IDEXX Laboratories, Inc. (IDXX) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Michael Ryskin. You may begin.

Great. Thanks for joining us, and welcome, everyone. My name is Mike Ryskin. I'm the Lead Analyst for Life Science Tools and Diagnostics at Bank of America. And I've also had the privilege of being the Animal Health Analyst here as well for the past 10 years now. It's been an annual tradition for us to host this Animal Health Summit every year in late February. I think it's a great opportunity to spend a full day focused just on animal health space, really take a little bit deeper into the topics and the issues that matter here. Over the years, we've had really great participation for companies in the space. We do again this year. And of course, really high interest from our clients and investors. Attendance and participation is strong every year, up again this year showing a large amount of interest in the space. And hopefully, you'll find the event to be very helpful and productive. We've got a great lineup of corporates and expert speakers today, plenty of exciting topics and debate that we're going to touch on. If you have any questions throughout the day, don't hesitate to reach out either through Bloomberg chat or email. There's also a Q&A box on the webcast portal. That's probably the easiest way to get our attention. But just ping us and we're happy to throw your question into the fireside chats. And with that, we're going to kick things off. Our first session this morning is with IDEXX Labs. We're pleased to host Andrew Emerson, Senior VP, Corporate and Finance, Soon to be CFO; and then Mike Erickson, EVP and General Manager, Point-of-Care Diagnostics and telemedicine. Andrew, Michael, thanks so much for taking the time being with us.

Good to see you, Mike. Thanks for having us.

Just to kick things off, I'll sort of throw in my opening question always sort of you -- you reported 4Q results about a month ago, initiated fiscal '25 guidance. Can you briefly run through how fiscal '24 ended, how the year played out and just sort of some of the key points in terms of how you see fiscal year '25.

Absolutely. So I think we saw a solid finish to the year. In Q4, our revenue performance came in above expectations. We saw a nice sequential growth coming out of Q3 into Q4, ultimately, and that was really across our business categories. We saw really strong growth within our VetLab consumable business, and that benefited from an increased installed base that we had on our instruments as well as benefits from some of the newer innovations like our pancreatic lipase slide as an example. So a really strong execution despite the fact that we did see continued clinical visit declines of about 3% within the quarter. As we think about how that plays out, the good news is as pets come into the clinic, we're seeing a really high quality of the standard of care being met through the use of diagnostics ultimately. We look at things like the diagnostic frequency as we gauge that, and that's really sustained at high levels within the quarter. So really nice benefits from a broader execution as well as just to close out to our 2024 year. As I turn to 2025 and the outlook, just a quick reminder. We're not confirming or updating guidance on the call today. But what we shared on our earnings call about a month ago, was we're planning for 6% to 9% organic growth -- revenue growth for the overall company. And that's really supported by a 5% to 8% CAG Diagnostic recurring organic revenue growth. Within that, what we talked about was the midpoint. We're assuming about 4% to 4.5% net pricing gains within the year. And that's come down a little bit from the approximately 5% that we saw in 2024. As we think about the volume side of the equation, we're anticipating about 2% growth associated with the CAG Diagnostic recurring revenue, and that's really supported by some of the recent and upcoming innovation and product launches that were expanding upon within 2025. So we feel really good about that. Again, at midpoint, we're planning for similar clinic visit decline levels that we saw in 2024, which were approximately 2% for the year. We feel like this is a well-calibrated plan and from a profitability or a P&L management standpoint, we're looking to continue to build off of a higher margin profile with about 30 to 80 basis points in comparable operating margin improvement year-over-year to deliver about 8% to 12% comparable earnings per share ultimately. So we feel good about the guide. I think obviously, it's a range here. And the lower end of the range would assume we see worsening effects from macroeconomic conditions, clinical visits being included in that -- in the upper bound would give a potential improvement from what we've seen in terms of trends in 2024.

