Jon Ayers - Chairman, President & CEO
Merilee Raines - Corporate VP, CFO & Treasurer
Ryan Daniels - William Blair
David Clair - Piper Jaffray
Miroslava Minkova - Leerink Swann
Jonathan Block - SunTrust Robinson Humphrey
Ross Taylor - CL King
Erin Wilson - Bank of America-Merrill Lynch
Nicholas Jansen - Raymond James & Associates
Mitra Ramgopal - Sidoti
IDEXX Laboratories, Inc. (IDXX) Q4 2011 Earnings Call January 27, 2012 9:00 AM ET
Good morning everyone and welcome to the IDEXX Laboratories fourth quarter 2011 earnings conference call. As a reminder, today’s conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Merilee Raines, Chief Financial Officer; and Pete Levine, Director, Investor Relations.
IDEXX would like to prefix the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding management’s future expectations and plans and IDEXX’s future prospects constitute forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should and similar words and expressions. Such statements include, but are not limited to statements regarding management’s expectations for financial results for future periods.
Listeners are reminded that actual results could differ materially from management’s expectations. Factors that could cause or contribute to such differences are described in IDEXX’s quarterly report on Form 10-Q for the quarter ended September 30, 2011 and annual report on Form 10-K for the year ended December 31, 2010 in the section captioned risk factors which are on file with the SEC and also available on IDEXX’s website idexx.com. In addition any forward-looking statements represent any IDEXX’s estimates only as of today and should not be relied upon as representing the company’s estimates as of any subsequent date.
The company disclaims any obligation to update or revise any forward-looking statements in the future even if its estimates or expectations change. Also during this call, we will discuss certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A definition of these non-GAAP financial measures is provided in our earnings release which can be found on our website idexx.com.
Finally, we plan to end today’s call by 10 am eastern. In order to allow, broad participation in the Q&A we ask that each participant limit his or her questions to one with one follow-up as necessary. We do appreciate you may have additional questions, so please free to back into the queue and if time permits we will be more than happy to take your additional questions.
I would now like to turn the conference over to Merilee Raines. Please go ahead.
Good morning and thank you for joining us today. For the fourth quarter, our revenues of $307.2 million yielding 7% organic growth were largely in line with our expectations at the time of our third quarter call. And earnings per share of $0.67 were about four pennies above our thinking.
As we had expected, revenue growth in our Livestock and Poultry Diagnostic business abated from previous quarters and was the driver for the 1% lower organic growth than the 8% that we experienced in the first three quarters of the year. The earnings favorability was primarily driven by a $3 million milestone payment related to sale in late 2008 of our feline diabetes therapeutic. This contributed just over three pennies to EPS, slightly lower share count was a minor secondary factor in EPS favorability.
Let me speak for moment on the economic backdrop for our Companion Animal business. Recent data showing a modest improving trend in certain aspects of the US economy are reflected as well in our fourth quarter metrics from a subset of nearly 500 veterinary clinics using our Cornerstone Practice Management System. Patient visits were up about 1% in the fourth quarter and this is versus flat in the third quarter and down 0.5% in the first half of the year. And practice revenues grew by 3.5% which was up 50 basis points from the third quarter and up about 150 basis points from the first half.
Despite the turmoil in the European economy, our Companion Animal business in Europe achieved 8% organic growth in the fourth quarter. While we remain cautious along with others about the predictive reliability of short-term data and the negative impacts to global economy from potential further shocks occurring in any one geography such as Europe. We nonetheless feel that the metrics we are observing support the assumption in our 2012 outlook that our businesses will benefit modestly from a very gradual improvement in the macroeconomic environment.
Now for some further detail on revenue performance for some of our businesses. VetLab Instruments and Consumables with fourth quarter revenue of $102.4 million grew 6% organically. Sales of instruments were $28.7 million and organic growth up 2%. Worldwide placements of Catalyst were up 13% year-to-year marked by solid performance in the US and on the international front, strong placements in Asia Pacific due in part to the launch in Japan offset relatively flat placements in Europe.
For the year, our combined chemistry placements of VetTest and Catalyst were within a couple of percentage points of our goal of 4000. ProCyte and LaserCyte hematology placements increased by 12% over prior year. ProCyte continues to be a significant contributor to our growth. With 381 units installed in the fourth quarter, we ended the year with 1,179 placements, nearly 20% above our 2011 goal of 1000 units.
Despite the strength of ProCyte, LaserCyte remains an appealing choice for many and the fourth quarter placements were consistent with last year. Approximately two-thirds of these LaserCyte units have been traded in our ProCyte sales and certified for resale, which is an economically attractive option for both us and for our customers.
