Thanks, some good insights into the industry and the operating model.
I don't have any qualms with corporatised medical services businesses - in fact i'm invested in two (ONT & ZNT), so i like the business model and the potentially mutual benefits provided to the medical professional and the corporate itself.
My biggest query on both VRT and MVF is the sustainability of their EBITDA margins, which currently run at ~30% for their cash cow Aus businesses - a~30% EBITDA margin is, off the top of my head, about as high as i can recall seeing for a listed professional services businesses (want to stress that's off the top of my head - ONT is around that mark and that's the highest that comes to mind). I understand IVF is a highly specialised service catering to a diffused customer base that arguably has an inelastic demand profile (as desperate would-be mothers will arguably happily pay whatever it takes to fulfill their desire to conceive), and Australia's IVF market is an effective duopoly between MVF & VRT - these aspects help to explain the very high margins in the business. That said, when operating margins are very high, i tend to think the chances of margins going down over time are higher than the opposite.
Without me knowing all the ins-and-outs of the industry, VRT disclosed in its prospectus that per-cycle revenue went from $10,741 in 2010 to $12,420 in 2012, then they IPO'd based on doing $13,034 in 2013 - so in the 3 years to 2013, they ramped pricing ~21%. In FY14 pricing hit $13,722 per cycle, so that's a 28% leap in pricing in 4 years...and since then, pricing has been flat. The trend for MVF was similar pre IPO - they did $10,316 per cycle in 2011, and IPO'd based on doing $12,372 in 2014 - a 20% ramp in pricing in 3 years. Given MVF and VRT's fertility specialists are primarily paid based on volume and not pricing of cycles performed, this lead to both VRT & MVF's EBITDA margins rocketing pre IPO - the significant per cycle price inflation was flowing mainly into the pockets of the corporate rather than the clinician specialists. Private equity 101 - buy business, consolidate industry, ramp pricing/margins for 2-3 years pre exit to show rocketing profit growth, exit on high multiple, and leave public market investors holding the bag.
Of course, the same mechanism works in reverse - if cycles performed (i.e. volume) continues to rise but per cycle prices stagnate or deflate, the fertility specialists will start pocketing more of the pie at the expense of the corporate. And in a duopolistic market structure with GDP-like volume growth driven by favorable demographic factors and >30% EBITDA margins potentially on offer, i think the potential for a well-heeled player to attempt to come in and undercut the incumbents on price to win market share is a risk (and is already happening to some extent). Given the dynamics of the fertility specialists being remunerated based primarily on volume and not price, it may be a tempting proposition for fertility specialists to ply their trade with a competing business model based on lower per cycle price but higher cycle volume.
Of course, you need to weigh all of the above up against the current valuation implied in the stock price - given where MVF & VRT currently trade, and the long-term favorable volume growth profile of the industry, it seems as though some long-term operating margin compression is already factored in by market participants.
Regarding the enforcement of non-competes, i can't offer any sensible input unfortunately - as with all legal matters it'd depend on the specifics of the case, i.e. the wording of the non-compete, what the alleged breach is etc.
MVF Price at posting:
$1.27 Sentiment: None Disclosure: Not Held
