In the 1950s, Australia’s fertility rate was more than three children per woman. Today, it’s less than two. Because the ‘baby boomers’ had fewer children than their parents, the proportion of young people in the population has been falling while the proportion of elderly has been rising. Combine this with medical advances that are constantly improving life expectancy and what you get is an ‘ageing population’. The median age of Australians has risen from 30 in 1950 to 38 today.
Several health-related industries will benefit from this huge, long-running change to society, but the media tends to focus only on the grey-haired side of the equation: private hospital operators Ramsay (ASX:RHC) and Healthscope (ASX:HSO); pathology providers Sonic (ASX: SHL) and Primary (ASX: PRY); or aged care businesses Estia (ASX:EHE) and Japara (ASX:JHC).
But there’s another way to invest in the ageing population or, at least, an ageing subset of it: Australian mothers. Women are marrying later, they're spending more time on their education and careers, and they're delaying having children. In 1990, the median age of women having a baby was a bit over 27. By 2014, it had reached 31. As maternal age increases, though, so too does infertility and the need for assisted reproductive services (ARS), the best-known of which is IVF.
Although the IVF industry has existed for the better part of 40 years, it’s still a largely untapped market. The number of Australian women of reproductive age affected by infertility is around 750,000, but only around 37,000 of them made use of ARS in 2014 according to the most recent report by The Fertility Society of Australia. That’s just one in 20. Not every infertile couple needs or wants a specialist’s help, but that still strikes us as a staggeringly low utilisation rate.
As you might have guessed, it largely comes down to price. In Australia, Medicare foots a little over half the bill, but out-of-pocket expenses still come to around $4,000 a cycle. Most women need at least three.
Over the long term, though, we expect affordability to improve due to automation and other technological advances that are making the IVF process more efficient, as well as growing levels of disposable income. Capitalism being what it is, prices should gradually fall, but this would help to unlock the significant pent-up demand. Any improvements in Medicare funding, however unlikely, would also speed up the process.
The number of women aged 35–45 is growing at around 1% a year, and we expect delayed childbearing as well as increasing awareness and affordability to bring overall cycle growth to around 4% a year, excluding any left-field Medicare funding cuts.
The lion’s share of this growth should fall to ARS providers Virtus Health (ASX: VRT) and Monash IVF (ASX: MVF), which account for 36% and 24% of the market, respectively.
What’s more, with high returns on capital, economies of scale, and free cash flow yields above 6.0%, there’s plenty more to like about these companies than just growing demand for their services.
To see our recommended price guides for Virtus Health and Monash IVF – as well as our current BUY recommendations – take a 15 day free trial of Intelligent Investor now. You can find out about investing directly in Intelligent Investor portfolios by clicking here.
Disclosure: The author owns shares in Virtus Health and Monash IVF.