愛德士 (IDXX) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the IDEXX Laboratories fourth quarter 2002 earnings review conference call.

Just a reminder, today's call is being recorded.

For opening remarks and introduction, I will now turn the conference over to Mr. John Ayers, Chairman and Chief Executive Officer of IDEXX Laboratories. Please go ahead, sir.

Thank you, Mike, and good morning.

First, I'd like to start by asking Conan Deady, our Vice President and General Counsel, to review our Safe Harbor Statement.

Thank you, John.

I'll remind everyone that statements that we may make on this call regarding management's future expectations and plans and the company's future prospects, including statements related to expectations about revenues or earnings for future periods, the status of products under development and for the timing of new product introductions, are forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from those reflected in these forward-looking statements include those that are discussed in our annual report on form 10K for the year ended December 31, 2001 and our quarterly report on form 10Q for the quarter ended September 30, 2002 which are on file with the SEC.

In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so even if our estimates may change.

Thank you Conan. Speaking of safe harbors, that was spoken as clearly as the beacon from Maine's famous Portland headlight.

Now let me introduce the other members of management team who are joining me today. Sitting with Conan and me are Dr. Erwin Workman, Chief Science Officer and President of IDEXX Pharmaceuticals; Merilee Raines, our corporate Vice President of Finance; and Lou Pollack and Bob Hulsy both corporate Vice Presidents with the Companion Animal Group.

I'd like to review the fourth quarter performance and some promise about our product lines and businesses and then per our usual custom and I'll ask Merilee Raines to review our financial performance for the quarter and the year before we wrap it up and open it up to your questions. As you saw in the press release, with revenues in the fourth quarter of $105.9 million we achieved 11 percent year over year growth consistent with our expectations for accelerating revenue growth as we finish the year.

Earnings per share came inline with our expectations at 36 cents, an increase of 29 percent over last year or 16 percent excluding the effect of FAS 142, which eliminates the amortization of goodwill. We are pleased with this performance for the year the quarter. It demonstrates the result, I think, are possible given the strengths of our business model including some great proprietary technologies, leading market shares and a great franchise with our customers.

Free cash flow was an additional five million for the quarter, bringing our free cash flow for the year to $86 million. Our definition of free cash flow takes into account changes in operating working capital and capital expenditures, but excludes cash from options exercises, any acquisitions or divestitures or financing activity.

Certainly 2002 was an exceptional year on the cash generation front as we worked to reduce the net operating assets needed to operate our business. The cash flow includes an $18 million benefit that came from receivables and inventories balanced reductions, and so while inventory turnover remains a priority and our operating business is a strong cash generator; I wouldn't expect free cash flow to be at the exceptional 2002 levels every year.

Cash and investments on the balance sheet were $163 million at the end of the quarter and debt remained the at less than one million dollars. I'd like to now turn to our two business segments, starting first with the Companion Animal Group. As you all know, our revenues in this segment are almost 80 percent of the total company.

In the fourth quarter, revenues for the Companion Animal Group were up 12 percent year over year. Of course, we're very pleased to have launched LaserCyte. LaserCyte is our next generation hematology blood analyzer. We delivered, installed and recognized revenue on a 114 units in Q4. Our sales force has done a really great job generating these orders and completing their installation in customer clinics.

In addition, to date we have generated firm orders for another 230 plus units in the U.S. The sales team has also done a great job with the realization of average unit price or AUP. AUP, so far, is coming in above expectation and are reaching over $16,000 per machine for both units installed in request are Q4 and in the current backlog. The order by order variation in is primarily as a result of the credit we give for used auto-readers or competitive unit that we take in trade. Of course, list price is 18,900 dollars without a trade--in, but I would still use 15.5 thousand dollars for the average net as we go forward into the year.