And Mike, maybe if I could, I just want to build a little bit on the innovation point that Andrew just made. I'm coming up on 14 years here at IDEXX. And there's just never been a more exciting time. We're in the midst of the next wave of IDEXX innovation that we're very, very excited about. And here you've heard some of the milestones in Jay's recent update, but just to kind of retouch on those. And we kicked off the controlled a launch process for inVue Dx in Q4 of last year. This new cellular analyzer promises to redefine cytology at the point-of-care. We're on the doorstep of the launch of IDEXX Cancer Dx here in late March in North America. Again, will be transformative, both for early cancer screening, but also establishing cancer screening as part of routine wellness blood work. So we're excited about that. We're simultaneously commercializing three different valuable extensions to our Catalyst Technology for Life platform. Andrew mentioned pancreatic lipase. Also SmartQC and our exciting enhancements to the IDEXX Lab station, which benefits Catalyst and the whole of that lab suite. And then finally, our software business hit a number of milestones last year including the rollout and launch and rapid growth of Vello, our new mobile-first pet owner engagement platform. So as Andrew said, we're excited about this. We're focused on executing this, this innovation agenda that drives growth even in the midst of some of the clinical visit softness that you talked about.

Okay. Great. That's a great intro from both of you. I appreciate that. Andrew, maybe I'll go to you briefly. Just on the role in the transition, you're title is about to change in about 48 hours on March 1 as you formally take over the CFO role that was announced -- the transition was announced, I think, in November or December. So first congrats on that. And second anything you want to touch on? I mean, obviously, you've been with the organization for a while. So this isn't -- you're not new to IDEXX, but any early goals in incoming CFO, what are your plans sort of what are you most excited about as you look forward?

Well, let me first take the opportunity just to thank Brian for all his meaningful contributions to IDEXX over the years. He's truly been a mentor to me for the past about a decade since I've been here, hired me into that. He hasn't had an incredible ability to connect the data to building off of that legacy that Brian's instilled in the company. I think what you'll find is we have very similar data-driven approaches in how we manage the business and how we work with the broader leadership team from that perspective. And so there's more probably similarly than difference in terms of our philosophies. Ultimately, we're both focused on continuing to drive the IDEXX strategy, which is really about expanding pet health care and ultimately, through the use of diagnostics and software integration. So as I think about going forward, some of the areas that really excite me are things like our ability to continue to deliver innovation, both for productivity in the clinic, but more importantly, the clinical insights that we can continue to deliver. I'm personally a pet owner of 6, and I benefited from IDEXX Diagnostic Solutions over my years of being a pet owner. As an example, I had a Pomeranian who had kidney impairment early on, we identified through SDMA. We're able to change her diet, incorporate some medications and ultimately, she survived to almost 17 years old. So I feel really grateful for that. And I think it's those types of clinical insights and the work that we're doing to leverage diagnostics to identify conditions earlier so they can be treated and you get a longer, better quality of life for pets. So those are the areas that I'm really excited about and certainly, that leads us into some of what Mike just highlighted, in terms of upcoming launches that we have around things like cancer as well. So a really exciting time to be transitioning into this role.

Yes. And I'll mirror your comments. It's been a pleasure working with Brian. I wish him all the best. He's -- I joked that the transition in his retirement was announced, I think, 24 hours after I had them on the road in the fall. So I really hope it wasn't anything I said or did that pissed him off that much. But he'll be missed. It was always great working with him. So -- but look forward to working with you as well. Okay. So in terms of the conversation going forward. I'm going, so the way I think about IDEXX, the way I think about the questions on the business and the stock now is I'll split it into 2 baskets. There's -- part 1 is what's happening in the market, what's happening in the macro sort of in the background. Things like pet visits, things like price elasticity, consumer demand. And then there's the IDEXX specific factors, which is execution, commercial engine, innovation and all those sort of all the levers you have to execute above what the market gives you. But that's the lens I'm going to approach. So starting with the first basket, the market trends, the vet visits. I think that's where a lot of the debate and lot of the questions have been for the last couple of years. Andrew, in your prepared remarks, you kind of said that your 2025 outlook embeds similar vet visit trends as what you saw in '24, that 2% decline. I think for the first quarter, you expect it to be a little bit worse than that, which is relatively consistent with what we've seen through third-party data. So my first question, just what do you see as the reasons why this end market softness has lingered for so long because we're sort of 3 years into this down cycle now, and we've gone through half a dozen different theories, but as you sit today, why do you think visits are still as challenged as they are?

