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April 12, 2004

The race for mad cow | Idexx attempts to capitalize on its recently approved BSE test

In recent years, much of the attention Idexx Laboratories has received has been related to its "companion animal" business, which develops diagnostics, drugs and software systems for veterinarians who treat the pets with which Americans are increasingly obsessed. But last month, in a development that signified the continuing importance of its products for livestock, the Westbrook biotech firm received federal approval for a rapid-response test that identifies mad cow disease, or bovine spongiform encephalopathy.

That approval was key for commercialization of the test; the U.S. Department of Agriculture is the only entity in the country allowed to test for BSE. Prior to the mid-March announcement, the USDA had only approved one BSE test, which was in use at one lab, in Ames, Iowa, and which takes four days to produce results. The discovery of the first confirmed American case of mad cow disease last December, however, intensified the agency's need for faster tests that would enable it to test more animals in a shorter time span. Thus, the Idexx test, which ˆ— along with a similar test developed by a competitor that the USDA also approved ˆ— delivers results in four or five hours.

"The initial market in the United States is about a couple hundred thousand-plus tests, and [the USDA] is also going to test 40,000-60,000 normal animals; [we expect them] to test roughly 250,000 this year," says Quentin Tonelli, an Idexx vice president. "I think we have a good shot at a good portion of it."

Still, that doesn't mean revenue from BSE testing will immediately begin flowing into Idexx's coffers. Because of the relative speed with which the USDA announced its approval, Tonelli says, the company's current financial plan doesn't include revenue from sales of the BSE test. And even if the BSE test takes off, it still will represent just a segment of the sales from a small division of the company; by way of comparison, the companion animal group alone accounted for $384 million of the company's $476 million in 2003 revenues, or just over 80% of its total sales. "The major part of our business is in companion animals, but production animals is our first business," Tonelli says. "It's where we started, and it's still a very profitable, high margin business."

Steve Hirshon, vice president of Maine Securities, a Portland investment firm that tracks the performance of Maine public companies, says the BSE test wasn't a huge hurdle for Idexx; more significant, he says, were developments last year such as approvals of new pharmaceutical products, including a drug that treats a parasitic disease in horses, and its introduction of a new blood-testing system for vets. However, he notes, the BSE test does serve as an important indicator of Idexx's strategy. "First, it reinforces their commitment to the production animal business," he says. "And, second of all, it talks to what has traditionally been one of Idexx's strengths, and that is an ability to go out and adopt the best technology and the best practices, and make that available in an Idexx context."

The live animal challenge
The roots of Idexx's involvement in BSE and related diseases, a category known as transmissible spongiform encephalopathy, go back three or four years, according to Tom Mikulka, global marketing manager for production animal services at Idexx. The company was interested in developing a test that would work on live animals ˆ— none has been discovered yet ˆ— as well as a post-mortem test. In December 2002, Idexx announced it had licensed TSE testing technology from Microsens Biotechnologies Ltd., a British research and development firm. Less than a year later, in November 2003, Idexx received USDA approval for a rapid-response post-mortem test for chronic wasting disease, a TSE that affects deer and elk. Then, just four months after that, came the BSE approval.

Mikulka calls it "an unheard-of development cycle" for its speed, something he attributes to having the right team of people ˆ— scientists, production people, marketers and regulatory advisors ˆ— working on the tests. Though Idexx's turnaround time on the TSE tests was fast, says Hirshon of Maine Securities, the time it took isn't the most important factor. Instead, he notes, it's significant that "the technical and regulatory wherewithal is certainly [already] in place [at Idexx] to expedite something like this."

That doesn't mean Idexx is alone in the TSE market, either domestically or overseas. Bio-Rad Laboratories, the Hercules, Calif.-based company whose rapid-response BSE test was approved at the same time as the Idexx test, is its main competition in both markets, and both Tonelli and Mikulka admit that Bio-Rad beat them to BSE when it released its own test in 2000. Bio-Rad's test, which is approved for use in 25 countries, accounts for about 10% of the firm's $1 billion in annual sales, according to the Sacramento Bee.

As a result, Mikulka has his sales pitch prepared, both for the seven U.S. laboratories recently approved by the USDA to do mad cow testing ˆ— all of which already buy other Idexx products ˆ— and for the customers he'll pursue overseas if the Idexx test is approved by the European Union, something the company expects to happen late this year or early next year. He and Tonelli refer to Idexx's test as a "second-generation" replacement for what they say is Bio-Rad's more laborious test. "When [potential customers] walk into a laboratory with benches full of equipment that the Idexx test doesn't require, with more people than the Idexx test requires to run it, they look at it from a financial standpoint," Mikulka says. With the Idexx test, he adds, "they can run the same number of samples through the lab with less people and less time."

In the meantime, Idexx stock continues to perform well. With the exception of a few bumps, the share price has climbed for most of the last two years. It's currently trading at just below $60 a share, up from a 52-week low of $31.87. And in early March, the company revised its earnings estimates upward for the first quarter of 2004 and the whole year, primarily on the basis of sales in the companion animal business. (Idexx reports its first quarter results April 19.)

As for the TSE market, Idexx plans to continue its work on developing a BSE test for live animals. Mikulka admits that it's a much harder task than coming up with a post-mortem test; development, he notes, will be "a long process." Still, if Idexx wins the live animal BSE race, it "could change the market," Mikulka says. "And we would capture a huge amount of that business."

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