Virtus Health (VRT) 2015 AGM Voting Intentions

Company/ASX Code : Virtus Health Limited (VRT)
Registry : Link Market Services
Webcast : No
Venue :
2pm Hilton Sydney
488 George St
Sydney, New South Wales
Monitor : Ms Joyce Yong
AGM Details / NoM : Wednesday 28th October, 2015
ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

As the first provider of in vitro fertilisation (IVF) services to list on the ASX, Virtus currently holds 36% of the Australian market where the company experiences good demand and favourable funding support under Medicare. These conditions enabled the share price to reach an average of over $8 a year after listing in June 2013 at $6.07.  

Since then there has been a reality check when the company recently announced a downgrade with net profit after tax (NPAT) of $30.4 million (down 1.7%), in spite of a 16.1% rise in revenue to $233.7m. VRT attributed the downgrade to a number of factors: increased competition following Primary Healthcare’s rollout of its bulk bill offering, economic weakness in Queensland and, more importantly, a change in clinical protocols in the Melbourne business. 

At a pre-AGM meeting with the Chairman and the Company Secretary, VRT states the Melbourne changes were an improvement introduced by VRT’s advisory boards consisting of clinicians, scientists and managers and it would be beneficial in the long term. In the meantime, the company has also rolled out a low cost option in the form of The Fertility Centre (TFC) and expanded overseas to Ireland and Singapore. When we asked why Ireland and Singapore, they replied VRT went into Ireland in response to an opportunity that arose, also both countries were well regulated and their clinical practices were similar to Australia. VRT hopes these moves would address the business risks posed by competition as well as downward pressures on government funding for medical services, including IVF. 

In relation to another key challenge, the scarcity of fertility specialists, VRT states it is rare to find a fertility specialist under 50 because of the extensive training required. On the other hand, they also find many specialists continue to work after 65 because the demands of the job are not as onerous as for other medical specialties. In the meantime, VRT is able to provide fertility specialists with an attractive workplace through the professional environment provided by their advisory boards and collaboration with their peers during periodic scientific and clinical days.

In spite of the risks posed by increased competition and reduction of government funding, it is obvious the growing social trend in developed countries towards later childbirth favours growth of the IVF market opportunity as well as cryogenic storage of ovum and embryos. When asked about the seemingly high impairment figure for accounts receivables, VRT admitted that charges for cryogenic storage tended to be slow to be collected and the company considered overdue accounts impaired after 90 days. In any event, receivables are small compared to sales. 

Another area of growth for the company is genetic testing to screen out genetically based diseases. Also worth a mention is that VRT’s 6 day hospitals, used mainly for IVF procedures but also for other specialist procedures, achieved revenue growth of 4.3% with growth in non-IVF procedures exceeding IVF procedures.

ASA Position
Item 2: Adoption of Remuneration Report

VRT’s remuneration structure comprises fixed remuneration (base salary and statutory superannuation), at-risk short term incentive (STI) of up to 50% fixed remuneration subject to achievement of specified targets and an at-risk long term incentive (LTI) of up to 60% of fixed remuneration under the Executive Option Plan. 

The Executive Option Plan grants options or performance rights over shares in VRT subject to two hurdles: relative total shareholder return (TSR) and return on equity (ROE). Each hurdle applies to 50% of the award. Calculations of both will be determined at the end of the 3 year performance period by the Board. While ASA prefers a 4 year performance period and for TSR to start vesting at the 51st percentile instead of the 50th, what concerns us most is that the conditions for satisfying the key performance indicators for either the STI or the LTI are not specified but are set by the Board at the time they are granted. 

We are encouraged VRT states that one of the principles behind the Remuneration Report is ‘acceptability to shareholders’ and they have demonstrated their willingness to note and implement some of our suggestions at their meeting with us. However, by not specifying the conditions for satisfying the KPIs, this Remuneration Report is less than transparent.

We hope they will take our suggestion on board so we can vote for the Remuneration Report next year.

ASA Position
Item 3: Re-election of Mr Peter Macourt as a Director

Mr Macourt has been the non-executive Chairman of Virtus since listing on 11 June 2013. He is also a member of the Audit Committee and the Nomination & Remuneration Committee. He has senior level experience and is not overloaded, being Chairman of SKY Network Television and Director of Prime Media. Although VRT does not have a minimum shareholding policy for either directors or senior executives, he holds 18,485 ordinary shares directly. His re-election is supported.

ASA Position
Item 4: Re-election of Mr Peter Turner as a Director

Mr Turner has senior executive level experience at CSL, having been executive director and Chief Operating Officer of CSL. He is the current Chair of NPS Medicinewise, a not-for-profit organization. He recently resigned as Chairman of Ashley Services Group, a company that provides vocational training and labour hire service and is currently being investigated for inadequate disclosure in its IPO prospectus. Although he is not overloaded, has excellent experience and holds 50,000 shares, we would like to know more about his involvement with Ashley before deciding how to vote.

ASA Position
Item 5: Increase to non-executive directors’ fee pool

VRT seeks shareholder approval to increase the maximum aggregate remuneration that may be paid to non-executive directors from $500,000 to $600,000 per annum. At our meeting, Chairman Peter Macourt explained that while he thought VRT has the right number of directors currently but may need to pay more to attract new directors. As the total pool is not excessive, ASA will vote in favour of this resolution.

ASA Position
Item 6: Grant of performance rights to Chief Executive Officer Sue Channon

VRT seeks shareholder approval to issue a maximum of 58,825 performance rights to CEO Sue Channon. The number of rights is based on 60% of base salary divided by the average daily closing price of VRT shares for the business days from 25 August to 11 September 2015. The number of rights that actually vest depends on satisfaction of the TSR hurdles as set out in the notice of meeting. Unvested rights will lapse. While ASA’s preference is for a 4 year vesting period and for vesting to start at the 51st percentile, rather than 50th percentile, based on our understanding of the hurdles that will apply to the grant, we vote for this resolution. As noted above, we will continue to press for improvements to the company’s remuneration disclosures.

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