As far as customer response, I would say that we are off to a good start, although it is very early days in the market. Installed customers appreciate LaserCyte's ability to permit the veterinary clinic to obtain comprehensive hematological information at the point of care. Actually, 24 different hematological values from a single blood sample. This is the same comprehensive diagnostic data that was previously only available to the veterinarian when they sent the blood sample to the outside laboratory. With LaserCyte, we are bringing the reference lab technology, laser flow cytometry to the veterinarian's clinic at an affordable price. Of course, having the capability in clinic allows it to generate hematological diagnostic information real-time during the pet visit. And laser provides the medical justification to run more hematology samples per week, which increases veterinarian office profitability, not to mention the sale and use of a proprietary and above margin consumables for this instrument. Our customers have not hesitated to put the machine to good daily use. And I'd say customers are spending a good bit of time learning how to integrate LaserCyte into the clinic workflow as well as how to interpret and use all the diagnostic information. Our expectation is that we will install and recognized revenue on approximately double the Q4 volume in the first quarter of 2003 as we undergo disciplined and careful ramp up in production, installation and service.

As you can see, market response is not the constraint, as we have already generated enough orders at good s to make this first quarter installation target. For the full year, our expectation is for about 1500 LaserCyte units to be sold and installed. Of course, we also have continued placement of our other hematology and clinical chemistry instruments, the QBC vet auto-reader and vet test, respectively. And between these two categories, we installed 652 units, pretty close to last quarter's number of 666. Our numbers here show the continued strength in these lines irrespectively of the launch of LaserCyte.

Moving onto instrument consumables, our U.S. clinic level sales were up 4%, while overall worldwide consumables dollar growth, adjusting for changes in distributor levels in the U.S. were up 9%. This reflected strong performance in Europe and the effect of currency of about 2.5%. As a reminder, you will hear us adjust reported sales to account for changes in U.S. distributor inventory, because this adjustment yields a better apples to apples, year over year comparison of the demands from our customers, the veterinarian clinics. We continue to look for our sales of instrument consumables to grow in the 6 to 8% range, supported by 3 strategies. First a variety of marketing programs to support the pact is of better medicine and thus consumable utilization, continued instrument placement in both hematology in chemistry and third, strong customer loyalty and retention. LaserCyte consumables do not generate much incremental volume in 2003, due to the low install base and the replacement in many locations who are operating Idexx system. The LaserCyte consumable extreme will become more of a factor as the install base grows in future years.

Turning to our rapid assay line in this segment, and these are the single-use point-of-care kits that test for the presence of certain infectious or diseases, world-wide sales, again adjusting for changes in U.S. distributor inventory levels, were up 16 percent. And in particular, the U.S. clinic-level sales were up 13 percent - a very good result.

Breaking this down further, our largest rapid assay product line is canine test kits. U.S. clinic-level sales were up 16 percent due to the continued success of our heartworm line, and in particular, the , which screens dogs for three parasitic diseases in a single test - heartworm, lyme, and . Overall, on heartworm we're very pleased with our continued performance in the market, and we're benefiting from strong sales and distribution performance. And of course, in the case of , we benefit from the continued growth in our vetinary customers' awareness of the importance of screening and early diagnosis of lyme and . With lyme disease in particular, the medical community is stressing the value of early diagnosis and treatment when lyme is typically in its sub-clinical phase. And of course, lyme disease is more prevalent than originally appreciated, having now been detected in 49 states.

Feline test kits are the other important product line in our rapid assay business. Here, our principal product is , which tests for two infectious diseases in one test - feline leukimia virus and feline immunodeficiency virus, or FIV, which is the cat version of HIV. is the only FIV in-clinic test available in the U.S. U.S. clinic-level sales for feline test kits were up 11 percent, led by the product. We continue to be successful in spreading the medical message to test all sick cats, cats at risk - these would be typically your outdoor cats, as well as kittens for these two diseases. Given that we have such low penetration in the use of an FIV test particularly in testing at-risk cats, we see a lot of runway ahead of us in this product line. Indeed, at the industry's premier tradeshow in Orlando last weekend, we received very favorable comments from the medical opinion leaders regarding the importance of screening for FIV, thus knowing the pet's FIV status.

