Shares in medical technology company 4DMedical Ltd (ASX: 4DX) had a strong start on Wednesday and were up over 6% at one stage following an announcement made by the company.
Despite shares finishing in the red by the end of the day, they’ve still returned roughly 50% since listing in August 2020 and currently trade at $2.25 per share.
4DX share price chart
What does 4DMedical do?
4DMedical is a health technology software-as-a-service (SaaS) business that operates in both Australia and the US.
The company gets its name from its underlying proprietary XV technology, which works by converting sequences of X-ray images into four-dimensional quantitative data by using patented mathematical models and algorithms.
In simpler terms, the technology is able to accurately scan a patient’s lung function as they breathe, resulting in better-informed diagnoses and ultimately, a better outcome for the patient.
Recent developments
On Wednesday, 4DMedical announced it will be commencing the US clinical pilot of its XV technology software at St. Joseph Hospital in Orange County, California.
Under the pilot, XV will be used to assist in the screening process for a variety of lung conditions, including COVID-19.
XV received FDA 510(k) clearance in May 2020 and also received Class 1 approval from the Australian Therapeutic Goods Administration (TGA) in September 2020.
What now?
This is a step in the right direction, but it’s still early days in my view.
Clinical pilots are just one of the many stages in the commercial rollout process of the XV technology in the US, and it’ll be interesting to see how much more commercial interest is gained throughout 2021.
Here in Australia, the company completed its first successful scan in December last year and it plans to roll out XV in hospitals in Victoria from early 2021.
What I like about 4DMedical
An opportunity such as this strikes me as the ultimate ethical investment. The prospect of gaining wealth as a shareholder in a company that also goes on to improve and save lives would be an ideal scenario for many.
There is also a fairly significant opportunity at play here, with the respiratory diagnosis industry worth an estimated US$35 billion per year. According to 4D management, current technology such as X-ray and CT scans are out of date and not fit for purpose, so it seems there’s potential for disruption in the industry.
The capital-light sales model that leverages existing infrastructure hopes to deliver an impressive 90% gross margin. 4D will charge a fee on a “per scan” basis, charging US$175 per test using the XV technology.
How I’d analyse a company like 4DMedical
If I were screening a company such as 4DMedical prior to potentially making an investment, it would be unlikely to score highly by traditional metrics such as price-to-sales or free cash flow (FCF). This company is the result of 15 years of research and development and is only just beginning to distribute its product into various markets.
In order to gain some sort of edge that could guide my investment decision, I’d want to take a more qualitative approach and put aside some of the financials for the moment.
Here are just a couple of factors I would try to identify for a company such as this:
A thorough understanding of the underlying technology
This may be the most important, as well as the most challenging, aspect. For me at least given my own background, I’d find it hard to understand the technical details behind XV. And as a result, I’d find it equally challenging to assign probabilities to different potential outcomes.
Strength of the management team
Even if the product is successful in being approved by regulatory authorities, the company is likely to benefit from a well-aligned management team that’s also capable of marketing, distribution and having strong corporate governance practices.
I’d be looking at the past history of the management team and seeing if they were involved with successful companies prior. I also think it’s important to determine if management have skin in the game by owning shares in the company or through other incentives.
Summary
These are just a couple of ways I would look at a company like 4DMedical. The valuation aspect is also something to consider, as no company is worth an infinite amount.
However, in order for me to have the required conviction to buy shares, I would need to undertake a high level of qualitative analysis to confirm this technology will offer differentiated value that will drive success.
I hope every success for the company, but it’s a little bit too speculative for me when I haven’t done enough research into the technology.
For now, I’ve got 4DMedical on my own watchlist and look forward to seeing what 2021 will bring for it.
If you’re looking to become a better investor, I’d recommend checking out Rask’s Value Investor Program. It covers aspects such as moat assessments and management team analysis, which are the sorts of factors I’d look at to help build a robust investment case.