Yes. Thanks, Mike. So maybe I'll kick us off, and then we can touch back on some of the numbers. I think there are a number of different things, Mike, that we see, our factors that are at play here when we're talking about clinical visit growth. I'll just start on the -- you asked about the consumer side. I'll come back to that. Maybe just start on the practice side of things. Capacity constraints in the practice are still a challenge. It's evolved a little bit. It's less on the hiring front, that's normalized somewhat. But just in terms of hours of operation, the extent to which practices are open on the weekends, things like that. Also just the untapped productivity within the current workforce in practices. We do have -- a number of our corporate account enterprise are partners looking to hire veterinarians, add more staff to their networks. And so when you look at that, that's an example of adding to supply, which can support demand and growth. But that's still a play in the practice side. I know your question kind of touched back on consumers. So just looking at pet owners. We've shared this data multiple times. We study it deeply. Pet owners have always demonstrated a very high willingness to spend on their pets, above and beyond just about anything in their personal and family budgets. And for that reason, demand for pet health care has always been very resilient to economic ups and downs and so forth. But of course, it's not immune to a long-term macro and so as you've heard us say before, when we look through the data lens, what we do see is this cumulative inflationary effects acting on consumers and on the margin, causing some of them to maybe defer a wellness appointment or to a lesser extent, maybe defer a non-well procedure that they view is a bit more discretionary, something like a dental or something like that. Andrew mentioned earlier that at the same time, we are seeing bright spots. So the frequency of including diagnostics in the visit has sustained at a really robust level. And in fact, if you look at the wellness visit trends, it actually ticked up -- so that tells us that the visits that are happening are high quality that pet parents continue to really seek and demand a high level of care, which includes diagnostics when they're coming in, and we see those as positive continuing trends. I think the other thing that we see is our customers who are obviously wrestling with some of these challenges themselves are increasingly looking to partner with us on growth plans. I'm talking about both independent practices, but also, of course, our enterprise partners. They're looking at -- they want to understand ways that they can grow diagnostics, adoption, utilization, to accelerate growth in medical service to drive growth in their practice networks. They're looking for cloud software solutions that can tap into those productivity opportunities I talked about earlier. And so just the interest in those types of growth plays and productivity plays is increasing. And in general, the signal that we have is just a greater interest in growth through volume with those strategies, which, again, we think is positive, just recognizing some of the growth in recent periods has been through price. And so to the question of when will it return and how it will evolve at the high level, what I'd say is we're very confident that clinical visit growth will return to positive. It's difficult to crystal ball this type of thing, but it's certainly a when, not an if question. And the reason for that is because all the underlying secular growth trends that drive this over the long run are very intact and expanding. You look at that bond between people and pets. And still, as you go into younger and younger generations of pet owners, it's just stronger and stronger and stronger. You look at the population of medicalized pets and how it's expanded, particularly through the pandemic. And we know those pets as they age will have to come back and we'll seek more care and disproportionately more diagnostics as part of that. And so these are kind of underlying factors that we look to that give us confidence that it will return to growth. So in the meantime, we can't control that directly, but the things we're focused on are some of the things Andrew and I talked about in our opening remarks, and I think we'll dig into here in a little bit later in the conversation around innovation-driven growth. Those are things that our customers are really looking to. And then deep -- our deep commercial partnerships with customers to run these growth plays that they're interested in. Those are things working with our customers that can drive growth even in the face of some of the softness in clinical visits that you asked about.

And maybe just to build off that briefly. Mike highlighted the trade-off of some of the discretionary areas. Part of how we look at that is certainly through the lens of information we share on the well versus the non-well. In Q4, as an example, we did see the wellness side of clinical visits down about 5% versus the overall clinical visits of about 3%. So we are seeing those effects. That's one of the dimensions we pay attention to. And as Mike highlighted, I think over the longer term, we have confidence that this will come back given the underlying pet population expansion and the aging demographics that we're continuing to see.

Okay. Great. I want to follow up on a couple of the points both you guys brought up. First is Mike, you mentioned sort of the cumulative inflationary effect impacting customers -- consumers. Definitely have seen that. We've heard concerns on that and elsewhere, other pockets of our coverage makes sense. I guess the question to come back to from that is that cumulative inflationary effect, I think that's the issue is it's not getting less, right? It's -- inflation continues to make vet care more and more expensive. Maybe it's not increasing at the same rate it did in 2021 and 2022 when inflation was 9%, but it is still getting more and more expensive every year. So sort of how do you undo that? We've gotten questions from investors that the only way you undo that cumulative effect is if vet care is 20% cheaper one year to sort of like reset it, that's obviously not going to happen. So if it is a cumulative effect, won't it continue to become -- won't continue to be a problem going forward?

