愛德士 (IDXX) 2003 Q3 法說會逐字稿

Good day everyone, we thank you for your patience, and welcome to this IDEXX Laboratories Third Quarter 2003 Earnings Review conference call. Just a reminder, today's call is being recorded. For opening remarks and introductions we will now turn the conference over to Mr. Jon Ayers Chairman and Chief Executive Officer of IDEXX Laboratories. Please go ahead, sir.

Thank you, good morning, everyone. As is the usual custom I like to start by asking Conan Deady, our Vice President and General Counsel to review our Safe Harbor statement.

Thank you, Jon. Statements that we may make on this call regarding management's future expectations and plans and the company's future prospects constitute forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations of future events which are subject to risks and uncertainties. These risks and uncertainties include the timing and success of new product introductions, demand for our products and market acceptance of new products, availability of products and materials supplied to us by third parties, intellectual property protection of products and the impact on our business of government regulation and government approvals, competition, and technological change and litigation.

A further description of these risks and uncertainties is contained in our quarterly report on Form 10-Q for the quarter end June 30, 2003 which is 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 change.

Thanks, Conan. Let let me introduce the other members of the management team joining me today. Sitting with Conan and me are Merilee Raines, our Vice President and Chief Financial Officer; Bob Hulsy, Vice President of the Companion Animal Group and Louis Pollock, Senior Vice President of the Companion Animal Group and Doctor Bill Wallen whom as you know joined IDXX last month from Bear Diagnostics as the Chief Scientific Officer. We have several exciting announcements today as part of this call, including a very good quarter in revenue growth, earnings, and cash flow. We have continued with the discipline ramp of our revolutionary LaserCyte bench top hematology analyzer with placements of 377 units, which is 42% growth over the second quarter.

We have some very exciting news in our chemistry business with the new agreement of the supplier of consumables and a new slide packaging launch. As I will discuss in more detail in a minute, this new agreement sets a very attractive course for this business well into the next decade. On the stock [reed] purchase front, the board expanded the authorization by 2 million shares and, finally, developments in the management team include not only the addition of Bill Wallen in the third quarter but also the election of Merilee Raines as the Chief Financial Officer.

So I would like to start with the review of third quarter performance and an update on product development. As you saw in the press release, with revenues in the third quarter of $120 million, we achieved 15% year-over-year growth; a strong result and consistent with the expectations for double digit revenue growth in 2003. Three percent of the growth this quarter was due to favorable currency translation of international revenues. Fully diluted earnings per share came in strong at 44 cents, an increase of 23% over Q3 of 2002, and higher than our expectation of 39-41 cents.

As with last quarter, this was a solid quarter with good business fundamentals driving revenue and earnings over delivery. Free cash flow was $21 million for the quarter and $77 million year-to-date which was very strong. To remind investors, our definition of free cash flow is operating cash flow less capital expenditures, and a table reconciling operating cash flow to free cash flow is included in our press release which, if you've not yet seen it, is posted on the website www.IDEXX.com.

Cash in investments on the balance sheet were $241 million and debt remained below a million. Turning to the companion animal segment which comprises 81% of the total company sales; revenues were up 18% year-over-year, 3% of which was due to favorable currency translation. We continue to be on track with the ongoing rollout of the next generation LaserCyte Hematology Platform. We delivered and installed 377 units in Q3 which as I mentioned was 42% sequential growth over Q2. Average unit price continues to be stronger than expected at around 17,000. We see average unit price, or AUP declining over time and used 15,500 as a forecast estimate. This average realized AUP is lower than the list price of 18,900, primarily because we give customers credit for any existing hematology machine that they may want to trade, either our own [event] auto read or competitive equipment. Our current target for the fourth quarter is to place 450 LaserCyte units, which is consistent with the [inaudible] volume we currently expect for 2004 of around 1600 units. With this level of placements we ensure that our customers experience with LaserCyte remains everything we want it to be.