Approximately 30% of our Catalyst and ProCyte sales were to new and competitive accounts. Once again, we’ve seen significant growth in the number of SmartService users with over 1,300 installations in the fourth quarter. This brings our active installed base to over 12,000 customers. A continued activation of SmartService has helped drive our success with testing protocol rebate programs in North America and we will support the use of similar programs in other regions.
In addition, SmartService allows us to improve the customer experience with our analyzers by proactively managing instrument field service and downloading software enhancements over the internet. Our Instrument Consumable revenue of $62.5 million grew organically 9% and changes in distributor inventory level has an immaterial impact on year-to-year organic growth.
Our fourth quarter growth is in line with what we saw throughout 2011. As we have noted, the use of protocol-based rebate programs has enhanced our success in placing instruments, the primary contributor to consumable growth. These programs resonate with customers because they are aligned with the veterinarian’s desire to practice best medicine while providing a way that is intuitive to them to fund their capital purchase by using rebates to cover monthly lease payments.
Under these programs, the most significant portion of the rebate is attributed to the consumable sale. This is a change from other programs where discounts are attributed to instrument sales. I mentioned that as expansion of these rebate programs will have a slight negative impact on year-to-year consumable revenue growth rates, accordingly for 2012 we expect normalized organic growth for instrument consumables to be about on par with 2011 as growth and volume is muted by price in large part due to the change in the structure of our marketing program.
In the fourth quarter, our rapid assay sales of $35.4 million grew organically by 14%, when normalized for changes in distributor inventory levels, revenues grew by 8%. This compares to the 2% normalized growth for the first three quarters of the year. A little more than half of the step up in growth in the fourth quarter was driven by a US price increase that went into effect on October the 1st. The first price increase on our canine parasitic panels, 3 and 4Dx since 2008. Additionally we've picked up a point of growth from the continued successful ramp of our snap feline pancreatitis test which was launched in the second quarter.
In the US canine parasitic disease testing volumes and feline testing volumes also showed a slight up tick from the first nine months. We believe this is in part reflective of the improved patient visit metrics and is related to canine testing, successful execution of marketing programs.
Our expectation for 2012 is to see normalized growth rates in the range of 4% for the Rapid Assay business, which is about on par with a normalized organic growth for the full year 2011. We anticipate that growth will be stronger in the first half and then moderate as we anniversary price increases and product launches.
US distributor inventory for instrument consumables and rapid assays averaged a little under four weeks at the end of the fourth quarter based on forward-looking demand, which is within their normal and customary range.
Our Reference Laboratory and Consulting Services business, with revenues of $91.7 million achieved reported growth of 13% in the fourth quarter, which translated to 10% organic growth for both the quarter and the year. Growth was strong across all regions with the majority of the growth coming from higher test volumes driven primarily by the addition of new customers. A slight improvement in same-store volumes and increasing adoption of panels and incorporate our innovative specialty test also contributed to the increased volume.
Acquisitions contributed just over 2.5% of the 13% growth in the quarter. Notably in the fourth quarter we acquired RADIL research and diagnostic testing laboratory in early November and ALX Laboratory in early December. RADIL serves bioresearch market with in-house monitoring and diagnostic testing services. The combination of Radil with our small existing presence in this market will enable us to provide a comprehensive diagnostic solution to bioresearch customers, addressing both reference laboratory and in-house testing needs.
The acquisition of ALX will also enable us to accelerate our expansion in the sizeable Manhattan veterinary market with an established presence and an existing customer base. ALX is co-located with Animal Medical Center who are the largest animal hospital in the world with a national reputation as a leader in animal healthcare.
While we are in the early days the integration is going well in both of these acquisitions and both have performed in line with expectations during the quarter. In addition to these acquired labs we opened two new data labs in the quarter in support of our goal of acquiring new customers and strengthen service level, one in Nashville, Tennessee and the other near Milan, Italy. This brings our total global network to 56 labs up from 48 at the end of the 2010.
Throughout 2011 we also continued to invest in the area of electronic connectivity between our customers and our laboratories. With additional enhancement to our web based test ordering and result delivery systems that connect, nearly 60% of our customers in the US are now submitting electronically generated test requisition.
That connect worked seamlessly with clinical practice information management system to improve work flow and easy of use of the clinic and to drive meaningful operational and productivity improvement at our labs.
Information technology investment such as this along with lab technology developments, LEAN and 6-Sigma processing, global purchasing contracts and volume leverage will continue to drive margin expansion in our reference labs over the next several years.
As we look forward to 2012, we expect organic growth for Labs and Consulting Services will continue at about 10%, driven primarily by an increase in volumes coming from footprint expansion, increased penetration of our specialty task and modest benefits from an improving economy.
Our Practice Information Management and Digital Radiography System with revenues up $21.8 million, grew organically 5% in the fourth quarter and 2% for the full year, performance consistent with our expectations as we entered the quarter. Strong order volume attributed in part to the seasonal pattern for fourth quarter capital equipment investments resulted in a solid backlog entering 2012. We expect the innovative enhancements for both product lines along with increasing industry appreciation for integrated solutions will support organic growth in the high single to low double-digit range for 2012.
