Shares in Virtus Health plunged by nearly 20% yesterday after the fertility service provider warned falling demand for IVF services and competition from low-cost operators has hit first-half volumes and will affect full-year results without a rebound in demand and profit margins.
The shares closed dwn 17% at $5.14 after they touched a day’s low of $4.98 which was down 19.5%. That was the lowest the shares have been since August 2015.
Virtus said numbers of new IVF cycles across Australia fell 7.2% in the first half of 2016-17, citing lower market activity and weakness in its NSW and Victorian markets, while it expected profit margin and volume pressure in Queensland in the second half.
Shares in Virtus fell 17.7% to $5.11 at the close.
Virtus became the latest in a growing list of former small cap market darlings falling out of favour as earnings have faltered or corporate governance and boardroom problems have emerged, or trading conditions have changed or been changed.
On Monday, shares in construction services outfit Aconex dived 40% on a profit warning (which was due to the uncertainty of the Trump presidency in the US and Brexit in the UK).
Bellamy’s shares have been pounded thanks to weaker demand from China’s and boardroom and management instability. Blackmores has sold off, a string of companies in the tertiary and vocation training fields have collapsed, or seen there shares sold off (Navitas yesterday with a fall of more than 5%).
Monash IVF, a rival to Virtus suffered collateral damage, with its shares marked down 10% on suspicion by nervy investors. It is the second largest domestic player in the IVF market, with a 25% share.
In particular, Primary Healthcare has targeted the solid margins in IVF services, opening clinics in Melbourne, Sydney and more recently Brisbane, which appears to be causing problems for Virtus, the country’s largest IVF provider.
Last November, Virtus warned it was experiencing weaker than expected IVF cycle volumes, and this morning it pointed to recent Medicare data for the December quarter which indicated a 6% drop in volumes in the states in which Virtus operates.
Virtus confirmed its sales volumes fell 7.2% in the December half year, blaming low cost competition, most notably in NSW where volumes have slumped by 19%.
“The level of this volume shortfall, should it continue in the second half will have a material impact on Virtus full year financial results compared to prior year,” it warned investors yesterdy.
"The exact level of the shortfall is highly dependent on fresh cycle activity in the second half of the financial year, and in particular, activity in the final quarter. We anticipate that volumes and margin in our [fertility clinics] in Queensland will come under pressure in H2FY17 as a result of increased low cost competition."
Virtus has made a series of offshore acquisitions, expanding into Ireland, Singapore and most recently Denmark in a bid to reduce its reliance on Australia, but the market reaction to yesterday’s downgrade shows the company is still rusted onto the local market so far as investors are concerned (and the actual operating results).