How long have you held Virtus Health (VRT)?
We have held Virtus since it listed on the ASX, buying the initial position in the Initial Public Offering in June 2013 and then adding on market.
What do you like about it?
Virtus is an Australian provider of assisted reproductive technology (ART) services. The company is not only a clinical leader in this field but it also has a very successful corporate model that Virtus has replicated across various Australian states, and is now taking offshore.
Virtus engages over 80 fertility specialists across Australia alone. The fertility specialists are not employed by Virtus; however, the company has a well-structured reimbursement model that only rewards specialists for the procedures performed and so it does not suffer specialist staff costs for non-productive work.
Virtus Health (VRT)
Source: Yahoo!7 Finance, 15 January 2015
In addition, a bonus and share option scheme provides incentives for specialists to perform maximum number of procedures; however, specialists are not penalised for performing less procedures in any particular year.
This model ensures that doctors find the most appropriate balance between clinical work and scientific research for themselves and are not pressured to abandon research or teaching for clinical work. Through this model Virtus is able to attract key opinion leaders in reproductive medicine and continue to be one of the globally leading clinical providers in this field, while still maintaining revenue growth and high margins.
How is it better than its competitors?
Virtus in one of only two listed ART service providers globally; the other one is Monash IVF (MVF) and so both players are Australian.
Both Virtus and MVF are clinical leaders in this field and have provided ART services for a number of decades. However, Virtus has existed in its current corporate form longer than MVF and therefore its Australian divisions operate in a similar manner.
In comparison, MVF has a number of different models across various Australian states (e.g. GP model in SA versus specialist model in VIC). Having one operational model across all of its Australian clinics means that Virtus’s clinicians are more productive and generate higher revenue per doctor each year. In addition, Virtus is in a better position to roll out new initiatives in a uniform way across the entire country – such as introducing a low cost model in appropriate socio-economic catchment areas.
What do you like about its management?
Virtus’s management has a proven track record in successfully consolidating smaller, stand-alone players into Virtus Group. The management team has, for a number of years, provided the right kind of administrative and marketing support to its fertility specialists while not interfering with their research or clinical work. This, combined with a strong support network of pathology labs, day hospitals and a large number of leading scientists, has continued to attract fertility specialists to Virtus. Therefore, we believe that Virtus management will continue to successfully consolidate both the Australian and the offshore markets.
What is your target price on Virtus?
We believe that Virtus could trade on 20 times 12-month forward PE or $9.50 per share. It is currently trading on 17.5 times.
At what point would you sell it?
We would take profits in Virtus if it traded through its valuation.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
In the last 12 months (to December 31, 2014) Virtus has subtracted 26 basis points of performance from our portfolio relative to benchmark.
Is it a liquid stock?
Virtus liquidity has improved significantly since April 2014 and currently trades >$2m worth daily.
Where do you see the value?
We believe that as Virtus continues to consolidate the markets in which it operates, the stock will continue to outperform.
Is there anything else you would like to say about company Virtus?
In the last 12 months Virtus share performance has been volatile and it has reacted to monthly Medicare data on IVF cycle growth. While Virtus’ short term performance will no doubt reflect the volatility (and recent downturn) seen in Medicare volume growth, it is important to note that long term demand trend for ART service providers remains positive.
The average age of first time mothers in Australia continues to increase (www.abs.gov.au) and a woman’s age is the single most important factor impacting female fertility. The chances of conceiving naturally for a 36-year old woman are approximately half of that of a 20-year old woman. However, IVF and other ART methods can increase chances of falling pregnant for 36 to 40 year old women from ~10% to 35%.
As ART success rates and affordability improve, we expect more people to seek fertility treatment from providers such as Virtus. This, together with Virtus’s plan to continue to consolidate the markets in which it operates, should ensure continued revenue and earnings growth for the company.
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