Our Livestock and Poultry Diagnostic revenues declined 3% organically to $24.1 million in the fourth quarter to yield 11% organic growth for the year largely in line with our expectations.
As anticipated we experienced a decline in BSE revenues in the fourth quarter resulting from the new EU rule that was effective July 1, 2011 that increased the mandatory testing age requirements for BSE from 48 months to 72 months.
We also saw a moderate decline in revenues associated with the bovine testing programs in Germany, driven by difficult comparison, as these programs ramped significantly in fourth quarter of 2010. We anticipate that growth in 2012 will be in the mid-to-low single digit range due to a couple of factors. First, we believe that the bovine testing programs in Germany have completed their ramp. Second, we expect further price and volume declines for BSE test. Growth in 2012 will reflect continued expansion in developing market in Asia and Latin America.
Our Water business had sales of $20 million for the quarter, which translated into 4% organic growth. This growth was in line with our expectations and resulted in 5% organic growth for the full-year. We expect growth in Water for 2012 to be in the mid-single digit range, reflecting growth in North America driven by volume gains from account acquisition and penetration of the waste water testing market, as well as growth in our core Colilert testing business in Europe.
Turning to the rest of the P&L, growth margin at 52% was largely consistent with our expectations. Operating expenses at 34% of revenues were slightly below our thinking in October, reflecting the $3 million milestone payment that I described earlier, which is netted against operating expenses in the G&A line.
Operating expenses were normalized for this item at 35% of revenue, were in line with our expectations in October. Our effective tax rate of 30.5% was in line with our expectations and in the fourth quarter as in the third quarter we were able to release reserves in conjunction with the expiration of certain statutes of limitation. Share count was slightly below our expectations in October reflecting somewhat higher repurchase activity in the fourth quarter.
Turning to the balance sheet and cash flow, we ended the quarter with a $184 million of cash and $246 of debt for a net debt position of $62 million. As expected our inventory balance of $133 million was approximately $4 million lower than the level at the end of the third quarter, due largely due to the timing of chemistry consumer board receipts.
DSO at 41 days remains in good shape and our free cash flow was $47 million or 123% of net income.
As we look forward to 2012, we project revenues to be between $1.3 and $1.31 billion. The decrease of $5 million to the high end of our range relative to the guidance provided at the time of our October earnings call is the result of the negative impact of currency, partially offset by the impact of the fourth quarter lab acquisitions. The increase of $5 million at the low end of our range reflect these factors, as well as the tightening of our guidance range by $10 million.
Our revenue guidance and price reported growth of 7% to 8%, which translates to organic growth of 8% to 9%, a 1% favorable impact due to acquisitions and a negative impact of currency, up approximately 2%. Organic growth of 8% to 9% compares to the 8% we achieved in 2011. We expect that the momentum that we have in our Companion Animal Group businesses will more than offset lower organic growth for livestock and poultry diagnostics for 2012. Implicit in our revenue guidance is a modest contribution of perhaps 0.5% to 1% from a gradual improvement in the economy.
We expect the full year gross margin to be approximately 54% about 100 basis points above the 2011 full year rate. The continuation of targeted initiatives in our two largest businesses, IDEXX VetLab and Reference Laboratories will help lead margin expansion and will manifest primarily in the gross margin line. We expect gross margin in the first quarter to be somewhat higher than the full year average due primarily to product mix and manufacturing volume favorability.
Operating expenses should average out to be between 34% and 35% for the full year. This spending level is consistent with the fourth quarter of 2011 when you exclude the favorable $3 million impact of the pharma related payment. The moderate increase over the full year 2011 reflects planned investments in product, service and information technology innovation, as well as commercial initiatives globally that support our revenue growth in 2012 and beyond.
We expect the operating margin to be between 19% and 20%. This reflects about 50 basis points of operating margin expansion when you adjust 2011 to remove the favorable impact of the pharma payments received both in the third quarter and fourth quarters which totaled about $4 million for the year.
We expect the tax rate to be between 31.5% and 32% for the full year. Our projected tax rate is approximately 50 to 100 basis points higher mid-2011, primarily due to the fact that we have not incorporated the benefit of the federal R&D tax credit into our 2010 rate.
Net interest expense should be approximately $3 million and weighted average share count should be down 3% to 4% from the full year 2011 level. The annual reduction of share count is higher than the 2% to 3% we have been averaging in prior years due to largely to the impact on 2012 of the step-up and repurchase activity in the second half of 2011.
