IDEXX Laboratories' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.19.12 | About: IDEXX Laboratories, (IDXX)

IDEXX Laboratories, Inc. (NASDAQ:IDXX)

Q3 2012 Earnings Conference Call

October 19, 2012 09:00 AM ET

Executives

Jonathan Ayers - Chairman, President and Chief Executive Officer

Merilee Raines - Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary

Pete Levine - Director, Investor Relations

Analysts

Ryan Daniels - William Blair

David Clair - Piper Jaffray

Erin Wilson - Bank of America

Ross Taylor - CL King & Associates

Debbie Wang – Morningstar

Ben Haynor - Feltl and Company

Nick Jansen - Raymond James

Mitra Ramgopal - Sidoti & Company

Operator

Good morning everyone and welcome to the IDEXX Laboratories’ Third Quarter 2012 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 preface 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 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 June 30, 2012, 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 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 be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A definition of those 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 10:00 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 feel free to get 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.

Merilee Raines

Good morning and thank you for joining our call today. As reported in our press release this morning, our third quarter revenues were $315.5 million, yielding organic growth of 6% and diluted earnings per share were $0.76, a year-to-year increase of 15%. Organic revenue growth was a couple of points or so below our expectation at the time of our July call, primarily the result of lower revenues from instruments and from our livestock and poultry business.

Earnings per share were essentially in line with our expectations as lower spending mitigated the gross profit impact of the revenue shortfall. While currency was slightly more favorable to reported revenues in our thinking in July, the impact to earnings per share was immaterial.

As for what we are seeing in the US veterinary market based on data from approximately 500 customers using our Cornerstone Practice Management System. In the third quarter, patient visits grew by 3.5% and practice revenues grew by 6%. These metrics are relatively consistent with what we saw in the second quarter, with patient visit growth of 4% and practice revenue growth of 5.5%. The consistency of the second and third quarter data once further validation to the hypothesis that the strong first quarter metrics of 5% patient visit growth and 7% practice revenue growth were favored by the mild winter weather experienced in much of the country.

In Europe overall we saw organic growth for our companion animal group of businesses hold steady at 5%, consistent with the first half of the year. The countries, primarily in southern Europe that are experiencing the greatest fiscal issues, are showing relatively lower growth, however we are seeing solid growth in Germany and strong growth in more emerging markets in eastern Europe.

For the balance of 2012 and into 2013 we remain cautious about the impact of the macro environment in both the US and Europe and the markets served by our core businesses. Europe continues to be fragile and in the US mixed economic data indicates that the fundamentals are not strong.

Asia-Pacific is a different story. The stronger economies and the relatively less mature markets have provided a tailwind to our innovation and commercial execution to produce 20% growth year-to-date collectively across our businesses. Implicit in our guidance today is a very modest benefit from the macro environment on volume growth over the next few quarters. And so, as over the past three or so years, our growth will largely be driven by our innovation and ability to build strong value-based partnerships with our customers.

Let me now give some further detail on the top line performance of our companion animal group. VetLab instruments and consumable revenue of $101.3 million grew 4% organically. Sales of instruments at $21.7 million declined 10% organically year-to-year. As we noted last quarter, the success of our protocol-based rebate program that was introduced in the third quarter of last year in North America makes for difficult comparison in the second half of this year, but particularly for the third quarter. And accordingly we had anticipated a year-to-year decline in unit chemistry placements. Nonetheless total chemistry placements which were down 14% year-to-year and relatively flat sequentially were a bit below our expectations. Though we had a strong finish to the quarter in September, we could not make up completely for the slow start experienced early on. This strong finish has given us a healthy order backlog and some positive momentum heading into the fourth quarter.

Despite the shortfall in quantity, we continue to be pleased with the quality of the placements in the quarter. As experienced through the first half of the year, roughly 40% of the Catalyst placements were into accounts new to IDEXX, both in the US and Europe. This comparable metric in the second half of 2011 was 30%. One more selling effort is required to place an instrument into a greenfield or competitive account, the overall value to us of a new placement is 4 to 5 times that of an upgrade of vet [ph] customer as measured by the gross profit on the instrument placement and 5-year consumable streams for an average Catalyst placement. We now expect 2012 Chemistry placement growth to be a point or two shy of our previous projection of 5%.

