| IDEXX LABORATORIES INC /DE Item 1A Risk Factors |
| ” 6 _________________________________________________________________ PRODUCTION AND SUPPLY VetTest^® Chemistry Analyzers are manufactured for us by Tokyo Parts Industrial Company, Ltd |
| under an agreement that renews annually unless either party notifies the other of its decision not to renew |
| VetTest^® slides are supplied exclusively by Ortho under supply agreements with Ortho (the “Ortho Agreements”) |
| We are required to purchase all of our requirements for our current menu of VetTest^® slides from Ortho to the extent Ortho is able to supply those requirements |
| In addition, we have committed to minimum annual purchase volumes of certain VetTest^® slides through 2010 |
| The Ortho Agreements expire on December 31, 2020 |
| The VetAutoread™ Hematology Analyzer is manufactured for us by QBC Diagnostics, Inc |
| (“QBCD”) under a supply agreement that expires on December 31, 2020 |
| The VetLyte^® Electrolyte Analyzer is manufactured for us by Roche Diagnostics Corporation under an agreement that requires Roche Diagnostics to supply analyzers through December 31, 2006, and consumables and spare parts through December 31, 2013 |
| The VetStat™ Electrolyte and Blood Gas Analyzer is manufactured for us by Osmetech, Inc |
| under an agreement that requires Osmetech to supply analyzers and consumables through 2015 and we have an option to extend this agreement for an additional four years |
| We have certain minimum purchase obligations under these agreements |
| We purchase certain other products, raw materials and components from a single supplier |
| These include active ingredients for our pharmaceutical products, certain digital radiography systems, instrument consumables, and certain components used in our SNAP^® rapid assay devices, water testing products and LaserCyte^® Hematology Analyzers |
| We have in the past been successful in ensuring an uninterrupted supply of products purchased from single source suppliers |
| However, there can be no assurance that uninterrupted supply can be maintained if these agreements terminate for any reason or our suppliers otherwise are unable to satisfy our requirements for products |
| We do not generally maintain significant backlog and believe that our backlog at any particular date historically has not been indicative of future sales |
| COMPETITION We face intense competition within the markets in which we sell our products and services |
| We expect that future competition will become even more intense, and that we will have to compete with changing technologies, which could affect the marketability of our products and services |
| Our competitive position also will depend on our ability to develop proprietary products, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans, obtain or license patent rights, and obtain adequate capital resources |
| We compete with many companies ranging from small businesses focused on animal health to large pharmaceutical companies |
| Our competitors vary in our different markets |
| Academic institutions, governmental agencies and other public and private research organizations also conduct research activities and may commercialize products, which could compete with our products, on their own or through joint ventures |
| Some of our competitors have substantially greater capital, manufacturing, marketing, and research and development resources than we do |
| Competitive factors in our different business areas are detailed below: • Veterinary diagnostic products and food and water testing products |
| We compete primarily on the basis of the ease of use, speed, accuracy and other performance characteristics of our products and services (including unique tests), the breadth of our product line and services, the effectiveness of our sales and distribution channels, the quality of our technical and customer service, and our pricing relative to the value of our products |
| • Veterinary laboratory and consulting services |
| In this market, we compete primarily on the basis of quality, service, technology, and our pricing relative to the value of our services |
| We compete in certain geographic locations in the US with Antech Diagnostics, a unit of VCA Antech, Inc |
| • Veterinary pharmaceuticals |
| We compete primarily on the basis of the performance characteristics of our products |
| We compete primarily on the basis of ease of use, connectivity to equipment and other systems, performance characteristics, effectiveness of our customer service, information handling capabilities, advances in technologies, and our pricing relative to the value of our products and services |
| 7 _________________________________________________________________ GOVERNMENT REGULATION Many of our products are subject to regulation by US and foreign regulatory agencies |
| The following is a description of the principal regulations affecting our businesses |
| Veterinary diagnostic products |
| Most diagnostic tests for animal health applications are veterinary biological products that are regulated in the US by the Center for Veterinary Biologics within the USDA Animal and Plant Health Inspection Service (“APHIS”) |
| The APHIS regulatory approval process involves the submission of product performance data and manufacturing documentation |
| Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for review before release to customers |
| In addition, APHIS requires special approval to market products where test results are used in part for government-mandated disease management programs |
| A number of foreign governments accept APHIS approval as part of their separate regulatory approvals |
| However, compliance with an extensive regulatory process is required in connection with marketing diagnostic products in Japan, Germany, the Netherlands and many other countries |
| We also are required to have a facility license from APHIS to manufacture USDA-licensed products |
| We have obtained such a license for our manufacturing facility in Westbrook, Maine and Memphis, Tennessee |