All of this leads us to 2012 EPS guidance of $3.04 to $3.10. We are maintaining the high end of guidance range as we anticipate $0.03 of negative impact due to currency relative to rates at the time of our October earnings call will be offset by the favorable impact of a slight lower tax rate and lower share count as just mentioned. The increase of $0.04 at the low end of our range reflects these factors as well as the increase in the low end of our revenue range.
For a little more detail on currency, the rate implicit in our guidance are, the Euro at a $1.25, the pound at $1.53 and the Canadian dollar at $0.97. For 2012, every 1% strengthening of the US dollar vis-à-vis our basket of currencies reduces revenues by approximately $4.5 million and operating profit by about $800,000 on an annual basis.
The projected impact of currency changes has increased slightly from our previous estimate reflecting the growth of our international business. We project free cash flow to be approximately 110% of net income.
And now I’ll turn it over to Jon for some further comments on the business.
Okay, thank you Merilee. We’re pleased with how our 2011 wrapped up as a company and the momentum we have going into 2012. As Merilee mentioned, our outlook for 2012 incorporates a very modest pickup in economic activity in our CAG businesses consistent with what we saw in the fourth quarter. Again, we remain cautious about an outlook that would be any more than 0.5% to 1% improvement in practice visit trends over the 2011 levels.
Having said that, our momentum comes from continued unique innovations that we bring for the market including our Real-Time Care offerings with in-house diagnostics differentiates Reference Lab Services and new and expanded information technology products and services.
A key thing in early 2012 was the introduction of new menu on our existing diagnostic platforms. In the Rapid Assay business we expect to launch an expanded Canine Vector-borne Disease Screening SNAP, we call 4Dx Plus. Launch timing is subject to USDA approval which we would expect in the early Q2. SNAP 4Dx Plus is able to detect two additional tick-borne diseases added to the four Vector-borne diseases including Heartworm that we already cover with SNAP 4Dx.
In total 4Dx Plus will detect diseases that can be carried by total four different tick-species, dogs for most of the country exposed to some, if not all of the species and the bacterial diseases that they can transmit. SNAP 4Dx Plus will replace 4Dx at the same price, giving our customers more value for their money and greater ability to detect patients with multiple simultaneous infections and important clinical finding. We believe that the standard-care continues to shift slowly from Heartworm only testing to full annual Vector-borne disease screening.
Moving on to the IDEXX VetLab suite, we’ll also be launching in April a viable new test on our highly successful Catalyst Dx Chemistry Analyzer. This is tested measures for levels of phenol-barbital, a standard therapy used to control seizure in dogs. Virtually, every practice has patients on Phenobarbital and our test is critical in determining if the dosage is within and not above or below the therapeutic range for the patient.
While the test itself will not be a significant revenue generator to IDEXX in the context of the volume chemistry consumable sold in the market, it will create another differentiator for the customer to use Catalyst and indeed entire integrated IDEXX VetLab suite as their in-house lab solution.
In our Reference Labs, our mini additions will include the lab version of 4Dx Plus which is popular with customers who prefer to use Reference Labs for their Vector-borne disease screening protocol. In addition in the Reference Labs, we’ve added five new Real PCR test to our canine and feline diarrhea panels; continue to bring new innovation in the area of molecular diagnostics for Companion Animal Medicine.
Turning to our Companion Animal business in Europe, we’re impressed with the 8% organic growth in this region achieved in Q4 in a period marked by a lot of macroeconomic uncertainty. Our team in Europe brings tremendous experience to the different country markets.
In addition, these markets appear to be even earlier in their development in the US and thus have momentum to help offset the macroeconomic issues. We continue to make investments in Europe to expand our commercial sales organization and Reference Labs footprint, and for example, we added the lab in Italy in Q4.
Moving to Asia, we’re very pleased to have received approval to market ProCyte in Japan. The combination of Catalyst, ProCyte and the IDEXX VetLab station will be sort of game-changer in Japan over the longer term and this is a market that generally prefers in-house equipment solution to lab services for core chemistry and hematology testing. We expect the full launch of ProCyte in Japan to occur in Q2.
Finally, I wanted to give you an update on the process of the FTC investigation, as we understand it. As we’ve said all along, we can’t predict when and how the investigation will be concluded. For example, last summer we thought the FTC staff was nearing the conclusion of this investigation, but staff required additional information. So it’s just very difficult to predict. But our sense at this time is that most of the FTC staff fact finding is done and that the FTC is working through its internal processes to determine whether or not to file a complaint against IDEXX in the Administrative Law Court within the FTC or to close the investigations without taking any action.
Ultimately, the decision of whether to file a complaint or not is made by the Commissioners of the FTC and not the staff. We do not know exactly when the Commissioners will make this decision, but we suspect it might be sometime in the next several months.
As a reminder, if the Commissioners decided to proceed with a complaint, we would litigate in the Administrative Law Court and my understanding that this litigation typically takes about nine months; or we do have an adverse ruling, we would have the opportunity to appeal a decision to the Commission and where that appeal fail, we would have the opportunity to appeal the Commission decision to the Federal Appeals Court of our choosing.
