IDEXX Laboratories Corporationfeltl.com/articles/IDXX20120315initiation.pdf · 2012. 3. 15. · IDEXX Laboratories Corporation Not enough leash, initiating with HOLD, $87.50 price

Healthcare- Diagnostic Equipment March 15, 2012

Please see important disclosures on pages 20 to 22.

Rev(mil) 2011A 2012E 2013E

Mar $292.7A $314.7E $342.6E June $317.9A $338.6E $368.8E Sept $301.0A $319.6E $348.7E Dec $307.2A $329.6E $359.1E

FY $1218.7A $1302.5E $1419.2EP/Sales 4.3x 3.8x 3.4x

EPS 2011A 2012E 2013E

Mar $0.62A $0.74E $0.84E June $0.83A $0.88E $0.98E Sept $0.66A $0.71E $0.77E Dec $0.67A $0.74E $0.82E

FY $2.78A $3.07E $3.41E P/E 43.8x 48.4x 35.1x

Price: $84.0052-Week Range: $89.49-$63.83Target: $87.50Rating: HOLD

Shares Outstanding: 55.1 milMkt. Capitalization: $4,608milAve. Volume: 255,000Instit. Ownership: 103%BV / Share: $9.79Debt / Tot. Cap.: 31%Est. LT EPS Growth: 15%

Feltl and Company Research Department 2100 LaSalle Plaza

800 LaSalle Avenue Minneapolis, MN 55402

1.866.655.3431 Ben Haynor, CFA

[email protected] | 612.492.8872

Company Description: IDEXX Laboratories Corporation develops, manufactures and markets instruments and consumables targeted at the veterinary, water quality testing, and livestock testing markets. The company sells its products worldwide directly and through distributors. In addition, the company offers veterinary diagnostic reference laboratory and other veterinary consulting services and software. IDEXX was incorporated in 1983 and is based in Westbrook, Maine.

IDEXX Laboratories Corporation

Not enough leash, initiating with HOLD, $87.50 price target (IDXX - $84.00) HOLD

Key Points

Financial Summary

Capital spending by veterinary offices set to return after secular decline.

IDEXX holds a dominant market position and is still in the early days of a replacement cycle.

Competition emulating IDEXX’s successful strategy and valuation makes us cautious.

Initiating with HOLD rating and $87.50 price target (16x FY2012 EV/EBITDA).

Dynamics in the veterinarian industry served by IDEXX appear to be changing favorably. From 2004 through 2009, the number of practicing veterinarians grew ~30%, while the number of companion animals (pets) increased only ~5%, hurting the financial health of veterinary practices. In the last two years, however, this trend has modestly reversed as the number of veterinarians has stagnated while pet populations have grown, albeit modestly. We believe that the number of visits per veterinarian per week has likely bottomed and that as baby-boomer veterinarians retire and the economy improves, the financial health of the typical veterinary practice will improve. In addition, both IDEXX and VCA Antech (WOOF – not rated) have noted stabilization in practice visits the past two quarters after more than two years of declines. IDEXX holds a dominant market position in the early days of an ongoing replacement cycle. Roughly 90% of veterinary practices have a chemistry analyzer and 60% to 70% have a hematology instrument in-house. IDEXX has far and away the largest market share in both areas, boasting ~32,000 chemistry installs and ~23,000 hematology installs. The company has rolled out its latest instruments, the Catalyst Dx on the chemistry side and the ProCyte Dx on the hematology side, but is still early on in converting its customers to the new devices with approximately 23% and 7% converted, respectively, to their latest instruments. The typical replacement cycle ranges from four to seven years on instruments but this has slowed due to the tough economy and secular decline in the veterinary market. IDEXX typically sees a 15% to 50% increase in consumable use as practices move to its latest instruments. We believe this represents a massive opportunity for the company once the replacement cycle begins to respond to an improving veterinary market, which we estimate will occur within 12-18 months. IDEXX’s competition has attempted to emulate their successful strategy of providing a full range of products and services. While neither Abaxis (ABAX – Buy - $34.50) nor Heska (HSKA – not rated) have as broad of range of products and services as IDEXX, they are both attempting to broaden their capabilities in the veterinary reference laboratory market. Abaxis recently launched their own reference lab and Heska spoke on their most recent call about partnering with local and regional labs to bundle their diagnostic equipment and consumables with the labs’ services, providing discounts to clinics in the process. We believe this will result in some pricing pressure. Initiating coverage of IDEXX with a HOLD rating and $87.50 price target, which represents 16x 2012 EV/EBITDA. While we believe IDEXX is positioned well for veterinary market recovery, it currently trades near the high end of its historical multiples. We would like to see additional improvement in the veterinary market, an accelerating replacement cycle, or more attractive prices before becoming more positive on the shares.

March 15, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer

Feltl and Company Research Department IDEXX Laboratories Corp. ( IDXX) Page 2

INVESTMENT THESIS We believe that IDEXX is well positioned for a recovery in the veterinary market with its large install base and wide range of products and services. The company is a leader in virtually all of the markets it serves. In addition, IDEXX’s research and development budget dwarfs that of its veterinary market competitors; the company’s research and development spending likely totals 75% of the entire industry’s combined research and development budget. Their position within the industry and the resultant scale should allow them to expand operating leverage. Based upon current multiples of other diagnostic equipment firms and historical multiples at which IDEXX has traded, we think it appropriate to assign the company a valuation multiple of 16x 2012 EV/EBITDA. This valuation methodology leads us to a $87.50 price target, approximately 4% above current prices. As the shares presently do not presently have 15%+ upside to our target, we have assigned the company a HOLD rating. Our outlook would improve should the broader veterinary market show accelerating improvement, the company begins converting its chemistry and hematology instrument installed base to the Catalyst Dx- and Procyte Dx-generation more rapidly, or the shares become more attractively valued. Opportunities Secular decline in veterinary market abating. The number of practicing veterinarians has grown ~30% since 2004, while the number of companion animals (pets) has grown only ~5%, hurting the financial health of veterinary practices. However, over the past two years, the number of veterinarians has stagnated while pet numbers have grown, albeit modestly. We believe that the number of visits per veterinarian per week has likely bottomed and that as baby-boomer veterinarians retire and the economy improves, the financial health of the typical veterinary practice will improve, leading to greater capital equipment sales and improved practice visit trends, ultimately resulting in increased consumable usage. Market-leading products with a large install base. IDEXX offers a full range of products and services for both in-house and laboratory veterinary diagnostics. IDEXX pioneered the in-house testing market and has reaped the benefits, with the largest install base of chemistry and hematology instruments that is several times greater than its next closest competitor. This scale and range of products and services allows the company to bundle their offerings, providing discounts to customers as a way to capture a larger portion of a practice’s business and/or drive testing volume. Still early in the replacement cycle. Roughly 90% of veterinary practices have a chemistry analyzer while 60% to 70% have a hematology instrument. IDEXX has converted ~23% of its 32,000-strong chemistry install base over to its latest generation instrument, the Catalyst Dx. On the hematology side, the company has placed ~1,624 ProCyte Dx instruments or about 7% of its 23,000 hematology install base. The typical replacement cycle for instruments ranges four to seven years depending on a variety of factors and has been impacted by the difficult economy and secular decline in the veterinary market. We believe the market has stabilized and is likely to reverse in the next 12-18 months. IDEXX tends to see an increase in consumable use when a practice upgrades (~15% in the case of Catalyst Dx) to a single current generation instrument, and a considerable increase of nearly 50% when a practice upgrades both its chemistry and hematology instruments to the latest generation. Exclusive distributor relationships with the three largest veterinary distributors. The company has exclusive distributor relationships with the three largest veterinary product distributors, Butler Schein, MWI Veterinary Supply, and Webster Veterinary, that preclude them from distributing in-house diagnostics made by competitors. This forces competitors to sell direct or utilize smaller distributors, providing them less reach than IDEXX has been able to realize. FTC investigation into IDEXX distribution resolved favorably. The Federal Trade Commission is currently investigating IDEXX’s relationship with the three largest veterinary health product distributors. Should the FTC find that these agreements are not anticompetitive in nature, IDEXX’s competitors will continue to face distribution difficulties. Superior research and development budget. IDEXX’s research and development budget is roughly three times larger than all of its competitors combined in the veterinary diagnostic equipment space. Should a competitor develop a product that leap frogs their offerings, IDEXX would be able to devote significant resources to countering it. Similarly, it should allow the company to maintain highly competitive product offerings. Economic recovery. It is well known that the recent economic slump has put a damper on physician office visits. A similar trend has also taken place in the veterinary space. An economic recovery would likely see the pet population grow as well as veterinary visits increase as new pets are acquired and pet owners who put off veterinary care in the past several years return. Since the economic downturn began, the pet population has aged, and, just as with humans, the more aged pets have more lab tests conducted upon them, increasing the potential demand for IDEXX’s products.



