This small-cap healthcare stock has significant AI tailwinds

How Integral Diagnostics is harnessing AI and teleradiology to scale operations and capitalise on a fragmented imaging market.
Eleanor Swanson

Firetrail Investments

Integral Diagnostics (ASX: IDX ) is a key holding in the Firetrail Australian Small Companies Fund  that provides diagnostic imaging services to GPs, medical specialists and hospital groups. Integral Diagnostics has 91 sites across Australia and New Zealand that offer a range of imaging modalities including MRIs and CTs. The imaging services industry benefits from several structural growth drivers including:

  1. An ageing population
  2. Increasing incidence of chronic disease
  3. A shift to higher cost imaging modalities that increase diagnostic accuracy such as MRI and CT devices
  4. A more proactive approach to management of illness

Large, high quality imaging players also have the potential to grow via acquisition. The industry is fragmented relative to the pathology market with 43% of the imaging market made-up of small independents relative to a mere 4% of the pathology market. Integral Diagnostics has been acquisitive having made five acquisitions since FY2020. 

Figure 1: A fragmented industry provides opportunities as an acquirer and a target

Source: Integral
Diagnostics, Medicare, FactSet, Goldman Sachs, Firetrail.
Source: Integral Diagnostics, Medicare, FactSet, Goldman Sachs, Firetrail.

Figure 2: In contrast, the pathology market is much more concentrated

Source: Integral
Diagnostics, Medicare, FactSet, Goldman Sachs, Firetrail.
Source: Integral Diagnostics, Medicare, FactSet, Goldman Sachs, Firetrail.

Whilst we believe Integral Diagnostics will continue to pursue an inorganic growth strategy, in the near term the company is focused on organic growth, increasing labour productivity and a recovery in EBITDA (earnings before interest, taxes, depreciation, and amortization) margins. Below we discuss two factors which we believe the market is missing when it comes to Integral Diagnostics expanding EBITDA margins over the medium term.

Artificial intelligence diagnostic tools to increase labour productivity

A shortage of radiologists, sonographers and nuclear medicine practitioners has driven significant wage inflation across Integral Diagnostics’ business. As the below chart shows revenue growth has not kept pace with the increasing wage costs driving substantial EBITDA margin declines.

Figure 3: Integral Diagnostics’ EBITDA margins have declined as a result of wage inflation for diagnostic imaging specialists

Source: Company reporting,
Firetrail, February 2024.
Source: Company reporting, Firetrail, February 2024.

Artificial Intelligence (AI) has the potential to materially improve labour productivity for large, high quality imaging players such as Integral Diagnostics that have made the requisite investment in technology and workflow systems. AI can be applied to scans to identify abnormalities and draw radiologists’ attention to areas of concern allowing for faster assessments.

AI diagnostic tools are currently being applied to high volume, low complexity scans such as ultrasound and X-Ray. Radiologists therefore have more availability to focus on higher cost, higher complexity images such as MRI and CT. MRI, CT and Nuclear Imaging are up to 8 times more expensive than an X-Ray scan.

Currently, 5% of scans assessed by Integral Diagnostics use AI diagnostic tools. The company expects the number of scans using AI to increase by 2-3 times over the next 12 months. A productive radiologist can get through 200 scans per day on average. As more AI tools become available and confidence in their diagnostic ability increases there is the potential to increase the scans assessed per radiologist 5-fold to 1,000 scans per day. A material tailwind to labour productivity if realised.

In addition, AI tends to be better at multi-tasking than a radiologist. Radiologists focus on a specific condition, organ, or region of the human body when assessing an image. AI may prove better at identifying abnormalities outside the original scope of testing, improving patient outcomes. The volumes will likely grow in tandem as further scans are required to verify the potential diagnosis. A more wholistic and proactive approach to diagnosing health conditions will help reduce the growing burden of an ageing population on the healthcare system. 

Figure 4: Radiologists are already using machine learning and artificial intelligence tools in medical imaging

Source: CSIRO, November
Source: CSIRO, November 2023.

Margin tailwind from Teleradiology

Teleradiology involves patient’s scans being sent to a radiologist, that is not on site at the clinic, for assessment. The radiologist may be working from a more centralised larger clinic or even from home. Having the ability to route patient images to different locations allows companies like Integral Diagnostics to better manage the supply of workers. In addition, Teleradiology provides less costly assessments with a 3-4% margin benefit from routing scans through this channel. Integral Diagnostics estimates approximately 15% of their imaging volumes are assessed via teleradiology. The company expects teleradiology to double to 30% over the coming years, improving both the supply of radiologists and reducing the cost per scan.

In summary, AI and Teleradiology present tangible ways for Integral Diagnostics to improve its labour productivity, imaging volumes and drive better margin outcomes over the medium term. 

This article is prepared by Firetrail Investments Pty Limited (‘Firetrail’) (ABN 98 622 377 913, AFSL 516821) as the investment manager of the Firetrail Australian Small Companies Fund (ARSN 638 792 113) (‘the Funds). Pinnacle Fund Services Limited ('PFSL') (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the relevant Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund. Link to the Product Disclosure Statement: Link to the Target Market Determination: For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance. Whilst Firetrail, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Firetrail, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication. Any opinions and forecasts reflect the judgment and assumptions of Firetrail and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Firetrail. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication. This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Firetrail.

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Eleanor Swanson
Portfolio Manager - Small Caps
Firetrail Investments

Eleanor Swanson is a Portfolio Manager at Firetrail Investments for the Firetrail Australian Small Companies Fund. Eleanor's primary sector responsibilities are Technology, Healthcare and Australian Small Companies. Eleanor has over 10 years’...

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