Company Notes Series (#7): iCAD

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first six editions in the series can be found here, here, here, here, here, and here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes

Data as of 26 October 2024

Details on company

  • Stock ticker: ICAD
  • Listing exchange: NASDAQ
  • HQ: Nashua, New Hampshire, USA
  • Employee count at end-2023: 69 (67 full-time; 24 in sales and marketing; 16 in R&D)

iCAD’s business

  • iCAD is a global leader in AI-powered cancer detection whose laser focus is to create a world where cancer can’t hide.
  • iCAD provides the ProFound Breast Health Suite, which is a  solution for breast cancer detection, breast density assessment, evaluation of one- or two-year breast cancer risk, and evaluation of cardiovascular risk based on breast arterial calcifications. The ProFound Breast Health Suite is cleared by the US Food & Drug Administration (FDA), has received CE mark (for European regulations), and has Health Canada licensing. It is available in over 50 countries and iCAD estimates that it has been used for more than 40 million mammograms worldwide in the five years ended 2023. The ProFound Breast Health Suite contains four solutions: (1) ProFound Detection, (2) ProFound Density, (3) ProFound Risk, and (4) ProFound Heart Health.
  • ProFound Detection is clinically proven to improve breast cancer detection and radiologist performance. Currently at V3.0, ProFound Detection is built with the latest in deep-learning and 3rd generation artificial intelligence. It is used for 2D and 3D mammography screening. ProFound Detection rapidly and accurately analyzes each individual image or slice to identify potentially malignant lesions. Analyzing for masses, distortion, calcifications, and asymmetry, it localizes, segments and classifies lesions giving them a score and a case score for the overall exam. ProFound Detection is FDA cleared, CE marked, and Health Canada licensed. V4.0 of the solution is under review with the FDA.
  • ProFound Density provides an objective and consistent breast density assessment, helping clinics align to the new FDA-MQSA (Mammography Quality Standards Act) notification requirement to patients, which took effect in September 2024. Using mammographic images, ProFound Density analyzes a woman’s breast anatomy, measuring the adipose and fibroglandular tissue dispersion and texture, and categorizes her breast density within the appropriate BI-RADS 5th edition density category. ProFound Density gives clinicians an integrated workflow for identifying and reporting breast density, allowing for personalized patient planning with supplemental screening and customized schedules when needed. ProFound Density is FDA cleared, CE marked, and Health Canada licensed. The newest ProFound Density, V4.0, is under review by the FDA.
  • ProFound Risk reads 2D or 3D mammogram images to provide one-to-two year risk assessments for breast cancer. It is the first tool of its kind. ProFound Risk uses a new model for predicting breast cancer during an annual mammogram screening that has been found to be 2.4X more accurate compared to traditional life-time models based on family and medical history. By evaluating several data points in a patient’s scanned image, ProFound Risk calculates a more accurate short-term Risk Score for developing cancer in one or two years. ProFound Risk is CE marked, Health Canada licensed, and available for investigational use only in the US; ProFound Risk is under review by the FDA.
  • ProFound Heart Health measures the presence and extent of breast arterial calcifications from the same mammogram used to identify breast cancer, breast density and breast cancer risk. From one mammogram, clinicians assess the patient’s risk of heart disease and recommend further surveillance or review by other care teams. Breast arterial calcification assessment is pending regulatory licensing and available for investigational use only. iCAD’s Heart Health solution is under review by the FDA. Starting in October 2022, iCAD and Solis Mammography have been collaborating to develop and commercialize AI to evaluate cardiovascular disease based on breast arterial calcifications. Multiple studies have shown a correlation between the amount of breast arterial calcifications, which are visibly detectable on mammograms, to cardiovascular risk. iCAD and Solis are working together to use AI to quantify the amount of breast arterial calcification in mammograms, correlated to the risk of disease, and define meaningful clinical pathways for high-risk women.
