IDEXX Laboratories, Inc.

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IDEXX Laboratories, Inc.

One IDEXX Drive
Westbrook, Maine 04092
U.S.A.
(207) 856–0300
Fax:(207)856–0346
Web site: http://www.idexx.com

Public Company
Incorporated: 1983
Employees: 1,515
Sales: $263 million (1997)
Stock Exchanges: NASDAQ
SICs: 2835 Diagnostic Substances; 3826 Analytical Instruments

IDEXX Laboratories, Inc. is one of an estimated 1,300 U.S. companies that have entered the biotechnology field since scientists discovered the recombinant DNA process in 1973. IDEXX focuses on producing and selling veterinary diagnostic test kits and instruments. Its products also include systems to test for food and water contamination, such as tests for bacteria in drinking water and salmonella in food. Headquartered in rural Maine, IDEXX has branches in several countries and works with state-of-the-art technological processes. It markets about 400 products in more than 50 countries. In the highly competitive and rapidly changing biotechnology field, IDEXX experienced rapid growth from its founding in 1983 through the late 1990s, although its revenues levelled abruptly in 1997.

1980s Founding

In the early 1980s David E. Shaw, having just turned 30, was commuting every week from Maine to Agribusiness Associates, Inc., an international management consulting firm in the affluent Boston suburb of Wellesley Hills, Massachusetts. The travel was draining, and Shaw began to think of other ways to live. As a consultant, he began to notice untapped markets that could be pursued from Maine. As he told the Boston Globe, “I saw opportunities in animal health that were not being served well. I got tired of the commute to Massachusetts and liked living in Maine, so I started with the poultry industry, seeing that the initial investment would be small and the time to market shorter.” In 1983 IDEXX was incorporated, and soon afterward the new company began operations. Shaw had some difficulty in luring employees to rural Maine for his startup company, but as the company’s success grew it also drew a pool of talented employees.

The early years of IDEXX were accompanied by enormous growth in the biotechnology field, and the field was highly competitive from the start. Typically it took several years for a company to develop a new product, since funds for research, testing, and marketing had to be raised. Often development funds were raised from pharmaceutical companies that in return wanted to own a share of the biotechnology company, and as a result, many biotechnology companies (most of which having fewer than 150 employees) were taken over by larger companies in the process. For products intended for human use, a company also had to go through an elaborate approval process at the U.S. Food and Drug Administration (FDA), and then, even if this approval was granted, companies could not predict whether products would be successful or prove disappointing when they finally reached the marketplace. In this turbulent atmosphere, IDEXX had the advantage of being able to avoid waiting for FDA approval for its early products, since IDEXX products were aimed at the veterinary and agricultural markets, rather than for human medical use.

Products Expanded from Earliest Focus

In its earliest years IDEXX concentrated on two key product lines. In 1985, IDEXX introduced systems that government agencies and businesses could use to test for the presence of contaminants in foods and food processing facilities. The following year it began to sell diagnostic and detection products for use by veterinarians in their offices. By the mid-1990s, IDEXX also sold tests with which government agencies and businesses could detect contaminants in drinking water (introduced in 1993) and began to offer commercial veterinary laboratory testing, consultation, and advisory services to veterinarians (introduced in 1994). IDEXX internally referred to its products and services as falling into two specialized areas: Animal Health; and Food and Environmental. Testing kits sold by IDEXX ranged in price from $25 to $4,000 each; testing instruments and systems were priced from $1,000 to over $70,000 each.

IDEXX’s products relied heavily on such sophisticated biotechnologies as immunoassay technology, which employs tests based on antibody-antigen reactions. Most simply explained, antigens are foreign substances such as viruses or bacteria that enter a body; through its immune system, the body produces antibodies in hopes of eliminating the antigen. Several IDEXX products relied on DNA probe technology, in which a single-stranded DNA molecule is introduced into a test sample. If a particular organism is present in the sample, the DNA molecule will combine with it to form a double-stranded molecule.

Animal Health Products and Services

During the 1980s and 1990s IDEXX developed numerous inexpensive test kits for veterinarians’ use, to detect diseases common among household pets, such as heartworm disease, feline immunodeficiency virus (sometimes called “feline AIDS”), feline leukemia, and canine parvovirus. Veterinarians recommended regular testing for many of these diseases, making such products quite profitable. IDEXX also developed a test for equine infectious anemia, important in that federal law required that horses be tested for this disease before they can be taken across state lines. The company also developed a wide variety of much more costly instrument-based testing systems: one to analyze enzyme levels in animals’ blood; a second to measure electrolytes (sodium, potassium, and chloride); a third to evaluate blood components; and a fourth to measure hormones. IDEXX created software that linked these four systems and allows veterinarians to produce a profile report within their own offices, rather than having to rely on commercial testing laboratories. Brand names of tests marketed by IDEXX included SNAP, CITE, VetLite, and QBC Vet Autoread.