Risks FTC investigation into IDEXX distribution resolved unfavorably. The Federal Trade Commission is currently investigating IDEXX’s relationship with the three largest veterinary health product distributors. IDEXX currently has exclusive agreements with these distributors precluding them from distributing competing products. Should the FTC find that these agreements are anticompetitive in nature, as their competitors believe, and force distributors to carry competing products, IDEXX would obviously face a higher level of competition and may face pricing pressures. However, uncertainty surrounds the timeline as to when the FTC may render a decision and how long the appeals process would take to play out, but it is likely to stretch over several years. Competition. Two of IDEXX’s smaller competitors, Abaxis, Inc. (ABAX – Buy) and Heska Corp. (HSKA – not rated), are attempting to emulate IDEXX’s long-successful strategy of bundling equipment and laboratory services. Previously, IDEXX was the only firm with a broad enough scale to offer a full range of instruments, consumables, and services. However, Abaxis has recently entered the veterinary reference laboratory business and Heska’s management discussed partnering with independent diagnostic labs to offer bundled pricing discounts on their most recent earnings call. We believe that this may reduce the differentiation between the three companies in the minds of some veterinarians and may result in pricing pressures in the future if Abaxis and Heska are successful in picking up share through discounting. Changing regulatory environment. Weakening regulations may harm IDEXX’s business. For example, in 2009, the European Union increased the age at which healthy cattle are to be tested for bovine spongiform encephalopathy (mad cow disease) from 30 to 48 months. This has since been raised to 72 months, reducing the demand for IDEXX’s testing products of this type. Veterinary practice roll-ups. In certain areas of human healthcare services, such as in the neonatal space, corporations and private equity have long been acquiring smaller practices, rolling them up into a larger entity to achieve scale. This has also been occurring in the veterinary space, with firms such as Banfield Pet Hospital, National Veterinary Associates, and VCA Antech (WOOF – not rated) acquiring practices and leveraging their scale to realize favorable pricing on instruments and consumables. Additionally, these firms tend to have their own reference laboratory services to which they send a large portion of their testing needs, obviating the future need to send the same quantity of samples to IDEXX’s veterinary reference lab. Thoughts on Valuation IDEXX poses a challenge, in our view, in determining an appropriate comp group. The company is a clear leader in the veterinary diagnostics industry. One could make a case that IDEXX should be valued based upon comparisons to diagnostic/testing equipment manufacturers that serve a broad array of industries. Similarly, one could make the case that it should be valued compared to medical technology firms that exhibit a similar growth rate while being leaders or innovators in their respective markets. The table below details various multiples and metrics exhibited by companies that we believe could potentially serve as the basis for a comp group on which to value IDEXX.

IDEXX Possible Comps?

Ticker EV TY NY TY NY TY NY TY NYDHR 41,541 2.2 2.1 6% 18,532$ 19,614$ 10.4 10.0 16.2 14.5 12%TMO 27,892 2.3 2.2 4% 12,327$ 12,799$ 10.3 9.5 12.0 10.8 11%BDX 17,591 2.2 2.1 4% 7,897$ 8,221$ 7.7 7.5 13.5 12.3 10%WAT 7,666 3.9 3.7 7% 1,943$ 2,075$ 11.9 11.0 17.1 15.2 12%PKI 2,892 1.3 1.3 5% 2,161$ 2,278$ 7.1 6.3 13.2 11.7 13%THOR 1,740 3.8 3.6 5% 457$ 478$ 10.1 11.1 20.9 20.0 5%MASI 1,185 2.5 2.2 10% 482$ 532$ 11.3 10.0 18.6 16.0 16%NXTM 1,009 4.2 3.7 13% 243$ 276$ 78.6 41.3 NM NM NMCYBX 938 4.3 3.9 12% 217$ 243$ 14.7 12.6 28.8 24.1 20%TRNX 908 3.2 2.9 11% 283$ 314$ 25.6 18.9 NM NM NMNUVA 703 1.1 1.0 10% 616$ 676$ 7.1 6.7 16.7 14.8 13%ABAX 505 3.3 2.9 14% 155$ 176$ 21.0 15.2 49.3 32.2 53%

Mean 2.9 2.6 8% 18.0 13.3 20.6 17.2 16%Median 2.8 2.5 8% 10.8 10.5 16.9 15.0 12%

IDXX 4,750 3.6 3.4 7% 1,303$ 1,395$ 15.2 14.0 27.7 24.2 15%

EPS Growth

EV/Sales Sales EV/EBITDA P/ESales Growth



That said, we view the challenge of picking an appropriate comp group based on either grouping of medical technology firms or diagnostic/testing equipment firms or some average thereof to be somewhat perilous. However, we would be biased in IDEXX’s case to choose similarly-growing medical technology firms who are leaders or innovators in their respective industries. Due to this challenge, our view would be that given IDEXX’s unique positioning within the veterinary diagnostics industry and their 20+ year history as a publicly traded company, to set our valuation multiple based upon historical multiples the company’s shares have attained under varying growth environments. The charts that follow depict next-twelve-month EV/EBITDA and P/E multiple ranges for their shares over the past 6+ years as well as the revenue growth rates they achieved historically.

IDXX EV/EBITDA (next twelve months)

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High Low Current Revenue Growth Y/Y Based upon these figures, we believe that the valuation range on forward EV/EBITDA at current growth rates should fall within the range of 12x to 16x and that the P/E multiples on the same basis should fall within a 20x to 30x range. Examining the EV/EBITDA chart, it appears that IDEXX shares have generally attained at least a 16x forward EV/EBITDA multiple in nearly every quarter where the year-over-year revenue growth was ~10% or higher. While we estimate that the company’s revenue growth rate will be slightly lower than 10% in 2012 as compared to 2011, we believe that the company will achieve an EV/EBITDA multiple of 16x our 2012 estimate during the next twelve months. Thus, we have set our price target of $87.50 utilizing 16x 2012 EV/EBITDA as our valuation multiple. This corresponds to 28.5x our 2012 earnings per share estimate. Key Model Assumptions We have taken our cue from management’s 2012 guidance given on their Q4 2011 earnings call, as seen in the following table, in constructing our model, although we believe we have taken a slightly more conservative approach to modeling



IDEXX’s results. Our estimates are below the low-end of guidance for organic growth and total growth slightly. We view managements’ guidance on foreign exchange rates and share count as quite conservative. Simply carrying the share count at year-end 2011 through 2012 results in a 3.4% share count decline; should the company continue its share repurchases at rates similar to years past, the share count could be several percent lower still. The foreign exchange rates implicit in the company’s guidance were at or below spot rates at the time guidance was offered and the company noted that for each 1% movement in their basket of currencies, revenue would differ by $4.5 million and operating income would change by $800,000 over the full year. For example a weakening of the US dollar versus the basket of currencies would result in approximately $4.5 million in additional revenue and $0.01 in EPS for the full year. We estimate the basket of currencies is roughly 50% Euro, 15% British Pound, 15% Canadian Dollar, 10% Japanese Yen and 10% Australian dollar.

