Telemedicine IPO: Highlights from Virtual Radiologic's IPO Filing

Virtual Radiologic, a provider of remote radiology services, filed recently for a Nasdaq IPO. Below are highlights from the filing; all excerpts are from the company's S-1:

Proposed Ticker: (VRAD)

Underwriters: Goldman Sachs, Merrill Lynch, William Blair

Maximum Offering: $75 million

Business Overview:

We are a leading provider of remote diagnostic image interpretation, or teleradiology, services in the United States. We serve our customers—radiology practices, hospitals, clinics and diagnostic imaging centers—by providing diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Our unique distributed operating model provides our qualified team of American Board of Radiology-certified radiologists with the flexibility to choose the location from which they work, primarily in the United States, and allows us to serve customers located throughout the country. We provide these services through a robust, highly scalable communications network incorporating encrypted broadband internet connections and proprietary workflow management software.

Need for Teleradiology

The number of radiologists in practice is expected to increase by less than 2% annually despite the expected growth in digital diagnostic image procedure volume. This relatively slow growth in radiologists, which is due, in part, to the retirement of existing radiologists and the limited number of positions in accredited radiology residency programs, is expected to exacerbate the radiologist shortage that currently exists. The shortage of radiologists and the growing imaging procedure volume are further compounded by the fact that contracted radiology practices are required to provide their hospital customers with services 24 hours a day, seven days a week in order to accommodate the growing number of off-hour procedures. Consequently, radiology practices and hospitals have begun to seek supplemental services to assist their own radiology staffs with both day and night coverage.

We address this industry need by providing radiology practices, hospitals, clinics and diagnostic imaging centers an attractive way to improve service levels, streamline underlying practice economics and enhance physician efficiency, without sacrificing the quality of work. We assist our customers by providing them with access to subspecialty-trained radiologists to perform reads, day or night, thereby improving the quality of patient care. Our services include both preliminary reads, which are performed for emergent care purposes, and final reads, which are performed for both emergent and non-emergent care purposes. Our ability to provide coverage 24 hours a day supports our customers when their workloads increase during the day and relieves the burden of performing reads overnight, and during holidays, weekends and other difficult-to-staff times. We believe this allows our customers to provide seamless patient care and to better attract and retain radiologists in their practices.

Financial Highlights: The company's revenues typically originate from services to radiology clinics that already provide services to hospitals. These clinics have one year, automatically renewable contracts with VRAD. As a result, VRAD is not dependent on Medicare or private insurance. The company claims that they have a 99% customer renewal rate. Their 265 customers serve 490 hospitals in the US.

VRAD grew revenue 109% between 2004 and 2005 to $26.99 million. For the first quarter of this year, revenue grew 94.7% over Q1 2005 to $9.67 million. Operating costs consist primarily of physician compensation (cash and stock) as well as SG&A (primarily VRAD employee compensation). Total operating costs and expenses grew from $14 million in 2004 to $30 million in 2005, and from $5.6 million in Q1 05 to $11.2 million in Q1 06. VRAD's net loss grew from $1.4 million ins 2004 to $1.8 million in 2005, and from $250k in Q1 05 to $1.5 million in Q1 06.

At the end of Q1, the company had $2.7 million in cash, $1.5 million in operating lease commitments and $218k in capital lease commitments.

Use of Proceeds: General corporate purposes (expansion of service, recruiting, etc.)

Competition: The company does not list any specific competitors, rather mentions that "We compete directly with both large- and small-scale service providers who offer local, regional and national operations."

Management: The founder comes from a primarily clinical background:

Dr. Sean Casey, a founder of our Company, has served as the President, Chief Executive Officer and a director of the Company and its predecessor since May 2001. Dr. Casey was formerly a clinical associate professor at the University of Minnesota and has published numerous professional journal articles on radiology. An American Board of Radiology-certified radiologist and neuroradiologist, Dr. Casey is a pioneer in the clinical use of cerebral CT angiography and venography. In addition to Dr. Casey’s extensive medical expertise, he is primarily responsible for the development of our service offerings and business model.

Ownership: The CEO currently holds 43.7% of the company, and Generation Partners holds 27.3%. Eduard Michel, Medical Director and Co-founder holds an additional 13%.