| Our instrument systems are medical devices regulated by the US Food and Drug Administration (“FDA”) under the Food, Drug and Cosmetics Act (the “FDC Act”) |
| While the sale of these products does not require premarket approval by FDA and does not subject us to the FDA’s Good Manufacturing Practices regulations (“GMPs”), these products must not be adulterated or misbranded under the FDC Act |
| Veterinary pharmaceuticals |
| The manufacture and sale of veterinary pharmaceuticals are regulated by the Center for Veterinary Medicine (“CVM”) of the FDA A new animal drug may not be commercially marketed in the US unless it has been approved as safe and effective by CVM Approval may be requested by filing an NADA with CVM containing substantial evidence as to the safety and effectiveness of the drug |
| Data regarding manufacturing methods and controls also are required to be submitted with the NADA Manufacturers of animal drugs must also comply with GMPs and Good Laboratory Practices (“GLPs”) |
| Sales of animal drugs in countries outside the US require compliance with the laws of those countries, which may be extensive |
| Water testing products |
| Our water tests are not subject to formal premarket regulatory approval |
| However, before a test can be used as part of a water-quality monitoring program in the US that is required by the EPA, the test must first be approved by the EPA The EPA approval process involves submission of extensive product performance data in accordance with an EPA-approved protocol, evaluation of the data by the EPA and publication for public comment of any proposed approval in the Federal Register before final approval |
| Our Colilert®, Colilert®-18, Colisure®, Quanti-Tray®, Filta-Max® and SimPlate® for heterotropic plate counts (“HPC”) products have been approved by the EPA The sale of water-testing products also is subject to extensive and lengthy regulatory processes in many other countries around the world |
| Dairy testing products |
| The sale of dairy testing products in the US is regulated by the FDA in conjunction with the AOAC Research Institute (“AOAC RI”) |
| Before a product can be sold, extensive product performance data must be submitted in accordance with a protocol that is approved by the FDA and the AOAC RI Following approval of a product by the FDA, the product must also be approved by the National Conference on Interstate Milk Shipments (“NCIMS”), an oversight body that includes state, federal and industry representatives |
| Our dairy antibiotic residue testing products have been approved by the FDA and NCIMS While some foreign countries accept AOAC RI approval as part of their regulatory approval process, many countries have separate regulatory processes |
| Any acquisitions of new products and technologies may subject us to additional areas of government regulation |
| These may involve food, drug and water-quality regulations of the FDA, the EPA and the USDA, as well as state, local and foreign governments |
| See “Part I, Item 1A Risk Factors |
| We are not a party to any collective bargaining agreement and we believe that relations with our employees are good |
| 8 _________________________________________________________________ ITEM 1A RISK FACTORS Our future operating results involve a number of risks and uncertainties |
| Actual events or results may differ materially from those discussed in this report |
| Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below, as well as those discussed elsewhere in this report |
| IDEXXapstas Future Growth and Profitability Depend on Several Factors The future success of our business depends upon our ability to successfully implement various strategies, including: • Developing, manufacturing and marketing new products with new features and capabilities, including pharmaceutical products; a new clinical chemistry instrument; and rapid assay, water testing and production animal diagnostic products, as well as improving and enhancing existing products; • Developing and implementing new technology and licensing strategies; and identifying, completing and integrating acquisitions that enhance our existing businesses or create new business areas for us; • Increasing the value to our customers of our companion animal products and services by enhancing the connectivity of these products, including the connectivity among the IDEXX VetLab^® instrument suite, Cornerstone^® practice information management system, the IDEXX-PACS™ software and IDEXX Reference Laboratories; • Expanding our market by expanding the installed base of our instrumentation through customer acquisition and retention and increasing use of our products by our customers; • Strengthening our sales and marketing activities both within the US and in geographies outside of the US; and • Reducing the costs of manufacturing our products and providing services through operating efficiencies and increased focus on quality |
| However, we may not be able to successfully implement some or all of these strategies and increase or sustain our rate of growth or profitability |
| Our Products and Services Are Subject to Various Government Regulations In the US, the manufacture and sale of our products are regulated by agencies such as the US Department of Agriculture (“USDA”), US Food and Drug Administration (“FDA”) and the US Environmental Protection Agency (“EPA”) |
| Most diagnostic tests for animal health applications, including our canine, feline, poultry and livestock tests, must be approved by the USDA prior to sale |
| Our water testing products must be approved by the EPA before they can be used by customers in the US as a part of a water quality monitoring program required by the EPA Our pharmaceutical and dairy testing products require approval by the FDA The manufacture and sale of our products are subject to similar laws in many foreign countries |
| Any failure to comply with legal and regulatory requirements relating to the manufacture and sale of our products in the US or in other countries could result in fines and sanctions against us or removals of our products from the market, which could have a material adverse effect on our results of operations |