We continue to see strong performance in our worldwide ProCyte placements, up nearly 20% over last year. Over one-third of ProCyte placements were into accounts new to IDEXX, a solid metric giving us relatively recent launch. As we have stated before, ProCyte does help us place Catalyst into large new customers. In the third quarter, half of our ProCyte placements also included a Catalyst. We have seen that these Catalyst accounts use roughly 50% more consumables than the average Catalyst customer who does not have a ProCyte. We expect combined ProCyte and LaserCyte hematology placement growth to be around 15% for the full year.

Consumable revenues of $67.7 million grew organically 10% or 9% when further normalized for changes in distributor inventory levels. This is consistent with the 9% growth we saw in the first half of the year, a function of our growing installed base increased testing as current IDEXX customers upgrade their in-clinic labs with Catalyst and ProCyte and increased same-store testing as a result of improving patient visit metrics. With regard to the installed base, given our placement success with Catalyst over the 4.5 year since launch, we now see that in the US over 80% of our Chemistry consumable sales, exclusive of corporate account are to Catalyst owners of very loyal base. We continue to expect full-year 2012 normalized organic growth for instrument consumables to be 9% to 10%.

Our third quarter rapid assay sales of $39.3 million grew organically 10%. When normalized further for changes in distributor inventory levels, revenues grew by 6%. This growth is largely consistent with the second quarter and our thinking at the time of our July call. And we continue to expect normalized organic growth to be 4% to 6% for the full year for rapid assay as we anniversary the list price increase we took in the fourth quarter of last year.

US distributor inventories for instrument consumables and rapid assays averaged just under four weeks at the end of the third quarter based on forward-looking demand, which is within their normal and customary range. Our reference laboratory and consulting services business with revenues of $101.4 million grew organically 7% in the third quarter. Though it gets lost in whole number rounding, we saw nearly 50 basis point improvement in growth from our second quarter organic growth, with sequentially higher growth rates in the US, Europe and Asia Pacific. The majority of growth continues to come from higher test volumes due to the addition of new customers. Our accounts acquisition success is fostered by a number of factors, namely our growth specialty test menu which now includes allergy testing with our second quarter launch in the US. Our ability to effectively bundle our lab and in-clinic offering greatly enhanced with the decision support and client communication capabilities of VetConnect PLUS also launched in the second quarter and our geographic footprint expansion to increase market coverage.

As per geographic expansion, we have opened up two new labs since our July call which bring our worldwide network to 60. Most notably, our new lab in Germany which we mentioned on our second quarter call was successfully opened in early October. To remind you, this new German lab will serve as a centralized hub for testing samples picked up by our European logistics partner from customers outside of major metropolitan areas. The lab and logistics combination will open up new markets for us in areas of Europe where we do not have lab presence today. It will also allow us to consolidate evening testing from our existing European labs to take advantage of scale economies. This replicates the successful strategy we have employed in the US through our Memphis lab and will greatly enhance our reach and service levels across Europe.

We are in a controlled launch in the fourth quarter to ensure smooth operations and the superior customer experience with broader commercial activity gearing up in the first quarter of next year. Consistent with our thinking in July, we expect reference lab and consulting services revenue growth of 8% to 9% for the full year.

Our practice management and digital imaging systems with revenues of $20.3 million, grew organically by 11% in the third quarter. These results are consistent with our thinking in July and so we are maintaining our expectation for low to mid teen organic revenue growth for this line for the full year. WE have focused a good deal of our innovation efforts in this area of technology in recent quarters, and Jon will be speaking in greater detail about this in his remarks. Suffice to say that we are developing some information based offerings that we believe will be differentiated and value added in their own ride and will also enhance the value and utilization of the rest of our product in service offerings among our veterinary customers.

Our livestock and poultry diagnostic revenues declined 2% organically to $18.9 million in the third quarter, which as we noted upfront was lower than our expectation for mid-single-digit growth. The primary drivers for this shortfall versus our thinking in July were lower swine testing in Asia which we believe is due in part to the suppressed port prices in the region. Lower cattle testing in Europe which may be in part timing between the third and fourth quarters and slower ramp of a couple of recently introduced products. In light of the third quarter performance and continuation of some of these factors into the fourth quarter, we are now expecting that livestock and poultry organic growth for the full year will be negative in the low single-digits, down from our expectation of flat growth in July.

Our water business had sales of $22.2 million for the quarter for organic growth of 5%. We continue to see growth driven by gains in our core Colilert testing business worldwide. As third quarter performance was in line with our thinking, we are maintaining our expectations for mid-single-digit organic growth for the full year.

