Lots of people did it tough last year during COVID-19. But one can only imagine what people who are desperate to have children, and needing fertility services, went through.
Many people had to put their fertility treatment on hold as IVF clinics nationwide postponed services due to social-distancing rules. For older women running out of time to give birth, due to their declining fertility, the anxiety caused by COVID-19 must have been heart-breaking.
Elective surgeries, including IVF, were temporarily suspended in March 2020. Thankfully, Australia was the first country to lift IVF COVID-19 restrictions in late April 2020.
That wasn’t the end of it. There was uncertainty about possible health risks that COVID-19 could cause to pregnant women and, more recently, the effect of the vaccines on people. Not to mention the financial burden of COVID-19 on people who lost their job or had their income cut, given IVF’s high costs.
Medical studies found IVF clinic closures were stressful due to the uncertainty and threat to becoming a parent. Understandably, patients were moderately to extremely upset about their fertility treatment being cancelled or postponed during COVID-19, research found.
The number of stimulated fertility cycles in Australia plunged almost 22 per cent in the fourth quarter of FY20, according to data presented in Monash IVF Group’s FY21 half-year results. Like many industries, IVF went into hibernation in COVID-19’s early stages.
With fertility services available again, the industry is recovering strongly due to pent-up demand for IVF. The number of key market-stimulated fertility cycles grew almost 25% in the first quarter of FY21 and 23% in the second quarter.
Demand for Assisted Reproductive Services (ARS) is now at a record high, says Monash. That’s good for the market’s two specialist IVF stocks: Virtus Health and Monash IVF. Both were sold heavily during in the first half of 2020 and have good recovery prospects.
A line buried on page 7 of Monash’s half-year results caught my attention. It said: “COVID-19 pandemic has changed the mindset of our patient cohort with greater focus on family, health and wellbeing resulting in redirection of priorities towards family extension.”
Nobody knows how COVID-19 will affect family-planning intentions. There’s no evidence that the Coronavirus has led to a baby boom that some forecasters predicted. Perhaps we spent more time on Netflix during pandemic lockdowns than with our life partner!
Extrapolating how COVID-19 will affect IVF intentions is also problematic. Judging by industry commentary, the IVF recovery in FY21 will continue for a while longer due to pent-up demand from the COVID-19 lockdowns before the usual industry growth rates resume.
For all the short-term machinations of COVID-19, the IVF industry is a long-term play. One in six Australian couples suffer infertility, according to the Fertility Society of Australia.
The industry’s underlying thematic remains: a growing number of women worldwide continue to have children later in life. IVF demand is rising because fertility declines with age. More women freezing their eggs earlier in life, to aid pregnancy, is a feature of the IVF industry.
Growth in same-sex couples and single parents wanting children through IVF also bodes well for industry growth. Strong technology advancements in treating infertility are another driver.
A headwind is greater price competition in IVF services as new providers with different business models enter the industry. Requirements for higher industry transparency (for example, the reporting of IVF success rates) could also affect demand at some clinics.
Business forecaster IBISWorld predicts modest growth in Australia’s IVF industry over the next five years. The big growth in IVF could be in offshore markets experiencing similar patterns to those in the west: more women entering the workforce and having babies later in life.
In August 2018, IVF firm Genea, this market’s third-largest fertility services player, was bought by a Hong Kong investment consortium, with a view to attracting Chinese would-be parents to Australia. Monash (MVF) and Virtus (VRT) also have offshore IVF operations.
Here is a snapshot of both firms:
1. Virtus Health (VRT)
Virtus was the world’s first IVF provider to list on an exchange when it joined ASX in 2013. The firm has grown quickly through IVF clinic acquisitions and has an estimated 39% share of the Australian IVF market, on IBISWorld numbers, making it by far this market’s largest player.
Virtus plunged from $4.77 to $1.57 during the March 2020 share market crash as the market fretted about IVF service cancellations. Virtus is now $6.11.
Although this year’s recovery impresses, Virtus shares have done little over longer periods. The five-year annualised total shareholder return is 3.5%, shows Morningstar data. Virtus has a lot of ground to make up after edging lower for most of the previous decade.
Nevertheless, Virtus performed well during COVID-19. Revenue for first-half FY21 rose 19% to $169 million. After-tax profit almost doubled to $30.3 million.
Virtus’ international operations – a long-term attraction for investors – are mostly growing strongly. The firm’s Danish revenue rose 31% in the half (compared to the previous corresponding period) and Singapore revenue leapt 49% (off a low base).
I like Virtus’ strategy to reposition its Singapore operation as a fertility base for South East Asia. The firm was first to introduce artificial-intelligence-enhanced embryo selection in Singapore – a market that should have continued solid growth in IVF demand over many years.
Virtus expects the normalisation of growth rates in the second half of FY21. The company’s UK and Irish clinics, a smaller part of the business, have been affected by tighter lockdowns in those markets, but could also benefit as COVID-19 rates in Europe fall.
Price gains for Virtus will be slower from here after the recent rally. A pullback or period of price consolidation would not surprise. But there’s a lot to like about Virtus’ long-term strategy and prospects as it continues to take Australian IVF technology to the world.
Chart 1: Virtus Health (VRT)
Source: ASX
2. Monash IVF Group (MVF)
Like Virtus, Monash was belted in early 2020. The stock fell from 94 cents in late February 2020 to 39 cents in March. Monash now trades at 87 cents.
I last wrote about Monash for the Switzer Report in May 2020 at 52 cents a share, nominating it as a small-cap takeover target.
However, over five years, Monash has an annualised total return of minus 7.7%, Morningstar data shows. Monash traded above $2 in 2016, but has been an investment laggard since.
However, Monash’s latest results impressed. Revenue for first-half FY21 rose almost 18% to $90.8 million. Adjusted after-tax net profit rose 32% to $12 million.
Monash stimulated fertility cycles grew 22% in the first quarter of FY21, recovering the COVID-19-affected decline in March-June 2020. Second-quarter FY21 cycles leapt 33%.
The outlook is promising. Monash said the “current new patient pipeline indicates strong growth and above historical industry averages in second-half FY21”. The company’s frozen embryos service continues to grow and its new flagship Sydney clinic is operating to plan.
Against that, Monash’s Malaysian operations grew slowly due to COVID-19’s effect in the region. Monash’s Asian strategy has lots of promise, but hasn’t taken off as expected. The company says “there remains significant opportunities available in the relatively immature South East Asian IVF market over coming years”.
I’ve been caught out by Monash before over the years, principally because I underestimated the organisation-culture challenges of being a listed IVF provider and the effect of key specialists leaving the firm.
Of the two IVF stocks, I prefer Virtus because it has larger, more established offshore operations. But keep an eye on Monash: the stock had had an awful few years and faces a landmark class action over a now-suspended, non-invasive embryo-testing program.
Contrarian investors know the best time to buy a beaten-up stock is when the market focuses on headline bad news and overlooks underlying operational improvement. As a small-cap stock, Monash suits experienced investors who understand the risks of this form of investing.
A final thought; don’t be surprised if Monash attracts an offer from a private-equity group or larger IVF firm. I suspect Monash would perform better under private rather than public ownership. Private-equity firms are reportedly looking at acquiring IVF providers in NZ and other markets, suggesting another round of industry consolidation is underway.
Chart 2: Monash IVF
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 14 April 2021.
