Despite Cramer's Recommendation, Infertility Isn't Bull Market (SRA, INMD)

I like to consider both value and growth arguments for many different stocks, which is part of the reason that I listen to the podcasts for both Gannon on Investing and Jim Cramer's Real Money (which, by the way, is much less shrill than the Mad Money TV show).

Cramer likes to talk about picking up growth ideas from the news, and one of his topics the other day was infertility. He mentioned a USA Today article about the money young, smart beautiful women can make selling their eggs, which he noted was an indicator of the growing trend of infertile couples taking extraordinary measures to become pregant. This has been going on for many years, of course, but I suppose the fact that it's in the nation's newspaper gets it some extra attention.

But his argument wasn't that the egg business was a good investment, it was that infertility treatment in general should be seeing a bull market because of the trend illuminated by the egg harvesting article.

That sent him to Serono (SRA), a company that makes many drugs used in fertility treatments -- Gonal-f for ovulation disorders; Ovidrel/Ovitrelle to induce final maturation of ovarian follicles and trigger ovulation, and others. Strangely enough, SRA shares are down a bit today -- just goes to show you the impact Cramer's radio show has compared to the CNBC show.

The shares are somewhat beaten down (forward PE of 15, quite reasonable for a midsize biotech without any blockbuster drugs), because folks are afraid Tysabri will beat out its MS drugs, which are another large part of its portfolio. It may be a good company, but that's not what I started thinking about when Jim started talking about infertility treatments.

No, what I started thinking about was IntegraMed (INMD). This stock was a true cautionary tale for readers of the Motley Fool back in December of 2004. It was a tiny stock, priced at about $5 and trading maybe 5,000 shares a day. Small small. A Fool author couple wrote an article about it, and it got the headline: "Lynch's Next 10-Bagger?" or something to that effect ... the headline was very shortly changed to make it less inflammatory (it's now entitled "A company ready for growth?"), but the damage was done.

The stock traded over 2,500,000 shares that day, 500X its regular trading volume, and it more than doubled almost instantly following the publication fo the article. It has had wild ride since, on not much in the way of news, but it is still well above that $5 price.

The argument for IntegraMed was much the same argument that Cramer made for SRA (though SRA is certainly a much larger company). INMD offers an array of products and services for centers that perform In Vitro Fertilization (IVF) -- from disposable supplies to financing and marketing support.

And thinking of IntegraMed brought forth contrarian thoughts that it's starting to become dangerous to think of infertility as a growth industry.

SRA may be in a good spot, selling some of the drugs that make fertility treatments possible. INMD is very much tied to it in their IVF work. It is logical to assume that this will be a huge growth area, because people are having babies later in life in general and that, perhaps combined with environmental factors, is increasing the need for fertility treatments to help couples have children (to say nothing about the growing acceptance of same-sex couples who seek egg and sperm donors, and other more marginal parts of the fertility business).

But there are other trends to think about, too, and that's what made me question the Fool article's assertion and Cramer's implication that we're at the "sunrise" of growth in the IVF business. One good article that brought this to mind was in the Boston Globe last fall, it focused on some of the preliminary indications that growth in IVF is plateauing.

The generation that first made use of biotechnology to help them become pregnant is now essentially past the child-bearing age ... baby boomers, the first generation to have large numbers of two-career families who waited a little longer to start their families, were the ones who found IVF to be a godsend and started using it. They spent millions of dollars trying to have babies in their late 30s and 40s, just as couples do now ... but it's going to be a long time before there's another market as big as the baby boom generation to sell to, and the baby boomers aren't going to have many more babies no matter what technology makes possible.

So while my generation (X) is actively involved in IVF as a solution, and I have personal experience with this, I don't think the size of the market is growing -- to think of it callously, fertility treatment will have to expand market share if it's going to be a growth business in the next ten years.

My second concern, again a callous one, is that fertility treatments have improved dramatically over the years, which significantly impacts the profits of companies that depend on a growth market for their services or drugs. It might not have been uncommon for a couple to spend close to $100,000 on eight or ten IVF cycles before they were lucky enough to have a child in the late 1980s or 90s.

Today, it's very likely that same couple might have a child after one or two cycles -- the technology and procedures have improved that much. At roughly $10,000 per cycle, that's a lot less business. And that's bad for you whether you sell the expensive drugs thave have to be used for every cycle, or if you sell the disposable medical supplies used or the financing.

And third, the margins for the business must be decreasing as it tries to address the needs of more people. Insurance is beginning to cover these treatments in some areas -- and while that may increase volume somewhat, if it picks up to any significant degree this area of medicine that has been blessedly removed from managed care pressure for the most part is going to become less profitable. It also cuts down on the lucrative business of financing IVF, which is something INMD does, though that's not the core of their business.

I'm not invested in either of these, nor have I looked at the financials of either of these particular companies or their competitors in great detail. It might be that the trend of infertility treatment demand growth is strong enough to fight these other trends -- a smaller addressable market, a smaller number of treatments required per customer, and more financial pressure on margins ... but it's not a slam dunk, in my opinion. I think it's important to question growth or value stories, even those that sound on their face to be eminently logical.