Why Virtus Health Ltd shares are being SLAMMED on its trading update

Virtus Health Ltd (ASX:VRT) shares have crashed down to earth with a bang after today's trading update. Here's why…

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In early trade the shares of Virtus Health Ltd (ASX: VRT) have crashed down by 16% to $5.21 after Australia's largest IVF provider released a disappointing trading update to the market.

In November the company's share price dropped sharply after it announced that it was experiencing weak IVF cycle volumes. Management advised that fresh cycle activity in Australia at that point had decreased 5.9% on a like-for-like basis.

Unfortunately there hasn't been any sign of improvement since then. In fact, things have got worse. According to today's release Virtus' fresh cycle activity in Australia during the first-half has fallen by 7.2% on a like-for-like basis.

Management has blamed the decline on a combination of low-cost competition and full service volume weakness leading to further market share losses in Victoria.

Furthermore, in New South Wales it believes low-cost competition has led to The Fertility Centre reporting a 19% drop in volume on the prior corresponding period.

Although The Fertility Centre operations in Queensland appear to have been unaffected at this stage, management anticipates that low-cost competition will hit its volumes and margins in the state in the second half.

Unsurprisingly management has warned that should this weakness continue in the second half, the company's full-year results could be materially impacted.

Whilst no guidance has been provided at this stage, considering the drop in volumes and margins it's not hard to imagine a double-digit decline in net profit this year.

Virtus and rival Monash IVF Group Ltd (ASX: MVF) have dominated the market for a number of years, but the emergence of these low-cost competitors has really shaken things up.

As tempting as Virtus may appear after such a sharp fall, I would keep clear of it until there is a significant improvement in its fresh cycle activity.

Although I'm a big fan of rival Monash IVF and its ability to outperform the industry average. In light of today's news it may also be worth staying clear of it until it updates the market.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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