Our first goal with the program is, and always has been, customer satisfaction. As we have built, and are strengthening every day, an extraordinary franchise with companion animal veterinarians around the world. We are there for the customer for the long haul not just the initial instrument sale, and of course this includes the world class renowned after sales support and sales efforts.

While we have a customer -- when we have a customer purchase the LaserCyte it's exciting for us to see in-clinic hematology go to a whole new level with 24 hematological parameters, including a five part white blood cell differential and an absolute reticulocyte count in every run. The instrument is also noted for the ease of use which is critical in the hectic vet clinic as well as the advanced analytical capabilities of the proprietary vet station software This software and the PC that comes with the LaserCyte system provides historical data retrieval and conductivity to the rest of the IDEXX VetLab as well as the IDEXX Practice Management Information System. With the vet station PC we're also developing the capability to run and diagnose instrument service issues remotely which is unique in our industry and something new we are adding to the machine.

As you saw with the other press release today, we are announcing an exciting development in the chemistry business. We have signed a new agreement with our supplier of chemistry consumables, Ortho-Clinical Diagnostics, or OCD, a subsidiary of Johnson & Johnson, extending our collaboration and support agreement through 2018 providing a long term supply of instrument consumables, that is "dry slides," at an attractive cost.

Our current vet test, Chemistry Platform, uses OCD dry-slides as the reagents for serum chemistry blood testing. Vet Test, with the use of dry-slide reagents, has several advantages that make that test the best and most used in-clinic chemistry system in veterinary medicine. First, dry-slides are the standard for accuracy in the human and veterinary fields, with precision across the wide range of possible values that might be exhibited by dogs or cats and the ability to fill out [interfering] substances common in blood serum that might otherwise affect the results.

Second, Vet Test has the most extensive test menu with 21 chemistries; more than any other system.

Third, Vet Test menu flexibility and the veterinarian can run any number and combination of chemistries depending on the needs of the patient. Fourth, Vet Test timed result is 8 minutes; half that of instruments sold by our nearest competitors. And fifth, IDEXX as previously mentioned has renowned after market customer sales and service support which simply cannot be matched by competition.

The veterinarians have come to depend on IDEXX, and the Vet Test system, for their extensive in-clinic clinical chemistry needs, and that is why we have sold over 27,000 systems and have roughly 70% of the install base of in-clinic chemistry systems globally.

With this new agreement, IDEXX is committed to the development of a next generation platform that will utilize dry-slide technology. The new chemistry instrument will build on the current superiority of Vet Test previously mentioned and will also incorporate significant advances in ease of use, sample through put, further expanded test menu, and advanced analytical capabilities of the Vet Station PC that now comes with LaserCyte. We think that customers will be very excited by the prospect of a new dry-slide instrument that will incorporate improvements on what they already highly value in Vet Test.

The extension of our commitment to dry-slide technology for this next platform provides several additional benefits to our chemistry business, including a secure long-term supply of consumables for both Vet Test and the new platform at an improved cost to IDEXX: Lower risk and capital requirements in the development of a new chemistry platform. In other words, we don't have to develop and manufacture our own menu of chemistry consumables.

Third, the opportunity to continue to increase the volume of dry-slides sold in veterinarian medicine worldwide over the next decade. And fourth, other efficiencies associated with the common consumable technology in both current and next generation analyzers. As a result in the new agreement, we're going to discontinue the development of an alternative clinical chemistry instrument that we had underway and its associated menu of chemistries. This continuation will result in the writedown in the fourth quarter of the value of the manufacturing equipment that we had purchased to date as part of the planning for consumables manufacturing with this alternative instrument platform. We estimate this charge to be approximately $7.3 million, pretax, or 12 cents per share after tax. The prospective charge is entirely non-cash as it consists entirely of capital equipment previously purchased.

We have chosen instead to focus the development efforts in clinical chemistry on the next generation dry-slide instrument. Importantly, we don't expect the launch time frame for the next generation chemistry instrument to be affected by the decision to proceed with the new dry-slide instrument rather than the technology we were developing internally. We already have underway, during 2003, advanced work on a new dry-slide instrument, and it is fundamentally a simpler and lower risk development effort. While our alternative chemistry platform was on track and had attractive customer value proposition benefits and economics for IDEXX, our opportunity to continue with dry-slide technology is an even better outcome for IDEXX and our customers with no negative impact on time-to-market for the new instrument.