  • iCAD has historically offered its solution as perpetually licensed software, primarily pre-installed on and sold with an iCAD configured, off-the-shelf computer, capable of optimally running the software. In 2022, iCAD began offering its full suite of breast AI solutions as a software package, without customers needing to purchase hardware; in the same year (in the first quarter of the year to be precise) iCAD also launched an on-premise, subscription model for its software. In the first quarter of 2024, iCAD began offering its solutions under a cloud-based, software-as-a-service (SaaS) model; iCAD’s SaaS product is powered by Google Cloud’s cloud computing infrastructure. Management’s current focus is on transitioning iCAD’s business model from a perpetual model to a recurring revenue model (this includes on-premise subscriptions and cloud-based SaaS).
  • iCAD is a US-centric business, with the USA making up 87% of total revenue in 2023. The remaining came from Europe (10%) and other geographies (3%).
  • In North America, iCAD sells its ProFound Breast Health Suite solutions solutions through a direct regional sales force and channel partners including OEMs, Radiology Picture Archiving and Communication System (PACS) vendors, AI Platform vendors, and distributors. In Europe and the Middle East, iCAD’s solutions are sold through a direct sales force and 22 reseller relationships with regional distributors:
    • iCAD’s OEM partners include GE Healthcare (focused on the manufacture and distribution of diagnostic imaging equipment), Fujifilm Medical Systems (a subsidiary of Fuji focused on the manufacture and distribution of X-rays and other imaging equipment) and Siemens Medical Systems.
    • iCAD’s PACS partnerships include Change Healthcare (a leading independent healthcare technology company focused on insights, innovation and accelerating the transformation of the US healthcare system) and Sectra (an international medical imaging IT solutions and cybersecurity company).
    • iCAD’s AI Platform vendors include Ferrum Health (works with global leaders of AI applications to provide a robust catalog of AI applications on a single, secure platform serving clinical service lines across healthcare enterprises), and Blackford (a wholly owned subsidiary of Bayer AG that provides a platform for integration of multiple disparate AI applications and algorithms with existing systems). 
  • iCAD has customer concentration risk. GE Healthcare is a major OEM (original equipment manufacturer) customer of iCAD, accounting for 22% of iCAD’s total revenues in 2022 and 2023. iCAD’s cancer detection products are also sold through OEM partners other than GE Healthcare; in total, all of iCAD’s OEM partners accounted for 32% of iCAD’s total revenue in 2023 and 29% of total revenue in 2022. iCAD also had one major direct customer that accounted for 8% of total revenue in 2023 and 4% in 2022. iCAD’s end-users appear to be radiologists working in facilities that conduct mammograms.
  • Prior to the third quarter of 2023, iCAD had two reporting segments: Detection and Therapy. The Detection segment houses the ProFound Breast Health Suite while the Therapy segment housed the Xoft business. On 23 October 2023, iCAD completed the sale of Xoft. Xoft was sold for US$5.76 million, and it is an electronic brachytherapy platform designed to deliver isotope-free (non-radioactive) radiation treatment in virtually any clinical setting without the limitations of radionuclides. So iCAD is currently left with only one reporting segment (Detection) and one product suite (ProFound Breast Health Suite).

