The prospectus of AWE reveals how lucrative the surrogacy industry can be

On December 22nd, IVF Hospital Management Group Limited (referred to as "IVF Hospital") submitted an IPO application to HKEX.

IVF Hospital mainly provides patients with one-stop assisted reproductive technology services, commonly known as in vitro fertilization (IVF) procedures.

As of the end of June 2023, IVF Hospital has successfully delivered over 33,000 test-tube babies from the embryos it has cultivated.

Behind the overlooked infertile population, IVF Hospital has achieved profitability during the reporting period.

From 2020 to 2022, the company's revenue was RMB 369 million, RMB 420 million, and RMB 407 million, respectively, with net profits of RMB 46 million, RMB 95 million, and RMB 65 million during the same period.

This is also one of the few IPO projects recently submitted to HKEX by a company that has already achieved stable profitability.

IVF Hospital's prospectus also reveals the business of "test-tube babies" in private hospitals.

In 2022, IVF Hospital charged an average of RMB 623,000 for one egg retrieval cycle (IVF), and the average customer price is expected to reach around RMB 1.5 million when calculated based on 2 to 3 cycles per patient.

IVF Hospital's gross profit margin is indeed considerable, reaching 40.6% in 2022.

However, challenges exist as the birth rate declines, and the secondary market has lost its enthusiasm for assisted reproductive service hospitals.

As the "first stock of assisted reproduction" on HKEX, JXR (1951.HK) has seen its market value shrink by more than 60% since its listing.

IVF Hospital's IPO is also facing a market value test.

At least 50,000 yuan is needed

The world's first test-tube baby was born in the UK.

In July 1978, British physiologist Robert G. Edwards and obstetrician Patrick Steptoe successfully helped a couple cultivate the first test-tube baby in human history, Louise Brown.

In 2010, Robert G. Edwards was awarded the Nobel Prize in Physiology or Medicine for his pioneering work in developing in vitro fertilization (IVF) technology and was hailed as the "father of test-tube babies".

In comparison, China was more than 10 years behind.

In 1987, Zheng Guizhen, a rural female teacher who longed to become a mother, had been unable to conceive for many years due to bilateral fallopian tube blockage. It was not until she met obstetrician Zhang Lizhu that she successfully underwent in vitro fertilization through laparoscopic egg retrieval, ultimately giving birth to China's first test-tube baby.

Zhang Lizhu is also known as the "mother of test-tube babies" in China.

This academic achievement was not easy to obtain. At that time, due to the lack of a constant temperature box for egg retrieval, Zhang Lizhu's graduate student had to run across the playground from the obstetrics department carrying a thermos bottle containing follicular fluid. Moreover, the culture medium for preserving eggs, the egg retrieval needle, and the device for aspirating follicles were all homemade by Zhang Lizhu's research team.

Now, in 2023, cultivating test-tube babies has become a mature technology and supports an IPO.Recently, VIVA IVF has submitted an IPO application to HKEX.

VIVA IVF primarily provides assisted reproductive technology services to patients, which can be divided into four categories: preliminary consultation and pre-treatment services, AI or IVF-ET treatment services, post-pregnancy services, and pharmaceutical sales.

The core service is AI or IVF-ET treatment.

According to VIVA IVF, AI treatment mainly includes follicle monitoring, semen processing, and artificial insemination, while IVF-ET treatment mainly includes ovulation induction, egg retrieval and fertilization, embryo development and transplantation, involving various medical and surgical procedures related to assisted reproduction.

Currently, VIVA IVF operates four hospitals: Zhongjiang Jiuhao Hospital, Tianjin VIVA Hospital, Jieyang VIVA IVF Hospital, and Kunming VIVA IVF Hospital. In 2022, the average fees for each IVF cycle at these four hospitals are RMB 58,800, RMB 67,000, RMB 71,200, and RMB 52,200, respectively.

It is worth noting that the success rate of in vitro fertilization is only about 50%. Public data shows that the cultivation of a successful test-tube baby usually requires 2 to 3 cycles.

Based on this data, the cost of IVF for a patient can reach approximately RMB 150,000.