Turning to distributor inventory, as you know, we sell our test kits and instrument consumables in the U.S. through distribution. At the end of the quarter, we ended at $13.4 million of distributor inventories, or 4.5 weeks of demand for test kits and consumables in U.S. distribution. This is the same level of demand in the prior two quarters. We continued to see around this level as the best-in-class distributor inventory for this industry and our product line. That is, it's the level required by our distributor to be able to meet and satisfy the same-day or next-day needs of the vast majority of our veterinarian-clinic customers.

Turning to our , the key service offering of IDEXX Companion Animal Group, laboratory services worldwide continued to show good growth in sales at 12 percent top-line growth in the quarter over the same quarter last year.

Our Computer Systems business - some people think of this in the information - in the medical community of informatics - is the sale and support of practice management systems to our veterinary customer. As we had predicted in our Q3 call, the Computer Systems business had a great Q4 with revenues up 21 percent over the prior year. This growth is due partly to the success of our newest release of the Cornerstone Practice Management System Version 5.0. Cornerstone is clearly the premiere practice management software in the industry. It is being well-received for its ease of use and support in the practice of better medicine. And this week, we're releasing version 5.1, which improves the support of multi-practice clinics. In fact, in Q4 we had a major win when our largest computer systems corporate account agreed to a major expansion in our relationship.

Right behind this 5.1 release of Cornerstone is the next, scheduled for the middle of the year, version 5.5, which will support the new wireless tablets and become even more medically centric.

Veterinarians are now beginning to appreciate that good, accessible and accurate patient information at the point of care via our Cornerstone platform improves their consistent practice of medicine. A good software system can also standardize such things as the use of consent forms, thus reducing the risk of malpractice liability.

We also continue to see operational improvements at computer systems, where in the last 12 months we have cut the cycle time in half between order receipt and invoicing; of course, that all includes installation and training.

Overall, this business appears to be in a virtuous cycle of improving volume, improving profitability and more rapid product releases.

At IDEXX Pharmaceuticals, the pipeline includes two products currently in FDA review, as investors know. The first, Nitazoxanide, is our proposed treatment for equine protozoal myeloencephalitis, a debilitating neurological condition in horses. This is an attractive market of about 50,000 treatments annually, plus or minus. Nitazoxanide has an 81 percent success rate in open trials. To review the status of this product, we were requested by the FDA in the summer of 2001 to provide more clinical data on safety, and we conducted a safety trial based on the FDA's recommended protocol. This data was submitted to the FDA in April of 2002 an Amended New Animal Drug Application, or NADA.

In December, we received a letter from the FDA that indicated that our application was not yet complete in terms of labeling and other documentation in what is referred to as the Freedom of Information Act portion of the application.

Based on this latest feedback, the FDA has indicated they consider our application to be complete in terms of the product safety. Now, with safety, efficacy, and the manufacturing portion of the application complete, we will be meeting with the FDA in the next three weeks at their request to present our response to their labeling suggestions. We would expect to resubmit the amended NADA shortly thereafter.

Although we would hope for a quicker turnaround at the FDA, given the nature of the remaining issues, the conservative assumption would be that they would be that they will take their normal six to eight months to review the application and approve the drug for launch, and our 2003 outlook reflects that assumption.

I might comment that we were gratified that the FDA had no additional questions on the 14-volume safety study that we submitted last year. We are very encouraged to have demonstrated the product's safety, and feel we are on track to launch Nitazoxanide before the end of 2003. We also have no concern that the changes in labeling will affect the commercial reception for the product.

Our other product in FDA review is our topical, non-steroidal anti-inflammatory drug, or , the drug . This product is being developed for the treatment of lameness in horses. The active is formulated in a liposomal delivery system which provides targeted drug delivery that is applied topically at the point of lameness. That means it's easy to use and there's no issue with client compliance. Importantly, the topical application avoids the undesired side effects such as gastrointestinal problems that can be seen with systemic nonsteriodals.

