IDEXX Laboratories CEO Presents at 30th Annual JP Morgan Healthcare Conference (Transcript)

| About: IDEXX Laboratories, (IDXX)

IDEXX Laboratories, Inc. (NASDAQ:IDXX)

30th Annual JP Morgan Healthcare Conference

January 09, 2012, 17:30 p.m. ET


Jon Ayers - Chairman, President and CEO

Merilee Raines - Corporate VP and CFO

Unidentified Analyst

We are going to go ahead and get started. (inaudible) and Diagnostics team. It's my pleasure to introduce our next company, IDEXX Labs. For anyone that’s in the breakout it's going to be across the hall in the Georgia room and let me turn it over to Jon Ayers, to tell you little bit more about the story.

Jon Ayers

Thank you very much. I’m also joined here by Merilee Raines, our Chief Financial Officer, and Merilee and I will be in the breakout room afterwards, really happy to have you all here at the JP Morgan Healthcare Conference.

First of course be familiar with our Safe Harbor statement. Let me change a pace. I hear there are always hundreds of companies presenting at the JP Morgan Healthcare Conference, and all of them but us are I think presenting on the human species and so we are switching track here and talking about some other mammals, that would be dogs and cats and livestock and poultry, generally animal health, a non-human. These are attractive global markets where of course, our big business is in pet healthcare, but we also have other animal health, livestock, and poultry diagnostics. We are big innovator, we are going to talk a little bit about that in both diagnostic and information technology and we had a really great track record over the last couple of decades of consistent top line growth even through the great recession and earnings growth.

Just to frame here, we are talking about mammals, that’s true, like humans. We are talking about the kinds of things that animals need, diagnostics, there are some similarities, but what is totally different is the commercial market. This is a market that is a cash business; there is really no third-party payer. It's subject to normal commercial economics as a result of the buyer of the services is the user of the services. In our case the veterinary practice that’s providing pet healthcare to your family pet, your dog, your cat. It's also a market that has far less regulation.

I’d say that we are likely regulated in terms or not regulated in terms of new product introductions and we don’t have some of the constraints such as HIPPA and other regulations that the human market has that cycle’s competition and innovation in information technology. And that allows us to move a lot quicker, we have a greater freedom to operator a greater to move forward with new product development and the other differences that we are talking to cat business. So, the pet owner is paying for medical services and so they really need to see value in the medical services and given the price points can be lower than they are in human health as a result of the normal commercial economics.

But these are all good, we think this is a very attractive industry environment and industry in a profession that’s seen good growth over the last couple of decades and we have been able to continue to innovate and grow in these markets.

If you look at our revenue profile, the large proportion of it 82% of that is what we call a companion animal group business. This is the lines of business that sell to veterinary practices around the world that are providing pet healthcare, primarily dogs and cats that would make up at least 98% of the volume. We also have some other good businesses that will get into briefly some in animal health and some in other related diagnostic categories.

If you look at, we are focused on the pet healthcare business, and if you look at the drives, the fundamental long-term core drivers of this business. I’d say that there are two with a third that’s really entering this space. First is starts with a pet human bond. The bond is an important emotional attachment, people more and more believe that their pets are integral family members, my cat sleep with me in my bed and that’s the case in many dogs and cats. We probably have many pet owners in this room and those of you who are or have been a pet owner you understand the real value and happiness that companion pet can provide you.

Many people say for example, that they have a better relationship with their pet than they do with their pals, because their pets are better listener. So, I think this really improves the human condition and of course as a result these are mammals they do need healthcare, and so they appreciate the healthcare that’s provided, and they are willing to pay for it.

The other driver of growth is veterinary medicine is advancing. And just like in human medicine the advances in veterinary medicine are allowing for the potential for a higher and higher standard of care. That standard of care demonstrably increases the longevity and improves the health and well being of the pet and the pet human bonds. And in fact if some cure that’s provided is preventative medicine is what we might call a wellness care. You can actually of course, reduce the cause of that pets medical care because you get to issues earlier and can dress them before they become acute and chronic and irreversible.