All of these proceedings could take a couple of years in total and during that period it would be business as usual for us. We remain confident about our legal positions for many reasons, including our prior success in two Federal Courts in which the legality of our distributor agreements was litigated. So while we are hopeful that the investigation will be closed without action, we’re fully prepared to defend ourselves in the FTC and beyond if necessary and we feel that our legal position is very strong.
So in summary, we have an economic environment with very modest growth, a competitive environment in the diagnostics space that is ever intensified. This is a natural progression of markets to have attracted demand characteristics and opportunities for technological innovation. Of course, we bring and our competition expands the adoption of new innovations when they come to the market with imitation and our goal is to continue to be the leader in bringing innovations to the market, in part by bringing new levels of differentiation and value to build upon our existing offerings and thus driving organic growth revenue for the market and for the company as a whole.
An example of that we've talked about just in this call of course are the vector-borne disease screening expansion with 4Dx Plus, real-time care with both 4Dx and pheno-barbital test and the expanded molecular diagnostics offerings that we are offering in the lab. So, Cynthia with that I would like to open it up to Q&A.
(Operator Instructions). Our first question will come from the line of Ryan Daniels with William Blair. Please go ahead.
Ryan Daniels - William Blair
Let me ask a quick one on the in-house protocol agreement program. It sounds like you are continuing to see that as a very successful strategy to place equipment and I am curious if you have data yet on what that does post placement for the consumable utilization, so anyway to compare that to an existing customer utilization or maybe that utilization versus the real-time protocol rebates.
Yeah Ryan, I say we are probably a little early on that, but of course we do have data on what happens when VetTest customer goes to a Catalyst customer or when a Catalyst customer adds ProCyte and those generally of course increase the utilization and we've got a little bit more runway on those to really have an analytical approach to that. The other thing that we are seeing that is interesting is ProCyte is when combined with Catalyst is going into larger accounts.
In fact the average chemistry utilization of a combined ProCyte Catalyst placement is close to 50% or 45% higher than the average of our Catalyst installed base that does have ProCyte Dx. So there is a lot dynamics going on here, but I think we are pleased with the quality of the placements and all the different initiatives which are driving utilization and ultimately of course growth in the Consumable volumes and revenues.
Ryan Daniels - William Blair
I guess a quick second question on how [Bob], just a little bit more color if you could on the R&D spend. I think it was up about 16% year-over-year which is the biggest uptick we’ve seen in a number of years. So a couple of questions there just, can you talk a little bit about that outlook as a percent of sales going forward. Do you expect that to stay at current levels and then maybe you could discuss some of the priorities, be it platform consumables, IT et cetera that you are currently focused on as we look forward on the R&D front?
Ryan, I’ll answer for the first question. I think the R&D levels as a percentage of revenue we see, expect in 2012 will be pretty consistent with what they were in 2011.
And Ryan, you got it. We’re going to be expanding you know the diagnostic menu, the capability consistent with real-time care and differentiated lab services which we really think are just different variations of providing, of serving the diagnostic market in general and of course if you think about diagnostics, what are they? They are really information and medical decision support and so the information technology are strategies that we have to both enhance the value of diagnostics and in fact help the veterinarians improve you know the patient traffic and the revenue per patient visit by helping them communicate the value of their services is really consistent with our overall strategy. So as we have advancements to talk about as we have done in this quarter, each quarter we will let you know. But we obviously have expanded the R&D because we think there is the opportunity in the market.
Our next question comes from the line of David Clair with Piper Jaffray. Please go ahead.
David Clair - Piper Jaffray
Just a couple of kind of OUS questions for me, I guess the first one, given the launch of ProCyte and Catalyst Dx in Japan, how big of a market is that currently for you guys on the companion animal side and how penetrated do you think you are in the market?
Yeah. Well of course we did launch Catalyst, a controlled launch in Q3 and of course grew that in Q4. We won’t be launching ProCyte although we are still in a lot of laser sites. But we won’t be launching ProCyte until Q2 but it will be a great accommodation. There is really nothing like a ProCyte in the Japanese market and it was kind of ironic here is that ProCyte of course is manufactured in Japan. So it’s got the kind of technology that Japanese really appreciate.
It’s obviously a lot smaller market than the US primarily because obviously a small economy and less pet ownership. But that doesn’t make it a very substantial market. There are 8000 veterinary practices. There although, many of them are smaller. But I think what’s interesting for us is that in Japan we have a relatively small share in relation to other countries that we are in. We have a very experienced management team there and actually we have been in Japan for two decades.
