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Monash IVF Group Ltd & Virtus Health Ltd: 2 great growth stocks?

Monash IVF Group Ltd (ASX: MVF) and Virtus Health Ltd (ASX: VRT) are Australia’s two largest IVF-focused listed entities. At $541 million and $596 million in size respectively, they aren’t micro-cap health stocks.

Monash IVF operates through its Monash IVF, MyIVF, Next Generation Fertility and Repromed brands, among others. Virtus has its IVFAustralia, Melbourne IVF, Queensland Fertility Group and Fertility Centre brands.

Each brand is appealing to a different price point and/or geographical area, so both businesses are diversified with their IVF brands.

Both entities have growing businesses domestically and overseas; Monash IVF has international operations in Malaysia, and Virtus has a presence in Ireland and Singapore.

Couples are having children older

There is an increasing trend for couples/women to put off having children until at least their thirties. This is admirable money and career wise, however it makes it more likely that medical assistance is needed to have a child.

Virtus and Monash IVF are the two biggest players in the IVF market, so they would be the two biggest beneficiaries of this trend.

Competition

Primary Health Care Limited (ASX: PRY) has recently launched an affordable IVF option through its Primary IVF brand. The concept is that everything in the IVF process is bulk billed; from the IVF procedures, to the doctors appointments and pathology.

This service will be quite popular with patients with minor-to-medium infertility issues, it might not provide the service that severe-infertility patients need.

However, this bulk-billed service could still take a portion of revenue away from Virtus and Monash IVF. Considering Primary is a new player, patients with minor fertility issues would have gone to Virtus or Monash IVF previously.

New technology?

News.com.au recently reported about a major breakthrough by Australian researchers that could lead to much cheaper and less invasive treatments. An improved in-vitro maturation (IVM) technique would use significantly less hormone drugs and create less chance of health complications when compared to IVF.

The new technique could produce higher quality eggs and a more than 50% increase in the number of embryos than the current IVM procedure.

The current IVM procedure produces embryos that aren’t as good quality as IVF procedures, but this new technique would change that. It’s highly likely Virtus and Monash IVF would adopt this new method, but it could mean a drop in revenue per cycle for the two providers.

Recent results and valuation

Monash IVF revealed a solid performance in FY16, growing its net profit after tax (NPAT) by 34.6% to $28.8 million and it increased its dividend by 22.3% to 8.5cps. It’s currently trading at 18x FY16 earnings and 15x FY18’s estimated earnings (source: Commsec). It currently has a grossed up dividend yield of 5.57%.

Virtus revealed an 11.9% increase in NPAT to $32.9 million in FY16 and increased its dividend by 7.4% to 29cps. It’s trading at 17x FY16 earnings and 14x FY18’s estimated earnings, with a grossed up dividend yield of 6%.

Foolish takeaway

Health companies that sell services based on a technologically superior offering are always in danger of being disrupted. Sometimes a much cheaper, or more effective treatment is offered by a competitor. Investors should keep an eye on the market share that Primary is taking and monitor advances with the new IVM method.

Out of the two, I prefer Virtus for its slightly higher yield and its larger foreign operations, though either could be a decent investment for an investor wanting diversification in the health sector.

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Motley Fool contributor Tristan Harrison doesn’t own shares in any companies mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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