Maybe I'll just lead with -- I think when we think about the cumulative effect, it goes beyond just the veterinary services themselves, right? This is the broader CPI metrics. What we know is consumers are feeling pressures in areas like housing and automobile gas or in different areas, even in food to some degree. I think we've all seen things like the prices of eggs throughout the news. So when we think about it, it's really in that broader landscape. And certainly, the veterinary services having an elevated price impact over the years plays into that to some degree as well. But to Mike's point earlier, I think we have a strong confidence that -- and this has been proven out both through experience and our survey data, that pet owners are typically willing to make trade-offs in order to ensure the health of their pets, right? They really see them as loved ones as part of their family, and we see folks making those trade-offs. And so we expect that to abate over time and not necessarily a reset in kind of veterinary service pricing per se, but being able to grow into that. The other piece of that I would just highlight is it's not one kind of consumer at the end of the day. I think there is -- it's not homogenous. I think there are some tentacles here between the higher-end consumer and the lower-end consumer. And that's likely where you're seeing some of those trade-off decisions as folks are working through their own budgets as well.

So on that point, exactly what you just brought up there. I had a question from an investor come in is, do you think there was any change in owner demographics during COVID? So that excess, especially that adoption puppy boom cycle that happened in 2020, 2021, 2022, -- did the demographics change somehow in that where maybe it was lower income pet owners or people that -- you talked about the bond between people and pets. Maybe this is a slightly different demographic in terms of pet ownership today than it was 5 years ago, and maybe that's why they're a little bit more price sensitive. Any thoughts there?

We haven't seen anything like that. I mean we saw an expansion in the population of pet owners. We also saw many pet owning families add additional pets into the household. So we saw both of those things. But it's really more an expansion across all demographics based on the data that we've seen there, Mike. So nothing that would kind of point to kind of the kernel of your question. I'll just touch back on kind of what we said earlier. Looking at just the frequency of diagnostic inclusion in the visits is one of those key metrics. So seeing that sustain is a strong indicator that demand for a high standard of care is still there with the pet owners that are coming in. And so that's one of the key things we're focused on.

Okay. Fair enough. The other part of -- when I talk about the macro and some of those factors, the other part I want to talk about is pricing power. And I think it is related to underlying visits, but you talked about price this year in 2025 of 4% to 4.5%, a little bit lower than you've seen in prior years, 5% last year. I think you were more in the [ 7% ] range before that, but still above the LRP and historical trends. So it seems like price is normalizing coming back to historical levels. How do you weigh how much price to take in this environment? I mean I kind of think about it, you can go anywhere between 2.5% at the lower end, maybe 5%, 6% on the higher end. How do you arrive at 4%, 4.5% as the right level where you're still monetizing as much as you can, but not doing it to the extent that you're hurting your customers?

