Virtual Radiologic (VRAD)

The fundamental premise of this company is that diagnostic procedures are increasing at a rate of 15% and radiologists are increasing at a rate of less than 2%. The radiologist shortage is further exacerbated by several factors:

1. the ever increasing age of radiologists.
2. the increase needs for 24/7 365 day coverage
3. the increased sub-specialization of radiology.

Procedures have gotten more and more complex to read. As digital technology has taken hold (PACS/DICOM), digital images have grown increasingly tougher and tougher to read. Many radiologists have commented to me (I was a former CEO of a radiology software company) that the risks are much greater today than they ever were. Someone must be trained to quickly get through images as complex as a small joint spiral slice CT image.

The evolution of RIS/PACS/DICOM has created the ability for a company like VRAD to address this critical need. A tele-radiologist visionary once told me that teleradiology is really founded on 4 principles:

A - Availability (ever increasing demands of service)
C - Capacity (can they handle the load - an average hospital radiologist may read 30 MRI's on a good day, where as a good telerad can do 80-100.
C - Credentialing (in order to get reimbursements, radiologists must be certified in a given state even per insurance carrier - this is very complex to administer)
E - Expertise (do they have the expertise to read the case).

I believe VRAD and Nighthawk (NHWK) have a headstart in addressing this need. In comparing these two companies, I do see some significant differences (I own both).

1. VRAD has the advantage in the more lucrative day final reads. Prelim reads or "wet reads" are more commodity play. NHWK has 8% of procedure volume and VRAD has 24%. More importantly, VRAD's radiologists are US-centric providing an extensive edge here. It is unclear as to how quickly NHWK can come up to speed from their acquisitions. Both are trying to balance prelims with day reads.

2. Workflow is key - I have been told VRAD has a technology edge and it's platform is more rad-friendly. However, VRAD's lawsuit with Merge-eMed could put a damper on this.

3. Both are remarketing their technology. NHWK is further adding business services which is interesting.

4. NHWK is profitable, but may not grow as fast.

5. Both have very high retention rates - above 95%.

Contrary to some of the analyst reviews I have read, I do not believe this area can be easily entered by competitors for the following reasons:

1. If workflow is integrated into the hospital or imaging center, that is very complex and physicians are very reluctant to change. Further developing this workflow is very complex (I know this first-hand since my former company developed RIS-PACS workflow).

2. Subspecialty risk of having enough coverage of different modalities to actually achieve scale.

3. Credentialing is a complex task and one that requires scalability.