We believe the treatment of lameness is a very attractive market. Currently about $60 million is spent annually on lameness and sore joints in horses. We don't know anything at this junction further regarding our status with the FDA. Again, to review, we've submitted an amended NADA in June of 2002 answering the FDA's questions regarding the manufacturing portion of the application.

As you all know, the FDA has already indicated that the application is complete in terms of efficacy and safety. While we cannot be assured the timing of their response, we hope to receive - we would hope to receive some indication from the FDA soon and assuming a complete application to be in the position to launch this product in the equine market in the June or July timeframe.

Now, a quick review of our other operating segments, the Food and Environmental Group, which contributes about 20 percent of our total revenue. We saw top line growth of 10 percent in the quarter. The stand out again, as it has been for all of 2002, was our production animal services business, which had year over year growth of 20 percent. Sales continued to be strong in European livestock, particularly bovine diagnostics.

The water testing business achieved 10 percent growth for the quarter due to strong volume, particularly in Europe. As you know, we received approval in Germany effective January 1, 2003 for our flagship product Colilert 18 and . They have already started to generate good sales in this country.

With our recent European approvals in 2002, including not only Germany but Norway and Hungary, we would hope to get approvals in most of the rest of the EU over the next two years. The opening in Germany, a major market in the EU, will help us sustain the 10 percent growth in this business in 2003 that we've been achieving historically.

At this point, I'd like to turn it over to Merilee for a more in-depth review of the financials before I conclude and open it up for questions. Merilee?

Thanks Jon. As mentioned total revenues for the quarter were 105.9 million or 11 percent growth year to year. International revenues in the quarter increased 16 percent to $32.7 million or 31 percent of total revenues driven by, as Jonathan mentioned, very strong performance in Europe particularly in our in-clinic diagnostics, production animal diagnostics and water testing products.

The positive impact from exchange contributed $2 million or two percent to revenue growth in the quarter. In 2003, we expect revenues to growth by 13 percent or so for the year with LaserCyte and pharma launched contributing approximately six percent to that growth. All quarters will achieve double-digit growth with the strongest performance in the second and third quarters.

The growth margin percentage for the quarter are 46 percent with about one point short of expectations due to costs associated with LaserCyte launch and scale out and cost center laboratory services associated with fourth quarter holiday. In 2003 we expect margins will be at about the same level through the first quarter and then increase one and a half to two points to produce a total year margin of approximately 48 percent.

Higher revenues will provide volume leverage on some relatively fixed costs such as distribution and we expect an overall improvement in manufacturing efficiencies. We'll also start to see some margin benefit as the clinical chemistry units installed early in the rental program, which we introduced in the third quarter of 199, become fully amortized. Turning to operating expenses, R&D was 7.1 million dollars in the quarter, or 7% of revenues, which compared to 6.4 million dollars, or 7% of revenues in the fourth quarter, last year. R&D spend in the companion animal group segment was 4.9 million dollars or 6% of revenues, and 1.4 million dollars, or 6% of revenues in the food and environmental segment. In addition, corporate R&D spending was about 800 thousand dollars in the quarter. We expect that R&D in total will remain at about 7% of revenue for 2003.

For the remainder of my discussion, so that 2002 and 2001 numbers are comparable, I will be referencing to 2002 numbers adjusted to eliminate goodwill amortization. A reconciliation of adjusted income to reported income is included in our press release. Total SG&A was 23.4 million, or 22% of revenues, which compares to 21 million dollars, or 22% of revenues for the fourth quarter last. Companion animal SG&A was 18 ½ million dollars, or 22% of revenues, compared to 16.5 million, or 22% of revenues for the fourth quarter last year. Food and environmental SG&A was 4.9 million or 22% of revenues, compared to 4.4 million, also 22% of revenues for the fourth quarter last year. So, 22% is the magic number. The increase in spending for both segments was primarily due to additional sales and marketing resources globally, with international spend also impacted by the weakening dollar. There was also an increase in corporate administrative support expenses.