However, VIVA IVF has introduced bundled assisted reproductive technology and auxiliary service projects.

In simple terms, when a patient purchases the bundled assisted reproductive technology and auxiliary service projects, they can undergo multiple embryo transfers under a one-time payment arrangement. If clinical pregnancy is not achieved within the specified period, they can receive a one-time refund.

This service model can be compared to the VIP service provided by civil service exam or postgraduate exam institutions, which guarantees a refund if the exam is not passed.

VIVA IVF did not specify the fees for bundled services.

A person named TradeWind01 contacted one of VIVA IVF's hospitals as a patient. According to a hospital representative, the fees for bundled IVF services are divided into two levels: RMB 48,000 and RMB 68,000. Taking the RMB 48,000 fee level as an example, the service includes one regular cycle of egg retrieval and at least 2 embryo transfers.

In 2022, the revenue from bundled projects was approximately RMB 42 million, accounting for about 10% of the total revenue.

"We believe that our bundled ART and auxiliary service projects can alleviate the financial and psychological burden on patients, especially considering that the Chinese government has not yet included ART services in the national social medical insurance program," explained VIVA IVF.

However, the possibility of including IVF costs in the medical insurance catalog is emerging. In February 2023, the National Healthcare Security Administration mentioned in a response that appropriate labor analgesia and assisted reproductive technology projects will gradually be included in the fund payment scope to alleviate the medical burden on infertile patients.

Guangxi has already taken the lead in including assisted reproductive technology in medical insurance, which may further improve the accessibility of IVF services.

However, challenges remain, and there is still uncertainty about whether assisted reproductive services will face price reductions.

From the current gross profit level, it is indeed a profitable business. In 2022, VIVA IVF's gross profit margin reached 40.6%.Moreover, AVEVA has achieved profitability, with net profits of RMB 46 million, RMB 95 million, and RMB 65 million for the years 2020 to 2022, respectively.

Scarcity of Licenses

Currently, mainstream IVF technology has gone through three generations of iterative development.

As a first-generation IVF technology, in vitro fertilization (conventional IVF) mainly uses the natural combination of sperm and eggs in a culture medium to solve female infertility problems. This is the current mainstream surgical solution and a major source of revenue for AVEVA.

The progress of the second-generation IVF technology (ICSI) lies in directly injecting a single sperm into the cytoplasm of the egg for fertilization, mainly used to treat male infertility.

Building on the first two generations of technology, as a third-generation IVF technology, PGT (preimplantation genetic testing) can help couples with fertility difficulties select embryos, improve success rates, and reduce miscarriage rates.

Medical institutions that perform first, second, and third-generation IVF surgeries need to hold different licenses.

Currently, AVEVA holds licenses for first and second-generation IVF surgeries. One of the purposes of its IPO fundraising is to obtain the qualification of a tertiary specialized hospital for its subsidiary, Zhanjiang Jiuhao Hospital, in order to obtain a license for the third generation (PGT).

Zhanjiang Jiuhao Hospital has contributed the majority of AVEVA's revenue. In 2022, the hospital generated revenue of RMB 214 million, accounting for 52.60% of the total.

However, obtaining a license for the third generation (PGT) is not easy.

Currently, the number of assisted reproductive institutions that have obtained a license for the third generation (PGT) is limited.

According to data from the National Health Commission, as of 2022, only 93 medical institutions in China have obtained a license for the third generation (PGT).

The scarcity of licenses for the third generation (PGT) is due to higher average transaction values.

Public data shows that the fee for one cycle of the third generation (PGT) can reach RMB 100,000. If calculated based on a patient undergoing 2 to 3 cycles, one patient can bring in revenue of around RMB 250,000 for a medical institution.

However, currently, none of AVEVA's hospitals have obtained a license for the third generation (PGT), which may be an important development goal for AVEVA in the foreseeable future.

It is worth mentioning that as a competitor of AVEVA, in July 2023, JXR's subsidiary, Sichuan Jinxin Xiguan Hospital (Bisheng Campus), has obtained the qualification for PGT trial operation.

Even so, the first-generation (conventional IVF) license held by AVEVA is still scarce.