IDEXX 2012 Guidance as Compared to Feltl Model Item/Metric Guidance Feltl Estimate Notes and Feltl Estimate Notes Instrument Consumable Organic Revenue Growth (normalized)

Similar to 2011

8.6% 2011 saw instrument consumables growth of 11.4% overall with 2.7% due to favorable currency movements, representing 8.7% organic growth. We have modeled 8.6% organic growth with -1.9% currency impact for total growth of 6.7%. Volume growth is expected to be offset by reduced pricing due to rebates and discounts

Rapid Assay Organic Revenue Growth (normalized)

4% 4.3% Guidance very similar to 2011 results of 4.1% rapid assay organic growth. Total growth for 2011 was 5.3%, with a 1.2% impact from currency. Management anticipates growth will be stronger in the first half and then moderate as product launches and price increases anniversary.

Labs and Services Organic Revenue Growth

10% 10.0% Driven by increase in volumes due to footprint expansion, increased penetration of specialty tests and minor benefits from economic improvement. Our estimates are inline with guidance; organic growth was very consistent during 2011 ranging from 9.8% to 10%, and we expect this to continue.

Practice Information Systems and Digital Radiography Organic Revenue Growth

High-single digits to low-double digits

11.8% Demand for integrated solutions and enhancements to both product lines anticipated growth drivers.

Livestock and Poultry Diagnostics Revenue Organic Growth

Mid-to-low single digits

3.5% LPD showed 11.4% organic growth in 2011 with a 4.5% tailwind from currency. Growth rate driven by continued expansion into Asia and Latin America, offset by price and volume declines of BSE (mad cow) tests in Europe.

Water Organic Revenue Growth

Mid-single digits

5.2% Water grew 7.3% in 2011, 4.8% organically, with the remainder due to currency. Management expects volume gains from account acquisition, penetration of the wastewater testing market, and growth in Colilert testing in Europe.

Total Organic Growth 8% to 9% 7.9% Similar to growth rates experienced in 2011 (7.8% organic). Total Growth 7% to 8% 6.9% IDEXX expects a 2% drag on revenue due to foreign

exchange and a benefit of 1% due to acquisitions. Their assumptions are detailed at the end of this table. The company noted that each 1% movement of the basket of currencies results in a $4.5 million movement in revenue and a $800,000 movement in annual operating income. This translates to approximately $0.01 in EPS over the course of the year.

Gross Margin 54% 53.7% Represent a 100bps improvement over 2011. IDEXX expects gross margin to be slightly higher in Q1 2012 than the remainder of the year.

Operating Expenses as Percentage of Sales

34% to 35% 34.1% This would represent a 30bps to 130bps deterioration versus 2011’s 33.7% in terms of reported 2011 results which included $4 million in payments related to the sale of its pharmaceutical business several years ago. Exempting



this, we are inline with 2011 levels. Research and Development as a Percentage of Sales

Similar to 2011

6.4% Research and development represented 6.2% of sales in 2011, roughly the same level it has been the last several years.

Operating Margin 19% to 20% 19.6% In 2011, operating margin was 19.4%, a 90bps improvement versus 2010. It appears the company will not see much in the way of operating expense leverage in 2012.

Tax Rate 31.5% to 32% 31.8% The tax rate range is 50bps to 100bps higher than 2011 due to not factoring in the federal research and development tax credit.

Share Count -3% to -4% -3.4% We have modeled flat shares outstanding in 2012 from year-end 2011. It is likely that our share count estimated will be too high as the company continues to repurchase shares.

EPS $3.04 to $3.10 $3.07 Represents 9.4% to 11.5% EPS growth versus 2011. US Dollar/Euro Exchange Rate

$1.25 $1.31 We are using the spot rate, ~4.8% above rate implied by management guidance.

US Dollar/Pound Exchange Rate


US Dollar/Canadian Dollar Exchange Rate


Company Overview Company Brief IDEXX Laboratories operates three main business segments, the Companion Animal Group (CAG), water quality testing (Water), and livestock and poultry diagnostics (LPD). The CAG segment is the largest, representing over 80% of the company’s sales, and is focused on diagnostic and information technology products and services for the veterinary market. The water and LPD segments are similar in size, each comprising 7-8% of sales. In addition, the company also operates two other, smaller businesses, Dairy, which consists of products for testing milk quality, and OPTI Medical, which produces products for the human point-of-care medical diagnostics market as well as manufactures the company’s VetStat Electrolyte and Blood Gas Analyzer and the electrolyte component of the Catalyst Dx Analyzer, and associated consumables. Together, these smaller businesses are grouped under “Other” segment in their results.

IDEXX Revenue by Segment (2011)

81%

7%

8% 4%

CAG segment revenue Water segment revenue

LPD segment revenue Other segment revenue

Source: Company filings. The company sells its instruments and consumables and rapid assay products direct and through distributors. In the US, they sell their instruments direct to the end-user in most cases. IDEXX was founded in 1983 and based in Westbrook, Maine.



Trade Commission Investigations into IDEXX Laboratories IDEXX Laboratories is currently under investigation by both the Federal Trade Commission (FTC) in the US and had been under investigation by the Office of Fair Trading (OFT) due to allegations claiming it provided discounts on diagnostic equipment to veterinarians who agreed to use IDEXX's external laboratory services and that IDEXX provided free or heavily discounted IDEXX analyzers to vets who agreed to spend a minimum amount each month on materials to be used with those analyzers in an anticompetitive manner. An additional allegation was that the company offered discounted bundles of external laboratory tests, which included tests only available from IDEXX. In November 2011, the OFT concluded their investigation and stated that there were no grounds for action against IDEXX, causing IDEXX’s stock price to jump 8.1% intraday, closing up 3%. Abaxis (ABAX – Buy - $34.50PT), a smaller competitor of IDEXX’s, believes that the company’s exclusive agreements with the three largest veterinary product distributors is anticompetitive. The resolution date of the investigation is unclear, but additional information has been requested by the FTC as recently as August 2011. Should Abaxis and other competitors gain access to these distributors as the result of an FTC decision, competitors would likely stand to benefit at the expense of IDEXX. Based upon commentary by MWI Veterinary Supply (MWIV – not rated), veterinary practices in the US generally purchase from a couple of distributors. We believe that Abaxis and its distributors have been unable to establish relationships with approximately half of the ~30,000 veterinary practices in the US. We shall not speculate on the outcome of the FTC’s decision, but would make two points. First, IDEXX’s distributors are able to terminate the agreements for any reason by giving 60 days notice to IDEXX. Second, if the FTC were to rule against IDEXX, the appeals process would likely stretch over several years, blunting the impact to IDEXX aside from increased legal expenses. Product Overview Point-of-Care Veterinary Diagnostics IDEXX offers a wide variety of instruments and consumables for the veterinary diagnostic market, as seen in the graphic below. The breadth of their product line as well as their large install base give the company scale in sales and distribution activities, allow for “bundling” of products and services to the company’s benefit, and gives the company the ability to integrate and capture medical and business information on a given practice in order to monitor incentive programs and practice trends. The subsections that follow shall discuss these products in greater detail.

Source: Company presentation.



Instruments and Consumables The VetTest and Catalyst Dx chemistry analyzers have the largest active install base in the veterinary market with a ~32,000 combined active installed base, a little over 7,500 of which are Catalyst Dx analyzers. The Catalyst Dx was introduced in 2008 as the company’s next generation chemistry analyzer, but the company also continues to place VetTest units. The Catalyst Dx offers test flexibility, with seven different preloaded “CLIPs” which combine up to 17 of the tests shown in the graphics below into commonly-run panels. For example, the NSAID 6 CLIP, which helps monitor NSAID therapy, combines ALKP, ALT, AST, BUN, BUN/CREA, and CREA slides into one battery of tests that can be run on a single sample. In addition, single slides for the 28 tests are available so that veterinarians can create their own custom panel or run an individual test parameter. Tests on the Catalyst Dx can be accomplished in 8 to 10 minutes. In addition to IDEXX’s chemistry/electrolyte analyzers, they offer a standalone electrolyte analyzer known as the VetLyte Electrolyte analyzer and also the VetStat Electrolyte and Blood Gas Analyzer which allows veterinarians to assess electrolytes, blood gas, acid-base balance, ionized calcium, anion gap, tCO2, and bicarbonate in-house or portably with a four-hour rechargeable battery.

