IVF Cycle Recovery And Consumables Momentum Will Support A Fairly Valued Outlook

Catalysts

About Vitrolife

Vitrolife provides products and services used in IVF clinics, including media, disposable devices, lab technologies and genetic testing.

What are the underlying business or industry changes driving this perspective?

• IVF cycle activity in the U.S. and parts of APAC is showing early signs of recovery. However, clinic purchasing of capital equipment such as EmbryoScope continues to be delayed, which can cap growth in high ticket technologies and limit operating leverage on EBITDA margins and earnings.
• Vitrolife is gaining share in consumables across the Americas and EMEA. This relies heavily on continued wins in a competitive market and on one large competitor being in restructuring, so any change in competitor behavior or pricing could pressure revenue growth and gross margins.
• Improved reimbursement for IVF in China has been introduced. However, depressed consumer confidence and weak cycle development are persisting, which could keep APAC revenue growth modest and weigh on mix and regional gross margins if China remains an outlier.
• Macroeconomic and geopolitical issues in the Middle East are affecting Genetics and broader IVF demand in that region. A slow or uneven recovery in cycles would limit growth in higher margin genetic services and keep group net margins under pressure.
• Investments in IT, digitalisation and U.S. commercial capabilities are supporting long term efficiency and growth ambitions. If revenue does not accelerate in line with these higher costs, EBITDA margin and earnings growth could remain constrained.

Assumptions

This narrative explores a more pessimistic perspective on Vitrolife compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Vitrolife's revenue will grow by 8.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.5% today to 19.7% in 3 years time.
• The bearish analysts expect earnings to reach SEK 879.0 million (and earnings per share of SEK 6.5) by about January 2029, up from SEK 440.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.4x on those 2029 earnings, down from 40.9x today. This future PE is lower than the current PE for the GB Biotechs industry at 33.6x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.29%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Vitrolife is already winning share in consumables across all regions and reports that its growth in these products is above customer reported IVF cycle growth. If this continues or accelerates, it could support higher revenue and earnings than implied by a flat share price view, especially as higher margin consumables scale.
• The combined EmbryoScope and witnessing offering is gaining traction in both EMEA and the Americas, with a growing pipeline of customers. A sustained pick up in technology installations over time could lift capital equipment revenue and eventually support better operating leverage and net margins than assumed.
• Genetic testing, including PGT-A, PGT-M and noninvasive tests such as Embrace, is described as a key growth driver with very strong growth from a low base in some segments. Continued adoption of higher margin tests and a mix shift toward more differentiated offerings could push gross margin and earnings higher than a flat share price scenario might suggest.
• Management is investing in IT, digitalisation and automated manufacturing to increase capacity of key growth drivers, and OpEx is described as stable over seven quarters. If these projects start to support efficiency and scale benefits, EBITDA margin and net income could trend higher than the market currently prices in.
• The IVF industry is seeing early signs of recovery in the U.S. and parts of APAC, alongside policy support such as improved reimbursement in China and fertility related measures in the U.S. If patient confidence and cycle volumes recover more broadly over the long term, that could underpin stronger group revenue growth and lift earnings compared with expectations that the share price will stay roughly unchanged.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Vitrolife is SEK141.0, which represents up to two standard deviations below the consensus price target of SEK188.75. This valuation is based on what can be assumed as the expectations of Vitrolife's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK230.0, and the most bearish reporting a price target of just SEK141.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be SEK4.5 billion, earnings will come to SEK879.0 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 5.3%.
  
• Given the current share price of SEK133.0, the analyst price target of SEK141.0 is 5.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.