Looking forward to 2003, we would expect SG&A to rise to close to 25% of revenues in the first quarter, as we add resources to support revenue growth. SG&A should gradually decline a couple of points as sales ramp up and should approximately 23 ½ to 24% of revenues for the year in total. Total operating profit was 18 ½ million dollars, or 17 ½% of revenues, compared to 16.1 million dollars or 17% of revenues last year. Companion animal operating profit was 12 ½ million dollars, or 15% of revenues, up almost 20% from 2001 on 12% revenue growth. Food and environmental operating profit was 6.9 million, or 31% of revenue, up 8%.

Based on our thinking about gross margin and operating expenses for 2003, we expect that operating margins in the first quarter will be 14 to 15% of revenues and will increase to 18 to 18 ½% over the remainder of the year. Total year operating margins should be in the 17 to 17 ½% of revenue range. Net income of 12.8 million dollars, or 12% of revenue compared to 10.9 million dollars, of 11 ½% of revenues of last year, an increase of 17%. Earnings per share of 36 cents for the quarter compares to 28 cents for the fourth quarter of last year as reported, or 31% adjusted for good will. As John has mentioned, an increase of 16%.

With regard to the balance sheet, cash and investments increased by 11 million dollars to 163 million dollars and free cash flow, as we mentioned a couple times, but worth repeating, was 5 million dollars for the quarter and 86 million dollars for the year. Inventory held constant at 75 million dollars, compared to the end of the third quarter, and receivables for the quarter were 46 million dollars, which was down about 2 million dollars from the third quarter. DSO at 40 days, was down 2 days from the third quarter, and 10 days from year-end of 2001. Looking at 2003, we would expect to see days sales outstanding remain relatively constant and inventory levels to be between 70 to 75 million dollars. at purchases are forecast at approximately 20 million dollars. Additionally, we project our tax rate will decline by half a point or so to 33 ½% as we continue to work on both US and international planning initiatives. Back to you, John.

Thanks, Merilee. Just to confirm, Merilee's 2001 versus 2002 SG&A was both before the goodwill amortization. So let me translate her components into an overall guidance for full year 2003 and first quarter. Based on the strong momentum in the business and the launch of LaserCyte, we see revenues growing approximately 13% to around 465 million dollars, consistent with the expectation that we communicated with investors during the fourth quarter. Also, as a result as our revenue outlook and improvement in our operations, we are raising our full year 2003 earnings guidance by 5 cents to $1.55 or thereabouts. In the first quarter, we see revenues of 108 to 110 million dollars, with earnings in the range of 30 to perhaps, 31 cents per share. For the first quarter, that would translate into 12% revenue growth and 15% earnings growth over the same quarter last year, when adjusting that first quarter 2002, adjusting out the one time CEO succession charge. So, it's on an apples to apples basis.

So, just to conclude my opening remarks, IDEXX Laboratories is a great business model of market leadership in our related businesses and a very unique combined position in animal health. In 2002, we saw accelerating growth, solid earnings and exceptional cash flow. I want to thank the team at IDEXX for what I consider to be a great year. Also we have done much to strengthen the business in 2002 and position us for an even better 2003. Finally, we continue to have an extremely strong balance sheet. My priorities continue to be focused on double digit, top line growth through new product launches that come from our great technology portfolio, such as LaserCyte and Cornerstone and to accelerate penetration of our under served markets through great distribution of our existing product portfolio. And, of course, to continue our track record of continuously improving operational excellence, supporting our gross margin and asset management performance. So, with that wrap that, I would like to now open it up for your questions. Mike?

Thank you, Mr. Ayers. The question and answer session will be conducted electronically. If you would like to ask a question today, you may do so by firmly pressing the * key followed by the digit 1 on your telephone keypad. We will take your questions in the order that you signal us and take as many question as time permits. Once again, to ask a question, please press * 1 at this time. And we'll take our first question from Rick Weiss from Bear Stearns.

