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

Good afternoon, everyone. My name is Erin Wright. I'm the health care services analyst at Morgan Stanley. For more important disclosures, please see the Morgan Stanley disclosure website at morganstanley.com/researchdisclosures. If you do have any questions, please reach out to your Morgan Stanley sales representative. And with that, I'm happy to have IDEXX Laboratories with us today. We have the President and CEO, Jay Mazelsky, with us and as well as Andrew Emerson, EVP and CFO of IDEXX. So thank you so much for joining us. We're really happy to have you. It's been quite a road this year and something we're excited to dig into. But I'll turn it over to Jay to just tell us a little bit more about IDEXX. Tell us about your positioning in this unique and attractive, what we like to call the dognostics market.

Sure. Thank you, Erin, for having us. We appreciate the chance to have a conversation and share a little bit about the company as a whole. The thing to keep in mind about diagnostics, it's just such a foundational aspect of the practice of medicine. You can't treat unless you first diagnose. You can't uncover chronic disease without diagnosing. You can't assess the basic health line status of a patient without diagnosis. It drives about 80% of the activity within the practice, if you think about the prescription of specialty diets or therapeutics or vaccines. Very often, it starts with the diagnostic. So directly, indirectly, it's about 80% of that activity. We're a global leader. Our strategy is to really provide best-in-breed solutions, both point of care and reference labs, integrate that with software, help support both the practice of clinical medicine but also workflow optimization and client communication and staff productivity, all the things that are important to practices. So with that...

All right. Let's get right into it. Okay. So let's talk a little bit about what happened in Maine. And at your Investor Day, you highlighted new innovation drivers. One, you reaffirmed your long-term targets, 10% plus organic growth, 15% plus, which is a little bit different but EPS growth. Can you talk a little bit about the moving pieces to bridge to that growth, the key drivers to get there while the industry still kind of recovers from a vet office visit standpoint?

Sure. So Andrew, why don't you talk about the growth algorithm and I'll talk about some of the individual pieces like innovation.

Yes, sounds good. So we have a very consistent financial framework that we outlined. And really, it starts with having a really investable business focused on the long-term potential. We see a really meaningful $45 billion opportunity in front of us within the diagnostics space and that's what we're focused on, to Jay's earlier comments. So with that, our CAG diagnostic recurring revenue growth algorithm is really focused on continuing to align with new customers, continuing to expand globally and place core instruments while we focus on innovation and utilization over time. So we've been really successful at expanding utilization within the diagnostic area. We look at the blood work inclusion per clinical visit as a key parameter of that and we shared that 50 basis points, which has been our long-term historic average, can contribute 1% to 1.5% growth associated with really the diagnostic usage within our customer base. Innovation, which Jay can highlight in a little bit more detail. We outlined an opportunity for about 2% growth with that. So a combination of acquiring new customers and really focusing on expansion, aligned with net price increases over time gives us the opportunity to continue to grow CAG diagnostic recurring revenue at 11% to 14%, if you assume a more historic range of 3% clinical visits. But even if clinic visits were just flat, we see the opportunity to continue to grow the business 8.5% to 11% just in terms of execution and our core strategy. You pair that with the focus that we have in software, where we see the opportunity to grow our recurring revenue base by 15% plus and mid- to high single digits in our Water and LPD business, that really leads us to that 10-plus percent revenue growth that you had highlighted. And we are -- benefit from -- as we grow, we have really high incremental gross margins. So that allows us to continue to expand our operating margin profile while reinvesting back into the business to achieve that long-term objective that we have. So finding that balance, we're focused on the 50 to 100 basis points of annual comparable operating margin expansion over time, which leads us to the 15% EPS expansion. So I think we feel really good about those parameters and we've been executing towards that today.

Yes. So maybe just a word about utilization. Our business model is based on growing utilization. And that's really a function of a couple of different things. It's the innovation, executing the innovation agenda and road map and then the commercial engagement piece. So a lot of the innovations that we've introduced over time, whether it's technology for life or new platforms like IDEXX Cancer, Dx or inVue Dx or future analyzers, comes down to driving blood work inclusion, driving testing inclusion. And we do that by solving these unmet clinical problems or in some cases, just workflow challenges that are being done manually or not being done as often as they might otherwise be done.

