In a changing society, PE finds growing opportunities in fertility

  • Interest in fertility sector has grown only recently
  • IVF treatment and egg freezing lead the way
  • Specialized testing also gaining popularity

More women are postponing motherhood, same-sex marriage is growing increasingly common and healthcare investors have taken notice.

Private equity professionals are getting educated on the fertility-services market as underlying demographic and cultural trends fuel demand for everything from in-vitro fertilization to the various diagnostic tests that support reproductive medicine.

“Two-and-a-half years ago when we first entered [the segment], there wasn’t a lot of interest,” said Collins Ward, partner at Lee Equity, whose Prelude Fertility platform joined forces with Inception Fertility in March to create the country’s largest fertility-services company.

“For the first time, dozens and dozens of PE firms are looking for investments in the space. It has been pretty amazing the level of interest [we’ve seen] since.”

Broadly, sponsor-led dealmaking in healthcare has accelerated over the past several years.

In 2018, U.S. PE buyouts totaled 682 in the healthcare industry, accounting for almost $94 billion in disclosed deal value, according to Pitchbook data. That’s up from 562 deals worth about $82 billion a year earlier.

Physician specialties accounted for a significant portion of investment, whether within home health, dermatology or behavioral health. But as competition drives up valuations in proved areas of healthcare, firms are looking to replicate buy-and-build strategies in new, fragmented specialties that are hungry for professionalization.

One of those nascent areas is assisted reproductive technology, a majority of which is treated through IVF, along with various ancillary services. “Fertility is in the early innings of consolidation and growth,” Ward said.

Today only a handful of sponsor-backed reproductive technology platforms exist in the U.S. But some experts say the industry is fast gaining traction as firms acknowledge the opportunity.

“For a long time, we had a different PE firm in our office every week,” said TJ Farnsworth, founder of Inception and newly appointed CEO of Prelude.

“The challenge is: What is the play? Most firms are trying to figure out where in the market they want to be.”

While Lee Equity isn’t thinking about an exit for Prelude anytime soon, Ward said his firm has fielded inbound interest from a wide spectrum of groups, including sponsors and strategics in the U.S. and internationally.

Prelude, for its part, focuses on IVF treatment and, increasingly, egg freezing. Combined, the recently merged company completed about 18,000 IVF cycles in 2018, or at least 7 percent of the U.S. market, Ward said.

Others have taken a different tack to investment in the space. Windrose Health InvestorsOvation Fertility runs a network of IVF and genetic-testing labs. The Los Angeles company engaged Harris Williams earlier this year to weigh a sale, Buyouts reported.

Elsewhere, EQT Partners took a piece of a different end of the market in February when it snapped up a majority stake in Igenomix. A niche within a niche, the Spanish company operates labs that support reproductive medicine worldwide, with the U.S. its largest market.

GI Partners, meanwhile, backs a large piece of the donor-sperm and egg-bank market through its investment in California Cryobank. Regal Healthcare Capital Partners recently led a $15 million Series A investment in Extend Fertility, New York’s largest provider of egg freezing.

Other PE-backed providers in the U.S. include TA AssociatesCCRM, Sagard Capital PartnersIntegraMed and Sverica Capital’s WHUSA. There’s also IVA-RMA Global, which has a large U.S. presence via subsidiaries including RMA of New Jersey.

Supply-demand Imbalance

The supply-demand imbalance for reproductive health makes for a compelling playbook.

The total number of IVF cycles in the U.S. increased to 263,577 in 2016 – the most recent year for which data is available. That represents almost 14 percent year-over-year growth and close to double the 141,807 total cycles that occurred in 2010, according to Center for Disease Control and Prevention’s Annual Fertility Clinic Success Rates Report.

Problem is the growth in supply and demand is not linear. The rate of physicians who perform IVF is somewhere between 1 percent and 3 percent, based on Lee Equity’s analysis, Ward said.

“One of [the industry’s] biggest issues is: How do we get enough physicians to be able to service patients for care?” Prelude’s Farnsworth said.