Turning to the rest of the P&L, gross margin at 54% of revenue was in line with our expectations. Operating expenses at 34% of revenue as mentioned were somewhat below our thinking in July, reflecting lower discretionary spending and to a lesser extent some timing between quarters. Our effective tax rate of 31.4% was in line with our expectations and a bit below the prior two quarters due to the release of reserves in conjunction with the expiration of certain statues to limitation. Share count was also largely in line with our expectations for the quarter.

As for the balance sheet and cash flow, we ended the quarter with $221 million of cash and $235 million of debt for a net debt position of $13 million. Our inventory balance of $147 million was about $4 million higher than the level at the end of the second quarter, primarily a function of the somewhat lower-than-expected Instrument and Poultry and Livestock revenues.

We expect inventory levels to come down modestly during the fourth quarter. DSO at 42 days remains in good shape and our free cash flow was $60 million or 140% of net income. For full-year 2012, we project revenues of approximately $1.3 billion. Our revenue guidance implies the reported growth rate of about 6.5%, which translates to an organic growth rate of about 7.5%. Organic growth for the year has reduced from our previous range of 8% to 9%, reflecting our latest thinking of our Instruments and Livestock and Poultry revenues.

We continue to project growth margin to be approximately 54% for the year and operating expenses to be approximately 34%. With respect to operating expenses, we expect a modest increase in spending in the fourth quarter, largely reflecting investments we are making in areas such as the full commercial launch of Pet Health Network Pro and the startup of the German lab. In addition, we are making some investments to improve our commercial effectiveness in the Scandinavian region of Europe.

We are increasing our full-year earnings per share projection to $3.08 to $3.11 compared to our July guidance of $3.05 to $3.10. The $0.01 increase as a high end of our range is a result of favorable impact of currency relative to rates assumed at the time of our July earnings call.

The details on currency rates implicit in our guidance and our currency rate change sensitivity metrics for both 2012 and 2013 are included in our earnings press release. As we look to 2013, we project revenues of $1.405 billion to $1.425 billion, a year-to-year increase of 8% to 9% for both reported and organic growth, and earnings per share of $3.37 to $3.47, a reported growth of 8% to 13%. As the currency rates we are assuming for 2013 are relatively on par with projected average rates for 2012, currency is expected to have an immaterial impact on 2013 reported revenue growth.

As mentioned, our projected 2013 revenue guidance contemplates only a modest favorable impact on our served markets from a gradual improvement in the economy. The 8% to 9% organic growth will largely be driven by continued enhancements to our product and service offerings and by further leveraging the innovations launched over the last few years.

We believe we have a unique opportunity within the veterinary industry to partner with our customers on solutions that promote both their clinical and business practice effectiveness. Our commercial organization along with our distribution partners are discovering how to put together the pieces of our multi-faceted strategy in a way that is compelling to veterinarians and then staff. These pieces include our broad, deep and complementary real-time and reference lab diagnostic offerings, made more valuable by the information insights enabled by VetConnect PLUS. Additionally, both VetConnect PLUS and Pet Health Network Pro provide veterinarians’ tools for more effective communication and outreach to their clients.

We are as energized about our opportunities to innovate commercially as we are about our products and service innovation. While currency is anticipated to have a minimal impact on revenue growth, our earnings per share guidance contemplates roughly $0.09 of headwind from 2012, for foreign exchange hedging that are not projected to recur in 2013 based on 2013 hedges in place and FX rates assumed in our guidance.

Were we to normalize for this year-to-year change in the impact of hedges, earnings per share growth would be 11% to 16% and operating margin expansion from productivity initiative primarily in our reference lab and vet lab businesses would be in the range of the 50 basis points to 100 basis points we have been targeting on an annual basis.

We are still in the midst of our annual internal planning process, and so, we will provide more details on the components of our P&L, balance sheet and cash flow at the time of our earnings call in January.

As one final point, both our 2012 and 2013 guidance does not incorporate any benefits from the federal R&D tax credit. And now, I would like to turn over to Jon for some further comments on the business.

Jonathan Ayers

Okay, thank you, Merilee. We could be more excited about our progress with our innovations at IDEXX, especially in the last quarter. In the Companion Animal Group, we have very strong base in our diagnostic offerings, including a world-class reference lab network and a set of in-house diagnostic capabilities that are unmatched.

We have discussed in the past calls our steady stream of advancements in menu and ease-of-use for the in-house equipment and kits, as well as geographic and expansion on the reference lab side. We continue to develop new enhancements and commercialize the ones we have already released. But what is new is how we are transforming diagnostics with information technology, using the latest software development tools.