Note: Phenobarbital test capability announced February 14th, 2012 and available now, but is missing from the table above. Phenobarbital testing is utilized in monitoring seizure patients. Source: Company marketing materials.

Source: Company website.

Similar to what IDEXX has done with Catalyst Dx, the company has continued to introduce new generations of their hematology analyzer. Their latest generation model, the ProCyte Dx, was launched in Q3 2010 and can conduct a test in approximately two minutes, the fastest in the industry. The company continues to sell their previous generation hematology analyzers, the LaserCyte and VetAutoread analyzers, and these products combined form an active install



base of approximately 23,000 units exiting 2011, with 1,624 being ProCyte Dx instruments. IDEXX has taken in a number of LaserCyte units on trade as accounts have upgraded to the ProCyte Dx, and has upgraded a significant portion of its VetAutoread customers to these refurbished LaserCyte units. Along with the aforementioned hematology instruments, the Coag Dx is available, which helps detect and diagnose clotting disorders in less than a minute. This product features a rechargeable battery for portable operation and integrates results with practice management software and the pet’s electronic medical record. IDEXX also offers two analyzers that assist in deciphering results from immunoassay and urinalysis tests. The SNAPshot Dx reads the results off most of the company’s SNAP line of rapid assay tests (discussed in the following section). The results obtained by this analyzer can be immediately uploaded into the VetLab Station laboratory information management system and placed in the pet’s electronic health record. In the urinalysis area, IDEXX offers the VetLab UA analyzer, which reads IDEXX UA strips (available for canine, feline, and equine use) and prints out the results. Rapid Assays The line of rapid assays offered by IDEXX is the broadest in the industry, as can be seen in the table below. All of the SNAP tests produce a result in 10 minutes or less. The company’s tests utilize ELISA (enzyme-linked immunosorbent assay) technology which offers high sensitivity and reproducibility and can be read in a fashion similar to a home pregnancy test or used in conjunction with the SNAPshot Dx analyzer for automated integration with practice management software (if the tests have bar codes and are amongst the 75% of SNAP tests available for reading on the device).

Rapid Assays Offered by IDEXX, Abaxis and Heska

IDEXX Abaxis Heska Canine Heartworm * Yes Yes Yes Ehrlichiosis * Yes In Development No Lyme Disease * Yes Yes No Anaplasmosis * Yes No No Feline Heartworm * Yes Yes Yes Feline Immunodeficiency Virus * Yes No No Feline Leukemia Virus * Yes No No Feline Pancreatitis * Yes No No Canine Pancreatitis * Yes No No Giardia Yes Yes No Parvovirus Yes Yes No Total T4 * Yes Reagent Disc No Cortisol * Yes No No Bile Acids * Yes Reagent Disc No Bovine Viral Diarrhea Yes No No Foal Immunoglobulin G Yes No No Avian Flu No Yes No Microalbuminuria No No Yes

Note: Rapid assays followed by * can be read with the SnapShot Dx. IDEXX VetLab Station (IVLS) The IDEXX VetLab Station (IVLS) can be thought of as the hub of the in-house diagnostic platform. The IVLS connects IDEXX’s instruments, relaying information between the equipment and other software systems, such as practice information systems (including those of third-party providers). The system features a user interface to input patient information and is able to output integrated patient reports that incorporate all of the lab work generated by IDEXX’s equipment as well as past patient record data. This can then be shared with the pet owner; studies have shown that this increases compliance with treatment recommendations and garners goodwill for the practice as pet owners are more likely to see the value the veterinarian is providing. Additionally, the IVLS can connect with IDEXX through SmartService, which allows the company to service and support its instruments. We view IVLS as a key competitive differentiator, as it integrates IDEXX into the veterinary office and provides capabilities through IDEXX SmartService that funnels information on VetLab analyzers and other practice metrics back to IDEXX, giving the company a broader view of conditions on the ground than competitors.



Veterinary Reference Laboratory Diagnostic and Consulting Services IDEXX currently has 56 veterinary reference labs (up from 48 at the beginning of 2011) spread throughout the globe in the US, Canada, Europe, Japan, Australia, South Korea, and South Africa. Their labs service veterinarians who submit samples by courier pickup in most metropolitan areas and by direct overnight delivery in non-metropolitan areas. In most cases, results will be available same day or by 8:00AM the next morning in the case of routine tests. Customers also have several options as to how they would like to receive the results, by fax, online at vetconnect.com, email, and/or automatic download to the practice’s information management system. Nearly 60% of their North American test requisitions were ordered through the company’s LabREXX software which can return results via VetConnect software and integrate with IDEXX’s Cornerstone practice management system as well as other third-party systems. The company has developed a broad menu of tests, including a number of specialized and proprietary tests, such as the Cardiopet proBNP test for diagnosing heart disease in dogs and cats, which has rapidly won market acceptance. The table below details the diagnostic areas in which IDEXX offers testing services and examples of where such tests are often utilized. Note that some testing areas listed below can be run as standalone tests or be combined as part of a larger panel or profile.

IDEXX Reference Laboratories Test Areas Hematology Complete blood count tests with or without manual slide review. Can trigger a

pathology review when indicated. Endocrinology Tests and panels to diagnose and monitor adrenal, diabetes, thyroid and parathyroid

disease. Pathology Cytology, biopsy, fluid analyses evaluated by pathologists as well as

immunohistochemistry panels. Microbiology Aerobic, anaerobic, fungal, and Methicillin-resistant Staphylococcus aureus (MRSA)

screening cultures to help address antibiotic resistance. Wellness Establishes patient baselines using comprehensive wellness panels including those for

young, adult, senior and geriatric pets. Also able to combine with tests for vector-borne illnesses and parasites.

Infectious Diseases Utilize IDEXX’s RealPCR panels to investigate diarrhea, respiratory, vector-borne, leptospirosis, anemia, and FIV diseases as well as determines suitability for blood donorship.

Vector-borne Diseases Investigates 13 infectious agents at once, screening for heartworm, Lyme, ehlichiosis and anaplasmosis in a single sample.

Pancreatitis Delivers quantitative results to identify pancreatitis and monitor treatment success. Gastrointestinal and Diarrhea Screens for zoonotic agents and infectious causes of chronic diarrhea from a single

fecal sample. Cardiac Health Quantifies heart stretch and stress in dogs with murmurs and clinical signs of heart

disease and cats with or without signs of heart disease. Respiratory Screens for the six most common infectious causes of respiratory diseases in cats, and

the eight most common in dogs. Equine Health Specialized tests such as diarrhea, salmonella, neurological disease to help detect

serious diseases affecting horses. In addition, the company can provide specialized veterinary consultation, telemedicine, and advisory services. These services range from radiological and ultrasound consultations to advanced imaging (MRI or CT) and cardiology consultation. Depending on the type of service and the turnaround time chosen, results may take less than an hour or up to 24 hours. Practice Information Systems (Cornerstone) The Cornerstone practice information system is IDEXX’s main offering in this area, although the company supports several legacy systems as well. The Cornerstone system consists of hardware and software that help manage veterinary clinic functions and data such as animal health records, billing, inventory, scheduling, and patient visit reminders. In addition, it can integrate with IDEXX lab ordering, IDEXX telemedicine consulting, and with IDEXX’s digital imaging systems. A large portion of the revenues for this area comes from ongoing service contracts.



Digital Radiography IDEXX currently offers two in-clinic digital radiography systems the IDEXX-DR 1417 and the IDEXX I-Vision CR and one portable digital radiography system, the IDEXX EquiView DR. The systems use IDEXX-PACS and IDEXX EquiView PACS (picture archiving and communication system) software for viewing, manipulating, managing, and storing and retrieving digital radiographic images, which communicate directly with the Cornerstone practice information system and allow attachment of information directly to the pet’s electronic health record. Additionally, the company launched the first veterinary digital imaging application for the Apple iPad and Android in late September 2011, known as IDEXX I-Vision mobile and shown in the image below. This software enables veterinarians to easily communicate information with pet owners face-to-face, which many industry consultants believe leads to increased customer loyalty; studies have shown that pet owners who see the value the veterinarian is perceived to be providing are more likely to abide by recommendations the veterinarian makes and return to that practice.