With only about 35 to 40 reproductive endocrinology and infertility graduates coming out of programs each year and many current physicians retiring, Farnsworth said, the lack of specialists has led to a major access problem: “You end up with a shortage of physicians that all end up wanting to be in primary markets.”

Coupled with the fact that IVF is expensive and time consuming, “if you’re in a lot of these flyover markets, you’re in a scenario where you don’t have access,” Farnsworth said.

For example, if you live in the Rio Grande Valley in Texas, your closest IVF clinic is probably 4 1/2 to five hours away, he said.

Adding to demand for infertility treatment, Farnsworth said, the U.S. is at the forefront of technological advancements and thus sees quite a bit of medical tourism from Europe and Asia.

“Because we can’t meet the demand, [the U.S. has] some economic imbalances that make cost higher,” Farnsworth said.

IVF treatment costs $12,400 per cycle in the U.S. on average, the American Society for Reproductive Medicine said in a 2015 report.

“Each [IVF] cycle is a significant investment of both time and money, so women do a lot of primary research and want to seek the best possible provider to maximize their odds of success,” EQT Partner Eric Liu said.

That’s why the specialized tests that companies like Igenomix offer are so important. The company doesn’t actually touch patients or embryos, but plays an important role in increasing the chances of successful and healthy pregnancies.

For instance, one of its tests grows and tests embryo cells for abnormalities. Another determines the best window of time in which to implant an inseminated embryo.

Liu said Igenomix will focus on expanding via further growth in the U.S., the fastest growing market globally, as well as look to develop new innovative tests that address other pregnancy issues.

At the same time, barriers to entry in IVF are challenging, given that most players market themselves based upon their success records, said Jon Santemma, general partner of Regal Healthcare Capital.

“If you start a new IVF company from scratch, you don’t have any SART data,” Santemma said. SART refers to the performance data that clinics submit to the Society for Assisted Reproductive Technology. As the industry’s primary organization, SART serves to maintain standards for quality, safety and care.

While the lower-middle-market firm initially evaluated New York’s IVF market, Regal found it was largely dominated by not-for-profit academic centers that are tough to compete with and generally not investable, as well as a couple of quality groups with established scale. That led the firm to evaluate egg freezing.

The American Society for Reproductive Medicine in 2012 lifted the “experimental” label on egg freezing due to improvements in technology. Regal found, however, that “nobody was really focusing on it.”

Egg freezing was still a “sideshow” among current providers of IVF, Santemma said.

Now the largest provider of egg freezing in NYC, Extend will seek opportunities in other geographic markets as well as expand into IVF, Santemma said.

Change will come

A confluence of factors is fueling growth in demand for fertility services.

Separate from consolidation and advancements in technology, experts point to a greater degree of employer coverage and growing acceptance of a treatment that has long been considered taboo.

The latter is largely driven by social trends, such as couples getting married and having children later in their lives amid a greater focus on professional careers.

The stats speak to this phenomenon.

For the first time ever in 2016, the number of women ages 30 to 35 topped younger moms to become the age bracket with the highest birth rate, according to the CDC.

Meanwhile, infertility rates increase substantially after age 35. Women between 35 and 39 have infertility rates of 39 percent, as compared with 11 percent for the 15 to 29 age bracket and 14 percent in the 30 to 35 bracket, the CDC said.

“These are patients that are racing against the clock, and so there really isn’t an option to not seek treatment if they [decide] they want to have a family,” Farnsworth said.

The growth in same-sex marriage and more single potential parents who are unable to conceive naturally is another important driver.

The precise number of same-sex married couples in the U.S. is unknown. But the Tax Policy Center estimated that in 2015 — the year in which same-sex marriage was legalized across the country — there were 250,450 same-sex married tax filers, up from about 131,080.

From a payer perspective, IVF remains largely cash pay, although it varies state by state. Egg freezing remains 100 percent out-of-pocket.

That said, there has been a real growth in large companies offering fertility benefits for their employees through companies such as ProgyNY.

This trend is only likely to continue as corporations compete for strong women candidates.

“The conversation around fertility is becoming a less taboo discussion to have,” Farnsworth said. “That’s allowing employees to look to employers and say: ‘I need this benefit.’”