In early Q3, as investors know, we formally launched VetConnect PLUS, a cloud-based application that provides the practicing veterinarian access to integrated diagnostic results for each individual patient, from blood analyzed by either our reference lab or our in-house equipment or both. VetConnect PLUS has a highly intuitive interface that allows for analysis of the patient’s most recent blood work data in the context of all of their historical data run on IDEXX. This time-based analysis with the support of intuitive graphing tools provides far, deeper insight into a patient’s health status.

As financial analysts, think of how much more value is derived from looking at trends overtime versus data from just a single period. In addition, because our diagnostic data is in the cloud as soon as the results are available from either in-house equipment or the reference lab, this information is available real time anywhere, at any moment, opening up the obvious value of mobile computing to a veterinarian.

For example, the fact that they can see blood work completed on their patients with their in-house hospital equipment, when they are at home or otherwise away from the practice and then can easily email these results to the client. That is, VetConnect PLUS results are easily shared electronically with pet owners or other veterinarians that might be involved in the care of vet patient.

VetConnect PLUS is transforming the practice of management, and the validation is the rate of adoption by our veterinary customers as Q3 progressed. We now have 2,300 customers that have activated their VetConnect PLUS account, an extremely rapid pace for our market and in the context of anything we have seen in the past.

In addition, over 25% of the IDEXX results that are viewed online in the U.S. are now viewed using VetConnect PLUS as powerful analytic tools. We expect that metrics to be 100% within a year, and we expect a significant increase in the overall use of our online tools for viewing and analyzing blood work results from either in-house or reference lab modalities.

In this way, we are bringing to the market today the future of diagnostics. Our business model here is to offer VetConnect PLUS to our customers of IDEXX diagnostics including in-house users and reference lab users for no incremental charge. Of course, VetConnect PLUS only works with IDEXX diagnostic offerings and can only do so.

The feedback we are receiving from veterinarians who start using VetConnect PLUS ranges from positive to very enthusiastic. Once they start using it, they never want to access their patient’s results any other way. It is a transformative experience. Thus, we expect VetConnect PLUS will further increase our already high customer loyalty, allow for greater cross-selling on in-house equipment to our reference lab customers and lab services to our in-house installed base, as well as present a unique value proposition to accounts that do not currently use either.

Over the longer term, we also expect that VetConnect PLUS will support greater adoption of diagnostic testing for preventive care, as the importance of establishing individual patient base lines become so obvious through the intuitive graphing and trending tools of VetConnect PLUS. This blood work presentation is not only intuitive to the veterinarian and her staff, but also to pet owners where they can see trends easily through a simple graph on a tabular or exam room screen.

As we know, the growth in the adoption of preventive care diagnostics is a quadruple win. It’s great for patients and pet owners, for veterinary practices and of course, for utilization of IDEXX diagnostics.

Today, VetConnect PLUS is only available in the U.S. However, in 2013, we have plans to bring it to many of our important international markets, which help us augment the already impressive growth rate we are realizing in these markets today.

In Q3, we also released the latest version of software for our Cornerstone practice management system as well as the beta version of Pet Health Network Pro, our new suite of client communication services. That like VetConnect PLUS are developed using cloud-based technology. Pet Health Network Pro is currently in a large-scale beta testing with anticipated full commercial launch in Q4, when we will start realizing monthly subscription revenues associated with the offering.

Customer response has been as enthusiastic as has been for VetConnect PLUS. From a customer perspective, each of these three, our software offerings, VetConnect PLUS, Pet Health Network Pro and Cornerstone offers clear value to our customers in its own right. These software offerings were also designed to be extremely complementary, as customers can use them together in an easy, seamless way. For example, it’s easy to share IDEXX lab results from VetConnect PLUS with a pet owner on Pet Health Network’s individual client page called Pet Link [ph]. It’s also easy to share pet exam reports that veterinarian has created in Cornerstone on Pet Link, and VetConnect PLUS is also fully integrated into Cornerstone in the latest release.

The customer response to the seamless integration capability has been overwhelming at our Cornerstone User Conference, which was attended by more than 500 of the profession’s most progressive customers. In addition, all these information tools help our customers gain more value from our core diagnostics offering of reference labs and in-house equipment and kits, and that spurs greater demand for diagnostics by pet owners.

Switching topics here, I also wanted to provide a quick update on the FTC situation, which is progressing as we had expected when we first announced our plans to make one of our distributors non-exclusive. As you know, we are very pleased to have signed a new non-exclusive agreement with MWI at the end of September that takes effect then in January. And we are now negotiating a consent agreement with the FTC staff that will formally end the almost three-year FTC investigation.