So, veterinary medicine is advancing. I think the other thing that is beginning to happen in our industry and of course, we are really leading the charge on that, is that veterinary practices are now appreciating that they can actually grow their business if they actively work to market their practices and communicate the value of the medical services that are being provided. So, this whole area of practice management, practice marketing in response to the recession, but also in response to pet owners seeing when they understand the value of medical care they are willing to pay for it. When they don’t understand the value of medical care they aren’t. and so a good example here is that it turns out many pet owners who are not fully aware think that their pets need less medical care although they get.

That doesn’t make any sense; we know that humans need typically more medical care, why would pets need less medical care. Well they historically equate a medical care to vaccines and after why you don’t need as many vaccines, they will get over vaccinated. They don’t fully appreciate the same kind of wellness care or preventative care that is applicable in human market is also clearly applicable to the pet market and as a result pets can live longer. But when they appreciate that they respond and you can see them devote a greater share of their wallet to medical care.

So, that is one of the things that is today are driver growth in this business particularly practices that are appreciating this are becoming more advancing. Of course, many of our tools and technologies are helping them implement better practice management and better practice marketing. If you take that 82% of our business, we are the lines of business that compose 82%, we are four categories, there are some sub categories in here but on the right side of this pie chart what I’d call the point of care diagnostic offerings. These are diagnostic equipment or individual use pets in the case of other rapid assays that are used during the exam typically where results can be provided during a 30 minute exam.

And then the other half are where the sample are sent out to the reference lab. Blood sample, tissue sample whatever for analysis. That will be our reference laboratory services. We have another segment digital radiography and practice management systems that is the information technology side of our business more of a software side of our business all of the software embedded in all of the information technology offerings that allowed practice to be managed and provide a digital radiography offering.

So, we are going to talk a little bit about data, even a digital radiography can be pointed here. That is to say the digital radiograph can be taken while the pet is in the exam and that results can be available within that 30 minute period for the vet to talk to the pet owner about the assessment and the plan that comes out of the both the radiograph and the diagnostic.

So, let’s talk a little bit about point of care and the trends that we are seeing in point of care which really apply to the instrument, the IDEXX VetLab business, the Rapid Assay business and the practice management digital radiography business.

We have a strategy; I think we are pretty unique in terms of our proven capability to provide what we call real-time care. So, imagine that you are going into your 20 or 30 minute exam and as part of the exam blood work is taken early on the pet, it's run and the results are available all with minimum time involved by the technician and the doctors sits down with you and actually reviews the blood work, maybe that blood work was even run last year and the reviews how the blood work has changed this year from last year. If there was a sick animal exam, the blood work will help rule in or rule out conditions and we can talk about a plan and action plan going forward which might involve some additional test sent out to the reference lab or some therapies or some radiographs for some additional work or maybe the diagnosis is made and it's a therapy.

And it turns out that this practice work flow is very efficient, because the entire whole first range of work is handled within the practice exam and the medical note is captured and the client has complied with the follow-on recommendations and chosen to spend the money. And so that’s great for practice efficiency, as I said it's great for better compliance and better case management. This is where we are going, we don’t really see this in human medicine, maybe some of you had this experience but it's my experience that it's pretty rare, that sure and you have the blood work going and the results are explained to you right there by the doctor, but it's a wild kind of experience that’s allowing us to help practices grow in this economy.

So, how do we achieve that kind of work flow, we have a large install base of instruments including some newer franchised products that of course generate the need for reagents for each time the blood is run. So, if you will it's a razor blade business model. 25% of the revenues roughly are the instruments sales and 75% are recurring revenues, the vast majority of that is consumables, small percentage of that is the service on the instruments.

And our recent product launches that we have had over the last couple of years which have been very, very successful have facilitate the ability for a practice to turnaround in a very short period of time in less than 10 minutes with minimum nanotech time, a comprehensive first line diagnostic profile either in a wellness situation or sick animal situation and thus allowing a practice really to have no constraints to practicing what we call real-time care.