Source: Company website.

Companion Animal Group Incentive Programs IDEXX offers a number of incentive programs for Companion Animal Group products and services that are structured in several ways. The incentives earned by achieving a defined volume or utilization level by the practice and are provided in the form of IDEXX Points, credits or cash. The company categorizes its incentive programs as follows.

• Customer Loyalty Programs - These programs generate incentives based upon purchases and utilization of IDEXX products and services.

• Up-Front Customer Loyalty Programs – Provide incentives to customers who enter into agreements to purchase products or services in future time periods. If these incentives are later used to purchase equipment, product revenue and cost is deferred and recognized over the term of the agreement.

• IDEXX VetLab Instrument Marketing Programs – This program requires customers to enroll at the time of an instrument purchase and allows the customer incentives based upon the products they utilize over the term of the agreement.

IDEXX is able to track customer activity for participants in these programs through IDEXX SmartService. There are various nuances to how these programs are conducted in practice, such as the “testing protocol rebates” which provides incentives for veterinarians to run tests that are consistent with standards of care or best practices. Livestock Diagnostics Products (previously known as the Production Animal segment) The livestock diagnostic products offered by IDEXX are utilized by laboratories, veterinarians and animal health officials to detect viruses and diseases that may damage production animal and/or herd health. Roughly 90% of the revenue in this segment is generated outside of the United States, primarily in Europe. Key products in this segment are tests for Bovine Viral Diarrhea Virus (a viral infection that suppresses the immune system), Bovine Spongiform Encephalopathy (mad cow disease), and Porcine Reproductive and Respiratory Syndrome (a contagious virus that causes reproductive problems and respiratory diseases). Water Testing Products The company offers a number of products in the water-testing market used to detect various microbiological parameters in water. They have several product lines, including Colilert (used in over 90% of US state testing labs), to test for the presence of Coliform and E. coli. The Enterolert products detect enterococci, bacteria normally found in human and animal waste, in drinking, recreational, and waste water. Enterococci testing is utilized as a broad indiator of microbial



contamination. The Pseudalert products detect pseudomona pathogens in pool, spa, and bottled waters, which can cause the infamous “hot-tub rash” or “swimmer’s ear” afflictions/infections. Additionally, IDXX offers their Quanti-Tray products which are used in conjunction with the aforementioned product lines to provide a quantitative measure of contamination. The Filta-Max line, which captures and recovers the Cryptosporidium and Giarda pathogens for testing is the world leading product and is complimented by a number of Life Technologies Corp. (LIFE – not rated) water testing kits that IDEXX distributes. These product lines are used by a variety of stakeholders, including government agencies, water utilities, private certified laboratories and by beverage and pharmaceutical companies, largely in efforts to comply with safe drinking water standards or production process water requirements. Its tests are approved in more than 40 countries and 51% of sales in 2011 were made outside the US. Milk Testing Products IDEXX offers several SNAP tests targeted at the milk testing market. The company’s principal product in this area is their SNAP Beta-Lactam test which checks for antibiotic residue in milk. The SNAPduo Beta-Tetra (launched in late 2010) test checks for tetracycline in addition to the other antibiotic residues tested for by the SNAP Beta-Lactam test. SNAP tests for melamine and Alfatoxin M1 are also offered by this segment. Human Point-of-Care Diagnostics (OPTI Medical Systems) OPTI Medical Systems, a subsidiary of IDEXX, sells the OPTI-branded point-of-care analyzers and consumables to hospitals and clinics. These products measure electrolytes, blood gases, glucose, lactate, ionized calcium, acid-base balance, and urea nitrogen. Typically, their products find usage in hospital departments or units where time-critical testing is required, such as in emergency rooms, operating rooms and cardiac monitoring areas. In addition to producing human point-of-care diagnostic products, OPTI Medical manufactures the VetStat analyzer and the electrolyte module and consumables used in the Catalyst Dx analyzer. Veterinary Market Overview Approximately 61,000 veterinarians in roughly 30,000 veterinary clinics serve the companion and production animal veterinary care market in the U.S. A large number of veterinarians have entered the practice in the last decade, with practicing veterinarians growing by 30% from 2004 through 2009 while the number of cats and dogs increased only 5% over the same time period. This has placed a strain on veterinarian office income. Both the number of new clients a veterinarian obtains annually and the median active client population has declined steadily since 2001, as seen in the chart below. The financial strain placed upon vet offices has been exacerbated by the unsophisticated financial discipline of many practices; an American Veterinary Medical Association survey, done in conjunction with Pfizer (PFE – not rated), reported that 62% of practice owners don’t use financial concepts to manage their businesses. Additionally, veterinarians, as a whole, have the lowest profit margin of any independent medical practice, ~10%, and some of the lowest total earnings. Even chiropractors attain a higher profit margin and total earnings. The recent economic environment and lack of financial sophistication in veterinary clinic management, in our view, has suppressed investment in the practice, particularly in terms of capital equipment purchases.



Clients per Full-Time Veterinarian

1,299 1,278

1,1841,141

1,070271

250243

230

218800

900

1,000

1,100

1,200

1,300

1,400

2001 2003 2005 2007 2009

Med

ian

Act

ive

Clie

nts

200

225

250

275

300

Med

ian

New

Clie

nts

Median Active Clients per VeterinarianMedian New Clients per Veterinarian

Source: American Animal Hospital Association PulsePoints 2002-2010.

Over the past 25 years, the median number of visits per week per veterinarian has consistently stayed above 60. The metric peaked at 76 in 2000, but has declined to 66 visits per week per veterinarian in 2009. We believe the decline has largely been caused by the growth in practicing veterinarians (roughly 30% growth from 2004-2009) outstripping the growth in the companion animal population (~5% for dogs and cats from 2004-2009).

Patients/Veterinarian/Week

7576

73

6866

60

65

70

75

80

1997 2000 2003 2006 2009

Source: 2009 DVM State of Profession Survey.

Another way of looking at the decline in visits is the ratio of companion animals per private practice veterinarian, shown below. The number of veterinarians has stayed consistent over the past several years, increasing by approximately 3%, likely due to baby boom generation veterinarians retiring. Based on this trend, we estimate that the visits per week per veterinarian stands at roughly 63 today, absent any economic effects. On the economic front, a late-2010 poll by NCVEI showed that over 70% of veterinary practices saw their number of veterinary visits stay stagnant or decline versus 2009, implying that veterinary visits continue to slow as well, being the number of practicing veterinarians has stayed relatively constant over the past few years. That being said, the stagnation in the growth of veterinary practitioners, combined with the slow growth in pet population should, in our view, soon lead to a bottoming out of the secular trend that has reduced the number of visits per veterinarian. We believe this will result in better financial health of veterinary practices, which, in turn, will lead to a rebound in capital equipment purchases (and resulting consumable volumes) in coming years.



Companion Animals per US Veterinarian

2,500

2,600

2,700

2,800

2,900

3,000

3,100

2005 2006 2007 2008 2009 2010

Source: American Pet Products Association, American Veterinary Medicine Association. Note: Intervening years interpolated using biennial data.

IDEXX is able to track practice visits and practice revenue for a subset of their Cornerstone practice management software customers. The quarterly practice visit and revenue metrics IDEXX has reported over the past several years suggest that this turn is beginning to occur, as practice visits saw their first positive print (+1.0%) in three years in Q4 2011. This is consistent with commentary from VCA Antech (WOOF – not rated), an operator of animal hospitals, which similarly noted positive same store sales growth in the second half of 2011.

IDEXX Cornerstone Reported Growth in Practice Visits and Practice Revenue 2009-2011

-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2009 2010 2011

Practice Visits Practice Revenue

Source: Company reports. Veterinary Diagnostic Instruments, Consumables and Rapid Assays The following chart depicts the sales volume for the three publicly traded companies (Abaxis, Idexx Laboratories, and Heska Corporation) focused on the veterinary diagnostics market. IDEXX Laboratories is the largest firm in the industry in every segment. The fact that IDEXX has exclusive distribution contracts with the three largest veterinary health product distributors clearly has helped maintain their lead. However, the Federal Trade Commission (FTC) is currently investigating these relationships to determine if they exhibit anticompetitive aspects. Should the FTC decide that these agreements represent a restraint of trade and force the distributors to open up their networks to competing products, we believe Abaxis would be the major beneficiary; based upon industry commentary, it appears that most veterinary practices purchase the vast majority of their supplies from two chosen distributors.



