Virtual Radiologic's Rad IPO

Late last week, Virtual Radiologic (Nasdaq: VRAD  )  went public and investors piled onto the stock, which rose about 47% before falling 12% today. In light of the rockiness with tech-stock bellwethers like Cisco and Google, it was an impressive performance. So why all the excitement?

Virtual Radiologic has built a platform that allows for remote interpretation of CT scans, ultrasounds, and MRIs. The company has 106 radiologists on retainer, who are located at their homes or any locations they want. No doubt the convenience is a big attraction. Additionally, the radiologists are offered equity ownership in the company.

Virtual Radiologic has a highly secure network and is based on complex proprietary software. More importantly, the company strives to find ways to make things easier for its radiologists. For example, Virtual Radiologic wanted to build a better navigation device that would improve the analysis of diagrams. As a result, the company looked at Microsoft's (Nasdaq: MSFT  ) Xbox and other gaming platforms to get more insights on designs.

There are definitely strong trends in favor of Virtual Radiologic. First, there continues to be increasing demand for diagnostic imaging services because of improved technologies and the country's aging population. Frost & Sullivan estimates that image procedure volume will grow 15% per year to 500 million by 2009.

Next, there is a shortage of radiologists. In fact, according to a study from the American Journal of Roentgenology, the number of radiologists in practice is expected to grow less than 2% per year.

The upshot is lots of growth for Virtual Radiologic. For the first nine months of 2007, revenue spiked 67% to $63.3 million and net income went from a loss of $1.8 million to a positive $2.1 million.

Competition? Actually, there is a direct competitor, NightHawk Radiology Holdings (Nasdaq: NHWK  ) . That company grew its revenue at 79% in Q3 and trades at about 4.5 times revenue.

Interestingly enough, Virtual Radiologic's multiple is about the same. However, given the shortage of radiologists and the growth of digital imaging, there should be room for several players in the sector. So for Foolish investors, Virtual Radiologic is certainly worth a look.

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  • Report this Comment On November 23, 2007, at 4:18 PM, georgerandy wrote:

    As a mature radiologist, in private practice for 27 years, I say investors in both nighthawk and virtual radiology will lose their shirts. Both companies make like they have something extraordinary to sell - they don't. Their income stream is dependent upon convincing highly paid, highly educated, very specialized physicians (board certified radiologists) to stay with them while the companys and investors profit. When the radiologists and investors carefully compare the income/expense sheets of these companys, one group or the other will sooner or later become very unhappy (perhaps after the "smoke" from acquisitions and mergers clears).The only winners will be those insiders and principals who took the IPO money as quickly and discreetly as possible, while shoring up the companys survivability long enough to "maybe" not be labeled culpable when things go bad. This is not rocket science.

  • Report this Comment On December 23, 2007, at 9:45 PM, imagesone wrote:

    This stock is a short only.

    This is a group of physicans who make money by reading scans. There are many, many such groups across the country. Almost all are private and in these groups all the money generated goes to the physicans who are doing the work and reading the scans. It is fantasy to think that any radiologist in the long term is going to work to generate money for a stockholder rather than to take it all for themselves. But they probably would in the short term if they think they can find enough suckers to buy there stock.

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