Okay. And then how is -- how are trends from a vet office visit perspective progressing throughout the quarter? And implied in your guidance, I think it's a negative 2% level in terms of what you're anticipating in terms of vet office visits for the balance of the year. Is that playing out according to plan? And how confident are you in that? And what ultimately turns this market in your view?

Yes. So we don't provide intra-quarter updates on that. I think what we've said is, at the first half, clinical visits were down 2.5%. And it was -- when you take a look at wellness versus nonwellness, they were pretty much moving in trend together. The -- our view is that both capacity and the macro impacts have largely stabilized. We're at a point, I think, on a go-forward basis that we can begin to build off of that. Obviously, it's a factor in the growth algorithm. It's not the only factor. We're driving through innovation and commercial engagement, the growth outside of what clinical visit -- outside of the clinical visit piece. What we guided to as part of our Q2 earnings call is that we assume clinical visits would remain in a comparable place or space that we saw in the first half. I do think to your question, there are longer-term trends that are extremely supportive of seeing clinical visit growth. We know that there is this huge pandemic puppy and kitten boom. They're now at the 5-plus year point if you adopted a puppy in 2020 or maybe you adopted a pet that wasn't a puppy but a young adult. They're at the point now at that magic 6.5- or 7-year point where they just consume more health care, just like we as humans need more care as we get older. And the percentage and absolute value of diagnostics in that equation grows in an outsized way as a pet ages. The other piece that we think is important and we've now been tracking for almost 3 years is, pets are living longer as a result of what we're doing and the specialty diet companies and the therapeutic companies, they're living appreciably longer. And we know that's a good thing. We love our pets and we want them to remain healthy and happy as long as they can but they consume more health care, too. So it's a good tailwind for the business. And I think we're looking at a trend line over time that reverts back to what we've seen historically between that 2% and 3%.

Okay. And then you talked about utilization being an important part of that algorithm. I think utilization did tick up meaningfully higher in the most recent quarter, depending on how you want to calculate your CAG premium net of pricing. How sustainable is this sort of level? We're back to kind of pre-COVID levels in terms of utilization on that front in that high single-digit range. I guess, can you talk about what's happening in the U.S. and outside of the U.S. on that front and how sustainable that is?

Yes. A couple of pieces that we think drive -- can help drive that outside of whatever clinical visits do. The innovation piece is extremely important. Obviously, I keep coming back to that. But if you take a look at Catalyst and we've had 3 new parameters in really the space of a year, the Spark QC, which is really a calibration test but pancreatic lipase and cortisol, these are significant specialty tests that really support pretty pervasive clinical use cases. And we think continuing to provide that menu expansion, we see at an enterprise level an uplift in the absolute number of tests. And there's added -- they're typically done with broader panels, whether it's chemistry and hematology. And then on the reference lab side, we've talked about IDEXX Cancer diagnostics. We think over time, as that menu expands from canine lymphoma to canine lymphoma plus mast cell plus one other in '26, you reach a critical mass of panel tests that represent over 1/3 of common cancer cases in dogs, can pull through wellness testing at the reference lab. So that's extremely important. We also think that if you take a look at outside of the U.S., our commercial footprint is -- we're expanding that with a number of different country and market expansions that could help drive growth. We know when we visit customers, they use more diagnostics through awareness and education. They grow faster, we grow faster. So all those pieces, we think can contribute to a more sustainable growth profile as we outlined.

Just in terms of the guidance itself, as we just mentioned, we did say we updated the clinical visit outlook to be at the same level as the first half. And yet our total CAG diagnostic recurring midpoint is about 40 basis points ahead of what we saw in Q2. So that gives you some indication about how you might want to think about the premium at least for the rest of this year and we'll certainly be continuing to report on those metrics going forward.

Okay. Got it. And then on price, price realization historically is in that 3% to 4% range. 4% to 4.5% is what's expected for 2025. And how are you thinking about price realization into 2026? Does it go back to that more normalized range?

