愛德士 (IDXX) 2005 Q3 法說會逐字稿

Good day everyone, and welcome to the IDEXX Laboratories third quarter conference. Just a reminder, todays conference is being recorded. Participating in this morning's call are John Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and Ed Garber, Director Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make regarding management's future expectations and plans and IDEXX's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Such statements include but are not limited to statements regarding management's expectations for financial results for future periods, and the timing of new product introductions. Listeners are reminded that actual results could differ materially from management's expectations.

Factors that could cause or contribute too such differences are described in IDEXX's quarterly report on Form 10-Q for the quarter ended June 30th, 2005 and its an annual report on Form 10-K for the year ending December 31st, 2004, which are on file with the SEC and also available on IDEXX's website at idexx.com.

In addition, any forward-looking statements represent IDEXX estimates only as of today and should not be relied upon as representing the Company's estimates as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future, even if its estimates or expectations change.

At this time, for opening remarks and introductions, I'd like to turn the conference over to Merilee Raines . Please go ahead, Ma'm Good morning, everyone, thank you for joining us this morning. Before I give you some highlights on our third quarter financial performance and the outlook for the balance of this year and for 2006, I wanted to mention the additional information that we've provided in our press release.

Along with the segment revenue information, you will see revenue and year-to-year revenue growth rates by product and service lines within our reporting segments. Also, we included some information on some of the drivers for year-to-year changes in P&L expense categories.

We hope that providing you this additional information helps you to get a better understanding of the results for the quarter in the context of historical performance and as a good compliment to what we will discuss with you now.

The third quarter mark continued solid performance for us with both revenues and earnings slightly above the high-end of our guidance. Revenues were $158 million compared to our projection of 155 to $157 million and diluted earnings per share were $0.61 cents compared to our guidance of 57 to $0.59.

The revenue over delivery was primarily driven by strong business performance and the inclusion of revenues from acquisitions which we completed in the quarter. Currency had a modest favorable impact to our guidance versus our guidance that we gave you back in July because currency rates, vis-a-vis the U.S. dollar, were a bit more favorable than we had anticipated back in July. The earnings favor-ability was the result of our higher revenues and a higher than anticipated growth margin as a percentage of revenues.

Acquisition integration costs came in at the penny that we had projected. Revenues for the total Company grew 18% over the third quarter of last year with currency being essentially neutral and acquisitions contributing 7%. Organic growth, adjusting for these factors was 10%, which is up from 7% for the first half of the year. International revenues of $52.5 million grew year-to-year by 31%, or 7% adjusting for both the impact of currency and acquisitions. As with the total Company, the Companion Animal segment revenues of $128.7 million increased by a reported 18%, of which 10% was organic.

As I mentioned, we made some additions to our laboratory and digital radiography businesses in the quarter. The acquisitions added nearly a million dollars to third quarter revenues and were essentially neutral to earnings.

Looking within the Companion Animal segment, our point of care rapid assay with revenues of $25.3 million increased year to year by 13% on a reported basis, or 10% when adjusting for the favorable impacts of currency and changes in U.S. distributor inventory levels.

Solid performance in our Canine business was the primary driver for this revenue growth. After a relatively weaker first half, year-to-date growth for rapid assay is 7%, adjusted for currency and distributor inventory changes, and we continue to project 7 to 9% growth for this product line.

Our IDEXX VetLab instruments and consumable accessories and services posted revenues of $52.4 million for the third quarter. Instrument sales comprised 9.2 million of the total. The momentum continues with placement activity and total placements to new customers up nearly 50% over a very strong third quarter last year.

Year-to-year growth was augmented by the successful launch of our new VetStat Electrolyte and Blood Gas Analyzer. However the core chemistry and hematology instrument are VetTest, Laser Cyte and QBC Autoread all had strong placements and they grew in excess of 20%.

As we've noted in the past, new placements of these core instruments of the IDEXX VetLab suite are the primary driver for the growth of our parietary consumables. Instrument reagent sales were $38.5 million, a growth of 10% on a reported basis and 6% when adjusted for the favorable impacts of foreign exchange and U.S. distributor inventories.