We expect that the principal element of a consent agreement will be a requirement that we maintain a non-exclusive relationship with at least one national distributor for a period of 10 years, such as we have with MWI, starting in 2013. To be clear, the MWI agreement that we signed in September would satisfy our obligations under the consent agreement.

In fact, this MWI agreement was reviewed by the FTC staff before we executed it, because we and MWI wanted to ensure that it would be satisfactory to the staff. We hope to have the consent agreement signed within the next few weeks, but obviously we don’t have full control over the timing. Following execution, the consent agreement would be presented to the commissioners for FTC approval.

Again, we can’t guarantee that the commission would approve the consent agreement, but our expectation is that they would support the recommendation of the FTC staff. If all goes according to plan, this whole process could be concluded in late Q4 or early Q1 of 2013.

In summary, we believe we are ushering in a new era in the usage of diagnostics and veterinary medicine, building on our strong platforms and point-of-care and reference labs, with an information ecosystem that enables our customers to rapidly advance for standard pet medical care. We have a fairly rapid innovation cycle in veterinary medicine because we do not have many of the constraints of human medicine, such as some specific constraining regulations and third-party payers.

And we have the benefit that pet owners care deeply about their four-legged family members and are willing to invest in their care, when the value of doing so is clear and intuitive. Our veterinary customers that lead the profession by having adoptive or advanced technologies are showing in veterinary medicine the way it could be in all of medicine.

And I want to thank all of our employers for helping make that happen and the work that they do every day as well as our shareholders for their continued confidence by pursuing this purpose, and that in doing so, we will create exceptional long-term value.

So, with that, Gale, I would open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go the line of Ryan Daniels with William Blair, please go ahead.

Ryan Daniels - William Blair

Thanks for taking my question first. I know you don’t want to get into the details exactly on 2013 guidance at this point on all the nuances. But I am curious, if you can talk a little bit more about some of the nuances with the new distribution agreement in regards to you getting higher margin of that and how you reinvest proceeds? I am curious, if it will go, not proceeds but margin, will it go into more R&D, more direct sales and marketing, just how are you thinking about that at this point?

Jonathan Ayers

I will just remind, thanks for the question Ryan, and just to remind investors, as we expected that the new agreement with MWI would transitioned to 10% margin for them, or say a targeted margin based on the retail price or clinic price of our products from 15%. So there would be 5% margin there. It’s hard to say because it’s really a mixture of a lot of different things, money is fungible, and it’s probably a combination of everything that you mentioned.

Ryan Daniels - William Blair

Okay, fair enough. And then I guess I might follow just on the VetLab instrument placements, I know you mentioned there is a little bit of weakness and I know the summer months might be a weaker quarter versus Q4 anyways, but anything in particular you are seeing there, you know more competitive pressures, is it more of a focus on kind of selling and launching all the new products you have had, just any color there would be helpful? Thanks.

Jonathan Ayers

Yes, I think the market is fine and I don’t really see the competitive pressure, it’s a very competitive market of course, I don’t really see it any different in Q3 than it was in prior quarters. We did have a lot of new launches and we had some management that – new management, managements that changed position in the first part of the quarter. So, I think it’s kind of a transitory thing. I also reinforce Merilee’s point that we had a very strong instrument placement in quarter last year, so the year-over-year compares is a little bit tough. Instrument placements can have very strong quarters and quarters like Q3, but we are very excited about the momentum and we are also excited about the quality of our placements. Quality can be measured in a couple of dimensions. One is the percent of new customers and Merilee mentioned that, the 40% for the Catalyst placements, and the second is the size of the customers. We are continuing to win big customers. For example, we completed outfitting the Animal Medical Center in New York City, which is the world’s -- probably largest and most well-known veterinary practice and now it is all IDEXX with Cornerstone that went into Q3, we have a lab there, they have our in-house equipment. It’s a great example of the kind of big accounts that we are winning. If you look at Q3, one of the things that we are very pleased about is the continued momentum in the core annuity portion of the business that is the consumables and the labs. That just continued to power along as you heard from the metrics from Merilee. So, that gives us confidence with the outlook.

Ryan Daniels - William Blair

Great, thanks for all the color.

Operator

Our next question comes from David Clair with Piper Jaffray, please go ahead.