So maybe I'll kick off with just talking about our approach to pricing strategy and Andrew could tie back a little bit to the long-range growth formula. So I think the best place to start is just philosophically, what we're focused on is understanding our customers' most vaccine challenges, bringing forth solutions in the form of diagnostics, software, integrated software that solve those problems and help expand the sector and really bring real value to our customers. And so then in that context, when it comes to -- when it comes to pricing, we think about it strategically. First, through the lens that I just outlined, we always want to stay on the right side of the value delivery equation. And I think we do a good job of that overall. So that's a very important starting point. The second piece, and maybe we'll come back and talk more about this, but we have a real interest in, I think, a leadership role in expanding the sector and price can aid to that end, helping expand access or utilization of diagnostics. Cancer Dx pricing is a great example of that. And then third, we have to factor in inflationary cost impacts as you asked about. So our annual price increases, I think it's fair to say they reflect those 3 factors. Let me just come back and touch on that cancer point. I mean I think that's a great example of Cancer Dx, probably dig a bit more into that. But bringing forward this breakthrough technology in early cancer and aid in diagnosis, cancer screening is transformational from a diagnostic standpoint. But bringing it forward also at what I would consider breakthrough pricing, $15 when part of relevant wellness sick panels. And what that enables is it ensures that doctors, but also importantly, pet owners don't have to choose between doing one or the other, between getting early insights on cancer for at-risk dog and doing appropriate full blood work as part of a wellness protocol. And so that's an example of pricing that helps to drive utilization, and we think will drive overall and support overall expansion in the category of wellness diagnostics. I think the other important point I would make here is a number of innovations, Mike, that we invest in, invest substantially into and bring forward to our customers are brought forward at no incremental cost. So you think about things like VetConnect PLUS right I talked earlier about our IDEXX VetLab station enhancements. On the software side, certainly on the diagnostics side, you know a number of these SDMA included in all chemistry panels in the reference labs. -- more recently, Cystatin B included in all sick pet urine panels or Cystoisospora included into fecal Dx. These are all examples of really groundbreaking innovations that we brought forward or major enhancements to solutions that we brought forward at no incremental cost. So that's another thing. As you know, we don't set end consumer prices. That's really -- our customers do that. So we don't set those things. We do provide insight to our customers on just how to think about pricing, particularly the sort of differential pricing for the wellness versus sick business models, if you will, in the practice or practice network. You think about wellness diagnostics wanting to cast a broad net and really lower that barrier of entry and then also just the time required by the doctor to examine those results is more modest, 5 to 10 minutes going through things and how valuable that is to provide that and maybe price that a bit lower relative to sick diagnostics, we have a different kind of value proposition, a much more time-intensive activity to go through those results. And so it makes sense to price that a bit higher. So that -- those sort of consultative insights that we provide as part of IDEXX Preventive Care Simple Start, for example, are very much appreciated by our customers because, again, I mentioned this earlier, they're looking for opportunities to put in place and to implement growth strategies within their practices and their practice networks. And so when we're able to come in and provide insight and help them really operationalize a preventive care diagnostic strategy in their network, that's highly valued by the customers. And of course, that helps them grow and we grow through that, too. So it's beneficial for IDEXX too.

Yes. I think that's a key point is continuing to see the value from a customer lens and the products and services that we deliver, and that's a key focus that we have when we are pricing. Ultimately, you touched on this, Mike, right? We had seen kind of broader inflationary levels. That certainly had an impact on how we were thinking about pricing in that moment. That's certainly started to ease here, and you've seen our pricing effects play out as it relates to that over time. Coming back to kind of that long-range potential and the building block of pricing. What we highlighted at Investor Day over the summer was we anticipate pricing to be a 2.5% to 4% benefit to our growth profile here over the longer term. And I think when you look at 2025, we're more aligned to the higher end of that at this point because of that, and we're still continuing to deliver these types of innovations that Mike highlighted. So I think we feel good about where we're coming back in from a pricing or net pricing benefit perspective, and it is more aligned with how we're thinking about that long-term potential over time.

So one more point on price. I think you both kind of touched on it a little bit. In 2024, in the third quarter and fourth quarter, there's a little bit of noise around some of the -- some major contract renewals or sort of expansions with a couple of reference lab customers. Could you walk me through -- it's not even in that case specifically, but broadly how price renegotiation or price taking works with those bigger customers or bigger contracts the dynamic there where part of a consolidator or sort of your major customer accounts, if their existing contracts up or you're renegotiating with them, how you can use price as a lever?

Yes. So I think, Mike, as you highlighted, I mean, we have long-term agreements with our customers, whether that's a private practice or some of these larger multipractice groups. And often, what that looks like is we're giving value upfront for a longer-term commitment and use of diagnostic capability over time. And we're in that cycle, continuously having these discussions with our customers and making sure that, again, we're providing value in that equation. Really, the reason we highlighted the few contracts within 2024. And just a reminder, those actually happened over the course of the year. We highlighted it in Q3 specifically because it started to have a pricing impact on our reference lab business where you can actually see that in the growth rate. So that was really the dimension that we were trying to call out by highlighting that we had these 3 larger agreements that were both extensions of the agreement, but also expansions of the agreement. So the good news is while we felt some of that impact and pressure in 2024, we also still delivered on our 5% net pricing benefit that we had guided to ultimately. And when you think about the go forward, that really gives us a great foundation with our customers to continue to build off of that with the extension mindset for a longer recurring durable revenue stream that we'll be working with them on. So that's kind of how we think about it and certainly the impact of when we negotiate these, what we're focused on, ultimately, which again comes back to expanding pet health care and aligning on how do we broaden the use of diagnostics.

