Infertility treatment is something mutual fund manager Ron Baron might call a "sunrise industry," which he defines as "a non-cyclical service industry where potential growth arises from new products or markets. . .where our children will work, not where our parents worked." This includes companies like biotech pioneer Amgen
Infertility has become a growth business partly as the result of more women putting off marriage and family in favor of their careers. So fertility problems have become increasingly age-related -- a trend that IntegraMed America
The potential market is enormous. There are nearly 6 million infertile couples in the U.S. and only 1% currently seek IVF treatments. That means 99% don't (hey, Larry didn't spend five years on the high school math team for nothing), and while some may choose adoption, not to have kids, or other fertility options, there's serious demand ready to ripen as IVF awareness increases and treatment methods improve.
A monopoly in the making
About 400 fertility centers now exist in the U.S., and IntegraMed alone provides packaged services and products to the top 25. Its doctors perform 20% of all IVF procedures in the U.S., with pregnancy success rates that rank in the top quartile of providers. IntegraMed works directly with these centers, providers, patients, and payers to offer:
- High-cost disposable supplies, laboratory reagents, and capital equipment used to diagnose and treat infertility. It also intends to offer malpractice insurance, computers, and medical supplies in the future.
- Marketing and sales programs that have helped fertility centers grow at triple the average industry rate.
- Receivables financing, so centers have access to funds upon billing, rather than waiting for their collection.
- A Shared Risk Refund program, through which a qualifying couple pays for three IVFs, and if they don't get pregnant, 70%-80% of their money is refunded to them. Given that each IVF treatment costs $15,000 and insurance rarely (if ever) covers it, this is a relief to prospective parents.
- Third-party financing for IVF treatments, with interest rates as low as 5.9% for qualifying couples. IntegraMed pockets a placement fee for bringing the parties together, and in the process dodges any credit risk.
- Its own 24/7 pharmaceutical service. Since pregnancy cycles are obviously time-sensitive, this service delivers medications to the client's door.
How IntegraMed makes money
IntegraMed's business model is simple. It enters into a long-term, exclusive service agreement with a fertility center and pays a fee for that right, in addition to providing equipment, facilities, support, and non-physician staff for the center. Doctors sign long-term, non-compete contracts with the center.
IntegraMed subsequently takes in: 1) a fixed percentage of the center's earnings ranging from 10% to 19%, meaning it has a vested interest in each center's success; 2) a variable percentage of revenues, up to 6%; and 3) reimbursement for any costs incurred in providing services to a center or paid on a center's behalf.
Sound familiar? It's similar to the way Marvel Enterprises
The classic Lynch investment
IntegraMed fits several Lynchian criteria. First, it is an under-followed company. Why? It deals in boring services, which takes it off most radar screens. Only one analyst tracks it and, after doing a Google
Peter Lynch is the famed investor who retired in 1990 at the age of 46 after serving as manager of the Fidelity Magellan Fund He liked to find small companies growing quickly in their early stages. Our own Hidden Gems newsletter editor, Tom Gardner, also reminds us not to ignore slower-growing companies at attractive prices. IntegraMed is currently the latter, but my prediction is that it will likely become the former before long.
Lynch learned that small companies generate bigger returns than large, well-known ones. IntegraMed is tiny, trades at a significant discount to potential growth (growth stemming, again, from the trend of increasing infertility and the previously mentioned 1% penetration), and has a healthy balance sheet.
Lynch preferred to see a high percentage of insider holdings and share buybacks. On this first count, IntegraMed disappoints. Only about 8% of shares are held by insiders. However, the company must think its stock is cheap because it has repurchased 27% of outstanding shares since 1999. Yep, share dilution over that period has been negative, and that includes exercised options.
Here are IntegraMed's financials, based on the recent $7.00 stock price:
| IntegraMed Financials | |
|---|---|
| Enterprise Value | $17.72 |
| Total Cash (MRQ*) | $13.90 |
| Total Debt (MRQ) | $6.54 |
| Book Value Per Share (MRQ) | $9.55 |
| Free Cash Flow (TTM**) | $1.17 |
| Trailing P/E (TTM) | 23.56 |
| Forward P/E (12/05) | 18.97 |
| Price/Sales (TTM) | 0.24 |
| Price/Book (MRQ) | 0.73 |
| Enterprise Value/FCF (TTM) | 15.14 |
| Enterprise Value/EBITA (TTM) | 2.66 |
| Total Cash Per Share (MRQ) | $3.88 |
| Expected Earnings Growth (FY 2005) | 32% |
*Most recent quarter
**Trailing 12 months
IntegraMed trades belowbook value, for less than one-quarter of a year's sales, and has more than half its $25 million market capitalization in cash. Factoring out the cash means you're buying the business at a 55% discount to the current stock price -- a deal that would make Lynch proud.
Some may point to lackluster free cash flow, but I say look again. The company's 10-K shows historically strong cash flow, but in 2003 it slacked off on collecting accounts receivable. It has since repaired that issue. If you knock out the last quarter of 2003, IntegraMed's free cash flow for the past three quarters was $9 million. That alone gives it a highly attractive EV/FCF ratio of 2. The low EV/EBITDA ratio also suggests it could be a takeover target. I could see it fitting in as a subsidiary of Johnson & Johnson
Finally, there's a huge barrier to entry in this area because of its highly specialized nature.
Et tu, Mr. Lynch?
IntegraMed did, in fact, attract Peter Lynch's attention. Up until recently, SEC filings showed that he held a substantial number of shares. His name has since disappeared from the roster, so we don't know if he still has any holdings, or if his holdings have simply fallen below the reporting threshold. But now we understand why he chose IntegraMed.
The last item about IntegraMed that makes it so compelling to us is that it is involved in a noble business endeavor: helping people make families. That's a feel-good investment if there ever was one.
Fool contributor Lawrence Meyers owns shares of General Electric. His wife, Lori, is Of Counsel to ART specialist firm AdoptHelp. The Motley Fool has a disclosure policy.