Another chemistry announcement we are making today is the introduction of new packaging for our Vet Test chemistry customers that enhances the attractiveness of purchasing individual chemistry slides or so-called single slides. By way of background for investors: Up until now if a customer wanted to purchase individual slides as opposed to a panel of slides for any of the 21 tests available on Vet Test, say glucose or cholesterol, they would have to purchase a box of 25 slides of that chemistry. On November 1st, IDEXX is introducing single slides in a 12 slide per box package for all 21 chemistries. This smaller package size is in response to our customers' requests for easier access to Vet Test single slide flexibility. This is the first new IDEXX offering in the Vet Test line in several years and demonstrates our renewed commitment to investing in the Vet Test platform for the long haul.

We are confident that the new singles packaging, along with a number of associated special offers designed around specific medical protocol will be an exciting development for our customers and our distributors and will generate new energy in our chemistry business.

Let's now turn to instrument consumables and rapid assays. First, please keep in mind that year-over-year revenue growth in our in-clinic diagnostic consumables and rapid assays can fluctuate from quarter to quarter due to a variety of factors, some of which are unrelated to the underlying demand at the clinic level, currency translation being only one such example. So, because reported revenue growth in a particular quarter isn't always indicative of what we believe to be the underlying growth for a particular product line, I'll also give an estimate of the underlying rate of growth of market demand that we see for instrument consumables and rapid assays.

Also, before I get to reporting sales, I'd like to comment first on U.S. distributor inventories. As investors know, we sell almost all of the test kits in instrument consumables in the U.S. through distribution. At the end of the third quarter we estimated that about $9.7 million of inventory was in U.S. distribution--about the same as the end of the second quarter or 3.4 weeks of forward demand for test kits and consumables. This level is about in the middle of the 3-4 weeks range optimal for our distributors. Note that during the third quarter of 2002 we only had a small estimated reduction in U.S. distributor inventory from the second quarter 2002.

Since this year's distributor inventory levels were also flat from second to third quarter, out-the-door growth in the sales of rapid assays in [inaudible] consumables taken as a group were reflective of clinic level demand, unlike the first two quarters of this year where the affect of period to period differences and distributor inventory changes caused reported growth to exceed growth in in-clinic demand. This is a long way of saying that this quarter's reported results for products sold through distribution were pretty true to real demand as we see it.

Now, for instrument consumables: over all worldwide reported growth grew 12% or 8% at constant currency. Given all the trends in the business we see underlying worldwide demand in instrument consumables growing in the 4-6% range. Consumable growth is supported by three strategies.

First, a variety of marketing programs to support the practice of better medicine and, thus, consumable utilization and the new singles' packaging just previously mentioned is only the newest example.

Second, continued instrument placement of both Hematology Systems, LaserCyte and QBC that auto-read and chemistry which would be our Vet Test platform.

And third, customer loyalty and retention. LaserCyte consumables do not generate any meaningful incremental volume in 2003 due to the low install base and the replacement in many locations for a currently operating IDEXX QBC Vet auto-read system.

Turning to our rapid assay line in the segment: These are the single-use point-of-care kits that test for the presence of certain infectious disease or infectious or vector born diseases.

Worldwide reported sales were up 14% or 13% in constant currency. We had particularly strong performance in rapid assays Q3 benefitting in part from the apparent difficulty of one of our competitors supplying products that compete with two or our single analyte snap tests. That would be canine heart worm and feline leukemia virus and growth of those products was about expectation. Our proprietary 3DX test, the 3 in 1 snap test for dogs, also continued to perform above expectations; and feline combo, that is feline immunodeficiency virus and feline leukemia virus in one test performed very well. The estimate for future growth and demand of our rapid assay kits is in the 7-9% range. Turning to our lab services line of business, the key service offering of IDEXX's companion animal group, laboratory services worldwide continue to show very nice growth in sales of 15% versus third quarter of 2002, with 2% coming from favorable currency translation.

