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IDEXX Laboratories, Inc. (IDXX)

This animal products company beat estimates by three cents last quarter, has double-digit organic growth, and could potentially be a takeover target.

IDEXX Laboratories, Inc. (IDXX)
from Canaccord Genuity Research

We recently surveyed a new set of 110 veterinarians located across the U.S. and conducted another round of interviews with distributor reps and vets. Our latest research bodes positive for the near- to mid-term trajectory of IDEXX Laboratories, Inc.’s (IDXX) business prospects.

While competition from ABAX and HSKA certainly escalated over the past year, our research suggests that 1) IDXX’s competitor’s swap out opportunities are drying up; 2) Vet customers as a whole are content with what they’re using and many IDXX users are reluctant to give up their software/connectivity, suggesting strong brand attachment to IDXX; and 3) new IDXX products are resonating well and are likely to drive upside to consensus expectations for 2016.

In our survey, ABAX took an 8 point net market share gain from IDEXX in instrument analyzers and an 8 point net gain from IDEXX in rapid tests, a notable achievement for Abaxis in a short period of time. These figures compare to 4 and 3 points, respectively, in our last survey 3 months ago, and we point out that with a new dataset of veterinarians we expect some variability comparing the two survey datasets.

Despite a relatively high number of conversions from IDXX to ABAX, based on our latest checks, only 1 out of the 110 vets we surveyed indicated they’re likely to switch rapid test brands in the next year (down from 5% in our last survey), which, coupled with our checks with our distributor rep contacts, suggests to us that market share shifts are drying up for IDXX’s competition. Our contacts think that converting accounts to Abaxis has become more challenging and the number of sales leads has declined from prior levels. Moreover, 8% of vets indicated they are likely to change reference labs in the next year, and we expect IDXX will take more than its fair share from WOOF.

We have positive views on IDXX in the backdrop of a strong industry: We believe IDEXX has too many shots on goal for competitors to make a material dent. We continue to like the long-term opportunity in the vet diagnostics space, particularly outside the US, where we expect IDXX will continue to lead for years to come.

While we like IDXX for both its double-digit organic growth prospects both for top and bottom-line, we think IDXX shareholders also have upside in the event they are the target of a larger acquiring company. Our industry contacts reiterated views that the low-hanging fruit has been picked and the remaining account wins for ABAX/HSKA will be “fence-sitters.” We think the total share gains for ABAX are most likely to account for less than 10 points of share shifts all-in.

Our BUY thesis on IDXX is intact driven by our positive view on the veterinary diagnostics market:

1) The vet diagnostics market is growing at a rate of ~8% in the US (and likely higher outside the United States), roughly 2x the rate of US GDP;

2) Razor/razorblade model ensures steady, strong recurring revenue growth;

3) The animal health market is largely a duopoly market (though HSKA is starting to emerge as a meaningful player);

4) There is no Medicare reimbursement and virtually zero payers to worry about;

5) There is no FDA regulatory hurdle to launch new products.

Our $87 PT uses a ~4.7x P/S ratio on our 2016 revenue estimate of $1,740M (+8.4%), and implies a multiple of ~37x our 2016 EPS estimate of $2.35 (which we expect will roll over to 2017 estimates in the next quarter or so). The P/S ratio is a premium to the company’s peer group average of ~3.0x. The multiples are a premium to IDEXX’s historical multiples of ~30x earnings and ~3.5x revenues.

Mark Massaro and David Westenberg, Canaccord Genuity Research,, 617-371-3711, October 15, 2015