Translation: Original comment published in Finnish on 8/21/2024 at 7:20 am EEST.

Revenio announced yesterday that it has signed an agreement to acquire the Dutch software company Thirona Retina. Revenio previously used Thirona's AI solution as part of its ILLUME screening solution, and Revenio is a minority shareholder in Thirona, so the takeover target is familiar to the company. We believe that the transaction price is very favorable for the industry and that the acquisition will strengthen Revenio's longer-term prospects in particular. However, the impact of the deal is limited in the short term, and it is still difficult to predict the ultimate winners in the AI market. We are positive about the acquisition but see no reason to change our view on the company, at least for now.

We think the purchase price is low

With the signed agreement, Thirona Retina B.V. will be acquired by Revenio's subsidiary Icare Finland Oy. Icare made a minority investment of 1.9 MEUR in Thirona Retina in 2023 and the company has said that it is committed to acquire the remaining shares during Q3'24 if conditions are met. However, it was not known what the target was. Revenio will acquire the remaining shares for approximately 4.8 MEUR, bringing the total purchase price paid by Revenio to 6.7 MEUR. We were surprised that Revenio was able to acquire a credible AI company with such a modest investment. For the sake of clarity, we note that the transaction includes only Thirona's retina-focused software business (Thirona Retina).

There is no information on Thirona Retina's current revenue, but we estimate that the business is currently small. It is also worth noting that Icare is believed to have been one of the target's most important customers. As a result, we believe that the required forecast changes will ultimately be relatively small over the next few years. In our view, the valuation of the transaction should not be based on the company's current numbers, but on the value of the acquired company's technology and the future opportunities it creates. AI algorithms and their use are the most important trend and the strongest growth area in the industry, and the acquisition of Revenio will give it a foothold in this potentially very lucrative segment. In recent years, US-based AI companies in this sector have been pumped into the market at inflated valuations, and we believe that the purchase price paid by Revenio is very low in comparison.

Thirona's RetCAD solution already in use at Revenio

Thirona Retina's flagship product, RetCAD, uses artificial intelligence to screen fundus images for eye diseases such as diabetic retinopathy, macular degeneration and glaucoma. The good performance of RetCAD has been demonstrated in independent clinical studies, according to the company. RetCAD is already used in the Revenio iCare ILLUME screening solution (iCare DRSplus camera combined with RetCAD technology), which speeds up the fundus screening process, makes the work of healthcare professionals more efficient and increases the accessibility of screening examinations. According to Revenio, the solution has been very well received in Europe and the Asia-Pacific region. In the U.S., the company currently has an FDA submission pending for the ILLUME solution, which would of course significantly increase the potential of the solution.

The acquisition gives Revenio ownership and control of Thirona's RetCAD algorithm. From Revenio's own business perspective, this will affect the company's AI revenue mix, as a portion of the revenue generated from screenings will no longer go to an external AI company (traditionally a revenue sharing agreement). As a result, the gross margin on recurring revenue related to screenings is virtually 100%.

Thirona continues to provide its solution to Revenio's competitors

Thirona Retina has also supplied its RetCAD AI solution to other major eye-tracking camera manufacturers such as Topcon, Tomey, Nidek, Canon and Optomed. According to the company, Thirona Retina will continue to sell its AI solution to these companies. We see certain risks that other camera manufacturers would reduce their investments in cooperation with Thirona if it were to be acquired by a competitor. However, we believe that direct replacement of the AI algorithm provider would be quite burdensome for competitors, and we do not see this as a particularly material risk. In the big picture, it's more important for Revenio that Thirona proves to be competitive in the AI race and is able to create a fully managed solution with its hardware and software.

Transaction has no immediate impact on our view

At the heart of Revenio's strategy has been a gradual transformation from an equipment manufacturer to a total solutions provider. In the long run, we believe the biggest winners in the industry will be those who can create the best overall solution and ecosystem around their hardware and software. Against this backdrop, we consider the recent Thirona Retina deal to be a very good and interesting strategic move, which we would have expected to require a significantly higher investment. The transaction will also strengthen Revenio's overall capabilities to develop AI-based eye screening solutions and other AI-based eye care solutions. We believe the purchase price is low, which also supports our positive view of the transaction. However, the transaction is small for Revenio's size (market cap around 850 MEUR) and its ultimate success will depend on Revenio's ability to create a competitive overall solution together with Thirona Retina. If this unit succeeds in gaining market share in the coming years, Revenio will have “added value" all to itself in the future.