Our computer systems business sales growth in the third quarter was 6% over last year which was lower than our expectation, although orders and backlog of Cornerstone systems, the market leading practice management software for the veterinary clinic, continued to be very strong.

In the companion animal group we essentially completed the two year rollout of Practice Developer with our U.S. veterinary customers, our loyalty program that allows clinics to earn points with purchases depending on the number of product categories they purchase from and the volume of those category purchases. We have unrolled almost 1,000 additional clinics this quarter with total member ship now over 6,000 clinics.

At IDEXX pharmaceutical our pipeline includes three products currently in regulatory review. The first, Nitazoxanide or NTZ, which goes by the name Navigator is our proposed treatment for Equine [inaudible]-mylioencephalitis--a debilitating neurological condition that, left untreated, can cause permanent nerve damage. This is an attractive market currently estimated at about 40,000 treatments annually. Navigator has an 81% success rate with EPM diagnosed cases in open trials. We still have no news regarding FDA approval, although we believe we are on track for FDA approval this quarter and we are prepared to launch the product upon receiving this news.

Another product on FDA review is our topical non-steroidal anti-inflammatory drug or [N-SET] the drug [Dyclopenax]. This product is being developed for the treatment of lameness in horses. The active [Dyclopenax] is formulated in a lyposomal delivery system which provides targeted drug delivery that is applied topically at the point of lameness, typically the knee or [thetlock].

Regarding the regulatory status of the [Dyclopenax] application, we had answered all of the FDA's questions regarding the manufacturing in a new animal drug application submitted in August. Also, we believe all of the third party preapproval inspections have now been satisfied. We would expect the FDA would take their normal nine month turn around time for approval, although it could be longer depending on the FDA's backlog, it's hard to predict.

The third product in FDA review is our [tellmycosin] single dose antibiotic product for cats. All of the various technical sections of the new animal drug application, including pivotal efficacy, pivotal safety, chemistry and manufacturing controls and labeling were submitted in the second quarter to the FDA under their phase-review process. We have no new news with this product since Q2 and are essentially in the regulatory waiting period. While the potential for this product we feel is significant because of the uncertainty of the regulatory process we have no expectation for revenues in 2004.

Now, a brief review of our other operating segment, the Food and Environmental Group, which contributes 19% of our total revenues.

We saw top line growth of 3% in the quarter with all the growth coming as a result of strength in foreign currencies. Our production animal services business revenues declined 6%. The comparison in the business was especially tough because 2002 period was unusually strong for PAS. We have in development a novel diagnostic for chronic wasting disease, or CWD, an infectious disease state in deer and elk similar to mad cow disease or BFC.

We have commenced the regulatory review process with the FDA for CWD diagnostic and have a customer who publicly commented they will purchase it upon approval. All things going right, we would expect USDA approval this quarter. While the over all sales potential for a CWD diagnostic is small, the pending success of this technology bodes well for it is the same technology that we have in development for mad cow disease.

The water quality testing business achieved 10% growth for the quarter due to the good volume and the benefit of currency and the dairy residue testing business revenues were essentially flat.

I would like to now turn it over to Merilee Raines but before I do that I'm delighted to comment on Marilee's election as our Chief Financial Officer. Merilee has demonstrated extraordinary financial leadership at IDEXX in the last two years. I need only comment to investors on the working capital management and cash flow generations as one example. She is also a strong force in the company's operating performance and strategic direction. Congratulations, Merilee.

Thanks very much, Jon. I would like to take a minute to express my thanks to our great finance team at IDEXX for the role they played in the accomplishments that you mentioned and their over all support of off business. It is a pleasure and true privilege to work with them. Of the revenues for the quarter of $120 million, international revenues were $35 million an increase of 18% over 2002.