The two key pieces of the equation are two technologies, chemistry and hematology, that are run by two different instruments, they are fundamentally different of course, technologies one is running the chemistry in the serum, the other is counting blood cells, but they go together to give you that comprehensive diagnostic profile. And we have two flagship analyzers that work together that achieve each of those criteria that I have mentioned.

If we have total of 32,000 chemistry analyzers of this and the prior generation active around the world 6,700 of them are catalyst and we continue to grow the business by placing new catalyst, we are also placing the other chemistry analyzer even today and growing the install base and growing the install base and growing the utilization what generates consumable growth, which is the profit diver in the business.

PROSITE is the (inaudible) it's actually an analyzer that we launched to greater claim little more than about 18 months ago. And really has very advanced capabilities quite somewhere to what you have really identical you send that CTC out to the reference lab.

In addition we have an information hub which really gets into the information technology component of our business, which ties these pieces of equipment and some of the other minor pieces of equipment that could fill out the suite whether it's infectious disease or coagulation or blood, gas or whatever. And this information what we call the IDEXX VetLab station. So, this of course is the single data entry and collects and presents the result from the different instruments on the patient. It's also integrated in an intelligent fashion with practice management software that might be building the electronic medical record and of course is also the billing mechanism for the practice. We are also player in that market.

And more and more now, we expect to have by the end of 2011, 12,000 of these IDEXX VetLab stations connected real-time with IDEXX. That real-time connection has several fantastic benefits. First is we can automatically download (inaudible) and software without troubling the customer. Second, we can diagnose emerging issues in the instrument for the customer receives them, or if the customer does have (inaudible) instrument we can go online and in many cases the fixing instrument online through our software.

But these are quite powerful tools, but the third is perhaps more countable. We have the ability to help customer realize a greater standard of care by providing incentive based protocol rebates based on exactly what they are learning on each patients. So, we can incentivize a customer to expand from just maybe a chemistry only profile to a chemistry and hematology, because we know that’s what they run on that analyzer that day for that patient, and use that to incentivize the customer if you will bundle bunch of test together at a lower cost and what they would cost as their individual component.

So, it turns out there are probably going to be other benefits to having a fully integrated real-time connection with the customer and that we believe we are the only instrument provider that even has this capability right alone 12,000 customers are already connected to IDEXX.

This line of business instrument has been a good grower, a 10% average annual growth, and third quarter of 2011 we had even good growth there 9% in the consumable business which of course has been most important growth element of instrument consumables.

This is also a business that we believe is not at this long-term margin yet and we have got number of dynamics which are allowing us to achieve margin expansion in this business and thus since this business itself is the third of the company margin expansion in the company. The consumables growth which are the higher margin piece supplier contract that we have that benefit from volume.

Moving down the learning curve, manufacturing and service cost actually also the learning curve and some of that reagents that we manufacture ourselves for the instruments, we really made huge progress in the field reliability of these instruments which reduces our warranty and service cost and of course increases the customer experience and customer satisfaction and help us place more instruments. And then some modest operating leverage.

The other big business for us is the reference lab business. This is a business for examples are sent out in many parts most geographies in the U.S. it's a twice a day service model, pick up in the morning, results available by the end of the day or pick up in the end of the day, and results are available 8:00 a.m. the next morning. We are up to 56 labs on the global basis, we are world’s largest animal health companion and animal health reference lab, with over 30,000 customers in 37 countries, and this is a business has just as much opportunity for continued innovation as our point of care business.

Again we had really attractive growth in this business has been both some roll up of acquisitions and probably just as important and certainly generated vast majority of growth from last couple of years has been organic growth as we continue to build out the global network of reference labs. It's also a business that we don’t believe has long-term margin potential and we see continued margin expansion in this business over the last couple of years and we expect over the next several years. Really [confronting] leveraging the fixed infrastructure over higher volumes and so that 10% organic growth that we achieved in this business in the first three quarters of 2011, the vast majority of that was volume growth, test consolidation into high volume core labs, so (inaudible) network. Global best practices of lean has really helped us, advanced lab automation and information management increases the productivity of what’s a people intensive business.

And we are the only truly global lab company, human health or animal health, doesn’t really exist (inaudible) you may ask somebody who have got some international business, but we are truly a global lab company and as a result we have the opportunity to leverage our supply contracts across that global network which allows us to be very, very cost competitive.

