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

[Audio Gap] on Day 1 of the Raymond James Institutional Investor Conference. I'm Andrew Cooper. I'm happy to be joined here by the team from IDEXX. We've got CEO, Jay. We've got incoming CEO, Mike, and we've got CFO, Andrew as well. So the full team. With that, I'm going to pass it over to Jay for a presentation, and then we'll go down to Amarante 1 for a breakout afterwards. Thank you.

Great. Good morning. It's a great pleasure to have a chance to update you on IDEXX' strategy, a couple of what we think are significant opportunities. I'm Jay Mazelsky, I'm President and CEO of IDEXX. Just a quick reminder, this morning is covered by safe harbor disclaimer, a copy of which is also on our website. So with that, let's dive into it. We're blessed to really be able to support a veterinary profession and industry that we think represents an exceptional long-term opportunity. We pegged this at about $45 billion-plus TAM. Of course, we have to develop that over time. And I'll talk this morning about our strategies and pillars we use to really drive diagnostics testing. The thing to keep in mind about diagnostic testing is it's foundational to practice and practice health. You can't prescribe therapeutics or pharma or specialty diets unless you know what potentially as the patient. It's also a foundational part of just assessing basic health status. So diagnostics plays a unique role. And our strategy is very straightforward in terms of really developing the opportunity, and it starts with innovation. It's an innovation-driven strategy centered around developing platforms, not just platforms for point of care, but also platforms and software and our reference labs that provide really, I think, compelling extensibility. We're able to also innovate to take advantage and bring innovations for our customers to our large installed base. We have approximately 78,000 Catalysts, which is our chemistry analyzer. And this past 12-plus months, we introduced a number of important innovations, just as, I think, a great example of being able to bring cortisol and pancreatic lipase and new calibration technology. And of course, our customers are businesses. They're in the business of providing exceptional medical care, whether they're independent practices or corporate groups. They look to software to help them really deliver excellent medical care, optimize the workflow within the practices, engage their clients, support their teams, and there's nothing better than software and data, which provides clinical insights to be able to do that and increasingly enabled through AI. Of course, you can come up with exceptional innovation and innovations as we do, but you need a commercial ecosystem to support your customers. And we have a very large, sophisticated commercial group that are subject matter experts that partner with our customers that help them achieve their objectives, that grow over time through awareness and education, relevant testing. The net result of innovation and partnering with our customers as trusted advisers is we believe that there's an opportunity to grow our top line at 10-plus percent over time with really attractive high return on investment type characteristics to the business. Let me just set up my discussion this morning and share with you how we think about our portfolio. You may have noticed that the patient or the customer, the veterinarian and pet owner are at the center of everything we do. Our customers typically use both point of care and reference labs. It may be situational depending upon the patient condition and circumstances. It may just be preference. And so our strategy around innovation is developing best-in-breed innovations, whether it's point of care or reference labs, tying it together through software and creating a seamless experience. And I'll cover each of these modalities in the next 15 or 20 minutes and give you a sense of how we think about them, how they come together in a very integrated way. Let me now talk about the opportunity, and this is on one level, it's a financial slide. On another level, it's an output from a successful articulation and execution of our strategy. You've seen that we have been able to grow through different time periods, double digits, the U.S. at 10%, international at 200 basis points faster. And the -- just to call out the different characteristics of these time periods from 2015 to 2020, you see it was 13%. What drove that is we introduced a new chemistry analyzer called Catalyst One in 2014. And at least in North America, we went direct. So we began to directly represent our products and solutions and directly with our customers. Internationally, you see that we've been able to grow faster. Part of that is investments we've made, not just in our commercial organization, but building out the enabling infrastructure, reference labs, logistics, VetConnect PLUS, which is our diagnostics portal, commercial expansions even more recently, and I'll share with you what those look like. And even in the U.S., where we've seen some headwinds with capacity and macro factors, we've continued to grow that at a fairly rapid pace. We think that testing and diagnostics testing is relatively underutilized that there continues to be really nice runway over time to develop these markets. So to double-click on the international piece, you see the 12% CAGR is pretty linear over time. As I mentioned, a couple of things have really driven that commercial expansions. We see in our country markets, Germany and the U.K. and Australia and Japan, they love their pets and consider pets to be members of their household just like we do in the U.S. It's just a little bit earlier in terms of overall development. And our strategy as a company is to help drive that sector development. And we do that, as I mentioned, through enabling infrastructure, new reference labs, commercial expansions, building out capability across the full value chain. We also do that through product development. If you take a look at the growth in the installed base, it's been very significant from a -- through a premium instrument lens. Hematology, as you can see from