This is squarely in the middle of the longer-term growth rate range for instrument consumables, which we revised upwards to 5 to 7% last quarter. Laboratory and professional services revenues of $40 million increased by 36% year-to-year on a reported basis, and the two small acquisitions, which we completed in the third quarter, a lab in the UK, and a veterinary business of a Virginia-based human lab services provider, combined with our fourth quarter, 2004 acquisition of VetMed lab in Germany to contribute 28% to lab growth year-to-year.

Currency had virtually no impact on the growth rate for the quarter, and the year-to-date organic growth rate for labs is 9%, which is consistent with our longer-term guidance for growth of 8 to 10%.

Our Computer Systems and Digital Radiography product lines posted revenues of $7.2 million, which was an increase of 11% from the third quarter of 2004 or 10% when adjusted for currency. We enhanced our Digital Radiography offering with a third quarter acquisition of innovative technologies and systems or ITS.

ITS brings a direct digital line that fills out our current computed radiography product offerings and enables us to provide a complete range of digital imaging solutions for our customers. The acquisition was completed in September, and so it had minimal impact on revenues for the quarter.

Pharmaceutical products contributed $3.8 million to Companion Animal revenues in the third quarter.

As for our other segments, the Water business recorded sales of 6% or 5% currency adjusted with sales topping out over the $115 million mark. The Food Diagnostic segment, $14.3 million in the third quarter, which was a year-to-year increase of 29% as reported, or 18% adjusted for acquisitions and currency.

Our production animal business continues to show very strong performance with organic growth for the quarter of 27%. With regard to BSE, we received notification from the USDA in the third quarter that we had been awarded a contract to equip up to five labs with our BSE testing system. The labs are currently being selected by the USDA, and we expect to begin installation and training in the fourth quarter.

As we mentioned previously, we do not believe that the U.S. testing volumes will be very meaningful in relation to the European market. With regard to the European market, though the growth ran a bit slow due to the time required to build customer awareness and confidence in our tests and due to the existence of contractual commitments for other tests, we are pleased with the progress we are making in building acceptance for our testing system.

We reaffirm our projection for BSE revenues of 1 to $2 million for 2005.

As we look forward to the fourth quarter, we project revenues for IDEXX as a whole of 160 to $163 million, year-to-year growth of about 12%, with acquisitions contributing about 4% and currency having a negative impact of about 2%.

This performance would yield full-year revenues of 631 to $634 million, which is a reported growth of 15% or 9% organic growth.

As I mentioned, gross margin for the quarter at 51.5% of revenues came in about a half a point above our expectations, and this was due principally to manufacturing efficiencies and continued improvement in the after-sale support of LaserCyte.

For the fourth quarter, we expect the gross margin percentage to be closer to 51%, as the revenue mix in the quarter is traditional skewed toward relatively lower gross margin capital equipment sales.

Our operating expenses, which include R&D and SG&A, were essentially in line with our thinking at nearly 32.5% of sales. R&D ramped up quarter versus spend in the first half, as we increased investments in instrumentation development.

As we indicated last quarter, we believe we are on track to generate an operating margin in excess of 18% for the second half of the year. About 100 basis-point improvement over the first half. I expect we will see a modest decline in the operating margin as a percentage of revenues in the fourth quarter versus the third quarter, due to the reduced gross margin% I mentioned previously, and the fact that our new acquisitions will start out essentially break-even, as we work to improve their profitability profile.

We project diluted earnings per share of 58 to $0.60 for the fourth quarter, which includes an estimated $0.02 of integration costs. Implicit in this guidance is diluted earnings per share growth in the upper-teens to 20% for the second half and about 12% for the full year, after adjusting for the 2005 integration costs and the 2004 discrete items noted in our press release.

Now looking forward to 2006, we're projecting revenues of 695 to $705 million or 10 plus % growth over 2005 with currency negatively impacting growth by about 1% and our 2005 acquisitions contributing 1 to 2%.

Per our press release, our 2006 diluted earnings per share guidance of $2.36 to $2.48 incorporates our preliminary thinking on the impact of expensing equity-based compensation as required under FAS-123R.

Now, to give you some context for evaluating EPS growth, our 2005 earnings guidance translates to pro forma 2005 EPS, including equity compensation expense of $2.08 to $2.10, excluding $0.06 cents of integration costs.