Yes. Let me just maybe build on that last point because I think any of these agreements really come back to a shared view of the future that we have with our enterprise partner oriented around growth, oriented around the very unique and important role that diagnostics and software play in driving that kind of growth in their networks. And they appreciate that these are -- diagnostics is a performance category. Software is necessary to be able to execute these things at scale. And so these are very -- these aren't commodities. It's very, very important parts of actually executing on those types of strategies. So that's really the starting point is that shared appreciation and understanding of the growth opportunity and the role that these categories play in driving medical services and overall expansion. And then the price of trade for volume is a fine trade to make. I mean these all tie back to growth for both parties. And so we're very happy to do that and it drives growth.

Okay. Okay. That's really helpful. There's a lot of innovation topics I want to get through, so I'm going to run through them relatively quickly. But Mike, maybe starting with you. inVue Dx, a lot of excitement about that launch. You've been talking about it for a while. I think the first time we really talked about it was the prior Analyst Day, so maybe 1.5 years ago. And then you guys did a little bit more of an unveil at VMX last year and then you launched late last year. So we've kind of been building up excitement for it for a while. You gave us a lot of metrics to think about in terms of -- you told us 20,000 placements over 5 years. You gave us some commentary on how to think about pull-through. You talked about the F&A rollout. Let's look at that placement target and sort of how 2025 fits into that. 20,000 over 5 years, so that's [indiscernible] a year, but you're targeting 4.5 in 2025. So faster ramp than we would have thought. We kind of were modeling a gradual ramp in year 1, year 2. You're sort of coming out of the gate doing 4.5 in 2025. Sort of what's supporting that? Sort of what gives you confidence in that ramp? And then the second part of that question is only 10 placements in the fourth quarter. We would have thought more. So just walk us through sort of like how you're metering the launch and how you're balancing your preorders with actual getting the units out there. .

Great. Thanks, Mike. So maybe just to reinforce a couple of things that you did hear when we have been talking about inVue Dx probably important to always set context here. When we bring forward a new premium instrument platform, it's a big deal. It's a big deal for us. It's a big deal for our customers, a big deal for the sector. And we only do that when we're prepared to do something that's transformational. We want to come forward with something that's incremental. And this is an example of that. inVue Dx will fundamentally redefine cytology at the point of care. And just to kind of dig a little bit into that, you look at cytology, the whole act of making a slide, it's incredibly -- it's hands-on, multistep, time-intensive, highly technique variable. I mean there's just countless different ways that it's done. And in our studies, we frankly have just seen how that translates into a lot of variability in the results. And this is if it's done on a microscope or if it's done on a microscope outfitted with a camera or some slice scan or something like that. It's really, in either case, hamstrung by the time-intensive aspect of sample prep and the variability that's associated with that. So inVue Dx, it just flips all that on its head because it removes the slide entirely from the process -- and this is really innovating on the edge of science and technology to enable us to study these slides in their natural 3-dimensional state through advanced optics and AI, precision staining, fluorescence, all of this kind of technology convergence that allows us to do that. And so the -- when we talk to customers about this, we know there's a tremendous amount of excitement, because this solves the actual problem that they have with cytology in the practice. And I think that comes through in what you heard from Jay on the call around, around 1,600 preorders that we have from customers. So there's certainly a lot of interest in inVue Dx because it hits the bull's eye from that standpoint. So as Jay shared, we initiated our control launch process in Q4. This is a tried and true process that we have. I mean this is the fourth premium instrument launch that we've done now in the past around 10 years. We always follow the same exact process because it works very well. Our customers have high expectations for us to bring forward a world-class customer experience, and we always deliver that. There's always some early tweaking that we have to do to make sure that we nail that. But we're very comfortable with that because, again, it's the process we've always followed. And so Jay shared the 4,500-plus number for the year that we will ramp to over time. That number is there. The 20,000, I think those are all things we're comfortable with. But I bring it back to the sort of the customer experience from our expansive field trials and those initial shipments, the things they're saying. It's amazing how it works. The workflow is so easy, 1 to 2 minutes of prep results in around 10 minutes. It's like nothing that they've ever seen before on that front. The launch menu, these are 2 very, very large categories of diagnostic testing between blood morphology, particularly when paired with the CBC to provide a comprehensive hematology solution with ProCyte and then [indiscernible] cytology, very common high-frequency, big categories of testing that will really benefit from automation, from taking the work out of the workflow for those 2 categories and then also the expanded insights that come with that. And then just the need to -- the removal of the need to have to train up technicians on how to make slides because that can be a multiyear process, quite frankly, particularly with blood smears, which required quite a lot of technique to be able to do those well. So corporate accounts are excited about not having to have that huge resource burn associated with that. So there's a lot of reasons why we're excited about inVue Dx and while we're hearing the types of things we are from our customers, we're following the process that we've always followed that works very, very well. And that's where we're at.