David Clair - Piper Jaffray

Yes, hi, good morning Jon and Merilee. So my first question is on the 2013 guidance. Just given the macro environment that we are seeing, the distributor change, and the decelerating growth we have seen through 2012, just want to try to get a little bit more comfortable with the outlook here. Can you give us some additional details just on the acceleration in organic growth?

Merilee Raines

Sure, David. I will take a stab at that and Jon may add some things as well. Of course, in January we will get into more detail by product line, but I would say at a higher level there are a few things that are driving that step-up in organic growth. First, we do expect that the information innovation such as VetConnect PLUS and Pet Health Network Pro will generate volume growth both via account acquisition and also an increase in account loyalty. And as well, because of the value of those offerings bring to our entire portfolio we will see increased price realization. In addition, we will have some favorability or we expect some favorability in price as we anniversary to ramp-up some marketing programs, programs such as the protocol-based rebate program that we launched in the third quarter of last year that’s driving the top instrument placement compare, and that program negatively impacted the price of VetLab consumables the way the accounting treatment works, and as well the instrument and lab bundled programs negatively impacted the pricing on our reference lab business and I think we alluded to that in the last couple of quarters.

We expect some acceleration in growth from geographic expansion. An example of that is the new hub lab in Germany, which will extend our reach in Europe. More generally, we see opportunity for growth internationally from investments that we are making in commercial resources, I just mentioned that we are making the investment to go direct in Scandinavia and also the investments in recent product launches as we roll those out internationally things like ProCyte was just launched a couple of quarters ago, our last quarter Q2 in Japan and so that’s still got a nice growth ramp to it. As Jon mentioned, VetConnect PLUS we intend to bring out internationally next year. So, those are just some of things that would be behind that step-up in organic growth from 2013.

Jonathan Ayers

I think it is important question, Dave, and I really appreciate it. In addition to the factors that Merilee has mentioned, you mentioned that the change in the US distribution, I think it is important to recognize, as Merilee mentioned in her prepared comments that 80% of our Chemistry consumables that are served by the market that distribution serves, you take out corporate accounts, 80% of those even today and if that percentage continues to grow is what Catalyst chemistry analyzes. The loyalty we have on Catalyst is over 99%. It’s hard to get much better than that. People love Catalyst, they love everything about it, and in addition when they start using VetConnect PLUS, they are going to love it even more. It’s a very, very loyal customer base and the vast majority of our consumables today are actually coming from that portion of the Chemistry base.

In addition, we have a couple of hundred reps in the field. We have three times that number of distributor reps. We have a wonderful relationship with all of our US distributors, including a continuing strategic relationship with MWI, particularly because they are also helping us with the Cornerstone software. So, really, the changes is really a minor aspect when you look at the -- first of all, the innovation we are bringing in the market, the situation that we have and of course the breadth of go-to-market channels and assets that we use to commercialize our product. So, we are very excited about 2013.

David Clair - Piper Jaffray

Okay, thanks a lot. As a follow-up from me, I was curious, given the new software launches that we have seen recently, can you parse the performance at digital radiography versus practice management?

Jonathan Ayers

They both grew but the practice management was clearly the lead horse in that low double-digit growth of that product line.

David Clair - Piper Jaffray

Alright, thank you.

Operator

Our next question comes from Erin Wilson with Bank of America, please go ahead.

Erin Wilson - Bank of America

Hi, thanks for taking my question. First I guess on the international side, can you give us an update there and the opportunities there? I know you talked about a little bit already, but the Germany lab I guess seems on track or even ahead of schedule. Did that actually have an impact on the current quarter’s results and that’s embedded in your guidance, right?

Jonathan Ayers

It is embedded in our guidance and I think we are very pleased with -- I want to say 5% organic growth in Europe for our Companion Animal business and no impact from the new lab because it actually didn’t start operating until this month, October, and it’s really just starting to crank up. So, we really see it being a 2013 contributor, but we are very pleased because it is in operation. It was a significant investment but a core lab and using a new logistics network. We know how to do it, we have been very successful with Memphis which didn’t exist 4 years ago, it’s now our largest lab in North America and so we are using that model for serving Continental Europe.

Erin Wilson - Bank of America

Okay, great. And then as it relates to the distributor changes, and I guess MWI, do you anticipate any material changes in ordering patterns from MWI?

Jonathan Ayers

No.

Erin Wilson - Bank of America

Okay, great. Thanks.

Operator

Ross Taylor with CL King, please go ahead.