In the mid-1990s, following acquisition of several testing laboratories, IDEXX began to offer veterinary laboratory services in the United States, England, and Japan. Veterinarians who needed more sophisticated testing than was possible in their offices sent samples to IDEXX facilities and received reports. Through its subsidiary Cardiopet, IDEXX provided specialized consultation services to veterinarians in the United States, Canada, and 11 other countries. Veterinarians could telephone Cardiopet during a patient’s visit and receive immediate interpretation of test results in areas such as radiology, dermatology, and cardiology.

IDEXX instrument-based systems were used by government agencies and industrial laboratories to test large numbers of samples, allowing diagnosis and monitoring of diseases in poultry and livestock. Of particular interest, given the concern about salmonella poisoning in the late 1990s, were IDEXX’s “Flock-Chek” testing system and software which could be used to test poultry for this contaminant.

Food and Environmental Products and Services

IDEXX also created many products used to measure the safety of drinking water, dairy products, poultry, and processed meat. Dairy farmers, government laboratories, and food companies all made use of these detection products, as numerous contaminants could be detected with IDEXX products, including E. coli (which could be found in both food and water and was responsible in the late 1990s for well-publicized food poisoning incidents in beef products), salmonella (a bacteria that could lead to fatal food contamination), aflatoxins, and dangerous antibiotic residues in food products.

Among IDEXX’s entries into this area were its Lightning, SimPlate, and Acumedia testing products. The Lightning testing system, introduced in 1995, was used to test the cleanliness of processing surfaces and other equipment in food processing plants. The SimPlate product line, introduced the following year, was used by food quality managers to determine the total level of E. coli and other contaminants in food products. In 1997, IDEXX acquired Acumedia, a company that manufactured more than 300 products used for bacteria detection in foods; these products were being integrated with other IDEXX testing devices in the late 1990s. IDEXX also maintained the Food Safety Net, a network of products and testing and consulting services.

Acquisitions and International Expansion

Through the mid-1990s, IDEXX completed several major acquisitions of other biotechnology and testing companies. Major acquisitions included: VetTest S.A., a veterinary clinical testing business; Environetics, Inc., producer of the Colilert water testing product line; AMIS International Company, KK, a Japanese veterinary laboratory business; and Cardiopet Incorporated, a veterinary consulting service.

Company Perspectives:

Our goal is to be viewed as a great company by employees, customers, and stockholders by creating exceptional long-term value for their benefit through worldwide leadership in our businesses.

During 1996 and 1997, IDEXX’s acquisitions accelerated, and it became the owner of several additional veterinary reference laboratory businesses, plus manufacturers of detection and diagnostic tests. Companies acquired during 1996 included: Vetlab, Inc., a Texas operator of two veterinary reference laboratories; Grange Laboratories Ltd., operator of veterinary reference laboratories in the United Kingdom; Veterinary Services, Inc., operator of veterinary reference laboratories in Colorado, Illinois, and Oklahoma; Consolidated Veterinary Diagnostics, Inc., operator of veterinary reference laboratories in California, Nevada, and Oregon; Ubitech Aktiebolag, a Swedish manufacturer and distributor of livestock diagnostic test kits; and Idetek, Inc., a California company that manufactured and distributed detection tests used by the food, agricultural, and environmental industries.

In 1997, IDEXX placed a similar focus on acquiring its competitors. It acquired Acumedia Manufacturers, Inc., a Maryland manufacturer of dehydrated culture media used for bacteria detection; National Information Systems Corporation, a Wisconsin company that supplied computer systems for veterinary practice management; Wintek Bio-Science Inc., a company in Taiwan that distributed diagnostic products to veterinarians and hospitals; and Professionals’ Software, Inc., an Illinois company also engaged in supplying practice management computer systems to veterinarians. IDEXX also entered into an agreement with Fuisz Technologies, a Virginia company that had developed technology for rapidly dissolving tablets, allowing IDEXX to adapt this technology for veterinary use.