This represents an approximate 11% reduction of earnings per share resulting from the pro forma expensing of equity compensation. If we were to compare this $2.08 to $2.10 for 2005 to our 2006 projection of $2.36 to $2.48. This would generate an earnings per share growth in 2006 of 12 to 19%. So weeding through all of that, 2006 revenue and EPS growth are expected to be consistent with our longer term expectations of 10 plus% revenue growth and mid-teens EPS growth.

To elaborate just a little bit further on the complex topic of FAS123 R, we anticipate that expressed as the percentage of earnings per share without expensing for equity compensation, the impact of expensing equity compensation will be relatively on par with or maybe slightly less than the 2005 pro forma impact of approximately 11%.

Of course, we, like other companies, who are readying to adopt this pronouncement, we're still in the midst of evaluating accounting methodology and compensation plans. These evaluations, combined with the inherent unknown, for the items that impact the calculation of the expense, such as future stock price, stock price volatility, employee exercise activity, et cetera, make this a very fluid projection.

As a couple of closing notes on the quarter's financial performance, we ended the quarter with cash and investments of $132 million. Cash from operations was $38 million and purchases of fixed assets and other assets were $7 million to generate free cash flow of $32 million in the third quarter, bringing year-to-date free cash flow to 58 million or just about 100% of net income.

We have $6 million of cash for acquisitions completed in the quarter. We repurchased 596,000 shares of stock in the quarter for a cost of $38 million. The cumulative repurchases for the year are 1.5 million shares.

As we noted in our press release, our Board of Directors has increased our share repurchase authorization by 2 million shares, which brings the total remaining shares under the revised authorization to 2.6 million shares.

Before I turn it over to John -- and I'm sure you're about ready for that at this point -- I want to mention that we will be making a change to our communications regarding financial guidance beginning next year.

When we update our guidance for 2006 at the time of our 2005 fourth quarter earnings release, we will be focusing our projections on the total year, and we will therefore not give guidance for the first quarter of 2006. As the year progresses, we will continue to express guidance in terms of the full year rather than on a quarter-by-quarter basis.

However, to the extent appropriate, we will continue to identify trends in the business that we think may have an impact on quarter-to-quarter performance over the course of the year.

We're making this change, not as a result of any change in our outlook for the business, but because this approach is consistent with the way that we manage the business, which is not to focus on single quarterly results but to maximize long-term value creation for our shareholders. Thanks, and I'll now turn it over to John.

Merilee, thanks for that detailed review.

As Merilee has indicated, we delivered a strong quarter in growth in both sales and earnings slightly ahead of our plan, where we would be at this point in the year.

As we've indicated on past calls, 2005 was to be a year of investment in the business, and we're beginning to see the returns on that investment even as we intend to continue making incremental investments.

Our updated guidance for the remainder of 2005 reflects that ahead-of-plan progress. For the first time, we're providing guidance for 2006. As Merilee has mentioned, our outlook is consistent with our long-term financial goals of 10% plus sales growth and mid-teen's earnings growth. Of course what makes next year's forecast different and more complex for most companies, including IDEXX, is the introduction of stock option expensing.

While there are many variables that will determine how stock option expensing ultimately will affect our income statement, we've incorporated our best estimate of this accounting change in our 2006 guidance.

While our financial results for the quarter were strong, I'm even more pleased with the progress we've made in building a business platform for sustained growth. We had a number of accomplishments in the past three months, and I'd just like to highlight a few.

First, our plan for new product introductions continues to be on track. For example, in our line of IDEXX VetLab in-house instrumentation, we have recently introduced or on track to introduce several new products. Our VetStat instrument, which had a very successful first full quarter of launch, is perhaps one of the primary ones. As investors know, VetStat is an electrolyte and blood gas analyzer that extends the IDEXX VetLab diagnostic capability.

We are pleased with the level of VetStat placements, many of which were placed in Banfield hospitals as part of our Banfield relationship, but also in the market in the U.S. and also the first product that we -- major product that we simultaneously launched in the same quarter in U.S. and Europe. And we had some European placements of VetStat.