Market opportunity

  • Incidences of breast cancer are growing. According to the World Health Organization, breast cancer is the most common cancer worldwide, with 2.26 million new cases diagnosed worldwide in 2020. One in eight women will get breast cancer in her lifetime, and every 14 seconds, a woman is diagnosed with breast cancer world-wide. When diagnosing breast cancer, early detection matters, as the cancer is more likely to respond to treatment and can result in greater survival rates.
  • According to the American Cancer Society, the relative 5-year survival rate from breast cancer is 99% when it is detected early, when the cancer is localized (no spread outside of the breast). When detected later, the 5-year survival rates drop, to 86% when the cancer has regional spread (to nearby areas outside the breast such as the lymph nodes), and to just 31% when it has distant spread (to areas such as the lungs, liver, and/or bones). iCAD calculates if diagnoses were shifted one stage earlier for 20% of the 280,000 women in the US diagnosed with breast cancer each year, there can be savings of approximately US$3.7 billion across 2-years of patient treatment and healthcare costs. But the problems with early-detection are:
    • 59% of women in the US miss their recommended screening mammograms, and for those who regularly screen for breast cancer, 20%-40% of cancers are missed in mammogram screenings with up to 50% missed in women with dense breast tissue.
    • Traditional risk assessment models have also relied on family history of the disease as a leading risk factor when in fact, and most surprising, 89% of women diagnosed with breast cancer have no direct family history of the disease and 90-95% are not related to inherited gene mutation.
  • AI can help radiologists spot cancer faster, with greater accuracy and save more lives. With the continuing migration from 2D FFDM (full-field digital mammography) reading systems to 3D DBT (digital breast tomosynthesis) systems, radiologists are spending twice the amount of time reading hundreds more images per 3D case compared to the four images captured with 2D (two images per breast). As a result, 50% of radiologists are overworked – and burnout is reported to be 49%. Simultaneously, false-positives and unnecessary recalls for suspected cancers have continued at similar rates while hard-to-detect interval cancers are being missed or diagnoses are delayed, leading to poor patient-experience.    
  • 40.5 million annual mammograms are conducted in the US across 8,834 certified facilities, as measured by the FDA Mammography Quality Standards Act (MQSA). Yet, only 37% of facilities are using a CAD (computer-aided diagnosis) or advanced AI mammography solution, according to Research & Markets United States Mammography and Breast Imaging Market Outlook Report 2022-2025. Of the 3,268 facilities using AI, iCAD has an active customer base of 1,488, or approximately 46% of the AI market, and approximately 17% of the total US market. Moreover, if more countries adopt the practice of each mammography exam being read by a single radiologist using AI, rather than the current practice in most countries of having two radiologists read each exam, this could be a tailwind for iCAD. Furthermore, some western European countries have already implemented, or are planning to implement, mammography screening programs, which may increase the number of screening mammograms performed in those countries.
  • iCAD’s large enterprise customers include Solis, Radiology Partners, SimonMed, Ascension and Cleveland Clinic, who collectively serve about 15% of the US mammography screening market. Some of them are in the early stages of rolling out iCAD’s solutions and continue to expand into more sites and markets each month. 
  • Globally, more than 31,000 mammography systems serve approximately 250 million women in the age range recommended for annual mammograms. Expanding to the 63% of the market that is not using AI, plus additional wins in the segment using AI but not ProFound, results in significant opportunity for new business for iCAD. The company has strengthened its sales team to take advantage of these opportunities.  
  • Data is the key to training robust machine learning and AI. In this regard iCAD is well positioned.  iCAD’s algorithms for ProFound Detection are trained on over 6 million images, including one of the largest 3D image datasets gathered from over 100 sites from around the globe. The training data includes the highest amount of sourcing from the US, providing diverse data that is ethnically, racially, and age representative of the US population. 
  • As it stands, iCAD’s ProFound Detection already performs better than the competition as shown in Figure 1. What’s missing in Figure 1 is that ProFound Detection also positively finds or predicts more cancers up to 2-3 years earlier by circling and scoring suspicious lesions for radiologists. As mentioned earlier, the latest version of ProFound Detection, V4.0, is under review with the FDA. V4.0 is built on the newest deep-learning neural network AI for breast cancer, density and risk. Per regulatory test data, iCAD has observed V4.0 will deliver significant improvements in specificity, sensitivity, and the highest AUC (area under the curve) for Specificity and Sensitivity for breast cancer detection at 92.5%.
Figure 1; Source: iCAD 2024 September investor presentation
  • iCAD appears to have strong partnerships. It has been partnering GE Healthcare for more than 20 years; in 2017 iCAD became the only integrated AI breast cancer detection solution in GE Healthcare’s systems; in November 2023, ProFound Detection and other iCAD solutions were integrated in GE Healthcare’s new MyBreastAI Suite offering. In November 2022, iCAD announced a strategic development and commercialization agreement with Google Health to integrate Google’s AI into iCAD’s breast imaging portfolio; iCAD expanded its partnership with Google Health in 2023 and signed a 20-year research and development agreement for the co-development, testing, and integration of Google’s AI technology with the ProFound Breast Health Suite for 2D mammography for worldwide commercialization to potentially ease radiologist workload and reduce healthcare disparities for women. iCAD is also working with Duke University, Indiana University, University of Pennsylvania and Karolinska Institute on artificial intelligence advancements and clinical testing. 
  • iCAD’s solutions are also interoperable with more than 50 PACS (Radiology Picture Archiving and Communication System) solutions worldwide. 
  • Early performance results from the first 30,000 ProFound cloud cases delivered an impressive processing time that’s over 50% faster compared to many traditional on-premise deployment solutions.

