Why IVF could soon become more affordable in Australia


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A member recently asked an interesting question: What happens if the doctors at Virtus Health and Monash IVF abandon ship?

It's something we've thought a lot about. These companies' business models rely on convincing doctors to sell their clinics and become contractors, who are then paid a fixed fee per cycle.

The doctors often sign short-term contracts with non-compete agreements that span a year or two. But, ultimately, a doctor can just walk away - often taking their clients and revenues with them.


Key points

  • Doctors have fewer choices of where to work
  • Scale lowers costs and boosts demand
  • Largest operators have sustainable competitive advantage

A perfect example occurred last month when Monash lost one of its most senior doctors, which is expected to cause a 'high-single digit' cut to earnings in 2019. And things can get far worse than that.

Vision Eye Institute, an operator of ophthalmology clinics, wrote off more than $100m of goodwill between 2010 and 2013 after its doctors walked out en masse.

Do Virtus and Monash face a similar risk? We don't think so, and here are three reasons why.

1. Supply/Demand

To start, the power of doctors - at least from the company's perspective - isn't a function of their education and skills, but of supply and demand. A good measure of that balance is the time a patient waits to see a specialist.

The median wait time for all elective surgeries in Australia is 71 days. We couldn't find the comparable figure for IVF specifically, but it takes nearly half that time - just 39 days - to see a gynecologist, which is the core specialty of most IVF doctors.

This suggests that relative to other healthcare professions, the IVF industry has a more favourable ratio of doctors to patients, which makes it easier to recruit new doctors or find replacements for those who leave.

2. Automation

Unlike most areas of medicine, IVF is as much a technology business as it is a people business. Between removing the eggs, fertilizing them, pathology testing, raising the embryos and implanting them into the mother, a whole suite of high-tech gizmos are used.

IVF is becoming more efficient, with improvements in robotics, diagnostics, microfluids, incubators, and embryo storage.

The procedure is increasingly standardised and automated. Much as self-checkouts at your local Woolworths have shifted power away from cashiers to the company, Virtus and Monash's shareholders will benefit from increasingly automated IVF.

What's more, genetic tests and many other aspects of IVF typically rely on expensive equipment and this means there's a benefit to having them perform as many tests and procedures as possible. Given that the labs are largely a fixed cost, each additional service performed lowers the average cost per procedure and improves margins.

With this in mind, it seems inevitable that IVF will follow the cost curve of most technology-intensive processes and get cheaper.

True, treatment prices have been rising at the big operators in recent years, but we don't expect this trend to last much longer - especially with the growing market share of budget and 'low intervention' IVF providers putting efficiency at the top of every executive's to-do list. As IVF moves from being a luxury item to a commoditised therapy, cost cutting becomes the focus.

3. Pays to be big

Why, you might be asking, would declining costs encourage doctors to stay? Wouldn't that just make it cheaper for them to set up shop alone?

As costs come down and procedures are standardised, it will be increasingly difficult for doctors to remain competitive on price because, as mentioned above, the big operators will have lower average costs as more volumes move through their labs.

What's more, IVF is expensive and couples are working to a biological clock. Having a child is a major decision for clients and they only have a small window of opportunity - there's a lot of trust put in the IVF provider, so people shop around for the best. Unlike, say, your choice of grocery store, convenience isn't the deciding factor.

Can you think of another industry that requires a large upfront cost and a lot of trust? How about cars? Like the auto industry, IVF invests heavily in brands and marketing. Virtus and Monash together spent close to $9m on advertising in 2016, so it pays for a fertility specialist to be part of a large group, otherwise they'll be overlooked by clients.

The biggest companies have the biggest marketing budgets, which attracts the most customers, so there's more funding for research and marketing ... and a virtuous cycle is born. Being big is a competitive advantage.

Industries characterised by strong economies of scale tend to consolidate into oligopolies, with small independent operators gradually bought out by the larger companies with whom they can no longer compete. And that's exactly what is happening with IVF.

Over the past 15 years, the industry has gradually merged into a few large players, which was sped up in 2008/09 when private equity groups bought Virtus and Monash then quickly made several bolt-on acquisitions.

Assisted reproduction is increasingly moving towards a model of big purchasers (private insurers/government) buying from big providers (IVF networks/mega clinics). The little guy is being squeezed out, so doctors who choose to go it alone face a mounting headwind.

Three-quarters of all IVF cycles in Australia are now performed at either Virtus (36%), Monash (24%) or Genea (15%), and we expect that figure to grow. Pathology, with its even stronger economies of scale, is the only medical industry with a higher level of concentration.

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Graham Witcomb is a senior analyst at Intelligent Investor owned by InvestSMART Group. Graham has a degree in psychology from the University of Sydney and is a Chartered Financial Analyst charterholder. He previously worked for one of the world's most successful professional gamblers, and joined InvestSMART in 2013 where he focuses on healthcare, insurance and transport infrastructure. This article contains general investment advice only (under AFSL 226435). To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.