Yes. I think the 4,500 premium instrument placements for inVue Dx is a solid start to that 20,000 that we highlighted. I think we feel good about that calibration point. And that's approximately $50 million is what we highlighted on the call for instrument revenues this year, which is about a 1% benefit to our overall organic growth profile. And just a quick reminder, that's really just the instrument revenue side that we highlighted. I think the exciting part here is actually that longer-term benefit on the reoccurring side, right, the use in these categories with our customers and delivering a great experience for them and really continuing to get that recurring revenue stream over time.

And you mentioned F&A. It's a technology for like platform. So as the installed base grows, that drives growth, as utilization expands, that drives growth. And then the third vector of growth is expanding menu over time, which we've seen that really expand economic value of our Catalyst installed base. That will happen here as well, too.

Yes. I was just about to ask on that like F&A and the expanding menu. Any updates on timing for those? I know there's -- like you said, there's a lot of opportunity to leverage the platform to deliver more. Just sort of what are you thinking on pacing of those menu expansions?

No updates today beyond what was shared on the call earlier this year, later this year is what was shared.

Okay. Okay. Great. We got about 5 minutes left. Still have, I don't know, maybe an hour's worth of questions. I'm going to go quickly. One is Cancer Dx panel. A VMX, you guys -- you talked about Cancer Dx panel for a little bit, but you really gave a phenomenal presentation, I thought at VMX really focused on what the opportunity there will be. So it's launching very, very quickly. So just can you give us a quick rundown of what the opportunity is there? And more broadly, how to think about the cancer opportunity in general in Animal Health has sort of always been a question of how big could this market be, because it feels like a very underutilized market in canine diagnostics compared to what it is in humans. You've had experience with Nu.Q. You've had some experience with PetDx, OncoK9 in prior years. So you've been in the market. You've got some learnings from that. So what have you taken from those? And how do you think that positions you to sort of launch Cancer Dx.

Yes. Thanks, Mike. We're really excited about CancerDx. The reception of VMX was tremendous. Maybe just to set the stage here. So cancer is the leading cause of death in dogs. And if you look at in the U.S., 1 out of 4 docs will be diagnosed with cancer in their lifetime. We estimate upwards of 20 million dogs are at risk in North America when you factor age and breed and certain breeds have a higher proclivity to cancer like Boxers, for example. So the -- you asked about the overall size of the opportunity. We think it's very large. We estimate the global sector for diagnostics, $1.1 billion. And Andrew earlier talked about his dog. This is a personal thing for like any pet owner who's been touched by this in their lives. In our family, we've lost 2 docs to cancer. And in both cases, by the time we got a definitive diagnosis, it was just too late to do anything beyond just the basic kind of palliative care. And so this has been -- this has been the missing piece. Veterinarians are asked about cancer all the time in their practices. It comes up all the time, and they just haven't had the toolkit to be able to handle that. So Cancer Dx is breakthrough technology, this panel from the lab that can enable both early detection of cancer prior to clinical signs, but then also as an aid in diagnosis tool. So it fills that critical gap that veterinarians have. We're starting with lymphoma, as you heard, at VMX because that's one of the most common and most treatable cancers when it's caught early. And so it's a good place to start. I talked earlier about pricing, it's worth -- that's probably a good way to address your question around the total opportunity. We're pricing it at $15 to ensure that both doctors and pet parents don't have to make this false choice between early cancer screening and preventive care blood work. We really see this as becoming an essential part of doing wellness blood work, early cancer screening. And so that's why the $15. So the overall opportunity here is really twofold. One is just really expanding the sector for cancer diagnostics. But the second one is a multiplier on overall blood work and particularly wellness blood work in the practice. And so I mentioned the reception of VMX very, very strong. I mean you saw it in the booth, a lot of interest. It's personal. It's a missing clinical tool, but also on the growth front, and I'll just talk about some of our corporate partners who we had a chance to meet with at BMX, really leaned into this because, again, it connects at all these levels. A lot of them are dog owners. themselves. And so it connects on that level. They see the fact that this is a missing piece of the clinical toolkit. But on the growth side, really understanding that, hey, this will help to drive visits because there's such a pull for this. This will drive more engagement with diagnostics, things that will drive more medical services. It will help expand the overall envelope from a growth and care perspective. So a lot of positives to this. So we're on track for the late March launch that we communicated at VMX. And beyond lymphoma, we also shared we'll be expanding over 3 years to cover the majority of cancer types. So this, again, will be a technology for life strategy that will grow over time. So very excited about Cancer Dx. And we see it as another example, along with the others we've talked about inVue Dx and our overall VetLab suite and the innovations in the lab, software, which we haven't talked as much about as really being key strategies through innovation with our customers to help them grow and to drive growth overall.