Management

  • Dana Brown, 59, was appointed president and CEO on 6 March 2023. Brown has been Chair of iCAD’s board since January 2023, and a director of iCAD since January 2022. Prior to being iCAD CEO, Brown was Strategic Advisor to Susan G. Komen, the world’s leading nonprofit breast cancer organization, and served as the organization’s Senior Vice President, Chief Strategy and Operations Officer from November 2018 to April 2022. Prior to Susan G. Komen, Brown served as Senior Vice President and Chief Digital Officer at United Way Worldwide, a global network of over 1,800 nonprofit fundraising affiliates. Brown was a founding member of several successful ventures; she co-founded and served as Chief Marketing Officer for MetaSolv Software (acquired by Oracle), and served as Chief Executive Officer of Ipsum Networks. Her background makes her well-qualified to lead iCAD’s transition from selling perpetual software licenses to on-premise subscriptions and cloud-based SaaS:
    • MetaSolv was an ERP (enterprise resource planning) system for telecom, media and internet providers. Brown helped MetaSolv become a category killer, consistently winning deals against many of the larger players of the time, including Lucent and Telcordia. MetaSolv was initially developed for a mainframe computing environment, and later became client server, and then SaaS. 
    • After MetaSolv, Brown became CEO of Ipsum Networks, a network performance management software company credited with pioneering route analytics technology. Ipsum Networks went on to be acquired by Cisco in its early stages.
    • After Ipsum Networks, Brown was on the turnaround teams of technology companies in the content delivery and mobile space, until 2011 or so, when she shifted to non-profit work by joining United Way Worldwide, then a US$5 billion global nonprofit. At United Way, Brown was its first Chief Digital Officer. She architected a co-development partnership between United Way and Salesforce to build a new cloud called Philanthropy Cloud, a platform that empowers corporations to put their values into action. Philanthropy Cloud extends each company’s reach by engaging its customers and employees in philanthropic endeavors, enhancing brand reputation and awareness, attracting and retaining top talent and delivering greater impact.
    • As of early-2023, Susan G. Komen has invested more than US$3.3 billion in groundbreaking breast cancer research, community health outreach, advocacy and programs in more than 60 countries. At Susan G. Komen, Brown led efforts to create MyKomen Health, the first patient care team and researcher engagement platform designed to guide patients through the end-to-end breast cancer journey with access to experts, resources and aid, as well as ShareForCures, the first ever patient-powered breast cancer research registry, storing information ranging from determinants of health, risk profiles, health status, including documentation of care deliveries such as diagnosis and interventions, all gathered from digital and nondigital EMR, EHR data as well as genomic data.
  • Brown has successfully led iCAD on a 3-phase transformation plan since becoming the CEO:
    • Phase 1 was to realign iCAD’s base. iCAD reduced cash burn which helped it to end the year in a strong cash position of US$21.7 million with no debt. In addition, iCAD made progress in its transition to a subscription-based recurring revenue business model.
    • Phase 2 was to strengthen iCAD’s foundation. iCAD’s brand changed from being product-focused into patient-focused, and the new branding was introduced at the annual, global Radiological Society of North America meeting in November 2023. Other parts of the Phase 2 transformation included iCAD’s aforementioned deals with Google Health and GE Healthcare in 2023, and the sale of Xoft.
    • Phase 3 is to invest in iCAD’s growth opportunities, where iCAD has a three-part, overlapping approach. The first part is to expand existing accounts; the second is to grow both direct and indirect channels; and the third is to enter new markets with new solutions, with an example being the ProFound Heart Health solution, which is currently available only for investigational use and is under review by the FDA.
  • Under Brown’s leadership, iCAD’s Total ARR (Total ARR stands for total annual recurring revenue and it consists of Maintenance Services ARR, Subscription ARR, and Cloud ARR) has steadily grown as shown in Table 1, especially Subscription ARR and Cloud ARR. The earliest data goes back to the third quarter of 2023, when iCAD started breaking down Total ARR.
  • Brown has also steadily grown the number of deals iCAD has signed for the subscription and cloud models for the ProFound Breast Health Suite, as shown in Table 2.
Table 1; Source: iCAD earnings call transcripts
Table 2; Source: iCAD earnings call transcripts
  • A major downside to Brown’s leadership of iCAD is lack of skin in the game. As of 22 April 2024, Brown controlled merely 238,334 shares of iCAD (and this includes 198,334 exercisable options under Brown’s name), which is worth just US$0.47 million at the 26 October 2024 stock price of US$1.96.
  • Another downside to Brown’s leadership is her compensation structure. It consists of (1) an annual base salary of US$400,000, (2) a cash and/or equity-based annual bonus of up to 30% of the annual base salary, and (3) options to acquire 250,000 shares of common stock, subject to a 3-year vesting schedule and 10-year expiration period. Brown is not incentivized on the long-term business results of iCAD.
  • The other senior members of iCAD’s management team are:
    • Chief Technology Officer, Jonathan Go. He joined iCAD in 2006 and became CTO in February 2019.
    • Chief Financial Officer, Eric Lonnqvist. He joined iCAD in February 2021 as Vice President of Financial Planning and Analysis, and became CFO in April 2023.