Ross Taylor - CL King & Associates

Hi, just two simple questions. VetConnect PLUS, I know it’s in very early days, but I just wondered if you can see any changes in behavior or kind of utilization of diagnostic test by the vets who are using it at this point? My second question relates to Pet Health Network Pro. I just wondered if you expect any material revenue contribution from that product in 2013?

Jonathan Ayers

Okay, those are two great questions, thanks. On VetConnect PLUS we do believe it has the potential to drive diagnostic utilization, as I said in my upfront comments. What I will say is in veterinary medicine behavior change happens over time in strong waves but it happens slowly. It plays out slowly. So, we believe that as veterinarians experience a particular case where they are able to see inside from changes in the individual patient’s parameters from the individual reference range but still within the reference range of the species and they are able to make better diagnosis and have pretty fabulous experience with those pets, they and their staff will then have further impetus to go really communicate the value of preventative care diagnostics with pet owners and it is so intuitive with the graphing tool, but that’s going to be a megatrend in my view. I think it is going to be a megatrend in all medicine but we are leading the way in veterinary medicine because we can innovate faster. I think that’s going to be a megatrend that will play out over the next half decade as an example. So, it is a powerful long-term trend but it takes a while for veterinarians to see this.

What we do know is the clinical basis, the clinical pathologists have been teaching the value of trending for decades. So this is on extremely solid medical ground as far as the academicians and the key opinion leaders are, and it is really just bringing it to practice. On Pet Health Network Pro, it is a great business because it is a subscription-based business and it has the characteristics of a software-as-a-service type business, and it will be contributor to our organic growth, but in the mix of $1.4 billion it is going to be one of the many things that will contribute to our growth, probably won’t be material in and of itself.

Ross Taylor - CL King & Associates

Okay, that’s very helpful. Thank you.

Operator

We will go to the line of Debbie Wang with Morningstar, please go ahead.

Debbie Wang – Morningstar

Thank you very much for taking my question. One of your competitors has been out there with their new reference lab for about a year now, and I am just wondering on the ground to what degree you’ve noticed anything, or any impact from that?

Jonathan Ayers

I wouldn’t say the competitive environment is any different today than it was 6 months, a year-and-a-half ago. It’s a very competitive environment in the reference lab business. We have one large competitor who is quite confident and capable and we have to compete with them every day, an addition of one lab when you got, I don’t know, probably between the two of us close to 100 labs there is not really -- I don't think we can really see that. But we are excited that we have new elements of clear differentiation with our reference labs with VetConnect PLUS that will give us additional competitive advantage as we go into 2013, both on customer acquisitions, but also customer loyalty. I mentioned the extremely high loyalty we have in the Catalyst. The labs is not as high it is in the ‘90s, mid-90s at loyalty, but if you go from the mid-90s to high-90s in loyalty that change in percentage loyalty you can just add right to your growth all other things being equal. So we are very excited about the lab business.

Debbie Wang – Morningstar

Okay, thank you. That’s all from me.

Operator

(Operator Instructions) We will go to the line of Ben Haynor with Feltl and Company, please go ahead.

Ben Haynor - Feltl and Company

Morning, thanks for taking my questions. On the lab side of the business, can you kind of parse out what roughly the percentage was in organic growth that was due to new customer acquisition and then price increases?

Merilee Raines

Ben, approximately 70% of the growth was volume growth and that’s largely due to acquisition of new customers, and then 30% would be price.

Ben Haynor - Feltl and Company

Okay, great. And then as a quick follow-up, with the acquisitions you made in Q4 last year, what do you expect the growth due to acquisitions to be at kind of half below where they have been running at in Q4? Is that a reasonable assumption?

Merilee Raines

That’s probably about right, yes -- happened in mid-November.

Jonathan Ayers

Yes, they were mid-quarter.

Ben Haynor - Feltl and Company

Okay, thank you very much.

Jonathan Ayers

Thank you.

Operator

We will go to Nick Jansen with Raymond James. Please go ahead.

Nick Jansen - Raymond James

Hi, I know you guys signed a relationship with GREER on allergy in 2Q. Maybe just your initial progress or thoughts on that market as you were live for three months?

Jonathan Ayers

Yes. We are very pleased with the rollout of allergy. It is actually one of the many contributors to the reference lab growth because it's an entirely new product line for us, and of course, gives us one more element of menu differentiation with the reference lab. And so, I would say that, that is as successful as we have expected to be, and of course, that’s going to be really a global offering because it turns out pets get allergies everywhere, and there is pretty well developed. There’s actually more developed market in allergy in Europe than there is in the U.S. So, we would see that there is an existing business there and then there is the opportunity to develop the allergy business as we go forward in the U.S.