Yes. So we're obviously not updating our '26 guide today. But just in terms of what we have seen over the more recent period, we start with the value that we deliver when it comes to our price expectations. And from there, we also have to take into account the inflationary environment that we're operating with in terms of costs that we're having to see and manage within the business. And that's really what you saw, I think, in the recent past in '23 and what we've seen is in '23 and '24 and '25, it's kind of stepped down. And right now, we're at the high end of what we outlined in terms of the long-range financial plan, which was 2.5% to 4% price. So that 4% to 4.5% range is really on the upper bound there and we know we're still dealing with levels of inflation that are more elevated than history. So I think we'll continue on that path and make sure we're balancing that value equation and making sure we're successfully teeing ourselves up to achieve that long-term potential. We don't want to get too far ahead of ourselves in terms of pricing. Really, we're looking to expand the sector and make sure we're driving volume.

The one thing I would add to that, we've done a number of things relative to pricing that I think have also provided substantial value and may have mitigated being at some of the higher end range. Like if you think about cancer diagnostics, pricing it at $15 as well as $15 when it's included as a test. That's a great example of, I think, expanding access. In other cases, fecal antigen and Cystatin B for urine test, for acute kidney injury, we've included those at no additional price. So some of these very common high-volume tests, we've added value. We haven't added price necessarily. And I think that's been a factor driving volume.

Okay. And when you add on those new indications in terms of Cancer Dx, that is a price escalator though, for you on top of the $15? Is it correct?

Well, we haven't communicated that, except at Investor Day, we said in the case of mast cell in addition to lymphoma, we'd like to keep it within the approximate price range of where we were, say approximate turnaround time and performance and price range.

Okay. Got it.

When it's sold as part of a panel.

Okay. Got it. Got it. And then on -- understanding you're not commenting specifics on 2026 but then you spoke about price. How do you think about some of those different headwinds and tailwinds as we go into 2026? Obviously, innovation being a key tailwind for you but how do you kind of rank the key headwinds and tailwinds?

Yes. So again, we're not providing a '26 guidance. But I do think we're in the early stages of innovation. So we feel really good about kind of the innovation cycle and being able to build that recurring revenue base. So in the case of inVue Dx, we certainly see more capital revenue this year. We highlighted that we anticipate 5,500 placements and approximately $60 million on capital. But that really builds the durable recurring revenue base over time. So that will ramp as we get continued access into accounts from that perspective. So that, along with, again, expanding Cancer Dx and some of the new Catalyst menu that we've launched, whether that's pancreatic lipase last year or cortisol this year, those give us some nice tailwinds in terms of how we'd be thinking about our overall volumes. As Jay mentioned earlier, too, we're focused still on continuing to expand our global reach. So 3 OUS countries that we're continuing to expand our sales force into and make sure we have reach and customer intimacy, help share best practices and really build that belief in diagnostic usage over time. So that's how we tend to think about it. But I think we have a good foundation that we can continue to build off of.

Okay. I want to dig into inVue here. I mean this is an area that, I mean, you've significantly exceeded my initial expectations in terms of placement trends for this product or this instrument by the end of the year at 5,500 placements. You're at -- still at -- you're still forecasting 20,000 by -- within that 5-year time horizon. Is that still the right number given the trajectory that you're on? Has this exceeded your internal expectations as well? Can you talk about a little bit more about the -- how we should expect kind of the placement cadence, which I do think there's a little bit of an overfocus on that placement quarterly cadence and it should really be focused on the consumables flow-through as well.

Yes. I mean we haven't updated that 5-year 20,000 unit placement goal or aspiration. We'll do that. We tend to do that when we have some quarters behind us in terms of what that trajectory looks like. I think what we've learned is that we've hit the sweet spot with customers in terms of menu that addresses some of the productivity challenges within the practice in terms of 15, 20 minutes of preparing a slide but also clinically, your cytology, blood morphology, these are very well understood, high-volume clinical use cases. And so an instrument that addresses the workflow bottlenecks as well as provides consistent and accurate output in those areas. So something that a lot of veterinarians really welcome. And then you add F&A lumps and bumps and the whole dynamic around -- most dogs through their lifespan will have those. They're challenging to diagnose, whether it's deposits of fatty acid, fatty deposits or cancers or precancers. I think providing a solution that will give the veterinarian indication within that practice window when the pet is there is something that's very well received, has been very well received in the market. So we expect as we roll that out towards the end of the year in addition to the existing menu that enthusiasm and momentum that we see in inVue will continue. Hard to know quarter-to-quarter what that looks like but we think we have a winning solution.

