The IVF market is booming

Lockdowns and travel restrictions have increased the demand for IVF services.

The lockdowns and travel restrictions in response to the COVID-19 pandemic have affected many businesses.

Probably the most obvious beneficiary has been online retailing.

There was already a structural tailwind as eyeballs moved online but the pandemic has just accelerated this trend given people are stuck at home and can’t visit bricks-and-mortar stores.

Even many businesses who were previously reluctant to respond to this trend – or just plain ignored it – have now improved their online offering, to the benefit of both customers and their business.

More cycles

Another perhaps unforeseen beneficiary of the pandemic has been the assisted reproduction services (ARS) sector, with companies such as Virtus Health (ASX: VRT), unlisted Genea and Monash IVF (ASX: MVF) reporting strong growth in ARS or IVF cycles over the past 18 months.

The ARS sector was already benefitting from tailwinds that are making it more difficult for couples to get pregnant the normal way, including rising numbers of women postponing childbirth to concentrate on their careers. Once most women reach the age of 40, the chances of getting pregnant dramatically decline.

Increasing obesity and the rising incidence of STDs are other factors, while technology is also helping improve the success rates of IVF, making it more attractive to would-be parents.

However, with travel restrictions preventing people from holidaying overseas, it seems more and more people are deciding to concentrate on starting a family, and ARS providers are benefitting.

In its recent 2021 result, Monash IVF reported that IVF cycles in Australia grew 31% in 2021. While there was an element of pent-up demand pushing up growth – the second half of 2020 was severely affected by the pandemic and Australia being locked down for the first time then – the growth from 2019 levels is still a healthy 12%.

This is impressive given ARS is expensive, costing many thousands of dollars, with only around 40% of cycles ending in a successful pregnancy. It is also invasive and emotionally taxing on all involved, particularly the mother.

Entrance of Adora Fertility

Medicare does cover some of the bill but the vast majority of costs are covered by the individuals involved. Given the high cost of ARS, it is often only available to people who can afford it.

Seeing a potential opportunity, Healius (ASX: HLS, FKA Primary Health Care) decided to enter the market in 2014 with a bulk-billed model, offering a basic, low-cost service to the less well-off, with the majority of costs paid for by the government via Medicare.

The entrance of Healius’ Adora Fertility forced the likes of Virtus and Monash IVF to create their own low-cost services, although Monash eventually gave up and concentrated on just providing premium services.

The impending entry of Healius was also a reason the former private equity owners of Virtus and Monash listed the companies on the ASX in 2013 and 2014, respectively.

While low-cost services aren’t as extensive as the premium ARS services offered by Virtus et al, they still impacted the premium operators by limiting their ability to raise prices, as they knew that if they raised prices by too much too fast, more people would quite sensibly consider utilising Adora Fertility’s low-cost option.

More rational market

Thankfully for Virtus, Genea and Monash IVF, new management at Healius increased prices to try to make Adora profitable on a stand-alone basis, and more recently, put the business up for sale, as it was always just a small part of the larger Healius group.

Virtus pounced, buying Adora for $45 million or around 10 times EBITDA. The acquisition is due to close in the second quarter of 2022 but by purchasing Adora, Virtus has taken out its most aggressive, low-cost competitor.

Interestingly, Adora’s EBITDA margins of around 15.5% are significantly below the 37.6% EBITDA margin earned by Virtus’s Australian operations in 2021. This isn’t a direct comparison as Virtus’s results include both its premium and low-cost service – the latter has a margin of around 35% before overheads – but it does show the opportunity here for Virtus.

I think that Virtus will not only gain significant cost synergies from the Adora acquisition, but also material revenue synergies as it hikes the price of Adora’s services where it can.

That Virtus management stressed in the company’s 2021 earnings call that Adora creates consumer choice and there remains a very healthy level of competition in the marketplace suggests to me that they see these revenue synergies too!

Together with the long-term structural tailwinds increasing demand for ARS, since accelerated by the pandemic, it will be interesting to see how Virtus shares perform in coming years.

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