Online Extra: The Sensible Side of Telemedicine

Forget sensor shirts that take your vital stats, the cutting edge of e-medicine is in networking and solving labor shortages

By Tim Mullaney

Of all the Internet bubble dreams, none had more Buck Rogers breathlessness than the hype surrounding telemedicine. But visions of sensor-laden shirts that would beam vital stats back to your doctor lacked solid business models, and most companies never made a ripple. Now companies that bridge medicine and the Net are back, profitable — and going public. Companies like Baltimore-based Visicu (EICU ) and Idaho's Nighthawk Radiology Holdings () are terrific news for patients — but are they good for investors?

Initially, they were two of 2006's best-received IPOs. Visicu's software links intensive-care units at different hospitals to central eICUs so every case can be managed by an intensive-care specialist. Its shares rose 60% after it went public at $16 a share on April 5, and now trade at $20.

Nighthawk, which went public in February, lets hospitals ship CT scans worldwide so they can be read in minutes, even when patients show up in the middle of the night and local radiologists are sleeping. Its shares initially spiked from an IPO price of $16, but are back down to $15.75.

STILL RISKY.

  Today, both companies are promising bets — if only for investors with steel stomachs. Each is fairly expensive despite the pullback. But both are riding a secular trend toward automating health-care and make solid money. Nighthawk made a $5 million operating profit on $20 million of first-quarter sales. (Accounting writeoffs produced a net loss in each period.)

Visicu posted only $6.7 million in first-quarter revenue, but its $4.6 million in operating cash flow dwarfed its $314,000 net profit. &quote;If you have a fairly high tolerance for risk and want to own technology that could be very disruptive, that's the target audience,&quote; says Morgan Stanley's David Veal, who rates both &quote;neutral&quote; though Morgan led both IPOs. &quote;If you're 65 and have a retirement account, it's not the way to go.&quote;

Visicu and Nighthawk both want to exploit medical labor shortages. The American Society of Anesthesiologists says it would take 25,000 intensive-care specialists to staff every U.S. ICU — but the U.S. only has 6,000. Visicu's technology lets eICU specialists co-manage cases while doctors with other specialties like pulmonology work at bedside. Using Visicu helps provide intensive care for 100 patients at a time, compared to a dozen in a traditional ICU.

GLOBAL INTEREST.

  Nighthawk says U.S. demand for CT scans is rising 14% a year. But the supply of radiologists to read them rises only 2%. Its 52 radiologists, all U.S.-trained, read off-hours tests for 15% of U.S. hospitals from offices in Australia and Switzerland.

Of the two companies, Visicu has more upside. It has penetrated only 7% of the U.S. market, has little direct competition, and hasn't expanded abroad. Yet Elizabeth Cowboy, who runs an eICU at Inova Health Health System outside Washington, says hospitals and government officials from as far away as Korea are visiting her eICUs to check out Visicu's technology. And it stands to benefit as business demands more specialization in ICUs.

The Leapfrog Group for Patient Safety, a consortium of major employers, says 54,000 lives a year could be saved if every ICU case were co-managed by an intensive care specialist. Visicu clients report dramatic drops in ICU death rates, from 12% to 27%. It's also up to 25% cheaper to treat patients using eICU technology, according to a 2004 study in the journal Critical Care Medicine. The close supervision by specialists helps avoid complications and shaves almost a day off the length of the average intensive care stay.

TOTAL IMAGING.

  Nighthawk's potential looks smaller than Visicu's because 30% of U.S. hospitals already have outsourcing deals to get radiology tests read at night. Veal says that means Nighthawk's market could be saturated within two years. What's more, pricing is eroding, and Congress is pushing Medicare to spend less on CT scans.

CEO Paul E. Berger says Nighthawk is expanding beyond its dead-of-night niche, supporting private radiology practices in the daytime as they try to develop specialities like reading advanced heart scans or orthopedic MRIs. &quote;The business we see is the total medical imaging business, which is multiple billions of dollars,&quote; Berger says. But that plan is in its very early stages, he admits: 89% of Nighthawk's business comes from CT scans.

The question is whether there's enough growth to justify the stocks' lofty prices. William Blair analyst Corey Tobin says Visicu will make 70 cents a share in cash flow in 2007, about 29 times the stock price now. That doesn't include any international expansion or new products. Visicu's other risk: Since its system costs about $2 million, it's vulnerable to long sales cycles that often lead software companies to miss quarterly earnings projections.

KEEPING IT REAL.

  Analysts project Nighthawk will make 59 cents a share this year, or about $17.6 million, on $90 million in sales. That puts the stock at about 30 times earnings. But though that stock has been under pressure, one early holder is hanging-in confidently. &quote;If the volume of tests to read is growing 10% to 15%, the business will sustain double-digit revenue growth,&quote; says Phil Stiller, an analyst at Renaissance Capital, whose IPO Plus Aftermarket mutual fund owns Nighthawk shares.

But here's the good news, Visicu and Nighthawk have succeeded by taking a pass on technological showing-off like sensor shirts, and instead solving mundane problems like labor shortages. &quote;In the bubble, companies could show great clinical improvements but no return on investment,&quote; Tobin says. &quote;Today the vendors are much more focused on that one-two punch.&quote; That's a winning combination.

Mullaney is E-Business editor for BusinessWeek in New York

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