The customer experience with the instrument has been excellent to date, demonstrating that we did our job in the development of the product prior to launch. The instrument exceeds our expectations in ease of use and reliability and meets our very high standards for diagnostic accuracy. And we back it up with superior customer support, as we do everything that we sell at IDEXX.

In Q3, we also had a successful launch of a new assay, Bile assest, which is a liver function test for the IDEXX VetLab.

Next week we're on track to launch three new products for the VetTest Chemistry Analyzer, including another new assay, lactate, useful in certain critical care situations. This is an assay that I mentioned in the last call. The two others are new panels. Our quality control panel, which consists of six slides, will make it more convenient for our customers to practice quality control on their in-house VetTest Analyzer. Building on the VetTest already strong reputation for uncompromising accuracy in in-house clinical chemistry.

We are also launching a new panel specifically designed to support the monitoring of dogs on long-term medication to address arthritis. By way of background, 5 to 6 animal health pharmaceutical companies market canine nonsteroidal anti-inflammatory drugs called Insed, under such names as Dura Max, Remadel, Edagesic, (ph) Medicam,(ph) Zubrant.(ph).

These medications are all long-term in nature and require the veterinarian to regularly monitor kidney and liver health through the enzymes in the blood to ensure that there are no adverse side effects from the medication. Our Insed monitoring panel with 5 chemistry slides provides a quick and convenient in-house solution. This monitoring protocol is good medicine and, through its link to the Insed treatment, supports the retention of the pharmacy business in the practice.

So as you can see, we are introducing an impressive number of new products for the IDEXX VetLab in line of instrumentation. Continuing our strategy of developing science based solutions to practical concerns of veterinarians and building on the value of the installed IDEXX VetLab list of instruments that we have in the veterinarian community.

We've also introduced an important -- achieved an important objective on the supply side of the instrumentation business relating to the QBC VetAutoread, which investors may know is our first generation hematology platform.

This month our previous supplier of instruments and consumables sold this business to another company. We participated in that transaction providing some of the purchaser's financing. In addition, we signed a new veterinary exclusive very long-term contract at favorable economics for both the supply of the instrument and the consumable. This secures our supply situation for this platform and improves our cost position.

We continued to see a long product life cycle for this product as it is a very effective and affordable in-house hematology instrument integrated with the rest of the IDEXX VetLab.

As Merilee has mentioned in her comments about instrument placement, the QBC VetAutoread contributed to the 20% unit growth in core instruments in Q3, despite the availability and growth of LaserCyte as a next generation hematology analyzer. This contract will be one additional, I'll be it small component of our expectation for improvement in our gross margins in the instrument business.

This accomplishment also ensures that we supply and support our install base of customers for the duration, consistent with our focus on long-term cultivation of our IDEXX customer franchise.

In one business that we don't typically talk about much on these calls is IDEXX Computer Systems. I'd like to add a few words today about that business.

We continue to make investments in the strategic product line in software development, customer support, sales and marketing. As investors know, we are the leading player in practice management systems for our franchise -- with our franchise Cornerstone offering.

We've had great success in placement will of Cornerstone Systems with unit placements up nearly 60% year-to-date. We're excited about the growth of the Cornerstone install base as this product truly is the cornerstone, if you will, of the move to electronic medical records.

As Merilee also mentioned, we're pleased with the addition of ITS to our digital radiography product line. The acquisition of ITS has immediately given us an equine radiography offering that utilizes direct digital imaging technology. However, perhaps more importantly for the long term, we have acquired a Small Animal Direct Digital System that is in development and that we expect to launch in 2006. Small animal here refers to a system specifically designed for the canine and feline species.

It will generate unsurpassed image quality at a competitive price and will utilize our proprietary picture archiving and communication system called IDEXX PACS that we developed for our digital radiography offerings. One comprehensive software and two hardware options at different price tiers will give IDEXX a unique and complete range of digital solutions for our customers. We look forward to the market conversion from film to filmless that will occur over the rest of the decade as we introduce high quality, yet practical and reliable systems for our customers. A final note on new product development opportunities is our BSE test for Mad Cow Disease.

In addition to developments that Merilee mentioned, in the European market we now expect to achieve approval for use of our BSE test kit in sheep and goats for a similar disease called Scrape.