Financials

  • Given iCAD’s sale of Xoft in October 2023 and its ongoing shift to a recurring revenue business model from a perpetual license model, the company’s historical financials are not important. What is important is the growth of iCAD’s Total ARR, in particular, its Subscription ARR and Cloud ARR. As mentioned earlier, iCAD’s Total ARR and Subscription ARR have grown steadily in recent quarters, with Subscription ARR being a particular standout. It’s still early days for Cloud ARR with only one quarter’s worth of data, but management’s commentary in the 2024 second quarter earnings call is positive:

“While early days, the adoption of our SaaS offering has been going better than planned…

…There was conversations in Q1 even before cloud was readily available. But that being said, I do think the deals close quicker and the performance that Dana mentioned of the product has helped. Some of the customers want to test the product in the environment, and they did, and the results were positive. So some of the bigger deals were sped up and closed quicker.

And then other deals in that 10 count, those were some migrations that we want the customers that weren’t even thinking about cloud and their subscription — or their service contract ended and they go, “Well, this sounds interesting.” It moved kind of quickly some customers that wanted to get rid of hardware that they’re tired of buying these boxes every 3 years and they’re ready to move the technology forward and it just kind of clicked. But some of the bigger ones have been — there’ve been talks in Q1 also before these came together.

But going forward, I think that just because of all the positives Dana mentioned in the opening remarks, there’s going to be a natural push and it’s with how the product is performing and the excitement in customers when you talk to it and just the ease to use it compared to the perpetual model. We’re feeling a lot of pressure that it’s moving quicker in this direction…

…Yes. I do believe that cloud is going to grow faster than subscription. At what point in time its growth rate overtakes subscription is still a little bit TBD since we’ve only had it commercially available for one quarter. But the early indicators are positive. So yes, we do see that as where the future is, right, for iCAD and for our customers.”

  • iCAD’s balance sheet is strong; as of 30 June 2024, there was cash of US$20.4 million, zero debt, and total lease liabilities of just US$0.27 million. Management believes this level of cash is  sufficient to fund iCAD’s operations with no need to raise additional funding.
  • The company’s cash burn has also stabilised materially as shown in Figure 2.
Figure 2; Source: iCAD 2024 September investor presentation

Valuation (as of 26 October 2024)

  • 26 October 2024 stock price of US$1.96.
  • As of 30 June 2024, iCAD had issued shares of 26.540 million, and stock options issued of 3.048 million, for a fully diluted share count of 29.588 million. At the 26 October 2024 stock price, this gives a fully diluted market capitalisation of US$57.99 million.
  • iCAD’s Total ARR as of 30 June 2024 is US$9.2 million. This gives a price-to-ARR ratio of just 6.3. Assuming a 15% net profit margin at maturity, we’re looking at an implied price-to-earnings ratio of 42. Is this high or low? Total ARR has been growing pretty rapidly, and should grow even faster in the coming years with the very recent introduction of the cloud model. 

Risks

The important risks are, in no order of merit:

  • Customer concentration (discussed earlier in the “iCAD’s business” section of the notes)
  • Competition: Many competitors have significantly greater financial, technical, and human resources than iCAD and are well-established in the healthcare market. iCAD currently faces direct competition in its cancer detection and breast density assessment businesses from Hologic, Inc. (Marlborough, MA), Volpara Solutions Limited (Rochester, NY), ScreenPoint Medical (Nijmegen, Netherlands), Densitas Inc. (Halifax, Nova Scotia, Canada), Therapixel (Paris, France), and Lunit (Seoul, South Korea). I couldn’t find first-hand information, but recent research on iCAD done by an investment writer stated that GE Healthcare and Hologic are the two most important companies manufacturing DBT (digital breast tomosynthesis) machines, and that iCAD’s software is compatible with Hologic’s machines. The research also stated that Hologic accounts for nearly 70% of installed mammography units, so if Hologic removes iCAD’s compatibility, iCAD’s business could take a major hit. 
  • Near-term decline in financials: iCAD’s shift to a recurring revenue model will create temporarily lower GAAP revenue and negative cash flow because (1) revenue from subscription-based licenses are recognised ratably, and (2) cash is collected ratably compared to all up front in the perpetual license model. If iCAD’s financials decline at a time when financial conditions are tight in general, it could cause distress for the company. 

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Leave a Reply

Your email address will not be published. Required fields are marked *