As mentioned, currency accounted for about 3 million or 3% of top line growth. Relative to guidance for the third quarter, exchanges favorably impacted revenues by about $600,000. The bottom line impact of strong currencies was negligible due to local currency expenses and offsetting losses on hedging activities.

For the fourth quarter we expect revenues to grow by 12-14% with growth in our core business and ramp of LaserCyte augmented by continued favorable exchange. Revenue growth for full year 2003 should be about 14% to a little better than $470 million with 4.5% or so of the growth coming from LaserCyte. The gross margin and 49% was on par sequentially and about a half a point better year-over-year and at the high end of the guidance of 48-49%.

Growth in the prior year was driven by pricing and exchange, some volume leverage from higher revenues and reduced amortization of Vet Test instruments placed through the rental program.

For the fourth quarter of 2003, we expect margins to be closer to 48% as we lose some benefit of favorable revenue mix from the seasonality of the higher margin rapid assay products. Additionally in Q3 we recognized favorability from lower than estimated health benefit spending which we do not expect to reoccur in the fourth quarter. Total year gross margin should be a little over 48%.

Moving to operating expenses R&D came in at $8.4 million in the quarter or 7% of the revenues compared to $7.3 million or 7% for the third quarter last year. We expect R&D to remain at the 7% level for the fourth quarter and total year.

SG&A expenses at $27.4 million or 23 percent of revenues compared to $25 million or 24% of revenues for the third quarter last year. The spending, which increased slightly sequentially, was somewhat below the expectations primarily due to slower than planned ramp and staffing. For the fourth quarter we would expect SG&A to be a little over 23% of revenues. Operating profit at 23 million was 19% of revenues compared to $18 million or 17.5% of revenue last year. The margin was a point or so above expectations driven by a combination of strong revenue performance, improve in gross margin percentage, and lower operating expenses.

Based on our thinking about the gross margin and operating expenses for the fourth quarter, we expect that total year operating margin will be approximately 17% of revenue or approximately 18% excluding the estimated non-cash charge of $7.3 million for write down of fixed assets.

Net income of 16 million or 13% of revenue compares to net income of 12.5 million or 12% of revenues last year--an increase of 28%. Earnings per share of 44 cents for the quarter compares to 36 cents for the third quarter last year as already mentioned an increase of 23%.

We expect earnings per share to be 27-28 cents for the fourth quarter or 39-40 cents excluding the charge. EPS for the year should be approximately $1.53 or $1.65 precharge.

With regard to the balance sheet, cash and investments increased by 31 million in the quarter to $241 million. Cash from operations was 26 million and we purchased 5 million of fixed and other assets. Inventory at $69 million was down about half a million dollars from the end of the second quarter and turns were approximately two. Receivables for the quarter were 51 million, essentially flat with the second quarter and DSO at 39 days was up one day from Q2 and down three days from the third quarter last year.

We did not repurchase any shares in the third quarter due to the pending status of the announcement regarding the new agreement with Ortho-Clinical Diagnostics. The total current repurchase authorization including the two million shares just authorized by the board and communicated in the earnings release stands at 2.7 million shares. This increase in the repurchase authorization reaffirms the commitment to a regular buyback program as we believe that IDEXX stock is an attractive investment. Share buy back, investment in our current businesses, and acquisitions close to our core businesses remain our strategy for deploying cash in a manner that creates maximum shareholder value.

For the fourth quarter expect to see DSO remain constant and inventory levels to increase to $75 million due to the timing of purchases of chemistry consumables is. Fixed assets forecasted at approximately $20 million. For 2004 we are comfortable with crept street estimates for revenue of approximately $520 million and earnings per share of $1.83 to $1.85. Back to you, John.

Thanks, Marilee. I continue to be excited by IDEXX's attractive strategic position in the Companion Animal Health Market, a market which is seeing long-term secular growth due to the bonds between humans and their pet companions.