Good morning. Couple questions. First of all, can you just make sure we understand in your top line guidance what your assumption is on currency? And second, maybe help us understand in a little more detail why gross margins were less than expected in the quarter? And that turns around so sharply in '03, thanks.

OK. Well, I'll take the one on currency, and Merilee can take the one on gross margins.

On currency, you know, the euro's gone all over the place. I think we have a conservative assumption in there. It's, I'd say, you know, several pennies less than it is right now. I don't know where it is. It was the last I looked, but I could even be off because it seems to change daily, but we're assuming a lower number for that. We hedge the currency for the year from a bottom-line point of view, so it doesn't really affect the bottom line.

Sure. But, just to make sure, to percentage change in revenues includes positive, neutral, negative? I just want to make sure I'm understanding.

Yeah, I think it's pretty much assuming neutral now, so that, you know, we just don't try to predict that ...

Sure.

... or put that into models, so.

I totally understand.

If the revenue is higher, we're not gonna see it drop through because we've hedged it.

I understand. Any gross margins, Merilee?

Yeah, the gross margin, as I've indicated, really the two primary factors that contributed to it being below what we had expected were really just the costs associated with LaserCyte scale up and launch, and as well, in the reference lab business, just due to the holidays and the need to provide staffing as people are out on vacation and incurring some overtime and things like that. We just had higher costs in those areas, and that really was what led to the lower performance.

And as we look forward into 2003, the primary driver here is volume leverage. As we just, you know, have a higher revenue base, we're gonna see some fixed costs spread over a higher revenue; things like our distribution areas and some components of our service businesses, as well. We also will see some manufacturing efficiencies; you know, some of those -- importantly and hopefully -- coming from the LaserCyte area.

And, as I mentioned as well, the clinical chemistry rental program, which we started a few years ago at the end of 1999 -- we now have instruments that will be fully amortized, and so we will be, you know, having the benefit of not having that amortization cost appear in our cost of goods, so.

OK.

Those are our two drivers.

And I will -- I'm just pointing out that we have achieved improved gross margins over fourth quarter 2001, as we had in the last quarter.

Yup. And then, two more questions, if I could. Just remind us of the consumables per LaserCyte instrument, and what you're seeing so far. And I hate to even ask you this question because LaserCyte's doing so great to start with, but how long -- how far do we have to go with LaserCyte installations if you hit your plan? Will we see a similar level in -- your thoughts about '04, or does it slow down? And really, the thrust of the question is, should we assume that in '04 you stay in the double-digit growth range, John, with, you know, LaserCyte at similar gross levels, or number of levels? Or, does Pharma have to kick in to keep you in the double-digit range in '04? Thanks.

OK. OK, the first issue on consumerables is I think it's way too early to validate our business model, which suggests that consumerables usage for LaserCyte will be higher than it is for Autoread. I can say that because it, you know, the first clinics we printed they really haven't even been out that long and they're typically clinics that are ones that are going to be higher consumers in the first place.

We're just - we're just way to early. There's no reason to invalidate our assumption that consumables usage and more hematologies will be run inside, but I think it's just way to early to.

And can you quantify at all what, you know, just what you expect to do better than for instruments?

Well, we have felt that the average field will benchmark the average of an R-reader utilization was around eight tests per week and we felt that we could see 15 per week for an average user of the hematology system. That's our - that's kind of built into our business model and business plan for hematology.

And, of course, in the case of LaserCyte the consumables that we have for the LaserCyte are of our own making and therefore are a significantly higher gross margins than the company as a whole or as the third party tubes would be for the auto reader.

That was the first question, and the second question was what happens in '04?

Exactly, and then just your general thinking there.

Well, '04 will be - I think it was a two-part question. I think the first part was, kind of, what happens with LaserCyte. We would expect to see that - we're still in a ramp up phase in the first part of this year. And next year we won't be in that ramp up phase so we would clearly expect to see LaserCyte sales to be higher next year than they are this year.