And we have sold instruments, but we really think it is going to just be a whole new game when we add ProCyte. The Catalyst is itself a new game, but then we add the hematology to it and again, they really do most of their hematology test, chemistry test and hematology in-house although most of it is not done with our equipment.
So we do see a long-term expansion opportunity if not, you know, it’s just one more attractive market in our portfolio of international markets.
David Clair - Piper Jaffray
Okay, and then the 8% growth in Europe, that’s pretty impressive given the challenges that we’re seeing over there. Has this been fairly consistent during 2011 and what are you expecting in Europe in 2012?
Well, we had, if I recall correctly off the top of my head, we have 10% organic growth in Q3 and of course that was a period that had some economic turmoil and then 8% in Q4 and I was just over with our entire European sales team and they’re really very excited about the opportunity going into 2012 and the context of course of economic uncertainty. I don’t know if with regard to it, I think it’s really with the component of our overall organic growth guidance.
I would just say, David, that as we’re looking at things and seeing a combination of both, the momentum we have in the market and the different levels of market penetration that we have in different geographies that, we’re just expecting pretty strong growth across all the regions for 2012. I don’t think there is any one area that’s driving growth significantly more than another area.
Our next question comes from the line of Miroslava Minkova with Leerink Swann. Your line is open.
Miroslava Minkova - Leerink Swann
Let me start with just the comment on the competitive environment. It seems like the instrument revenue growth of at least in dollar terms was a little bit slower than it has been in prior quarters. I guess I was wondering if there is anything that struck you there that will slower your expectations and also if you could please guide us into John’s commentary about the environment getting tougher competitively, [boxes] are out actually promoting their strategy that having the reference lab helps them drive instrument placements. I guess I was wondering if you could respond to that, how you respond to this competitively? Is it making any impact to you?
Miroslava, I will just speak for a moment on the instrument revenue growth. I think we characterized that placements and how we felt about those and you know I think again I will just reiterate that you know. As far as the placements were, they were I think I would characterize as solid in the US and then in Europe they were a little bit lower than in the US and another geographies and Asia was a little bit stronger albeit a smaller market.
I think some of the factor that is driving a lower organic revenue growth is the fact that it is a competitive market and we are finding that our marketing programs do involve discounts. I talked about discounts on instrument consumables, but they also are requiring discounts on instruments and I think the placements I guess I would summarize and say we are feeling good about the placements. We are pleased with the double-digit growth that we had both for chemistry and hematology for our largest instruments and the somewhat lower AUPs that we have via discount are something that is helping us to achieve the placement levels that we have.
And Miroslava, its an entire business model. So you've got the instrument placements and of course the instrument revenues, you have consumable. We are pleased to see that the quality of our consumable growth is entirely volume-related. We think that's a good, strong strategic dimension to our business and then we've put our cost reductions in there and you put the whole thing together we are able to get the top line growth and the margin expansion in the instrument business and continue to innovate. And of course people are going to come when they can and follow and try to copy innovations that's the nature of these markets and yet we are continuing to lead the way with new levels of differentiations.
I think one of the things that we are very pleased about for example with our catalyst and our ProCyte install base is the loyalty and the retention of our customers when they start using these technologies is extraordinarily high. They really value them when we put them in place and I mean its impressive. So that's another thing that makes us feel good about the long-term prospects for growth in this business.
Miroslava Minkova - Leerink Swann
Okay, great. And maybe just a quick follow-up, the operating expenses as a percentage of sales, guidance that Merilee gave for next year is probably a little bit higher than what I would have thought. I appreciate you are making some significant investments there. Maybe if you could give us some color on what exactly are you investing in?
Well, I am not going to get into a lot of specifics on that, the two primary areas will be within RD. And then within sales and marketing it is largely related to commercial activities. There are some infrastructure investments that we are looking to make internationally. We are also continuing to make investments in our commercial sales force in the US. So I think its really across the globe in a variety of different things.
Miroslava Minkova - Leerink Swann
Okay, great thank you and I’ll get back in queue.
Thank you. Our next question comes from the line of Jonathan Block with SunTrust Robinson Humphrey. Your lines is open.
Jonathan Block - SunTrust Robinson Humphrey
Thanks and good morning. Some of my question have been already asked. I guess if can follow up here as well. John you mentioned the slight step down from 10% to 8% in CAG but again the number considering the environment was pretty good. Can you just maybe give us some more detail on the type of customer over there in Europe?
And what I mean by that is wellness testing as prevalent in Europe or is it not, and it its not, does give you a little bit more of a cushion those growth rates because maybe the testing environment would be therefore less discretionary than what we might see here in the US?
John, that is an excellent insight and we do believe that, so called wellness testing or what we would preferred to call it as a preventative testing is really at a very, very low utilization versus the US. And its really the way that vet schools we thought of course were trying to shift the market but there is a much higher mix, if you will of sick animal or chronic care type of testing that’s on our testing to confirm a diagnosis.