Nick Jansen - Raymond James

And then lastly kind of looking at the lab footprint expansion with Germany in 4Q, if that’s successful, is there something that you could kind of implement in Asia as well to kind of think about that same strategy or it is just too early to talk?

Jonathan Ayers

Well, I would say, having actually lived in Asia a long time ago, it is a little different geography, it is big. And the nice thing about Germany is you have got continental Europe and you can do the flights relatively straightforward on logistics network, and of course, DHL is well situated. Asia is just about -- it is a vast geographic distances. So, we are excited about Asia, we are excited about the 20% plus organic growth that we achieved in IDEXX in our Asia businesses. And the outlook is good there, but probably how we are going to continue to do that in the lab business will play out over time and probably, I am not sure I would see a core lab for the hemisphere in the same way we have it for North America and the Europe continent.

Nick Jansen - Raymond James

Thanks.

Jonathan Ayers

Thanks.

Operator

And we will go to Mitra Ramgopal with Sidoti. Please go ahead.

Mitra Ramgopal - Sidoti & Company

Yes, hi good morning. Just a quick question on the lab business. I was just wondering as you look forward to the next year in terms of the guidance etcetera, are you counting on the growth coming mostly from just taking share or are you also betting that the market will – you are getting growth from the base business in the overall market?

Merilee Raines

Mitra, we are really not expecting very much growth from the market. As I mentioned, that we are remaining cautious on the economy. So, we are really thinking that growth in the lab business, our business really going to, it is going to come from really the impact of the innovations that we had. So, that can come in the form of acquisition, you know, increased – customer acquisition, increased customer loyalty and some higher utilization because of the value of the products, but we are not, I guess just to be clear, we are not seeing much impact on our growth from just a pickup in the general economy.

Jonathan Ayers

Right. And what you might call same-clinic sales or same-store sales, (inaudible), but we are cautious on that and grow as steady as you goes, not worst, but not better than it has been historically. I will say though, if the number of innovations we have at IDEXX is such that don't always bring them up. In the lab business, we introduced a new menu item in October. We are pretty excited about from a medical point of view and that is our complete blood count, CBC, which is on majority of standard profiles that our central lab has got an upgrade and one of its important parameter is (inaudible), which is really again at the forefront of advances in medicine and the value of the CBC.

So, we are just, it’s that steady stream of new menu innovation that we almost take for granted right now, but each one is pretty exciting in its own rights that continues to set us in unique place in terms of the forefront of veterinarian medicine with our standard lab offering.

Mitra Ramgopal - Sidoti & Company

Sure thing. Thank you very much.

Operator

We will go the line of Erin Wilson with Bank of America. Please go ahead.

Erin Wilson - Bank of America

Hi, just a quick follow-up. You provide, I guess, a metric on the percentage of Catalyst and ProCyte placements that are new customers to IDEXX. Do you have that breakout by geographies?

Merilee Raines

For Catalysts, that was very consistent across geographies. We saw that in the US. I mean, US and Europe would be the primary, the placement rating in Asia Pacific, relative to the other two is still quite small. And I would have to look up the ProCyte piece on that.

Erin Wilson - Bank of America

Okay. Great.

Jonathan Ayers

I will say though, speaking of Asia here and strong performance we have, we are very pleased with how Japan did. And part of that was the introduction of ProCyte in Japan, which is actually not surprising. If you think about it being extremely well-received, Japanese are very picky about their medical technology and they really demand the highest standard of excellence and reliability. And of course, ProCyte meets that standard and it's also manufactured in Japan.

So, we really did have ProCyte and Catalysts and actually even the reference lab in Japan were all contributors to that good growth in Asia Pacific. It was certainly China and Australia and other places were also contributors, but we are in particular pleased with the Companion Animal business in Japan, which is a big market and one that overall our share in diagnostics is substantially lower than it is in other international markets.

Operator

We have no further questions. I will turn the call back to you, Mr. Ayers for closing comments.

Jonathan Ayers

Well, I want to thank all shareholders and investors for your continued confidence and for attending the call. I also want to take this opportunity again to thank all of our employees who may be listening to the call, and many do, because it is a good opportunity to get an overall update. And it is only because of our employees that we are able to continue to be successfully serving our customers with these kinds of innovations. So, with that, we are going to conclude the call, and we will be talking to you with our fourth quarter results in January.

Operator

And ladies and gentlemen, that does conclude your conference 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: transcripts@seekingalpha.com. Thank you!