In 1991, only 21 percent ($6.5 million) of IDEXX’s revenues came from sales outside of the United States. By 1996, that figure had risen to 34 percent ($91.5 million). The company attributed this rise largely to the expansion of its sales force in other countries; by 1996 it maintained foreign sales offices in Australia, France, Germany, Italy, Japan, New Zealand, the Netherlands, Spain, and the United Kingdom. However, these foreign operations were not without risk. IDEXX had to deal with regulatory approvals and patent processes for its products that differed from country to country, import and export tariffs, and economic fluctuations in foreign countries. The latter factor became particularly important in late 1997, when economies in both Europe and the Pacific Rim countries (Japan, Asia, Taiwan, and Australia) became shaky and IDEXX’s revenues there dropped substantially. This drop contributed to an overall decrease in revenues to IDEXX for the first nine months of 1997, an abrupt halt to its rapid growth in the preceding years.

Patent Lawsuits a Constant Concern

As the biotechnology industry was marked by rapid change and heavy dependence on legal protection for a company’s products—such as licenses, patents, and copyrights—it was common for companies to charge each other with infringement of product patents. The resulting lawsuits often proved very expensive, complicated, and time-consuming. In the mid-1990s IDEXX found itself involved in several of these lawsuits. The two most important of these involved the Millipore Corporation and the Barnes-Jewish Hospital of St. Louis.

In 1993, IDEXX had acquired Environetics, Inc., which already had a lawsuit pending against Millipore Corporation, charging that Millipore had infringed its patented technology for detecting E. coli and other contaminants in food and water. Two years later, IDEXX added a second lawsuit against Millipore for similar infringements. The two lawsuits were finally settled in December 1997, when Millipore agreed to halt sales of the products that were the subjects of the lawsuits.

In May 1995, the Barnes-Jewish Hospital of St. Louis filed a lawsuit against IDEXX, claiming that IDEXX’s canine heart-worm diagnostic products had infringed one of the hospital’s patents. Although IDEXX claimed that the hospital’s patent was invalid, it eventually decided to settle the case out of court in September 1997, paying the hospital $5.5 million. (Following this settlement, the hospital then sued IDEXX’s chief competitor in the heartworm diagnostic business, Synbiotics Corporation of California.) While the lawsuit was pending, IDEXX also had spent a great deal of time and funds to develop products to replace the ones challenged by the hospital.

Financial Outlook for the Future

IDEXX experienced massive growth during the mid-1990s. Between 1994 and 1995, its total revenues increased 49 percent, from $126.4 million to $188.6 million. Its international revenues almost doubled during that single year, rising from $34.3 million to $65 million. Between 1995 and 1996, growth was almost as impressive. Revenues in 1996 increased another 42 percent, to $267.7 million; international revenues in 1996 increased 41 percent, to $91.5 million. Growth in Europe and Japan was a key factor in these increases. In 1996, revenues in the Pacific Rim region rose more than 135 percent.

However, 1997 saw the brakes applied to such large-scale growth. The combination of the settlement paid in the Barnes-Jewish Hospital lawsuit, the costs of acquiring new companies, and drastically reduced sales in economically troubled Europe and Japan resulted in a third-quarter 1997 loss for IDEXX, a reversal of the large rise in profits the company had come to expect. In November 1997, CEO Shaw announced that Erwin F. Workman, Jr., president and chief operating officer of IDEXX since 1993 and an employee since its first year in business, would be replaced by Jeffrey J. Langan, a 20-year employee of the Hewlett-Packard Company. Workman would take over operations in the products divisions and would focus on research and development activities. There were several other high level executive shifts in late 1997, including appointment of two new division vice-presidents and appointment to the board of directors of a specialist in venture capital investment.

Principal Subsidiaries

Access Medical Systems, Inc.; Acumedia Manufacturers, Inc.; Cardiopet Incorporated; Environetics, Inc.; ETI Corporation; IDEXX Distribution Corporation; IDEXX Veterinary Services, Inc.; National Information Systems Corporation; Radiopet Incorporated; IDEXX Laboratories Foreign Sales Corporation (USVI); IDEXX Laboratories Pty. Limited (Australia); IDEXX Laboratories Canada Corporation; IDEXX Laboratories Limited (England and Wales); IDEXX Logistique et Scientifique Europe S.A. (France), IDEXX Management Services Europe S.A. (France), and IDEXX S.A. (France); IDEXX GmbH (Germany); IDEXX Laboratories Italia S.r.l. (Italy); IDEXX Laboratories, KK (Japan); IDEXX Laboratories B.V. (Netherlands); IDEXX Laboratories (NZ) Limited (New Zealand); Ubitech Aktiebolag (Sweden).