In addition, we have demonstrated a protocol that shortens the test cycle time at our from 4.5 to 2.5 hours, reducing turnaround time for slaughterhouses waiting for results before they release their product.

We expect these two improvements to complete the regulatory and country approval process in Europe this quarter. Together they add unique and tangible benefits that further differentiate our second generation test technology.

These accomplishments give us confidence that our outlook for BSE revenues in 2006 is solid, and also the fact that we, and all other BSE test participants, are confronted with a downward price environment in Europe.

In summary, we're very pleased with the company-wide execution of our plan in the third quarter. As in past years, the sum of the parts of our plans have added up to the -- more than the whole. However, we've learned that not everything goes according to a plan, and our overall Company plan for 2005 and 2006 has some contingency for this reality.

Now we'll open up for any questions that you may have. Tracy?

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to Rick Wise with Bear Stearns.

This is Mike Bailey for Rick.

Good morning, Mike.

Good morning. Question for you on the EPS guidance for 2006. Can we talk a little bit about the stock option expense portion of that?

Doing some quick math, it looks like it might be something like $0.20 cents for the full year, as far as the stock option expense. Is that pretty reasonable?

Well, Mike, we're not actually breaking out the stock option expense other than the comments that Merilee made in the call which --Merilee.

Yes. I think, Mike, we tried to rather than back out the impact of options to normalize 2005 to say here's what that would look like with options in it.

We were really extrapolating from our financial notes that have been in our 10-Q. So, again, I think we laid out all the pieces there with giving the percentage EPS reduction being about 11% looking at guidance and saying that you can --

In 2005?

In 2005, and saying that you can look for it to be relatively on par with that to maybe slightly less of an impact as a percentage of EPS in 2006.

Hi, John. Hi, Merilee. It's Rick. Two questions, if I could. One, John, you talked about the gross margin improvement and some actions you'd taken and gross margins do continue to trend higher.

Can you maybe expand on that, and just remind us of some of the other initiatives that are underway, and maybe the kind of gross margin goals you have down the road?

And the second question, perhaps you could reflect a little bit on your acquisition strategy going forward, what areas you're looking at?

You continue to do some thoughtful, interesting technology acquisitions. What can we or should we expect over the next 12 months? Thank you.

Thank you very much. First, with regard to gross margin, I'll remind investors that we've had a disciplined process to improve the gross margins in a couple of our businesses. The first one, of course, is our instrumentation business.

We do expect gross margin improvement in that business in 2006, resulting from a number of productivity initiatives and the reduction of the cost position that we have in our consumable's base, primarily the chemistry consumables.

But it also now -- a very small additional contributor to that will be the reduction in the cost position in 2006 and some further cost reductions in the future years in our QBC VetAutoread consumable.

So it's an improving overall cost position in that and then also productivity in instrument manufacturing.

We also will look for continued productivity in our Lab Services business, globally, some of which has to do with acquisition integration and some of which has to do with the general improvement that will take place with normal operational initiatives.

So those are the two primary areas that will contribute to gross margin improvement in the Company.

We're not giving any kind of P&L geography for 2006 in our guidance. We'll give you a little bit more flavor of that next year as we get into it.

With regard to acquisitions, we are very pleased with some, as you've mentioned, thoughtful technology acquisitions, and that probably characterizes the nature of our acquisition strategy. It's not that we have a very large pipeline of acquisitions.

We're very focused on the growth of our core businesses, and I think that the types of acquisitions that we've made over the last couple of years would be very consistent with our acquisition strategy going forward.

It really -- but the major focus and the primary driver for growth in the Company will be the organic growth of our existing businesses.

Thank you, John.

Next to Ryan Daniels of William Blair.

Good morning, guys.

Good morning.

Good quarter on the instrument placement. I guess I was a little surprised to see that given Q3 is historically a slower quarter. Is there anything unique? Was it just the new products coming online that really drove that? It looks like the core business is up nicely, too. Is that more overseas or something of that nature?

Thank you very much for that comment, Ryan. It was just a very solid quarter that had probably three factors in it.

The first, was solid growth and instrument placements generally. I think every single one of our instrument categories had growth over the prior year contributing to that.