But I think the focus also is on that recurring revenue streams, the flow-through in terms of the consumables. Can you talk about how you're going and you're recontracting, renewing these contracts under presumably IDEXX 360 relationships, locking them into minimum revenue commitments and this is driving a considerable amount or outsized consumables growth consistent with what we saw kind of in the second quarter. I mean, am I wrong to think that the consumables growth in the second quarter didn't really have much to do with inVue consumables, specifically with IDEXX's broader package.

[indiscernible] Yes, it's the broader -- a couple of things to keep in mind about how we think about IDEXX 360 and new instrument placements and the consumable strength. So just maybe a couple of details to anchor my comments. For inVue, we've said the consumables brackets are between 3,500 and 5,500 F&A lumps and bumps inclusive. And we're still early in the launch. It's tracking well against our expectations. And then at some point, we'll provide an update in terms of what that looks like. The thing to keep in mind about the instrument placements, there are a lot of direct and indirect benefits when we come out with a new instrument. It really is a very big deal. Most instruments are placed through some marketing program, IDEXX 360 being the predominant program that the customers use. To your point, it's a placement. There's no cost upfront and then there's a volume commitment connected with that. We use that as a recontracting event for customers who may not be using any of our equipment, we then use that to gain access that we didn't otherwise have. We potentially could place a broader suite that's 100% drop-through in those instances. For those cases where the customer may be an existing IDEXX customer, they use our chemistry, hematology, maybe SediVue, we can place it in inVue, use that as a contract extension, as a way of inspiring a deeper relationship. And with that volume commitment, they may be inspired to use a broader portfolio of our testing solutions. We can satisfy that volume commitment either through our in-clinic solutions or reference labs or telemedicine or software, if it's a Software-as-a-Service type model. So there's a lot of both indirect and indirect benefits. We have seen and I shared this on the Q2 earnings call, a nice uptick in contract extensions and renewals using that as inspiration.

We continue to place Catalyst at competitive clinics as well. So we're expanding our customer base more generally, both the U.S. -- in the U.S. and internationally. That certainly helps us continue to create a recurring revenue stream. And we've had a new menu on something like Catalyst with pancreatic lipase and Smart QC, which we really benefit by having that large instrument base. There's rapid adoption of some of these specialty tests over time. So I think we benefit from those types of characteristics as well. But the focus is really on continuing to drive utilization within our core customers through the expanded use of diagnostics.

So hopefully, is this all driving these durable recurring revenue streams. But then on top of that, you also have potentially upside from an inVue utilization perspective, depending on how it shapes out relative to your expectation. Is $90 million really the right flow-through in terms of the high-margin consumables? I mean some of our survey work suggests that it should be higher but what are you seeing in terms of use cases, feedback? And what are the vets saying in terms of -- how are you seeing the traction in terms of consumables?