So that’s one of the reasons why I said I believe this markets are earlier in their development and also of less discretionary as a result. Also the other thing that we are finding in Europe and I mentioned this generally but certainly it has been very true in Europe, is that with a combination of Catalyst and now ProCyte, we are actually getting into some large accounts that we really previously didn’t have, a great reason to get their attention.
A Catalyst was very nice, many of these accounts have vet chemistry, which is a technology that works very well on high volume, but it didn’t capture their attention but with ProCyte where there nothing like it in the hematology. We are capturing the attention and we are getting the whole suite and I think that is helping too. That’s one of the market opportunities that we are capturing and of course the other thing is we are expanding our lab business in Europe.
We have not crucially been in all the countries. Now we are in Italy, we weren’t in Italy before, even though we have had very strong commercial organization in Italy. That has done very well and so when we add lab to that commercial organization, they get very excited. We did that previously in France and Spain. We have a very, very strong operation in Germany in lab, which actually serves a whole bunch of countries surrounding Germany and those services are expanding. So the combination of the instrument business and lab business appear to have excellent momentum in Europe.
Jonathan Block - SunTrust Robinson Humphrey
Okay, great. Thanks for that color. May be just one more question that might have a couple of parts to it, but the organic growth in Rapid Assay was a big number. It seems like Merilee almost half the growth rate was a sell-in to the distributors. So I just want to make sure I heard it correctly, may be a couple of million dollars was a sell through in to the distributors on the Rapid Assay form, but there was a normalized level of inventory on the consumables. So, I guess that’s sort of is just a clarification.
And then in the second part to the question would just be Jon, why aren’t you taking price on 4Dx Plus if you would? Maybe if not today, that’s something that you might roll out in a couple of quarters. Thanks guys.
Well, first let me just kind of clarify or walk through the components of the organic growth. Again, so, organic growth 14%; 6% of that it was attributed to changes in to distributor inventory levels year-to-year. And then so the adjusted growth and normalized growth, which is what we are typically looking at was 8%.
Right. So, 8% I think is the right number. To answer your question, of course we did take a price increase in 4Dx in October, as Merilee had mentioned. But we really think the opportunity to grow the utilization of Vector-borne disease screening is a bigger opportunity than to realize price. So, interestingly, there are 70 million plus dogs in the US and not all of them are going to a veterinary clinic unfortunately. 35 million of them are on some kind of heartworm preventative and only 21 million of them are roughly, these are all rough numbers, are tested annually for heartworm, even though it’s a really recommended test before we put them on preventative. And then less than nine million of those have a heartworm test associated with the full Vector-borne disease screening, even though 75% to 80% of the dogs in the country are exposed to ticks.
So, we think that there is an opportunity to continue to expand the utilization of heartworm and in this case, Vector-borne disease screening and really so our focus is in that area with the 4Dx Plus test and of course all the medical education and support that we give with that offering.
Thank you our next question comes from the line of Ross Taylor with CL King. Your line is open.
Ross Taylor - CL King
I’ll just have look at two topics, I wanted to ask you about. First of all did I catch from your prepared remarks that your protocol rebate programs are still relatively insignificant in Europe and related to this I just wanted to clarify. Are these programs here primarily important to you economically because they are helping your drive your instrument placements or are you actually also seeing an improvement in your chemistry and clinic revenue and your profitability for the consumer growth as well?
To answer the first question, they are really not been introduced in Europe yet. We think that maybe every country in Europe is a little different and there may be some opportunities to do so in Europe but not at this point of time. They are certainly helpful with instrument placements, they also provide a nice framework for customers to expand the utilization.
So I think that part of the story of moving to real-time care with that primary first screen, or what we call in medical profession minimum database of chemistry and hematology values is run at the point of care upon the presentation of the pet. So they provide a foundation for that. I think I answered in our early question, we are too early to really see this to be able to measure that at this point in time.
Ross Taylor - CL King
The last question is fairly minor but I noticed in your guidance some of the Fx rates you use are a little below where the current market rates are and I just wondered if there is any particular reason for that?
Well, you know I think the rates have sort of been all over the place recently and so our feeling was I don’t know, you know it’s typically, it just feels like with the environment that we have in Europe that you know that probably 125 is we’re looking out over the years and it’s good of a rate as any. And I think that’s why we are hurt you know because we can’t predict these things very well that we’re just pretty clear about stating what our rates are and then giving the sensitivity guidance and metrics for you so you know everybody can calculate what the changes would be.
Thank you. Our next question comes from the line of Erin Wilson with Bank of America-Merrill Lynch. Your line is open.
Erin Wilson - Bank of America-Merrill Lynch
Most of my questions have been answered, but I noticed that you established a relationship with one of your distributors MWI to meet demand to the Cornerstone platform and I think that starts April 1st as I recall and can you elaborate on this relationship and other opportunities or existing similar relationships with other distributors and does this offer some sort of stickiness to your model?