As of the end of 2022, there were only 559 medical institutions in China with a first-generation (conventional IVF) license, which means that on average, each province has only 16 medical institutions that can provide IVF surgeries to patients. Moreover, over 90% of these licenses are held by public medical institutions.

"In China, one assisted reproductive institution is set up for every 3 million people. Compared to the US market, China's assisted reproductive market has strict policy barriers, strict license approval standards, and a lengthy process, with higher requirements for patients' physical conditions," said Du Xiangyang, a healthcare industry analyst at Southwest Securities.At present, AWEF is also one of the top players in the private sector.

In 2022, AWEF's total number of IVF cycles reached 6,706, accounting for 0.9% of the total in China, ranking fourth among private assisted reproductive service institutions.

Is the golden track silent?

Under the high industry threshold, both AWEF and JXR do not need to worry about the situation of "internal competition" as there are limited competitors.

However, the common challenge they face is whether the commercial prospects of assisted reproductive technology services are a smooth path.

According to Frost Sullivan data, the infertility rate in China reached 17% in 2020, an increase of 2 percentage points compared to 2010. (Note: Infertility rate = number of infertile couples divided by the number of couples of childbearing age)

Behind the seemingly golden track, the secondary market does not seem to "buy" the targets of assisted reproductive technology hospitals.

As of the close on December 22nd, JXR's total market value was only HKD 8.707 billion, evaporating more than 60% compared to the market value of HKD 22 billion when it went public in 2019.

The valuation has also plummeted.

JXR's price-to-earnings ratio has dropped from 116 times at the beginning of its listing to 52 times now.

From a fundamental perspective, although JXR's revenue is continuing to grow, its profits have significantly declined.

In 2022, JXR's revenue and net profit reached CNY 2.379 billion and CNY 190 million, respectively, with a revenue growth rate of 28.59%, but a YoY decline in profit of 66.65%.

However, JXR explained that it was mainly affected by one-time losses caused by the temporary interruption of business in some subsidiaries, and the hospital is now operating normally.

But it is undeniable that the overall trend of population change has a negative impact on companies like this. In the long term, the scale of the domestic population of childbearing age is shrinking, and the number of women of childbearing age willing to have children is also decreasing, which undoubtedly poses challenges to the potential market for assisted reproductive technology services.

"The problem now is that the group of people who don't want to have children and then can't have children is also shrinking rapidly. In the long run, there is actually no increase." A medical industry insider in Beijing told Zhitong App.

In the short term, the penetration rate of assisted reproductive technology is limited. Public data shows that the penetration rate of the assisted reproductive service industry in China is only 7%. More people will undergo various treatments such as medication before choosing in vitro fertilization.

For example, polycystic ovary syndrome, which makes it difficult for women to conceive, can be treated with ovulation-inducing drugs, and prostatitis in men can be treated with antibiotics.

In other words, assisted reproductive technology services are more like the last "trump card," different from ophthalmic and dental surgeries that have high accessibility.

At the same time, China has strict control over assisted reproductive technology, including surrogacy and female egg freezing, which are still illegal in the country.

Currently, JXR's solution is to "go global." In 2020, JXR acquired relevant operating licenses from Ruiya International Medical Center (Ruiya) to provide assisted reproductive services in Laos."Vietnam's population is comparable to that of the Chengdu-Chongqing region, but the number of IVF cycles in Vietnam is higher. In the future, the company will continue to exert efforts in important development areas such as Chengdu-Chongqing and the Greater Bay Area. At the same time, we will provide excellent product and service in Yunnan, Laos, Shenzhen, and Hong Kong, which are two important regions, one domestic and one international," said JXR.

AVEVA seems to be ready to follow suit. In its fundraising plan, it proposes to use the funds to expand its international medical network in the next three years, aiming to meet the needs of developing countries in Southeast Asia, the Middle East, or South Asia.

However, with the inclusion of IVF in the medical insurance catalog, which is beneficial to increasing the industry's penetration rate, coupled with the boost from going global, the performance of AVEVA is attracting a lot of attention from the market, as it may bring more incremental space.