The New Criterion

Cliff Asness
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Virtus Health (VRT) $5.72

Monash IVF (MVF) $1.54

A pregnant pause, or the advent of a more permanent decline? The country’s biggest providers of assisted reproductive services – ARS to friends – are contending with a downturn in the baby-making business, even though the age of an average mum has crept up to 31.

In the case of Virtus, the biggest provider, the average age of a client is a mature 37, by which time the biological clock is ticking at two minutes to midnight.

The dynamics that have delayed pregnancy – such as enhanced careers for women and twenty somethings staying home longer – remain intact.

In the eastern seaboard market in which it operates, Virtus reported a 3.7 per cent decline in IVF cycles on a like-for-like basis to 15,776 for the 2016/17 financial year.

Victoria’s Monash IVF (the second biggest provider nationally) reported a 3.1 per cent decline in local cycles to 8902.

Virtus reckons the overall market is down 0.24 per cent, while Monash IVF estimates the decline at 0.8 per cent.

Both providers are losing market share: Virtus from 43.9 per cent to 42 per cent and Monash IVF from 22.9 per cent to 22.4 per cent.

It’s not so much a case of the ARS falling out of the market, but a migration to low-cost providers and notably the clinics set up by bulk-billing newcomer Primary Health. The patchy economy means couples have either deferred treatment, or chosen the discount option.

While Monash IVF does not play in the low-cost sector, five years ago Virtus set up the first of its no-frills chains, under the banner of The Fertility Clinic (TFC). While Virtus’s full-service activity declined 3.1 per cent, TFC cycles increased by 3.9 per cent like-for-like. After a poor first half, TCF’s cycles surged 24 per cent after the company discounted in some geographies to compete with Primary.

Virtus chief Sue Channon estimates 20 to 30 per cent of cycles are now low-cost, despite the government reducing Medicare benefits.

Rather like flying Jetstar over Qantas, the discount experience differs only at the edges such as access to genetic testing services. The success rates are similar, although women deemed as unsuitable are up-sold to the deluxe option that may skew the comparison.

“We triage very carefully,” Channon says. “We would not put some patients through this low-cost model.”

As for the overall industry, Channon says that industry growth rates have always yo-yoed. While growth over the last five years has averaged 2.2 per cent, in 2011 the cycles sunk 6 per cent and then in 2012 rebounded to 9 per cent. “The overall long term compound average growth rate sits at 3 per cent but with lots of variations,” she says.

“Generally the global demographics support growth in ARS. One in six couple have an issue with fertility. When there’s less activity you have pent up demand.”

Monash IVF has fared better than Virtus in maintaining its bottom line, reporting 2.9 per cent net profit increase to $29.6 million on a 0.9 per cent revenue decrease to $155.2 million.

Monash has operations in Malaysia and has expanded into Tasmania – a state that could do with a few more youngsters – through its minority holding in Fertility Tasmania.

Virtus, reported net earnings of $28.1 million, down 14.6 per cent and revenue of $256.5 million, down 1.8 per cent. The company also operates in Ireland, Singapore and Denmark.

Pending the next assisted baby boom, the duo may struggle to maintain their mojo.

Monash IVF chief James Thiedman reports “no apparent reversion of ARS industry growth rates to long-term market growth rates in the first two months of financial year 2017-18.”

The star IPO of 2013 and the first listed IVF company globally, Virtus has responded with a $5 million cost-cutting drive focused on non-clinical areas such as marketing.

A special plea though: spare those promotional pens with a moving ‘sperm’ and ‘egg’ encased in fluid.

*Disclosure: your columnist solicited – and received – a sperm-and-egg pen

Invocare (IVC) $15.10

In the circle of life, every organic being must die and that makes the country’s dominant funeral and crematoria provider the ultimate defensive stock.

Over a long period, mortalities have followed the Australian Bureau of Statistics’ projections although in the past few years deaths have been below par.

But in its recent half-year results, InvoCare said mortalities had reverted to trend with an encouraging (our words) 3 per cent increase on a rolling annual basis.

A decent flu season (as we have now) is likely to assist.

Ultimately though, Invocare’s performance will be influenced by other factors such as the average spend per funeral and the growth of its pre-paid funeral funds under management.

The latter was a key contributor to the company’s 50 per cent rise in reported half-year net earnings, to $41.7 million.

While an increase in underlying demand is a dead cert (sorry), Invocare needs to be careful to tap into the demands of ageing baby boomers who demand more bespoke and expressive exit arrangements.

These usually involve Harley Davidsons, eco burials or ashes fired from projectiles.

Despite the stellar top line Invocare’s market slipped by 130 basis points, which followed a calendar 2016 decline of 77 bps.

Reasons cited included “evolution of customer preferences” and low-price competition. Bear in mind that just as folk scour the internet for the cheapest TV or Hawaiian holiday, they’ll increasingly go online to compare funeral costs.

Pretty much anyone with a briefcase and mobile can be a funeral director, providing someone else takes care of the back-end (morgue) stuff.

Under its “protect and grow” strategy, InvoCare is spending $200 million over four years to tart up its premises and such – but we doubt any promotional pens are on order.



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