CY2011 Revenue by Category

0

100

200

300

400

500

600

IDXX ABAX HSKA$

(mill

ions

)

Instruments Consumables Rapid Tests

Source: Company reports, Feltl and Company estimates.

In terms of tests available on the each company’s instrument platform, the following table compares the analytes available as consumable tests on the chemistry side. Both Abaxis and IDEXX have analytes available for testing that Heska does not. However, Heska does not have any analyte tests available that either IDEXX or Abaxis are unable to test.

Analyte Tests Offered by Abaxis, IDEXX and Heska Test Method Abbreviation Abaxis IDEXX Heska Alanine aminotransferase ALT Yes Yes Yes Albumin ALB Yes Yes Yes Alkaline phophatase ALP Yes Yes Yes Ammonia NH3 No Yes No Amylase AMY Yes Yes Yes Aspartate aminotransferase AST Yes Yes Yes Bile acids BA Yes No No Calcium CA Yes Yes Yes Canine heartworm antigen CHW Yes No No Chloride CL- Yes Yes Yes Creatine kinase CK Yes Yes Yes Creatinine CRE Yes Yes Yes Gamma glutamyltransferase GGT Yes Yes Yes Glucose GLU Yes Yes Yes Lactate LAC No Yes No Lactate dehydrogenase LD Yes Yes Yes Lipase LIPA No Yes No Magnesium MG Yes Yes Yes Phosphorous PHOS Yes Yes Yes Potassium K+ Yes Yes Yes Sodium NA+ Yes Yes Yes Thyroxine T4 Yes Yes No Total bilirubin TBIL Yes Yes Yes Total carbon dioxide tCO2 Yes No Yes Total cholesterol CHOL Yes Yes Yes Total protein TP Yes Yes Yes Urea nitrogen BUN Yes Yes Yes Uric acid UA Yes Yes Yes

Source: Company sales literature. Rapid assays are used for testing for the presence of a biochemical, often as a part of annual screening for parasites such as heartworm, Lyme disease and Ehrlichiosis. IDEXX has a wide range of rapid assays available for the veterinary market, including several tests that combine several of the following individual tests. However, most rapid assays on the market



screen for only one biochemical marker shown in the table below. Abaxis has several rapid assays in development and offers a couple of the substances IDEXX’s assays screen for on their reagent discs.

Rapid Assays Offered by IDEXX, Abaxis and Heska IDEXX Abaxis Heska Canine Heartworm Yes Yes Yes Ehrlichiosis Yes In Development No Lyme Disease Yes Yes No Anaplasmosis Yes No No Feline Heartworm Yes Yes Yes Feline Immunodeficiency Virus Yes No No Feline Leukemia Virus Yes No No Feline Pancreatitis Yes No No Canine Pancreatitis Yes No No Giardia Yes Yes No Parvovirus Yes Yes No Total T4 Yes Reagent Disc No Cortisol Yes No No Bile Acids Yes Reagent Disc No Bovine Viral Diarrhea Yes No No Foal Immunoglobulin G Yes No No Avian Flu No Yes No Microalbuminuria No No Yes

Veterinary Reference Laboratory Market The US veterinary reference laboratory market is essentially a duopoly at present, with VCA Antech and IDEXX being the dominant players as seen in the chart below. The market recently became more competitive as Abaxis entered in partnership with Kansas State University. While Abaxis’ reference lab business is still in its early stages, it is clear that the company is attempting to emulate IDEXX’s successful strategy of bundling reference laboratory services with instruments and consumables. Based upon Abaxis’ management commentary, they were willing to compete on price in an effort to gain customers for their recently launched effort. We believe there is risk of pricing pressure in the veterinary lab market with Abaxis and Heska attempting to emulate IDEXX’s strategy and by virtue of the fact that operating margins for veterinary reference labs with scale, such as VCA Antech’s and IDEXX’s, are roughly double that of human reference laboratories. For example, VCA Antech’s laboratory operating margin was 37.8% in 2011 compared to 13.3% for Quest Diagnostics (DGX – not rated) and 17.1% for Laboratory Corporation of America (LH – not rated).

Veterinary Laboratory US Market Share 2011 Estim ated Total M arket $750-780M

IDXX37%

WOOF41%

Other22%

IDXX WOOF Other

Source: Company filings, Feltl and Company estimates.



Management Jonathan W. Ayers - Chairman, President and Chief Executive Officer Jonathan W. Ayers has served as Chairman, President and CEO of IDEXX Laboratories, Inc., since January 2002. Before joining IDEXX, from 1999 to 2001, Mr. Ayers served as President of Carrier Corporation, then the largest business unit of United Technologies Corporation, and from 1997 to 1999 he was President of Carrier’s Asia Pacific Operations. From 1995 to 1997, Mr. Ayers was Vice President, Strategic Planning at United Technologies. Before joining United Technologies, from 1986 to 1995, Mr. Ayers held various positions at Morgan Stanley & Co. in mergers and acquisitions and corporate finance. Merilee Raines - Chief Financial Officer and Treasurer Ms. Raines became Chief Financial Officer of the Company in October 2003. Ms. Raines was Corporate Vice President of Finance of the Company starting in May 1995, Vice President and Treasurer of Finance from March 1995 to May 1995, Director of Finance from 1988 to March 1995, and Controller from 1985 to 1988. William E. Brown, III, PhD - Chief Scientific Officer Dr. Brown became Chief Scientific Officer, overseeing all Research and Development activities in the Company, in March 2010. He first joined IDEXX as Corporate Vice President, Instrument Research and Development and Manufacturing, in December 2008. Before joining the Company, Dr. Brown was a Corporate Officer and Divisional Vice President of R&D, Assays and Instrument Systems for the Diagnostic Division of Abbott Laboratories, Inc. Most recently he was responsible for R&D portfolio development, new product launches, and basic research for immunoassay, clinical chemistry and instrument systems.

March 15, 2012


IDEXX Laboratories, Inc. (IDXX) Ben Haynor, CFA612.492.8872

[email protected] Statement (millions) 2010 Q1 Q2 Q3 Q4 2011 Q1E Q2E Q3E Q4E 2012E Q1E Q2E Q3E Q4E 2013E

Total revenue 1,103.4 292.7 317.9 301.0 307.2 1,218.7 314.7 338.6 319.6 329.6 1,302.5 342.6 368.8 348.7 359.1 1,419.2

Cost of revenue 524.8 137.7 143.8 142.3 148.3 572.2 142.1 154.8 150.6 155.2 602.7 154.9 168.8 164.5 169.2 657.5

Gross profit 578.6 154.9 174.0 158.7 158.9 646.5 172.5 183.8 169.0 174.4 699.8 187.7 200.0 184.2 189.8 761.6 Gross margin 52.4% 52.9% 54.8% 52.7% 51.7% 53.0% 54.8% 54.3% 52.9% 52.9% 53.7% 54.8% 54.2% 52.8% 52.9% 53.7%

Operating expensesSales and marketing 179.6 51.0 51.0 50.7 52.2 204.9 56.5 54.6 54.4 56.7 222.2 60.8 58.8 60.2 61.6 241.5

% of sales 16.3% 17.4% 16.0% 16.8% 17.0% 16.8% 18.0% 16.1% 17.0% 17.2% 17.1% 17.8% 16.0% 17.3% 17.2% 17.0%General and administrative 126.5 32.6 33.1 32.5 31.2 129.4 34.6 35.5 34.9 34.3 139.3 37.0 38.3 38.3 38.2 151.8

% of sales 11.5% 11.1% 10.4% 10.8% 10.1% 10.6% 11.0% 10.5% 10.9% 10.4% 10.7% 10.8% 10.4% 11.0% 10.6% 10.7%Research and development 68.6 17.8 18.6 19.4 20.2 76.0 19.7 20.9 20.6 21.6 82.7 20.8 22.2 22.5 22.8 88.3