In the third quarter we continued to report double digit revenue growth, great earnings, growth, and strong cash flow. Our priorities going forward continue to be focused on top line growth through a combination of new product introductions on innovation, such as LaserCyte, the pharmaceutical pipeline and in the future a new chemistry platform. And further penetration of our underserved markets through great sales and marketing of our existing product and service offerings. We also expect to extend our track record of continuously improving operating excellence and quality performance, supporting improvement in gross margins and return on invested capital. With that I would like to open it up to investor questions.

Q&A

To ask a question press star one. If you are on a speaker phone turn off your mute function to allow the signal to reach the equipment. Star one to ask a question. We'll move to Tim Lee with Merrill Lynch & Co.

Good morning.

Good morning,Tim.

First, Marilee congratulations on your promotion there.

Thank you very much.

Well deserved I'm sure. A couple questions here in terms of the LaserCyte--noted the Q3 average realized prices were higher than expected. Was that a function of lower swapouts or new accounts you are going into, more of an expansion of the customer base rather than upgrading existing customers?

Tim, it is Marilee and I will take that one. The increase in the selling price is in good part attributable to the fact that we had a larger number of international units sold in Europe this quarter.

And was that like about a hundred units shipped over to Europe or give us a...

We sold about 60 in Europe.

Thank you. And then kind of looking at the full year expectations. If I were to look back to my notes here, I think you were targeting 13-1400 systems previously in terms of placements for the year but based on the current outlook for 400 to 450, I believe that translates to something like 1225 to 1275 if I'm not mistaken, so just kind of your thinking as to why the more conservative outlook here for the fourth quarter?

Well -- we are very pleased with the progress on LaserCyte and the ramp and as we get into the program we think that that is the right level of new placements that ensures a high level of customer satisfaction.

Recognize that these are customers that we also have -- do a lot of other business with and so we have the ability to actually leverage LaserCyte into the sales of other products and we want to make sure that we have a balanced focus not just selling LaserCytes but selling everything that is of value to the clinic so as we balance our focus across all of the product lines and ensure customer satisfaction on the LaserCyte placement we think that is about the right level.

All right. In fact, just one more question, if I may. In terms of your outlook for next year the $520 million sales outlook--what is your expectations on the pharmaceutical side for that number?

We probably would expect that to just about maybe double from the revenues that we have this year. So maybe ending up being about some where $12-$13 million.

Great, thank you very much.

Thanks, Tim.

And with one question remaining in the queue, once again if you would like to ask a question press the star key followed by the digit one. Moving on to Rick Wise with Bear Stearns.

Good morning, this is actually Dee. I wanted to ask about the Companion Animal Group. Considering at the vet clinic level less vaccinations are being advocated and possibly the revenues on that side are declining and that is still over 90% of your business. You seem to be growing quite healthy that area and wanted to understand what kind of dynamics you are seeing. Are they turning to other options to generate revenue where you are benefitting? If you could give us some color on that?

Sure, thanks, Dee. There is a -- there is a trend towards away from vaccinations which is a general concern to the vet industry and doesn't really affect us directly but as a result there is more and more wellness care as a -- and other types of higher level of care. And all of those generally benefit diagnostics.

One of our successful programs has been a senior care which is really all about setting baseline blood values starting at the age of seven so that you can more effectively monitor subtle changes and those baseline blood values of course generate consumable revenue for us and there is also more focus on proactive testing and this would help both the Lyme disease, 3D X, and the FIV products. There is more focus on doing testing prior to putting a pet under anesthesia and there is greater focus to doing monitoring of kidney and liver when pets go on these long-term medications. There are a number of inset therapies that are being introduced by the pharmaceutical companies and they all require regular monitoring of kidney and liver function which is basically four chemistry tests perfect for the Vet Test to be monitored on a regular basis so there is a -- it is shifting more towards other types of care, away from vaccinations and I think net it is probably positive for the vet industry. It is very positive for us because diagnostics is typically a growing area of the clinic.

And just a couple of followup questions on LaserCyte. Is the profile of customers adopting LaserCyte remaining consistent over time throughout the course of launch? And two, at accounts where LaserCyte has been for example functioning for let's say about six months--are you seeing an increase in utilization levels? Are they in line with your expectations? Can you just tell us a little bit about how that is going?

