While Australian women were having an average of 2.3 babies each 40 years ago, according to latest official figures fertility rates have now plummeted to just 1.8 babies per woman. Analysts and market participants attribute the decline to a combination of factors including a growing female population, rising maternal age and increased incidences of obesity.

Fertility rates have fallen 10 per cent in the past seven years and the trend looks set to continue. As fertility rates have fallen, demand for assisted reproductive services (ARS) has grown. As one in six experience fertility issues, this has led to 3.7 per cent of all babies born in Australia due to fertility treatments.

In mid-2013 investors got the opportunity to gain exposure to the growing demand for ARS when Virtus Health Limited listed on the ASX. The company’s shares surged 62 per cent to a high of $9.20 in the six months following its market debut with confidence in the business’s prospects high among investors. The float of Australia’s first ARS provider was followed a year later by the $428 million IPO of Monash IVF, although it was met with a more subdued response from investors.

The two companies dominate the Australian market with a combined market share of more than 70 per cent. Although lower than originally expected, Virtus and Monash IVF reported growth in revenues with profits of $33.6 million and $23.3 million respectively in 2014-15. Both Virtus and Monash IVF have expanded their businesses through diversification with each company owning a suite of different brands with businesses offering a range of services in addition to IVF, such as imaging and genetic testing. Virtus and Monash IVF growth strategies are underpinned by a forecast increase in demand as well as acquisitions here and overseas.

Demand forecast to grow

While demand for reproductive services softened overall last financial year, the demand for reproductive services is forecast to grow, driven by a number of social and demographic factors, primarily rising maternal age. The average maternal age in Australia has risen to 30.9 years over the past decade with the proportion of women having babies 35 years and older rising from 17.1 per cent in 2000 to 22.3 per cent today.

Virtus predicts other underlying demographic factors will ensure continued demand for ARS, including increasing incidences of obesity as well as greater levels of awareness and acceptance of ARS in the community.

The health of the economy is also considered to impact demand as patients postpone treatments and their associated costs in a weakening economic climate. Virtus chairman Peter Macourt observed that IVF activity in Australia, as seen recently, “is prone to short term local economic influences”.

As the industry matures it is experiencing significant change, with low-cost operators entering the market and changes to the Medicare rebate flagged. These factors are impacting patient behaviour and are influencing the strategy and approach of established players.

Low-cost provider

Mid last year Primary Health Care entered the ARS market with its low-cost service offering IVF treatments to patients for an out-of-pocket cost of up to around $700. In comparison, with more full service operators patients pay several thousands of dollars. While on the one hand the entry of new low-cost operators squeezes margins of the more premium providers, it also grows the overall market. The impact of Primary’s foray into the market is thought to have driven a recent surge in growth of the total market in NSW. In our view, low-cost options increase the total size of the market as more people seek treatment who would not otherwise have been in a position to afford it. It also suggests that while a proportion of patients are not price sensitive, for many cost is a determining factor.

As reproductive services are a heavily subsidised medical treatment, changes to the regulatory environment can significantly influence the profitability and structure of the industry. Proposed changes to the Medicare safety net, due to come into effect in January, will reduce the threshold to qualify and potentially reduce out-of-pocket expenses for costly treatments such as IVF. While we await the passing of the legislation, the lower hurdle to accessing the Medicare safety net could have a potentially positive impact on the listed IVF operators.

Although last financial year the ARS market experienced a slow-down in growth, the industry as a whole is adapting through diversification of services and locations and by offering lower cost options within their stable of businesses. Industry data shows fertility treatments for the first quarter of the fiscal year have jumped up and we think that various underlying factors will drive future demand in Australia and overseas, providing new opportunities for expansion of the total market and growth of existing players.

Read more: http://www.afr.com/personal-finance/virtus-health-and-monash-ivf-are-making-money-from-making-babies-20151108-gktz4i#ixzz4J4yCWeTd
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