Second, was certainly the introduction of the VetStat. That was new category, and we had placements there. And third, was we started to place instruments in Banfield as part of our relationship with Banfield.

Regarding the Banfield relationship, should we look at that as kind of Q3 you placed it in all of their centers and going forward? That was a one-time blip and going forward it will just be with growth in their facilities or do you have some facilities yet to outfit with your equipment?

We still have the majority of their facilities to outfit with our equipment. So it's going to roll it over a number of quarters.

Great. And then anything on the Timicasin update? Is that in your guidance for '06, assuming a midyear roll out of Timicasin or any update there?

We do continue to be on track, and I reiterate what I said in the second quarter. Really no additional news that we expect to launch Timicasin some time in 2006. The revenues that would be associated with that launch are incorporated in our guidance.

On the VetStat, Merilee, I don't know if you've disclosed this in the past, but have you got a feel for what the annual consumable sales will look like for that as we look forward in our models?

I think we have not specified that particularly, but probably you can look at that -- again, this year, obviously, it would not be a very big contributor, but maybe somewhere in the 2 to $3 million category for 2006.

2006 total. Great. And last question and I'll jump off.

Have you guys seen any change? You mentioned a few things on the distributor inventory. Any change where the days inventory or weeks inventory has fluctuated? I guess there is a follow-up to that even, any comments on the health of the end market? It appears that, even given the slow down in consumer spending, people are still spending on their vets, so that will remain strong. A little help with those two would be great. Thanks.

I'll certainly take the first question. Distributor inventory levels have remained in the 3 to 4 range that they've been in for many, many quarters now.

And with regard to the overall market, I agree it looks pretty solid. I don't think it's affected -- we don't see any discernible effect by any change in consumer interest in providing healthcare for their pets.

Great. Thanks.

We'll hear now from Lee brown with Merrill Lynch.

John, Merilee, Ed, good morning.

Good morning.

Just a quick question on your integration costs that have been impacting the P&L to some extent. When do you expect that to be fully washed out, anniversaried?

Lee, I think we'll be pretty much done with those this year. The acquisitions that we talked about that happened in the third quarter of this year -- and they're very small, and they only have very minimal impact this year and virtually none next year.

So we'll be done with everything that we've acquired so far. I don't think you'll see any integration costs in 2006.

So that should help for an increase -- an additional increase in the operating leverage. Correct?

That's all a piece of it. That is certainly a piece of what was happening with operating margin in 2005.

Super. In terms of your outlook for BSE, I know that you mentioned for '05 you're expecting just 1 to 2 million, and you did reference pricing pressure in that area in Europe, but could you give us a ball park figure or what's in your plan or '06?

I think you can look at that probably in the 4 to $6 million range.

Super. And then, in terms of your expected pharmaceutical sales for '06 as well, I know many of us are expecting that to ramp markedly. What is ball park in your plan at this time?

I think at this point, we really don't want to give that. We'll talk more as we get closer.

But I think with the timing of Tomax and everything else being something that is a variable for us, we're going to hold off on that.

Could you just provide LaserCyte placements in the quarter?

We've decided -- and I think indicated last quarter -- that we're getting away from --

Getting away from that.

Let me follow-up with one last question. I apologize.

It grew.

Super.

It's a good number.

I understand moving away from that sort of myopic view.

You mentioned 228 to 230 for this year and with option expense 208 to 210, so about $0.20 of option expense. In looking at the Q's, you'd already had about $0.13 of stock comp in the first half. What's leading to basically a $0.07 hit versus in the second half -- versus a $0.13 hit in the first half.

What you missed there is the piece that the 208 to 210 is excluding the $0.06 of integration costs.

Oh.

So earnings per share --

Otherwise your math is perfect.

Yes. So if you were to look at it with that piece then, I guess EPS, including the pro forma impact of equity compensation expense would be 202 to 204.

Got you. That's much more sensical. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Robert Goldman with Key Banc.

Good morning.

Good morning, Robert.

I think, Merilee, with a clarification I heard might have answered the question, but it still seems to me, that when you adjust for the acquisition related charges in '05, and then adjust for FAS-123 in '06, that your adjusted earnings per share guidance might be lower than sort of your long-term annual projection in the higher teens.