the color code there, has grown very substantially. That was a result of ProCyte One, which is a hematology analyzer we introduced quite some years ago that from a physical characteristic, economics, ease of use fits what are hematology-first markets in many of these countries and more recently, inVue. So we see a very significant opportunity over time as you build that installed base you benefit from the flywheel as you inspire increase in testing. A little bit about the U.S. geography. As I mentioned, it's a little bit further along and mature than some of our international regions. But I think what this highlights is this foundational, very important role that diagnostics plays in practice health. So over a 5-year period, which is a fairly significant time period, clinical visits have been very modest at 30 basis points. But total practice revenue and clinical revenue is -- has grown approximately 6.3% to 6.9%, respectively. Diagnostics revenue, 90 basis points faster than that. That gets back to you can't treat, you can't assess basic health status unless you first diagnose. And then in the case of IDEXX, we've grown 180 basis points faster than that average. And I'm often asked, why do we do that? What explains that? It comes down to a variety of factors. Our diagnostics are differentiated. We uncover more. And when you uncover more, you find more things and you treat them. It's also integrated as part of a workflow, so you can integrate and harmonize care protocols. You can make it very easy for customers to test. I'll talk about our point-of-care platforms in a minute, but they're load and go. You don't have to get into very complicated sample preparation and management activities. And that drives diagnostics usage over time. A couple of market or macro, I think, tailwinds that I'd like to describe, and this is a very important one and one that we're very proud of as a company. Pets are living longer. In fact, dogs and cats, approximately 2 years longer, just over a single generational lifespan for these pets. Now a lot of things explain that. There's been a mix shift into smaller breeds of dogs, the smaller dogs live longer than larger dogs. In the case of cats, they're being kept indoors, which is more often, which is safer for them. But also the role of innovation should be understated or underappreciated. The innovation that we have made in diagnostics in terms of uncovering more and really assessing the basic health status of a patient, innovation that our colleagues in the pharma space and specialty diet or nutrition space have also contributed. This is good for pet owners. Those of us who have pets, we love the dogs and cats that are members of our family. It's good for veterinarians because they're dedicated and very purpose-driven to provide longer lifespans and healthier pets. And it's good for business because as these pets age, that I'll share with you in just a minute, they consume more health care. And so this is a slide that we have, it's a subpoint of this notion of as pets age, they consume more health care. This is broken out or spotlighting specifically diagnostics. And the way to think about this is just like very analogous to what we as humans experience. But as we get older, we have more disease typically and that you need more health care. In the case of pets, it follows that exact same relationship. And you could see as they progress from young to adult to senior and geriatrics, significantly more diagnostics is used. And in fact, diagnostics, both in an absolute value sense and as a percentage of total health care spend increases disproportionately. So we think that this -- as pets live longer, as they age as a result of what we saw a step up in pandemic, that there's a tailwind connected with medical services consumption and the use of diagnostics, which drives that. A little bit more about the pet population piece because that's the other very significant tailwind in front of us. The -- during the pandemic 2020 to 2022, so that 3-year period, there was a 4x increase, 4x relative to the pre-pandemic baseline of 2019 of the number of pets that were adopted. In the U.S. alone, it's over 20 billion pets. These pets, as they age, getting back to the point that I made earlier, they're going to use more health care, consume more health care and veterinarians are going to use more diagnostics as part of assessing and treating patients. We, in fact, as we've indicated in our last 2 earnings call, have begun to see the front end of that, what we think may be the front end of that green shoots, if you will, within that age 5 through 7 cohort, where on a nonvisit or nonwellness clinical visit standpoint, we're starting to see slightly modestly positive growth in that respect. So typically, if you look at dogs, just to maybe highlight that at age 7, historically at age 7 or so, they need more medical care. And that line begins to pivot and goes up. So we think that this is another long-term tailwind to the business. Let me talk about now going from tailwinds to testing and how we drive testing utilization. It starts with innovation. Innovation is an important part of our value proposition to our customers, solving their most challenging, not just medical problems, but business problems. If you think about practices as in the business of providing medicine, they can be independent practices, they can be corporately owned practices, but they need solutions and technology is really helps provide that solution. We have accelerated the investment that we've put into innovation. If you think about this in chunks of $1.2 billion, [indiscernible] the tape beginning of 2025, we'll invest approximately at that level in a period of 4-plus years. If you compare that amount and how long it took previously, it was 7 years and before that, 20-plus years. So we're investing more. We're very focused, I'll share with you in a minute, and across this broad solutions portfolio, premium instruments, biomarkers or menu, software, data and AI enablement. Having now almost 4 decades in human health and animal health, I can tell you, very few companies have this type of broad capability and competency across all these areas