% of sales 6.2% 6.1% 5.9% 6.4% 6.6% 6.2% 6.3% 6.2% 6.4% 6.5% 6.4% 6.1% 6.0% 6.5% 6.3% 6.2%Total operating expenses 374.7 101.4 102.7 102.6 103.6 410.3 110.9 111.0 109.9 112.5 444.2 118.6 119.3 121.0 122.7 481.6

Operating income 203.9 53.5 71.3 56.1 55.3 236.2 61.7 72.8 59.1 61.9 255.6 69.0 80.7 63.2 67.2 280.0 Operating margin 18.5% 18.3% 22.4% 18.6% 18.0% 19.4% 19.6% 21.5% 18.5% 18.8% 19.6% 20.1% 21.9% 18.1% 18.7% 19.7%

EBITDA 249.8 65.0 83.2 68.1 67.6 284.0 73.7 85.2 71.7 74.8 305.3 81.5 93.5 76.2 80.5 331.7 EBITDA margin 22.6% 22.2% 26.2% 22.6% 22.0% 23.3% 23.4% 25.2% 22.4% 22.7% 23.4% 23.8% 25.4% 21.9% 22.4% 23.4%

Net interest income (expense) (1.8) (0.4) (0.4) (0.5) (0.6) (1.8) (0.6) (0.6) (0.6) (0.6) (2.4) (0.6) (0.6) (0.6) (0.6) (2.4)

Earnings before taxes 202.1 53.2 70.9 55.6 54.7 234.4 61.1 72.2 58.5 61.3 253.2 68.4 80.0 62.6 66.5 277.6 Taxes 60.8 16.6 22.3 17.1 16.7 72.7 19.4 23.0 18.6 19.5 80.5 21.2 24.8 19.4 20.6 86.1

Tax rate 30.1% 31.2% 31.4% 30.8% 30.5% 31.0% 31.8% 31.8% 31.8% 31.8% 0.0% 31.0% 31.0% 31.0% 31.0% 0.0%

Net income 141.3 36.6 48.7 38.5 38.0 161.8 41.7 49.3 39.9 41.8 172.7 47.2 55.2 43.2 45.9 191.5 Non-controlling interests 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)

Net income attributable to IDEXX 141.3 36.6 48.7 38.5 38.0 161.8 41.7 49.3 39.9 41.8 172.7 47.2 55.2 43.2 45.9 191.6

EPSBasic 2.45$ 0.64$ 0.85$ 0.68$ 0.68$ 2.85$ 0.76$ 0.89$ 0.73$ 0.76$ 3.14$ 0.86$ 1.00$ 0.78$ 0.83$ 3.48$ Diluted 2.37$ 0.62$ 0.83$ 0.66$ 0.67$ 2.78$ 0.74$ 0.88$ 0.71$ 0.74$ 3.07$ 0.84$ 0.98$ 0.77$ 0.82$ 3.41$

Shares outstandingBasic 57.7 57.5 57.3 56.7 55.7 56.8 55.1 55.1 55.1 55.1 55.1 55.1 55.1 55.1 55.1 55.1 Diluted 59.6 59.1 58.7 58.0 56.9 58.2 56.2 56.2 56.2 56.2 56.2 56.2 56.2 56.2 56.2 56.2

Margin SummaryGross margin 52.4% 52.9% 54.8% 52.7% 51.7% 53.0% 54.8% 54.3% 52.9% 52.9% 53.7% 54.8% 54.2% 52.8% 52.9% 53.7%Operating expenses as percentage of sales 34.0% 34.6% 32.3% 34.1% 33.7% 33.7% 35.2% 32.8% 34.4% 34.1% 34.1% 34.6% 32.4% 34.7% 34.2% 33.9%Operating margin 18.5% 18.3% 22.4% 18.6% 18.0% 19.4% 19.6% 21.5% 18.5% 18.8% 19.6% 20.1% 21.9% 18.1% 18.7% 19.7%EBITDA margin 22.6% 22.2% 26.2% 22.6% 22.0% 23.3% 23.4% 25.2% 22.4% 22.7% 23.4% 23.8% 25.4% 21.9% 22.4% 23.4%Net margin 12.8% 12.5% 15.3% 12.8% 12.4% 13.3% 13.2% 14.5% 12.5% 12.7% 13.3% 13.8% 15.0% 12.4% 12.8% 13.5%

Growth Summary (year-over-year)Total revenue 7.0% 9.0% 12.9% 11.6% 8.3% 10.4% 7.5% 6.5% 6.2% 7.3% 6.9% 8.9% 8.9% 9.1% 8.9% 9.0%Gross profit 9.9% 8.8% 16.6% 11.6% 9.7% 11.7% 11.4% 5.6% 6.5% 9.8% 8.2% 8.8% 8.8% 9.0% 8.8% 8.8%Operating expenses 7.0% 7.9% 8.8% 11.0% 10.2% 9.5% 9.3% 8.0% 7.1% 8.6% 8.3% 7.0% 7.5% 10.2% 9.0% 8.4%Operating income 15.9% 10.5% 30.0% 12.6% 8.8% 15.9% 15.2% 2.1% 5.4% 12.0% 8.2% 11.9% 10.8% 6.8% 8.5% 9.6%EBITDA 10.7% 8.9% 25.6% 11.2% 8.0% 13.7% 13.3% 2.4% 5.2% 10.5% 7.5% 10.7% 9.8% 6.3% 7.7% 8.7%Net income 15.6% 10.9% 30.8% 11.0% 4.5% 14.5% 13.8% 1.2% 3.7% 10.0% 6.7% 13.3% 12.1% 8.1% 9.8% 10.9%

Growth Summary (quarter-over-quarter)Total revenue 3.1% 8.6% -5.3% 2.1% 2.4% 7.6% -5.6% 3.1% 4.0% 7.6% -5.4% 3.0%Gross profit 7.0% 12.3% -8.8% 0.1% 8.6% 6.5% -8.1% 3.2% 7.6% 6.6% -7.9% 3.1%Operating expenses 7.9% 1.3% -0.2% 1.0% 7.0% 0.1% -1.0% 2.4% 5.5% 0.6% 1.4% 1.4%Operating income 5.4% 33.2% -21.3% -1.4% 11.6% 18.0% -18.8% 4.7% 11.5% 16.8% -21.7% 6.3%EBITDA 3.8% 28.0% -18.1% -0.7% 8.9% 15.7% -15.9% 4.3% 9.0% 14.8% -18.5% 5.6%Net income 0.6% 32.9% -20.9% -1.3% 9.6% 18.2% -18.9% 4.7% 12.9% 17.0% -21.8% 6.4%

March 15, 2012


IDEXX Laboratories, Inc. (IDXX) Ben Haynor, CFA612.492.8872

[email protected] Breakdown 2010 Q1 Q2 Q3 Q4 2011 Q1E Q2E Q3E Q4E 2012E Q1E Q2E Q3E Q4E 2013ECAG 905.7 240.6 259.7 248.1 251.3 999.7 261.3 280.3 266.4 272.1 1,080.1 287.1 308.1 293.2 299.3 1,187.8

% change 8.7% 11.8% 11.3% 9.7% 10.4% 8.1% 6.8% 6.8% 7.4% 0.0% 7.5% 7.5% 7.5% 7.5% 0.0%% change from currency 1.3% 4.3% 3.2% 0.3% 2.3% -1.0% -2.1% -1.6% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.1% 0.1% 0.1% 0.9% 0.3% 0.9% 0.9% 0.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth 7.3% 7.4% 8.0% 8.5% 7.8% 8.2% 8.0% 7.5% 7.7% 7.9% 7.5% 7.5% 7.5% 7.5% 7.5%