One other business that I just want to reference briefly is our digital radiography business. It's an important business for us but it's also leading the charge and helping us inspire the pet owner to adapt to greater level of medical care with their veterinary practice. And because not only do we have of course the digital radiographic system to generate the image, but in October we launched a tablet application that allows that image to be presented real-time on a tablet and iPad or Android tablet by the veterinary in the practice seconds after that image was taken in the back. And that’s fully integrated medical record into the billing system can be send by e-mail to the patient, to the pet owner, they send for telemedicine consult, fully integrated into our veterinary practices specific.

The power here is that a picture tells a thousand words, and while the pet owner may not appreciate the sophisticated medical technology that’s being used if they hadn’t seen that when they see it real in that picture in that digital image, it all sudden brings to life what they are spending their money on. And it inspires and then they appreciate and they understand. We capture not only their heart and their mind, but a greater share of wallet and growing the profession.

So, we are the first to launch this capability in animal health. We took this to RNSA, the big radiology conference in the human side, and we realize we are further advanced here than even on the human side in this application and we believe the reason is that this is how regulated product, whereas on the human side it is regulated and there is a lot more (inaudible) we got to go through, I don’t know anything about it, but I hear that’s what the case is. We can innovate fast, it took us three months to launch this product probably because we have the software and the infrastructure but probably because we had no regulatory process that we had to go through. And it's not a great success in the market.

We have got some other great businesses, we are the world leader in diagnostics for livestock and poultry. The production animal business, we have a wonderful business that we call water, that test for microbial contamination of water which is a regulated test. And then we have some other businesses. We are the leaders in almost all of the businesses that we are in on a global basis and these are all been it's a very good contributors to our company’s growth.

If you look at the company’s growth, we have achieved a 12% average annual growth. One measure that we look at quite closely is organic growth as for most of our company’s growth has come from. Organic growth strips out acquisitions and the changes associated with foreign exchange translation. And we have achieved organic growth and everyone of these years most notably in 2009 we have 5% organic growth, in 2010 we had six year-to-date organic growth, it's eight, we expect eight for the year, our guidance for next year is [nine]. And so through our innovation, through our new product technology, through our great commercialization efforts, we are going pass to the market. We have achieved consistent growth and of course that’s helping us deliver a bottom line results.

Speaking of bottom line, we have had attractive earnings per share growth and our guidance you can see there that we issued in October is to continue that growth for the full-year 2011 and into 2012. This growth is coming not only from the top line, but from the margin expansion that I referred to, over the long-term we a five-year timeframe we see between 50 and 100 basis points of margin expansion. And then we have really good free cash flow generator and we used most of that free cash flow for us to stay ongoing to assure that buyback program which has overtime on the average reduce the share count by 2 to 3%, and they have given us good leverage on bottom line.

There is a lot as a result we haven’t allowed excess cash to build up on the balance sheet. You can see here the year-to-date results for 2011 compared to 2010 through October and the margin expansion that we have seen here is an example and also the strong free cash flow as a percentage of net income. Very strong balance sheet, we do have some cash overseas like many companies do and debt in the U.S., but the net of it is a net cash position. So, a strong unleveraged balance sheet and we have been responsible of that free cash flow generation.

So, to summarize we think this is a really, really different and attractive space. It's a space that allows for innovation, it's a space that we can control (inaudible). We are by far the leader in almost all of our lines of business individually and we are the only company just our (inaudible) 2% in four major product categories. We are the only company in all four of those categories. So, individually categories and the only one in our four and then so we execute on each one of them individually and then we bring them together for integrated value to customer which is further differentiates our position and allows for tremendous amount of innovation. And we are financially disciplined in order to achieve to take some of the margin enhancement potential that we have and reinvest in the business to achieve our long-term growth profile and some of it to drop to the bottom line to create shareholder value.

So, with those overall comments, I’d like to invite you all I think to the Georgian room where we will have our breakout session. Thank you very much.

Question-and-Answer Session

[No Q&A session for this event]

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