| We have entered into an agreement with the FDA under which we have agreed, among other things, to perform specified lot release and stability testing of our SNAP® beta-lactam dairy-testing products and to provide related data to the FDA If the FDA were to determine that one or more lots of product failed to meet applicable criteria for product performance or stability, the FDA could take various actions, including requiring us to recall products or restricting our ability to sell these products |
| Sales of dairy antibiotic residue-testing products were dlra15dtta6 million for the year ended December 31, 2005 |
| Commercialization of animal health pharmaceuticals in the US requires prior approval by the FDA To obtain such approvals, we are required to submit substantial clinical, manufacturing and other data to the FDA Regulatory approval for products submitted to the FDA may take several years and, following approval, the FDA continues to regulate all aspects of the manufacture, labeling, storage, record keeping and promotion of pharmaceutical products |
| Failure to obtain, or delays in obtaining, FDA approval for new pharmaceutical products would have a negative impact on our future growth |
| 9 _________________________________________________________________ We Purchase Materials for Our Products from a Limited Number of Sources We currently purchase many products and materials from single sources or a limited number of sources |
| Some of the products that we purchase from these sources are proprietary, and, therefore, cannot be readily replaced by alternative sources |
| These products include our VetTest^® Chemistry, VetAutoread™ Hematology, VetLyte^® Electrolyte, and VetStat™ Electrolyte and Blood Gas Analyzers and related consumables; certain digital radiography system components, specifically image capture plates and readers; active ingredients for pharmaceutical products; and certain components of our SNAP^® rapid assay devices, water testing products and LaserCyte^® Hematology Analyzers |
| If we are unable to obtain adequate quantities of these products in the future, we could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on our results of operations |
| The slides sold for use in our VetTest^® Chemistry Analyzers are purchased under an agreement with Ortho that, as of December 31, 2005, required us to purchase a minimum of dlra92dtta7 million of slides through 2010 |
| We purchase our electrolyte instruments, components and consumables under an agreement with Roche Diagnostics, under which we are required to purchase a minimum of dlra4dtta1 million of these products through 2006 |
| We purchase our VetAutoread™ Hematology Analyzers, components and consumables under an agreement with QBCD, under which we are required to make aggregate minimum purchases of dlra18dtta0 million through 2020 |
| If demand for any of the products purchased under these agreements is insufficient to support our minimum purchase obligations for those products, we could incur losses related to those obligations |
| In addition, because we purchase the products at predetermined prices, our profits on sales of these products could decline if we are unable to maintain current pricing levels for such products |
| Our Biologic Products Are Complex and Difficult to Manufacture Many of our rapid assay and production animal diagnostic products are biologics, which are products that are comprised of materials from living organisms, such as antibodies, cells and sera |
| Manufacturing biologic products is highly complex |
| Unlike products that rely on chemicals for efficacy (such as most pharmaceuticals), biologics are difficult to characterize due to the inherent variability of biological input materials |
| Difficulty in characterizing biological materials or their interactions creates greater risk in the manufacturing process |
| We attempt to mitigate risk associated with the manufacture of biologics by continuing to improve the characterization of all of our input materials, utilizing multiple vendors, manufacturing some of these materials ourselves and maintaining substantial inventories of materials that have demonstrated the appropriate characteristics |
| However, there can be no assurance that we will be able to maintain adequate sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy applicable product release criteria |
| Our inability to obtain necessary biological materials or to successfully manufacture biologic products that incorporate such materials could have a material adverse effect on our results of operations |
| Our Success Is Heavily Dependent Upon Our Proprietary Technologies We rely on a combination of patent, trade secret, trademark and copyright laws to protect our proprietary rights |
| If we do not have adequate protection of our proprietary rights, our business may be affected by competitors who develop substantially equivalent technologies that compete with us |
| We cannot ensure that we will obtain issued patents, that any patents issued or licensed to us will remain valid, or that any patents owned or licensed by us will provide protection against competitors with similar technologies |
| Even if our patents cover products sold by our competitors, the time and expense of litigating to enforce our patent rights could be substantial, and could have a material adverse effect on our results of operations |
| In addition, expiration of patent rights could result in substantial new competition in the markets for products previously covered by those patent rights |
| In the past, we have received notices claiming that our products infringe third-party patents and we may receive such notices in the future |
| Patent litigation is complex and expensive, and the outcome of patent litigation can be difficult to predict |
| We cannot ensure that we will win a patent litigation case or negotiate an acceptable resolution of such a case |
| If we lose, we may be stopped from selling certain products and/or we may be required to pay damages and/or ongoing royalties as a result of the lawsuit |
| Any such adverse result could have a material adverse effect on our results of operations |
