IDEXX Laboratories

Since its founding in 1983, IDEXX Laboratories (IDEXX) has built a formidable competitive position in the companion animal testing market, resulting in startling economics. Over the past decade, the company has grown sales and earnings per share by 10% and 19% per annum, respectively. IDEXX generates a cash return on invested capital of over 40%, an impressive feat, which has been trending higher as the business grows.

A leader in veterinary diagnostics

IDEXX dominates the US market for veterinary clinics (65% market share) and reference labs (50% market share) diagnostic testing of companion animals. The business also boasts an impressive global footprint with a third of its revenue now being derived from international markets.

While the bulk of IDEXX revenue is generated from testing services, the company can also provide systems that make the life of the veterinarian (vet) easier. Often a vet will run a full suite of IDEXX products to reduce labour costs, improve testing accuracy and automatically store patient records. This is achieved through a closed loop system that encourages upgrades and adjacent purchases. Namely, IDEXX provides:

1. Practice management software that automates tasks, schedules appointments and integrates testing results to patient records;

2. A VetLab Station that serves as the central command centre for diagnostic testing systems. It connects all point-of-care analyser machines, allowing for seamless data management which requires limited human oversight; and

3. A raft of diagnostic analysers for haematology, cytology, and urine analysis (amongst others) which connect seamlessly to the Vetlab and practice management software.

Razor/razorblade business model

The company boasts a classic razor/razorblade model where diagnostic analysers are sold at skinny margins to support the sale of consumables such as reagents and point of care ‘SNAP’ tests. As the suite is sold in a modular fashion, often a vet will start with one analyser and upgrade over time as they experience the accuracy of the system along with the significant labour cost savings. This installed base drives recurring revenue steadily higher (Figure 1), and the ingrained nature of the product has the added benefit of increasing switching costs, supporting pricing power.

Figure 1.

Early education benefits the network

IDEXX grows brand awareness and familiarity at the ground level via a comprehensive university education program which trains vet students on IDEXX diagnostic analysers and adjacent products. In 2022, more than 20,000 students completed the program. Vets who graduate with a working knowledge of IDEXX systems are more valuable to employers. Simultaneously, students prefer to apply for jobs at clinics that use the IDEXX equipment they are familiar with.

Friendly middlemen

Clinics that use IDEXX equipment tend to grow faster than those using competing products. Over the past five years, IDEXX clients have driven annual clinical revenue at a rate exceeding the market by 200bps. IDEXX’s customer advocacy exceeds competitors, with the company enjoying Net Promoter Scores that are >20% higher across all product categories.

Structural market drivers

Companion animals are increasingly thought of as an extension of a family, resulting in a willingness to spend on their wellbeing. In 2005, Americans spent $35 billion on their pets. In 2024, this figure has grown dramatically to an estimated $150 billion. Not only is the propensity to own pets higher amongst households, but pets are also living longer, requiring more testing as they age (Figure 2).

Figure 2.

‍The Fairlight View

The boom in pet ownership during the Covid pandemic is causing some challenging comparative metrics for IDEXX . Average clinical visits per practice grew by 15% in 2021 as ‘Covid pets’ were vaccinated and tested for the first time. Visits have since retreated from this inflated base, partially as the pet boom moderates, but also due to a softer economic environment. Fairlight believes these factors will prove to be transitory – it’s likely the step up in pet population will drive revenues over the long term, especially as Covid pets age.

IDEXX grew earnings by 12% during 2024, a departure from its high teens cadence which disappointed the market and provided an attractive entry point for Fairlight to start a position. Given the long-term structural drivers, R&D dominance and exceptional management team, we believe the company can return to mid-teens earnings annual growth over time.

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