Breast Density and Volpara Health Technologies (VHT)
Ethnocentrism is the tendency of humans to see things through the lens of their own culture. This same tendency is what causes “domestic bias” which means that investors from Country X will lean towards investing in stocks from Country X because that’s what they know. We often come across gems while doing research that are lesser known companies in faraway foreign countries that offer investors some great pure-play opportunities along with some great currency diversification opportunities. One such stock we profiled recently was ISRA VISION, a profitable high-growth small cap that is a pure-play on machine vision. Now we’re going to introduce you to a little-known medical imaging stock with a great growth story and some incidental currency exposure to the Australian dollar (all numbers that follow are in USD).
Founded in 2009, New York company Volpara Technologies (ASX:VHT) took in a single round of $5.5 million in 2014 and then decided to have an IPO on the Australian stock market in December of 2016 (mainly because it was more convenient) which raised around $8 million. Based on today’s share price of 46 cents, that gives VHT a minuscule market cap of just $43.6 million. At the time of the IPO, they had just $145,000 a year in run rate (run rate refers to the recurring revenues of Software-as-a–Service (SaaS) companies). Fast forward to today (less than a year later) and we see a run rate of $1.53 million, a number they expect to double before the end of this fiscal year. So what exactly is it that Volpara is selling? In order to answer that question, we need to give you a little bit of background on breasts.
No matter how much we try to downplay it, breasts are something we’re all pretty fascinated by. The majority of women stare at two of them in the mirror every morning and “the lads” like to share pictures of these “assets” and remark at their size and shape. Advertisers use them to attract attention (much to the chagrin of feminists everywhere), and there’s even a Russian startup called “TittyGram” that lets you rent your breasts out for ad space and messaging:
Silly, sexist Russian boys (rolls eyes).
While we can all agree that there is a certain appeal to breasts, what we don’t know much about (males anyways) is what these bouncy contraptions are made of. As it turns out, breasts are made up of supportive tissues (dense breast tissue) and fatty tissue (nondense breast tissue). The former is what gives them that firm feeling and the latter is what makes them all squishy. The problem with having dense breasts is that it becomes more difficult to spot potential cancer tumors putting women with dense breasts at a greater risk of cancer.
With early detection having a +95% survival rate, women are encouraged to go in for breast cancer screening (also called mammograms). This is where Volpara Health Technologies comes into play with a software solution called VolparaDensity, the first automated breast density assessment software with clinically proven performance (40 peer-reviewed clinical studies). Here’s a look at the output from the software:
Remember how we said that increased breast density translates to an increased risk of cancer? This means that women with dense breasts should undergo supplemental screening (like ultrasounds) but insurers and referring physicians require justification before spending those dollars. That image you see above is your justification.
VolparaDensity is just one component of VolparaEnterprise which is the entire cloud-based platform on offer which integrates with all the popular screening machines and also includes a cloud-based “big data” component called VolparaAnalytics. With over 10 million women screened to date, there are loads of insights that can be gleaned from all this data, even simple ones like the decrease in breast density as women age seen below:
Now that you understand the product on offer, here’s where investors might start to get interested. This is a high-margin SaaS product that is seeing strong rates of adoption, and as investors we love nothing more than a company that tells you exactly how they plan to make money. Check out this “anatomy of an enterprise deal” noting:
So if you’re one of their US-based sales team that’s selling things directly to test providers, the case for adoption is pretty clear cut. This is why they already have a market penetration of 1.5% in their leading market, the United States (expected to exceed 3% by end of fiscal year). They claim that there are no competing solutions that have the clinical validation they do (yet) and their leading competitor is “visual assessment”, something that even some of our MBAs are able to do competently. We say “yet” because these margins are just begging for some new entrants:
Remember how we talked about “run rate”? Well the acronym ARR stands for “Annual Recurring Revenue” which is just another way of saying “run rate”. The information seen above shows us just how profitable it is to sell enterprise cloud-based software or SaaS. So how big is the Total Addressable Market (TAM)? Take a look:
An important point to make here is that the United States has certain regulatory requirements for test providers to measure breast density and report that to patients. 32 states mandate that test providers report breast density, and there’s actually something called the “Mammography Quality Standards Act” or MQSA which mandates that sites adhere to certain quality standards by January 1st, 2018, otherwise they will be fined or even closed down. Again, this thing is practically selling itself.
While the company is growing by leaps and bounds, you may be surprised to hear that they aren’t using artificial intelligence (AI) yet in the way that you would expect. According to a blog post by their Chief Information Security Officer:
To date, Volpara has not taken a machine-learning approach to delivery of these analytics. However, with the large amount of data being acquired, we are looking forward to delivering new insights for our customers using AI approaches.
Maybe they can pick up one of the +40 medical imaging startups that are using AI and do an aqui-hire of sorts in order to accelerate this. The best AI algorithms will always be those that are being fed the best data. Volpara needs to keep focusing on rapid deployment of their solution to capture as much data as possible after which time they can then start to improve their analytics capabilities with some “advanced artificial intelligence technology”.
If you want to pick up some shares in Volpara (ASX:VHT) and you’re not an Australian native, open up an account with Interactive Brokers. We’ve sworn by them for years and they are the best broker for trading international stocks – period. We picked up a small lot of VHT shares because we liked the growth story, the transparency of senior management, and the regulatory factors that are driving adoption. The side-effect of holding some AUD denominated assets is just an added bonus.
Most people don't know that Interactive Brokers is the biggest online brokerage firm in the U.S. and the only firm we know of that allows you to buy stocks directly on 22 different foreign exchanges. We've used IB for many years as a cheap platform to exchange currency, for trading stocks on foreign exchanges, and for trading U.S. shares at just $1.00 per 100 shares. Click this link to get started.