerns over data security, data ownership, and increased costs. Over the last few years, however, we have seen region-wide solutions becoming more frequent, and growing numbers of customers choosing to switch to cloud services. Procurements have increased in both scope and complexity, and over the last few years we have been awarded several of the largest and most comprehensive projects— Greater Manchester in the UK, for example, with whom we signed an agreement in the second quarter."

"Our new One sales model, with use-based invoicing, has been positively received in the market, especially due to the fact that COVID-19 has created liquidity problems for some of our healthcare providers. An increasing number of customers, especially in the US, will be asking for One instead of license-based purchases. Recurring revenue, earnings and cash flow will all increase over the longer term while the variation between quarters will decrease."

"We are meeting demand with solutions that help our customers put together coherent strategies for all their needs concerning medical image processing—a strategic decision we made more than ten years ago. We have gradually added medical specializations and competences such as cardiology, dermatology and digital pathology. Today, we have one of the market’s most complete enterprise imaging solutions for diagnostic image management. Our focus is on areas linked to illnesses among the elderly and cancer diagnostics, where the need for efficiency is especially great. In some cases, we are also working on partnerships to meet our customers’ demands for functionality."

"Our corporate culture is strong and we have fantastic employees. With satisfied customers, a strong balance sheet, positive cash funds and significant increasing recurring revenue, we are relatively well equipped to manage the high level of uncertainty in the world. Initiatives in innovation and further product development are continuing at full speed, unaffected by the pandemic. Our possibilities for growth are favorable in all operating areas for the foreseeable future. Continued growth in the US market, and new product segments such as digital pathology, are a few of the short-term possibilities. We also have new geographic markets and several exciting projects in the pipeline in our operating areas that could be significant over the long term. And even if COVID-19 results in a temporarily suppressed demand in some markets and areas, people will still fall ill and society needs cybersecurity. With long-term initiatives, investments in existing customer offerings and innovation, we create value for our customers. That way, we help make society healthier and safer. Customer value is the foundation of our success, and also determines how we successfully create shareholder value and returns for our owners."