IVF Meets NASDAQ

…and Other Industry Disruptions No One Talks About

I’ve been trying to get smart about the concept of corporate practice of medicine.

Like proteins folding on themselves in a predictable fashion, based on structure and electrical charge, the macro of IVF practice continues to evolve in predictable ways.

As networks — both purchasers and providers — consolidate, the bulk contracting for cycles becomes more the norm than the exception, and the industry evolves from niche to major market segment, the sources of financing evolve too.

The first stage of IVF growth combined physician startup capital and the subdivision of hospital on/gyn departments to form a decentralized scattering of practices whose growth was paid for out of retained earnings.

Stage two emerged as better-run programs leveraged their competitive advantage to expand, choosing to finance the expansion by selling equity to outside investors rather than by borrowing against the increasing cash flows.

Right now we are in a sort of stage 2A, where some of the private equity businesses are exiting, in many cases selling to other outside investors. Some of these transactions are economically rational and result in operationally sound even larger networks, increasingly standardized and scalable. Unfortunately, some of the transactions are value destroying.

As IVF productivity to scale, from well less than a million babies a year to a million a month or more, capital needs will outgrow the current private equity marketplace, and new sources of capital will emerge.

Where will the money come from? Let’s consider two sources.

IVF has successfully tapped owner operator startup funding, internal capital in the form of retained earnings, outside capital from private equity firms, much of which came from time-limited closed end fund structures where the duration of ownership has to be substantially less than ten years. Bank debt has primarily been used for working capital, not to finance growth.

Within the private equity segment, IVF has climbed the ladder from niche firms to the largest PE firms in the world. To continue to grow, two other sources of capital are likely to be tapped, one old source and a new one. The old one? Hospital systems. The new one? NASDAQ.

Consider hospital systems first. During the healthcare system mega-merger era starting in the 1990’s, hospitals abandoned IVF, existed outside the huge provider / huge payer duopoly that increasingly defined healthcare delivery in the US. If Cigna didn’t want to cover it, why do it? Thirty years later, only a small number of IVF programs, even those whose facilites exist within the hospitals themselves, are owned by the hospital systems.

But those same hospital systems are now financially stable and looking for growth, at a time when private equity funds are looking to exit their positions in some very large IVF programs. Strategic synergies with other clinical programs make IVF programs more valuable to a hospital system than to enterprise value over EBITDA — calculating PE firms.

Healthcare system venture and strategy committees are working on this now.

Similarly, if my incoming phone and email traffic from investment bankers is an indicator, the first IVF network IPO cannot be too far in the future. There are only so many sources of nine-digit capital, and the IVF’s inevitable near-term 5–10x growth needs to access every all of them.

More to come.