And are also we started to get the benefit of the installed base on the consumables. So that will start to flow through. I'm not sure we've given any kind of revenue guidance for 2004 yet and so I decline to do that. Certainly my objective is to have a business model here that has a double-digit growth rate and that could come from any number of initiatives and investments that we have in place, whether it be instrumentation or pharmaceuticals or other areas of the portfolio.

Thanks.

Once again, to ask a question today please press star one on your telephone keypad. Moving on, we'll take a question from with Merrill Lynch.

Good morning.

Good morning Tim.

Just a couple of questions here on the LaserCyte. I think you had said you had orders of roughly 230 systems share in hand, was that kind of what you're targeting in terms of shipments? What's kind of the limiting factor on that? Is it just in terms of manpower for installations or is it just manufacturing those systems? Kind of just shed some color onto that front.

Yes Tim, the 230, of course, doesn't include the instruments that we installed in the fourth quarter. That's an incremental number. And I think that demonstrates sort of the enthusiasm that the customer community has for this technology.

We have a plan and disciplined ramp up in terms of the whole organization here. That's, of course, includes a manufacturing. It includes the installation of this and it is a new technology and there's a fair amount of involvement in training the customers and a fair amount of learning associated with that.

And it also includes, of course, our legendary after sale service capability. So, it is - I'd say that the constraint isn't what we can sell. It's constraint that we want to do it right so that we've got, you know, we think we have a winner here and we want to just have a good disciplined ramp up so that it is done right every step of the way.

Then, let me see if I can rephrase my question, in terms of your disciplined ramp up, what is the factor that you're spending most time on to get it right? Is it the installation part, in terms of training the customers, or is it just in terms of doing the extra QC off the production line to make sure things are going out, fully within spec?

I'd say it's the QC, as you mentioned. The overall -- we're not wanting to just manufacture and QC and ship instruments. We are developing a manufacturing line, which is one which can do that with high quality and a sustainable process here. So, lean line. So, there is a fair amount of work going into not just making units, but making the line as disciplined and lean as we want. So, that's one piece and the other piece is you know, what -- what I would call the whole installation and after service -- this is our franchise and we have every objective of ensuring that our customers are happy with the units and so we want to make sure that we're putting them out at a rate which we can install and service them and continue to keep that franchise at the level that it's at.

That's great. If I can just switch gears to the pharma side then and just in terms of the pipeline, beyond MTZ and , I know you have the companion animal antibiotic and the like. Just kind of give a sense of what things deeper in the R&D pipeline besides the MTZ and ?

Hey, Tim. It's Erwin. You know about and we really haven't shared what else is in the pipeline but there are a number of new products that we are working on.

Then, I mean, instead of the specifics, can you just give a sense of how many product launches maybe we can see maybe in the '04 time frame out of the pharma side?

I can't really do that.

Okay.

I'll say that we have -- there is two parts to this equation, is what we have under our control, which is development and we have a typical phase review process where we have a lot more product early and then we make the choices on which ones we take through clinical trials and submit to the FDA, but I think, not only us, but certainly everybody in the community, in the animal health community, is -- we have to be, the FDA moves at their own pace and that's a factor that is not as much in our control, so we can't get -- in order to launch a product we've only got, of course, got to do our own work, but we also have to go through the FDA process.

Great. Thank you.

Once again, to ask a question press * 1 on your telephone keypad. Once again, that's * 1 to ask a question. And we'll go back to Rick Weiss with Bear Stearns.

Just a couple follow-ups. Cash is obviously growing nicely and even if you don't have as wonderful as cash flow year as in '03 as you did in '02, it sounds like you'll be adding cash. What are your thoughts about using that cash, John, just in terms of for the share backs, or are you thinking any more aggressively or thoughtfully about acquisitions? Is that a possibility?

I think acquisitions are always a possibility. We evaluate those and consistent with what we think we can do well and what will add shareholder value. The metric is, you know, a cash flow and strategic rationale - it's not whether something would be accretive. You can buy anything these days and it'll be accretive. So, that's a piece of it.