and how we bring these areas together for fit for purpose, fit to task for what our customers want. I'd say that even though we're spending and accelerating in innovation, solving our customers' most challenging problems, we're very focused. We're disciplined capital allocators. We're disciplined and prioritize where that investment goes. We think about this in terms of disease states or disease conditions that offer multiple billion dollar TAM over time. Now in the case of vector-borne disease, that's a great example. We've been investing in vector-borne disease for over 3 decades, starting with heartworm, expanding to include the full vector-borne disease of Lyme and of anaplasmosis and ehrlichiosis and then more recently, Leishmania in some of our international country markets. We continue to improve performance. We brought rapid assay and that testing portfolio into the IDEXX diagnostics ecosystem with SNAP Pro, and this is a great business for us. Parasitology with fecal antigen, another great example, where we introduced fecal antigen at our reference lab, which detects more. We're detecting proteins before the eggs become available, so we can detect more and we can detect earlier. And then we expand the menu more recently over the last couple of years, flea tapeworm and Cystoisospora. Renal, we reimagined what was possible in renal, starting with SDMA in 2015 to really detect far earlier than creatinine chronic kidney disease or kidney impairment. We expanded to include Cystatin B, which is an acute kidney injury marker. And the importance of this and the focus of this is driven by the fact that kidney is really our indication for overall patient health. And more recently, with oncology, and I'll share with you, provide an update on our oncology offering, the challenge is we do today over 1,300,000 tests for detecting or validating cancer. This is on a global basis. But by the time the patient comes into the practice and is clinically symptomatic, the challenge with that is that there's -- from a treatment standpoint and an outcomes and efficacy perspective, it's -- there's not as much you can do. And in fact, it's in many cases, tragic. So being able to detect cancer earlier, being able to do something when the disease is in an earlier stage is a very, very important clinical contribution that we made. And I'll come back to that, but I want to just touch on our point-of-care modality. I'm not going to go through each of these. I will spend some time and talk about inVue Dx. But I do want to point out that we've earned our industry-leading franchise in this space through really delivering what the customer wants. We follow a set of first principles in terms of developing new instruments. First and foremost, from a performance standpoint, it should work as well or better than what you get at the reference labs. It needs to integrate within the workflow within the practice. We believe that veterinary technicians are not laboratory technicians. So from a sample prep standpoint, having a load and go functionality is extremely important. And as important as anything else is what we call technology for life, which is menu extensibility, making sure that when a customer purchases a Cat One 10 years ago that their investment is protected, meaning that they have the same feature, functionality and capability as a customer who purchased Catalyst One 2 weeks ago. A little bit about inVue. This has been a really successful, I think, well-received analyzer. We've had the fastest ramp in the history of any of our premium analyzers. Last year, approximately 6,400 of these were placed. I think this fits those first principles that I described in terms of ease of use, it's slide free. Customers don't have to spend 15, 20 minutes preparing a slide. It fits within the workflow. It delivers differentiated performance at the hands of the veterinarian and it takes variability out of the interpretation equation, and it supports very high volume, well-understood use cases and menu extensibility, technology for life. Starting with blood morphology and air cytology, we expanded it in Q4 of this past year and a controlled launch for FNA for mast cell tumor. And as you can see from the slide, as we count up the total number of manual cytology exams done today on a global basis, it's 150 billion. So a very significant opportunity still in front of us. This is obviously good medicine. Veterinarians love having their investment protected and having this type of technology for life capability. But let me just give you an important analog. It's also a good business for IDEXX, which is when we introduced Catalyst One, which is our chemistry analyzer, it had a comprehensive menu with it back in 2014, late 2014. But through the 10-plus years since then, we've introduced SDMA on a slide, Total T4, fructosamine, cortisol, pancreatic lipase, there's a series of tests that we introduced. The economic value of that platform has grown 2.5x. So I think there's an analogy within inVue Dx that we create technical architectures for cell cytology. Anything done manually in cytology has the potential to be adapted and adopted onto this platform. So it's something we're very excited by. The point-of-care business, though, we've been very successful, and we had a record year of over 22,000 placements in 2025. We have a very large installed base, but you can see from this slide that it's still early in terms of -- at least in terms of international adoption and for the new analyzers, we think there's a really nice opportunity still in our largest market, which is the U.S. And we think that this is a function of the fact that veterinarians want a laboratory within their clinic. They want the type of capability that these analyzers generate or create for them, and we've seen really nice traction over time. And we think that those international country markets and geographies provide very, very compelling opportunities and ones in which we'll continue to pursue. Now let me move into the reference lab business and maybe spotlight or highlight our cancer diagnostics platform. We've now been on the market for about a year or so with canine lymphoma. We started with