Yeah Baby: Virtus Health On A Growth Path

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-Robust IVF growth
-Genetic testing growth
 

By Eva Brocklehurst

Reproduction services provider Virtus Health ((VRT)) is a leader in its field and brokers believe the company's target market has attractive growth potential.

Macquarie expects assisted reproduction services (ARS) in this country will continue to rise as IVF – in vitro fertilisation – becomes more affordable and success rates rise. The broker expects industry revenue growth of 7% per annum over the next five years. Virtus earnings are also being boosted by day hospitals and diagnostics, courtesy of the emergence of new genetic testing technologies. Key to the company's growth in ARS, according to Macquarie, is the superior pricing, because of the patient demographic – age and income – and the fact that IVF tends to be a one-off service that figures highly in relative importance to the patients concerned.

Demographics are important in IVF. The age at which women have their first child is increasing and as ageing reduces fertility there is growing need for medical help. Moreover, Macquarie observes awareness of IVF is now relatively high in the broader community and, while this as a driver has largely played out among heterosexual couples, the social acceptability of single mothers, same sex couples and surrogate pregnancies is growing and this increases the prospect for a greater proportion of IVF volumes coming from these segments in the future.

Margins in excess of 30% and high incremental returns on capital may appeal to new entrants, and there has been reports of potential low-cost entrants into the ARS arena. Bell Potter understands that Monash IVF is now conducting pre-deal marketing for an IPO later this year and expects pricing to be at a small premium to that at which Virtus was offered. Monash is significantly smaller in scale than Virtus. Overall, Macquarie sees little risk to existing players because the scale of any new entrant is limited by the difficulty in recruiting specialists and embryologists. Macquarie remains confident that market penetration has some way to go. Moreover, the company's valuation is not demanding and the broker has initiated with an Outperform rating and $9.30 target. Bell Potter retains a Hold rating and $8.42 target, expecting capital growth of 11.1% and a dividend yield of 3.2%.

Bell Potter notes Medicare statistics were encouraging for growth in the March quarter and expects 6% growth in second half IVF volumes for Virtus. May and June are traditionally the busiest times in the year and will be critical to guidance. The broker notes there has been no discussion of IVF funding in the lead up to the federal budget and, given the budget will confirm details of the paid maternity leave scheme, believes it is unlikely to contain an adjustment to ARS. Furthermore, the establishment of paid maternity leave is expected to be a significant catalyst for the industry. The company's first half met UBS' revenue expectations, although fell short on net profit estimates. Site expansions and refurbishments were blamed and UBS expects stronger growth in the second half. The broker has an $8.65 target and a Buy rating.

It's not just about IVF. Virtus provides assisted reproductive services, responsible for around 4,000 births per year, but also specialised diagnostics. Other revenue is generated from opthalmology, endoscopy, plastic surgery, gynaecology, urology and dental from its six, day hospitals. Genetic testing is an additional area of growth, in Macquarie's view. This includes screening of embryos as well as pre-natal testing of blood.

Australian operations are predominantly in the three main eastern states. Services are provided through 34 integrated fertility clinics, 17 embryology laboratories, 19 andrology laboratories and the day hospitals. Macquarie considers peer comparisons should be made with other heath service providers such as Ramsay Health Care ((RHC)) Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)) on the basis that the majority of revenue comes from, or is regulated by, government, and all have exposure to Australia's growing demand for health services. The economics of this sector consist of 3-5% volume growth, 0-3% pricing growth with potential for modest margin expansion, in Macquarie's assessment.
 

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