We will continue with our share buyback program in 2003. As you know, we have about - a total authorization of 10 million shares, of which we've purchased about 8.6 million. And so we have 1.4 million in that existing authorization that is outstanding, and we will be continuing with share buyback in 2003 as we did in 2002.

OK, thanks.

And Timothy Lee has a follow-up question.

Just one quick question - in terms of the heartworm season, with that coming up here, I mean particularly in Q1, should we expect to see some type of of shipment out to the distributors to kind of - in support of that season? So should we expect an uptick on that front?

I may turn that over to Lou. We certainly don't expect that we will be doing anything different than our overall objective of having a lean value chain. And, you know, we're at the level of weeks of distributor inventory that is, you know - is our target, so we're not going to see any unusual activity in terms of shipment versus clinic level demand, but I think we're pretty optimistic about our position at heartworm. Lou?

I agree, Jon.

OK, that's great. Thank you.

OK, are there any remaining questions?

We do have a question from with .

Thanks. Merilee, I didn't know if you gave the depreciation and amortization number for '02 and kind of what you expect for '03. And second, more of a general question on the LaserCyte System, and does - do you worry at all on impacting your, I guess, reference lab business if the - if the instrument is actually, you know, used that much and is as good as what you guys are saying, I guess? Thanks a lot.

Yes, I will turn the first question over to Merilee.

OK. I'll fill the numbers one here, Rob. The depreciation and amortization for the year was about $19.6 million. And for 2003, expect it'll be roughly the same as, you know - or maybe in the neighborhood of about $18 million.

Thanks.

With regard to impact on the reference lab business, we factored in a minor impact in 2003 in our plan. I'll make a couple of bigger comments, though. First of all, you know, we're not the major - we have - we have high market share - market share leading positions in the geographies that we operate, but there are many geographies that we don't operate. And in fact, if you look at the total U.S. reference lab business, we're - you know, we're by now means the majority. There's at least other out there that's about twice our size - roughly so.

And then the second is that we think that testing begets testing, and once clinics start having the capability of having their own in-house hematology, they're going to do more hematology testing. The overall number of tests done per clinic will go up. It'll probably benefit the in-clinic piece, but we wouldn't necessarily expect to see a sustainable decline in the - in the reference lab. We've done this - looked at this before, and - you know, when - because we do have clinics that are both outside lab and in-clinic, and sometimes they move from one category to the other or the other category to the first. And when people put an in-clinic lab in, sometimes the reference -- you know, typically the reference lab volume will go down, although, we've seen in the majority of cases over a period of time, it seems to recover to its original levels.

So, I think it's just that clinics in general are finding diagnostics are an important line in their business. It's important to their practice of medicine. You've got to -- you know, typically diagnostics plays a role in almost any sick patient visit -- blood diagnostics. And vets are continually advancing their understanding of how to use it, and therefore, their utilization.

So, you know, to summarize, we have a minor impact, and we think that's about right. But, time will tell whether there's a more fundamental shift, or whether our thesis of just more testing taking place is the result.

Great. Thanks a lot, and great quarter. Thanks.

Thanks, Rob.

Moving on, we'll go to Select Equity Group and Chris Arndt.

Yes, just a quick question.

Hi, Chris.

How are you doing?

OK.

If you could just comment on what you expect expenditures to be in 2003.

Yeah, we expect them to be about $20 million, Chris.

OK. Great. Thanks a lot.

That concludes today's question and answer session. Mr. Ayers, I'll turn things back over to you.

OK. Thanks, Mike.

Hey, I'd like to congratulate the IDEXX Laboratories' team for a great fourth quarter and a great 2002. I think we're in an exciting time here at IDEXX, as we launch products and use our technology strength to reinforce our position as the premiere and most innovative companion animal health company.

And I'd like to thank all of our investors for joining us today.

That concludes today's teleconference, and we thank you for your participation.