Yes. I'll describe qualitatively the -- what we're seeing and what customers are telling us. Most -- I would say the vast, vast majority of customers do both ear cytology and blood morphology. There are some customers who use -- who think about inVue primarily through one lens or the other. And it depends a bit on the patient use case in terms of what they're trying to determine. The receptivity has been great. The thing to keep in mind is that veterinary technicians are not lab technicians. And I don't think that's a controversial statement. But what they'll tell you is too often they get trapped into spending 15 or 20 minutes trying to prepare a slide, doing a chemistry experiment. And they just don't have the training or the time to often do those well. So all things being equal, that workflow benefit is something that's very important to the practice and the technicians themselves. When you layer on top of that, the fact that you're getting consistency and high accuracy, it tends to drive more usage. We know in the case of blood morphology, for example, about 2/3 of the cases of a CBC standard blood work produces a result that suggests you should do a follow-on blood morphology. And in only about 10% of the cases in the practice does that happen. And the reason that doesn't happen more often is it gets back to slide preparation. It gets back to -- we don't have 20 minutes to stop and do a blood morphology, maybe it needs something, maybe it doesn't. So it's not like there's this yawning clinical gap where veterinarians and technicians are saying, we shouldn't be doing this and now we're going to be doing something that may not add a lot of value. They think they're starting from a point that we should be doing this. We'd like to do it. There's clinical value. We just don't have the time or we're just not happy with the variability that results. So we think there's a really nice utilization play there in terms of the quantification itself other than what we've provided, the 3,500 to 5,500 and the 20,000 placements. We haven't updated that since the initial launch.

So we'll wait on that.

We'll wait on that. That's a long way of saying, to come.

Yes. Okay. So you have Cancer Dx, you have inVue. I mean I want to say that this is probably the most robust pipeline I've seen from IDEXX since probably covering the company. I mean now you also have on top of that [ MultiQ ], which you haven't said much except for the name for us. But you're more than welcome to announce the [indiscernible]

Can we show the picture?

Yes. Can you talk a little bit about the time line for the new platform? It's noncannibalizing, I think you confirmed and will it have a material contribution in 2026, '27?

It is noncannibalizable. We provided a profile of what we think from a placement standpoint in terms of the instrument placement standpoint it represents. We haven't provided a time line with [ MultiQ ] other than to say that we're making really solid product development progress on it. Yes, instruments are a bit different than, let's say, tests that you add to a Catalyst in a sense of we like to preview them because there's some preparation from a customer and field standpoint around budgeting and things that are important that we think there's some benefits of previewing it. We're excited by the instrument. It very much fits the profile of what we think drives successful adoption, which is, the performance is as good or better than what you can get in the reference labs. It's very easy to use. It solves sample preparation and overall management challenges that the practice may be saddled with. It fits within the workflow. We think the economics and turnaround time are attractive. So we're excited by it and we'll provide additional specificity in the future.

And on Cancer Dx, you did recently announce the expansion of the offering. It seems that other constituents here at the conference are also very excited about Cancer Dx and what cancer diagnostics, generally speaking, can do in terms of innovation across therapeutics and otherwise. So can you talk a little bit about the market opportunity, the reception of Cancer Dx thus far? It's been still relatively early but yes, any insight you can give us? And what is this doing to ultimately drive market share gains to across the competitive lab space?

Yes. This is a very significant unmet need. Cancer diagnostics, we've been in the cancer diagnostics business for almost 3 decades with pathology. But the challenge is and I think this is really well understood as you -- if you wait until the patient is clinically symptomatic, they tend to be at Stage III, Stage IV cancer. And the lifespan depending upon the cancer and the virulence of it, maybe a couple of months to 5 months, something in that range for the vast majority of cases. So being able to detect and screen earlier with high specificity, meaning you're not getting false positives for common cancer cases, starting off with dogs is very significant. In the case of canine lymphoma, it represents almost 1/4 of all cancer cases. There are excellent treatments already on the market in terms of CHOP protocols being able to do chemotherapy through an infusion path that we've seen rapid uptake, not just from IDEXX reference lab customers but also from competitor customers who don't use this as the primary provider, about 15% or so. We think that's very significant. It requires a break in workflow and how they practice. And I think veterinarians think about this as, I don't care who's providing it. We just want to make sure we're getting the best tests for our customers. The way we break down cancer diagnostics is in 2 categories. One is an aid-in-diagnosis So that's, the patient is suspected of having cancer. It's a confirmatory test. The other one is a screening test. We know both the veterinarians and pet owners understand cancer, both at a visceral or motive level as well as the clinical benefits of early detection. So there's very high receptivity to doing cancer screening tests. And there's a very significant group or cohort of dogs that get cancer at early ages. When I say early, 4 or greater, you start seeing a significant increase from an incidence standpoint relative to more classic 7, 8 years of age. So going from lymphoma, canine lymphoma plus mast cell plus one other in '26, you get over that 1/3 of all cancer cases. And price -- where we've priced it, including it, screening, we think can drive a paradigm shift in terms of how you think about cancer and its inclusion in just wellness screening for dogs. And so we're excited. We think that over time can be a multiplier in our reference lab business from a volume standpoint. And the early indications are very well received.