Well, we have a relationship with one of our distributors. I suspect overtime that that will grow; that allows the customers with our practice management software to have a greater level of electronic integration with the distributor. We think that was really part of the entire trend of moving to information technology to make the practices increase the standard care, in this case increase the productivity and the profitability of the practice.
So it’s very exciting; and I think it brings great value to our customers who use Cornerstone and what I will tell you is that people who you know purchase practice management software, they usually keep it for very long time, I mean there is very little change in the installed base overtime of practice management software; its not a decision that you make lightly and you want to make one with somebody who is going to be in the market for a long time and continuing innovate with advanced releases.
And we haven’t really spend any time in this call, but we have in past calls, we’re just very excited about Cornerstone and its ability to move into electronic medical records and integration with the in-house system whether they would be diagnostics or others and with suppliers such as in the case with distribution. So I think it’s just continued evolution of that connectivity that’s taking place.
Erin Wilson - Bank of America-Merrill Lynch
On the bioresearch opportunity, I know it’s still very, very small, but how can we track the performance of this business going forward?
Yeah, it’s pretty small; I think we’re going to have within the parts of the business, both with the Reference Lab and the point-of-care. We were very certainly very pleased with having leaded the acquisition of RADIL and we’ve been very pleased with the integration today.
And indeed the performance of that business in a short term that business part of the IDEXX family and we’re also very excited, you know they really had an outstanding reputation, but they were primarily, the revenue has been primarily domestic and it’s really a global market and so one of the opportunities that we see in bioresearch is to expand that capability internationally.
And again, when I was in Europe with our European organization, they were excited about the opportunity to expand the bioresearch presence. But, it’s so small in relation to the larger businesses I think we will be tracking as part of the larger lines of business.
Our next question will come from the line of Nicholas Jansen with Raymond James & Associates. Your line is open.
Nicholas Jansen - Raymond James & Associates
Just one quick question, most of my questions been answered, but thinking about kind of placement activity for 2012, certainly you had a kind of a robust finish of 2011. I know you gave initial guidance last year kind of what you anticipated for kind of ProCyte placement growth, just may be any expectations surrounding the number of placements for ’12 and then also with Catalyst you are several years into the placement ramp; just kind of your expectations for Catalyst placements heading into 2012? Thanks.
Hi Nick, with regard to, let me just say proudly, our hematology line, so we got LaserCyte and ProCyte, we are anticipating approximately a 15% unit growth year-to-year and for ProCyte that would kind of translate we’re expecting about 1,400 placements. And as we look at our Chemistry Line, Catalyst and VetTest, we are expecting about a 5% to 10% growth across both.
And our final question will come from the line of Mitra Ramgopal with Sidoti. Your line is open.
Mitra Ramgopal - Sidoti
Hi, just a quick question regarding Europe, clearly as we look at the numbers, it’s now about 43% of revenue and with the investments you are planning in increasing infrastructure there, how do you see that number moving over the next couple of years?
I think the 43% is total international. And so, is the question with regard to Europe or international, in general?
Mitra Ramgopal - Sidoti
Overall, as Europe grows and I guess, even in Asia, how much is international sort of, become, I mean do you see it becoming 50-50 sort of over next five years or so?
You know, it’s a question that I get frequently and I am certainly very, very excited about the growth internationally. But quite frankly, I am pretty excited about the growth domestically too, because the US is really going through a technology, the US market; for veterinary care it’s going through an information technology revolution which is really able to change the game in terms of the pattern of the client experience, and appreciation for veterinary care.
So, while we think that the international markets are underdeveloped in relation to US market, we think the US market is underdeveloped in relation to what we’re seeing leading practitioners accomplish with pet owners. And we’re not talking demographics here, we’re not talking geographies. We’re just talking about practices who are very, very successful in communicating the value of care and having greatly expanded, therefore intensity of care, which quite frankly, lengthens the life of the pet and lowers the cost of that pet over the long-term, because you don’t have as many chances for chronic or acute intervention.
And so, you know, that’s a long way of answering that; I don’t think those numbers will change a lot between domestically and internationally. They do change as much because of currency as they do underlying volumes in those core markets. But having said that, you know 10 years ago, I think the mix was 39% international and today the mix is 43% international. So you know, there has been some shift in that direction.
Thank you. And with that Mr. Ayers, I would like to turn it back over to you for any closing comments.
Well, I just want to thank everybody for joining the call and it being the wrap-up of 2011 I also just want to take this opportunity to thank and congratulate all of our employees. And indeed of course our customers; we wouldn’t be in the market without our customers and we know we have to win our customers’ confidence everyday and we look forward to continuing to do that in 2012. Thank you. That ends the call.
Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!