Instruments and consumables 354.2 93.9 98.6 99.7 102.4 394.6 100.0 103.8 105.8 111.3 421.0 110.0 114.2 116.4 122.5 463.1 % change 12.6% 14.1% 12.7% 6.7% 11.5% 6.5% 5.3% 6.1% 8.7% 6.7% 10.0% 10.0% 10.0% 10.0% 10.0%% change from currency 1.6% 5.2% 3.7% 0.3% 2.7% -1.5% -3.2% -2.4% -0.5% -1.9% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth 11.0% 8.9% 9.0% 6.4% 8.8% 8.0% 8.5% 8.5% 9.2% 8.6% 10.0% 10.0% 10.0% 10.0% 10.0%

Rapid assay products 146.5 38.6 44.2 36.1 35.5 154.3 41.1 46.4 36.9 35.8 160.1 42.8 48.2 38.3 37.2 166.5 % change -2.1% 9.2% 1.4% 14.2% 0.0% 6.5% 4.9% 2.2% 0.8% 3.8% 4.0% 4.0% 4.0% 4.0% 4.0%% change from currency 0.5% 2.3% 1.5% 0.1% 0.0% -0.5% -1.1% -0.8% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth -2.6% 6.9% -0.1% 14.1% 4.6% 7.0% 6.0% 3.0% 1.0% 4.3% 4.0% 4.0% 4.0% 4.0% 4.0%

Reference laboratory diagnostic and consulting services 329.7 89.1 99.1 94.0 91.7 373.9 99.4 108.8 104.0 101.3 413.6 112.8 123.5 118.1 115.0 469.4 % change 11.6% 15.2% 13.9% 12.8% 0.0% 11.5% 9.8% 10.6% 10.5% 10.6% 13.5% 13.5% 13.5% 13.5% 13.5%% change from currency 1.5% 5.3% 3.9% 0.2% 0.0% -1.5% -3.2% -2.4% -0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.1% 0.1% 0.2% 2.7% 0.0% 3.0% 3.0% 3.0% 1.0% 0.0% 2.5% 2.5% 2.5% 2.5% 0.0%Organic growth 10.0% 9.8% 9.8% 9.9% 9.9% 10.0% 10.0% 10.0% 10.0% 10.0% 11.0% 11.0% 11.0% 11.0% 11.0%

Practice management systems and digital radiography 75.2 19.0 17.9 18.3 21.8 76.9 20.8 21.3 19.6 23.7 85.4 21.6 22.1 20.4 24.7 88.8 % change 1.1% -7.7% 11.9% 4.8% 0.0% 9.6% 19.2% 7.4% 8.7% 11.1% 4.0% 4.0% 4.0% 4.0% 4.0%% change from currency 0.6% 0.5% 0.5% -0.1% 0.0% -0.4% -0.8% -0.6% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth 0.5% -8.2% 11.4% 4.9% 2.2% 10.0% 20.0% 8.0% 9.0% 11.8% 4.0% 4.0% 4.0% 4.0% 4.0%

Water 76.5 19.0 21.5 21.6 20.0 82.1 19.7 21.9 22.2 20.8 84.7 20.7 23.1 23.4 21.9 89.1 % change 6.2% 10.6% 8.0% 4.4% 7.3% 3.7% 2.0% 2.8% 4.1% 3.1% 5.2% 5.2% 5.2% 5.2% 5.2%% change from currency 1.5% 4.7% 3.5% 0.2% 2.5% -1.5% -3.2% -2.4% -1.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth 4.7% 5.9% 4.5% 4.2% 4.8% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%

LPD 81.2 23.9 25.4 20.7 24.1 94.1 24.1 24.6 20.4 24.4 93.5 24.9 25.5 21.1 25.3 96.8 % change 20.0% 32.4% 18.3% -1.9% 17.2% 0.5% -2.9% -1.3% 1.2% -0.6% 3.4% 3.5% 3.5% 3.5% 3.5%% change from currency 0.0% 11.1% 7.9% 0.7% 4.9% -3.0% -6.4% -4.8% -2.3% 0.0% -0.1% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth 20.0% 21.3% 10.4% -2.6% 12.3% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Other 40.0 9.2 11.3 10.6 11.7 42.7 9.7 11.7 10.6 12.2 44.2 9.9 12.1 10.9 12.5 45.5 % change -1.3% 6.6% 14.8% 6.9% 6.8% 5.2% 4.2% 0.7% 3.7% 3.4% 3.0% 3.0% 3.0% 3.0% 3.0%% change from currency 1.2% 3.1% 3.2% 0.9% 2.1% -0.8% -1.8% -1.3% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%% change from acquisitions/divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic growth -2.5% 3.5% 11.6% 6.0% 4.7% 6.0% 6.0% 2.0% 4.0% 4.5% 3.0% 3.0% 3.0% 3.0% 3.0%

March 15, 2012


Analyst Certification I, Ben Haynor, CFA, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report.

Important Disclosures: The analyst or a member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl and Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company’s account as part of the company’s authorized stock buy-back program in the last twelve months. No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months.

Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds.

3/15/2012Ratings Distribution for Feltl and Company

------ Investment Banking ------ Number of Percent Number of Percent of

Rating Stocks of Total Stocks Rating categorySB/Buy 42 64% 3 7%Hold 22 33% 0 0%Sell 2 3% 0 0%

66 100% 3 5%

The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months.

March 15, 2012


Date Nature of Report Rating Price Target

03/15/12 [email protected] Hold $87.50

Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities. Valuation and Price Target Methodology: Our valuation is based upon an EV/EBITDA methodology. We have chosen 16x forward EV/EBITDA as the multiple on which to value IDEXX based upon valuation ranges IDEXX has experienced in the past. Based on our 2012 estimates, this results in an enterprise value of $4,885 million from which we subtract current net debt of $61.6 million to arrive at $4,823 million, or ~$87.50 per share based upon 55.1 million shares outstanding at the end of Q4 2011.

Risks to Achievement of Estimates and Price Target:

• FTC investigation into IDEXX distribution resolved unfavorably - The Federal Trade Commission is currently investigating IDEXX’s relationship with the three largest veterinary health product distributors. IDEXX currently has exclusive agreements with these distributors precluding them from distributing competing products. Should the FTC find that these agreements are anticompetitive in nature, as their competitors believe, and force distributors to carry competing products, IDEXX would obviously face a higher level of competition and may face pricing pressures. However, uncertainty surrounds the timeline as to when the FTC may render a decision and how long the appeals process would take to play out, but it is likely to stretch over several years.

03/15/12 HOLD Target: $87.50

March 15, 2012


• Competition - Two of IDEXX’s smaller competitors, Abaxis, Inc. (ABAX – Buy) and Heska Corp. (HSKA – not rated), are attempting to emulate IDEXX’s long-successful strategy of bundling equipment and laboratory services. Previously, IDEXX was the only firm with a broad enough scale to offer a full range of instruments, consumables, and services. However, Abaxis has recently entered the veterinary reference laboratory business and Heska’s management discussed partnering with independent diagnostic labs to offer bundled pricing discounts on their most recent earnings call. We believe that this may reduce the differentiation between the three companies in the minds of some veterinarians and may result in pricing pressures in the future if Abaxis and Heska are successful in picking up share through discounting.

• Changing regulatory environment - Weakening regulations may harm IDEXX’s business. For example, in 2009, the European Union increased the age at which healthy cattle are to be tested for bovine spongiform encephalopathy (mad cow disease) from 30 to 48 months. This has since been raised to 72 months, reducing the demand for IDEXX’s testing products of this type.

• Veterinary practice roll-ups - In certain areas of human healthcare services, such as in the neonatal space, corporations and private equity have long been acquiring smaller practices, rolling them up into a larger entity to achieve scale. This has also been occurring in the veterinary space, with firms such as Banfield Pet Hospital, National Veterinary Associates, and VCA Antech (WOOF – not rated) acquiring practices and leveraging their scale to realize favorable pricing on instruments and consumables. Additionally, these firms tend to have their own reference laboratory services to which they send a large portion of their testing needs, obviating the future need to send the same quantity of samples to IDEXX’s veterinary reference lab.

Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request.

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Documents

IDEXX Laboratories Corporationfeltl.com/articles/IDXX20120315initiation.pdf · 2012. 3. 15. · IDEXX Laboratories Corporation Not enough leash, initiating with HOLD, $87.50 price