Yes, first of all, I think after the very first group of customers that we had where the, you know, they have been -- they were sort of the early adopters, beyond that I think that there isn't really any change in the profile of the customers other than the fact that of course we have been growing the international component of it and had a very successful launch in the -- in Q3 in our continental European country accounts-- previously we had simply been in the UK so that is going very well.

With regard to utilization of the machine certainly it is our theory and expectation that on an apples to apples basis there will be more in-clinic chemistry done and we continue to monitor this. It is still really too early to give a number but we are very confident we are seeing an increase in utilization now when you do an apples to apples comparison of someone having a prior technology machine and having the current technology machine with the five part white blood cell differential and all of the other hematological parameters---there are more reasons to do a CBC and we are seeing that but I don't think we have -- I think we can say, from a statistical point of view, we are seeing an increase but aren't able to put numbers on it that are meaningful yet.

Thank you very much.

Once again, that is star one to ask a question. We'll now move on to Chris Arnt with Select Equity Group.

Hi, Jon. Congratulations on the quarter. Let's see, can you comment on how the new agreetment with Ortho-Clinical Diagnostics can you comment on your cost position under the new equipment, and when would you think you will transition to the new equipment?

I can say that over -- say that over time it is an improved cost position but we are not getting into any details. Obviously it is an agreement that we are very pleased with and think it is fair to say that it is an agreement that our supplier is pleased with or they wouldn't have entered into it with us so it is good for both of us.

Our time frame for a new instrument; this is a new platform. It's just the machine. It's not you know, the fundamental chemistry consumable. Our time frame for a new instrument; this is a new platform. It's just the machine. It's not you know, the fundamental chemistry consumable. There is a--we've done the advanced work, but we haven't gotten into the depths of it. I would not expect this machine, certainly in the near term, because we have a development program ahead of us... So we are not really -- we're not giving a date yet. We probably get better understanding of that through the course of 2004. But we feel pretty good about the agreement.

Oh okay. Is this a piece of equipment you anticipate selling or will you be placing it with existing customers?

We would -- we would be selling it to existing and other customers. It'll-- it will be a great -- it will be a great incremental platform and I might say we already have a great platform out there with Vet Test and it is the premier platform, but this one will take it to the next level. So it would be an instrument sale because there would be a lot of value to that and then of course the follow-on the consumable business similar type of business models we have with Vet Test--very similar and we will by the way, continue to support the Vet Test for quite a, you know, easily over the next decade. It's a great platform.

One other question, if I may. Can you comment on the outlook for the rapid assay test kits, you know, perhaps the penetration of the 3DX combo test versus the older heart worm, you know single heart worm tests or dual tests and it just seems like this category has been stronger than expected this year, and I was wondering if you would provide some color going forward?

Yes. It is -- you're right, it continues to be nice. I would say that we have now topped 50% in terms of our unit volume in 3D X as a percentage of the total tests sold. We have increased the number of clinics by another thousand that have purchased the unit over this time last year.

And obviously the 3D X has the higher AUP, so the revenue percentage is larger than the unit percentage. And we're just -- you know, I don't think it will ever get to 100% penetration. But, it does have -- it has just been great product for us and continues to show great strength in the market.

Okay, thanks a lot.

And one final reminder, if you would like to ask a question, please press the star key followed by the digit one. Next with a followup from Tim Lee.

Two quick questions. Did you give the backlog number for LaserCyte? Did I miss that or?

We -- our backlog is a little over a hundred, about 125 units or so. Consistent with the expectation.

Okay. And just a second real quick question in terms of the total instrument placements what were they in the quarter?

The total.

LaserCyte, QBC, and vet test combined.

900.

Great, thank you very much.

That does conclude today's question and answer session. At this time I'll turn the conference back over to Mr. Ayers for any additional or closing remarks.

Thank you all, I think we been pretty come comprehensive in the opening remarks and we continue to be excited about the future here at IDEXX, and thank you for your attention and investment.

That concludes today's conference call. Thank you for your participation.