Could you just comment on that and if there is a bit of a dip in '06, perhaps give us the explanation why?

Bob, I think just trying to do the math again -- I think, if you look at, again, an adjusted '05 pro forma '05 of 208 to 210, and then compare that to the 236 to 248, you do get a 12 to 19% year-over-year growth on a consistent basis. So, I think, that is in line with what we are --

What we generally said, which is mid-teens.

Just one follow-up then on the range. 12 to 19% is a pretty good sized range. What uncertainties are out there that lead to a need to have a fairly broad expectation?

That's a good question, Robert. We always have some uncertainties associated with the business that would be a contributor to the range, but the other factor is -- and I think you're going to find this to be the case with other companies in our situation with the adoption of FAS-123 is that there are going to be additional uncertainties associated with earnings that come from FAS-123R -- you know -- the tax effect, for stock price, options exercises, cancellations. It contributes another element. Thank you.

A follow-up question from Rick Wise .

This is Mike Bailey again for Rick. Looking at some potential products for your potential products that could grow, anything in the avian influenza testing market? I understand that IDEXX currently has a product, but have you seen any more interest there? Any more sales pickup? What are your thoughts on 2006 there?

Well, certainly the avian influence has gotten an amazing amount of publicity worldwide. We do sell an avian influenza product. It's a relatively minor contributor to our sales.

There just isn't a lot of diagnostic work done in that area. If it's a highly pathogenic strain, they just slaughter the flock, and it generally shows up in symptoms before it would show up in a diagnostic test, for reasons we can get into off-line, but the antibodies don't show up as soon as the symptoms show up.

I do think it's maybe contributed in some ways to the overall focus on zonotic diseases and maybe helped our Companion Animal business to some extent to that basis. What's interesting about our production animal services businesses, we just had really excellent core organic growth this year. I think, it's been in the area for the nine months year-over-year of 20%, not including the benefit of the acquisition, and that doesn't really include much benefit from either AI or the BSE test.

Great. Thanks.

And looking at the third quarter Pharma sales, I think it was about 500,000 more than we looked for, and I believe it was a record as far as the most sales ever.

Can you remind us what were the key drivers in the third quarter? Was there any seasonality there or do you think the drivers in the third quarter are likely to carry through for Q4 and next year?

I think that we had some strong growth in some of our feline products. The influent product is doing very well, and we see that continuing. We haven't particularly seen a lot of seasonality with our other products. We thought there would be some with the equine, but they have been relatively constant.

These are things that will probably carry into the fourth quarter.

One last one as far as acquisitions. We've seen a couple of smaller acquisitions in the last quarter with you guys.

Anything we should think about for the next year or so? Do you have any requirements for acquisitions? Is there anything you need? Or should we expect things to be very quiet there? Thanks. .

We feel very, very good about our portfolio, so we don't have any requirements for acquisitions. From time to time, something interesting comes along and we take a look at it as part of normal business operations.

But our focus really is on growing the core business and our guidance for next year in terms of revenue has no acquisitions in it, other than the ones that we've already discussed.

Great. Thank you.

Our final question today comings from Lee Brown with Merrill Lynch.

Just a follow-up question on the stock options. Can you give us sort of a ball park allocation in terms of P&L line items? We're going to have to put that EPS impact of $0.11 cents into the line items, so I was wondering if you could provide a bit of guidance in that regard?

Of the 11%?

Yes.

We really can't do that at this point. We're in the process of doing the same thing.

And I think, as we give a little bit more detailed guidance in January when we do our fourth quarter call for 2006, we will be able to help more there.

You're absolutely right, though, it will affect all the lines in the P&L.

Okay. Fair enough. I will touch base with you at a later date. I appreciate it.

Okay.

That is all the questions we have at this time. Mr. Ayers, I'll turn it back over to you for any closing comments.

Thank you very much. Thank you for attending the call.

I do want to thank investors for their continued confidence in IDEXX and our management team, and I certainly want to thank those who are on the call who are employees and management of IDEXX for their hard work and success in this quarter. And we are very, very excited about the future that we have in the business, and the momentum that we've had in the business, and we expect to continue to have in 2006 and beyond. Thank you all. And that ends the call.

Thank you. That concludes today's conference. Thank you all for joining.