lymphoma because it's highly prevalent, and it's hard to detect early. And in fact, 1 in 4 dogs through their lifespan will get these type of common cancers. It's been very successful as a test. In fact, the performance, as you can see from the chart, 99-plus percent specificity. So very few test results are false positive, very high sensitivity. In majority of cases, we could phenotype B versus T, which is important from the type of therapeutic pathway that the veterinarian pursues. And then at VMX, we were able to come out with some additional data that we are able to detect or have test consistent with canine lymphoma up to 8 months before clinical symptoms appear. On average, it's about 3 months. So very, very important. And also when lymphoma is detected, the treatment of choice is CHOP, which is a 4-agent chemotherapy regimen. It tends to last 5 to 6 months. It's not always efficacious our biomarker for canine lymphoma is able to detect molecular remission, meaning if it's not working, if it's not molecularly going away, then the veterinarian should stop and maybe pursue some other means. We announced at that point that at VMX that we will introduce mast cell tumor as part of a panel expansion sometime in the middle of the year and one other test this year. Our belief is that our commitment is to be able to provide a panel in -- by the end of 2028 that detects 50-plus percent, the majority of common canine cancer cases. Again, keep in mind that cancer is very, very prevalent. 1 in 4 dogs through their lifespan will develop cancer. And we price this for access at $15 when included as part of a blood work panel, 2- to 3-day turnaround time. And when we include mast cell, we're not changing the price. We're not changing the workflow or the time to result. So very -- I think it's a very compelling offer and that customers have -- are not only using it as an aid in diagnosis but as a screening tool. This is a depiction of how diagnostics over time has developed. Typically, what we've seen historically in the business is that pet owners and veterinarians when a pet comes into the practice, they will screen. And they may screen at some very basic level for heartworm or vector-borne disease or fecal testing. And then over time, as they recognize the value in diagnostics and blood work is included, you see a more comprehensive panel or approach given. But in the U.S., which is the most advanced market for diagnostics in the world, only about 12% or so of these tests include blood work. We believe that cancer because of what our customers have told us, can change that paradigm from left to right, to right to left, that it's such a huge driver of adoption based on what pet owners and veterinarians are telling us. And this is a great chart that I think is a global market research survey that as pet owners and veterinarians their interest in cancer screening and testing. And you can see in -- it's high 90s in many countries, high 90s in many countries from a pet owner standpoint and veterinarian is equally compelling. So just a great opportunity, and we look forward to continuing to develop this market over time. Software is an important part of our overall solution portfolio, as I mentioned in the beginning, veterinary practices or businesses. They want to optimize workflow. They want their teams to be productive. They want to be able to communicate in many cases, digitally with pet owners, being able to provide a full vertical stack really focused and fit to task for the animal health market is an important part of our overall solutions portfolio. You can see it's PIMS, pet owner engagement application, our Vello solution, VetConnect PLUS, which is our diagnostics portal and the ability to leverage our balance sheet and provide payment and financing in some cases, to support other payment processing solutions. I've talked about innovation and the importance of innovation and our solutions orientation as a company. This market is not going to just develop by itself. It requires subject matter expertise. It requires a partnership approach with our customers, interfacing with them to understand their most challenging problems and how our solutions can help them. What we have found is key to being able to democratize our solutions and drive our solutions orientation is this partnership with customers, and it requires frequency and reach and access. So over time, we have expanded our commercial footprint. Just recently in 2025, we announced 4 commercial expansions of our ecosystem, the U.S. as well as our international country markets given the backdrop of the opportunity that I described to you. This is an area of continued focus for us. We believe that when the data tells us that when we call on our customers and create awareness and education and consideration for diagnostics, they use more diagnostics. We grow faster and pets get better care. So this is something that over time, we'll continue to invest in. It's an important part of our overall value equation. So let me now bring this together because just down to the last minute or so. We are blessed to participate in this remarkably compelling, robust long-term opportunity that we pegged at $45 billion-plus TAM. Diagnostics plays a foundational role within the practice. You can't treat, you can't assess basic health status unless they first diagnose. Our innovation strategy is around creating differentiated platforms, whether it's point of care, software or the reference labs and bringing them together in a compelling way. As a result of this innovation strategy, a commercial ecosystem, which is large and sophisticated and trusted by our customers, we're able to generate attractive long-term returns for the business. We believe that over time, we can grow top line revenue at 10-plus percent, operating margin expansion, 50 to 100 basis points, capital allocation leverage as a result of share buybacks and long-term EPS growth potential at 15% plus. So thank you for attending this conference. I've enjoyed providing a quick update and overview of IDEXX. And for those of you joining us with a Q&A session afterwards, look forward to answering maybe some specific questions you have.