Okay. You have over 1,000, I think, in your field sales force and technical service representatives globally. How are you thinking about sales force expansion? You talked about some commercial initiatives at Investor Day more recently. And then on that front, how do you think about other levers too from a margin expansion standpoint and balancing kind of some of those investments that you're making on that front? What does peak margin look like for IDEXX longer term?

Yes. Why don't I talk about the sales force and I'll have Andrew address some of the initiatives that drive margin expansion. The sales force expansions are really around increasing the density, the footprint of our sales organization. In the U.S., we have approximately 115, 120 accounts per account manager, primarily diagnostic consultant. Outside the U.S., it's at least twice that depending upon the country and market. And the -- just through experience and frequency of visits and the amount of time that they can spend with customers, the optimal reach and frequency metrics are achieved at that rate we see in the U.S. with our existing portfolio. Now we've expanded in the U.S. as our portfolio has expanded in metropolitan areas from a population standpoint, they've gotten more dense. But we think that model and those metrics for the model are about right. Internationally, we're not close to where we think we can be. Now you don't want to rush it. The market and the sector has to be ready and developed. But we know we can drive that. It's a function of both innovation as an input and IDEXX creating awareness, education and then ultimately, consideration, which has resulted in growth through that playbook. And so we'll continue to evaluate where there are opportunities for expansion. And we know from experience, the return on that is pretty quick. It's not something that, generally speaking, is a high-risk strategy. And then, Andrew, why don't you talk about...

Yes. And those investments are, to Jay's point, very rapid and quite high. And so those are the types of investments we look to make. And part of that is driven by our ability to continue to expand our gross margins. So when we think about our comparable operating margin expansion of 50 to 100 basis points annually, really, that's going to be gross margin led as we see significant opportunity with incremental gross margins higher above our overall business across all our major modalities, including things like software over time. So that growth and that recurring nature of the growth really enables us to expand our gross margin as we find the right balance to reinvest in operations as well as expand into R&D and sales as well. So we're focused on expanding gross margins. That's a key parameter for us. We've talked about areas like reference labs with automation and digitization and leveraging newer technologies like AI to create efficiencies within the operation itself. But we also benefit just again from that scale. So we have a lot of initiatives that go on. We think there's a long runway ahead of us in terms of gross margin expansion but we're trying to find that right balance of reinvestment to achieve our long-term objectives.

And Andrew, you're not new to IDEXX but you're newer to the CFO role. Any changes in philosophy around capital deployment? And how do you think about potentially introducing a dividend as a use of capital here? Or can it be better used elsewhere?

Yes. So we -- I've been part of the company, to your point, for about a decade and I've been part of the senior leadership team for quite a long time. So I've been able to influence that and I don't think you're going to see any major change within the strategy that we have. As I mentioned, we had a very consistent long-term financial framework that we published in -- at the Investor Day a couple of weeks ago. In terms of the capital deployment front, we've been really successful at leveraging share repurchases over time to return excess capital to our shareholder base. We always want to be thoughtful about how we do that. We do assess things like dividends over time but it really starts with reinvesting organically and then returning excess capital to shareholders through share repurchases.

And as you think about all of this combined, I think in your growth algorithm, I want to go back to innovation just for the last question, just you have inVue, Cancer Dx, [ MultiQ ], all that kind of contributing to the 200 basis points in CAG growth in terms of innovation contribution. Or does that offer potential upside longer term just given how robust the pipeline is?

So we have obviously better insight to our overall pipeline. And we think that's a good long-term metric to use on average for innovation. Certainly, it captures some of how we think about the currently announced items. But again, we're continuing to invest in R&D over time.

Okay. All right. Thank you so much. Appreciate the time.

Thank you.

Thank you. Appreciate it.