| 10 _________________________________________________________________ Our Sales Are Dependent on Distributor Purchasing Patterns We sell many of our products, including substantially all of the rapid assays and instrument consumables sold in the US, through distributors |
| Because significant product sales are made to a limited number of customers, unanticipated changes in the timing and size of distributor purchases can have a negative effect on quarterly results |
| Our financial performance, therefore, is subject to an unexpected downturn in product demand and may be unpredictable |
| Distributors of veterinary products have entered into business combinations resulting in fewer distribution companies |
| Consolidation within distribution channels would increase our customer concentration level, which could increase the risks described in the preceding paragraph |
| Our Markets Are Competitive and Subject to Rapid and Substantial Technological Change We face intense competition within the markets in which we sell our products and services |
| We expect that future competition will become even more intense, and that we will have to compete with changing and improving technologies |
| Some of our competitors and potential competitors, including large pharmaceutical and diagnostic companies, have substantially greater capital, manufacturing, marketing, and research and development resources than we do |
| Changes in Diagnostic Testing Could Negatively Affect Our Operating Results The market for diagnostic tests could be negatively impacted by the introduction or broad market acceptance of vaccines or preventatives for the diseases and conditions for which we sell diagnostic tests and services |
| Eradication or substantial declines in the prevalence of certain diseases also could lead to a decline in diagnostic testing for such diseases |
| Our production animal services business in particular is subject to fluctuations resulting from changes in disease prevalence and government-mandated testing programs |
| Such declines in diagnostic testing could have a material adverse effect on our results of operations |
| International Revenue Accounts for a Significant Portion of Our Total Revenue For the year ended December 31, 2005, 34prca of our revenue was attributable to sales of products and services to customers outside the US Various risks associated with foreign operations may impact our international sales |
| Possible risks include fluctuations in the value of foreign currencies, disruptions in transportation of our products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets |
| Prices that we charge to foreign customers may be different than the prices we charge for the same products in the US due to competitive, market or other factors |
| As a result, the mix of domestic and international sales in a particular period could have a material impact on our results for that period |
| In addition, many of the products for which our selling price may be denominated in foreign currencies are manufactured, sourced, or both, in the US and our costs are incurred in US dollars |
| We utilize nonspeculative forward currency exchange contracts to mitigate foreign currency exposure, however, an appreciation of the US dollar relative to the foreign currencies in which we sell these products would reduce our operating margins |
| The Loss of Our President, Chief Executive Officer and Chairman Could Adversely Affect Our Business We rely on the management and leadership of Jonathan W Ayers, our President, Chief Executive Officer and Chairman |
| We do not maintain key man life insurance coverage for Mr |
| Ayers could have a material impact on our business |
| 11 _________________________________________________________________ We Could Be Subject to Class Action Litigation Due to Stock Price Volatility, which, if Occurs, Could Result in Substantial Costs or Large Judgments Against Us The market for our common stock may experience extreme price and volume fluctuations, which may be unrelated or disproportionate to our operating performance or prospects |
| In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities |
| We may be the target of similar litigation in the future |
| Securities litigation could result in substantial costs and divert our management’s attention and resources, which could have a negative effect on our business, operating results and financial condition |
| If Our Quarterly Results of Operations Fluctuate, This Fluctuation May Cause Our Stock Price to Decline, Resulting in Losses to You Our prior operating results have fluctuated due to a number of factors, including seasonality of certain product lines; changes in our accounting estimates; the impact of acquisitions; timing of distributor purchases, product launches, research and development expenditures, litigation and claim-related expenditures; changes in competitors’ product offerings; and other matters |
| Similarly, our future operating results may vary significantly from quarter to quarter due to these and other factors, many of which are beyond our control |
| If our operating results or projections of future operating results do not meet the expectations of market analysts or investors in future periods, our stock price may fall |
| Future Operating Results Could Be Materially Affected By the Resolution of Various Uncertain Tax Positions and Adversely Affected by Potential Changes to Tax Incentives In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain |
| Significant judgment is required in determining our worldwide provision for income taxes and our income tax filings are regularly under audit by tax authorities |
| We believe that we have adequately accrued for all potential tax liabilities and, although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different than that which is reflected in historical income tax provisions and accruals |
| Additionally, we benefit from certain tax incentives offered by various jurisdictions |
| If we are unable to meet the requirements of such incentives, our inability to use these benefits could have a material negative effect on future earnings |