Okay. That's helpful. We're going to go a couple of minutes over, if that's all right, just because I still want to cover a couple more topics. Andrew, maybe back to you. I want to touch a little bit on margins and sort of expectations for 2025 for margin expansion, but also kind of expanding that into the longer-term algorithm. So you've got some benefit -- some discrete litigation expense you're lapping from prior year. So you need to do a little bit of an adjustment to the margins. But essentially, underlying margin expansion is 30 to 80 basis points in 2025. How do you see that balancing between gross margin and operating margin, operating expense? Sort of what are the bigger drivers there? And how are you seeing that leverage despite the continued pressure on the top line?

Yes. So just in terms of our operating margin, you hit it right, Mike. On a comparable basis, we're targeting 30 to 80 basis points of improvement year-over-year. That's net of 160 basis point benefit from the discrete litigation items. So when you take a look at how we're planning to get there, it's really going to be gross margin led. What we know and what we see is we have exceptionally high incremental margins that are above kind of our overall average. So as we continue to grow, we feel like we can continue to expand the gross margin profile. We also have a lot of initiatives within our operations teams and reference labs as an example, to look at efficiency within those areas. So continue to drive those initiatives and make sure that we're delivering improvement on a year-over-year basis, and that scale certainly helps kind of us get that benefit. Additionally, we see high margin in our software business as well. The SaaS and recurring model associated with software really enables us to, again, continue to expand that gross margin over time. But this year, in particular, in 2025, what we did highlight is we have some high-level estimates for inbound tariffs. Certainly, that's an evolving area for us. We'll have to continue to pay close attention to that, and we'll provide updates as that makes sense. And because of the launch of inVue Dx and the incremental instrument revenue that we'll get, that will be a bit of a headwind for us on the product mix side as well. So I think we've factored those in. We believe, again, there's opportunity to continue to build off of this margin footprint over time. And a lot of that will be gross margin led as we think about the continued investment back into innovation and commercial to make sure we're continuing to grow into the potential that we have from a sector standpoint.

Okay. And then just one last one. Sort of thinking about margins, additional levers you might have if visits or just overall top line growth comes in a little bit on the lower end of expectations on the upper end of expectations, how should we think about margins? Like if it comes in a little lower, do you have additional levers to offset that? And on the other hand, if the business end markets are a little bit stronger, will you let that flow through or reinvest.

So what I would say is, obviously, again, it's a range, and I think we've calibrated aspects of how revenue may play out for the year within that range. When we think about our ability to adapt, I think we've been really good stewards of the P&L over time. We've continued to moderate where we needed to when sector trends or headwinds from a macro standpoint have played out and continue to deliver on that improvement in profitability. So I would anticipate we have levers that we can kind of look at, whether that's pacing some of our investments or how we may want to think about the delivery of that. But I think we feel good about the guidance that we have.

Okay. All right. We definitely keep going, but I think we've used up all of our time on that. Mike, Andrew, thanks so much for joining us. Really appreciate the time. Good luck on Saturday, Andrew, with the switchover and will chat soon.

I appreciate that. Thank you.